Not So Sticky?

By Lauri Giesen

Once touted as a customer-retention tool, online banking is becoming commoditized. But that doesn't mean providers can scale back online services.

Has online banking become a commodity service? The question would have been viewed as heresy when the dot-com economy was in full bloom, but recent evidence casts doubt on the theory that online banking users are somehow "stickier," or more inclined to stay with the institution, than other customers.

"If there is any lowering of attrition rates among customers who bank online, we have not seen it," says Richard Bell, research manager of retail delivery channels for Financial Insights, an IDC company based in Framingham, Mass. "When banks first started offering Internet services, a full-service offering could be very advantageous. But now Internet banking is widely available and few services can be distinguished from all the others."

To be sure, some major institutions continue to tout the stickiness of their online banking programs, Bank of America Corp. and Wells Fargo & Co. among the most notable. And it does seem to be true that online bill pay, when it's a strongly used component of these programs, helps to dissuade customers from switching because of the hassles involved.

But customers can also go directly to vendors for online bill pay services, entirely bypassing financial institutions. The percentage of U.S. households using both e-billing and online banking will reach parity this year at 30%, according to e-Marketer Inc., a New York-based research firm. But e-billing will then pull ahead as the "biller-direct" method of paying bills online overtakes the "consolidator" model (see sidebar).

The eroding differentiation provided by online banking raises some challenging issues. Should providers redouble efforts to promote online bill pay and presentment in order to achieve the retention payoffs that this linkage seems to deliver?

The gains are not certain and this course of action can be expensive. BofA, for example, set aside $45 million in 2000 to pay for a joint marketing campaign with Atlanta-based CheckFree Corp., which provides e-billing technology.

The other choice is to simply accept that online banking is a channel, like all the others, that must be maintained to keep customers. In other words, it's just table stakes to stay in the game. Payoffs will come not from special customer responsiveness, but rather from potential cost reductions as customers are serviced online rather than through the call center, the branch or by mail.

There are no easy answers. Every institution must decide for itself whether it wants to put more money on the table now, in the hopes of boosting online bill pay and reaping its retention benefits, or accept that online banking no longer can serve as a strategic tool for increasing or strengthening customer relationships.

Bill Pay Adhesive

When it comes to the stickiness of online banking, there are two categories of banks: those that do see a lot of stickiness and those that don't, with follow-through apparently being an important swing factor. In the first group are institutions such as Wells Fargo and BofA, which have invested heavily in building robust online services and then promoting them.

The key adhesive element, for both institutions, is online bill pay. When customers sign up for the service, they go to so much trouble setting up electronic payments for multiple billers that they're usually reluctant to switch banks after that. In fact, a 2002 Gomez Inc. survey found that 24% of online banking customers felt electronic bill pay was too inconvenient to bother with.

Consider the retention numbers at San Francisco-based Wells Fargo: customers who access account information or engage in other transactional banking activities online are 50% less likely to leave the bank than other customers. Meanwhile, those who use the bill pay services are more than 70% less likely to leave than those customers who do not engage in any online activities, according to Jim Smith, senior vice president of consumer Internet products.

Additionally, Wells Fargo customers who bank online keep higher balances and have more products with the bank than other customers, although the bank declines to quantify the latter two assertions. "It is very clear that the value of the customer relationship increases as those customers conduct more activities online with us," Smith says.

Similarly, Charlotte-based BofA cites a 55% reduction in attrition by customers who conduct online banking transactions and an 80% reduction in attrition by those who pay bills online, according to John Kelleghan, senior vice president of e-commerce.

Unlike most other banks, which lack a critical mass of e-bill customers, BofA has persuaded 2.3 million customers to actively pay their bills online. That represents a 36% penetration rate of its 5.5 million customers who bank online. "This product requires customers to come to our Web site multiple times a month, and that frequency makes our site stickier," Kelleghan says.

To get that high rate, BofA has conducted one of the most active bill payment promotions in the industry. And perhaps most importantly, it does not charge for bill pay. Many banks in the U.S. still charge a fee — typically around $5 per month — to some or all of their customers who use the bill pay service.

Bank of America's internal studies are extensive and include data from 600,000 customers. When comparing groups of online customers to those who do not use the Internet for banking, BofA tries for a close match on such factors as age, income, tenure with the bank and geographic locations, so that the single variable for comparison is whether the customers conduct transactions online.

BofA has verified that online customers keep higher balances in their deposit accounts. After three years, for example, online bill pay customers showed a 45% increase in the size of their loan balances with the bank.

Among smaller institutions, one outfit that has also seen the benefits of online bill pay is People's Bank in Bridgeport Conn., which annually retains 97% of its online banking and bill pay customers, compared with a rate "in the high 80s" for other customers, according to Ted Josephson, vice president of e-business at the $12 billion-asset institution.

However, People's does not break down its retention numbers by those who only bank online and those who also pay bills online. About 40% of the bank's online users routinely pay at least one bill via the bank's Internet service, Josephson says.

Narrowing Gap

Contrasting with the optimism of Wells Fargo and BofA, KeyCorp sees less benefit from online banking. When the Cleveland-based bank first began offering the service in 1997, it found those customers who banked online were clearly more loyal to the bank, kept larger balances in their accounts and opened more accounts than customers who shunned the service.

But today, with about one-third of the bank's retail customers using the online service, "the gap between online customers and the others is narrowing," says Paul Ayres, senior vice president and manager of Key.com. "As online banking hit the mass market, we found a lessening difference between the two groups in terms of retention and profitability."

What changed? For one thing, the early online customers were generally an affluent group, which cannot be said of the mass market. Also, online banking services are no longer unique. "Early on, people assumed that the benefits they gained from online banking might not be available from another institution." Ayres says. "But today, there is an expectation that you can get online banking pretty much anywhere. Customers may not appreciate the subtle differences between the various services."

This view is backed up by research from outside consultants. "Usually the quality of a bank's Internet offering is not a leading factor in the customer's decision to choose or stick with a bank," says Raj Dhinsa, a San Francisco-based senior analyst for financial services at Jupiter Research, which is headquartered in New York. "Most customers today use many channels. They take all these channels into consideration when deciding where to bank, such as the convenience of the branches, numbers of automated teller machines, and where those ATMs are located."

Financial Insights' Bell agrees that online services are rarely a factor when customers have to decide whether to stick with an existing institution. "About 45% of customers attribute their decision to leave a bank to bad service of some sort," Bell says. "It might be a rude teller, or they got the run-around at a call center, or there was a mistake in their account that never got resolved. Rarely is Internet service cited as a factor one way or the other."

Sometimes, institutions just don't have the data. Busey Bank in Champaign, Ill., a $1.2-billion institution, has about 11,700 customers who are active users of its online banking service — about 16% of the total retail customer base. But only a little more than 700 of those are active bill pay users, according to Kelly Denneman, vice president and e-business manager. Denneman believes these customers are more loyal than most, but admits the institution has been unable to document that view.

Amarillo National, a $1.5 billion institution in Texas, simply accepts online banking as part of the cost of doing business. "We don't view this as a tool to keep customers, but rather as something we have to offer to stay competitive," says Darren Jenks, vice president and Internet banking manager. "We probably would lose customers if we didn't have this, but we're not retaining our online customers at a higher level than any other customers."

What about the oft-heard assertion that Internet banking customers are more profitable than others? Again, there's no clear answer from Amarillo National. "We have all kinds of people banking online, from our best customers to those with accounts that routinely have negative balances in them," Jenks says.

The controversy over online banking extends to the question of whether it encourages customers to buy additional products and services. Chris Musto, vice president of research at Waltham, Mass.-based Gomez, says such cross-selling does occur. "By having customers come to their Web sites routinely, banks have been able to sign them up for additional accounts and get them to keep bigger balances in those accounts."

But Jupiter's Dhinsa disagrees. "Most people who bank online are transaction-oriented. When they go to a bank's Web site, they have something mundane that they need to do — check a balance or make a transfer, for example. They're not looking to check out other products and offerings. They do what they need to do and sign off."

What is a banker to make of these contradictions?

KeyCorp's Ayres thinks some re-ordering of perspective is required. "As online banking hits the mass market, the strategy has to change," he says. "Banks used to justify online banking in terms of customer retention and improved profitability. Today, we have to look at it differently.

"We know customers expect this service. And their expectations, in terms of services and functionality, are growing. Banks have to keep pace with those expectations to retain established customers. Secondly, we need to look at how online banking reduces our operating costs as we get customers to migrate from other, more expensive, channels."

While most banks have not seen corresponding reductions in branch traffic or ATM usage as Web banking has grown, many report substantial reductions in the number of inquiries to bank call centers. And that can yield major cost savings, since banks have to pay for the telecommunications service they provide at call centers, while customers pay for their own Internet connections.

Still, Ayres' larger point is that banks need to continue investing in the online channel simply because that's what today's customers expect. Online banking may be a commoditized product, and it's true that no institution can distinguish itself simply by offering it. But it's also a product desired by a large segment of important customers. To that extent, customer "stickiness" is a real phenomenon that must be factored into the calculations of institutions anxious to retain customers.

Ms. Giesen is a freelance writer based in Libertyville, Ill.

Copyright © 2004 by Banking Strategies, published by BAI.

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