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Citigroup Ventures Into Direct Banking

Citi hopes the new initiative will help it scoop up new online banking customers.

Global financial services giant Citigroup (New York; over $1 trillion in assets) announced last week it is launching a new, high-interest direct banking service in an effort to entice more customers to bank online.

The company's Citibank unit will offer consumers a rate of 4.5 percent on its e-savings accounts, with no minimum balance and no fees to those who open a linked checking account. The venture now pits the largest U.S. bank against the likes of ING Direct and HSBC's direct banking offering.

Officials at Citigroup could not be reached for comment.

George Tubin, a senior analyst with Needham, Mass.-based TowerGroup, says to think of the new direct banking offering as the next evolution of Citi's current online banking product. "There are a couple of reasons behind the bank's move. Citibank is not quite as big on the consumer side in the U.S. as we might think," Tubin relates. He says the financial services conglomerate has less than 1,000 branches, far less when compared with Bank of America (4,500 branches) or Wells Fargo (over 3,000 branches). However, he says the firm's brand is stronger than the competitions.' "About 40 percent of those who sign up for an online account with Citi are outside the bank's footprint, so they've been very successful online so far."

Despite this achievement, Tubin says Citigroup realizes deposits are being stolen from them by ING and other direct banks. "Citi thought if it restructured and became primarily an online bank that they could take advantage of the benefits of servicing customers online rather than at their branches," he explains.

This cost-savings is a big boon to the bank. More customers banking online means fewer will visit branches. Furthermore, online customers in general tend to be more profitable since they usually have more money and use less expensive delivery channels, Tubin explains. As a result of these two factors, the direct banking product could in fact have a very positive effect on Citigroup's bottom line.

Also in Citigroup's favor in the direct banking game is its depth of products. "While ING offers a limited product set, like cards, CDs and savings, Citi can offer its full range of products," claims Tubin. "Citi is in a position to cross-sell everything [online]." That is part of the main reasoning behind this move.

The bank's business model shift comes at a good time. According to TowerGroup figures, 35 percent of U.S. households bank online, representing half of those households with Internet access. "Online banking came out about 10 years ago," explains Tubin. "There is now a large segment of people who like to bank online. The Internet is now a standard delivery channel. Some banks do more transactions online today than on any other channel. This is a huge shift."

Whether Citigroup's move will mark the start of a trend where other major banks open direct banks remains to be seen. Tubin says the other top banks have such huge branch networks that such a venture "would be tough to do." In this case, "Citi is leveraging the fact that they're not everywhere," he comments.

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