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
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
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
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.