Online Ties: Web Banking Makes Customers Less Fickle

Just because the Internet didn't kill bank branches or launch a score of Internet-only banks doesn't mean it hasn't irreversibly changed the banking industry.

Customers who bank online are 50% less likely to switch banks, says Sona Chawla, executive VP of Web channel management at Wells Fargo & Co., which has 5 million online customers that make up 43% of its total checking-account base. Customers who bank online and use online bill payment are 80% less likely to leave, Chawla says.

Efforts such as Bank One Corp.'s online-only subsidiary, WingspanBank, failed in part because bankers thought they could peddle checking accounts online the same way they do credit cards, says Richard Bell, an analyst at research firm Financial Insights. "People are willing to buy a credit card online, but when it comes to giving money to someone for safekeeping, that's a different proposition," Bell says.

That's why asset-management companies such as Merrill Lynch, E-Trade, TD Waterhouse, and State Farm have succeeded with setting up online-banking subsidiaries: Instead of pitching banking services as products, they've offered them as an added convenience. Since customers are apt to go online frequently to conduct trades or view portfolios, it makes sense to let them pay bills or write checks at the same time.

A few Internet-only banks, as opposed to offshoots of existing banks, have found life in the niches. Internet-only NetBank Inc. has attracted 164,000 customers--mostly affluent and well-educated--who don't need or want to interact with humans when conducting banking transactions. Its deposits have grown from $654 million in 1999 to $2.5 billion in 2003.

Online banking is a must-have in today's business, but KeyBank CIO Bob Rickert remembers it as a leap of faith when the bank started. Key began adding transactional capabilities to its site in the mid-1990s, when most bank Web sites consisted of brochureware, if they existed at all. Online now is likely to overtake branches in just a few years and become Key's second-most-used banking channel, trailing only ATMs.

Bell predicts that as baby boomers age and spend more time with their retirement accounts online, the Internet will evolve into the primary delivery channel for financial services. In the future, conventional banks will need to broaden their range of online services if they hope to keep pace with the Merrills and E-Trades of the financial world.

Return to the story: Where The Money Is