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September 2000
Breaking
Banking Model Barriers By Marc Phillips With the advent of online banking in
1995, it’s no secret that financial institutions have been downsizing their
network of physical banks. As 2001 approaches, banks need to recognise that
having an internet offering as part of their business model is not enough.
Banks must regroup and actively pursue customers wherever they go online, or
risk losing them completely. Marc
Phillips explores the changing business models of internet-based banking
services.
Internet-only-banking When
banks began to allow account details to be viewed online, the service was
merely seen as another method to reduce teller and branch costs. However
technology has undermined traditional business thinking and existing banks
have found themselves competing with newcomers which operate in an entirely
different paradigm. Ireland
based First-e (http://www.first-e.com)
is the largest Internet-based bank in Europe. Although the company began with
a physical infrastructure, it has developed a business model designed from
the outset to operate exclusively over the internet. This has allowed it to
take a singular product offering around the world. It is now a purely
Internet-only service. First-e
offers three main services. Simple current and savings banking accounts with
better-than-average interest rates make up the base-end of the business.
Interestingly, the company has managed to achieve a zero-risk operation by
pooling customer liabilities and assets together. To bolster inadequate
margins on Internet banking, First-e is smart by acting as an intermediary to
offer third party financial products. First-e has taken the position as an intermediary
of these products rather than a provider of them in order to earn margins and
service customers. Finally, First-e has stated that it intends to offer
trading and investment products eventually, dependent on a critical mass of
around 300,000 customers. First-e’s
business model is built around a multi-tiered strategy. Multi-channel
distribution is used to improve customer service and expand business reach.
Early on, the company created a specialist banking technologies division
called ‘Factor-e’. This division provides the same banking technology
services for other banks that have difficulties building efficient
operations. This move hedges against online competition by placing Factor-e
in a position to benefit from other (potential competitor) online bankers.
First-e has also taken advantage of excess processing capacity that exists in
traditional banks in Europe, by outsourcing back office processing. Bank? Broker?
Banking Broker? Broking Bank?
When
U.S. based online broking service E*Trade (http://www.etrade.com)
signed a merger agreement with the Arlington based virtual banking
institution Telebank in December last year, a new inflection point was
reached in the history of online financial services. No longer were the
barriers between broking service and banking service distinguishable. E*Trade created a subsidiary company
E*Trade Bank, which offers branchless banking via the low-cost
direct-delivery channels of Internet, telephone, fax, Automatic tellar
machines and mail. E*Trade
immediately introduced its first banking product resulting from the merger, a
12 month fixed term deposit with an annual yield of 6.5% per annum, which the
broker lauded as at the time being over 50% higher than the U.S. national
average. The offer was limited to E*Trade customers, however this exemplifies
how E*Trade can leverage a banking service to attract customers, and then
introduce them to other services. The ultimate aim of the
merger is the integration of bank and broking accounts and despite the fact
that they are technically held in separate companies (E*Trade Bank and
E*Trade Securities Inc.), E*Trade has succeeded. The website features a
smooth transition from bank to broker with a small disclaimer at the borders.
The impact on E*Trade is
to create a highly scalable business model with cost and pricing advantages.
The bank also features a bill-payment systems, similar to Yahoo’s BillPay,
which further bolsters E*Trade’s wholistic virtual financial service approach. Person-to-Person
payments
A
new form of payments has emerged from seemingly e-nowhere. Person-to-person
payment (P2P) services allow anyone to send money to other individuals
online. The concept is astoundingly simple yet extremely useful. A service simply
tap funds from your credit card or chequing account, then emails the
recipient, who logs onto the service’s site to claim the funds. A number of
operators offer P2P services, such as payme.com, eMoneyMail and eCount,
however the most popular service is called ‘PayPal’, operated by privately
held U.S. company X.com. PayPal
(http://www.paypal.com) is the most
simple form of free P2P payment on the web and is now the number one payment
service on eBay, the leading global auction website. It reports to have over
3.5 million users and according to Media Metrix is one of the fastest growing
websites. Anyone, anywhere can join PayPal online and instantly send money to
any person with an email address via the PayPal website using any standard
internet browser. The service was
listed as a recommended product by net authority CNET.com (http://www.cnet.com). How it works: 1. Log onto
PayPal.com. First-time users must register, supplying name, street address,
e-mail address and passwords. 3.
Friend gets e-mail saying, ‘You’ve got cash.’ 4.
Friend clicks e-mail link to PayPal.com and registers. 5.
Friend asks PayPal.com to transfer payment into bank account, mail a check or
leave the money at PayPal.com to use for future e-payments. The
major benefits of PayPal are its simplicity of use and support for all
platforms and browsers. The service is globally scalable, with X.com boasting
average customer acquisition costs of just U.S. seven dollars each. Paypal's
online business model reduces the costs of acquiring customers and, in the
process, ensures a scalable global software application which has dramatic
barriers to entry for traditional banking and finance competitors. Viral Marketing PayPal
enjoys the benefits of being a viral product. That is, the business
model intrinsically lends itself to
self-promotion. If the payment is sent to a person who is not a registered
PayPal user, the receiver simply completes the form attached to the e-payment
to receive the money, which is already waiting in a PayPal.com account in the
receiver’s name. Completing the form also registers the receiver as a user,
thus capturing further customers. In this way, the service can grow its user
base in an exponential manner. The
PayPal P2P model is the biggest threat to traditional payment systems, as it
leverages on some of the most powerful forces that the Internet unleashes –
open architecture standards, viral marketing, has a scalable business model
and achieves volume growth at near-zero costs. Bill Payment
With
experts advising that paying of bills can take from two to six hours per
month, a method for reliably and simply automating the payment process for
the domestic market has proven particularly lucrative for some innovative
operators. US
Based and NASDAQ listed CheckFree Corporation offer fully integrated,
end-to-end systems for electronic billing and payment of richly formatted
bills over the internet. Nearly 190 companies, including utilities,
telecommunications companies, mortgage and credit card services are
registered to distribute bills using CheckFree’s online billing and payment
services. Consumers
are able to access details and pay bills through the web, including all
billers, even those that don’t present bills online, such as for a gardener
or plumber. CheckFree’s revenue stream is generated by charges for each bill
paid, with differing rates dependent on which institution is selected as the
web site where bills will be received and paid. Customisable front-end capabilities are also available for
banks and brokerages who use the system to tie the product into their
web-look and present a smooth and seamless online banking system. Portal’s enter
the scene
With
all these different services available, it was only a matter of time until
the opportunists flocked in to capitalise on these ideas by bundling them and
integrating them into a homogenous web-experience – the portal. As
a major portal, U.S. based Yahoo! (http://www.yahoo.com)
has aggressively maneuvered to take full advantage of the transition to
online banking. It currently offers three major banking services; Yahoo!
PayDirect, Yahoo! BillPay and Yahoo! Banking. PayDirect
is a P2P system that works in a similar way to PayPal. Users can transfer
money into a PayDirect account, and then send this money to anyone with an
email address, who then can open a PayDirect account, or transfer the money
into an existing PayDirect account.
From there, the money can be moved into a credit card or chequing account. Currently no charges are made for use of
the service, however Yahoo! has reserved the right to introduce fees. As yet
the service is still only available to users with a US mailing address. BillPay
is a pay-per-use bill paying service that allows electronic payment to over
60 major US companies (mostly utility providers). The site features a
customizable interface to set-up automated bill-paying systems for regular
payments such as car-payments and rent. Yahoo! completed a deal
in August with VerticalOne, a subsidiary of the NASDAQ listed S1. S1 develops
Internet financial software that executes secure banking and credit-card
transactions over the Internet. The deal allows Yahoo! users to view account
information through their customized site. However, users must already have
online banking accounts, with certain banks, all but four institutions being
U.S. based. Banks are facing increasing threats from non-traditional competitors. Banks need to meet these challenges by exploring new avenues, with new offerings leveraging on the Internet and the power of the company’s online customer relationships. In the current environment, time is a critical component in any bank’s online strategy, they would do well to enter relationships with portals whilst there are still deals available. For further information contact APT Strategies at info@aptstrategies.com.au |