InformationWeek

September 18, 2000

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A Game Of Choice

continued...page 2 of 2

More on online banking:

Banks Face Big IT Demands (9/11/00)

Chase.com Goes Global (7/24/00)

TechWeb Internet 'Bank Heist' Puts Spotlight On Security (8/24/00)

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CompuBank services are open to anyone, but its main thrust is to acquire new business through partnerships with companies that already have an online relationship with their customers, like the one it signed in July with Electric.com, the online arm of the utility Commonwealth Energy Corp. in Tustin, Calif.. It has similar deals with Dynamic Trade, General Electric, MP3.com, and Netcentives.

While Goldberg is confident CompuBank can attract customers without a physical presence, he won't rule it out. "Is any physical presence worth looking at? Yes," Goldberg says. "But it doesn't mean opening an extensive branch network."

One reality creating uncertainty for online financial institutions is a more demanding customer--customers such as Russell Stern. Stern, CEO of Escrow.com, a transaction-management service for auctions and exchanges, has been using an online broker to trade stocks, but the novelty of managing his own finances is wearing off.

"I'm in business meetings all day long. I don't have time to punch in trades," Stern says. "I'd rather have trading with a broker that I can call, so he can do the trade for me if I'm not able to."

Stern says having the ability to talk with an adviser he knows by name would be a welcome change, having spent several frustrating hours trying to get through to a call center with his online broker. But in addition to a personal relationship, Stern wants to retain the ability to view his financial portfolio online and execute trades in his own time.

Another challenge facing online financial institutions is the extent to which traditional competitors have embraced the Internet. In an increasingly deregulated market that blurs the lines between banks, insurance companies, brokers, and financial advisers, companies are using a mix of Web and traditional services to try to capture a bigger piece of an individual's financial activity. Stock trading may be easier than ever thanks to online trading, but the complexity of investment choices has risen.

PaineWebber Inc. is a traditional brick-and-mortar brokerage firm that has found online tools such as retirement or college planning calculators only whet the appetite of investors, who eventually want to talk with an adviser. When PaineWebber launched its online operation, the Edge, in 1997, its goal was increasing interest in advisory services. "The adviser makes the technology more valuable," says Marten Hoekstra, executive VP and director of marketing for PaineWebber. Online service has made clerical functions such as entering trades less valuable to customers. "But they will pay for an adviser who provides monitoring and ongoing services," Hoekstra says.

Gomez's Jamieson is doubtful that banks or other financial institutions can remain online only and compete with rivals offering multiple service channels such as branches, ATMs, and the Internet. Banking customers simply haven't reached the point where they are willing to give up the peace of mind a physical presence engenders even for slightly higher interest rates and lower banking fees. "As irrational as it seems, there is a psychological benefit," he says.

Bill Decker Photo by Tony Arruza Decker, VirtualBank's CEO, was convinced when setting up the bank that people would be more comfortable using the Web if they'd met a representative. But he still needed an affordable way to deliver that. That's why VirtualBank is trying to partner with customers' employers to set up offices in their buildings, much like a small credit union that provides banking services on-site.

Those offices will handle more complicated and revenue-generating tasks such as creating loans, while leaving the expensive handling of deposits and withdrawals to ATMs.

It's not clear what mix consumers will choose from the online and traditional banks. But online financial institutions are increasingly buying into the idea that they need a physical presence to maintain mass-market appeal. The reality seems to be that while today's customers are technology-savvy enough to bank online, they still want the option of banking in a building.

Says Forrester's Punishill, "Who will I go scream to when the Web site goes down and I can't get through to the call center because there aren't enough reps?"