Online Banking Stuck in Neutral

Many of the incumbent banks in the UK are poorly positioned culturally, organizationally, and technologically to seize the opportunities afforded by the Internet, according to the report “UK Online Finance: Moving to a Post Oligopoly Market” by Fletcher Research.

Of the 47 million adults in the UK, 11.5 million are now regular Internet users, and of these, around one-third (3.5 million) are using the Web to research financial products, Fletcher found. One and a half million UK Internet users are using online banking and this number is predicted to rise to more than 9 million users by 2004. These online personal finance users are some of the most attractive financial-services customers in the UK. Almost all of those who use the Internet to manage their finances are affluent and well educated (50 percent hold a university degree) and have multiple financial-services products.

Many of the UK’s traditional financial-services players, such as the big banks and life assurance companies, are poorly positioned to keep customers’ business once they move online, according to Fletcher’s report. Incumbent financial-services companies are typically hamstrung by outdated and inflexible legacy systems; the high costs of maintaining bricks-and-mortar distribution; and organizational structures that run along product lines and distribution channels. New entrants into the market are exploiting the Internet to undercut existing players and meet customer demands for increased convenience, choice, and flexibility.

Looking to the future, Fletcher predicts new entrants will continue to make inroads into incumbents’ customer bases by offering better rates and sacrificing individual product profitability for overall customer relationship value. Ultimately, the Internet will force all financial institutions to re-evaluate whether their core competence lies in customer relationship management or product development.

Online Banking Penetration Among European Online Population
Nation Percent of Population
1999 2000 2001 2002 2003
UK 7 9 10 13 16
Germany 42 47 51 56 62
Sweden 28 32 36 41 48
France 5 7 10 12 15
Total 17 20 23 26 31
Online Brokerage Penetration Among European Online Population
Nation Percent of Population
1999 2000 2001 2002 2003
UK 1 1 2 4 6
Germany 3 4 6 10 18
Sweden 6 8 11 15 19
France 2 3 5 7 10
Other 1 1 2 3 5
Total 2 3 4 6 10
Source: Jupiter Communications

“Internet pure plays and smaller financial-services players will open up to the financial-services market by offering third-party products to their customers,” said Fletcher analyst Benjamin Ensor. “Instead of force feeding customers their own products, forward-thinking financial institutions with few fears of cannibalization will recognize the value of offering a greater degree of choice.”

According to research by Jupiter Communications, European financial institutions are looking to capture 34 million online banking accounts and 12 million online brokerage accounts in 2003. Jupiter reports that financial institutions must offer high-end services such as discretionary money management to overcome consumers’ apathy toward online banking and capture the market.

Germany and Sweden currently are, and will remain, the largest online banking European markets in 2003, when more than 60 percent of German Intenet users and almost 50 percent of Swedish Internet users are expected to own online bank accounts.

In the US, banks are having a difficult time convincing consumers to take advantage of online bill payment. In 1999, only 3 million US households were paying their bills online compared with 7 million households who view their accounts online and an impressive 20 million stock portfolios that were tracked online in 1999, according to research by GartnerGroup.

Before they will switch their bill paying online, US consumers want to be able to save money by making the switch. Sixty percent of consumers polled by GartnerGroup who already use online banking or trading services said they are not willing to pay a fee at all for online bill payment. Today, four out of five banks charge customers for paying their bills online. The average monthly fee is more than $6.

“Market pressures to recoup investments and show growth eventually will force Internet bill payment service providers to offer financial incentives to attract a critical mass of consumers,” said GartnerGroup’s Avivah Litan. “As with many Internet offerings, the consumers will have their way when it comes to fees in the bill payment marketplace.”

There will be 15 million US households using online bill payment services by 2002, according to GartnerGroup.

“Marketers at banks need to find more attractive pricing points for this service,” Litan said. “Or they should bundle lower checking account fees as a retention incentive. Once all those account numbers are entered into the system, consumers will be reluctant to begin again with a different online bill payment system.”

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