The bar is rising for online banking features

Mark Vernon reports on the trend in banking to feature more online services, following the lead of new Internet banks, such as NetBank, which are exclusively online.

Providing online banking facilities is now expected for retail banks. However, the range of services that banks offer solely over the Internet tends to be limited. For example, often customers have to call to set up bill payments. Alternatively, they cannot integrate personal finance software with account information from the bank.

The commercial story behind this blockage is that although banks feel the pressure to offer some features on their Web sites—perhaps displaying balances as graphics or providing primitive calculators to forecast expenses—these offerings are limited, due to the cost and complexity of more advanced functionality.

However, that is changing, according to a new report from Celent Communications. By 2006, the amount retail banks spend on external IT services is expected to break the $500 million mark. On the one hand, what is happening is that online banking vendors are gearing up their offerings and extending the interoperability, customization, and integration capabilities of their products. And on the other hand, new pure players in the online space are raising the bar.

Virtual banks push the envelope

Take the case of NetBank. This exclusively online bank claims to be the United States' first commercially successful Internet bank; it currently has more than 150,000 customers in 50 states and 20 foreign countries.

The bank sells itself as offering a full line of financial services designed around the needs and lifestyles of its net-savvy customers—this is the flexibility that the online channel brings. Moreover, its branchless business model allows it to operate at a fraction of the cost of a traditional bank, savings that the bank says are then passed back to customers through more competitive deposit rates and free account services, such as online bill payment.

However, the bank wanted to develop its online functionality, partly to extend Web site facilities into the more advanced services, but also to move its offerings into the small to midsize business space. In other words, it was thinking about the kind of operations in which the use that an advanced individual user might make of a Web site would be pretty similar to the use that a small business might require.

NetBank turned to Corillian, the leading online banking vendor, according to Celent, and NCR, a provider of ATMs and other self-service solutions. "In launching a new small business banking program, we needed partners who could help us deliver a superior customer experience to a targeted group of tech-savvy business professionals," explains Tom Cable, NetBank CTO. "As a branchless bank, we rely on the Internet as our primary delivery channel for services. We chose to partner with NCR and Corillian because they provide the expertise, and flexibility required to compete and win in today's marketplace."

So far, the project has proved a success. It generated $17 million in new deposits in five months, and without aggressive advertising. Cable believes the new services are proving attractive to existing retail customers too: he projects a 5-10 percent improvement in retention, accounts, and revenues.

Speaking about the market in general, Dan Schatt a senior analyst at Celent, says that this kind of activity will form a trend: "Historically, banks have been content to allow Quicken or Microsoft Money to take care of their customers' personal financial management needs and have spent considerable sums to facilitate OFX downloads for this purpose. We are now seeing quite a bit of expense management, funds transfer, and aggregation technology offered within bill payment and online banking offerings, enriching a user's online banking experience. This year, banks have an opportunity to take advantage of this functionality through core and application vendor offerings like never before."

His colleague, Alenka Grealish, adds that the vendor market offers retail banks increasing choices if they want to go down this route: "Over the past decade, Internet banking vendors have significantly increased their ROI arsenals. Despite the tepid market, vendors have not slowed their pursuit of enhancements that strengthen the ROI equation. Their current challenge is demonstrating to bankers how these enhancements translate into line items on income statements." And if the half-billion dollar spending prediction is anything to go by, it looks as if they are succeeding.

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