"After a decade of near-total failure, the online banking industry needs to begin working with innovative software developers to help make the combined online banking/money management experience less onerous and complex." — David Fenichell, author of FIND/SVP’s Online Banking

In one of the more comprehensive studies yet of consumer demand for online financial services, FIND/SVP, a market research and advisory firm based in New York, concluded that banks must do a better job of marketing their online banking products. The study, Online Banking: User Profiles, Market Segments and Forecasts, also suggests that banks and financial software developers should consider creating low-end electronic financial services (EFS) systems to attract mainstream users.

“This report was written to help banks identify and segment the customers that are prime targets for online banking,” Stuart Gibbel, Marketing Communications Manager for FIND/SVP’s Emerging Technologies Research Group etrg.findsvp.com said. “The bottom line is that banks are not doing a great job delivering the message to the right customers.”

The research is significant in that it was culled from random-digit dialing methods that screened 3,255 households for PC ownership. From that sample, 1,018 PC owners and 182 who indicated PC purchase intent were interviewed in depth. Error rate is estimated at +/- 3% at the 95% confidence level. Interviews were conducted between May and October, 1996, and were originally published in FIND/SVP’s American Home Financial Services study in late ’96.

From that sampling, FIND/SVP and Jupiter Communications estimated there were 2.1 million U.S. households using an online banking service at year-end 1996. The company projects the user base to grow to 16.9 million by year-end 2001. This is consistent with most estimates of the growing market including ours. FIND/SVP’s definition of online banking matches ours, the ability to access account data through a PC (dial-up, Web, or other).

FIND/SVP pegged the total market for electronic financial services at just over 40 million U.S. households. That includes the 34.8 million that already own PCs plus the 5.9 million intending to purchase a PC in the next six months. Given that only 2.1 million were current users of online banking, the market penetration of PC owners is only 6%. But a closer look at the numbers provides much promise. Slightly more than 27% of those that are aware of online banking from their financial institution are already using it. Not a bad penetration level for a relatively new service.

Willingness to Pay

If you’ve been struggling to win additional resources for online initiatives, you’ll like this finding. Respondents overwhelmingly said they would pay for electronic financial services. Only 19% of PC owners said they definitely would not pay. Nearly half (45%) said they would pay $10/month or more.

Caveats on “Willingness to Pay”

Before you recalculate all your spreadsheets using $10.49 (or $12.22!) for the average monthly revenue, consider this warning included in FIND/SVP’s analysis:

It is difficult to draw conclusions as to whether consumers are willing to pay specifically for the ability to get financial services online, or if their stated willingness to pay indicates the desire to shift traditional service fees to the online arena.

We never believe what anyone says about what they might pay for a some hypothetical service to be offered in the future. Here’s why:

• Competition will drive prices down, even if consumers are willing to pay more.
• It’s unclear what fees the respondent is saying they will pay. Does the $10.49/mo include the checking account too? Bill pay? Net access? News? Overdraft protection? Foreign ATMs? A credit card? etc. etc.
• Saying you’ll pay is a lot easier actually doing so.
• General aversion to paying fees for banking.
• The actual service delivered will inevitably fall short of the perfect service imagined. Assuming that consumers actually would fork over $10/mo for the perfect EFS bundle, will your offering have all the right features? Will users ever get peeved at your service reps? Will all transactions post on time? The question is, what will your customers pay for your REAL, less-than-perfect, service? You won’t know until you test it, or launch it.

Our advice: Be glad, be very glad, that consumers think would pay $10/mo. There is perceived value here. But don’t make your business case dependent on these fees. It’s quite likely you’ll have to make money the old-fashioned way: from the net interest margin on deposits and loans. Any online banking fees will be a bonus (and will probably be needed for extra customer service anyway).

For More Information

In addition to the 1,200 telephone interviews, FIND/SVP conducted consumer focus groups and contacted online banking service providers and experts while developing the 115-page report. For more information or to order, call 800.346.3787 or on the Web etrg.findsvp.com.