Search Domain

By Kenneth Cline

Building an effective online banking service for small business customers requires an understanding of their total needs — online and offline.

Banks reacted with great alarm a couple of years ago when online upstarts such as LiveCapital.com and OneCore Financial Network Inc. started angling after their small business customers. And no wonder: small business provides 10% of the typical bank holding company's annual profits, according to one recent study, and other published estimates are even higher.

But the ebb of the online threat has brought little comfort to traditional providers. After all, they still need to realize returns on their own significant investments in online capabilities, and they remain mindful of the possibility that their electronic rivals could rally. This has prompted some intensive thinking about what the customer really wants — a hodgepodge of electronic and physical services, or something integrated?

The emerging consensus is that online banking, whether for small business or any other customer segment, constitutes a channel rather than a product. In other words, small businesses won't gravitate towards a bank just because it offers a robust online product. But they will patronize a financial institution that offers online banking as a supplement to its branch and telephone banking services. It's the quality of the total package that counts.

The issue then becomes: how do you deploy online banking effectively as part of a multi-channel delivery system? What products and capabilities do you need? And how do you make the service profitable, or at least reduce expenses to a tolerable level?

We explored those questions with a panel of experts in the field: Richard "Ric" Carey, former marketing director, business banking, for Chicago-based Bank One Corp.; Jean Martin- Weinstein, practice manager at the Business Banking Board, Washington, D.C.; and Charles B. Wendel, president, Financial Institutions Consulting, New York. We spoke with the three during BAI's Internet banking conference in San Antonio last April.

Their responses centered on the need for a back-to-basics strategy. Bankers must identify prime customer segments and their various needs, and then integrate online service with branch, telephone and automated teller machine channels in a way that meets those needs. And rather than try to migrate the great mass of small business customers to the Internet, financial institutions should target those clients who are really disposed to it.

In practical terms, it's a matter of compiling the relevant offerings, both offline and online, that will meet the needs of the targeted small business customer in a manner that capitalizes on the provider's strengths. "The concept of 'search domain' applies here," Martin-Weinstein says. "Companies come to the Web site of a given provider with a certain set of activities in mind. The provider must understand customers' search domain and then leverage its core offerings to meet their needs."

Banking Strategies: What are the opportunities to serve small businesses online?

Wendel: Increasingly, online banking capability is a cost of admission to the market, in terms of a service a financial services provider must have to be considered by small business customers. But it's certainly not a major new revenue-generating source. Rather, it's an account-retention tool, an informational tool, something needed to retain customers. It is not the lead channel.

Martin-Weinstein: Our research at the Business Banking Board suggests that more than four-fifths of all commercial banking executives working in the small business market are pursuing an online banking strategy. Almost all of them plan to migrate product information, account balance information and transaction reports to the online channel.

Some institutions are using the Internet to re-invent their value propositions. One product that comes to mind is called "electronic financial officer," which is offered by Bedford, Mass.-based OneCore Financial. It serves as an online chief financial officer for the small business owner, for example by offering real-time financial status updates and early warnings of insufficient funds to cover upcoming payments.

But for most institutions, the online channel is clearly a supplement. During the 1999 dot-com boom, there was a rush to get all customers online, including small businesses, because that channel was considered less expensive. But it's no substitute for a face-to-face or phone relationship.

Banking Strategies: At the same time, might there be specific online services that can't be provided at the branch level?

Carey: They are emerging. J.P. Morgan Chase & Co. has a Web site for lawyers, for example. At Bank One, we rolled out a service in which our relationship managers take customers online to show them how to analyze their industry and value their company in relation to others.

Martin-Weinstein: The Internet represents a challenge to product development. It must be done under conditions of extreme uncertainty, particularly regarding the nature of customer demand. Banks will ask customers, "What would you like us to provide on the Internet?" Customers identify things but won't actually buy any of the products.

Wendel: As somebody wrote years ago, nobody knew they needed the Sony Walkman until there was one. So you're making a mistake if you rely upon customers to tell you what they want. In some respects, customers need to be educated and led along the way. But even under that scenario, they expect added value. And typically, the benefits of the online value proposition are unclear.

Banking Strategies: So how does a provider justify such capabilities?

Wendel: It can be essential to customer retention. It can also reduce cost by eliminating the need for people to make phone calls when they want to check their balances or transfer funds between accounts. If you can move low-value accounts and activities online, it can improve profitability.

Martin-Weinstein: We're also seeing some stand-alone revenue-generating products. For example, California's Imperial Bancorp, prior to its acquisition by Comerica Inc., offered an interesting letter-of-credit product to business customers. The online product commanded a fee similar to what was charged for the standard branch product. It also freed up relationship managers' time.

Wells Fargo & Co. has been a leader in this area. It built a profitability management system around the online channel, such that it's profitable most of the time. Service packages were created that charge Internet customers lower fees than those who use the more expensive branch channel.

Generally, we're seeing institutions turn from customer migration strategies to product-development strategies. Providers are designing specific applications that a target market is willing to pay for. One example is GE Capital Corp.'s fleet-leasing product. Intuit Inc.'s Quicken.com also has an equipment-leasing product. Banco Bilbao Vizcaya Argentaria, a Spanish bank, charges for participation in an online marketplace, and many banks charge a fee for developing and hosting a small business owner's Web site.

Carey: Every business case that was developed around the Internet included fee-generating products. In some cases that worked; in some cases not.

Banking Strategies: What's the revenue angle at Bank One?

Carey: We're still working on it. We recently launched an expanded small business Web site that includes a considerable amount of functionality to help customers, ranging from building business plans and marketing plans, to helping value a company. We also offer health insurance, which is one of the top 10 concerns of small business owners, both for their families and their employees.

We charge a monthly fee for a few of the services, but there are variations. You can make a one-time payment for e-health insurance, for example, or sign up for a package of services that includes business advice, education, business plans, forms, personal e-mail, company e-mail and storefront development.

Banking Strategies: Are you encouraged by the results?

Carey: The only discouragement so far is the financial play. Our business case projected significant fee income from non-traditional product sales through the Internet. That is not happening.

We're going back to basics — trying to understand customer needs and couch solutions within the context of a multi-channel delivery strategy, as opposed to a stand-alone Internet strategy.

Banking Strategies: Can banks brighten the online revenue picture by broadening their product array to include non-financial services?

Carey: Right now, I believe it's better to stick to the banking basics. When we focused on promoting our Internet partners and their capabilities, signups for our basic online services fell. As soon as we returned to emphasizing basic online services, the pace of signups was restored.

Wendel: Selling core products to a customer makes all the sense in the world. But when you start to go into other products, customers tend to pigeonhole the banks as being good at some things and not so good at others. Why should I go to a bank to buy office furniture when I can go directly to a Staples store or a Web auction site like e-Bay?

Whether it's Web site hosting, or an e-procurement service, or even investment products, other nonbank providers already offer those services, and they do it better than banks ever will. Granted, some customers prefer to work with banks, and such people are willing to extend relationships to areas outside of financial services. But they're a small percentage.

Martin-Weinstein: The concept of "search domain" applies here. Customers come to the Web site of a given provider with a certain set of activities in mind. The provider must understand customers' search domain and then leverage its core offerings to meet their needs. As we learned from Amazon.com, it may not be a good idea to purvey garden tools to people who log on to buy books. Banks are also starting to make that distinction as they select activities and products to move online.

Banking Strategies: What's the role of the branch and relationship manager in all this?

Carey: The branch and relationship managers remain critical. You have to get your facilities and staff connected to the Internet and then train employees so that they, in turn, can provide some training and education for customers. You also have to incent employees. If orienting customers to online banking isn't part of their incentive program, you'll have issues around the use of employee time and the intensity of their involvement.

Banking Strategies: So branch personnel will go out of their way to sell a product to the small business customer over the counter, but won't necessarily stretch to promote the online product?

Carey: I am saying that it's critical to incorporate all small business products, whether offered through the branches or the online channel, into an appropriate pay and incentive structure if you're going to be successful with sales efforts.

Selling small business products is difficult, online or offline. It's not like the typical banking center opens hundreds of business accounts a month.

We're focusing on identifying the products and services that a specific industry sector needs and is willing to pay for, and working those perspectives into the online experience. The packaging of the right products and services is important.

Banking Strategies: This takes us into the realm of segmentation, since it's widely acknowledged that a one-size-fits-all approach falls short. How do you segment small business customers in the online channel?

Martin-Weinstein: Some overseas banks have been particularly successful at identifying small businesses that prefer a certain type of relationship with their bank, whether it's remote and technology-intensive, or high-touch and face-to-face. By reconfiguring on the basis of such preferences, these banks have carved out a competitive advantage. Lloyds Bank PLC, United Kingdom, is outstanding in that area.

Carey: I would add a "Busy Customer" segment to those two categories. Some clients are so busy running their businesses that they do not have time to deal with traditional chores during regular business hours. For them, the online experience can be attractive. The size and complexity of the small business can also increase its propensity to use online services.

Wendel: The key is, the segmentation strategy must be realistic. I've seen projects in which institutions tried to focus on sixteen segments. You can't execute against sixteen segments; you've got to make it three or four.

Banking Strategies: Once you've identified the appropriate customer segments, how do you organize your company to serve them?

Martin-Weinstein: I'm hearing three themes from executives. One is that integration is a prerequisite. Even the best Internet product will fall short of its potential unless it aligns with the rest of the channel platform and is consistent with the brand.

Then, you need a dedicated product development team that spends a lot of time studying the supply chains of the specific businesses the company serves. GE, for example, has a small team, which includes many former business owners, that studies specific business transactions. The team must not only think of products that can be purveyed through the Internet, but also tie them into the overall GE product set.

Finally, there needs to be more emphasis on teaching customers how to use the product.

Carey: At Bank One, we conduct "Net meetings," where customers log on to our site while listening in over the telephone. We control their screens and guide them through a presentation of the functionality and benefits of our site.

Generally speaking, we need to better analyze and understand our customers' needs, and then match up those needs with online services customers will actually use. And then we need to find the right partners to help deliver those services.

Banking Strategies: What are the major issues involved with these partnerships?

Martin-Weinstein: I've heard more than one institution say, "I will not partner with someone unless they have been in the market at least 10 years."

We're starting to see a winnowing of the field. When we first started talking about banking small business on the Internet a couple of years ago, people were worried that San Mateo, Calif.-based LiveCapital Inc. might take over the online loan business. That is simply not a concern at all anymore. Instead of supplanting banks, LiveCapital now is emphasizing partnering with them.

Carey: Before the dot-com implosion, you didn't have to worry too much about whether a company was in its first, second or third round of venture capital. If they had a hot idea, the thinking went, they'd be a good partner. That's no longer the case. For example, we were in negotiations to advance our participation in Boston-based PrimeStreet Corp.'s online loan auction when it suddenly closed.

That raises several issues. These partners require annual fees from banks. Now that we're in a different economic environment, I wonder if bankers are going to have difficulty justifying those fees. What are the consequences of pulling services off our Web sites? How will customers react?

There's also a potential "dependency" issue involved in online banking. It stems from the fact that, in some cases, we're sending customers software that provides an immediate link to the bank. If their computers don't start up tomorrow, whom are they going to call? There's a whole support infrastructure around the Internet that puts banks in the position of having to handle a host of technical problems for their customers.

Banking Strategies: What are the other risk factors involved in banking small business online?

Carey: There's adverse selection. In an automated scoring environment, when you're dealing with loans under $50,000, you tend to generate a roughly 60% approval rate on applications coming through the branches. However, it appears that people who didn't like being turned down in person don't mind being turned down by a computer. So we're seeing online approval rates in the 20% range. I also see a lot more rejections on deposit accounts.

Martin-Weinstein: The credit risk issue will continue to be a big problem because of the ongoing need for face-to-face assessment.

There are some additional challenges. One is that getting your message to the customer on the Internet is more difficult than it used to be. Customers can log on to search engines, identify themselves as a small business owner, and look at customer comments about various banks. These comments are typically quite negative. So that's a disintermediation tool pushing banks one step away from their customers. Banks need to design a new marketing strategy to differentiate their products and keep them from being just one of many on a list generated by a search engine.

The Internet can also be bad for margins. Nonbank competitors such as OneCore, for example, don't charge fees for overdrafts, which represent an important source of bank fee income. Banks will need to adjust to these types of changes in their competitive environment.

Finally, there's the service issue. In 1998, we studied how banks respond to Web site-based requests for information. We found only 20% of the major banks in the United States actually responded to those requests. The situation possibly has changed for the better since then, but we still have to ask ourselves: are we truly supporting the service promise?

Carey: Those e-mails typically end up in the call center.

Martin-Weinstein: Exactly. So there needs to be a call center support strategy that goes with the Internet strategy.

Banking Strategies: What are your key take-aways?

Carey: My main take-away would be to remain flexible. This is not an exact science, things do change, and you have to be able to respond quickly.

Martin-Weinstein: For me it's integration, making certain all of your channel strategies are in place. Start with a simple Web offering and make certain that it is very well integrated with your branch and phone centers — and your relationship managers.

A second idea would be: think about where you can make money. What will customers actually pay for? It's a simple notion, but hard to implement on the Internet. You need to design an income-generating strategy, even if it's a narrow one.

Wendel: Mine is a back-to-basics message. Strategy is still important. Knowing your customer is still important. And segmentation is critical. The Internet may not be a profit-making vehicle by itself, but it can be critical to profitability. So banks need to re-think its effectiveness as a channel and how it complements the branch and other channels.

Mr. Cline is senior editor with Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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