What's all this about BarCampBanks? From a North American premiere in Seattle almost a year ago, we've witnessed two more in the last few months, and eight more are either scheduled, or in the planning process.

Well, maybe not exactly "planned." BarCampBanks emerge more than they are planned.

What's a BarCampBank?
It emerged from the BarCamp movement, which according to barcamp.org, is defined as...

...an ad-hoc gathering born from the desire for people to share and learn in an open environment. It is an intense event with discussions, demos and interaction from participants.

It started as a technology summit, an un-conference where developers and technology geeks could share exploits, connect, and find like-minded companions to extol the virtue of open-source and emerging technologies over pizza and wine.

And then someone decided that this forum would be a perfect place to talk about banking and finance. Weird. And yet it works.

It started in Seattle
I was fortunate to learn about BarCampBankSeattle, the first North American BarCampBank soon after it was announced by the prescient organizer Jesse Robbins. I can't quite call it a decision to attend - it was more a compulsion. Somehow I knew I had to be there.

Probably some of you reading this will feel that way, too. And if so, I urge you to get yourself to one of the BarCampBanks spawning like saplings everywhere bank-geeks gather. The conversations initiated, the innovations surfaced, and the relationships developed at these organic and loose events are truly inspirational and energizing. It really is something to be experienced, and at a cost of $20-35, it's a fraction of the cost of a typical talking-head conference.

After BarCampBankSeattle in July of 2007, there was a long dry BCB spell, which wasn't broken until the last few months when BarCampBankSanFrancisco and BarCampBankNewEngland emerged. Some dedicated BCB-heads even attended both in a cross-country banking-frenzy (you know who you are, my friends).

Coming soon, in Dallas
If you've read this far and feel the need to dive in right away, your first opportunity is BarCampBankDallas planned by my co-participant in Seattle, Brad Garland. It'll take place 21-22 June at the American Bank of Texas Building in Frisco, Texas. Brad is excited about the attendees who have signed up on the wiki (each BarCampBank hosts) where people can add what they wish to contribute to make the event their own. They have people coming from in and out of the country, from banks, credit unions, and even companies like Microsoft. It should be a great conversation.

BarCamping in London
If you'll be in London this summer, you can check out BarCampBankLondon on 5 July at Sun Microsystems' offices on King William Street. London is being planned by the great blogger James Gardner, the head of innovation at Lloyds TSB. In his entry on the event's wiki, James mentions that he is interested in talking "about innovation programmes and the economic reasons why *not* to give them too much money." Intriguing.

July in Charleston
After London, look out for BarCampBankCharleston, taking place on 26-27 July at the First Federal Corporate Center in North Charleston. George Pasley is organizing, and it should prove to be a great, inaugural Southern event.

BarCampBankBC, just too many Bs and Cs
If you're on the West Coast and want to save the planet from the carbon emissions of travel to London or Charleston, come to BarCampBankBC, 20-21 September, at the British Columbia Institute of Technology in downtown Vancouver (originally called BarCampBankVancouver, who could then resist the acronym BCBBC?). I am organizing this event, along with Gene Blishen and Tim McAlpine. I am humbled and excited by the diversity of the attendee list so far.

Coming to Charlotte?
But what if you work at Bank of America or Wachovia? With the credit crunch, you may not be able to get your supervisors to pony up cash for an event with the flaky name of BarCampBank. Well, fear not, BarCampBankCharlotte is in the concept stage, and you can help make it a reality. Click through to the wiki and lend Josh Street a hand in organizing.

Stay tuned for more BarCampBanks
The other two in the nascent stage are another BarCampBankSanFrancisco, hoping to coincide with MacWorld in January 2009; BarCampBankMadison, being planned by Christopher Morris from the National Credit Union Foundation; and BarCampBankChicago, 16 July, in conjunction with the FDIC's Interagency Minority Depository Institutions National Conference. 

With all the changes happening in our industry, the focus on relentless innovation, and so much uncertainty about the economy, it's a good thing that there will soon be a BarCampBank near you.

William Azaroff has been an occasional contributor to NetBanker for the past year. His duties driving Online Strategy & Community Engagement at Vancity, Canada's largest credit union, keep him from writing as often as he'd like. He blogs at azaroff.com/blog

This past weekend, NetBanker sponsored an event called BarCampBank in Seattle. It's an unusual name for an unusual event. The name derives from an international network of events, which Wikipedia defines as "open, participatory workshop-events, whose content is provided by participants." It usually refers to "early-stage Web applications, and related open-source technologies and social protocols." In this case it was a loose, collaborative unconference about "innovation in banking, credit unions, social lending, or finance." It attracted close to 40 people—credit unions, banking experts, consultants and suppliers across the United States and Canada. It was unfortunate that there was no representation from actual banks.

The topics discussed included the use of social media, credit relief for third world countries, branching strategy, expectations of Gen Y and Millennials, mobile banking, and open-source core processors. Over the weekend, as discussions opened and progressed, the ideas were distilled down to a few themes.

• Banks and credit unions don't really know what it means to be customer-centric.
• The disintermediation that the industry has been seeing on the horizon for years seems to be occurring, and financial institutions had better get on board or lose market share.
• Are social media (blogs, social networks, wikis) an effective way to market and promote banks?
• What would a bank look like if one was built from scratch today?

There was a lot of talk that banks and credit unions only look after their own needs and don't pay enough attention to serving their customers effectively. There is a lack of bravery and responsiveness to their customers' needs. To most consumers, banking is a chore like going to the grocery store or the post office (and in the worst examples, the dentist). People want easy access to their money and sound financial advice; in many cases, that is not what they receive.

There were some very interesting and disruptive ideas. One big one that kept coming up was the banking equivalent of local number portability. You get an account number the first time you create a bank account, and you can move it from bank to bank to bank. An amazingly customer-centric idea. You neither have to change your bill-pay info, nor your direct deposit or pre-authorized payments. This is one of the main factors that keep people where they are, and would force the banks to differentiate based on service and product innovation. The pain of switching would be eliminated and people could change banks when they found a better option for them and not wait until they get so frustrated with their existing bank that they overcome their inertia.

Another theme that emerged, which will come as no surprise to NetBanker readers, is the brilliance of Wesabe.com's model. There is real passion in the way the founder and CEO Jason Knight describes the mission of his organization, which helps consumers make better decisions with their money. With a focus on showing consumers where their money can get them the most value, he doesn't see himself competing with banks at all, but offering a complimentary service. I wonder how many banks see the value Wesabe adds, and will work with it to give customers deeper insights into how they spend their money.

The people in the room were keenly aware of the echo-chamber effect created by being surrounded by those who feel similarly about social media. We were mostly proponents of the relevant use of social media to further the goals of a financial institution. But adoption of blogging, social networking tools and Web 2.0 technology by financial institutions is slow at best, and the number of successful implementations of these tools is few and far between. That honesty was refreshing.

There was an overwhelming feeling in the room that banking is ripe for a revolution. Interesting to come back from BarCampBank and see this insightful article on GonzoBanker about the demise of the banking industry as we know it. Many of these same themes were reflected in our dialogue. Money is too crucial in our lives to avoid big shifts ahead in the financial services sector. BarCampBank demonstrated that this is definitely an interesting time to be in banking.

There’s a reason why everyone and their uncle are offering toolbar’s that plug-in to Internet Explorer. They are a convenience to customers and a tremendous branding opportunity. The latest entrant from GeoTrust’s TrustWwatch unit: a privacy toolbar. It’s similar to Ebay’s Account Guard function with a green light for “verified” websites, yellow for “not verified,” and red for “warning,” websites on their black list. If you are working on a bank-branded toolbar (see OBR 85), consider licensing this functionality from GeoTrust  http://www.trustwatch.com/  Also, if you haven’t already done so, make sure your website is verified by submitting it to one of the trusted third party certification authorities such as Entrust, Betrusted, or GeoTrust.

Electronic messaging is wide-open for innovation. The content, delivery, and style of your electronic messaging provide numerous points of differentiation, and the business case is positive with potential retention, cross-sale, and cost-reduction benefits (see OBR 91/92 for a complete analysis).







Source: Online Banking Report, 9/04
 

Although not as robust as Barclays, Washington Mutual is the only top-10 U.S. bank with prominently targeting startups. Through its partnership with StartupNation, the bank has posted several articles on its website, and also sends users to a cobranded www.StartupNation.com  website to sign on for more tools and resources including webinars, resources, and coaching. We don’t know the terms of the relationship, so we can’t judge the cost effectiveness. However, we definitely like how WAMU is positioning itself as a supporter of
small business. 

Innovators in small business online delivery

Today much has changed. Everywhere you look, banks are innovating to serve the small business market more effectively. According to Watchfire’s GomezPro unit the best small business banking sites are Bank of America and National City, tied for first place in its year-end 2003 scorecard (see Table 55, right). 

Other online innovators in the small business market:

•          Barclays Bank (London; $800 billion) uses its website to target startup businesses with a broad array of support services that many startups would find essential, including a free business checking account for the first year. It’s so impressive, we’ve given it our second Best of the Web award this year
  (see next page).
•          PNC Bank (Pittsburgh, PA; $70 billion) and NetBank have both announced plans to offer remote check deposits, something most U.S. banks will support within a few years. One of the last reasons to visit the branch will be eliminated when clients can feed paper checks into a scanner instantly depositing the cash into their account and storing the image into their online banking archive
  This service is a shoo-in for an OBR Best of the Web once it goes live.
•          NetBank (Alpharetta, GA; $4.1 billion) which launched a new small business initiative a year ago, has attracted 1,600 businesses with $38 million in deposits ($24,000 average deposit). If it keeps to the announced third-quarter launch, NetBank may be the first bank to offer remote paper check scanning

Barclays provides valuable services for startups

Why do the U.K. banks do a better job serving small businesses online compared to their U.S. counterparts?¹ Perhaps U.S. banks are underestimating the value of services targeted directly to small business owners. Or maybe they’ve found it too difficult because business owners won’t bother switching bank accounts to save a few bucks a month. That’s why it makes so much sense for Barclays Bank to focus on startups at its business website <business.barclays.co.uk>. After all, if you succeed in being a startup’s first bank, you have the inside track to retain its business over time.

Barclays business homepage (see below) is dominated by a shaded area asking the important question, Starting a business? Even though the vast majority of visitors already have a business and a banking relationship with Barclays, those most likely shopping for services are startups. The bank also offers Pain relief in a box, a proprietary business management and accounting program targeted for tiny businesses or startups that haven’t settled on an accounting software system.

¹Two out of three of our Best of Web winners for small businesses are headquartered in the U.K.

Barclays’ small business Starter Accounts consist of the following features and benefits:

•          Current account (checking) with an overdraft facility; free for the first 12 months, 18 if you also maintain personal accounts at Barclays
•          Savings account
•          Loans, subject to credit approval of course
•          Insurance
•          45-minute free consultation with a business/marketing consultant
•          45-minute free consultation with an accountant
•          30-minute free consultation with an attorney

NetBank and PNC to offer remote deposits

According to recent press reports, both NetBank (American Banker, May 20) with 1,600 small business clients and PNC Bank (Wall Street Journal, June 8) with 200,000, will launch remote deposit service for their business customers. Although details of the yet-to-be-launched services are sketchy, it is expected that business customers will be able to scan paper checks into a remote device that transmits images to the bank for immediate deposit. PNC estimates the scanners will rent for $15 to $25 per month. No word on pricing from NetBank. The NetBank service is expected in late third quarter and PNC expects to roll-out by yearend. Alogent http://www.alogent.com/  is the technology provider for NetBank.

Benefits for small business owners:

1.   Saves time/money: Frees business owners from the daily/weekly trek to the branch, something 80% of online self-employed households reported doing during the past 30 days according to Javelin Strategy

2.   Improves cash flow: Checks can be deposited immediately rather than collecting dust waiting for the owner’s next trip to the branch

3.   Streamlines record keeping:

i.    the original check can be filed as a paper receipt if desired

ii.   a back-up electronic image is stored at the bank if questions arrive

4.   Improves customer service: Check images can be quickly retrieved and emailed if
a dispute arises

5.   Saves storage space/cost: Paper checks can be destroyed much sooner, eliminating storage and security issues

6.   Improves management control: Owners can spot-check deposit activity by looking at actual check images, rather than staff-entered accounting entries

Speaking as both as a small business owner and an industry analyst, this is a great service and a strong candidate for a Best of the Web award once it becomes operational.

Innovating in online marketing and delivery

Credit cards have always fascinated me. From my first card in 1982, through my stint as a card product manager in the late 80s, I’ve been a student of the industry, watching and learning from the best: American Express, Citibank, First USA, Capital One, and others.

As we entered the Internet era in the mid-to-late 90s, I fully expected the credit card issuers to lead the financial services sector online. For a while, it looked like a good prediction. Many of the early online banking pioneers, NextCard, Providian/GetSmart, Wingspan Bank, C2it, Juniper Financial, had their roots, and business plans, centered on credit cards.

But a funny thing happened as that story was being written. Recession. Whether it was an unseasoned portfolio (NextCard), problems at the parent (Wingspan), or an over reliance on sub-prime (Providian), these pioneers lost their funding and retrenched (Providian, Juniper) or disappeared (NextCard, Wingspan, C2it).

But as card companies recover from the beating they’ve taken during the past three years, we are seeing renewed innovation from the sector. For example, after a decade of struggling to get traction, the card companies have put online bill payment on the map with their convenient card-payment options. As a result, card issuers have some of the largest registered user bases in the financial services arena (Table 1 below):

Table 1

Top 5 Online Cardholder Bases, Year-end 2003
number of online cardholders

Source: Companies, (e) Online Banking Report estimates, +/- 25%, 2/04

We still believe that long-term you are better off wrapping your direct banking efforts around plastic rather than paper ( “Will that be Paper or Plastic?”). If NextCard had been more patient in building its portfolio, they could have been a powerhouse today. So who will take their place as The Internet Credit Card? It’s one of the more intriguing opportunities of the decade.

Table 2

Top 5 Online Cardholder Bases, 2000 to 2003
number of online cardholders

Sources: Companies except, (d) Dove, (e) Online Banking Report estimates, +/-25%, 2/04

Online Card Usage

According to a recent Forrester report,¹ 75% of U.S. credit card customers have online access, and of those 36% (20 million) access their card statements online. More than 60% of those users (12 million) accessed their account regularly. Fisite Research, a company founded by ex-Gomez payments analyst, Paul Jamieson, found even higher usage; with 57% of online cardholders saying they manage some aspect of their card online² (see Table 3, right). Whether the true number is 20 million or 30 million or somewhere in between, we do know that the use of online credit card management has exploded. Three years ago (year-end 2000), fewer than five million households accessed cards online (see full details, Table 5, opposite). Now, at least five individual card issuers have online user bases of five million or more (see Table 2, above).

There is even a greater disparity in estimates of the number of cardholders paying their card bill online. Forrester found that just 36% of online card statement viewers
(7 million HHs) pay their bill online, while Fisite reported 74% of online card managers paid online.² Gartner estimated that 22 million adults pay their card bill online, either directly or through third-party bill pay.³ Based on these estimates and usage numbers from individual card issuers, we estimate 16 and 18 million households pay their card bills online directly at the issuer, up nearly 20-fold since less than one million users at the beginning of 2003.

¹How To Right-Channel Credit Card Customers, by Catherine Graeber, Forrester Research, Jan. 2004, $675, http://www.forrester.com/ , fielded, Q2, 2003
²The TSYS Summer 2003 Executive Online Credit Card Survey, Finite Research, $2495, http://www.fisiteresearch.com/  fielded May/June 2003; the numbers may be higher because respondents included pay-anyone third-party payments in their answers
³EBPP Future Blends Direct Bank Aggregation Models, Jan 13, 2004, by Avivah LItan, Gartner, http://www.gartner.com/  $95, fielded May ‘03

Table 3
U.S. Online Credit Card Usage Estimates

Source: Companies, Online Banking Report, 2/04
*OBR estimates, Fisite reported usage as a percent of cardholders responding
to its online survey fielded summer 2003, household extrapolations by OBR
**Includes online payment direct at card issuer or through third-party bill pay

Table 4
Online Card Evolution

Source: Online Banking Report, 2/04                                                      

Forecast

The convenience and reliability of paying card bills online will continue to drive online credit card growth. For 2004, we project overall growth of five million new online credit card households (range: 4 to 7 million), the same number of newcomers as in 2003. However, the rate of growth will slow slightly to 25% compared to 33% last year. Ten years from now, online credit card penetration is projected to grow to 47 million, 40% of U.S. households, compared to 19% today.

Table 5
Online Credit Card Forecast

U.S. households using online credit cards at year-end*

Source: Online Banking Report projections based on industry data (+/- 30%), 2/04

Table 6a

Consumer Households Using Online Credit Cards: U.S. vs. Worldwide
millions of households actively using online banking and/or online bill payment

Source: Online Banking Report estimates 2/04, accuracy estimated at plus or minus 30% U.S., 40% worldwide

Table 6b

Annual Growth Rate of U.S. Credit Card Households

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

Source: Online Banking Report estimates, 2/04; accuracy estimated at plus or minus 30%

Table 7

OBR Definition: Online Credit Card Household

•         Someone in the household must have done at least ONE of the following during the past 6 months:

•        Viewed balance/available credit or transaction data online¹ for a general purpose² credit or charge card

•        Authorized a card payment at the site of the card issuer (not at a third party such as a bank’s pay-anyone bill-pay service)

Does not include:

•        Online point-of-sale transactions using a credit card

•        Debit or prepaid card account management, application, or purchase

(1) Any connection from home, work, school, or other place where data can be viewed through any device (Web phone, browser, proprietary software, Quicken, Money, etc.)

(2) Visa, MasterCard, American Express, Discover

Table 8

Gomez Top Card Companies

Q3 2003 Scorecard

Source: Gomez, 1/04

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. 

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

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

Table 16

BofA Online Banking & Bill-Pay Users Trend

active users (past 90 days)

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

Table 17

BofA Online Banking & Bill-Pay Metrics

November 2003

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.               

Class of 1998

Four of the top-20 innovations debuted in 1998. Only one exists today in the same format, albeit under new ownership: LendingTree.

Table 13

The Top 10 Annual Innovations: 1999 to 2002

Source: Online Banking Report, 1995 – 2002                  *Due to high activity levels, two lists were prepared in 2000.

Table 14

The Top 10 Annual Innovations: 1995 to 1998

*The 1995 Top Ten is not directly comparable to other years; it simply lists the top 10 financial Web sites
  of the year according to the criteria

Online Banking Report has covered online banking for nine calendar years beginning in 1995. In that time, we’ve seen the industry go from a premium-priced niche service used by just one of every 300 households to a mostly free, mass-market offering used by one of every three households. Following is a list of the top 25 online banking innovations of all time. There were two additions this year, Online Resources “Money HQ,” at number 15, and PSECU’s Upost@home at number 23.  

Table 12
Top 20 Web Banking Innovations of All Time (North America

Source: Online Banking Report, 12/03

The fake Citibank email (below) fooled so many users that the bank took the unusual step of posting a warning on its home page (screenshot left). Last month, Absa Bank did the same thing, to educate customers about the keylogging security breach at the South African bank.

Fake Citibank email.
(Source: Bankers Online, 8/18/03)  www.bankersonline.com/operations/custserv_infosec.html

Royal Bank of Scotland

http://www.oneaccount.com/

Royal’s Elegant OneAccount Demo

The animated demo does a great job explaining the innovative account (access the demo under “How the OneAccount works,” then choose “Detailed Guide”).

We’ve looked at hundreds, no make that thousands, of online demos, and Royal Bank of Scotland’s OneAccount demo is one of the best. The OneAccount, which now boasts over 100,000 users, is an award-winning* mortgage product that combines debit (checking, savings) and credit accounts (mortgage, loans, cards) into a single master account that minimizes interest paid by continually paying down the mortgage balance with excess funds. It was launched in 1998 with Virgin, as the VirginOne account. You can still get to the product from Virgin’s UK finance site,  http://www.virginmoney.com/  but the program is now wholly owned by Royal Bank.

The yellow-and-blue online demo shows a faucet filling different “buckets” from water drawn from the outline of a home. The only sound is that of water being poured and the stamp of credit obligations being paid off. The demo is fast and effective and does a great job reinforcing the elegance of the OneAccount solution.

The account used to be known as VirginOne.

*The product was even called a “disruptive technology” by author
Clayton Christensen at a Retail Delivery keynote a few years ago.

MBNA
http://www.mbna.com/

Free Credit Report Monitoring for New
MBNA Worldpoints Cardholders

NEW! Free Protection
from identity theft

MBNA E-lert

-- teaser copy on direct mail 9/12/03

MBNA, the Wilmington, Delaware-based credit card giant, is bundling daily email credit report monitoring with its WorldPoints Platinum Plus MasterCard. The MBNA e-lert service, powered by Intersections Inc., checks the cardholder’s Equifax credit file every day and provides email notification of significant events such as a credit inquiry, new account opened, address change, and so on. Users also receive a monthly email if no changes have been detected.

Innovations:

<     Offered free-of-charge compared to $9.99/mo on the MBNA/Intersections co-branded PrivacyAssist site  http://www.mbnaprivacyassist.com/ 

<     In a preapproved direct mailing we received Sept. 13, the e-lert service was featured prominently with “teaser copy” on the outer envelope (see above, a 0% interest rate offer was also on the envelope) and a one-page insert dedicated to the new feature.

<     The sales rep we talked to on the phone was conversant in the benefits of the service.

Caveats:

<     There is no mention of the service on the MBNA website  http://www.mbna.com/  the rewards site  http://www.mbnaworldpoints.com/  or the account access site  http://www.mbnanetaccess.com/   so it’s probably a test.

<     In order to maintain the free credit monitoring service, cardholders must make at least one retail purchase every 90 days.

<     The service does not include access to full credit reports; presumably they would be cross-sold, perhaps even paid for with rewards points.

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.

Eight of the top 20 innovations debuted in 1997. Most are still around in one form or another more often than not, but under new corporate ownership.

#9: Beneficial Finance

Beneficial Finance, now owned by Household International, launched the first real-time approved mini-app in January 1997. The loan program, cleverly branded “Two-Minute Loan,” wasn’t widely marketed, probably due to credit quality concerns. At left is a screenshot from January 1997.

#15: PeopleFirst Finance

PeopleFirst Finance, pioneer of blank-check auto lending in 1997, was purchased by Capital One Sept. 2001 and continues to dominate the category. Total originations in the four years prior to its acquisition were more than $2 billion. Here’s a screenshot from August 1998.

#18: QSpace

QSpace, now owned by Experian, was a couple years ahead of its time. It launched the first Web-based retail credit report in August 1997, but it wasn’t until 2001 that a significant number of consumers trusted the Web enough to use it for credit report retrieval. This is how the service looked at launch, mid-1997 .

Online Banking Report has covered Net banking for eight calendar years beginning with 1995. In that time, we’ve seen the industry go from a premium-priced niche service used by just one of out of every 300 households to a mostly free, mass-market offering used by one of every four households. Following is a list of the top 20 online banking innovations of all time. There were no changes to the list in 2002.

#1: May 1995 ushered in the Net banking era and is the month Wells Fargo first posted statement data on the Web.

#3: LendingTree is the first radically new retail banking business model to gain a critical mass and profitability.

Top 20 Web Banking Innovations of All Time (North America)

Source: Online Banking Report, 12/02

Mortgages may be the first traditional banking product to lose market share to Web-based competitors. Why? It’s a significant consumer purchase, estimated to consume more than 80% of a household’s disposable income in the year of purchase. Second, with thousands of unregulated and highly competitive mortgage brokers scrambling to grab another tenth of a point of market share, innovation is a certainty.

TD Bank Provides Continuous User Feedback with Novel Session Logs

TD Access: Web banking from Toronto-Dominion Bank www.tdaccess.com includes a superb feature we haven’t seen before. Session History tracks user activity and provides real-time transaction confirmations. It’s a wonderful tool for users of all abilities, but especially those new to the program. We expect the feature to quickly become state-of-the-art in the industry.

TD Bank

www.tdbank.ca

TD Bank (Toronto, Ontario, Canada; 3 million checking accounts), even as it awaits the merger with CIBC to be finalized, is on an online roll. The newest program, TD Access: Web Banking launched on May 5 with a goal of 40,000 users within six months. We spoke with interactive chief Steve Gesner recently about the new program and TD’s online initiatives in general.

We were impressed by how seriously the bank takes its online banking services. With 350,000 Web visitors per month and 400,000 unique subscribers (see table) across its banking and brokerage services, you can see why. They are a profit-oriented unit developing new features at a clip more associated with software companies than banks.

The bank’s Product of the Month winner is its novel Session History feature. Though it sounds ho-hum, it’s a missing ingredient in online banking. By providing continual feedback on banking sessions, users have the peace of mind, and a printed record if they like, that every transaction they’ve entered has been recognized by the bank. Obvious, but brillliant!
Contact: Stephen Gesner is Interactive Services Manager, (416) 982-4088, gesnes@tdbank.ca .

TD’s new Web banking program includes convenient download buttons to Money and Quicken.

Last month we began a two-part look at the role non-financial content can play in your online strategies. Our thinking on this subject has evolved during our three years of analyzing financial institution Web sites. When we made our first recommendations for the optimal feature-set for a financial institution Web in June 1995 (table below), we didn’t see the need for non-financial content beyond simple things such as community links and personal finance information.

Three years later, we still believe these twelve modules are the core of a good banking Web. But with more than 2,700 Webs in the U.S. alone if your strategic plans include increasing market share among online consumers, you must look beyond the basics. That’s why non-financial features deserve a second look. If nothing else, think of them as easier-to-implement placeholders while you wait for your I/S dept. or technology vendors to deliver more advanced financial analysis and personalization features to your Web.

1. Enhance/Differentiate your Online Banking Program: There are two problems facing online banking programs as they attempt to expand beyond the early adopter segment:

• Lack of REAL-WORLD benefits: The first 5% of your customer base, the so-called early adopters, don’t need to be sold on the advantages of banking online; they are adept at visualizing the benefits themselves. The other 95% are more of a challenge. They are pragmatic and not about to buy something new until they see real benefits in cost savings, time savings, or quality improvements. Simple to understand non-financial content, such as free email , can help you appeal to the pragmatists.
• Lack of differentiation: The problem with attracting new customers to your bank is that most online banking programs are very similar on the surface. Non-financial content can be used to develop a lengthy list of unique features to aid your online account acquisition efforts.

2. Improve your Position in Search Engine Results: The more diversity there is to your online content, the better your chances of being displayed prominently in search engine results. For example, business owners searching on “small business advice” could be drawn to your Web site’s Small Business Advisor online newsletter.

3. Improve Brand Positioning with Online Users: Everyone wants to do business with winners. The more robust your online offerings appear, the more likely you are to attract new customers. Note of caution here: You must be careful not to bury core functions behind less useful content. First Technology Credit Union (screenshot below) puts the four most important features right on their first page:

•  account access
•  customer service
•  rates
•  loan application

First Tech CU puts the four most important Web features right on its first page at www.1sttech.com .

4. Improve Customer Retention: There are three ways your Web can help keep customers locked-in to your financial institution.

•  Help users build a highly personalized online portal to their financial situation. Allow users to enter a wide variety of preferences on how they want to view their account data and how it’s delivered (e.g. email, Web, fax, snail mail, etc.).
•  Offer non-financial functions that require user involvement such as reminder services, free email or virtual safe. Once the user has gone to the trouble of setting up these services, they will be less likely to move their accounts.
•  Allow users to build a large file of account history on your server and/or in a proprietary data format, which would be time-consuming to transfer to another financial institution.

5. Increase Loan Originations: Double-digit growth in Web site traffic makes for great bar charts in PowerPoint presentations; but what attracts funding to you and your Web projects is revenue generation. Every time you add a new feature to your Web, consider the impact on the primary online revenue generator for the next few years, lending.

That’s why we like mundane, yet addictive Web features such as weather forecasts, online datebook/reminders and email services. These are Trojan horses that provide an opportunity to pitch preapproved credit to users each and every week. Advice: Avoid ad banners, especially for repeat visitors. They are obtrusive and increase download times; instead develop a series of eye-catching buttons with loan teasers such as “press here for $5,000” or “press here for an instant tax refund.”

Republic Bank

www.republicbankfl.com

Republic Bank is offering online ordering for
Equifax credit reports on its first page.

Republic Bank (St. Petersburg, FL; $1.5 billion) reports that 6.6% of its customers have signed up for Internet banking during its first five months of operation (launched May 1997). Account access is free, with bill payment priced at $4.95/mo for the first 10 payments, then $0.35 each. The $4.95 charge is waived for users with $15,000 or more on deposit, and for users of its Generations package account, but the $0.35 usage fee remains. The Web banking program runs on Security First Network Bank’s platform www.s1.com.

Republic Bank is offering an innovative customer service and sales tool on its loan page. A feature from AT&T makes it convenient for users to request a telephone call from a bank service rep. Users click on the icon (left), then enter their phone number and whether they can receive a call while logged on (see screenshot right).

Crestar and BankBoston have also been experimenting with this feature. BankBoston reports that 55% of calls have been converted to sales. Cost is $295 for installation plus $295/mo.

Republic is one of the first financial institutions to use AT&T’s Interactive Answers service.

Source: company reports

Equifax provides a co-branded order entry screen www.equifax.com/consumer/order/info2rep.html
for users coming from the Republic Web site
(see screenshot previous page).

Contacts: Christie Gieber is Offer Manager at AT&T interactiveAnswers Service in Bridgewater, NJ (908) 685-8400. David P. Beach is Electronic Banking Manager at Republic Bank, (813) 823-7300.

First Chicago’s File Taxes area is a standard menu item on the Personal Banking section.

First Chicago (Chicago, IL; $109 billion; 2.2 million ATM cards) is the most prominent financial institution partner of SecureTax. The bank also offers a link for ordering Intuit’s TurboTax ($49.95 using a link to a co-branded version of the Internet Shopping Network, www.isn.com ) along with the Web-based SecureTax option. First Chicago wisely captures user name and address before linking into the SecureTax co-branded site where bank customers enter an offer code to save $5.

The SecureTax engine contains 55,000 individual calculations on 940 forms. The company also supports 45 state tax forms, and offers electronic filing to all 20 states supporting that feature. In all, 1,800 forms are available through the Web site. Other competitors, including Intuit, also offer free Web-based tax preparation, but usually the forms supported are limited to a few of the most common ones. Security First Technologies www.s1.com Security First Network Bank’s sister company, designed the security architecture for SecureTax.

The benefits of electronic filing:

•  Refunds in as little as 10 days (a JavaScript program provides users with the estimated date of their refund if they submit their returns that day)
•  Receive an IRS acknowledgement that they received your return
•  Ability to store last year’s returns

SecureTax banner is displayed on AltaVista when searching on any term containing the word “tax.”

We wouldn’t advise getting into this business yourself. The price for Web-based or downloadable software including online filing has dropped to $5 to $15 at most providers (see table). A few, such as Intuit and Block Financial, still offer more expensive shrink-wrapped versions, though both are unveiling low-cost Web services this season.

Contacts: At Universal Tax Systems in Rome, GA, Randy J. Tullos is CEO; Naomi Williams is Mkt. Dir., (706)232-7757, naomi.williams@universalsystems.com .

Source: IRS, 1/26/98, www.irs.treas.gov

Security First Network Bank

www.sfnb.com

The soon-to-be-divested banking affiliate of S1, Security First Network Bank (Atlanta, GA; $89 million), will become the first bank to go paperless beginning with January statements. Customers received a reply card in December statements offering them the option of continuing to receive a paper statement, if they returned the card. Now the bank needs to develop an electronic equivalent to the forgone monthly mailed statement. Specifically, a statement or balance alert
e-mailed periodically, so those of us not visiting the SFNB Web on a regular basis can keep track of our account balance.

Contact: Hope Flammer is VP Marketing, 404.812.6500.

Evergreen Bank

www.evbank.com

Though the bank has recently taken the above graphic off its site, we thought it was a great traffic builder. Evergreen Bank (Seattle, WA; $138 million) had posted a catchy link to “Time, Temp, Traffic, T-Bills” on the front-page of its Web. All the information was provided by other content providers, Evergreen merely provided a convenient jumping-off point. The bank now provides these links in an expanded resources section, but it’s not nearly as prominent. T-Bill rates were provided through unbranded (meaning the bank doesn’t have its name on the site…user must use back button to get back to bank) link to CNNfn www.cnnfn.com/markets/rates.html .

First National Bank of the Internet

www.fnbinternet.com

&

The First National Bank of the Internet is a division of First National Bank of Cherokee.

Now it’s official, you can forget about using the name First National Bank of the Internet as the name of your direct banking division. First National Bank of Cherokee (Woodstock, GA; $85 million) has first use of that catchy name for its Internet division. If it’s any consolation, its Web address doesn’t exactly roll off the tongue,  www.fnbinternet.com .

The bank offers three products, SafeNet Checking, SafeNet CDs, and SafeNet Small Business Administration loans. The site, built by nFront,  www.banking.com , consists of just a few sections, but it covers about 80% of the basics including online account access, deposit and loan account applications, financial calculators, and contact info for the bank. Contact: Tripp Rackley is President at nFront, 706.369.3779.

If your marketing efforts are limited to a specific geographic region, you can take advantage of the thousands of Web sites devoted to particular cities, counties, etc. At a regional Web, you can pay a much lower cost per thousand and reach just the users in your core market. For example, the Seattle Times offers a number of sponsorship opportunities on its Web  www.seattletimes.com. Despite the extremely high penetration of computers in the area, there is nary a financial institution on the site. Even the payment calculators in the real estate and automobile classifieds are without a financial institution sponsor.

.
Two ad banners appear in the real estate section of the Seattle Times online, a traditional real estate broker, and Virtual Realty, which includes a link to an online prequalification form from Redmond Mortgage www.redmondmortgage.com.

Sometimes it’s the little things that are most important. Here are four improvements for your small business Web that could be implemented for a couple thousand dollars.

1. Include “small business” in your Web site description posted on Yahoo and other directories. If you could do just one thing to improve traffic at your site from small business prospects, this would be it. Amazingly, only 19 banks out of the 2,000 or so with Web sites show up on Yahoo when searching for “small business” and “bank.” Refer to the table on the right for the exact bank descriptors that allowed these banks to land in the elite 19.

Cost = $0

2. Give your small business Web its own address such as <smallbiz.yourbank.com> or <www.yourbank.com/smallbiz/>. Better yet allow users to type either of these two addresses to get to your Web.

Cost = minimal depending on how much file restructuring is necessary

3. Post telephone, pager, e-mail, and fax numbers for each of your small business lending officers. Include a hyperlink to a short bio of each lender and a few comments from each person on their particular areas of expertise, unique qualifications, or sales buzz.

Cost = a few hundred at most

4. Make commercial loans the centerpiece of your Web site. The primary (only?) reason a non-customer business owner will pay a visit to your Web is to find out about your commercial lending programs. Within a few seconds of visiting your site, they should be able to identify the pertinent link(s).

Cost = several hundred on up

Yahoo Search Results for
“Small Business” and “Bank”

• Banco Sabadell (Spain) - specialized in individual clients and small, medium businesses and in overseas trade.
• Bank of Melbourne - large regional bank in Victoria providing services for small business and personal customers.
• Cole Taylor Bank - personal banking, small business banking, loans, mortgages.
• Crestmark Bank - specializes in financing small business with factoring, ABL, leasing and traditional loans.
• Enterprise Bank and Trust Company (Lowell, MA) - locally managed commercial bank providing highly responsive service to individuals, professionals and small to medium-sized businesses.
• Franklin Bank - Metropolitan Detroit's bank for small businesses and entrepreneurs.
• First National Bank in Pinckneyville - retail banking for individuals, small businesses and farms.
• First Waco National Bank - An innovative community bank meeting the needs of Small Businesses and Consumers in the Central Texas area.
• Gulf Coast Bank & Trust Company - On line commercial and small business loans, home mortgage loans, consumer loans, and Master Card and Visa.
• Industrial Bank of Korea - bank for the small and medium enterprises
• Lexington Savings Bank - community banking franchise for small businesses and individuals.
• Metropolitan State Bank - Fairfield, NJ - deposit and loan products, specializing in Home Equity, Small Business loans and Mortgages.
• MidFirst Bank - Oklahoma City, OK - offers checking, savings, and investment accounts, as well as consumer, mortgage, small business, and commercial loans.
• NatWest - more than just a bank: news and information about personal, small business and corporate banking services.
• Republic National Bank of Arizona - Arizona's leading small business lender and a full service commercial bank.
• Savings Bank of Walpole - savings, loan and investment services for individuals and small businesses.
• Valley Bank - provider of U.S. small business administration loans in Riverside and San Bernardino counties in Southern California.
• United Bankshares, Inc. - full service community bank geared to small business needs.
• Westamerica Bancorporation - multi-bank holding company serving communities located in northern California from 57 banking branches. mainly targets small businesses and professionals.

Source: Yahoo! www.yahoo.com , 9/17/97; descriptions are provided by banks when submitting to Yahoo (italics ours).

Rockdale National Bank
www.rockbank.com

Rockdale isn’t even open yet and you can learn about its principals, how to invest in the start-up, even access a demo of its upcoming online banking program. They could lose the 85kb ticking clock though.

Rockdale National Bank (Conyers, GA; in organization) will likely become the first new financial institution to launch a full-functioned virtual branch at the same time it cuts the ribbon on its two-branch brick-and-mortar network. nFront www.banking.com  is providing the Net banking technology.
Contacts: Bill Daniel is President at Rockdale National Bank. Tripp Rackley is President at nFront, 706.369.3779 ext. 222, trackley@banking.com .

Crestar

www.crestar.com

Crestar (Richmond, VA; $23 billion; 635,000 ATM cards) will be the first financial institution to implement Web banking from the newest player in the game, Corillian, a Portland, OR-based spin-off from Checkfree. For a look at Corillian’s full-featured Web-based PFM, run through the demo on its Web www.corillian.com (registration required).

The up-and-coming company, run by Ted Spooner, was previously known as Checkfree Net Services. Corillian became an independent entity on May 16, 1997, just 13 months after Checkfree had acquired the company, formerly known as Interactive Solutions Corp., from Mr. Spooner. Interactive Solutions had been closely affiliated with CFI ProServices, processing bill payments on behalf of Personal Branch clients as well as developing Web connectivity for Personal Branch. As part of the April 1996 Checkfree acquisition, the bill payment processing business was divested to minority owner CFI. Other Corillian clients include two California credit unions, Technology FCU and Mission Federal, which will be rolling out Web banking programs this fall.

Contact: At Corillian, Denise Montoya is Product Manager, Ted Spooner is CEO, 503.526.5233. Amy Humphries is at Crestar, 804.782.5404.

MSFDC’s Web site does a good job explaining their approach, so take a trip to www.msfdc.com as soon as you can spare 15 minutes. The Web includes four electronic bill presentment mock-ups: a mortgage statement, an electric utility bill, a cell phone bill, and the credit card statement shown below.

Summary Page: MSFDC divides the screen into three areas using “invisible” frames (no borders):

1. Biller’s logo and advertising message runs across the top of the screen.
2. Navigational menu is on the left.
3. Statement detail is in the middle frame.

Itemized Purchases: This screen contains the statement detail. Since the Web provides far more statement “real estate” than a paper form, billers will be able to present information in a much more readable format using colors and other graphical clues. Statements may also contain promotional messages and offers from the biller or its marketing partners. This could be an attractive advertising medium for the merchants whose charges are itemized on the current statement.

Finance Charges: On this screen the issuer details APR and finance charge calculations. Again, with more real estate to work with, issuers can do a better job explaining the detailed calculations, and provide links for more information. Issuers can also make promotional rate offers from this screen.

Terms and Conditions: This screen provides the “back of the statement” legal and regulatory fine print. Links can be imbedded into the text to send users to the issuer’s Web site for clarification on any term.

Contact: Bryce Hausmann is Business Development Manager at Microsoft, 206.936.4091, bryceha@microsoft.com.

MSFDC’s Web site was well-prepared for launch date.

Microsoft, with more than 150 million users of its software products, and First Data Corp. processor of 150 million credit card accounts, announced a joint venture, MSFDC, that will compete with CheckFree and others in the growing field of digital bill payment. But MSFDC’s approach is radically different, focusing on Web-based bill presentment with a business model based on the biller paying the tab rather than the consumer (or consumer’s bank).

This approach promises to speed consumer adoption, which in turn will finally get billers interested in making the necessary electronic connections. Finally, a solution to the age-old “chicken and egg” conundrum. Which comes first, billers able to accept payments electronically, or consumers wanting to make electronic payments? It no longer matters. The combined Microsoft/First Data entity has the credibility, resources, and customer base to bring both chickens and eggs to the table by the time the service launches in 1998.

While the focus is bill presentment, the service also includes “pay anyone” bill payment so that users know they can get all their bills paid online, not just the ones presented online. Pay anyone bill payment will function in the same manner as competitive services from CheckFree, Travelers Express, and others. Users initiate payment requests online and MSFDC remits the payment to the merchant in the fastest way possible, either electronically or by mailing a paper check. Banks offering the service will be charged fees competitive with other bill pay processors, $0.40 per payment plus or minus a couple cents which banks can pass on to users or absorb.

Bill presentment is more complicated, but far more appealing to everyone involved: end-user, biller, bank, and MSFDC. Billers use Microsoft software to send statements to the MSFDC data center in Denver. Bills are posted to customer mailboxes on the MSFDC server. Users accessing the service through a bank would first log-in to their bank’s Web, then select pay bills to be transported to the MSFDC Web. The transition would be seamless with all screens retaining bank branding and navigation. After authorizing payment, users would be returned to their bank’s Web.

In the background, MSFDC would debit the user’s bank account that evening and send a message to the biller alerting them that payment had been authorized and a debit item had been submitted. At that point, the biller could elect to update the user’s account to show payment was on the way, or they could wait another 24 hours until “good funds” were assured. Either way, it will provide needed relief to bill pay users, and their bank providers, tired of the tedious tracking of “electronic” payments languishing on a postal truck or in the biller’s exception-item bin.

Whether MSFDC pulls it off is yet to be seen, but given the track records of its parents, we think they will. Here’s why:

• It’s Bank Branded: MSFDC could have gone directly to the end-user in the same manner as Microsoft Expedia and Investor. But this would have required a significant investment in time and money building consumer trust. Instead, it appears MSFDC will remain largely behind the scenes, acting as a secure electronic messenger (not unlike the postal service delivering letters and payments). Instead of facing competition from 20,000 U.S. financial institutions, MSFDC has 20,000 potential partners serving 100% of the banking market. The crucial selling point in getting billers off the dime.
• It’s Free: More precisely, billers are picking up the tab instead of consumers. It’s the only proven model for Web success, and it will speed adoption like no amount of advertising and promotion could. Assuming MSFDC can deliver the user base, billers will save considerably more than the $0.30 they are anteing up to MSFDC.
• It Saves Banks Money: Bill payment has been a customer service headache since it was invented. Now banks can offer a state-of-the-art Web service for no cost and minimal customer service expense. With true next day payment, customer service should be a breeze. In fact, once the bugs are worked out, we think your overall expense on an MSFDC bill presentment payment will be negligible. Maybe even less than the support costs of traditional hand-written checks.

1. Forecast Usage Levels: If you haven’t already done so, you will need to forecast the number of new and closed online banking accounts for each year of your planning period. Plus you will need usage forecasts for any line items that you are tracking separately such as number of bill payments, number of funds transfers, number of e-mails, number of customer service requests, etc.

2. Calculate Variable Costs: Variable costs are those expenses that increase with each new online banking subscriber. Therefore, variable costs are totally volume related. The major variable costs were summarized on the previous page.

3. Calculate Fixed Costs: Fixed costs are the opposite of variable costs. They are not volume related. Fixed costs are relatively constant across a large range of volumes. Management salary and benefits, systems development, marketing, and software/hardware purchases are typical fixed costs.

4. Estimate risk factors (if necessary): If you are quantifying intangible benefits, you better do the same for the intangible costs, better known as risks. Some potential risk factors worth noting:

• increased staffing to evaluate and monitor new areas of potential online fraud (especially in the area of bill payment)
• potential procedural changes needed to beef-up internal fraud-prevention controls
• potential monetary losses from fraud in online banking customer accounts (although this risk may already be accounted for within the pricing of the individual products, credit cards, debit cards, checking accounts, etc.)
• potential public relations/consumer confidence cost from a publicly known computer fraud (even if there was no monetary loss)
• management time in evaluating and dealing with unforeseen customer service and performance problems (especially in the area of bill payment)
• costs to correct major errors in transaction processing (especially with bill payment and investment transaction processing)
• increased need for internal training and education in the area of online customer interactions

5. Allocate Overhead and Intercompany Chargebacks (if necessary): Business schools teach that overhead allocations and intercompany accounting treatments are generally irrelevant when evaluating individual projects (because corporate overhead won’t change whether the project is approved or not), but that may not be the way your company handles business cases. So follow company policy on this one. If you have any influence in the matter, simply the analysis by ignoring overhead allocations. You’ll have enough debate on the future of online banking to fill-up all available meeting time (and then some!).

Note on overhead: Allocations for corporate overhead (occupancy, executive management, investor services, etc.) can be either a fixed cost or variable cost depending on formulas used in various financial institutions. Our model spreadsheet does not contain a line item for overhead, but you can easily add one.

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!

Looking for inspiration on how to justify new, or continued investment in your Internet banking services? With fees for simple online account access (not including bill pay) expected to fall to zero, you must consider, and quantify, the many side-benefits, or “soft dollar” benefits of online banking.

Because it’s a five-part business case (see previous page), “running the numbers” through standard product profitability models will likely produce negative returns. Viewed simply as a product, online banking probably doesn’t make the grade, financially anyway. But viewed as a combination product, customer service tool, customer retention program, market research tool, and new sales channel, you may be able to justify sizable investments. Here are some other ideas:

1. Customer Retention: With more than 20,000 financial institutions to choose from, U.S. consumers have a phenomenal level of choice in purchasing financial services. Already 20% of the U.S. population is online, and experts predict the percentage to more than double to 40-50% by year 2000. What do you think would happen if you ignored the needs of that group for another 12 months? or 24 months? As consumers become accustomed to pushed information services (e-mail, voice message, Webcast), financial institutions failing to deliver digital banking information will lose some fraction of their customer base and fail to attract some percentage of new business. Only time will tell whether that sum of somes will be material at your company. But given the number of cost-effective entry strategies available, why take the risk?

2. Reach New Markets: The Web allows you to reach prospects that otherwise would never have heard of you. For example, someone moving to your area from out-of-state. Depending on the size of your market and the number of incoming new residents, that factor alone could justify a Web presence. Other ways to reach prospects online:

• Joint marketing with computer retailers (on or off line): Offer computer financing in a package that includes online loan payments and other online banking services.
• Joint marketing with online Realtors: Offer home financing information services such as mortgage calculators and rate-update e-mail subscriptions, along with mortgage loan preapprovals, home improvement loans, home buyer lines of credit, first-time buyer educational services, etc.
• Online sponsorships/advertisements at local information sites: In order to tap the banking needs of users moving across country or across town, make sure your name is prominent on Web sites that cater to users seeking local information, especially real estate and rental property listings.
• Company banking programs: Online banking may have special appeal to certain companies, especially in the high-tech sector or those with employees scattered all over the world. Create special banking programs with online banking as the centerpiece. Some credit unions have even been able to get their online banking programs installed on company LANs.
• On-site Web banking kiosks: Place kiosks in branches to showcase your Web, and attract attention from prospects. For less than $1,000, you could equip each branch with a 16 MB Pentium computer and modem. Browsers can be configured to run your Web offline, with the modem automatically dialing out each night to download the latest version.
• Off-site Web banking kiosks: To prospect for new business, place kiosks in other retail locations. Pay rent, or better, partner with the company hosting your kiosk and include their Web site(s) as well. For instance: team with a local mailbox provider and put a Web kiosk in their shop that includes a menu of business services:
  • - Federal Express package tracking
  • - UPS package tracking
  • - US Postal Service for ordering stamps and free shipping boxes
  • - outbound e-mail (which the mail center could charge for to pay for the space)
  • - banking/bill pay through your bank

3. Customer Service Improvement: Like your automated phone center, online banking provides 24-hour information far more conveniently and cost effectively than through a branch. But unlike call centers, Internet services can be expanded far beyond balance and transaction look-up. Web users can find their own answers to routine questions (e.g., what’s your rate on six-month CDs?) or you can deliver answers before they even ask (e.g., six months after someone looked up your six-month CD rate, you could e-mail them your latest rates, along with an online transfer form).

How much self is in the service provided by your Web will be determined by how well you deliver information to users in a common-sense, straightforward manner. Must haves for a state-of-the-art Web, circa July 1997: site map, search function, drop-down boxes with links to major areas, and customer service e-forms with drop-down boxes to assist users in formulating their queries to customer service (a few hours spent in forms design could save hundreds of hours of staff time answering incomplete questions).

The problem with justifying a Web site investment based on customer service improvements is the difficulty in quantifying the benefits. You might try comparing the cost per user of delivering information over the phone vs. online. If the number is lower for the online option, or will become lower if your usage projections hold, you have a “quantifiable” benefit.

4. Cross Sales Generator: It seems every new program with a weak business case is justified using cross sales from other products. But with online banking, this assumption may be valid due to the unique sales opportunities from the online connection, such as:

• Checking account consolidation: Most households have multiple financial relationships. Often there is little incentive to consolidate accounts. But online connectivity offers new hope for marketers. Users may find it convenient to have all their financial accounts and transaction archives in one central database. If you’re the first to market with this type of broad-based offering, you may find a significant amount of account consolidation headed your way.
• Overdraft protection: Customers who enjoy auto-mating their finances with online banking are the same ones who buy overdraft protection services. This should be an easy online sale.
• Credit products: The typical online user, younger with above-average income, is also inclined to be a heavy user of credit products.
• Savings/investment plans: Baby boomers are interested in saving for college and retirement. Forced savings plans delivered online and reinforced with outbound messaging could be a strong sales tool for your deposit/investment products.

5. Bank Image: While the media no longer jumps on every online story, new online initiatives still generate consumer interest and build a positive image. With the right angle, you can still expect good play in the media when you launch your program or create your Net banking first. Your advertising or public relations agency can quantify this PR value.

6. Cost Savings: Long-term (10-15 years), online banking will reduce industry costs dramatically as paper checks disappear and branches are downsized into sales-oriented nooks in high-traffic retail locations. But even short-term there are potential savings worth quantifying for your business case:

• Customer Service: Reduce staff expense by answering customer e-mails during slack time.
• Telecommunications: In-bound 800-number expenses can be reduced through less expensive Web access to information and help.
• Check processing: By 1999, electronic bill payment/presentment will begin to have a measurable impact on the number of paper checks processed in the United States
• Data entry: Every form your customers complete should be mounted on your Web, from credit applications to change-of-address forms. Not only does this save you the expense of reentering the data from a paper form, it can dramatically reduce the number of errors and customer call-backs. Web-based forms can be programmed to check the data entered and prompt the user for additional information, or verify questionable entries.

7. Checking/Credit Card Account Enhancement: What have you done lately to distinguish your checking account from the competition? ATMs, POS, overdraft protection and 24-hour touchtone access are now standard fare. Online access, e-mail customer service, and other services geared towards computer users can spruce up your checking brochure and energize sales at the new accounts desk.

8. Market Research Tool: The value of your Web as a market research tool hasn’t received much attention in the banking press. But consider the benefits of posting a survey on your Web:

• immediate results
• little cost to post
• no data entry expense/errors
• no irritating telephone calling
• easy to change the questions quickly
• can be interactive
• can be presented only to target customer types

9. New Fee-Based Revenue Streams: Being wired to your customers creates a whole new category of fee income, what we have called “alert services,” or better, the name coined by Signet Bank “notification” services. This is a “push” information service that sends an e-mail notification whenever your balance hits user-defined trigger points. While the two banks that currently offer these services, Signet and Britton and Koontz , have elected to offer them free-of-charge, this is a value-add that could support fees, especially since they are completely optional for your customers.

We think consumers will accept a small fee, say $0.10 to $0.15 per message with a cap of $5/mo (see p.8), each time their “personal electronic banker” sends an e-mail alert regarding account balance or activity, maybe more if the alert service offered automatic escalation (e.g., if the user doesn’t reply back confirming the e-mail alert within 24 hours, a second alert would be issued via voice message).

10. Component of Total Household Profitability: With the free-fall in information storage and processing costs, it can be cost effective to track total profitability at the individual household level. One use of that information is to make better decisions about delivery channels and customer service required by high-profit households. If Pareto’s Law holds in your company and 20% of your households provide 80% of profits, you will want to provide the channels these folks want. Even if only a quarter of those top 20% are Internet users, you are risking 20% of your company’s profits by under investing in the Internet channel.

The value of the wired connection isn’t limited to data delivery either. You can leverage e-mail and Web-based messaging to increase “share of wallet.” By tracking user preferences and Web usage, your electronic personal bankers can make appropriate product pitches in a helpful, unobtrusive manner. For example, a day or two after a user used your mortgage refi calculator, the e-banker could send an e-mail offering advice on refinancing mortgages.

11. Improving the Level of Personal Service: We covered this in detail in the last two issues. Consider the Web and e-mail as a way to create an ongoing dialogue with users so that you can enhance the level of personal service delivered, thus improving overall satisfaction levels. To quantify this benefit, multiply the average profitability of online households and times the estimated number of incremental households retained.

12. Platform for the Future: With an estimated 80 million worldwide users of e-mail today, growing to 200 million in three years (Source: Morgan Stanley, 2/97), does anyone doubt that the Internet has arrived as an important communications channel? With a global market of 200 million, hardware, software, and connectivity vendors will continue to innovate at a rapid pace. It won’t be long before Web access is imbedded in televisions, phones, public kiosks, ATMs, and video game players. And don’t forget the potential for Web-based smart card services, downloading cash, updating databases contained on the card, etc. You may want to boost usage forecasts in year 2000 and beyond to account for the expected growth in Internet connectivity and usage

Treasury Bank (Washington D.C.; $50 million) joins Mark Twain Bank, now part of Mercantile Bank
(St. Louis, MO; $19 billion; 440,000 ATM cards) in offering foreign currency time deposits (FCTD). Citibank and First Union also offer foreign currency-denominated CDs but not through the Internet. Treasury Bank’s CDs are marketed by its Treasury WorldWide division at www.treasuryworldwide.com. The first page (screenshot above) shows a map of the world complete with current 90-day CD rates for each currency. The day we visited (May 7), 90-day rates varied from 1.42% for CDs denominated in Swiss francs to 17.5% in Mexican pesos. For comparison, the U.S. dollar rate was 5.10%.

Unlike Mark Twain’s CDs which carry full FDIC protection, Treasury Bank does not hold the deposits. The money is brokered off to participating banks in each country; therefore, no FDIC protection. However, in many cases the country where the deposit is being held offers similar safeguards through insurance and/or strict oversight. Complete details on deposit protection and tax policies are provided via links on www.treasuryworldwide.com/twwframe.html. Depositors incur all the risks of currency fluctuations.

Along with the 90-day CDs, the bank offers 30-, 180-, 270- and 365-day versions for most currencies. Minimum deposit amount for each FCTD is $20,000. Most of the bank’s fee income will come from a 25 basis point management fee on rollovers.

Fee Income Potential

This is exactly the type of niche product we expect to see more of, both from large banks exploiting their infrastructure advantages and from smaller players looking to boost their returns. Treasury Bank can use the CDs to boost its presence in the lucrative foreign national market in the Washington D.C. area and pick up hot money from around the world. Since the bank doesn’t hold the funds, it’s a pure fee-income business.

Applications can be submitted online or through a print-and-mail form. Funds can be transferred by wire or sent by mail. According to Financial NetNews, Treasury Worldwide is receiving just 365 visitors per day. That will increase as the site becomes better indexed by the big search engines, and gains incoming links from the thousands of personal finance sites.

Analysis

We like what Treasury is doing. The Web site doesn’t beat around the bush. They sell FCTDs and that’s all. No wading through pages of text about merchant card services and student loans before finding the CD area. Rates are displayed on the front page, and clear links allow investors to find more information on specific CDs quickly. And the online form makes it easy to buy.

If Treasury Worldwide truly wants deposits from all over the world, they will need to invest in multilingual capabilities and boost the amount of detail on the Web site. Most investors will need more information about Treasury Bank before wiring off $20,000+. Other banks looking to implement niche services should consider posting similar single-purpose Web sites.

Contacts: Frank Trotter is SVP International Markets at Mark Twain, 314.889.0712. At Treasury Bank, Thomas W. Lynn is CEO; Lecia Smith is Managing Director Treasury WorldWide, 202.296.1300.

When Microsoft first briefed me on its new Active Statement feature, I was both impressed and surprised. I hadn’t expected this level of integration between the Web and personal finance software for at least another year. But when you think about it, it’s an obvious application of Microsoft’s strategy to build Internet linkages into all application software.

As a user of Money since the version 3.0 (the first version with an online banking link) beta-testing days of 1993, I was happy with the software, but not particularly enamored at having to establish a direct-dial connection to servers at Intuit Services Corp. in order to pull down my transaction data. It would be far easier to click over to my bank and get the data right from the Web, probably saving five minutes per access. But not willing to give up a database filled with 3.5 years of transaction history, nor interesting in mastering the convoluted process of importing QIF formatted files, I was left wondering when I personally would be able to use Web-based banking services. In November, Microsoft provided the answer with the introduction of Active Statements.

Definition:
Active Statement: A feature offered on Web sites that allows statement data to be seamlessly downloaded into Microsoft Money directly from the browser. Coding embedded in the data file prevents duplicate transactions from being downloaded into the Money register. More than 50 financial institutions, including Wells Fargo, Wilber National Bank and 29 of Digital Insight’s credit union clients, have agreed to offer Microsoft’s Active Statements. Already, more than 30, mostly Digital Insight clients, are offering it on their Webs.

And why not? If you already support statement downloading in QIF format, offering the Microsoft version is a routine programming chore, and there is no charge from Microsoft. According to Matt Cone, Business Development Manager at Microsoft, adding Active Statement downloading to an existing QIF function is “just a couple of days of development time.” Cone says that bank Web programmers can learn all they need to know to implement Active Statements at Microsoft’s OFC web page.

One of the most important reasons to offer Active Statements, according to Cone, is that it can substantially reduce the customer service time necessary to support data downloading. Walking users through the error-prone process of importing data into a Quicken file using a QIF formatted file can be a customer service nightmare.

There is one small catch though. To use the downloading capability, users must have a copy of Microsoft Money 97 which only runs on Windows 95. But Microsoft is doing its best to minimize that barrier to adoption. Financial institutions can display a link to Microsoft’s website (see Community CU screenshot to the right) where 90-day free trial versions of Money 97 are available for downloading. Users must pay about $35 to continue using the program after the initial 90-day free trial. Once Money 97 is installed users can demo Active Statements at Microsoft’s MoneyZone.

Open Financial Exchange
Intuit will be offering a similar feature later this year. And since Microsoft, Intuit, and Checkfree have agreed to agree on a standard format for online banking record layouts called Open Financial Exchange (OFX), banks will be soon be able to offer downloading to either Quicken or Money 97 using identical code (OFX specs).

Financial institutions react positively
We surveyed many of the thirty banks and credit unions that have adopted Active Statements since its November debut. While it’s too soon to call the feature a hit, most financial institutions reported positive feedback.

Members using Active Statements “feel as if they have more control over their money,” said Jim Craig at New Mexico Educators Federal Credit Union (Albuquerque, NM; $350 million; 45,000 members). “This is the type of feature that we needed to give our online banking product an interactive aspect.” NMEFCU first offered online banking in August 1996 and currently has about 1,000 members using it.

Craig is sold on Active Statements, “Microsoft has come out with a wonderful tool. Now, smaller financial institutions can offer interactive account information without the huge expense of becoming a partner with Microsoft or Intuit, and without the hassle of developing their own proprietary software.” But he is disappointed that NMEFCU receives no recognition in Money 97 itself or on the MoneyZone Web. “If a member looks us up in Money 97’s directory of online institutions, they are told that we don’t have online services. We’ve had a couple members get a little upset when they think they’ve bought Money 97 for nothing.”

Texas Bay Area Credit Union (Pasadena, TX; $90 million; 20,000 members) hopes to have 500 members enrolled in its Internet Account Access program and using Active Statements by summer, said Thomas R. Green, Data Processing Manager. Among the 300 members already online, initial feedback to Active Statements has been good. While Wilber National Bank (Oneonta, NY; $495 million) thinks the Internet will play a large role in the future of banking, they’re finding customers are cautious in moving to the service.

Although Wilber has offered Internet banking since July, most customers continue to use the bank’s proprietary PC software (from Online Resources). CEO Bob Moyer said, “I think that’s just a matter of evolution. The Internet is still used more as a search engine than for active things, though I think that will change.” Moyer sees Active Statements as “one more step into the future” where software gets smarter and handles much of the information retrieval burden.

Carol Szaroleta, Director of Marketing for APL Federal Credit Union ($100 million; 8,000 members), the smallest financial institution with Web-based account access, said the only drawback to offering Active Statements is that some members think the credit union is advertising for Microsoft. Szaroleta estimates that half of APL’s 1,500 online banking members use some sort of money management program. “Demand among our membership for interacting with money management software is high,” she said. “We have had the ability to export information in (QIF) format for several months. In November, there were more than 3,000 hits on the export button.”

Community Credit Union (Plano, TX; $430 million; 115,000 members), the sixth financial institution in the world to offer Web-based account access, will highlight Active Statements in its newsletter, but coordinator Kathi Cavanagh believes most members will discover the new feature by noticing the Microsoft logo on CCU’s Web site (see screenshot above).