Looking back at 2003, we selected 10 industry developments that provide the best glimpse at the future of online financial services delivery.

Innovation of the Year

Premium Online Banking: Money HQ from Online Resources

Money HQ from Online Resources earns 2003’s Innovation of the Year and number 15 on our all-time list for its innovative packaging of several advanced features into a fee-based premium service. The new service, powered by CashEdge, combines account aggregation and interbank payment services. It’s accessed via a tab (far-right) on Online Resources Internet banking platform (see screenshot below left). 

The premium service offering is optional for client financial institutions, but with zero out-of-pocket costs, the company expects widespread adoption. Currently, 40 out of 500 clients are live with the service, including First Command Bank (Fort Worth, TX) and Pinnacle Federal Credit Union (Edison, NJ).

Suggested retail price is $5/mo plus transaction fees for certain A2A transfers. Revenues are shared between the financial institution and Online Resources.

 

 

 

Two

Phishing undermines trust (for now)

Not coincidently, just when mainstream users were beginning to trust online financial services, along comes the mass phisher, spamming the world with hundreds of millions of fraudulent emails purporting to be from the user’s bank, credit card company, or ISP. Unfortunately, the problem is going to get worse before it gets better. Anti-phishing.org, a non-profit bankrolled by Tumbleweed Communications, identified 60 unique phishing attacks in the two weeks before Christmas, which unleashed an estimated 60 million fraudulent messages. Not until an authentication protocol is widely adopted (hopefully, by early to mid-2005) will the onslaught of fraudulent emails slow. 

A recent phishing attempt aimed at Bank One went out under the guise of a phishing warning. Recipients were asked to login to their Bank One accounts to learn more about fraudulent emails.

The media is beginning to jump on this story, with phishing mentioned in 103 major articles during the past 30 days, compared to just 17 during the entire first half of 2003. The resulting consumer awareness will help keep users from being caught in the trap, but it will also lead to significant problems in marketing new services via email, hampering financial institutions’ efforts to turn a profit online. For a sobering view on the subject read the Wall Street Journal Online’s Jan. 19, 2004 article, Stink in Your E-mail Box Means Big Trouble for Marketers.  

Long-term, as techniques such as digital signatures eliminate most casual phishing efforts, it will be a non-issue. In fact, these scares tend to be good for existing financial institutions whose customers are even less likely to venture to a new provider .

 

Three

Banks move to boost security perceptions

After a quiet first half of the year, banks were hit with a number of highly publicized security intrusions. First, the South Africa press had a field day with a keylogging incident that became public knowledge in May
. Other incident in the UK and New York were also publicized, but at a far lower level than the South Africa incident. Then beginning with two Wall Street Journal stories this summer (July 22 and August 19) and continuing until year-end, the endless phishing attacks garnered a significant amount of press, nearly 500 articles in the past six months contained the word phishing. 

Banks, understanding what’s at stake, took decisive actions to reassure online banking users and prospects. For example, within weeks of its keylogging breach, ABSA Bank installed numerous new authentication tools to virtually eliminate the threat. Its most visible change: an optional virtual keypad allowing wary users to “type” in their PIN codes (see inset). This defeats most keylogging since the hacker would have to map mouse coordinates to determine which digits were selected. In addition, the bank instituted a rotating secondary password requirement for users to move money out of their accounts or change personal information.

Four

Citibank launches interbank transfers (A2A)

 

Five years ago (Oct. 1998), when the ill-fated CompuBank first launched its online services, it included an innovative interbank funds-transfer system (A2A). At the time, we expected it to become common within a few years. But other than the Internet-only banks such as ING Direct and E*TradeBank, the service has not caught on in the United States. In fact, no major U.S. bank offered it until the fall of 2003 when Citibank added interbank transfers to its online banking program. CashEdge, which also powers Money HQ from Online Resources operates the transfer system behind the scenes.

Citibank, which for several years has boasted a top-rated online banking service based on ranking
by Gomez, Forbes  www.forbes.com/bow  and others, may earn a new round of kudos by being an industry leader in A2A. Just this week Forbes bestowed its Best of the Web on Citibank once again (see Table 15, right), specifically mentioning the A2A functionality.

Table 15

Forbes Favorites: Personal Finance & Investing

Category	Best of the Web
401k Advice	MPower Cafe
Auto Insurance	InsWeb
Banking	Citibank.com
Brokers	Charles Schwab
Calculators	FinanCenter
Credit Cards & Loans	Bankrate.com
Debt Management	About.com Credit/Debt Mgmt.
Estate Planning	Nolo.com
Financial Planning	Financial Engines
Financial Portal	MSN Money
Full Service Broker	JP Morgan Online
Fund Families	Vanguard Group
Fund Selection	Morningstar
Life Insurance	Quotesmith.com
Mortgages	Quicken Loans
Tax Planning	Internal Revenue Service

Source: Forbes, 1/04

 

Five

Press turns positive online banking and other online financial activities

A year ago, much of the mass media was negative or neutral on the overall benefits of online banking. Reporters were still looking for examples of dot-com excesses and often invoked the names of Wingspan, CompuBank, and Citi f/i as examples of online banking’s failed promise. Never mind that the service was growing faster than ever in terms of net new households. During 2003, the negative reporting gradually gave way to new stories about convenience, ease-of-use, and good value (especially with the elimination of bill pay fees). In 2004, we expect a mini-backlash as the press focuses on the phishing threat, but overall we expect the media to embrace online banking for years to come.

Six

Bank of America hits seven million users

On its homepage, BofA is currently promoting free bill payment’s potential cost savings of $53 (Jan 20, 2004).

At year-end, Bank of America had as many online banking customers as all U.S. banks combined had five years ago (at year-end 1998). The bank’s 7 million active users account for 43% of its checking account base, and 22% of all households. Year-over-year growth was an impressive 50%, with 2.3 million new active users. Total enrollment, active and inactive, is now 10 million. Bill payment growth was even stronger, spurred in part by its high-profile campaign touting free bill payment which began in mid-2002 and continued through 2003 (see inset). More than 1.2 million new bill pay users came on board in 2003, a 67% increase, ending the year at more than 3 million, the largest bill payment base in the country. 

 

 

Table 16

BofA Online Banking & Bill-Pay Users Trend

active users (past 90 days)

	Online Banking	Bill Payment
Date Reported		Num	% OB
Dec. 18, 2003	7.0 mil	3.0 mil	43%
Oct. 21, 2003	6.6 mil	2.8 mil	42%
Sep 22, 2003	6.2 mil	2.6 mil	42%
Aug. 26, 2003	6.0 mil	2.6 mil	43%
July 24, 2003	5.7 mil	2.4 mil	42%
June 19, 2003	5.5 mil	2.3 mil	42%
Mar 25, 2003	5.0 mil	2.0 mil	40%
Jan. 1, 2003	4.7 mil	1.8 mil	38%
Nov. 27, 2002	4.4 mil	1.5 mil	34%
Oct. 30, 2002	4.3 mil	1.5 mil	35%
Aug. 2002	4.2 mil	ina	--
May 9, 2002	3.3 mil	1.1 mil	33%
March 2002	3.1 mil	900,000	29%
Dec 2001	2.9 mil	ina	--
Dec. 2000	1.8 mil	ina	--
3-year growth	5.2 mil

Source: Bank of America, 2001-2003
DDA = demand deposit account (checking)

 

 

Table 17

BofA Online Banking & Bill-Pay Metrics

November 2003

Website Traffic	Value
Unique visitors per month*	8.9 million
Number of visits per month*	71.0 million
Online Banking
Total subscribers	9.9 million
Active subscribers (past 90 days)	7.0 million
Inactive subscribers	2.9 million
Active subscribers, % of all HHs	22.1%
Active subscribers, % of DDA HHs	43.0%
Subscribers added monthly*	441,000
% BofA associates actively using	81.5%
Online Bill Pay
Active bill payers	3.1 million
Bills paid per month*	16.1 million
$$ processed per month*	$4.5 billion
eBills delivered per month	2,360,000
eBillers	300
Online bill pay customers have:
80% lower attrition rate
30% fewer calls to call centers
38% higher deposit balances
45% higher loan balances

Source: Bank of America, 11/03

*average monthly rate past 3 months

 

 

Seven

The decline of paper statements begins

Although it will take the better part of the decade before even 50% of online banking customers turn off their paper statements, 2003 marked the beginning of the inevitable decline in paper statements.

Table 18

Market Share: Paper Statements vs. Electronic Statements

U.S. checking/share draft accounts

Source: Online Banking Report estimates, +/- 50%

¹Percent of all online-enabled demand deposit accounts (DDA) receiving monthly paper statements, can also be receiving an electronic statement

²Percent of all online-enabled DDAs with no paper statement

³Percent of all DDAs receiving a monthly paper statement, can also be receiving an electronic statement

⁴Percent of all DDAs with no paper statement

Eight

Banks redesign websites for Yahoo-like clarity

Each year since the industry got through its Y2K headaches, bank websites have made dramatic usability improvements. Last year, the most notable redesign was at Web-banking pioneer Wells Fargo. Every financial institution should show similar restraint in limiting homepage promotions and extraneous text. National City and Wachovia also introduced similar-looking homepage styles.

Nine

Real-time credit for remote deposits

E*TradeBank and Pennsylvania State Employees Credit Union both earned OBR Best of the Web awards with creative solutions to the remote banking bugaboo, delays and uncertainties in deposit posting. PSECU was especially innovative, earning the 23rd spot on our list of all-time online banking innovations by providing immediate credit for deposits being mailed to the CU. Not only is it a great online banking benefit, it has saves the CU more than $100,000 in interchange costs. Pentagon Federal Credit Union launched a similar service in October, dubbed Trust In You.

Ten

Identity Theft 911 provides a credible source to fight ID theft

Identity theft was raised from an obscure crime to dinner conversation in late summer when the FTC released survey results indicating that everyone in America has assumed the identity of someone else, or so it seems if you read all the press accounts. Actually, the FTC reported that 10 million U.S. adults (5% of the total) fell victim to identity theft (including credit card theft) during the past five years, far higher than anyone suspected. Even if you discount the results due to survey methodology, identity theft claims more than one million victims a year, a huge problem.

Luckily, the private sector stepped up to the table with consumer protection services. Identity Theft 911 appears to be an early leader, offering insurance, victim resolution services, credit report monitoring, and educational material. The company markets directly to consumers, but its business model revolves around wholesaling services to banks and corporate employee-assistance centers.