Are Online Banks Profitable?

Web banks may be luring the wrong customers

Can banks make money online? It's a question that has been dogging the banking industry in the five years since Internet banking debuted.

"It was -- and still is -- a legitimate question," said William B. Harrison, president and CEO of The Chase Manhattan Corp. in New York.

Banking analysts said it's impossible to generalize about whether Internet banking has been profitable since there are so many ways to measure profitability (by customers or by products, for example). A few banks' Internet-based services have been profitable, such as online bill payment. But "for the majority of institutions, the Internet is not profitable in and of itself," said Richard Bell, an analyst at TowerGroup in Needham, Mass.

Even Web-banking leaders like Wells Fargo & Co. can't say for sure. Because the bank's 1.4 million online customers also use myriad other channels -- including stand-alone branches, branches in supermarkets and automated teller machines -- measuring the profitability of the business they do specifically online is difficult, said George Cheng, senior vice president of the online financial services division at the San Francisco-based bank.

Cheng said the bank's most profitable online customers match an enticing demographic, with incomes averaging $75,000 and educations higher than the average Wells Fargo customer.

But some banking experts said it's a fallacy to conclude that most Internet banking customers will be profitable.

"Who signs up for free PCs in exchange for advertising? Price-sensitive customers, that's who. And how much money are (banks) going to make off these people?" said James McCormick, president of First Manhattan Consulting Group in New York. Although that group represents only one subset of Internet banking customers, McCormick estimates that roughly 70% of all Internet bank accounts are unprofitable. He said that's due, in part, to the fact that most banks have created services that unintentionally lure unprofitable customers. For example, in the 1970s and 1980s, banks sank millions into developing 24-hour telephone banking centers that were used primarily by their least-profitable customers, to check account balances, not to buy new products.

"Adding channels added costs but not necessarily (profitable) sales volume," said P. Jan Kalff, chairman of ABN Amro Holding NV in Amsterdam.

Others hope retail Internet banking will deliver more lucrative returns. For example, one-third of the Web surfers who visit Security First Network Bank are prospects, said Eric Hartz, president of the bank, which holds $300 million in assets. The Atlanta-based bank, which garnered Gomez Advisors Inc.'s highest overall customer satisfaction rating for an Internet bank, focuses on customer service, said Hartz.

Security First tries to think "six steps ahead" of questions a customer or potential customer might pose on its Web site to resolve a bill payment or to open a checking account.

Representatives in the bank's multimedia call center will also assist customers who are having problems with their Web browsers, even though it's not one of the bank's traditional services, Hartz said.

Wells Fargo, which Lincoln, Mass.-based Gomez ranked No. 2, also focuses on customer service. To help make Internet banking easier, Wells Fargo holds frequent customer focus groups to get feedback on everything from graphical user interfaces to navigability of its site, Cheng said.

Another challenge for old-time banks that offer Web services is that banks operating only on the Internet don't have to support brick-and-mortar branches, so they can offer more attractive interest rates, said Mike W. Boland, chairman of Newfoundland & Labrador Credit Union in St. John's, Newfoundland.

Some industry executives said it's unfair to judge the success or failure of Internet banking after just a few years. For example, Citigroup Inc. in New York, which has been engaged in Internet banking since 1997, has a lofty goal of acquiring 1 billion worldwide customers by 2010, primarily through electronic channels. At present, the bank still has roughly 900 million to go.

"It takes time to move to critical mass," said Citigroup division executive Josh Grotstein.

Copyright © 2000 IDG Communications, Inc.

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