Online Banking

Saturday's Wall Street Journal featured an article on the current generation of online banking. It brought back memories from my days at Chase Manhattan Bank in the 1980s.

To be sure, twenty years is a virtual eternity in a technology area like this. When I arrived at Chase, Citibank had recently discontinued its own home banking project, which included script that one would print out as "money" on a home printer. Back then, the biggest obstacle to "home banking," as it was then known, was the inability to simply use a personal computer as an ATM.

Chase had two separate electronic banking groups operating in the mid-1980s. Believe it or not, we lost money on every customer in the "online bill paying" product. That was because the customer entered the electronic bill payment, but Chase had a roomful of low-level employees writing checks on a Chase account to physically send, for the customer, to the payee.

Oh, how times have changed!

The WSJ piece rightly points out that online, home or electronic banking- choose your preferred name for the service- tends to wrap you up in the bank's clutches in a rather irreversible manner. As such, by making you captive, their economic propositions, in terms of loan rates, terms, deposit rates, etc., will tend to get a little worse, since you can't easily leave the relationship.

This is one reason I don't personally participate in online banking. Although, I admit, the potential to manage cash disbursements to the day is vaguely appealing. Then again, I have worked at a bank, and am aware of the culture of finger-pointing and unaccountability when an error is made. Heaven help the poor customer who tries to manage cash flow by timing payments closely, and ends up late on the mortgage or utility accounts, thanks to uncontrollable network problems.

I was also struck by the popularity of third-party, omnibus account aggregator services, which allow all ones disparate financial institutional relationships to be presented, online, in one place. On the plus side, this keeps each institution at arms length. On the minus side, you risk a lot of security with an essentially unregulated, reporting and processing vendor.

According to the article, electronic customers are 27% more profitable, and online bill paying has now risen to a 15% market share, from just 4.8% in 2001. As many as 40% of US households now do some online banking.

Which brings me to the point of this post. As the piece suggested, online banking is now moving into the phase of differentiation. Banks need to provide distinctive assortments of offerings online, in order to gain some advantage from it.

Does this not begin to resemble the earlier eras? More technology expenditures to gain new users and share, moving the user base from early adopters to late adopters? Will these later users, perhaps including me, open more accounts and provide more profits due to online usage?

It's an interesting intellectual and business question. Investments are made on the profitability and usage data of current online banking customers, but the eventual drivers of such numbers will be the masses of customers which banks hope will migrate out of branches and onto cyber connections.

Granted, there is a likely cost saving in servicing accounts online. With ATMs probably accounting for most cash transactions, online banking offers the promise of dispensing with an avalanche of paper check processing for large banks. But will these profits be offset by communications and technology expenditures? Will the online services be free? My guess is, eventually, "yes."

All of which confirms my continuing view of these mega-banks as the financial super-utilities that my friend, B, foresaw in 1996. I would not bet that any one bank will see its total returns rise over time on the back of online banking. They might not fall too far, due to the cost savings, but I'm guessing that significant revenue gains won't come from this area. And, in the end, the easiest way to earn consistently superior total returns is to engineer consistently superior revenue growth.