DIVERSE PLAYERS BUILD BANKS ONLINE

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Online banking is creating its own version of convergence in cyberspace.

Credit-card companies and electronic stock brokerages are competing with bricks-and-mortar banks to sell certificates of deposit and checking accounts to the plugged-in masses.

During the past month, American Express Co. and Bank One's First USA -- two of the country's largest credit-card issuers -- both launched online banks. Just weeks earlier, E*Trade, the nation's second-largest online brokerage according to U.S. Bancorp Piper Jaffray, announced a deal to buy Telebanc Financial Corp., the largest online bank according to Bank Rate Monitor.

Citigroup and Wal-Mart Stores are among the companies said to have e-banks waiting in the wings.

"This is something that will take off in the next five years," said Brook Newcomb, senior analyst at Forrester Research.

USERS TO INCREASE MORE THAN FIVE-FOLD

According to Forrester, only 11.9% of 28.6 million wired U.S. households banked online in 1998. But the number of households banking online is expected to jump from 3.4 million last year to 18.5 million by 2003 as consumers become comfortable carrying out transactions on the Web.

Already, two cyberbank models have emerged: In one, established financial companies trade on their name or, in the other, establish what appears to be a maverick start-up.

AmEx's venture, Membership B@nking, falls in the first category, while Wingspan Bank, a venture of Bank One and its First USA unit, is the second.

AmEx didn't even set up a separate bank Web site; Membership B@nking is a part of its site, www.ameri canexpress.com/banking. AmEx was planning banner ads and direct mail to back Membership B@nking.

Meanwhile, Wingspan's ad campaign from Gardner/Nelson Project, New York, plugs its Web site, www.wingspanbank.com, with no mention of the parent.

FRESH BRAND FREES START-UP TO BUILD BUSINESS

Kurt Campisano, senior VP-Internet marketing at First USA, said the company opted for a new brand to give it the freedom to build a bank without encroaching on its existing business. Wingspan Bank, for example, offers higher interest rates on deposits and better deals on checking than the bricks-and-mortar Bank One.

Over time, Mr. Campisano said, Wingspan may drop bank from its name as people get comfortable with online financial services.

First USA, one of the most aggressive financial advertisers on the Web according to Nielsen/NetRatings, is a veteran of Internet marketing.

Credit-card companies have the advantage of experience in using direct mail, testing offers and analyzing results, said Forrester's Mr. Newcomb.

"Companies that have a history doing this in the direct marketing world have a leg up about doing it in the online world," he said.

Online banking has been around since the early 1980s, mainly in the form of dial-up software to let customers perform simple functions such as check balances and transfer funds, said Michael Weiksner, manager of finance strategies at Cyber Dialogue, New York, an Internet database marketing company. He said electronic banking didn't take hold until more recently as the Internet lowered the consumer barrier.

For banks, online banking is an extra cost, said Mr. Weiksner. Cyber Dialogue estimates the annual cost of maintaining an account at an online bank is $54 on average, compared to $62 for traditional bank accounts. However, if a customer uses several channels -- automatic teller machines, bank branches and the Internet -- the cost shoots to $107 per year.

Even so, International Data Corp. estimates 86% of all U.S. banks and credit unions will offer online banking in 2003. Only 6% did so in 1998.

COST VS. TURF

The next few years will see all sorts of experiments with online bank setups and customer incentives, said Mr. Newcomb. Banks will have to balance the cost of setting up online banking against the cost of giving up ground in cyberspace, he said.

"This is a market where early movers have the advantage," said Mr. Newcomb. "The laggards will pay the price."

Losing the brand equity of the parent -- by setting up an online-only spinoff such as Wingspan -- can be a fair trade-off for halving the cost of doing business since the customer uses only the cheapest transaction method.

Additionally, Mr. Weiksner said, customers often see no difference between one brand and another.

"Bank brands are OK. They stand for safety and security," he said. "The problem is, the brands are extremely undifferentiated. The only difference between Fleet and Chase [branches] is location, not brand."

While the number of people banking online is expected to grow rapidly, there has been no major clamor for new ways to bank. That means online banks have to give customers an incentive to change their habits, said Forrester's Mr. Newcomb. What's more, he warned, customers who miss teller windows will be hard to convert.

CONSUMER INCENTIVES

Already, both Membership B@nking and Wingspan offer CD rates almost 1 percentage point higher than the national average among traditional banks and credit unions, free checking and online bill payment, and rebates on ATM fees when customers get cash from another bank's machine.

"People for the most part were comfortable with the way they were brought up to

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