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On-lineBanking:StrategicandManagementChallenges

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On-line Banking: Strategic and Management Challenges Elizabeth Daniel and Chris Storey

Introduction The increasingly competit ive environment in the fin- ancial service market has resulted in pressure to develop and utilise alternative delivery channels. The most recent delivery channel to be introduced is on- line or electronic banking. There is wide agreement that electronic delivery will have a significant impact on the future of retail banking. 1-4 Skilled consumers will be able to change banks at the press of a button, in the comfort of their own homes. They will have access to on-line 'intelligent agents' which will give them the ability to compare products for the best terms and conditions and so push prices down. In addition a whole new range of players, such as soft- ware and telephone companies, will view themselves as capable of providing these electronic banking ser- vices to customers and so be interested in entering the banking market. 5-7 If they wish to survive in the on-line home banking age, the retail banks of today will have to earn customer loyalty through product features and service excellence rather than allowing loyalty to stem from customer inertia, as is often the case today. 8

Although electronic banking has been available in the UK since the early 1980s, it is still at an embryonic stage. It is not clear whether all customers want or are comfortable with electronic banking. Technology is changing at a rapid pace making it difficult for both the customer and the bank to determine the best approach. Particular problems arise with trying to integrate new channels with existing channels. It is for these reasons that academic research is needed in this newly emerging delivery channel.

This article identifies the strategic responses of UK retail banks to electronic delivery channels. It has three aims:

1. To identify the different approaches UK banks are taking towards electronic banking.

2. To understand the strategies behind these approaches.

3. To identify the problems and concerns managers have in this area.

To achieve the stated aims of this research, ten in- depth interviews were carried out in seven major retail banking groups in the UK, representing those active in this field. The interviews, which were face to face and semi-structured, were with staff respon- sible for the development and operation of the on-line services and included both technical and marketing personnel. The interviews took place between Jan- uary and May 1997. These were supplemented by an analysis of industry publications on the subject. This information is distilled in the following sections and related to literature on services marketing.

The emphasis of this article is on the strategic issues related to electronic banking and hence there are a number of detailed issues that are not addressed.

Pergamon PII: S0024-6301(97)00074-5

Long Range Planning, Vol. 30, No. 6, pp. 890 to 898, 1997 © 1997 Published by Elsevier Science Ltd. All rights reserved

Printed in Great Britain

These include, hardware and software design and security and crime implications.

Types of Electronic Banking Web Pages In its very simplest form electronic banking can mean the provision of information about the bank and its products via a page on the World Wide Web (WWW). The WWW has been described as the equivalent of a virtual trade show. 9 It allows companies access to groups of customers not being reached before. Cur- rently all the major banks and building societies in the UK have a Web Page. Increasingly these pages are including features that allow the customer to interact with the information provided, for example, cap ~:ulating the payments on a mortgage, and even to interact with the bank itself, via email. Web pages can act as a mechanism for handling customer complaints ~,nd suggestion solicitation. As more use is made of such interactive and mult imedia formats, promotion and selling via Web Pages will become more and more distinct from current forms of remote distribution, such as direct mail and telesales. The interactive nat- ~lre of the channel means messages are more likely to be remembered and it encourages involvement. Research has shown that people remember: '°

• 20% of what they see

• 40% of what they see and hear

• 70% of what they see, hear and do.

Web Pages lack the advice and reassurance that direct contact offers. Therefore they are best suited for offers which are perceived as standardised, low-advice, low ~:omplexity products, such as travel insurance. As ~:ustomers gain in confidence they may be willing to purchase a wider variety of products, such as life insurance and pensions, via this route in the future. This will be aided by development of expert systems ~:apable of handling more complex information and making the process easier from the customer's point ~f view.

Fhe use of the WWW for promotional purposes is m~t limited to the use of Web pages. Advertising on other Web sites and sponsored sites can be used to provide hot links to the supplying company's home page. Techniques for making potential customers aware of and encouraging people to visit your Web sile is an important part of any Web site strategy. It is important to integrate Web pages with existing pro- motional tools and other distribution channels. Care must be taken to ensure that they are all delivering the same message.

On-line Transactional Banking As well as utilising the internet and other electronic vehicles as channels for the distribution of product

• Display balances and statements • Pay bills • Transfer money between accounts • Arrange to pay bills and transfer money • View standing orders and direct debits • View transactions with a search and sort facility • Order cheque books • Transfer information into other software, e.g. a personal

financial manager

information, larger retail banks are exploring their potential as mechanisms for delivery purposes. They are offering their customers the opportunity to gain access to their accounts via PCs or TVs in their own homes, referred to as electronic-, on-line- or home- banking. 11'~2 Some banks are undertaking trials of these systems with a limited number of their customers, whilst others have launched the service to all of their customers. The range of functions that such systems typically offer are shown in Table 1.

Currently there are a number of strategic alter- natives the banks can exploit in order to provide the above services to their customers. These are:

• PC private dial-up services--proprietary software is distributed to customers by the bank. The cus- tomer instals this on his/her PC and accesses the bank via a modem linked directly to the bank. It is this approach that the majority of banks have adopted or undertaking trials on. Banks choosing this approach include NatWest, Midland, Barclays, Bank of Scotland, Citibank and the Nationwide Building Society.11'12

The advantage to the supplier of such a system is one of greater control of the service provided to the customer. With private dial up systems the user is not connected to other services and therefore will not need help finding the bank's services, a process which is termed 'navigation'. On non-private net- works, the customer may have to rely on a third party to provide an interface with the on-line services, and the bank would have little control over this interface. A direct connection to the bank also allows it to control the speed of access to the service and the reliability of the access. In addition it is perceived as being secure by the user.

• Managed Networks-- the bank makes use of a net- work operated by another party. An example of this in the UK is TSB's on-line bank which makes use of the Internet Service Provider CompuServe's net- work. ~1 In the US, a consortium of fifteen banks have linked up with IBM, in order to provide their on-line services via the IBM global network. Com-

Long Range Planning Vol. 30 December 1997

parties are very much reliant on the network sup- plier for the level of service.

• Internet- -customers of the bank can access their account when they access the internet. The only UK bank that currently provides an internet service is the Royal Bank of Scotland, 3 however, Barclays Bank have announced the launch of an internet service later this year. The adoption of the internet for on-line banking systems has been hampered by concerns over security and the speed of access. New users of the internet often have difficulty navigating their way to the page that they want. Customers do perceive the internet to have the advantage of easy access to other on-line services. However, this means they also have easy access to competitors ' products.

• T V b a s e d services--satel l i te TV is currently being used to deliver account information to the TV screens of customers. Trials have also been under- taken on providing banking services to the home via cable TV. A rapid increase of such services is envisaged with the arrival of digital TV services. The Co-operative Bank is currently operating a sat- ellite TV based system in the UK. 13 Interaction with the account information is achieved by use of a touch tone phone. However, the information needs to be 'disguised' as it is making use of a broadcast medium. The main advantage of such systems is that they do not require the user to own a PC. This encourages the mass market uptake of such a systems. However, currently only a limited set of operations are possible.

At present there is a trade-off between the advantages of each system from the consumer 's point of view and the advantages of each system from the supplying organisation's point of view. This can be seen in Fig- ure 1. Consumers are concerned with speed of access

extensive

Supplier Reach

limited

f TV text based

Internet

Ma na g e d network

Private dial up /

low hig~ Customer Control

to the service, its reliability, its perceived security and its user interface. These reflect the degree of control of the service the customers have. Managed networks and private dial-up systems are more attractive to customers on this dimension. Obviously supplying companies are also concerned with these issues. In addition, however, they are concerned with the ease of reaching potential customers that each system pro- vides. TV based systems benefit from the mass market reach that a broadcast medium offers. The internet also has a broader reach than that of a managed net- work or a private dial-up service. Given the advan- tages and disadvantages of the different alternatives, multiple means can be used in order to access dif- ferent target segments.

Future Directions The delivery mechanisms listed in Figure 1 pose important choices for banks currently determining their electronic or home banking strategy. However, future technological developments will cause a blur- ring between some of these alternatives which will require banks constantly to review their chosen strategy.

Those interviewed expressed the view that the key drivers for mass uptake will firstly be internet TV and interactive television services and subsequently, the widespread use of smart cards. The delivery of ser- vices to the television would broaden access from the current segment of the populat ion that have PCs and also would move the use of on-line services from 'the spare bedroom or study' to the main family room of the home. The future will see a blurring of the current internet based services and the TV-based services. The set top decoders required for digital TV will also provide the user with fast internet access 14 and the leading PC manufacturers are planning a new gen- eration of products that combine PCs with digital TV and the internet. 15

The additional functionality offered by smart cards, such as the downloading of cash onto the card from a PC, would be an attractive incentive for customers to undertake electronic home banking as they would effectively have access to 'an ATM in the home'.

The bankers bel ieved that there will be a move away from private dial-up networks towards internet or 'open' provision of services in the future. One driver for this move to the internet is the existence of additional services that the user can access. There was a strong feeling that banking services on their own were not sufficiently compelling to attract some- one to on-line usage; rather there needed to be a criti- cal mass of other worthwhile services. However, many thought that the internet must first develop in terms of speed of access and ease of navigation.

On-line Banking: Strategic and Management Challenges

• To protect or enhance the organisation's reputation for innovation

• Added value for customers • Means of attracting new customers • There is demand from current customers • Competitors are launching services • Cost savings • Potential to develop mass customised services

Source: Field study.

the customer to scroll through three months of account history on their screen. There therefore exists the opportunity to charge the customer for the pro- vision of such added value. Accessibility and ease of interaction with the service provider are key elements of the service offering. 19 In the past is has been the branch network, via location and density of branches, that differentiated between banks and provided a competitive advantage by offering the consumer improved accessibility. More recently the size of the ATM network was seen in a similar fashion. For cer- tain segments of customers on-line banking provides a valuable alternative to existing methods of delivery.

The Strategic Direction It is well recognised that new service offerings may be made for a range of business reasons. Very rarely are new products and services launched purely for bottom-line profit. They may, for example, be laun- ched to complement existing products, to use com- pany resources more fully, to broaden or improve the company image or to diversify or grow into new markets. 16 Easingwood and Percival 17 found new fin- ancial services were aimed at producing a wider range of commercial benefits including: enhancing the pro- fitability of other products; attracting new customers; improving the loyalty of existing customers; pro- viding a platform for future new service products by opening up a new market, or changing the company's image.

Not all of the banks had undertaken a quantitative business case analysis prior to development of their electronic banking service. Even for those that had arrived at a positive NPV at the end of a financial business case, this seemed to be a function of the modest cost invested in the project rather than the prediction of large revenues.

The strategic rationale as to why an organisation should launch or trial electronic banking was both offensive and defensive in nature. The most common reasons given are shown in Table 2 and are discussed below.

To Protect or Enhance Reputation This was one of the most frequently given reasons for launching electronic banking, although it was not given by all interviewees. It is recognised that build- ing a reputation for innovation may make it easier for a company to introduce new products or services in the future, as consumers are more ready to accept new offers from proven innovators. 18

Added Value for Customers Electronic banking undoubtedly offers additional value to the customer via added functionality and accessibility. For example most on-line banks allow

Means of Attracting New Customers One of the key reasons to develop new products and services is to attract new customers either from new segments of the marketplace or by winning share from the competition. 16 The use of multiple distribution channels can increase effective market coverage by enabling different offers to be targeted at different segments. It is argued that an important goal of prod- uct development is to improve the mix of customers which is served by the organisation. 2~

Demand from Current Customers Companies must respond to requests for new services or risk losing customers to competitors. Whilst the majority of customers are unaware of the potential benefits of electronic banking and hence are not demanding these services there is a desire for such services amongst a small number of sophisticated consumers. These requests often come as direct feed- back from Web Pages.

Competitors are Launching Services It has been observed that in recent years many new service offerings in financial services have been cop- ies of offerings by competitors. These defensive laun- ches are aimed at retaining customers that may otherwise move to the new services of the competi- tor. 21'22 Much product development is aimed at keep- ing up with the competition.

Most interviewees viewed their organisations as fast followers in electronic banking, rather than being the prime mover. However, each organisation viewed elements of their offering as unique, and they were keen to stress their benefits.

The advantages of being a fast follower in this area were seen to be that banks could learn from the mis- takes of others; hardware and software costs are reducing all the time, so that they could enter the market with a lower investment than the prime mover; and the prime mover would have to undertake the onerous marketing spend associated with creating a demand amongst consumers for a new product. Con- versely there were concerns in the organisations inter- viewed that they should not be too far behind the

Long Range Planning Vol. 30 December 1997

prime mover in entering the market, otherwise they would have no learning in-house with their own cus- tomer base; customers who were early adopters of new technology or services might leave them for their competitors; and also that they may be locked out of key alliances with other players, such as network operators or software vendors.

Cost Savings It was recognised that electronic delivery will have a lower cost per transaction than more traditional distribution channels. Booz, Allen and Hamilton 23 have estimated that the unit transaction cost for a non-cash payment is £1.08 for a branch, 54p for a telephone bank, 26 p for a PC bank and just 13 p for an internet bank. These figures exclude set-up, instal- lation and capital expenditure costs.

Enable Mass Customisation Using electronic delivery to personalise the offering of products and services to customers was seen as one of the most compelling features of on-line services by a number of the organisations interviewed. One example described was the credit scoring of cus- tomers using information provided by them in the course of their usual on-line transactions and activi- ties. Once scored, this would allow customers to be granted a loan at the click of a button and the funds transferred immediately into their account.

The aim of electronic delivery was expressed by one interviewee as 'more personalisation and push'. The intention would be to capture additional infor- mation about the customer via their interactions with the on-line banking service and use this to tailor the on-line service they received. Offering them products and services specific to their needs would also be possible. The ultimate intention would be to provide 'personal or relationship banking' to all on-line cus- tomers. In the current climate of banks having less and less of a 'relationship' with their customers, for example due to the use of ATMs, this could be an important way of rebuilding that relationship.

However, although different reasons were given for entering the market at the current time there was no doubt in the minds of any of the interviewees that electronic banking was the future for banks. Some predicted that it would be a major distribution chan- nel in between 3 and 5 years time.

Management Challenges One of the key areas of concern facing managers who are involved in the future development of electronic banking is the appropriate method and technology to employ. This issue has already been discussed. However, those managers interviewed also discussed

• Customer acceptance • Integration with other channels • Cost savings • Pricing strategies • Impact of intermediaries • Top management support

Source: Field study.

a number other issues that are of concern to them. These are listed in Table 3.

Customer Acceptance Currently on-line banking is being carried out by very few bank customers. The most frequently mentioned issue during the interview program was the difficulty in predicting when and at what rate the level of usage by customers would start to grow. Without a firmer prediction on future uptake, organisations were find- ing it difficult to commit significant resources to either the development or marketing of these services.

Strategies need to be developed to encourage adop- tion of on-line banking. Service guarantees and trial periods can be used to reduce the perceived risk associated with the services. Steps need to be taken to educate customers how to use the service. This is especially true for the more mature sections of the market who are on the whole reluctant to adopt new technology.

There is also a concern that during the early dif- fusion of electronic banking, providers over-promise to customers who become disil lusioned with the service and stop using it. Poorly designed or im- plemented services by some providers could result in a poor reputation for the whole concept.

Integration with Other Channels It was recognised that electronic delivery would form one of a plurality of channels of communicat ion with the customer. The term 'hybrid marketing systems' has been used to describe the process of adding new channels to existing ones. 24 The main advantage of hybrid marketing systems is increased market cover- age. Multiple channels provide access to multiple seg- ments. However, if channels overlap they compete for the same customers. This can be de-motivating for the high service/high cost channels. Although it would be beneficial to migrate routine transactions on-line, most felt that there will always be a need for face to face, or at least person to person, contact in the provision of financial services.

In order to service this range of communicat ion channels, interviewees referred to a design aim of 'channel independent products and solutions'. This

On-line Banking: Strategic and Management Challenges

would allow operations and system complexity and cost to be kept to a minimum. The same products can be offered through different channels to target different segments. These segments often need dif- ferent levels of advice and support. For those cus- tomers who do not require advice it is relatively uneconomic to deal with them through high service channels such as the traditional branch network. Pre- ~ious research on new product success in the fin- ancial services sector has stressed the importance of multiple distribution channels. 25

Cost Savings The lower transaction costs, discussed above, will only translate into cost savings if transactions can be migrated from higher cost channels to the on-line services in such a way that allows the former to reduce their costs. Also, development, set-up and marketing costs of the on-line service must be kept under check to ensure that these do not negate the lower trans- ~tction costs.

The organisations interviewed were at the stage of having undertaken expenditure to set up their on-line service but were not yet able to make cost savings in ~ther channels, resulting in a net expenditure. Chan- nel usage data will be increasingly important in the tuture to ensure that companies understand how cus- tomers are making use of the different channels {~ftered to them.

Pricing Strategies T h e issue of pricing for on-line services provoked a range of responses. Some managers felt that it was

difficult to charge for any banking services in the UK as customers were accustomed to receiving them free of charge. One organisation had carried out research among its customer base and found that their cus- tomers were aware that on-line delivery offered cost savings to the bank and therefore they did not expect to pay for this service. However, the Royal Bank of Scotland has set a benchmark by charging £1.50 a month for the service after an initial 6 months at no charge. The private dial-up service HOBS, operated by the Bank of Scotland since 1985, also has a monthly charge. The key to being able to charge for electronic banking is to provide significant benefits for the cus- tomer in terms of increased convenience and extra functionality.

The Impact of Intermediaries Figure 2 shows the on-line value chain, which is a useful way to think of the important roles that will exist in delivering on-line services to customers. 2'5 The bank 'manufactures' and markets products and processes information, which is referred to by the generic term 'content'. This is delivered to the cus- tomer via a network. The customer's access to the network and navigation around it are provided by a 'gatekeeper'.

Currently, with branch based banking, the bank is in direct contact with their customer. The need to gain direct contact with customers has in recent times been seen as an important feature in the marketing and delivery of financial. 26 The benefits of this include being able to control all aspects of these processes and also allow the customer to become familiar with

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Long Range Planning Vol. 30 December 1997

the bank itself, rather than building a relationship with intermediaries.

In the case of on-line delivery there is an oppor- tunity for intermediaries to come between the bank and its customer. The need for intermediaries is reduced if the bank offers on-line banking via a pri- vate dial-up service. Here the public telephone sys- tem is used as the network but the bank retains the important role of gatekeeper in-house. This reduced reliance on intermediaries that is one explanation for the majority of UK retail banks offering PC banking.

The scope for intermediaries to come between the bank and its customers was an important concern. However, the managers did not feel it was necessary to own the access to the customer, rather it was impor- tant to control it. The solution they therefore believed would be, where necessary, via the formation of alliances. Most managers felt quite confident that they would be able to make successful alliances with the players in the electronic delivery chain, such as soft- ware vendors, internet access providers and network operators. They felt that the banking industry had relied on alliances for many services for many years, such as credit cards and cash handling, and were increasingly forming alliances with very different kinds of partners such as supermarkets and airlines.

Top Management Support One interviewee stated that their MD had a 'vision' of their organisation providing 'anytime, anywhere banking', and this had set the tone for their electronic banking developments. However, in the other organ- isations it appeared that on-line delivery devel- opment did not have a very high profile within the organisation. Some managers said that lack of com- mitment and awareness at senior levels was the big- gest issue hampering their on-line development. Most teams working in this area seemed to have a modest budget consistent with this low status. Given the pro- found effects that electronic delivery is predicted to have on the future of retail banking, it is alarming that the development of a coherent on-line delivery strategy is not being developed at the very centre of these organisations. All academic studies on the suc- cessful development of new products and services in the financial services sector have stressed the need

for a clear corporate vision and top management com- mitment. 2 7 - 3 °

Conclusions Most of the major retail banking groups in the UK are currently offering, or carrying out trials on, on-line transactional services to consumers in their homes. Those organisations which have not yet reached this stage are watching their competitors closely and plan- ning to be fast followers in the provision of these services. There was no doubt in the minds of any of those interviewed that electronic delivery will become a major distribution channel for retail bank- ing in the next 3 to 5 years.

At present the services being offered or tested are mainly based on private dial up services. This is so that banks can remain in as close a contact as possible with their customers, and intermediaries are not introduced into this relationship. It also allays some of the security concerns that customers and banks have about on-line services and allows the quality of service to be controlled. Despite these benefits of private networks, those interviewed believed that a move towards the provision of services over more open networks is inevitable in the future. Such net- works allow easier access by customers, provide a wealth of other services in addition to banking and will also cut the costs of on-line provision.

There were a number of reasons given as to why organisations are launching electronic banking. These included both defensive reasons, such as their competitors are launching such services, and offens- ive reasons, such as the ability to provide per- sonalised marketing and selling.

The managers also had a number of concerns regarding on-line delivery. These included organ- isational issues, such as support from senior man- agement, and issues related to a changing market place, such as the entrance of new competitors. The most common concern, however, was related to cus- tomer acceptance. The bankers wanted to be able to predict with more confidence when and at what rate on-line banking would grow from a service utilised only by a minority of customers to a major dis- tribution channel.

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On-line Banking: Strategic and Management Challenges

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On-line Banking: Strategic and Management Challenges