Outside view – Banking on a secure future

Although it was initially slow to adopt the Internet, the banking industry has now fully embraced the online world. Matthew West looks at the issues – past, present and future


At the turn of the millennium the banking community had a collective vision of a future in which it only communicated with customers through the Internet.


Everything would take place online and there would be no need for local branches on every high street. It was a utopian vision in which costs were minimal while profits were huge.


The truth is somewhat more complex. Banks, as Nigel Moden, head of banking at consultancy Unisys says, tend not to be early adopters of anything and, in reality, were slower to react to the potential of the Internet than other industries.


In fact, many of the more traditional high-street banks only set up their online services after Internet-only banks – such as Egg, Smile and IF – had proven the investment in the web would provide a real return.


Since 2001 the high-street banks have worked hard to close the gap on the early adopters and now there is little to choose between those that took the initial leap online and those that were more cautious.


But the industry as a whole now faces a problem: consumer interest in Internet banking has reached a plateau; there are concerns about security; and there is unwillingness among consumers to use the Internet for more complex transactions such as a mortgage purchase.


Moden says consumers were expected to switch to the Internet and, in some quarters of the industry, that it was going to replace all the other channels.


According to David Mathews, head of marketing at Abbey.com and Cahoot, there were other reasons for interest in the Internet, such as increased regulation under the Financial Services Authority, increasing customer demand for greater choice, competition from those already offering online banking and the fact that these combined led to margins being squeezed.


While the high-street banks did not exactly fall over one another in the rush to go online, Moden says they did eventually see the value in providing some services through the Internet. He says credit cards and some insurance products have been very successful in the transfer online but others have failed for a number of reasons.


One of those was an initial lack of understanding in the banking community over what customers wanted to do online.


“The banks took the top five transactions that take place in the branch and transferred these to the web. But they quickly found that although customers might use the Internet it did not stop them using other channels as well,” he says.


Similarly Mathews says the banks began with a single channel view of their customers believing them to have a tendency to use the Internet, phone or branch, rather than a combination of all three.


It was this lack of understanding that meant, for a while, the Internet-only banks had the edge over the high street. They not only created a multi-channel view of their customers but were also not hampered by legacy IT systems the high-street banks were forced to use.


Andy Muddimer, head of Internet banking at Alliance and Leicester, suggests problems exist for the Internet-only banks that stem from the way in which they were created.


He points out many of the Internet banks were created as standalone subsidiaries of existing high-street banks.


For example, IF is owned by HBOS; Smile is owned by The Co-operative Bank; Egg is owned by Prudential; and Cahoot is owned by Abbey. However, the high-street banks did not focus on the Internet from the beginning as many did not want to have their brand associated with a failed attempt to offer Internet banking services.


Muddimer suggests the level of investment required to maintain these Internet subsidiaries may actually lead to many of them disappearing now the high-street banks know consumers are willing to use such services.


In the meantime, as the Internet as a consumer tool has grown massively in the past 12 to 18 months, its use for banking has slowed, and in some cases actually fallen away.


Moden says Internet use has dropped to such an extent that two of the leading banking groups are concerned and see greater use of the web as a priority.


Of the two thirds of the population regularly using the Internet, only one quarter are registered online bankers. One of the reasons for this is an ongoing concern that identities will be stolen or their bank account hacked.


Mathews says the banks are working at improving security. He points to a recent attempt by Cahoot to improve security by introducing a web card facility that enables the bank to issue a one-time-only credit-card number for each transaction its customer makes using their card. The web card works by creating a unique number for each transaction, which is linked to the customer’s credit card.


“The banks are getting wise to the security threats. What they need to do is make it as easy for customers to use online services securely as they can currently insecurely,” he adds.


Equally significant is the fact that customers simply do not want to carry out certain transactions online.


Muddimer says while there is an argument that Internet usage could be related to age, it is not one he accepts.


He says: “There are large numbers of people who are financially aware and are happy to do things online. However, equally for those same customers, there are products such as mortgages and pensions that, while the Internet is good for research, they still want face-to-face contact.”


What is clear is that banks now take the web very seriously indeed. Moden says many of the high-street banks are now looking at the layout of their
websites, realising they have to keep any new designs simple, and then transferring the design principles developed for the Internet to their other channels.


“While the Internet has been the newest channel for banks to communicate with their customers it is now the design principle for the other channels in the business,” he says.


Such design principles include the development of personalised e-marketing and creative ways of cross-selling other products to customers.


Secure bank statements by e-mail are considered another way of getting customers online. What most seem to be in agreement about is that banking services, whether online or branch based, need to be simple and convenient to use.


Whether the web will become the primary method for people to communicate with their bank is uncertain and it is likely that for more complex transactions they may always want a greater level of human contact.


It is inevitable though, that as those currently growing up with the Internet start to mature, the proportion carrying out their banking transactions will also increase. For the banks, then, it is a waiting game they would rather not play. After all, 20 years is a long time.



Mobile balance


The next big step will be increased access to online banking facilities via mobile phones or PDAs. 


In theory it should be easy for a person to access their bank account from anywhere in the world.


This has already begun to happen with SMS text messages being sent to customers when they are getting close to their overdraft limit.


Banks are looking at providing mobile web services and consumers can expect advances in mobile Internet banking to occur perhaps as early as within the next 12 to 18 months.

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