Aggregation's Stress Test

By John R. Engen

Tepid customer demand for account aggregation keeps profitability out of reach. Can banks build an acceptable business case?

Account aggregation was hailed as a breakthrough technology when it burst on the scene a few years ago. Thinking that consumers would flock to a Web-based arrangement that would enable them to view account information from multiple institutions on a single PC screen, providers rushed to expand their systems and find a revenue angle.

But instead of an exciting new market, account aggregation is shaping up as a burden for financial institutions. Information technology budgets have come under pressure as providers grapple with deteriorating business conditions. And consumer adoption rates have disappointed, with only 0.7% of online U.S. households using account aggregation regularly, according to Forrester Research Inc., Cambridge, Mass.

Throw in an expected leap in operating costs for the service, and the first true test of the industry's faith in account aggregation is at hand. Expenses are expected to rise significantly this year as low-cost introductory contracts with technology vendors expire. Redwood Shores, California-based Yodlee Inc., the leading provider of aggregation services, says per-user charges for large banks will rise to about $8 annually, plus license and maintenance fees, compared with virtual giveaway pricing right now.

Financial institutions that offer aggregation services thus face a choice: persist in the hope that consumer demand will pick up, or cut their losses and run. "A lot of senior executives will be asking, 'Why are we funding this? What has been the bottom-line impact on the bank thus far? How will aggregation create value?'" says Catherine Graeber, a San Francisco-based senior analyst for Forrester Research.

The tentative mood of bankers is evident at Cleveland-based KeyCorp, where senior vice president of online services Paul Ayres is taking a cautious stance. "We want a seat at the table to see how things develop. But we're not going to bet the farm on it."

This kind of "place-holder" strategy may not be tenable over the long term, however. Experts involved in the business, as well as outside observers, agree that aggregation requires a more robust functionality before it becomes truly attractive to consumers. Basically this means linking aggregation with online banking applications and other financial planning tools, something that requires a further investment of time and dollars.

The upshot is that aggregation is likely to become a winning strategy only for those deep-pocketed institutions that have the right mix of customers, technology prowess, and marketing skills to make it work.

Reluctant Embrace

As practiced by Yodlee and other vendors, aggregation is a process of using customer-provided access codes to extract a customer's account information from multiple providers and compile it on one Web site. The appeal is convenience: customers get a centralized snapshot of their various online relationships without having to access all the individual Web sites.

When aggregation first emerged in 1999, it was marketed directly to consumers by third-party technology firms. Banks initially sought to thwart the efforts of firms such as Yodlee to employ so-called "screen-scraping" technology to grab information from their Web sites. One bank, the erstwhile First Union Corp., even temporarily went to court over the issue.

In short order, however, these institutions changed their tune. It was technically difficult to block the service, and some providers worried about alienating customers who found aggregation attractive. Banks also were intrigued by the possibility of gaining access to their customers' external account information — and were especially fearful that competitors might get there first.

By 2000, the industry was collaborating with aggregation firms to establish technology and security standards — efforts that met with some success. At the same time, many large banks rushed along plans to offer aggregation themselves. Today, Yodlee says, more than 65 financial institutions offer the service, and another 35 are poised to launch it in 2002.

From a demographic perspective, the technology is nicely positioned with customers. Surveys by Yodlee, Forrester and others show that aggregation enthusiasts are an attractive lot, with higher incomes, asset balances and education levels than typical online banking users. Yodlee says more than two million Americans have registered for aggregation and predicts that number will skyrocket to nearly five million by the end of 2002.

Major institutions such as Bank of America Corp. and Wachovia Corp., both of which launched their services only last fall, report strong registration volumes. "It has tremendous promise," says John Rosenfeld, Bank of America's consumer and small-business e-commerce executive in Charlotte, N.C. "Aggregation is something our customers value, and we can use it to significantly deepen our relationships with them."

The outlook is not universally sunny, however. Fifth Third Bancorp in Cincinnati is among the banks that looked at aggregation and passed. Dan Goldman, the company's retail Internet product manager, says that while the service is "compelling," industry security and accuracy standards, as well as regulations, have not yet progressed sufficiently to ensure the comfortable participation of either Fifth Third or its customers.

Meanwhile, banks that do offer the service are discovering that justifying the exercise financially is tougher than originally thought. Indeed, respondents to a recent Forrester survey of 45 financial services firms said identifying a reasonable business case was the single biggest challenge they faced.

That raises the question: Should aggregation be viewed as a standalone business proposition, or as a form of cement for customer relationships? Some bankers say it's a mistake to look for returns from aggregation itself. Charlotte-based Wachovia, for example, views that service as "incremental and additive to our online value proposition," according to Parrish Arturi, new strategies director. "It's short-sighted to look only at immediate returns, instead of what the service does for the overall customer experience."

For Bank of America's Rosenfeld, aggregation is a research-and-development expense, carried on his e-commerce unit's internal profit- and-loss statement. He looks at the overall costs, revenues and "shareholder value-add" of the unit's various online initiatives — including values assigned to retention — to determine operating margins and contributions to company profits. "We're confident we'll see the results we projected," he says of aggregation. "But we still need to develop a stronger business case for it."

The "Stickiness" Effect

Building that case may depend on how well aggregation is marketed. Financial institutions today are offering the service to two distinct segments: mass-market customers, through the retail bank, and affluent clients through private banking, trust or investment groups.

The affluent market — roughly defined as customers with investable assets of at least $250,000 to $500,000 — is viewed by many as a natural fit for aggregation since these individuals tend to have complex financial relationships. State Street Corp. recently strengthened its position in this market with its purchase of a minority stake in ByAllAccounts Inc. of Woburn, Mass., an aggregation vendor that specializes in creating personalized investment portfolios. Boston-based State Street plans to offer ByAllAccounts' service to clients through its investment advisors.

The idea is that by aggregating external account information for upscale clients, banks eventually will be able to bring some of those assets in-house, or at least earn advisory fees for helping manage assets held at other institutions. Sukhinder Singh, Yodlee's vice president for business development, says it makes sense to focus on wealthier clients, "especially in a recessionary environment where budgets are being cut."

But most banks still focus their aggregation efforts on the retail mass market, primarily as a customer-retention tool. Wachovia's Arturi says the service complements the bank's other online offerings and helps put Wachovia at the center of customers' financial lives. "We don't want to lose relationships to another institution because we don't offer aggregation," he adds.

The retention argument is based on the idea that aggregation is one more service that binds customers to an institution. Rosenfeld likens it to online bill-pay in this regard. Bank of America's internal surveys show that online bill-payment users have 75% lower attrition rates than offline clients. Rosenfeld believes aggregation "eventually could exceed bill-pay" in terms of such customer "stickiness."

Critics argue, however, that client retention is a murky basis upon which to justify expenditures. Aggregation is also redundant, in this respect, since established services such as electronic bill-pay already provide a powerful anchor for online customers. "It's extraordinarily unlikely that anyone will switch banks because of aggregation," says Octavio Marenzi, president of Celent Communications, a consulting firm based in Cambridge, Mass.

The stronger argument for aggregation may lie in its sales potential. By accessing the information that customers volunteer from their other accounts, and then routing it directly to sales channels, banks could potentially improve the targeting of their pitches.

Marenzi gives the example of a customer who has aggregated credit-card account information on a bank's site. By using that data to offer a card with a lower interest rate, the bank may be able to switch the account. The idea, he says, "is not to cross-sell new products, but to replace existing ones." To aid in this process, Yodlee is launching a set of analytical tools that can provide banks with share-of-wallet or benchmarking reports based on the aggregated data.

Boosting sales in this way faces several practical limitations, however. For starters, aggregation's ability to provide a compelling view of a customer's external accounts is limited by the information volunteered. Two-thirds of online consumers in a recent study by Atlanta-based Synergistics Research Corp. said they were wary of their information being used for cross-selling efforts. Banks, under pressure from regulators and anxious to avoid public criticism, are moving cautiously in collecting this data. For example, many allow aggregation customers to "opt-out" of receiving marketing messages.

It's also the case that few banks have integrated their information systems sufficiently to do anything with the mountains of customer information they already possess, much less the external information that aggregation might bring their way. In its survey of financial institutions, Forrester couldn't find one that had done anything with that external data. The fact that most financial products are commodities doesn't help either, since institutions find it difficult to offer anything sufficiently compelling to inspire a switch.

Spreading the Word

The key to capitalizing on aggregation will be spurring higher levels of registration and usage through better marketing and enhanced functionality. On this front, banks face a daunting level of consumer disinterest, given that Synergistics' survey found that only 30% of Internet users are even aware that aggregation exists.

That's why financial institutions are spreading the word, with outreaches ranging from pop-up screens on their online banking sites to targeted direct-mail solicitations stuffed into account or credit-card statements. Some banks are using in-branch signage, employee "paycheck stuffers," and monthly online newsletters to promote usage. They're also making it easier to sign up for the service. Rosenfeld says it takes "about two seconds" for an online banking customer to register for aggregation at Bank of America.

Registrations don't mean much, however, unless customers actually use the service. Most banks on Yodlee's application service provider model must pay per-user fees whether or not the service is used. Yet only about half of those people who sign up for aggregation — or about 0.7% of the total online population — actually manage multiple accounts, according to Forrester. The adoption and usage challenge holds across the industry, from smaller institutions to New York City-based Citigroup, whose MyCiti.com, the oldest and largest aggregation site, has more than 500,000 registrants, but only about half as many active users.

The key to driving usage is getting customers to add accounts when they first sign up for the service. Yodlee is working to make it easier to do this. One recent innovation is a "password saver," which allows customers to add Yodlee-enabled accounts to an aggregation site with a single click.

Banks also must step up their post-registration e-mail campaigns that remind customers about aggregation's benefits. Enhancing the functionality of their sites with calculators, debt-reduction planners and portfolio-maximization tools would help. Most importantly, banks must integrate aggregation offerings with other established online banking applications.

Research by Waltham, Mass.-based Gomez Inc. shows that nearly two-thirds of customers who conduct at least one online transaction per-month are strongly interested in an offering that is integrated with general account-management capabilities. "Separating aggregation services from online banking keeps aggregation out of sight and out of mind," cautions vice president of research Chris Musto.

Cost Control

As bankers confront the long list of things they must do to make aggregation more attractive to customers, they might justifiably wonder if the results are worthwhile.

Forrester's Graeber, former head of Wells Fargo & Co.'s consumer Internet services group, assessed the financial implications for a hypothetical bank that steadily increases its aggregation client base to 135,000 over a three-year period. She concluded that the combination of vendor and internal costs required to grow and leverage the service would easily outstrip the additional revenues a bank could reasonably hope to achieve through incremental fee generation and cross-selling. Those internal costs included marketing, customer and technology support and program management.

"If you're convinced that you've got to provide this to everyone, then you've got to find a way to reduce the costs, or you won't find any return on the investment," Graeber says.

Singh recommends a rally-the-troops approach to cost control. By enlisting the various business units that might benefit from aggregation to share in the costs, she asserts, an institution can minimize the costs to any one group, and also encourage those units to make aggregation part of their business plans.

But that doesn't reduce the institution's overall costs. While circumspect about discussing the details of Bank of America's contract, Rosenfeld indicates that his bank pays Yodlee only for active users. This approach lowers the count of billable users, though Graeber says the per-user fees are bound to rise under this methodology.

Another alternative is to change the technology-acquisition model. Some banks access Yodlee's technology through online banking vendors such as Atlanta's S1 Corp. and Financial Fusion Inc. of Concord, Mass. These vendors allow the financial institution to take advantage of volume discounts, but without the same level of customization available from Yodlee. Others use software from Yodlee rivals, including ByAllAccounts and New York-based Kinexus Corp., to avoid per-user costs in their private banking offerings.

Wachovia is among those contemplating a shift from Yodlee's ASP model to in-house software integrated into its own systems — an approach it already uses for high-end clients. "We want to gain some economies and drive out some costs," Arturi says.

Many bankers remain confident that aggregation will eventually become a staple of their online offerings. Whether it ever gets that far may depend, at least for some institutions, on how well they balance the service's elusive revenue potential with the rising costs of providing it.

Mr. Engen is a freelance writer based in Minneapolis.

Copyright © 2003 by Banking Strategies, published by BAI.

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