Pop Quiz

Q1. For banking, is the Internet a

A. delivery channel?
B.  product?
C. marketing medium?
D. customer service tool?
E. cost-avoidance strategy?
F. All of the above.

A. You know this is a setup, the answer is “all of the above.” But does your Retail Strategy Committee believe it? Really? Has the fact that The Internet Project is really FIVE PROJECTS ROLLED INTO ONE been blurred by debates over pricing, security, compliance, approval procedures, etc., etc.

You may want to spend a few moments reiterating the five fundamental elements of your online initiative next time you are up for funding. In case you need a few more words of explanation, here’s a short summary:

1. Online banking is a delivery channel because financial information is delivered to users.
2. It’s a product because you can earn explicit fees from the financial info stream.
3. It’s a marketing medium because you can reach new prospects and cross-sell to existing customers.
4. It’s a customer service tool because users can find the answers to their own questions or fill out forms that make it easier for you to resolve issues.
5. And it will eventually lead to significant cost reductions in the areas of forms management, check processing, and customer service.

Developing the Business Model

One would think that with five huge benefits, the business case would be a “slam dunk.” Unfortunately you have a number of factors working against you:

• history of poor results in online banking (pre-1996)
• lack of faith in the future of Internet commerce
• discomfort with security issues
• lack of easily quantifiable revenue flows
• difficulty in funding projects with multi-year negative cash flows

To overcome these objections, the business model you propose for online banking must be considerably more creative than that used for typical bank investments. For starters, make sure you touch on all five core project attributes: cost savings, fee income, marketing/sales, customer service, and delivery channel issues. Then be ruthless in quantifying benefits. Leave no stone unturned in the quest for cost justifications. Even if each benefit on its own would be shot down, the cumulative effect of all the “intangible” benefits could put you over the top in gaining approvals to proceed.

Revenue Drivers

Online banking only becomes interesting, financially speaking, when you put together all the current and future hard and soft dollar benefits. Make sure you cover all seven revenue drivers listed below:

1. Forecasted usage, both in number of subscribers and usage levels.
2. Explicit fees income for online services (e.g., subscription fees for online banking).
3. Related income from increased cross-sales of bank products to online banking subscribers, especially overdraft protection services and other credit products.
4. Attracting new customers to the bank based on the attributes of your online banking program.
5. Improved customer retention from serving your wired customers in a manner that improves their satisfaction and reduces turnover.
6. Cost savings from serving customers electronically, especially replacing costly human-assisted transactions and information requests with much cheaper completely electronic alternatives.

Other intangible revenues derived from spin-off benefits of online banking such as gaining a market position as technically innovative, or implicit fee income: the ability to charge more for a checking account with Internet access.