Online financial services: In search of a direction

Online financial service providers - a very cumbersome term for a set of industry players whose role is generally to make personal money management less of a chore than it has traditionally been perceived to be.

The current market encompasses transactional banks, investment banks, advisors and consultancies, and various other content and service providers which have sprung up in response to the need for such services in a rapidly growing environment.

Nevertheless, between the established service providers, new entrants to the market and peripheral operators that have taken an interest in adding a financial services offering to their product portfolios, the market appears to remain young, confused and somewhat uncertain of the next step to take.

The past three years have seen partnerships and alliances, new ventures and both consolidation and diversification up and down the financial services chain, but surprisingly little product innovation. The Internet has long been acknowledged as a valid delivery channel, but it is only recently that the need for a new approach to dealing with these online customers has been appreciated.

Pat Moffett, group marketing director at Global Technology, a solutions provider to financial, insurance and banking communities in Africa and Australia, believes the current trends in online financial service provision had their beginnings in several profound changes in the banking industry some time back.

The two primary changes are convergence of services offered by various associations, and the rise of the individual, he says.

Traditionally, one could easily differentiate between the types of products to be had from banks, life assurers and the like. Banks had limited product sets, and most consumers generally used the services of only one bank.

Life assurance players sold life insurance, generally through a broker or agent which more often than not lacked training and experience. But insurance companies had access to high net worth individuals, and managed to make their bread and butter regardless.

The modern customer cannot be retained through the promise of loyalty points alone.

Pat Moffett, group marketing director, Global Technology

Of course, everyone wants a piece of the high net worth individual, which prompted the banks to foray into short-term insurance - making the banks brokers and insurers themselves.

"A mega trend changing the way things are is the rise of the individual. People have more knowledge, freedom and choice these days. In order to succeed, financial service providers should be looking at what the customer wants, not at the best business angle," Moffett adds.

"In addition, self-employment created a new range of individuals with a new range of requirements. Banks have traditionally struggled to service this segment - they`ve needed to change their approach to a more customer-centric one."

Nevertheless, Moffett claims the heretic view of the Internet`s worth to a business.

Yes, it facilitates a different type of communication and changes the relationship with one`s clients. In the grand scheme of things, Moffett says, the Internet is the smallest, least profitable channel. But it will grow - that much is for certain.

Gavin Came, MD of the Liberty Group`s online arm MyLife, explains the inhibitors to financial service providers taking to the online medium. The issues at hand are complex, and not always catered for in the legislation governing the financial industries, he says.

"It looks compellingly simple to disintermediate the banks, and that you can do online financial services much easier and much cheaper than you can do offline financial services, but the truth of it is, you`ve got to comply with some very comprehensive legislation in any country in the world that you operate."

"In MyLife`s case, we had to comply with the Insurance Act and the Stock Exchange Control Act for a lot of our products, we also had to comply indirectly with the Unit Trust Control Act, and more importantly, many of the Acts had no vision of electronic delivery when they were written."

It looks compellingly simple to disintermediate the banks.

Gavin Came, MD, MyLife

Another challenge is that of gaining critical mass in any particular customer base. It`s more difficult for some than it is for others.

"Banking is transactional-based, and there`s a regular engagement and consumers can readily learn how to do it. In the case of wealth creation products, which is where MyLife specialises, the engagement with the client is less frequent, so you`ve got to have a relationship with the client that is beyond the product that you`re selling.

"MyLife has the online balance sheet, goal planners, and those products that encourage regular use, but there`s no guarantee of regular use from the consumer. And I think that`s the biggest challenge facing people that enter the market from outside financial services."

Two prominent examples of such entrants are that of retail chains Pick 'n Pay and Woolworths, both of which diversified into offering their customers varied financial services. These ventures are invariably done in partnership with an existing bank or financial institution, as the cost of becoming a bank is prohibitive.

Michael Blackbeard, head of the legal division in the Bank Supervision department at the South African Reserve Bank, explains: "Banks must be public companies, and banking business in essence entails the taking of deposits from the general public. A deposit is nothing more than a member of the public entrusting his money to an institution and having a claim on that money to have it repaid at demand or on some terms. So the banks are really the custodians of public deposits and that is the main reason why they are regulated, because they hold public funds.

In order to deliver what customers want, financial institutions will have to be connected and integrated with multiple distribution channels and will need to identify their core competencies.

Linley Scorgie, executive director, Nettreasury

"In order to establish a bank, the Banks Act is quite clear on the provisions regarding capital, and the quality, fitness and 'properness` of directors and board of directors, and the systems that need to be in place," notes Blackbeard.

"It`s a fairly involved application because we only have one banking licence. If you`re registered as a bank, you may provide all the banking services available, provided it`s in your business plan, you have adequate and fit and proper people managing those services, and you have enough capital to back-up your risk."

Aside from this capital, an application for a banking licence costs R250 million - and that`s exclusive of administration fees and operational costs.

Despite the costs, says Blackbeard, there was a significant increase in applications from around 1990, though it`s tapered off in recent years.

The other side of the coin, the on-lending side of banking, is not regulated by the Banks Act.

"If you have enough capital or if you inherit money, or if you obtain money by other means than deposits, you may really do with that money as you wish, provided then again you comply with the Usury Act, regarding interest rates and other disclosures."

Of course, there are a number of related services which a company can provide without the need of a banking licence. Several such services have emerged in direct response to the trend of individual financial empowerment.

SA is seeing more financial services companies build "a one-stop environment". This trend is growing; for the consumer, a one-stop environment spells convenience and accessibility, while for the product provider, this enables them to reduce operational costs and improve competitiveness.

I-Net Bridge Retail Financial Solutions MD Brian May says that investment product providers, portals as well as financial intermediaries stand to gain from the upsurge of online financial service providers in SA.

"Take I-Net Bridge Retail Financial Solutions, for instance. We help product providers such as unit trust companies in distributing their products cost-effectively by providing them with a seamless and secure mechanism that allows them to do business with their customers, suppliers and intermediaries," says May.

May adds that if traditional retail financial institutions, which include banks, invested in the appropriate software, they would significantly reduce their internal operating costs that typically service these channels.

In order to succeed, financial service providers should be looking at what the customer wants, not at the best business angle.

Pat Moffett, group marketing director, Global Technology

Another such service provider is Nettreasury, which describes itself as a non-bank intermediary that allows its clients to manage foreign exchange and cash management treasury operations via the Internet.

Linley Scorgie, executive director, comments: "The core benefits of the Internet are that it drives all industries into open and more efficient competition. This is realised largely through having a more informed and empowered buyer. Institutions with their own internal inefficiencies and considerable market power will resist attempts at a more informed client, as power will move from the supplier to the buyer.

"In order to deliver what customers want, financial institutions will have to be connected and integrated with multiple distribution channels and will need to identify their core competencies. These will inevitably lead to the emergence of many non-banking institutions, or mega intermediaries, aggregating and delivering specialised services to clients."

A major criticism of banks and other financial institutions operating online is their seeming hesitance to employ technology to overcome the digital divide in banking.

This gap has been quietly filled by a number of microlenders, but many industry observers believe banks that embrace the online delivery channel as yet another way to chase the high net worth individual, while ignoring the masses, are decidedly short-sighted.

After all, most banks make their money off transactional charges; increase the number of people who transact, and it translates to greater revenue in the long run.

One of the easiest ways to do this is through the adoption of mobile technology allowing consumers to use a cellphone as a payment instrument, either remotely or at the point of sale.

Banks aren`t doing enough to meet their social responsibility to the unbanked.

Cliff van Tonder, country manager, Brokat Technologies SA

Such solutions are already in place on the ground in the UK and Germany, says Cliff van Tonder, country manager for Brokat Technologies SA.

Van Tonder says that while banks are investigating the concept, they aren`t doing nearly enough to meet their social responsibility to the large percentage of the population which remains unbanked.

Moffett agrees, saying the biggest challenge to banks in this respect is their complacency in new customer acquisition.

Moffett is sceptical of the success of customer loyalty programmes that have mushroomed along with online financial service providers.

"The modern customer cannot be retained through the promise of loyalty points alone."

Twenty years ago, most people had three bank accounts. Today, the average 30-year-old can sport up to 15 accounts, he says, and a customer-centric approach to retaining that business is key.

Investment product providers, portals as well as financial intermediaries stand to gain from the upsurge of online financial service providers in SA.

Brian May, MD, I-Net Bridge Retail Financial Solutions

Came agrees. The MyLife@Bluebean.com venture, which partnered MyLife`s products and Standard Bank`s Bluebean customers, initially targeted only Bluebean cardholders. The rationale was that it would be a less risky way to find consumers who were familiar with making use of online financial services, and that the financial tools available would prompt people to join.

"The proof of the pudding has been in the eating - our registrations went up by about 30% when we took away that requirement."

Van Tonder comments: "There are an estimated 9 million cellphone users in SA, of which around 70% are prepaid users. Between the banks and the network service providers, it`s estimated that between 60% and 63% of those are unbanked, or economically inactive."

This translates to close to 3.6 million people which remain largely uncatered for by the current banking industry.

"Some banks are doing good things - like Standard Bank`s e-Plus product, or Absa`s SME involvement - but there is still more that the network providers and the banks can do in joint venture, which will allow people to be banked, and have complete access and control of their funds from a cellular phone."