Where did the Internet Go?

This is part one of a two part article by Chip Filson which originally appeared in the June 2003 issue of Callahan's Credit Union Report. Check back next week for part two!


This is part one of a two part article by Chip Filson which originally appeared in the June 2003 issue of Callahan's Credit Union Report. Check back next week for part two!

Three years ago the popular view was that Internet business models would drive traditional financial service providers out of business. Look what was happening, commentators said, in the broker-dealer market. Other observers counseled that the Internet was “just another channel.”

Now that the stock market dot.com mania has collapsed, what has been the impact of the Internet? Were the earlier predictions about the era of the e-customer just entrepreneurs’ hype? How is the Internet impacting strategy in credit unions today?

Several Quiet Successes

While some of the early efforts to create Internet-only institutions have long ago died away, several have quietly become substantial players with niche strategies.

E*Trade bank began life as “Telebank,” a financial institution using only telephones and ATM’s with no branches. In 10 years with this model, the bank grew from $50 million to $5 billion. In 1999 in an effort to expand products, Telebank began discussions with E*Trade, the discount online broker/dealer. The result was a merger, which closed in 2000. The new “E*Trade” bank using the Internet and E*Trade’s customer base has grown assets to $17.1 billion. Almost all its business is still done remotely.

In 2001 the bank bought a 15,000-ATM network to provide cash access. Just this week, the bank announced a new product, a portable fixed-rate home mortgage that would stay with the customer even if they sold their home and bought another. The bank, which began as a new model for delivering value by avoiding brick-and-mortar fixed costs, is “inventing” new products and building the innovative capabilities of the Internet.

ING Direct is also an Internet-centered financial institution that in just three years has become one of the country’s 50 largest banks. The business offerings are similar to the “plain vanilla” strategy used by a number of credit unions. They do not intend to replace “local” banks. They have no checking (transaction accounts) — just a regular savings account with no fees, minimums or service charges — and no bank-owned ATMs. This account is a customer’s primary savings account — the bank wants to “lead America back to savings.” The current yield is 2.1%.

The bank puts these savings to work in adjustable mortgage products from 1/1 to 7/1 ARMS. The current APR for the 7/1 is 4.326%. There are none of the standard underwriting, document prep fees or points with the mortgage. The result of this Internet bank’s focus on Internet and call center channels for sales and service is a two-year growth in deposits from $1.3 billion to $12.5 billion at March 31, 2003. Assets at this same date were $14 billion.

While the size of ING Direct and E*Trade is not yet overwhelming in a banking context, the total assets of these remote-service, Internet-based retail firms, would rank them #2 and #3 if they were credit unions.

The Internet’s Impact on Traditional Channels

One of the first consequences of the Internet’s home-banking capabilities was to change the way members viewed service in the branch and call center channels. The Internet meant that for the first time the credit union’s database was “customer facing,” not employee-centered. Once members learned what was available via the Internet, they had similar expectations from live service providers. “Why do I have to fill out my name and address—you already have that information” is a typical reaction to duplicate work requested in a “live” channel application.
Once Internet loan applications incorporated instant underwriting and decisioning, members’ expectations for approval time carried into telephone or in-person contacts. Credit unions reacted by attempting to conform processes across all channels, frequently bringing new levels of automation to traditional ways of responding to members. The internet raised the bar for responsive member service across all points of contact.

Aggregation—No Killer Application

Because the claims for some Internet business models were so apocalyptic for traditional providers, it was not unusual for some innovations to be positioned as potentially “killer applications.” This meant that once a member started using the service from a provider, the ability to change relationships would be difficult. Microsoft’s dominance of the PC operating system was a monopoly model that seemed to validate the hope for other software innovations.

The killer app concern was one of the factors causing credit unions to launch account aggregation solutions when the capability first became available. The fear was that members would select a single provider through which they accumulated all of their Internet accounts (including frequent flyer miles, etc). Once established, the member would be very reluctant to go through the hassle of re-entering the information for another provider. After all, aggregation was a way to simplify all of the Internet-accessible information in one view—why would a person want to have duplicate capabilities?

The experience has been a killer more so for the credit unions than the members. A small group of early adopters sign up for the program, but after several months active usage drops considerably. However, credit unions pay an ongoing monthly fee to the provider and in turn rarely charge members for the service.

Most credit unions that have launched aggregation efforts have backed away from active promotion. But a few have looked at the concept and re-positioned the service. Their assessment was that information alone is not a sufficient benefit to cause members to use the service. Now these credit unions are embedding the application behind their home banking sign-ons. This eliminates duplicate PIN requirements. This process also allows the member to move money between accounts if the credit union offers account-to-account ACH transfers. This simpler operation and enhanced functionality may be the keys to making aggregation a true service valued by users.

Check back next week for the second part of this two part article by Chip Filson. Next week Chip explores the evolution of e-Statement programs, the Internet's impact on 'Digital Knowledge', and the importance of the Internet's role in credit union 'Networked Strategy.

Is your web site ''just another channel,'' or are you effectively using the Internet to bring innovative solutions to your members? Have you taken a step back recently to rethink your web site strategy? Join your peers Wednesday, October 22nd for the next of our eBusiness Strategy webinar's: Best Approaches to Credit Union Web Site Redesign, Content, & Navigation and learn from some of the industry's web site leaders.




Sept. 29, 2003


  • This is very interesting but you need to tell how it became popular.
  • This article mirrors many of my own thoughts and conclusions - I will share it with others in the strategic planning group at our Credit Union.