Memorandum

October 2001

To: Your CEO

From: You

Subject: Why Internet Banking Still Matters

With the media focused on the downturn of the economy and the Internet, I know you’ve been questioned about our level of investment in the Internet channel. To help respond, we’ve prepared this brief analysis of the competitive situation and why we need to maintain a superior online presence.

With the closing of more than 600 Internet companies, including well-financed banking ventures  CompuBank and Wingspan Bank, it may seem like the future of online banking is cloudy. However, looking at actual consumer behavior, it’s clear that online banking is becoming as important to the consumer banking experience as previous electronic innovations, such as ATMs and call centers. Already online banking is used by a third of all online households, and industry analysts expect 50% usage within four to five years. With many of our competitors putting projects on hold, we believe this is an ideal time to expand our services, so that when the business cycle turns, we will be well positioned to increase market share.

1.       Our customers expect it: Already, more than 20% of our country’s households are active users of online banking and/or bill payment. In recent months, more than twice as many adults banked online than made online purchases.¹ Five times more people banked online than traded stocks online.² When it comes to ecommerce activities, banking is a clear winner.

2.       The competition has it: Most large banks have offered online banking for a number of years. An OCC study in Sept. 1999 found that online banking was already available from 114 of 160, or 71%, of banks with assets greater than $1 billion. In total, online banking was available from financial institutions that controlled 89% of the country’s asset base and 84% of deposit accounts less than $100,000. And that was projected to grow to 95% and 93% respectively by year-end 2001.

3.       We can use it to humanize the banking experience: Only a small percentage of our customers are recognized in the branch by name. For the majority, branch banking is a semi-automated experience. Online, we greet everyone by name, and in the future will provide highly personalized recommendations and service that could never be duplicated by a teller.

4.       It’s more secure and private: Most articles about online banking security focus on problems, real or imagined. In reality, electronic banking can be far more secure, and private, than the paper-based world it replaces. How much privacy do you have when you write a paper check, exposing your name, address, and bank account numbers to everyone who handles it during its long route through the banking and postal system? Authenticated and encrypted electronic data transmissions are far more secure overall.

5.       It’s the best way to get a loan: Applying for a loan is dreaded by most consumers, that’s one of the reasons why people pay 18% for credit card debt when they could cut their rate in half with a bank loan. Although Web lending is not yet a mainstream activity, consumer trepidation can be alleviated with pre-approvals, excellent email service, guarantees, and fast processing.

6.       It’s the ultimate self-service channel: According to Tower Group, 60% of the country’s 19 million affluent households are already “remote-oriented” in the way they do their banking.³ Once customers are successful in finding answers to their account-related questions online, they will be more inclined to go back and use it for future problems.

7.       It’s more efficient: By automating transactions and customer service responses, both the user and the bank can spend less time on routine matters, leaving more time and money for more interesting endeavors. Even though many of our customers still enjoy face-to-face interactions in-branch, their numbers are falling. When it comes to conducting routine transactions, such as balance monitoring and bill payments, Web banking has the potential of reducing the time spent on these chores to just a few minutes each month.

8.       It’s easier: ATMs took off once people understood that it really was a much easier way to get cash. Likewise, online banking will be equally popular as banks institute services that are clearly better than off-line alternatives (e.g., email statement, interbank funds transfer, balance-level alerts, automated bill payment, and so on).

9.       It reinforces and supplements off-line media: The 60% of households now online have an easy way to act on radio, TV, and print advertisements. We no longer have to rely on consumers remembering to look up our telephone number and call for more information.

10.    It will be profitable: The latest Tower Group research found the following⁴:

Online households have annual incomes almost twice as high as offline households. This simple fact cannot be ignored. Even though our online initiatives have thus far not paid their way in bottom-line results, we are confident that is about to change. Going forward, a high quality Web presence, managed and operated like a branch, with a line manager and good online sales reps, will turn a profit. Look at NetBank, which has turned a profit almost since inception by keeping focused on the bottom line, even during the high-flying-high-spending 1998/1999 period.

Internet banking isn’t for everyone. Most customers still desire a physical presence for reassurance and services such as deposits and safe deposit. But for an increasing number of consumers, many of whom are heavy borrowers for shelter and education, the Internet is fast becoming the preferred channel for most transactions. Complacency now puts us at risk of losing our best customers to more aggressive online competitors.

¹Gartner Group estimate of online banking users, 9/01, see Table 9,; NRF/Forrester estimate of online buyers, 8/01

²Jupiter Media Metrix, 5/01;

³Affluent households have income greater than $100,000 or assets greater than $500,000; remote oriented customers use ATMs, call centers, point-of-sale debit, and the Internet

⁴“Internet Banking in North America: Moving to Where the Action Will Be,” by Frank Caruana, Tower Group, Sept. 2001