Internet banking: The future is not what it used to be

The rise of the Internet and e-commerce was touted as heralding the end of banking as we know it. Advocates of online banking predicted that the advent of the Web and mobile devices would see a decline in the use of physical branches as banking clients chose the convenience of banking "anywhere, anytime" along with its associated lower costs.

However, a few years down the line, the predictions are proving to have been off the mark, with banks now saying that the Internet did not provide them with the competitive-edge they originally expected, although it has become an essential banking channel they have to retain if they want to remain in the business. The branch remains a core channel, and bankers say it always will.

Now new, far more realistic, predictions are being made for online banking. The future is not what it used to be.

So far, if indications are correct, most domestic banks playing in the online environment have yet to turn their Internet projects into profitable ventures. A PricewaterhouseCoopers (PwC) survey, "Strategic and Emerging Issues in South African Banking", released last month, shows that out of seven participating domestic banks with an Internet banking presence, four reported that they were incurring losses in this area.

The guys are saying well, you`ve marked the card and you`re in the business but beyond that it has not really given them a competitive advantage.

Tom Winterboer, lead banking partner, PricewaterhouseCoopers

Tom Winterboer, PwC lead banking partner, says while an Internet presence has become a business necessity for banks, they have found that the Web has not given them the competitive-edge they originally expected.

The PwC survey shows that most of the participating banks made minor or no changes to Internet strategies, suggesting that it is important to be positioned in the Internet arena, but not necessary to make any new significant or fundamental changes.

"I think it`s mainly because everyone has it," says Winterboer. "And among competitors - you look at the big four and they all have an Internet service offering - the guys are saying well, you`ve marked the card and you`re in the business but beyond that it has not really given them a competitive advantage."

Sandy Yates, CEO of FirstRand`s eBucks.com, agrees. She says the viewpoint has been backed up by what some of her colleagues at FirstRand saw at a banking conference in New York earlier this year. Former CEO Michael Jordaan attended that event as well as the same one three years ago. "When he attended the conference three years ago, Internet was flavour of the month, it was all people could talk about, there was an enormous amount of hype about what Internet banking would do for business." Yates says.

"And this year, what he saw there pretty much summarised what you see reflected in the PwC report, which is that the Internet is 100% necessary. There are very valuable customers there who absolutely love the channel. At the same time, it`s kind of what we would call an 'order qualifier` as opposed an 'order winner`. If you don`t have Internet banking as a bank today you are off the mark. If you do have Internet banking it`s not enough to differentiate you from a competitor because they`ve got Internet banking too."

We`re not going to shut the branch, but what we`ve done is we`ve freed up branch staff to concentrate on more value-added activities.

Sandy Yates, CEO, eBucks.com

Dave Donkin, Absa group executive of e-business and information management, says: "Providing basic Internet banking - it`s a competitive disadvantage not to do it. Customers are demanding access via a variety of channels and they are also demanding convenience, and that`s exactly what Internet banking provides. But there are still some things for which they want to go and see a person. There are still some things you can`t do on the Internet, like withdrawing cash. Hence the need for a broad coverage which includes physical cash outlets or automated teller machines, branches, cellphone or telephone banking, as well as Internet banking. I think that it`s a combination of channels that`s needed to service the customer.

"The current functionality being offered on Internet banking isn`t a great deal different than the stuff you can get via the other channels. It`s just a lot more convenient."

Despite the failure of the hard sell predictions, the Internet has had an impact on the mix of services offered at banking branches, even if traffic there has not decreased substantially.

"I think what you`re seeing is, depending on where the branches are, the mix of traffic is changing," says Yates. "There are some branches where a very high proportion of the customer base do make use of electronic channels, whether it`s telephone banking or Internet banking, and those are the branches that are now piloting different sort of products and value-adds because they`ve got the capacity to do so. But as to whether overall branch traffic has come down, I would guess not.

"Also, if you just look at the numbers, we`re talking in SA at the moment about 800 000 Internet banking users at the top end of the estimates, depending on whose numbers you look at. And if you look at the number of people in SA who use the bank, you`re talking about 10% maximum. So it`s not at this stage going to dramatically shift patterns in the branches."

She says that even during the hype period there were two schools of thought - one which saw the decline of branches and the other which saw the continued need for branches. However, there are still reasons to keep branches, one being that there are still customers who choose to use them, and the other being that many customers choose their Internet banking by virtue of which branch is close to where they either live or work. "So again that visible presence is necessary," Yates adds.

"But what you`re seeing from the banks is a recognition that we`ve shifted routine transactions out of the branch. We`re not going to shut the branch, but what we`ve done is we`ve freed up branch staff to concentrate on more value-added activities. The ability for branch staff to now do more financial advice and planning with customers, to sell a broader range of products to people, and certainly in the FirstRand context (it plays in the bancassurance model) starting to sell life assurance products through the branches, because the branch staff now have time to do that, because they`re not as frantically busy just servicing routine withdrawals, deposits and transfers."

SA should be leading the world in the migration onto electronic billing and payment.

Mike Wright, CEO, The E-mail Corporation

Donkin says the volumes and value of transactions have increased overall. "The fact that the volumes of transactions being processed are continually going up shows that traffic is both growing and moving, it`s probably fair to say." He says the value of transactions being processed monthly at Absa topped R8.75 billion recently.

Industry players say the regulatory environment has not kept up with changes in technology, although there is the intention to update it. "The intentions are there and the Electronic Communications and Telecommunications Bill is under way, but I think the business is ahead of regulations as we speak," says Donkin. "There are still some issues around electronic signatures and what-have-you, and business can`t wait for regulations to be developed."

Says Yates: "The current Banks Act, for example, stipulates that you have to send the customer a statement once a month, and the definition of a statement is a piece of paper." However, she says the e-commerce green paper is taking these things into account. "So right now, legally, it`s definitely still a bit behind, but everybody`s recognised that. And recognising it, they don`t expect the banks to sit back and wait for the legislation to catch up, because it can take a long time for the position papers to be finalised."

Despite the legal lag, electronic bill presentment and payment (EBPP) is seen as a major future growth area. Standard Bank became the first local bank to offer a secure electronic statement delivery service to its Internet banking clients, using FinMail software - which provides for strong encryption of confidential information via e-mail - developed by the E-mail Corporation. E-Mail Corporation also announced recently that Absa had awarded it a R1 million contract for a similar service.

E-mail Corporation CEO Mike Wright says SA presents the perfect "nursery" conditions for EBPP - a competitive and consolidated banking environment; a small but demanding and adventurous Internet community; and a select group of mass consumer billers. "Put these factors together, and SA should be leading the world in the migration onto electronic billing and payment." However, he says there are obstacles to be overcome.

"South African billers have been interested, but cautious, when approaching e-billing," he says. The reasons include businesses` concerns about technology costs (although the big cost saving come when they have the courage to discontinue the paper channel); the need for additional sets of customers` data to be captured; the need for processes within the organisation to be changed; security concerns; and concerns about how customers will respond to e-billing.

"Companies have also made the mistake of adopting an 'if you bill it, they will come` strategy. They have now found that they need to market the programme and educate the consumer - through inserts in paper bills, direct marketing and mass mailings. Lack of awareness and understanding about e-billing programmes is a major reason why more customers have not been participating.

"Organisations have also not provided an incentive to customers to migrate, or at least a disincentive to stay with the traditional channels. If it costs less for the business to present billing electronically, then offering the customer a slice of that cost saving will certainly encourage buy-in to the electronic channel."

The access speed is a function of a number of things, including the last mile and including, courtesy of Mr Gates, the time it takes to switch on your PC.

Dave Donkin, group executive of e-business and information management, Absa

However, Wright says the South African business community often looks to the banks to be the early adopters of new processes like e-billing. "The good news is that local banks are investing the 'presentment` aspect of EBPP. Those with developed Internet banking channels are able to 'present` statements to customers via their Internet banking pages, with maybe an e-mail prompt indicating that the statement is now online."

He says that many other local financial institutions are either investigating or implementing the option of delivering statements and invoices to clients via an encrypted e-mail attachment.

Wright adds that it is highly likely that e-billing will become the fastest growing e-commerce business in SA over the next several years because everyone involved stands to benefit.

"Billers will cut costs significantly by eliminating printing, paper, envelopes, postage, and the processing of paper cheques and payment. Customers will benefit from being able to streamline the monthly monotony of managing traditional paper invoices and statements. Convenience for customers is one of the primary factors driving the move to e-billing, as customers have the power of banking at their fingertips all day, every day."

With all the benefits of online transacting, why has there not been a more rapid adoption of the concept by banking clients?

Yates says the main reason is that most South Africans cannot afford to have an Internet-linked computer at home. "I think it`s just the overall expense of buying a computer, paying the telephone bills and setting up the ISP connection."

Donkin adds that not everyone finds online banking convenient, particularly when they are not regular PC users. "The access speed is a function of a number of things, including the last mile and including, courtesy of Mr Gates, the time it takes to switch on your PC. If all you are doing is one banking transaction, it`s not going to be a convenience. You`ve got to turn it on and watch all those Windows screens come up. It`s a little time-consuming."

He adds that Absa is focusing on response time, "doing whatever we can from our side to make sure that the core banking engine is running as quickly as it can and then we have some reliance on the ISPs our clients use and the bandwidth, their dial-up lines".

Several IT players focusing on the financial services industry also point to technology issues.

Rubico Products specialises in the development of business solutions based on assembling business patterns for the dynamic needs of the financial services sector. Director Dr Jay van Zyl says research undertaken by the company in SA, Europe and the US "showed that silos of data and applications still exist as barriers to cross-channel integration. While organisations wanted agility and the ability to present common customer views, they did not want to rebuild their vast systems. Service-based software architectures present many opportunities for financial services organisations. The ability to re-use existing systems or product lines as components means they can be exposed as services to many different channels - Internet, ATM terminals, kiosks, mobile devices, call centres or whatever else is coming down the line."

He says the frustrations financial services are encountering in implementing online channels able to deliver a common face to their customers could soon be over, if service-based architectures succeed in protecting their existing software infrastructures while allowing a move towards a more integrated architecture.

From an infrastructure perspective, the voice channel is fairly saturated. However, the same problem does not apply to the SMS channel which is where most of the current banking or payment efforts are concentrated.

Steve Sidley, marketing director, Prism Holdings

"A service-based architecture can be used as a means of assembling software systems from loosely coupled software-as-services - including Web services - in such a way that concepts such as common customer views can be achieved easily," he says. "In such an approach most, or all, software elements in an organisation get defined as services and this will help overcome cumbersome integration processes and technology issues."

He says the big plus with service-based software is that a financial services organisation can encapsulate existing business processes, publish them as services across an internal intranet or externally across the Web, search for and subscribe to other services, and exchange information throughout and beyond the enterprise.

Winterboer says while banks` technology spend, particularly with regard to the Internet, is declining, there does not appear to be an increase in investment in other channels, although there may be more of a focus on the branch network.

"We did talk about what the role of branches will be, and they`re really just saying you have to be more involved in sales and servicing of customers, saying branches would be more strategically located and perhaps smaller in size. So I think they`re going to be more focused in terms of what they do with branches and which branch they place where. I think it comes back to the unbanked population firstly, and then secondly access to the Internet and computers. You`re going to have to retain that physical presence."

Industry players agree that Internet banking is here to stay, and that the main changes in Internet banking offerings will lie in the richness of functionality offered.

"Over time we will see a whole lot more that`s offered that actually just can`t practically be done by other means," says Donkin. "Financial tools for example, to emulate a financial advisor. You can take in personal information and provide insight and ultimately analysis that helps the customer from a financial management perspective." He adds that a number of other value-adds will be released over time - "tools and things that will make [customers`] lives more convenient".

The PwC survey shows that banks believe that mobile banking will have a major impact by 2005. But while most players believe mobile banking will play a significant role, not all agree on what form that will take. Donkin believes mobile banking has its limitations. "If you want to do your banking using a cellphone, you can call the call centre and either speak to somebody or use IVR [interactive voice response]. We do offer cellphone banking via SMS. As for WAP [Wireless Application Protocol], I think we`re going to see that superseded by GPRS [general packet radio services] and related technologies. But for mobile banking to work it`s got to be really simple banking. You can`t expect to have to type in lots and lots of different numbers on a cellphone because it wasn`t intended for that."

FirstRand sees things differently. Says Yates: "You know, the sort of WIG [Wireless Internet Gateway] and WAP bandwagon that everybody jumped on, and it`s kind of faltered along the way - it`s going to be back, and it will be back very strongly, but I think all the banks have learned a lesson, which is don`t go out and promote a channel that from the customer point of view is just so un-user friendly. But down the line we still see perhaps the cellphone as a bigger access to the same channel than the actual computer terminal."

Prism marketing director Steve Sidley points out that all of SA`s banks are involved in wireless pilots of varying sophistication, ranging from basic banking services and SMS alerts to full-blown payment including bill payment, prepaid cellular top-up and other services. He says the interest in mobile banking has resulted from the fact that the global wireless network has grown to the point where there are now more mobile phone subscribers than desktop computers connected to the Internet.

"However, while most are following the cautious 'walk before you run` philosophy, there is no doubt that the banks are taking wireless seriously. Indeed, South African consumers can expect a wide range of wireless or mobile banking products and services from their banks. Some are already available from, for example, Absa, Standard Bank and FNB."

Yet, says Sidley, there are challenges to overcome. "From an infrastructure perspective, the voice channel is fairly saturated. However, the same problem does not apply to the SMS channel which is where most of the current banking or payment efforts are concentrated. Because most electronic payment instructions require very little information, a typical payment instruction can easily fit into one SMS."

The future of online banking may not be what was originally anticipated, but the players agree that the Internet is a necessary business channel and there are still areas of growth ahead, particularly in functionality, in continuing to strive for a paperless environment, and in the mobile arena.