-Caveat Lector- from: http://www.aci.net/kalliste/ Click Here: <A HREF="http://www.aci.net/kalliste/">The Home Page of J. Orlin Grabbe</A> ----- Digital Society The Hollow Promise of Internet Banking Think so? Get a load of the regulators. Internet banking has failed to live up to its promise, both for traditional banks and for the upstarts that were supposed to wipe them out UNTIL six months ago, no self-respecting financial consultant would travel without it: the bar chart showing that the marginal cost of Internet banking transactions was a tiny fraction of the cost of branch banking. It was the chart that launched dozens of stand-alone Internet banks. Unshackled from the cost of real property�and real people�Internet banks would, it was claimed, blow stuck-in-the-mud incumbents out of the water. However, as Roberta Arena, director in charge of the Internet for HSBC, a British banking giant, remarks wryly: �Easy to say; tough to do.� Now Internet banks around the world are faltering. Part of the reason is that their physical rivals have become wiser, launching their own integrated �clicks �n bricks� strategies that offer customers electronic access as well as dark satanic branches. But they are not undisputed winners either. They are finding that the Internet is, at best, a zero-sum game. The decline of the stand-alone Internet bank has been a global phenomenon. In America, Wingspan, one of the e-pioneers, announced in October that next year it will share information-technology facilities with its parent, Bank One, in order to save money. First-e, a Dublin-based Internet-only bank valued at euro1.1 billion ($1.1 billion) when it was acquired by Spain�s BBVA in March, has laid off staff and cut expensive television advertising. Marbles, an Internet credit card offered by Britain�s HFC Bank, is also switching from TV advertising to cheaper direct mail; and SEB, a Swedish bank which has said that it sees the Internet as a means of expanding overseas, nonetheless acquired BfG in Germany because of its 170 physical branches. Egg, which was established two years ago by Prudential, Britain�s largest life insurer, has seen its value subside since it was launched on the stockmarket this spring; and Halifax�s stand-alone Internet bank, IF (for �Intelligent Finance�), opened eleven weeks later than planned, and then only as a telephone bank. AIB, Ireland�s biggest bank, dropped its own plans for a stand-alone Internet bank at the end of October after concluding that its customers preferred to have a choice of channels. In Japan, never known for being at the forefront of financial innovation, Sanwa Bank is abandoning plans to set up a �15 billion ($140m) stand-alone Internet bank, having seen their poor performance elsewhere�which leaves Japan with just one online option: Japan Net Bank. Customer inconvenience Why has the online �revolution� faded so fast? The biggest problem has been that, for all their talk of liberating customers from the yoke of traditional branches, Internet banks did not think clearly about what customers really wanted. For a start, they like to know that their money is secure. And whether it is fair or not, customers fret about the security of online transactions. Just as worrying is the thought that somebody else can find out your bank-account details, even if they cannot do anything with them. Traditional banks are still thought to be more secure, even though, as Barclays showed this summer, they too can bungle software upgrades and give one customer�s details to another. Convenience was supposed to be the big attraction of Internet banking. But service has proved unreliable. Servers crash and connections can be slow, especially over home telephone lines. Often it is easier, and quicker, to telephone. Internet-only banks have also been slow to offer a full product range. The convenience of online banking is greatly diminished if a customer has to maintain a current account, for example, offline. And Internet banks have discovered that customers have a stubbornly persistent preference for buying long-term savings products face-to-face. Egg is now considering a link with a high-street firm for this very reason. Customer resistance to Internet-only banking has slowed revenue growth. This is of crucial importance to e-banks that were relying on that consultant�s chart. Marginal costs for Internet transactions may be negligible, but fixed costs are anything but. Halifax put aside �100m ($145m) for IF and its 1,100 staff. Many Internet-only banks based their business plans on the assumption of rapid customer recruitment. But new Internet-only banks start with no customers at all. In order to get them, they had to spend real money�in Marbles�s case, for example, some �25m to date�to build consumer awareness. Then, to retain them, they have had to offer appealing (and unsustainably unprofitable) returns. Eventually, everybody in the market was doing the same. ABN Amro, a Dutch multinational bank, reckons that British online banks have plans to attract 3.5m customers by the end of 2002. But Forrester, an Internet research organisation, reckons the total market is just 2m. Most of the targeted customers already bank elsewhere. The bricks �n mortar banks may have been slow on the uptake, but most now allow customers to do all their banking online. And they have been forced to respond�if grudgingly�to the �online only� banks� pricing. The result is that online banking is actually still growing, but mostly among traditional banks. So far, however, none has found that the Internet has delivered what it first promised: lower costs. Cap Ernst & Young, a firm of consultants, reckons that the Internet cut British banks� costs by just 0.1% last year when they were, somewhat heroically, hoping for a 25% cut. Worse still, on the revenue side they have found, says HSBC�s Ms Arena, that the Internet is the consumer�s friend. HSBC itself was forced to cut its British mortgage rates to 6.75%, and promised that it would never exceed base rates by more than one percentage point, in response to a price war in home loans. The Internet may not have brought about the wholesale cannibalisation of traditional banks� business, but it is still not good news for them. Jose Fonellosa of Spain�s BBVA, which acquired first-e, says that the Internet is at best a zero-sum game for banks. He defends his massive investment as a defensive move, saying: �If I�m not there, someone else will be.� Big banks are now wrestling with how best to use the Internet, and some of their plans look distinctly off-centre. Lloyds TSB, a British bank whose share price has been hammered because investors thought it had not �got� the Internet, has now gone to the other extreme. It has a �portal� leading to other people�s websites, and hopes to earn commissions when, for example, its customers use it to lease new cars. Bankinter, a Spanish bank, developed data-mining techniques to such an extent that it has been able to set up a useful business as a private detective agency for suspicious spouses. It is a long way from the original dream of click �n borrow, but then the Internet was never going to change business in predictable ways. Economist, November 9, 2000 ----- Aloha, He'Ping, Om, Shalom, Salaam. Em Hotep, Peace Be, All My Relations. Omnia Bona Bonis, Adieu, Adios, Aloha. Amen. 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