Without a doubt, the online channel is the most cost-effective way for financial institutions of all sizes to deliver their services. It also delivers a strong ROI: research from The Boston Consulting Group and other research firms has shown that online banking users are over 30% more profitable than offline users, while bill payers are nearly 100% more profitable.
These kinds of numbers show the real value of promoting and securing the online banking channel. The question is how to securely deliver services over the Internet while striking a balance between effectiveness and convenience for the online banker. Our industry leaders provide insight into how this delicate goal can be achieved.
Carl Rutstein, Vice President, The Boston Consulting Group
Contrary to many predictions, the online channel didn't lower costs, nor slow down the ongoing expansion of branch networks. It also doesn't represent a good free standing economics, but must be viewed as just another channel alongside branches, call centers, ATMs and telephone banking.
From our experience consulting with the largest banks, coupled with a recent online banking benchmarking survey leveraging detailed internal data from twenty of the top thirty banks along with deep-dive analysis into their strategies and operations, we can classify retail customers into three general segments: 1) those that are offline; 2) active online bankers that do not use bill pay but log on monthly and 3) monthly active bill pay users. This third category represents the ultimate goal for banks due to the fact that they are twice as profitable as those offline customers. We worked hard to assess whether this was casual or simply correlated – after running event studies, we concluded there is something real going on here. Bill pay activation precedes a 40% lift in household profitability in the first year alone. Usage of this product changes the relationship between the bank and these customers – they move deposits, take out loans, have richer pricing and have much better retention than any measurable control group.
The key facts are that activating bill pay fundamentally changes customer behavior, and various institutions have widely ranging success rates at converting online bankers to active bill payers. Our research shows a 10x gap between active bill payers at these large institutions from first to fourth quartile penetration. In fact, the one clear difference between top and bottom quartile performance was if the bank ‘got religion’ around the Internet – it is a channel everyone understands, pushes, has compensation tied to performance and is systematically measured. To make a clear and final point on this topic – the vast majority of banks can dramatically increase their customers' profitability by increasing their bill pay penetration to levels that their top performing competitors have been able to achieve.
David Foss, General Manager, ProfitStars, Jack Henry & Associates
With online banking and other online services, the boundaries are gone for financial institutions and we continue to see tremendous expansion in online banking and bill pay programs. Surprisingly, while larger institutions are on 2nd and 3rd generation systems, there are still many smaller community institutions that are coming online for the first time with online banking programs.
One online solution that has the potential to revolutionize the way banks acquire and retain commercial accounts is Remote Deposit Capture. This solution allows banks to set up ‘virtual branches’ at merchant sites and provide a new level of service to their commercial clients. Retailers using this solution no longer send an employee to the bank to stand in line to deposit their checks. They can simply and securely scan and transmit the checks from their business locations. The merchant enjoys better cash flow and immediate access to electronic images, while the bank keeps its costs low and commercial customers happy. ProfitStars’ Enterprise Payment Solutions Group is working closely with our banking clients to deploy these merchant deposit capture solutions and has hundreds of commercial clients online today.
In terms of security, we believe that close cooperation between financial institutions and vendors is key to managing fraud. Certainly multi-factor authentication will help secure the online channel because it adds another level of comfort for the consumer. In our ProfitStars division, we offer powerful Biometric Identification, Fraud Detection, and Enterprise Risk Management solutions that are all designed to help financial institutions in their ongoing battle against cyber-criminals.
Even though more and more consumers are increasingly comfortable with electronic transactions, banks must still actively promote their online services, especially newer products such as Remote Deposit Capture which are not that well understood in the merchant community. The bank’s staff must be well trained and familiar with these electronic services, and act as sales people to promote both the tremendous convenience and security that the online channel offers consumers and businesses.
Chuck Gowin, Manager, Retail Banking Segment, Hewlett-Packard
One of the biggest questions this year in the online banking realm is the impact of multi-factor authentication on consumers and banks. Online bankers are concerned about security and should welcome the extra layer of protection, but for banks the FFIEC guidelines are somewhat ambiguous. Plus there are not many major players in the authentication market, so it may be difficult for banks to choose a robust, but easy to implement and use, solution and then install it in a timely manner. At Hewlett-Packard, we have partnered with Corillian to offer our clients a complete and powerful authentication and fraud prevention platform.
Bill presentment is also a big issue this year as billers become more aggressive in their approach to win over consumers with direct pay. They want direct contact with their customers and the opportunity to market to them via the online channel. That is why banks need to step up their efforts to be the main portal for consumers to pay all of their bills, and not let individual billers gain a foothold in bill payment or presentment.
With the tremendous growth of the online channel and the increased need for security, management concerns come to the forefront for IT and Audit/Compliance Departments. That is where HP OpenView can help banks with network services management, consolidated event and performance management, and application management. We have close ties to many third-party developers and this tight integration allows IT personnel to closely manage and monitor the online channel.
To be successful in today’s competitive marketplace, banks must focus on their customers, not their internal operations. All too often, the online channel is a separate silo from other channels such as the branch, call center, ATM, or IVR. To address this problem, we have been working hard on our OpenBank initiative. OpenBank is both core system and channel independent – it is a platform that allows financial institutions to seamlessly tie disparate systems together and put an architecture in place that is customer focused, not product oriented. For banks that want to consolidate multi-channel systems and applications, while reducing infrastructure costs, OpenBank is an excellent choice.
Michael D. Nicastro, Senior Vice President, Open Solutions Inc.
When it comes to either functionality or security, online bankers want ease of use and convenience. It is a fundamental truth that when consumers perceive that something is safe, they are more apt to use it. Being a technology company with a long history of innovation, Open Solutions decided to develop our own two-factor authentication solution to meet the new requirements and concern surrounding improved Internet banking user authentication.
While we considered hardware tokens, the costs of buying, maintaining and replacing them were just too high. There is a level of simplicity to this issue that requires a simple delivery mechanism. With our Security Matrix system, online banking consumers receive an additional, true two-factor level of protection when accessing their sensitive account data. This type of authentication requires limited customer training and, if the wallet sized card is lost, replacement is easy and inexpensive. If the financial institution would like to offer tokens or other systems, our flexible online banking platforms support them as well.
A bigger issue for online bankers is why they are using the online channel – it needs to be much more than just logging on to view balances. Financial institutions must educate their customers about the value of bill pay and strive to be the trusted intermediary when it is time for their online users to pay bills. The key difference is that online banking is basically just another channel when used for simple things like viewing account balances, but the use of bill payment and presentment transform it into a valuable way to manage money.
Advanced functionality is also critical – the ability to view checks, perform ACH originations, wire money, and do account to account transfers differentiates one institution from another and helps them succeed in their markets. Our Consumer and Commercial e-Commerce suites deliver a comprehensive package of Web-enabled Internet banking and cash management tools. Financial institutions that partner with us are assured of receiving the latest technology – from online banking to their core system to all ancillary systems – from a single source provider that delivers world class technical support.
Thomas C. Noyes, Online and Payment Services Director, Wachovia
The online channel has established itself as a premier delivery channel in a remarkably short time. Wachovia was one of the first three banks to roll out online banking in 1996, while competitors were focused on PC banking. The response that we have had from the beginning has been amazing, and the use of the online channel has evolved from a supporting role to a leading role for many of our most valuable customers.
Today we are seeing every type of demographic using the online channel, not just affluent households. More importantly, we are seeing greater usage in terms of funds transfers, bill paying, applying for new products/services, etc. Wachovia is committed to customer satisfaction across every line of business. In fact, we lead the industry and are also among the top 10 companies in any industry. Online this commitment manifests itself in customer listening. We listen to our customers and act on this information. Every new release incorporates customer feedback and influences both new features and customer communication.
Customer behavior is changing and online bankers are becoming more knowledgeable. One driver of customer satisfaction is response time; this was a key factor in selecting Corillian and Microsoft as our key partners that are delivering the core platform for our retail online bank. The .NET platform works with our enterprise hub to dramatically increase response times and reliability. Within the last two years our response times have been cut in half, while our customers have doubled.
Security and fraud prevention are also keys to success for online banking. Continuity and collaboration among financial services and government are necessary to solve this problem in order to maintain customer confidence in both the online channel and the banking system. Differentiation in terms of security is not something that will work for any networked business.
24/7 access makes the online channel the most flexible and convenient way to manage finances. But financial institutions and their vendors must constantly strive to improve the experience for their users, if they want to maintain customer confidence and satisfy the ever increasing needs of the online customer.
Tom Berdan, Vice President, Product Management, Harland Financial Solutions
Two of the biggest issues facing bankers today in regards to the online channel are the recent Federal Financial Institutions Examination Council's (FFIEC) strong authentication guidelines and the demand by commercial customers for more sophisticated cash management features. With data compromises from various companies making headlines almost every day, both consumers and businesses continue to have concerns with online fraud. The FFIEC mandate will help address these concerns. Banks must act to adhere to the guidelines in a timely manner, while communicating the benefits of strong authentication to their customer base. Harland Financial Solutions’ Phoenix Internet Banking, which is integrated with the bank core processing Phoenix System, adds a multi-layer, two factor authentication model. It is robust and open to all customization by market segment, but not too intrusive for the customer. Phoenix System technology supports a wide range of hardware and software authentication options and enables the bank to decide which ones best suit their individual needs.
The Phoenix System Internet Banking solution utilizes the .NET and XML frameworks. This structure allows community banks to deliver real-time information to customers across any delivery channel, including Internet Banking, branch, call center, interactive voice response (IVR) and ATM. Because the Phoenix System is built entirely on a Microsoft platform and relational database, it possesses the flexibility to make additions and improvements to quickly fulfill customer requests. Harland Financial Solutions is currently further developing cash management functionality in the Phoenix System Core Banking Solution for mid-tier to upper-market bank clients. This functionality will then be extended to the Internet banking channel. The cash management feature will include positive pay, ACH origination, payroll processing and electronic tax payments.
Both online bankers and bank employees value convenience and ease of use when it comes to using a banking platform. Harland Financial Solutions recognizes technology is the backbone of the bank, but the true value comes when it is easy to use, integrated and presents a consistent interface. In support of this, the Phoenix System is committed to providing clients an advanced architecture and open design – with a strong focus on flexibility and usability.
Alex Hart, President and CEO, Corillian Corporation
We have reached a tipping point in the effectiveness and ubiquity of online banking. Not only is it easier to use than ever before, but it is also more functional and useful now. Broadband access has helped drive usage, but the fact is that more consumers are realizing the convenience and usefulness of handling their finances online. Our Corillian Voyager platform alone supports over 30 million online bankers!
Unfortunately, convenience and security are diametrically opposed, which puts financial institutions in a tough position when it comes to complying with the new FFIEC guidelines. Some institutions want a very unobtrusive system in place for their customers, while others demand very high and visible levels of security. We can support these needs and virtually any options that our clients demand with Corillian Intelligent Authentication™, which is available either integrated into our online banking services or as a stand-alone solution.
Corillian Intelligent Authentication is virtually transparent to the end user. Behind the scenes, it examines and tracks multiple patterns of online banking behavior and challenges fraudulent users attempting to access accounts. Implementation and support costs are low because it is a ‘zero-footprint’ solution that requires no distribution of hardware or software. Security is a constantly moving target and security issues are always evolving, so we offer our Corillian Fraud Detection System as well, which actively monitors Web site activity for fraudulent activity and phishing attacks. This solution has been well received in the financial services arena, and by various government agencies as well, such as the Secret Service and the FBI.
Financial institutions need to increase the relevancy of the online channel and work towards better integration with their core system and other delivery channels. They need a new strategy that transforms the online channel from one driven by ‘cost avoidance’ to a revenue center – a place to gather new deposits, garner new customers and offer new online services. With a fully integrated Microsoft .NET-based suite that includes Consumer/Small Business/Corporate Banking, Credit Card and Wealth Management, and Online Payments, we are uniquely positioned to help both small and large institutions achieve these goals.
Russ Paul-Jones, Product Unit Manager, Microsoft Money, Microsoft Corporation
We have recently seen a notable rise in the number of people going online to perform various financial tasks. Microsoft Money 2006 added increased functionality that maps back to financial institutions needs with regard to customer draw and retention. By providing a solution that works with banks’ existing Web sites to provide all of the customer’s financial information in one place, financial institutions now have an opportunity to get ahead of the trend and provide a service their customers will want and need in the future.
Security is certainly of paramount importance when it comes to personal financial information. However, it’s important to note that only 11 percent of ID theft happens online compared to more than 68 percent occurring by offline means (Javelin). But with the increased threat of both phishing and pharming ID theft tactics, we have made it our goal to ensure the safety of our customers’ information. Microsoft is an active member of the OFX Consortium, which is committed to achieving the highest level of security and following recommendations that are put in place by the FFIEC.
Consumers can easily and securely enhance the online banking experience using a personal finance software program like Microsoft Money. Microsoft Money communicates with financial institutions to exchange financial data for our mutual customers using the OFX protocol. This communication is encrypted using SSL, a security protocol that provides communication privacy, and is authenticated with credentials that the financial institution provides.
Adoption of programs like Microsoft Money provides consumers with not only an extra layer of security, but the ability to integrate with all their accounts in one interface and a password manager to unlock a string of more complex, encrypted passwords with one code. Money has a Web-like interface, so it’s intuitive and easy to learn even for brand new users. The proposition of having all your accounts in front of you, coupled with increased protection and the ability to conduct multiple transactions in one place may serve to increase adoption of online services.