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Viewing report
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Electronic Banking Market Assessment
Key Note Publications Ltd, Jan 2000
Electronic banking is not a tidy product or service which can be described and confined easily. In one sense, electronic banking has been with us ever since the first computer was installed in a bank. The development of electronic clearing of payments through Bacs and Chaps in the 1960s was the first step in the development of the electronic bank, and it was entirely invisible to the customer and to most of the staff. It was very much an internal affair between the Committee of London Clearing Bankers, which agreed among themselves that this should be done.
The development of payment clearing has developed very fast since the deregulation of cross-border flows of funds, the development of capital adequacy ratios, and the imminence of the Euro. The Bank of England is heavily involved in developing the Target system of real-time gross settlement that is the ultimate goal of electronic banking ó the instantaneous transfer of money so that it can be put to work to generate interest immediately and at as low a cost as possible.
The driver for electronic banking, and the hope for dematerialization of money, was the cost of handling cash and cheques. Customers like cash and cheques because they retain control of the money, and do not trust the electronic clearing systems that are still slow and prone to error. But the shrinking of margins and the new competition between financial service providers means that all customers are now faced with possibly formidable new mediator dealing with their financial affairs.
Businesses in particular are conservative in their habits, and will give up cash and cheques only when banks offer them something better. This may come from a bank that decides to make things easy for their customers by giving them a personal service. It could come from a software provider who can deliver a personal banking package like Quicken or Microsoft Money, which could be developed to become rivals to the traditional commercial banks.
Market Assessment undertook a survey of personal customers, which confirmed their overall concern for security, convenience and speed in the electronic banking developments which are being introduced. Our respondents were open minded about the technical possibilities but were suspicious about remote access to financial advice. Since none of them will have experienced the new media which are about to be tested on the market, this is hardly surprising.
There was a heartening interest in trying out new media for getting money problems sorted easily and conveniently in the home. It could not be said that there was a clear-cut division between the rich, who would use their PCs for Internet banking, and the poor, who would possibly prefer television banking. This reflects the fact that only the rich can afford PCs and television is the cheapest form of entertainment and happens to be in most poor people's homes. In practice, both groups will want to try out new media equally.
The most significant factor from our survey was the steep age gradient between those who find the new media interesting and useful and those who see them as threatening and difficult to use. There was a clear division around the age of 45, and a survey, which excluded anybody over that age would have shown a massive interest in, and support for, electronic banking at the customer interface.
The demand for electronic banking is inevitably going to grow with time, and provided the elderly are catered for by branch structures, or more likely through post offices or benefit agencies, banks will be happy to market their gadgetry to the young.
Investigations of the banks' actual use of the new media were hampered by the lack of any real information about their use. Telephone banking is almost universal now, according to the annual reports of the banks, but the level of service being offered is variable: a major bank may have made a central call centre available for personal customers to enquire about their accounts, because the records have been centralised and the staff rationalised so as to reduce branch staff. But only a few banks actually offer a full telephone banking service rather than a promise to look into problems the next working day. For them, it is essentially a holding operation while they struggle with their legacy systems and restructure themselves to cut their cost/earnings ratios.
Internet or online banking has been available for 15 years, and the proprietary systems are good in their way. But their customers are locked in, and as soon as they realise they can use the equipment supplied for more than just financial services there will be a large shift away from systems of only limited validity in favour of, say, interactive television or browsing the Web.
Of the open Internet-based financial services currently available, the majority are simple sets of web pages for customer information, coupled with account checking facilities. Full Internet banks like SFB, or self-help financial software packages like Quicken or Microsoft Money can develop and survive because of the different US culture regarding financial services. UK tests using, for example, BarclaySquare or NatWest's Buckingham Gate, have failed to obtain significant customer interest, possibly because the idea of a bank offering a retail grocery or hardware business is even stranger than Marks and Spencer offering cash.
The likely success of Internet banking will be as part of a range of services offered by banks to their customers, who will have different financial needs at different stages in their careers, or according to their lifestyle. The year 2000 is likely to see most banks introducing Internet services, and some banks introducing digital TV or mobile telephony banking, as complements to their other market channels. It is likely that these will be targeted at retaining customers, and at customers migrating from more costly channels, rather than at brand new customer segments. The move by NTL and Alta Vista to offer free and unlimited Internet access in return for an annual fee will cause a dramatic change, accompanied as they are by a pledge by the UK Prime Minister that every British citizen should have unhampered access to the web within five years. NTL also offer cable television.
Market Assessment do not believe that the supermarkets or other new entrants pose a major threat to traditional banks, provided those banks do take notice of innovation elsewhere and apply it intelligently. Their main problem is the need to grapple with their legacy computer systems and learn how to mine their customer files for useful marketing information so they can add value by cross-selling and taking a positive attitude to customer service.
Supermarkets are only offering banking services because banks are working with them to make a profit from the money transmission aspect of the business. The supermarket is simply adding one more product to its range and once it starts getting bad debt problems and its image starts to be as tarnished as the banks', it will drop the product line and try something else. The banking service is a device to get more customers in and to get a better customer database for marketing and product control purposes.
The development of plastic cards and of chip cards has a major advantage to the banks in that the number of small payments being made is cut, thus lowering bank costs. The card can be used as a branding or marketing opportunity, and can be charged for at a high rate of interest. The problem with the chip card will be customer resistance, and the trials will probably prove disappointing in the short run. After all, the only people who are pushing for such cards are the banks, not the customers.
One of the major brakes on technological change in UK banking is the imposition of charges on people using the new media. Most banks impose a charge, even if they want to encourage use, and in the case of credit cards they charge an extortionate rate of interest. Only one, Abbey National, appears to be using charging as a way of encouraging use of its telephone banking service and it was very unpopular for doing so. Charges for automated teller machine (ATM) use are a growing practice by major banks objecting to the 'free rider' habits of fledgling services relying on the expensive ATM network to provide them with free branch facilities for dispensing and depositing funds.
Another brake on development, and one, which is well beyond the scope of this report, is that the senior management of the major banks are themselves over the 45 year old cut-off for acceptance of the new technology. They probably do not understand what the technology can do, how quickly it can do it, and the implications of doing it. Bankers who do not understand how their business is run are in a dangerous position.
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