Guest columnist Jim Van Dyke, a recent alumnus of UltraData, now working at Hewlett Packard, delves into the cost issues of online banking. Mr. Van Dyke is well-suited for this role. As Remote Banking Product Manager at UltraData, he was responsible for evaluating vendor proposals for various online banking services such as bill payment.

Many financial institutions underestimate the total costs of an online banking program, in terms of dollars as well as other issues such as time and business disruption. If your initial budget estimate is too low you may get management approval to begin, but risk losing full financial support when you need it the most. After all, you will encounter unplanned expenses (of both the mission-critical and discretionary variety) when managing technology in this rapidly evolving field. The purpose of this article is to minimize the number of surprise expenditures you will face in the future, plus give you background information to do a better job estimating total project costs.

Once you embark on building a broad-based online banking program you will soon encounter a staggering number of detailed line items. Each new access method — Internet, PFM (personal finance managers, such as Quicken and Microsoft Money), kiosk, and others — brings its own unique category of cost items. Fixed and variable costs (monthly/annual, per transaction and per customer) will apply to the major categories of software, hardware, Web access, installation, training, service, facilities, staff, marketing, and telecommunication connections, to name the more significant types. (Disclaimer: No article, consultant, or employee can identify every possible expense. But by uncovering several common major costs categories now, you’ll be sure to miss far fewer line-items later.)

Let’s explore the area of fixed investments, beginning with hardware. Hardware costs are generally the easiest to obtain, assuming you’ve planned for enough system capacity to handle your long-term needs. In addition to the obvious client-server CPU, be sure to consider Internet firewalls, host system upgrades, and required physical changes to your facility. And modems are a requirement for every form of access except Internet and LAN/WAN connected devices.

Software costs can be more difficult to estimate for several reasons: capabilities can vary greatly from vendor to vendor, add-on third-party software may not be itemized in the vendor’s quote, security options vary greatly, and you may eventually require custom programming to modify the system to your unique needs.

To make the new system(s) communicate to your host, you’ll likely need system integration programming. This can be avoided if your host vendor offers a pre-integrated, off-the-shelf product. Such solutions will greatly reduce costs, help you avoid incompatibility problems with each successive upgrade, and guarantee that all of the online banking product features can actually get to the required data on your host. But the downside is that you will be limited to the online banking product of your host vendor’s choosing.

Another way to minimize integration costs and difficulty is to select a product that includes built-in middleware, a capability that can greatly simplify host system integration. A few major vendors now offer middleware as part of their online banking products, as a way to address the wide variety of host systems available in the financial services market. Another way to minimize the initial integration cost is to select a vendor that uses ATM-based communication to the host, but the twin downsides of this are:

• ATM switch fees.
• limited a set of functions recognized by the ATM transaction-code set.

One more way to save overall cost and difficulty is to select a vendor that offers an integrated suite of access options through one single client-server product. This is beneficial if Internet access is just one of many forms of account access that you believe will be widely used in your lifetime. On the other hand, many bankers feel that Internet access is the primary wave of the future. If you tend to agree with the latter statement, then select one of the many qualified vendors that specializes in Internet banking solutions. In any case, this vendor strategy will have a great bearing not only on your cost, but system performance capabilities as well, so make sure your strategies are in synch.

If online banking is a killer application, then bill payment is certainly the “killer app” of online banking. (After all, would you or your customer really go to all this trouble just to get a balance?) We’ll explore bill payment costs in some detail for two reasons:

1. Bill payment fees will likely be your highest variable expenditure (see also p. 7 item 7).

2. Throughout this industry, vendor quotes often show only half the picture by listing just your per-transaction charges. In addition to payment transaction fees, these bill payment costs may also apply:

• financial institution start-up fee, including software license, installation, and training
• initial end-user set-up fees
• base fee, or minimum fees, per active customer (regardless of how many bill payments are made)
• customer service fees (per customer per month or per inquiry)
• ATM switch fees (may also apply to basic account inquiry functions as well!)
• stop-payment and other per-incident fees
• integration to your host, online banking systems, and bill pay databases for other access methods (such as touch-tone bill payment)

To estimate bill pay cost per customer, financial institutions have been known to simply take the vendor’s transaction fee per bill payment and multiply it by the industry rule-of-thumb seven to ten payments per month. (However the average number of payments per month can vary dramatically depending on your pricing, ease-of use, customer demographics, etc.). This method could result in an estimate 50% lower than reality.

Some bill pay vendors process transactions only, and aim to provide the best pricing and quality for a narrow offering. Others provide a soup-to-nuts product offering. In any case, be sure to compare all relevant costs when building a financial projection. When you do so, you’re likely to find that your per-customer costs easily will add up to $6/mo or more.

One key aspect of online banking that has been continuously underestimated right from the start is end-user customer support. The more features and access methods you offer, the more your customers will inquire. And if you treat them well, they may “virtually” stay with you longer than your customers that walk in or call in. But if your customer service standards are below expectations, then they’ll head to one of three places: back to the branch, over to the call-center, or on to another financial institution that offers electronic account access and perhaps better service.

If specialized online banking customer service resources are out of the question right now, there are several companies offering outsourced end-user customer service. Your probably want a support vendor aligned with your online banking vendor so that the support provider’s staff isn’t being trained on a new system using your customers as guinea pigs.

Your actual variable costs will vary significantly based on several factors: your financial institution size, current host system, desired platform and features, the quality and stability of the product, and how hungry your vendor’s children are!