Almost certainly, Internet banking will prevail in the near future driven by intense demand from next generation consumers who are both knowledgeable about where to seek information and technology savvy.
Much like the ATMs that were first introduced to the mainstream in the late 1960s for increased customer satisfaction and efficiency, the Internet is expected to provide this same level of satisfaction and much more.
But at what pace and in what direction are the unknown answers. Many industry experts such as Diogo Teixeira, president of US-based TowerGroup and academics such as Michael Porter of Harvard University have commented that no doubt the Internet and Internet banking will gain widespread acceptance.
Mr Teixeira noted that in the near future banks will have Internet banking capabilities, whilst Mr Porter noted in a recent conference that organisations will reach an "equilibrium" in the Internet industry. If one assumes that a ceiling or an equilibrium will be reached in the near future as banks race to be first-to-market, the obvious question is how will banks differentiate themselves once everyone reaches this "best practice frontier"? A quick perusal of the World-Wide-Web (www) provides some anecdotal evidence that may be of interesting news to rivals. The list (see page 6) does not aim to be exhaustive or totally comprehensive, rather it provides an example of some banks in Western Europe that have felt the need to include the Internet as part of their service offerings.
The list contains some of the world's leading banks and shows that indeed, banks are slowly realising that the Internet can be a competitive tool in acquiring new customers or retaining existing customers. While the Internet bank listing is bound to expand, this most up-to-date listing marks the first time that it has been created. Compiled in February 2000, the listing shows Internet banks that are readily available online in Europe. The UK financial institutions came up on top with 18 Internet banking sites followed by Switzerland with 17.
Germany came in with 16 Internet sites; Spain with 12; Norway with 11; Austria with nine; Sweden with seven; and Portugal, France and Italy all with five. Finland, Ireland and the Netherlands all have three sites at the moment; and Cyprus and Denmark have two for the time being. Even this brief look at Europe's Internet banking site is extraordinary considering that if one were to look back two years ago, there were hardly any sites that had transactional capabilities and which used the sophisticated technology that these banks have now deployed. Also included are "virtual banks" such as First-e, which operates from Dublin but is backed by Banque d'Escompte based in France; Yahoo!Banking, which operates from France; and Comdirect bank in Germany.
The interesting aspect of First-e is that one can apply for an account online without being a previous customer. This has added advantage over other Internet banks because a customer can be located anywhere in the world and apply for an account (although insurance covers Germany and UK residents).
The market is broadened globally for Internet banks that can maintain this ubiquity. Bankers would attest to the fact that most people who do banking over the Internet outside of their own country are expatriates that need to access their home accounts. Barclays Bank quickly realised this and where previously existing customers had to order and send a paper application, they now can simply provide their bank details from their CONNECT bank card and expect to receive their username and password to access their online account within a fortnight. This ease of access for customers is certainly one of many tactics that banks are deploying in efforts to differentiate themselves.
It will become easier and more sophisticated once digital certificates and digital signatures become part of the mainstream. Branding is another key differentiator. There has been much talk lately concerning brands: Whether banks should set-up completely different Internet entities or simply extend on to existing operations. There are some possible reasons why a bank would want to keep an Internet bank separate. An Internet start-up may fail and erode a bank's brand equity. Also a bank may want to be a financial portal and by establishing a separate entity, it may feel that it is safer to sell products and services from other financial institutions.
Similarly, it may be the case that banks cannot be all things to all people and need to stick to their core competencies and set-up new (Internet) operations for other product/service extensions. In this fashion, they are able to use service providers such as Unisys and Getronics to maintain their Internet banking site - some banks do not have the IT skills to support an Internet bank. However, the issue is whether an Internet bank can secure enough trust if customers are unaware that it is supported by a regulated authority or supported by a brick and mortar bank that has enough capital for compensation if the bank should be liquidated.
Would customers agree to sign on with Smile.co.uk if they did not know that it is supported by Co-operative Bank with a tier one capital of $462 million? Furthermore a purely Internet bank has to propose deals with different ATM networks in order for customers to have access to cash. The surcharges to access other organisations' ATMs will be difficult to absorb given many of these Internet banks are initially offering 6% interest rates or higher on current accounts. This is an issue that Security First Network Bank is dealing with in America. Some banks have played it safe by having two Internet sites: one with their existing brand name and another with a completely new name.
For example, Co-operative Bank in the UK has its own online banking site and a completely different site, smile.co.uk., and US based Bank One, in addition to its own site, has Wingspan.com. In Europe, online brokerage services are a recent development but banks are positioning themselves in this area in efforts to differentiate themselves from their competitors. Banks such as Berliner Volksbank and Bank 24 in Germany; Banco Santander Central Hispano in Spain; and easybanking.com (Fortis Group) in Luxembourg are offering Internet brokerage and Internet banking concurrently on their web sites. A recent Forrester report, Online Trading Skyrockets in Europe, found that online brokerages were a recent development - 65% of online firms opened their doors less than two years ago and only 20% have more than two years of online experience.
Moreover, 77% of these firms have fewer than 50,000 customers. Low customer numbers result in low transaction volumes - 70% of the companies process fewer than 50,000 transactions a month. However, 23% of the firms expect business to grow by more than 300% in the next three years. The report was based on interviews with 24 brokerages, 26 banks across Europe that offer online trading today or plan to do so in the next six months, 21 technology vendors and "thought leaders". While compiling the list of Internet banks, it was found that banks such as MeritaNordbanken in Finland, S-E Banken in Sweden, Banesto in Spain, and HSBC in the UK are leading the way in mobile banking. Customers are using wireless application protocol (WAP) to access account balances, make payments and do other transactions with a mobile phone.
MeritaNordbanken is known to be the first to provide a service, which facilitates equity trading over WAP-enabled mobile phones and this new initiative should contribute significantly by adding new customers to its existing 1.1 million online customers (see Scandinavia). The significance of such developments were also mentioned in the Forrester report that revealed online services will not limit themselves to the PC - 84% of firms will launch WAP sites this year. And of the pure brokerages, 50% will sell additional products like credit card to compete against banks. HSBC also allows for TV banking. It was found that most banks in the listing were concerned with Internet security.
Many used the most up-to-date and sophisticated encryption technology - 128 bit keys with the highest version of SSL (secure sockets layer). It should be noted however that security is not a one-off solution but rather follows an evolutionary approach because decryption technology is increasing at roughly the same rate as encryption technology. It is safe to say that soon technology will exist that can factor 128 bit keys. Some banks are realising this and have taken an evolutionary approach. For example, Marbles (HFC Bank) takes security very seriously and has designed one of the safest and most secure credit card systems. Its approach is to continually monitor and enhance the system requirements to ensure that it's one step ahead of the fraudsters.
Security is still a pivotal issue with e-business as noted by a recent Arthur Andersen report, Thriving in the new economy: perception vs. reality, where it noted that transaction security is perceived to be suspect by customers (80%). Other efforts to differentiate include: multiple access to the Web, where Alpha Credit Bank in Greece allows customers to access web banking in their branches; free Internet connection service provided by some of the larger UK banks such as NatWest, Barclays Bank and Bank of Scotland; and online currency conversion provided by banks such as BAWAG Internet Banking in Germany. Credit Suisse Group has an innovative way for customers to access their servers for increased efficiency. Two different servers (DIRECT NET servers) have been connected to backbones (direct connection to the main path) of the service providers, which shortens the transport path considerably thus reducing transmission times when exchanging data over the Internet.
Customers choose the server type, which provides the fastest connection according to their own systems configuration. Internet banking is bound to take-off at "Internet speed". With this rapid growth however, the use of the Internet will reach a ceiling or level playing field where banks' competitive advantage will lessen. The way banks differentiate themselves will be critical to their future success of winning new and retaining previous customers.
A perusal of the world-wide-web provided a list of banks that are on top of their game, noticeably the sophistication of Spanish, German, UK and Finnish banks on their online developments. Many of the banks are using cutting edge technology in efforts to differentiate themselves, some of which includes the use of WAP-enabled mobile phones, digital certificates, high level encryption and Java applets.
The consolidation and combination of these technologies provides the basis for a dynamic banking environment in the future.