Internet banking software and service vendors: change agents

Computer Industry Report,  Jan 22, 1999  

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COMMERCIAL BANKING SERVICE

Online banking is expected to spread to business users, particularly small firms that want to complete via the Internet such tasks as wire transfers, interactive stop payments, and detailed reporting with bank statements dating back a few years. For example, Q-Up estimates that one-third of its banks have been offering cash management features online.

Big core-processors are getting into the game as well. Fiserv and Politzer & Haney will start offering an array of online cash management services in the first quarter of 1999.

However, online cash management for corporate customers will be a tough market to crack because of the need to tailor the solutions for individual businesses. Because the value of corporate banking transactions tends to be greater and the customers are more likely to demand personal service, the Internet may not be considered the most user-friendly channel for delivery of online cash management services.

CONCLUSIONS

The future of the Internet banking applications marketplace is promising because these products will enable banks to hold onto their accounts, identify retention risks, and determine whether online users are actually more loyal than regular customers.

Vendors must add more intuitive and personalization features to their applications and service offerings, and they also must be prepared to share the rewards and risks of building a virtual financial center for their clients.

These vendors might also have to deliver applications that could transform a bank into a portal site or an active selling entity on the Internet. A likely scenario involves selling vacation packages on a bank Web site, allowing purchasers to apply for a special-interest loan to fund their trips. But some risk-averse banks may question whether this selling technique would hurt their loan portfolio. If banks reject such ideas because they run contrary to the traditional definition of a bank, growth of these products could be stifled.

Still, the tremendous changes in the financial-services industry are forcing banks to diversify. As more online banking application vendors add insurance policies, stock trades, and other personal finance services to the bank sites they're hosting and developing, their revenue will be coming increasingly from transactional fees and development work. The result is that for every stock trade handled by a vendor like Digital Insight for a credit union's customer, and for every loan package a vendor like Digital Insight is involved in closing, the service provider will get a commission.

However, there is a catch. Not every bank would want to see a third-party company take a big chunk out of its revenues if its Web site proves to be hugely popular. Some banks may even find this commission structure punitive.

In the future, the profitability of online banking applications vendors and providers will be closely linked to the ultimate success of bank Web sites. Currently, a Web site costs a bank anywhere from $20,000 to $100,000 to set up and another $3 per month for every customer it is able to sign up. However, the majority of banks can attract only 5% to 10% of their customer base to their online offerings and instead must continue to rely on expensive existing channels like bank tellers and ATMs to serve the bulk of their customers.