t scarcely bears repeating that the online revolution was over-promised. The hype behind that promise was perhaps never more clearly illustrated than Super Bowl Sunday, the year 2000, when no fewer than 17 dotcoms offered their wares at $2 million per 30 seconds--half the available commercial time--and a befuddled nation wondered what the heck they were selling. By the 2001 Super Bowl, reason returned, and the number of advertising dotcoms had dwindled to 3.
To a lesser degree, online banking suffered from some of the same hype. The mania may have climaxed in the giddy year of 1999 when Edward Crutchfield, then CEO of First Union, told Wall Street analysts that he saw a day when three out of four bank branches would shut down as their customers found a home on the Net. If such a day does arrive, Edward Crutchfield won't be around to see it. Today, banks may be contracting personnel, but they are not closing branches.
As Tom Mathis, UMB senior vice president notes, there is no lessening of need for brick and mortar facilities, "but the nature of those interactions is changing." According to Mathis, customers are more likely to seek in-person counseling for "their more complex financial needs." He cites trust and wealth management planning, investments and insurance among other services. In a similar vein, Kevin Barth, Commerce Bank president and COO, reports that Commerce "continues to build new branches and locate new ATMs for optimal customer convenience" all the while customers "are clearly asking for the additional convenience afforded by the Internet."
Customers are doing more than asking. In real terms, no other major online service has experienced the consistently exceptional growth that online banking has. If not for the oversell of the late 90's, online banking would be the rage of the banking world.
How could it not be? Compounded annual growth of customer enrollment since year-end 1994 has been an eye-popping 80 percent. Worldwide, more than 100 million households use the service, up 20-fold. In the U.S., household adoption rates have passed 25 percent. By the end of the decade, those numbers should double to 50 million households. Worldwide, the total is expected to triple to 300 million or more households. Already, several European countries, notably the Scandanavian ones, are pushing 50 percent household use. According to Kansas City president Clyde Wendel, the Bank of America nationwide is registering 135,000 new online customers--each month. Says Stu Lang, president of First National Bank, "Probably no trend has had more impact on banking over the last five years than the growth of the Internet."
In October 2002, the PEW Internet & American Life Project, an initiative of the Pew Research Center, completed the most exhaustive survey on the subject yet undertaken. They estimated that about 37 million Americans had done their banking online. In March 2000, when PEW first asked, only 14 million Americans had done so, a 164 percent increase in just two years. Nor was the increase merely the result of increased Internet use. The percentage of Internet users who banked online increased from 17 percent to 32 percent in that two-year period.
In Kansas City, perhaps due to the relative ease of moving about the city, Internet use tends to be less aggressive than in other areas. Of those banks surveyed only a few cite online usage percentages at or above the national average of about 25 percent online business. Tim Thomas, Executive V.P. and head of retail banking at Bank Midwest reports that banking transactions at Bank Midwest have more than doubled in the past year alone. Stu Lang of First National Bank has harnessed the trend as well. "Our customer base is highly computer-savvy," says Lang, "and we have had great success in establishing a large user group of online banking customers."
Bob Regnier, president of the Bank of Blue Valley, claims a 10-20 percent range for his bank, which seems closer to the area norm. Says Regnier, speaking for more than just his own bank, "We still have a banking system that is based around the check." In fact, the number of checks written by customers at his bank continues to rise annually, though decreasing as a percentage of bank transactions. Nationally, however, according to a recent report by the Federal Reserve, the number of paper checks written by consumers has dropped in real terms from 49.5 billion checks in 2000 to 42.5 billion checks--a 14 percent decrease.
On the more conservative end, Frank Wright, Sr. VP of Electronic Banking for Capitol Federal Savings cites a 5 percent to 7 percent range for his institution. Indeed, he expects usage at Capitol Federal to plateau at about 15 percent.
The Bottom Line
"The real online revolution," according to Stu Lang of First National, involves the use of online services by business customers to manage their day-to-day cash flows more effectively. Adds Kevin Barth of Commerce, "From a commercial perspective, most of our larger commercial customers interact with the bank through our online banking platform."
Bob Regnier agrees that the business market is the one where the demand is most urgent. He tells the story of a prospecting call he made a few years ago on a mid-sized business. He was busily selling all of the features of the bank, when he mentioned that Blue Valley also had a solid Internet banking program. Said the customer, "We wouldnt be talking if [you] didn't." Up until that point, Regnier had been using the bank's online service as "the sizzle to the sale." Afterwards, he realized that it was "an essential bank product." "Relying on a paper trail of data in today's complex business world doesn't cut it for most businesses," affirmed Stu Lang of First National. "To deliver information and images and initiate transactions--all online--has made the difference."
It is likely that online banking will help banks as much as it does their customers. Several respondents to Ingram's survey, however, downplayed that possibility. Said Frank Wright of Capitol Federal, for instance, "Online banking is used as an access channel to support existing customers not as a market expansion leverage tool." Mike Guillon of Gold Bank had a similar take, seeing online banking more as a needed customer service than as "a revenue generating activity."
That much said, as Clyde Wendel of Bank of America notes, online banking has made his operation "cleaner, faster, and more efficient" and presumably more profitable. "We're getting better," Wendel says with conviction.
From a positioning standpoint, contends Tim Thomas of Bank Midwest, "Online banking allows us to compete with large, national financial institutions." Just as importantly, "It allows us to deliver our banking services more efficiently than through traditional brick and mortar facilities."
Convenience
According to PEW, convenience is the number one attraction for all online bankers. Tom Mathis of UMB argues that online banking "has given customers the flexibility to manage their day-to-day banking activities whenever and wherever it is convenient for them." He observes that what started as a useful way to view balances and account activity has evolved to include transactional services such as funds transfers, bill payment and the ability to view online check images-- "a favorite feature among UMB Bank's online banking users." At Gold Bank, CEO Mike Guillon sees online banking as a way "to provide convenient access to information."
According to PEW, the younger Internet users are the most concerned about saving time. 82 percent of online banking users under 50 say that convenience was "very important" to their decision to first bank online. That figure drops ten percent or more among those over 50.
For convenience and other reasons, online banking attracts a younger, more educated group of Internet users. For instance, 36 percent of Internet users between 30 and 49 years old bank online compared to just 16 percent of Internet users age 65 and older. These figures suggest the inevitable growth of the online market. As young people move through the system, it is likely that their usage numbers will only increase. Says Mike Guillon, "As the Internet grows in use and becomes more comfortable for a broader segment of the population, we see on-line banking increasing in importance."
Trends
According to PEW, men are some-what more likely than women to bank online. 35 percent of male Internet users have done so, compared to 30 percent of female Internet users. Online banking also attracts a more diverse group of Internet users than other financial activities. PEW reports Hispanic and African American Internet users are just as likely as white Internet users to bank online.
Not surprisingly, education and affluence are also associated with online banking. 41 percent of college graduate Internet users are e-bankers compared to 23 percent of Internet users with a high school degree. 44 percent of Internet users in the highest-income households--$75,000 or more per year--have banked online, compared to 21 percent of Internet users living in the lowest-income households.
The more experience a person has with the Internet, the more likely they are to bank online. For instance, 39 percent of those who used the Internet for four or more years have banked online compared to 20 percent of those with two to three years of experience and 6 percent of those with one year of experience online. These numbers also suggest a natural future increase in online banking as people grow more familiar and comfortable with online services in general.
Another encouraging development for online banking is the increased use of high-speed connections. Today 49 percent of those with such connections at home bank online as opposed to only 30 percent of dial-up users. As the high-speed numbers swell, and they inevitably will, so too will the numbers of online banking customers.
None of our respondents had a more visionary take on who those customers might be and what form their transactions might take than Tim Mathis of UMB. Said Mathis:
"Some day, financial institutions might monitor your balance for you, move excess money into higher interest bearing accounts and notify you by secure e-mail to your personal computer, personal digital assistant (PDA), or cellular phone; whichever you prefer at whatever time of day you select. Your statements may be available electronically and stored centrally for retrieval at your convenience. Instead of giving cash gifts, you may give a cash value card that can be used anywhere. Instead of going to the ATM, you might be able to download money into your personal cash card using your computer, PDA, or cellular phone. And yes, there may even be a checkless and cashless society. . . someday."