Throughout 2002, banks, billers, and especially credit card companies signed up users at an astonishing pace. For example, American Express, a company that has provided online access for more than seven years, grew at 400,000 users per month. Financial institutions focused on satisfying the basics (five s’s): speed, statements, settlement (bill), security, and service. The more time- and capital-intensive feature improvements were deferred. That’s been a winning strategy the past two years, but companies looking to gain market share will need to differentiate their offerings to better compete in the near future.

Innovation of the Year

Last Out of the Gate, Charter One Bank Pulls Ahead

Just when some were beginning to think online banking was entering commodity status, Charter One Bank (Cleveland, OH; demonstrates how a quick-thinking retail bank can grab the limelight online. In a throwback to 1998, a relative unknown launched a service (March 2001) that became the talk of the industry within 18 months.

Charter One is our hands-down winner for 2002 with its pioneering fyiAlerts, along with a number of other Web innovations that propelled the bank to second place in the Gomez ranking, up from ninth in the preceding survey.

It was the fourth time in eight years that a retail bank topped our list of innovations. Previous bank winners include BayBanks (now FleetBoston) in 1996; Bank of Montreal in 1997; Citibank in 2000 .

Charter One isn’t resting on its laurels. The company has already announced a Q1 Web update that will include Web-activity summaries (think Amazon), customer message center, and an enhanced check-image facility. By mid-year the company expects to offer integrated account aggregation with interbank-transfer capability.

Totally eChecking is the latest Web product
             from Charter One. 

Two

Credit Card Issuers Become a Major Driver of
Online Financial Services Usage

Excluding PayPal, credit card issuers own the four largest online banking user bases in North America with a combined 32 million users as of Sept. 30, up six-fold in two year (see Table 89). It’s obvious why users are flocking to credit card companies: In most cases they can pay bills literally at the last minute with near-100% confidence that the transaction has been properly date-stamped and recorded by the card company, a benefit unavailable through conventional means of mail or CheckFree-based bill payment. With late fees averaging more than $30 and additional interest charges of $10 to $100, benefits can be substantial.

It will be interesting to see what card companies do with the newfound traffic. In the short-term, they will likely see a modest decline in late-fee income as more cardholders beat the deadline via online payment. Long-term, we expect the card companies to aggressively leverage the traffic with credit card aggregation integrated with real-time balance transfers (increases outstandings); numerous self-service features (reduces call-center volume); required e-statements (eliminate monthly snail mail); and finally, a plethora of financial and nonfinancial cross sales (more revenue).*

*Hopefully, this time around, card companies will show better taste and not repeat the trashy offers currently stuffed into envelopes. But we wouldn’t bet on it.

Three

Credit Report Monitoring & Identity Theft Protection
Optimized for the Web

With every new identity-theft news story, the credit-monitoring industry gains another group of devotees. We’ve used credit monitoring for nearly a decade, and wouldn’t give it up unless annual fees went above $500. But that’s not likely to happen. We predict fees will continue to fall as competition heats up between a dozen wholesale suppliers and thousands of financial institution retail distribution points. 

In 2002 more than 10 million individuals (U.S. only) purchased credit monitoring or credit reports, up more than four-fold in three years. By 2007, we expect 36 million household users, see Table 1 below. Refer to our July report for a complete overview of the industry and opportunity.                                    ð

Table 1

Households that Purchase Credit Reports Online or Use Credit Report Monitoring

millions of U.S. households

Source: Online Banking Report, 7/02

Four

PayPal’s AuctionFinder Demonstrates the Power of
Integrated and Targeted Screen-Scraping

Since account aggregation burst on the scene three years ago, most of the attention has focused on what we call the “Quicken variety” where all online info, from bank accounts to email, is aggregated on a single page. This format appeals to a relatively small segment of the market devoted to tracking their finances on a weekly, daily, or, in some cases, hourly basis. Many of these financial junkies already track everything via Quicken, Money, or Excel using manual date entry or online downloads. Even though this group would benefit most from Yodlee-like account aggregation, they will be slow to convert from databases they’ve spent years creating.

We believe the future of aggregation and screen-scraping lies in more specialized applications. For example, early last year, PayPal demonstrated the power of the technology when it began offering AuctionFinder, which automatically pulls from eBay the user’s winning auction bids, then presents them in an online “bill” for one-click payment . Now that PayPal is owned by eBay, this integration will be hard-coded into the auction-settlement process.

Five

Online Banking Usage Soars, Again

For the third consecutive year, U.S. online banking households grew by more than 5 million. On a percentage basis, it was the first sub-40% year since the service first appeared in the mid-90s. That’s to be expected in the eighth year of a product life cycle.* Next year, we expect somewhat slower growth of 3 million to 5 million households and a growth rate nearing single digits, just 10% to 15% .

Continuing the trend we’ve seen for the last three or four years, the biggest players continued to pick up share online. The 10 largest players have a combined 80 million registered users, vs. 50 million a year ago, a 60% increase. 

Table 2

Annual Growth Rate of U.S. Online Banking and/or Bill Pay Households

millions of U.S. households and percent change from previous year

Source: Online Banking Report, 11/02

Six

ING Direct Proves the Validity of the Net-Only Model

The biggest market share gain goes to ING Direct, the direct banking (primarily Internet) arm of Dutch giant ING. On Sep. 30, its U.S. division served 760,000 customers, triple the estimated 250,000 of a year earlier. During the same period, its deposit base grew to almost $10 billion from an estimated $3 billion. The U.S. division is now the second largest, accounting for 17% of the total direct bank worldwide customer base. Germany is the largest, with 1.7 million customers, more than one-third of the total.

Table 3

ING Direct Client Base Worldwide

number of customers and funds entrusted in EUROS*

Source: ING Direct, 12/02        *Note: Currently Euros and US dollars are approximately at parity (1:1)

Seven

Online Share of Residential Mortgage Originations Surpasses Ten Percent

According to several research firms, the online share of total U.S. mortgage refinances passed the 10% threshold in 2002, approximately double the percentage two years ago. In Q3, LendingTree alone originated $4.2 billion, more than 0.5% of all U.S. mortgages on- and off-line.¹ Although, the online mortgage penetration rate trails statement access (24% of households) and bill payment (19% of households), it’s significant for two reasons: (1) it defies conventional wisdom that mortgage applicants desire face-to-face assurances on large convoluted financial transactions, and (2) it’s a significant and profitable financial product.

Online mortgage lenders have some of the most highly evolved ecommerce sites online,² and they will only get better as more and more applicants choose the online channel as their first choice. We maintain our bullish outlook on the online loan sector, reiterating our Nov. 2000 prediction, that by the end of the decade more than 50% of U.S. loan originations will be made online. CountryWide, one of the largest mortgage lenders, now tops the Gomez ranking of best mortgage sites.                                                                                   

¹According to the Mortgage Bankers Association, U.S. 1-4 family mortgage originations were $694 billion in Q3, 2002. LendingTree’s $4.2 billion in mortgage originations works out to 0.61% of the U.S. total.

²In 2001, we gave Best of the Web honors to IndyMac, LoansDirect (now E*TradeMortgage), MortgageBot, LendingTree, and E-Loan . Recently, CountryWide has moved to the top of the Gomez ranking for best mortgage site.

Eight

ATM-based Interperson Funds Transfer Systems

When NYCE announced its ATM-based P2P system in mid-2000, we were skeptical. We couldn’t imagine squinting at an ATM screen, keying in account numbers to transfer money to a limited universe of fellow NYCE ATM users. Mailing a check seemed a whole lot easier. However, the product that eventually debuted in 2002 solved these problems. Transactions can be initiated online from within the password-protected online banking application at the user’s bank, and transfers can be made to any U.S. bank account through third parties such as CashEdge or PayCast..

Nine

Bank Web Sites Become Far Easier to Use

Usability improvements didn’t happen entirely in 2002; it’s been a gradual process and gained steam after the Y2k fixes were put into production. While few banking sites would rate an A, we’d estimate the average is now a solid B, up from Cs and Ds a few years ago. That doesn’t mean there still isn’t a lot of room for improvement. See Top 10 Web Mistakes.

Ten

Splash Screens and Pop-ups for Sales & Service Boost ROI

When you have something important to say, don’t be subtle. No matter how enticing links and banners may have looked on a Web designer’s 21-inch monitor, users are accustomed to fighting information overload at every corner of the Web and rarely click the bait. PayPal solved this problem by presenting splash screens periodically to alert customers to new features. Every month or two when logging in to their account users are presented with a full-screen announcement. Users can then click through the screen to get to their account, choose to learn more, or to sign up for the new feature. Cookies are used so that the user only sees the screen once; otherwise, it would be irritating. PayPal used the approach five or six times during 2002.

A similar, but more targeted approach is pop-ups. While unsolicited pop-ups ads are universally detested, when used in small doses within your site they can benefit users while returning an impressive ROI for you. You can use popups to gently push reticent applicants forward. For example, when users are stalled on a page, launch a popup offering help in the form of online chat, FAQs, email, or telephone. Another approach is to offer popups with special offers when a user attempts to abandon an application. NextCard used this technique up until they stopped taking new applications last February as part of their closure agreement with the FDIC.

One of four popups NextCard used when applicants abandoned a new credit application.