MKF 9790 BANKING AND FINANCIAL SERVICES MARKETING

Report on Internet Banking:

A Cost or Revenue generator?

PREPARED BY:

AMINUL ADHLEN 19901593 ANKUR ARORA 20559313 STEVEN DUMAS 11743492

WORD COUNT: 2048 Words

23RD APRIL 2007

23rd April, 2007

Mr. Steve Worthington

Building S, Level 5

Monash University

400 Dandenong Road

Caulfield East, Vic, 3145

Dear Mr. Worthington,

Re: Report on Internet Banking- A Cost or Revenue generator?

Here is the report you requested on 23 April 2007. This report attempts to analyse whether

internet banking generates cost or revenue.

The report includes an introduction to internet banking, evaluates the various aspects involved

in internet banking, related to cost and revenue and at last provides a conclusion.

Please feel free to contact either of us with any questions or queries you may have regarding

this report as we would be happy to discuss or clarify them with you.

Sincerely yours,

Aminul Adhlen

Mobile: 0439634140

Ankur Arora

Mobile: 0430536274

Steven Dumas

Mobile: 0421235222

Internet Banking

1. Introduction

Every bank has an on-line presence where information about services offered can be obtained.

However, internet banking goes one step further allowing a customer to access their account

on-line, make transactions and amend account/personal details.

If money is transferred on-line, usually the money is transferred over-night if being

transferred to an account within the same bank. However, if money is transferred to an

external account, it can usually take around three working days to transfer.

Internet banking, in addition to basic activities such as transfers, also includes the following:

When banks advertise their products on the internet.

To clarify queries of customers and to address their problems through the internet.

To deliver the monthly statements of customers electronically i.e. in their e-mail

accounts.

An example of internet banking other than making basic transfers can be of ING Direct. ING

Direct hooks depositors with Internet ads and targeted snail mailings--one even offered $25 to

people who open a savings account.

There are two prevalent Internet models in the banking industry-e-banks and e-branches. An e-

bank is a banking institution that exists only on the Internet, with no bricks-and- mortar branch

access. This framework gives a bank the opportunity to exist without paper, without

geographical limitations, and without ever closing the doors to customers. The e-branch model

is where a traditional bricks-and-mortar bank offers Internet banking to its customers.

2. Cost of Internet Banking

In the last few years, the number of households using internet banking has increased

dramatically. In the 1990s, there were hundreds of banks operating as primarily online

providers. By 2003, the number virtual banks and web based start ups had shrunk by 97%.

Most (if not all) brick and mortar banks have now incorporated online banking as one of the

channels used to deliver financial services to consumers. The significant reduction in purely

web-based banks, however, shows there are implications that financial service providers must

consider when utilising the web as way to reach customers.

Internet fraud costs Australian financial institutions 25 million dollars every year. Banks have

implemented a number of measures to increase security. One method has included giving

customers small electronic tokens (about the size of a key-ring) that generate a pass-code every

few minutes, making it impossible for others to guess. While these tokens are compact and

easy to carry, they are confusing to use and costly to produce.

Most consumers and consumer advocates believe the costs of security necessary to effectively

deliver financial services online should be borne by banks. Predictably, financial service

providers feel otherwise. ASICs Electronic Funds Transfer Code of Conduct sets guidelines

for consumers and providers of ATM, EFTPOS, phone banking and internet banking services.

It stipulates that consumers are liable if they are negligent with their PIN numbers, for example,

leaving them in their purse or wallet along with their cards. Alternately, if customers are

negligent with their personal information online, and defrauded as a result, banks are liable.

Banks are now lobbying ASIC to make consumers liable for online negligence. David Tenant,

the director of CARE Financial Counselling Services, disagrees. He believes that banks save so

much money through online banking that its unfair to pass costs onto consumers. Also arguing

that if even the banks have trouble keeping up to date with the latest scams, then the average

consumer shouldnt be expected to do so.

Banks also need to invest in maintaining their websites. Links, for example, need to be active

and up to date. If a link fails to work, then this could result in the loss of a sale. Researchers

have also found a correlation between website download speed and user satisfaction. Increased

competition means greater website features which can lead to greater download time. There are

also other factors that banks dont have control over, such as the infrastructure of various

locations or the computer hardware consumers may have. If customer perceptions are negative,

then the cost may be customers who will take their business to other providers or turn their

backs on internet banking altogether.

Channel creep is another issue that must be considered. While the concept of channel creep

is probably most relevant to exclusively online providers, it could be a potential problem for

multi-channel providers that are over-dependent on online channels of delivery. The internet

represents only one channel of delivery in a multi-channel environment.

Consumers may be happy to start off with a delivery platform based solely around the internet,

but changing circumstances may demand access that the internet cannot provide. Fast access to

large amounts cash or bank cheques, for example, may require internet providers to form

expensive partnerships with brick and mortar financial service providers. The cost of this

may not only be financial. These partnerships may serve to dilute the identity of ones brand,

the result being that consumers identify you as a partner of another institution, or even worse, a

subsidiary!

The ease with which financial services can be provided online, also results in increased

competition. An over-supply of providers can only lead to a greater investment in marketing. A

lack of name recognition and a saturated market force online banks to engage in more

desperate measures to recruit more customers and maintain existing ones, putting pressure on

already squeezed margins. Internet banks offer an average amount of interest on deposit

products 1% higher than their brick and mortar counterparts. Weak lending relationships with

consumers also necessitate investing in lower yielding securities, such as bonds, rather than

more profitable investment vehicles, such as home loans.

Online banking has also seen the emergence of intelligent agents, such as Infochoice and

Cannex, that enable consumers to compare a range of products offered by competing providers.

This development can only serve to increase competition for banks. Product comparisons

become much easier, resulting in a price induced erosion of brand loyalty.

Banks will become increasingly exposed to the vagaries of empowered consumers, seen by

some commentators as kings and queens, in an increasingly competitive and transparent

market place. The traditional inertia (or apathy) that previously characterised consumers of

financial products is in decline. Consumers are now becoming increasingly demanding, as

banks must grow to accept that changing financial service providers is as simple as a mouse

click away, and no longer subject to the temporal or geographical barriers that may have

hindered customers in the pre-online world.

3. Revenue from Internet Banking

In this part, we will see how internet banking generates revenue for financial institutions and

how beneficial it is in todays business which is exceedingly competitive. Internet banking is

fairly new in the industry even though the internet has been around since the 1980s.

Throughout these years, the internet has experienced rapid changes as now it is more user-

friendly, a much faster speed connection and it is affordable.

When internet banking first emerged, banks were ecstatic as internet banking was forecasted as

the new revenue maker for the industry. The initial plan was to charge customers a fee for

transactions done over the internet; this includes any account update, balance check or online

payments. However it did not go as planned due to a number of reasons. Firstly, there were

stiff competitions between all the banks adopting the new technology, security issues such as

fraud and account hacking, and the number of customers adopting the internet technology was

not as high as expected.

So how does internet banking generate revenue? Through advertising of products on the

internet, this marketing technique apparently has been very successful for banks because the

one of the unique characteristics of the internet is interest driven which means users seek a

certain or a specific website as it is their own initiative or interest which makes advertising of

products reach the proper or relevant audience. Unlike the television where advertisements are

targeted at a mass audience and it usually does not reach the intended audience. Lloyds TSB

stated in a report that internet sales represented almost half of its total product sales which

support the point of how internet banking generates revenue.

Banks are able to offer much competitive rates to customers the reason being that no extra

physical branches are needed to set-up internet banking; in fact it would be possible for banks

to close down a few branches in order to save cost. As discussed earlier, the e-bank model,

through that model it is possible for banks to not even have any physical branches, solely focus

on online banking and still succeed and a very good example would be ING Bank. However,

there are some doubts that internet banking results in closing of branches in fact some would

argue more branches are opened to fulfil the demand of customers. This will then lead to the

next point of how internet banking generates revenue.

As there are no physical branches needed for online banking, this gives the bank an

opportunity to cut cost by doing paperless transactions. Now, banks are able to save thousands

of dollars on mailing and printing, and send customers account and card statement

electronically. Study also shows that banks are able to generate revenue whenever customers

do their banking online. Theoretically, if customer Z makes a transaction in-person at the

branch, this would cost the bank $1.07, and that same transaction would cost the bank $0.27 if

done at the ATM, however if customer Z does the same transaction online it would cost the

bank a measly $0.02!. This means that the bank have generated a savings of $1.05 per

customer and just imagine the amount saved if the banks entire customer did their transactions

online.

Finally, an accurate target market is vital for financial institutions in order to have successful

internet banking. Researches show that most banks target high income earners age 25-50 years

old. This may be because these customers are technology savvy and are well off. In-line with

the statement above, a study done by Well Fargo Bank in the United States showed that their

online customers have an average income of $75000 per annum with higher education level

than average. Furthermore, the study showed that Wells Fargos online customers generate

50% more revenue than average, hold 20% higher balances and use 50% more products.

There are parties that are sceptical with these studies and the results; and doubt internet

banking generates revenue for financial institutions. These studies may still be at an infancy

level and further research needs to be done but internet banking has most definitely changed

the banking industry in this new millennium. It can not only generate revenue and save costs

for banks, but it can also improve the quality standards of customer service as bank employees

have more time to spend and pay extra attention to customers that really have to deal with the

bank at its branches which may result in a higher level of overall customer satisfaction and

quality of work.

4. Conclusion

Internet banking has grown the fastest when compared to other activities on the internet such as

online games, online shopping, etc. And, that is why; every bank is investing in internet

banking irrespective of whether it generates cost or revenue.

The banks operating solely on internet boast of lower costs, even in the case of attracting new

customers. For instance, ING Direct spends just $90 to land a new customer, compared with as

much as $350 at a typical bank. And bagging web-savvy depositors, who spend an average of

just 16 minutes per month on its site, compared with 60 minutes for Bank of America users,

helps minimize site maintenance costs.

Therefore for a bank, internet banking involves costs at the beginning, when the website is

supposed to be designed and then regularly maintained to ensure that banking on their site is

secure for its clients. And, it generates revenue as bank has a cheaper source available for

advertising, it needs less staff for its operations if it has internet banking as a channel of

distribution and it is less expensive for a bank to entertain customers online.

Internet banking, thus incurs costs at the beginning of its operation and there is cost involved

over time due to maintenance. But, these costs are offset by the revenue generated from

internet banking in a shorter period of time.