Most banking customers aren’t quite ready to abandon local bank branches for their PCs, but almost a third are headed that way.
That’s one conclusion from Internet researcher Jupiter Communications that points to a fundamental shift in how Americans manage their money. By 2003, Jupiter predicts, 26 million U.S. households will bank online, up from about 10.2 million this year. This will represent just under 30 percent of U.S. banking households.
In the coming years, customers will more routinely use the Internet to check account balances, research rates, apply for loans and pay and receive bills, the research group said. Jupiter also reported that households making more than $50,000 a year would continue to make up the bulk of Internet banking users.
These numbers have banks of all sizes boosting their online financial services to attract and retain these tech-savvy, often affluent customers. But many banks also face the challenges of building an online presence while integrating differing computer systems after mergers and trying to smooth out gaps in services and customer complaints. Many people, analysts say, still prefer dividing their banking tasks among all their available options, such as the Internet, ATM, telephone and their local branch office.
“Overall, online banking adoption rates are still low,” said William Wong, an analyst with Josephthal & Co. in New York.
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For decades, the image of the local bank–the sturdy downtown building with stone columns outside and a walk-in safe inside–has symbolized financial security. Stopping by the bank was one of life’s routines.
Most people grew up where the bank played a substantial role in the development of communities, said Paul Jamieson, senior analyst of banking and payment services for Gomez Advisors Inc., which rates Internet banking services. “The bank’s presence still plays a critical role,” he added.
Many bankers and analysts predict that Internet banking will grow as the methods of paying bills online improve and as people use the Internet for a wider array of financial tasks.
After costly mergers, many financial institutions also are recognizing the potential savings brought by steering transactions from traditional branches to the Internet. “They’re in the process of understanding they can service their customers far more cheaply through this channel than any other channels they have,” Jamieson said.
But the wave of bank consolidation has also left newly merged banks working under sometimes multiple computer platforms, making it more difficult to create the unified online presence analysts say is critical for success on the Internet.
San Francisco-based Wells Fargo Bank, which has offered online services since 1989, gained 1 million Internet customers in the last year–to 2.1 million in July–after gaining its first million between 1995 and 1999, bank spokeswoman Wendy Grover said. The bank also reported strong growth in online bill payment.
Bank of America Corp., the nation’s largest bank, is in the process of rolling out and promoting Web-based bill payment, with about 700,000 already signed up for the service, according to spokeswoman Linda Mueller. “What we’re seeing is, as people become comfortable with online banking they’re also opting for bill payment services,” she said.
The Charlotte-based bank reported that its Internet service is growing at a rate of about 120,000 customers a month. Of the bank’s base of about 30 million households, about 2.4 million customers use the online service, Mueller said.
Eric Rothmann, banking analyst with First Security Van Kasper in San Francisco, said a full line of Internet banking helps a bank develop brand loyalty. “The more lines of business you have, the higher stickability you have. They’re going to stick with you longer,” he said.
Internet-only banks face challenges establishing themselves in an industry where small banks sell themselves on customer service and giant institutions offer vast networks of branches and ATMs.
Deborah Newman, spokeswoman of E*Trade Bank, a subsidiary of Menlo Park, Calif.-based E*Trade Group, said physical branches handled about 41 percent of bank transactions in 1999, leaving plenty of room for Internet-only banks. Newman said the bank offers an ATM-free refund program and added a network of 8,800 ATMs.
“The whole point of Internet banking is the superior value it can provide to the customer,” Newman said. The bank’s branches system reduces its operating costs by a third-to-a-half that of a traditional bank, allowing it to offer lower fees and higher interest rates to customers, she added.
For E*Trade Group, Wong said, an online bank is part of an overall strategy to use its trusted brand name to accumulate more of a customer’s assets. He said the average E*Trade brokerage customers have about 25 percent of their assets with the company, making it not their primary financial services provider. “I think it has to do with offering additional services,” he said of the bank.
E*Trade Bank reported about $8 billion in assets and more than 250,000 customers, up from $5 billion in assets and 130,000 customers at the end of 1999, according to Newman. In January, E*Trade completed its merger with Telebank, which was the nation’s largest pure-play Internet bank.
Gomez’s Jamieson said though Americans have not taken to Internet banking as quickly as originally predicted, the stream of customers to online banking will continue for years ahead.
“As customers get more comfortable with the online bank,” he said, “brick and mortar will be less of a presence in acquiring customers than it is now.”