Will Web banks ever be a threat to traditional banks?

The tantrums thrown by technology constitute a real threat for the online world of finance

There is no doubt that online broking has definitively proven the efficiency of its online business model and, as a result, modified the whole financial scene but this is not quite so for online-only banks that have not yet broken into the big leagues on the Internet, at least when their business model happens to be based on their banking activities only.

On paper, everything looks rosy for Internet-only banks: they operate with 50 percent of a traditional bank. This is why classical banks should start getting worried.

But this is not the case. First of all, no single actor in the Internet-only banking sector has yet managed to prove the efficiency of its business model.

First of all, faced with working costs that are actually lower, Internet-only banks still face the same problem as leading eRetail sites: the need to establish an eBrand able to generate enough traffic but also, and most importantly, trust.

eBranding might play an important part in the eBusiness sector but this is even more so when Web banks are concerned. The average consumer prefers buying a book or a CD rather than investing his money online.

What this means is that Internet-only banks need to invest a great deal of money in marketing to make up for their deficiency in terms of fame and trust and those costs are just too high for their margins.

It goes without saying that it is rather difficult to try and take market shares from actors who have been in the business for over a century and who offer off line services you can not offer your own customers.

Once more, the web is fighting against firmly rooted habits. We already noticed the same phenomenon with the failure of Stamp.com and eStamps.com that tried to sell stamps online.

And yet, the business model seemed interesting on paper and was based on a simple idea: to save customers the bother of queuing at the post office when buying their stamps.

In this case, as in many others, sites did not give enough thought to the way people act. It is true that behavioural analysis is only a few years old and that it still has more detractors than followers. But you'll still admit that our so-called classical economic models are faced with inconsistencies on a regular basis, as consumers do not always behave as we expect them to.

I personally think that people will tend to rely on behavioural economy more and more when they have to make a decision but I also think that it is becoming urgent to apply its theory to the Internet in order to avoid the mistakes that are constantly shown online.

The biggest mistake has been to believe that the Internet was going to create a new category of consumers that would go on holidays more often since eTourism sites were going to encourage them to do so, that they would neglect their traditional stores since they would be able to buy 24 hours a day and seven days a week and that they'd dream that they would no longer have to queue at the bank…

Well, this is not so, the Internet does not create new consumers. It can help, it can offer more interesting prices without having to spend hours in the town centre in order to find a better deal but there is no way it can do "everything".

As a result, Internet-only banks are still looking for their customers and the first results we've seen so far will only get a praise from the critics…when they are positive.

Of course, Internet gurus such as Jupiter communications have been predicting that online banking activities were going to triple in the five next years, that over 40 million Americans would be managing their bank accounts online in 2005.

It this figure happens to be true (one should remain cautious with this type of forecasts since they are only based on what suppliers have to say), it will only mean that the Internet has become part of our life and traditional banks should be the great winners.

Indeed, nearly all the so-called classical banks already give their clients the possibility to manage their accounts on line. This is how, among the 14.6 million Americans who already manage their accounts online, most of them do it via their… traditional bank.

When you look at the Internet-only banks first results, you can indeed wonder about the role they might play in the future.

Netbank.com (whose shares went from $83 in April 99 to $10 today…) earned $8.6 million in 2000, and has presently 162.000 accounts. As for the First Internet bank of Indiana, which is another Internet-only bank, it is presently adding between 40 and 60 accounts each day.

You'll agree with me, if things keep on evolving the way they are, online-only banking might never take off and even if this market did become profitable, it would still remain a relatively niche phenomenon.

The future of online banking is clear to me and the figures are here to prove it: no bank today can neglect a strong strategic online presence.

And yet, I think traditional banks are the ones that will end up winning tomorrow's online banking battle and they will probably only have to buy off the few Internet-only banking actors that will have proven successful in their niche.

Source : Excite/Reuters

We often hear that such and such leading e-Retail site had to close down its selling activities for an hour or more. This type of problem first creates frustrated users but also a loss in the company's turnover, and the loss is not always proportional to the length of the blackout.

In the eFinance sector, things can be much worse. This is how websites were taken to court by furious consumers who could not place trades or who believed they had placed trades…

Even though technology has now become reliable enough to prevent this type of problem, the experience it gained regularly comes up against Web sites that keep on getting bigger and more powerful everyday.

Scale changes in the computing sector, but also in the industry field, often lead to breakage in the production process and to blackouts in the Internet business. The eFinance sector is no exception and despite the efforts displayed by the biggest online actors to get ready and take any rational measures that can possibly be taken, very few manage to avoid the almost unavoidable blackouts.

It goes without saying that most of these blackouts are almost imperceptible to consumers, as they sometimes only last a few minutes. But when consumers do notice them, these blackouts can do real damage to the site image, and its consequences might be much worse than they'd prove to be for a classical e-retailer site. The black Monday Charles Schwab just suffered is only another example.

Last Monday, a problem took place on Schwab's main server. The whole site was switched over to a backup system at once. At first sight, everything went well and Schwab remained as powerful as ever. Unfortunately for Schwab, a few customers did not receive confirmations for the orders they placed during the blackout.

As a result, orders were sent twice or even three times and this soon started to be a major problem for the site.

Schwab had no alternative but to post messages, informing its customers that their orders had been taken into account and that they did not need to resend them. Schwab also offered its customers to call its help centre and obtain confirmations for their orders directly from them.

And yet, even though Schwab seemed to react positively at first, I think its attitude became reprehensible when the site took the liberty to post the following messages: "Duplicate orders will be your responsibility".

This is the second lesson that can be learnt from a technical problem: how to deal with the blackout in a "commercial" way. There is no use trying to make your customers feel guilty since they will end up turning against you. It would be much more sensible to inform them of the problem and offer them an answer such as calling the help centre. Threatening them and accusing them of being responsible when you are the one to blame does not seem a very clever approach to me.

If all websites have technical procedures ready in case of emergency, they should also conceive a marketing strategy to contact their consumers in order to avoid this type of non-commercial behaviour.