Inter-Institutional Transfers (IITs) have been available online for several years through community banks, credit unions, Internet banks and brokerage institutions. However, the ITT product launches by Citibank and Bank of America have shed more attention on IITs. It is too soon to detect a standard industry approach for deploying IITs, but there are a few consumer and industry indicators that are worth examining if your financial institution (FI) is planning to support IITs through online banking.
IITs are defined as fund transfers among accounts held by the same customer at two different institutions. That could mean a lot of things, but here we will focus on the recent trend at Citibank and Bank of America: IITs as ACH transfers among deposit and possibly investment accounts.
Generally speaking, funds transferred via ACH-based IITs credit to the destination account in between 2 to 5 business days, with 3 business days the most common for both push (outbound) and pull (inbound) transfers. Some online banking services offer next day credit for a premium charge.
According to a large regional bank, IITs are among the five features its online banking customers request the most; Watchfire GomezPro consumer market research suggests this demand is strongest amongst the more affluent segments of online bankers. Customers enrolled for online banking IITs average about one transfer per month.
Currently, only nine of the 30 Watchfire GomezPro Scorecard banks offer IITs, and of the nine ScoreCard banks that support IITs, only five currently offer outbound transfers. This rate of adoption by Scorecard banks contrasts with the availability of IITs at internet-centrics, such as ING, and at brokers. But the largest Scorecard banks, in particular, are catching up. Assuming a continuation of the recent trend of large banks launching IITs -- as evidenced by rollouts at Bank of America, Citibank and Key Bank, and an announced 2005 rollout by Wells Fargo -- FIs that do not support both inbound and outbound IITs could effectively push their online customers to other FI sites to execute IITs -- a consequence that surely is not in sync with their online banking goals. And indeed, the number of banks telling Watchfire GomezPro they plan to roll out IITs in the next year suggests the majority of the 30 Scorecard banks will offer the service by year-end 2005.
Despite the availability of IIT technology, there are three main reasons why online IITs have been slow to evolve. First, the most common IITs are conducted through the ACH network, which was designed for FI-to-FI transactions and not consumer-generated transfers. Consequently, there are limited safeguards against user error. There are also legal and risk concerns regarding fraud and money laundering transactions. Luckily, errors and fraud have proved manageable for standard consumer ACH transactions, and NACHA's Internet Security Council is proactively exploring initiatives to strengthen security for consumer ACH transactions. Legal and risk concerns around ACH also forced potential IIT users to verify ownership of external accounts through a paper trail, such as paper enrollment forms and cancelled checks. But this paper-based approach has given way to trial deposits and, more recently, the customer verifying ownership by demonstrating the ability to log in to view the external account through the relevant online banking or investing offering.
Secondly, integrating the user experience across transfer platforms is challenging -- particularly if a third party IIT solution is implemented. The current online IIT landscape contains a combination of online integration, enrollment and user experiences. For example, a few online banking sites treat intra-FI transfers and IITs as two distinct classes of transfers. Everything from enrollment and adding eligible accounts to initiating a transfer employ different user interfaces. In some cases, IIT functionality is grouped with bill pay instead of with transfers. But to the extent customers want to move funds between deposit and investment accounts, clicking on bill pay is non-intuitive.
Thirdly, concern among FIs about loss of funds from profitable accounts has hindered their implementation of outbound transfers and continues to factor into pricing strategies. Four of the nine ScoreCard FIs offering IITs impose fees on outbound transfers but don't charge for inbound transfers. A small sampling of data collected from several FIs that have supported IITs for more than six months with no transaction fees shows a nascent trend: 60% of IITs at these banks are outbound. Data from FIs that do charge indicate price sensitivity. Inbound transfers exceed outbound transfers by a 3 -1 margin when fees are imposed only on outbound transfers. The dollar amount is the same on average at $850 for both push and pulls transfers.
These preliminary trends might suggest charging for push transfers, but that would be the wrong lesson. If all FIs were to charge only for push transfers, what would stop customers from simply going to the receiving FI to pull funds into their account to avoid fees or just writing a check? Rather than preventing customers from moving funds out of the FI, charges for outbound transfers could encourage customers to use competing sites and thwart the FI's efforts to promote itself as the customer's primary FI.
There's another issue banks should consider before charging for standard IITs -- while charging for outbound IITs is both a revenue opportunity and a way to prevent funds leakage, it can promote the appearance of nickel-and-diming. Key Bank, for example, does not charge for outbound transfers because it assumes customers will transfer funds as necessary through other vehicles if they have to pay to do so online and, more broadly, the bank is attempting to position itself as a bank that isn't constantly charging customers. As research indicates profitable customers are more likely to use IITs, the service may be serve banks better as a retention tool than as a fee generator.
Does the growing prevalence of IITs, and its use of IITs by higher-profit customers, mean that FIs should rush to deploy IITs if they have not done so already? Not necessarily, especially if customers only execute one transaction per month. Although these can be important transactions, they are not frequent events for the average online customer at this time and there are passable alternatives, such as writing a check. But over the coming year, as more large banks launch and market IITs and consumer awareness grows, customers will increasingly expect to be able to use IITs to move money in and out of accounts held with a particular FI even if that FI doesn't offer the service itself. Accordingly, we believe that IITs should be in online banking product roadmaps to avoid losing customers' online sessions and transactions to other institutions or channels. When a bank does deploy IITs, it should tightly integrate the feature within the existing online banking offering. Long-term revenue possibilities are not substantial for basic ACH transfers, as fees for basic IITs may plummet to zero. Revenue will depend on fees the FI can charge for providing features and settlement times not available through free alternatives and from the tighter relationship the FI will enjoy with higher-balance customers.
Susan Foulds is a senior analyst with Watchfire GomezPro in Waltham, MA. She can be reached at [email protected].