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Vivian Wagner
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Traditional methods of performance measurement break down when applied to online banking channels, according to a TowerGroup research report.

The methods used to measure online banking ROI are flawed and potentially detrimental to the long-term success of the channel, according to a recent TowerGroup report

As online banking generates an increasingly larger share of revenues, banks are seeking ways to improve their online banking programs.

To date, these attempts have usually taken the form of calculating the return on investment for a particular channel. Yet traditional ROI measures can lead to false assumptions about the effectiveness of Web banking programs.

In particular, channel profitability measurements often ignore the influence of the channel on the customer's overall behavior and profitability, according to a TowerGroup report, Online Banking Performance: If You're Not Keeping Score, You're Only Practicing.

"The complexity of appropriately allocating both revenues and costs renders ROI calculation impossible," according to the report.

For example, when a customer calls to request direct deposit, the call center may be credited for selling the new service, when in fact the customer was motivated by a nearby ATM, where it's easier to withdraw funds than by cashing a check at a branch. Thus, the ATM channel should properly be credited with the sale.

When attempting to isolate a channel, the report said, the institution must attribute to the channel numerous direct and indirect factors, such as sales, referrals, retention rates, reduced service costs and higher balances. "Attempting to use ROI on a continual basis to measure the value of online banking is an accounting nightmare."

Cause and effect are frequently misunderstood. For example, customers who bank online may be observed to maintain higher account balances than those that don't, causing the bank to attribute this to the fact that they bank online. In fact, those customers might have had higher balances even before they went online. Failure to isolate cause and effect can lead the bank to faulty conclusions.

"Although we're many years into online banking, most financial services institutions don't understand the value they're getting from their online banking programs," said George Tubin, senior analyst of consumer banking at TowerGroup and author of the report. "Measuring the value of something like online banking is extremely difficult."

Another common error is to treat online banking users as a distinct customer segment. In fact, online users cross many demographic boundaries.

"Many institutions simply carve their customer base into online and offline customer segments when performing statistical analysis," according to the report. "Finer segmentation is required to key in on profitability drivers and create actionable results."

The report offers suggestions to help financial services institutions both evaluate the effectiveness of existing programs and design profitable online offerings in the future. "The goal of this is to make their programs more profitable," said Tubin.

"What the bank wants to do is something that causes people to have higher account balances," he said. "The best way to figure it out is to do controlled experiments."

In other words, to use the account balance example, a bank should compare account balances of online customers both before and after they went online, and then compare the results with a control group of customers that don't bank online.

Another problem in analyzing the value of online banking is isolating the profits that the bank accrues from its online channel from those that come from other channels.

"Trying to do a straight ROI is almost impossible," said Tubin. "If you look at the way customers bank, trying to figure out the exact revenues and costs to attribute to online banking is almost impossible."

To address this problem, Tubin recommends taking a careful, scientific approach: compare online customers with a control group of those not online, and evaluate which group is more profitable.

Some banks, such as Bank of America, have already started performing this kind of scientific analysis. Other banks that develop accurate and scientific evaluation procedures can in time increase the profitability of their online banking programs.

"Bank of America's decision to offer free online bill payment was not made by accident," according to the report. "It was an informed decision, based on careful statistical analysis."

"Banks want to understand the value they're getting for their investment," said Tubin. "As they go forward, it's good to measure the performance of new programs."

Smaller banks lacking the means to invest in sophisticated profitability software can still benefit from measuring the success of their online banking programs. One possible method is to review historical data to determine if account balances differ between online and offline customers. Smaller institutions should also look at other indicators, such as transaction mix, attrition rates, and number of products.


Steady Growth
(Percentage of U.S. households using online banking)

2002: 24.3%
2003: 27.3%
2004: 30.0%
2005: 32.3%
2006: 34.5%
2007: 36.8%

Source: TowerGroup

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