Open an account at the Bank of Montreal and in days you’ll receive the letter from your branch manager, thanking you for your business and looking forward to your future together. Almost without knowing it, you’ve begun a relationship.
TD Canada Trust, the Bank of Nova Scotia and others
all make similar overtures. These are not the simple formalities they seem but the building blocks of client retention. Generally speaking, most customers don’t switch banks once a relationship is in place. The trick is sealing the relationship, and this has never been more difficult than it is online.
Earlier this week Pensacola, Fla.-based G&L Internet Bank closed its virtual doors, a singular example of the challenges Web-based financial institutions face. G&L quickly gained a high profile because of its unique marketing approach to a specific demographic: gays and lesbians. The idea held great promise, in part because it was trying to take advantage of the Web’s ubiquity to serve a specialized group of users. G&L executives argued that only an online financial institution could make homosexuals feel that it cared about them, and it would also allow gays and lesbians to escape the kind of scrutiny they could face in a small town when they asked for a mortgage.
If the failure of G&L is a blow to that community, they are not alone. Wingspan Bank, which was launched in 1999, was integrated into an operating unit of its brick-and-mortar parent firm, Bank One, within a year. Just days before G&L shut down, the United States Office of the Comptroller of the Currency shut down Internet-only credit card company NextCard for acting in an “”unsafe manner.””
These setbacks are to be expected from a market sector which is still feeling its way on the Web. Customer behavior patterns rarely change as quickly as experts would predict, but there are plenty of signs that online banking is growing in healthy ways. In December, for example, NFO Cfgroup released a study of more than 2,000 Canadians where 25 per cent of 18 to-25-year-olds said they had brought their banking to the Internet. Adults in the 26 to 35-year-old demographic (in other words, the people who are actually starting to make decent money) are even more active online, at 34 per cent.
Security concerns are the biggest obstacle to Internet banking, and the collapse of G&L and NextCard are not going to help matters. At the same time, there is enough interest in the convenience of the online model that it is merely the approach that needs to be fine-tuned.
In the first place, banks need to stop treating the Internet as an either/or scenario. G&L might have been successful if it had developed ties with physical institutions in major cities. Likewise, Bank One had no reason to create Wingspan as an Internet-only property when it was already spreading its wings in cyberspace through its own BankOne.com site. Whether it’s laziness, fear, blind faith or a history of good service, many of the physical banks possess trusted brands with unmatched longevity. The best firms are learning how to effectively extend these brands online, and as they do so it will become extremely hard for an unknown virtual entity to compete with them.
The biggest threat to traditional banks comes not from their online-only adversaries but in transaction processing companies that closely resemble them. On Thursday the best known of these firms, PayPal, managed to pull in US$70.2 million in its initial public offering — not bad for a company that has never been profitable, particularly in these post-Internet hype days. PayPal customers are given accounts where their money earns interest. They can be issued PayPal bank cards or be cut PayPal cheques. Its greatest feat has not been to survive the market downturn and file an IPO, but to deftly avoid being classified as a bank by regulators.
PayPal is a service that already enjoys more than 200,000 customers in Canada and is effectively fending of competition from Citigroup, Yahoo! and even its own partners, like eBay. It is convenient, secure and customers aren’t readily switching to other payment services. This is what 21st century Internet banking is starting to look like — where traditional relationships are taken to the next level.