Study: Online banking declining

A study released today by SRI Consulting indicates that the number of people banking online is decreasing, in contrast to the increase in activity at other online sites, such as retail and entertainment.

According to the study done by the Menlo, Calif., firm, this year only 8 million of the 40 million households connected to the Internet will bank online.

One reason for the decline is that the financial institutions may have underestimated the amount of personal service necessary to acquire and retain customers.

In addition, the company said, customers of branchless banks face hurdles making deposits through other banks' automated teller machines, and they have to mail checks and can't deposit cash.

Randi Purchia, an analyst at Meridien Research in Newton, Mass., said she agreed with SRI Consulting's study.

"Consumer accounts are going dead," she said. "While online banks are spending money to acquire new customers, they are losing their older customers," she said.

Purchia said customers' expectations are high and they are being turned off by poor navigation — and the fact that the back-end systems haven't been fully developed and integrated — as well as a lack of customer service.

"Online banks need to hold onto their accounts," she said. "It takes 24 to 36 months before an account becomes profitable (for a bank)," she said.

But Richard Bell, a senior research analyst at TowerGroup in Needham, Mass. said he disagreed. "It's not true that Internet banking is declining," he said. It "is experiencing fairly healthy growth. It's grown from a 3% to 4% penetration of U.S. households (connected to the Internet) to 7% to 9% penetration. And over the course of three to five years, the number of users promises to grow to 15% to 18% of U.S. households. And this is healthy and consistent with the way in which people adopt new banking models."

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