Online Banking

Report Highlights

• In 1998, just 6.6% of American households accessed their checking accounts via the Internet or using closed-end online services offered by banks. That figure will double by year-end 2000, to 13.7% of households with a checking account. By 2005, a projected 40 million American households (38.6% of U.S. households with a checking account) will bank at least occasionally online, a 25.2% AAGR that is in marked contrast to the 1.7% AAGR rate for household banking overall.
• Over the next five years, online banking will grow slightly faster than the online transactional universe as a whole (220% AAGR versus 21.3% for all other online transactional categories), as some banks scramble to add an online presence to their distribution channel mix and others add transactional capability to existing informational sites. The sheer ubiquity of bank checking accounts is a key factor, as is the larger number of banks versus other institutions (i.e., insurance companies, brokerage firms, and non-bank lenders).

INTRODUCTION

STUDY GOALS AND OBJECTIVES

When it was introduced in the 1980s, PC banking was supposed to revolutionize the way people handle their personal finances. Optimistic industry analysts posited that by the year 2000, nearly everyone in the U.S. would do their banking online.

The online banking revolution has largely failed to materialize – at least, not at the pace that was first envisioned. Still, the proliferation of the Internet has given online banking a fresh transfusion of growth in the last two years. Non-bank companies have taken advantage of the low barriers to entry made possible by the Internet to encroach into the banking and bill presentment marketplace. Meanwhile, new legislation has opened the door to competition from brokers, insurance companies and other financial service competitors, all of whom are fighting banks for their customers.

This report attempts to define the market for online banking and financial services, including the major transactional categories: e-banking, online brokerage, Internet-enabled credit cards, online insurance and online lending, plus electronic bill pay and presentment.

The report details the competitive forces shaping the market, the regional breakdown of the market and its participants, and the competitive dynamics between the bricks-and-mortar players and the upstart online-only companies sweeping into the marketplace.

Finally, this report projects the near-term future of the online banking and larger financial services marketplace, with an emphasis on what banks and their competitors must do to attract and retain customers.

REASONS FOR DOING THE STUDY

Despite the widespread attention that online banking and finance has attracted, from the financial services community, from government regulators, and from budding "Netrepreneurs," there is surprisingly little agreement in the analyst community about the size, structure and scope of the online banking sector. Projections on where the market is going vary widely, with that variation matched only by the disparities in the historical data.

The aim of this study to test the conventional wisdom about the online financial services market, and to define clearly and concisely, its structure, key players, and the marketing imperatives that will drive it over the next several years.

CONTRIBUTION OF THE STUDY AND FOR WHOM

Today, the financial services market is accessible not just to bankers, but to players from a variety of sectors. The barriers to entry are low, but a ground swell of consumer trust and excitement has yet to materialize in the online banking market in the U.S. This study seeks to understand why, and to begin to craft strategies for the future. Fundamentally, this study was undertaken:

• To create a framework for understanding the online financial services market
• To reveal the implications of the convergence of financial services online; and
• To assist marketing and management executives and professionals in delineating the market forces affecting the financial services market.

SCOPE AND FORMAT

This report covers the macro and microeconomic trends shaping the financial services market. The technological changes sweeping the market are addressed, but the minutiae of the technical aspects of online banking, such as the specific programming platforms, are not. Instead, the report focuses on the marketing implications of online banking for existing and potential financial services companies.

METHODOLOGY

The top 100 banks hold a disproportionate 69% of total bank assets and 66% of deposits in the U.S. The top online banks in the U.S. have almost universally put transactional websites online, and they absolutely dominate the market. The ranks of the top 100 online banks included nearly 70% of the nation's largest commercial banks and bank holding companies, juxtaposed against some of the country's smallest savings institutions. The online-only banks (the "pure plays") were found to be mostly small, nationally chartered savings institutions.

Because the top 100 banks reflected a broad and influential cross-section of the banking market as a whole, the key trends shaping the top 100 were extrapolated to the online banking market in the U.S. This critical assumption was the genesis of much of the data contained in this report.

In deducing the size of the online financial services markets, a fairly conservative approach was taken. First, three major online bank databases were surveyed, from which a total count of the current online banking market was deduced. Redundancies were hand-deleted to arrive at a total online banking website universe for the current year.

To deduce the size of the market in 1999, a total "head count" was drawn from the same databases December 1999 numerical counts by region. The regional numbers were totaled on a state-by-state basis, and then compiled into the four major Census regions.

The total number of banks and savings institutions in the U.S. was taken from Federal Deposit Insurance Corporation (FDIC) and Federal Reserve National Information Center (NIC) head-counts. The FDIC number was taken to be the total number of banks and savings institutions in the U.S. (the overall banking universe), while the NIC figures were use to analyze the national banking universe.

A ranking of the top 100 U.S. banks was taken from the FDIC, and each of those banks' websites was queried using a survey "check-off" method. Each site's online banking demo was tested for the following characteristics:

Results of the survey were tabulated, and certain assumptions about the online banking market allowed the data to be extrapolated across the market as a whole:

• The transactional online banking market is dominated by a small number of large banks
• The transactional online banks are considerably larger than offline banks
• Key trends within the leading online banks have a disproportionate effect on the overall market.

MORE BANKS THAN URLs.

The top 100 U.S. banks and bank holding companies encompassed a total of 394 individual banks represented online by 137 distinct URLs.

The number of banks offering transactional Internet banking is greater than the number of online banking websites, in part due to the continuing consolidation of the global banking industry. As banks merge, seeking the improved economies of scale offered by combining their regional or national markets, multiple bank subsidiaries of the same banking company are often accessible via a single website.

For example, following their 1999 merger, Bank of America and Nationsbank, now one institution, are both accessible on the Web at bankofamerica.com.

Increasingly, smaller banks that remain independent are coalescing around a single online banking community, to reduce costs and still take advantage of the advanced Internet functionality that the larger banks enjoy. One example of this is bankzip.com, an Internet banking portal allowing community banks to create online banking communities delineated by zip code.

TERMS AND DEFINITIONS USED IN THIS REPORT

Throughout this report, industry-standard terminology is used to designate the various forms of "online banking." Some terms may be used interchangeably which by strict definition, are not quite equal. The reason for this is that online banking is still in its infancy, and no standard terminology has emerged to clarify the distinctions between product and service offerings that are identical to the consumer. As the market matures, clearer distinctions and terms will emerge, and they will be reflected in future updates to this report.

Software-Based Vs. Internet Online Banking

Software-based proprietary online banking and Internet Online banking are both forms of remote banking (as are ATM and telephone banking). It is not yet a standard procedure to distinguish between the software and Internet versions when discussing "online banking" and neither consumers nor industry members currently do so. Still, they are quite different from a technological standpoint. One of the key differences is that with Internet banking, devices other than personal computers can be used to access account information, including Palm-Top devices (hand-held computers), kiosks, Web TV, pagers an Internet-enabled cellular phones. Software based PC banking has been available in the U.S. since 1980, although it has never attracted widespread use. Internet banking was introduced in 1995.

Internet Banking, Online Banking, PC Banking and Electronic Banking

The terms PC banking, Internet banking, electronic banking, and online banking are used interchangeably in this report, as they are in the industry. Any or all of the terms refer to remote banking by personal computer or other remote device, using software installed on the remote computer or by logging onto the Internet.

Transactional Websites

Transactional banking websites are those that allow users to perform any or all of the following functions online:

• open an account,
• check account balances,
• download statements,
• view or pay bills online,
• transfer funds between accounts,
• transfer funds to accounts outside the bank,
• purchase CDs or securities
• administer brokerage or retirement accounts (IRA, 401K, etc.),
• apply for a credit card, check credit card balances, or pay credit card bills
• apply for a loan, check loan status
• purchase insurance.

Some transactional sites also allow users to shop online or offer portal services that connect users to shopping or travel-related services.

INFORMATION SOURCES

Sources used in this study include the following.

Government agency online resources

• The Federal Deposit Insurance Corporation (FDIC)
• The Federal Reserve/National Information Center (NIC)
• The Office of the Comptroller of the Currency
• U.S. Department of Housing and Urban Development (HUD)
• FedStats
• The White House Briefing Room Online

Online databases

• American Banker
• PC Banker Online
• Electronic Banker
• Bankweb.com
• IT Web technical glossary
• Qualistream.com
• Gomez consumer ratings guide
• Top9 website ratings guide
• MutualFundsNet
• Insure.com

Industry trade association websites

• The American Bankers Association
• Independent Insurance Agents of America
• Mortgage Bankers Association of America

Industry contacts/telephone interviews

• Q-Up
• S1 Corporation (Security First)
• FundsXpress
• Digital Insight Corporation
• HomeCom Investor Relations
• Equifax
• IBM
• WingspanBank
• Bank of America
• E*Trade Holdings Co.