Putting Customer Relationship Management (CRM) to Work in Internet Banking: The Chicken or the Egg?

Highlights
* The early adopters of online banking services in the United States have already chosen their financial services institutions (FSIs). Now, FSIs must address the remaining population of fast followers and online banking laggards. Unfortunately, too many FSIs continue to display an appalling lack of knowledge about who their existing Internet banking customers are, what motivates them, and how to best serve them.

* The conventional wisdom provided to retail FSIs holds that customers that are active users of online banking are more valuable than any other segment of customers. They are believed to be more loyal, more profitable, and have higher usage of financial products and services. But with online banking adoption rates in excess of 50% at some institutions, FSIs need to investigate more critically who these "online banking" customers are. The statistical average masks a multitude of variations in value.

* In the land rush to acquire new users of online banking services, FSIs have been reluctant to focus on two major issues that affect their success rates. They rarely investigate the reasons customers become inactive users of online services and they also fail to pay sufficient attention to the reasons why customers do not use online services in the first place. Focus upon these two issues is critical if online services are to continue to grow.

* Perhaps the greatest value of a CRM business strategy is that it enables an FSI to segment customers finitely and create meaningful value propositions. FSIs that adhere to a disciplined CRM strategy have moved beyond basic segmentation strategies that are based on demographic information such as age, income, and educational level.

Introduction
Since the dawn of the new millennium, the US banking industry has witnessed the near total crash and burn of Internet-only banks. TowerGroup estimates that the number of Internet-only banks has declined to fewer than 20--and none of the surviving institutions are of any remarkable size. As yet another early pillar of new economy fades from view, bankers, vendors, and investors should take a hard look at what Internet banking has become and what it is likely to be over the near term. This is particularly important as industry averages for online banking continue to hover at an estimated 25% of the US population.

Internet banking services are now nearly universal at US-based financial services institutions (FSIs) with $1 billion of assets and up. In addition, the 2002 American Banker/Gallup Consumer Survey found that 74% of respondents have a PC at home. Of these, 52% said they were not interested in using their PC to conduct banking transactions, and at present only 32% are using it for online banking transactions. Clearly the time is ripe for FSIs to intensify their analyses of customer behavior and preferences to solidify their acquisition and retention strategies for the online channel.

Today, Internet banking is undergoing yet another major metamorphosis. The early adopters have chosen their FSIs. Now, FSIs in the United States must address the remaining population of fast followers and online banking laggards. Unfortunately, too many FSIs continue to display an appalling lack of knowledge about who their existing Internet banking customers are, what motivates them, and how to best serve them. This makes the acquisition of new online banking customers all the more difficult. And this lack of knowledge also applies to small business users of online banking. To date, the best practices of the industry have been decidedly underwhelming.

"All animals are created equal, but some animals are more equal than others," George Orwell wrote as he created a scathing indictment of socialism in his book Animal Farm. Can the same be said of online banking customers? Are all online banking customers equally valuable or are some more valuable than others? FSIs that are willing to engage in the investigative disciplines of customer relationship management (CRM) are likely to realize that not all online customers are equal and that the value propositions for early adopter users are likely to be significantly different than those for the newly converted. It is time for FSIs with online banking offerings to start peeling back the layers and understand the motivations of all customers: those that use the online channel today and those that may be ripe for adoption.

This TowerGroup Research Note investigates the current status of knowledge and understanding of online banking customers among US FSIs and offers recommendations on what institutions need to do to develop appropriate value propositions for the variety of customers they target for online services. For additional background information on Internet banking and online services, refer to TowerGroup Research Notes 028:45N, "e-Banking with the Top 25 US FSIs: The End Nears in the Battle over Functionality," and 030:14N, "e-Customer Service."

What FSIs Need to Know About Online Banking Customers
Given that the heyday of Internet banking is relatively recent, it should not be too surprising that many FSIs have failed to move beyond surface descriptions of their customers using this channel. If FSIs spent more time trying to understand the underlying drivers and motivations of the customers using the online channel, they would quickly surmise that online banking is not a valid customer segment, but rather is a channel preference that customers in many segments share. They would also realize that the preference of these customers for the online channel is not exclusive, and that customers may be frequent users of multiple channels. The days of defining customers by channel (branch, ATM, Internet, call center, IVR) would soon come to an end, and more sophisticated segmentation schemes would emerge.

Building Reliable Customer Views: Gathering Critical Information
Peeling back the layers and understanding the motivations of consumers that use online banking require that the FSI develop a disciplined analytical framework. Analysis of existing accounts for patterns of behavior, channel preferences, channel usage, profitability, and risk should occur on a regular basis. In addition to analyzing customer behaviors and preferences, FSIs must also begin to gather information on customer attitudes toward the online channel. TowerGroup believes that FSIs that combine a periodic account analysis with attitudinal information will have a richer and more comprehensive understanding of how customers differ in their use of the online channel.

Customer Analysis. Lumping all customers that have registered for Internet banking under the rubric of "online banking customers" fails to acknowledge the very real differences that are commonly exhibited within this macrosegment of customers. A periodic assessment of online banking customers would reveal some striking similarities and differences that FSIs must acknowledge if they are to create appropriate value propositions. Following are some of the key analyses that TowerGroup recommends FSIs complete on a regular basis:

* Transaction patterns. Over time, customers will develop patterns of behavior for common transactions (deposits, withdrawals, transfers, balance inquiries) in the various channels. Customers may execute all transactions in all channels or may use specific channels for specific transactions.

* Activity duration. Customers are likely to change their behaviors in the online channel over time. The transaction patterns of newbies most likely will differ from the patterns of long-term users. FSIs must be sensitive to the length of time that customers have been using the online channel and note transaction patterns against time. This is particularly important for understanding why some customers become inactive.

* Channel preferences. Not all transactions are executed in all channels. FSIs need to understand how customers use the channels and how they wish to receive communications.

* Online services used. Online customers show great variation in the numbers of online services that they use. A small segment of these customers will use all services, while the majority will conduct only basic online banking transactions.

* Customer profitability. Customers of the online channel will have different profitability levels. To avoid drawing inappropriate conclusions about online customers, FSIs should track all the major levers of customer profitability (balances, fee income, channel-associated expenses) at the customer level.

* Demographic information. To the extent information is available, FSIs should analyze their online customers according to demographic measures of age, income, marital status, educational level, etc.

Customer Attitudes. The passive observation of transactions and customer behavior can provide keen insights into customers and how they approach financial products and services. A more active research approach of questioning customers and capturing their responses for additional analysis allows the FSI to gain a more definitive view of their attitudes and desires for interaction. Following are the attitudinal issues that FSIs should understand in order to create meaningful value propositions for online banking customers:

* Financial goals. Not all customers have the same tolerance for risk. Customers will also exhibit marked variations in their long-term financial goals depending upon their age, their marital status, the age of their children (if any), and their income. The challenge for FSIs is to move beyond simple demographics and to capture an understanding of their customers' attitudes toward financial goals.

* Channel preferences. If customers use certain channels exclusively for specific transaction types, the FSI should use that information when creating and delivering its value propositions. For example, customers that show a preference for opening accounts in the branch should not receive messages about opening accounts online.

* Convenience vs. cost. The interrelation between cost sensitivity and a convenience orientation should not be assumed. While some customers will pay additional fees to complete a transaction conveniently, others will not. FSIs cannot assume that all customers have the same attitudes toward convenience and cost.

* Privacy. FSIs may readily provide financial advice to customers, but not all customers are interested in receiving information from the institution or affiliated entities.

* Security. Consumer attitudes toward online security will vary significantly. A registration for online banking may indicate a different level of comfort with security than that demonstrated by active users of account aggregation and EBPP services.

FSIs must be sensitive to the impact of statistical averages throughout the process of analyzing and gathering proprietary research data. The more time FSIs spend poring over the data, the more it will become evident that online banking is an inappropriate customer segment and that the differences among online customers are significant. Many customer segments will share an affinity for the online channel, but as FSIs find adoption rates for the online channel in excess of 20% of their customer base, the statistical average obscures all efforts to understand who these customers really are and what is important to them.

FSIs need to know why customers are choosing not to use online banking capabilities. As Exhibit 5 demonstrates, TowerGroup found that US consumers pointed to a variety of issues when explaining their desire not to use Internet banking. FSIs need to ask the same questions of their existing customers that have not yet registered for online banking and assign appropriate resources to overcome consumers' objections.

Exhibit 5

Reasons for Not Using Online Banking (Among Online Households Indicating That It Is Available to Them)

Concerned About Security: 27%
Not Comfortable Conducting Banking Business Online: 18%
Prefer to Conduct All Banking Business Face-to-Face: 12%
Not Sure How to Use It: 6%
Concerned About Privacy: 6%
There Is a Fee for Use of the Service: 6%
All Other: 24%

Source: TowerGroup Primary Market Research--Delivery Channels

And finally, FSIs must understand the obstacles to online banking services that exist in the minds of nonusers. By understanding the underlying attitudes and motivations of users and nonusers, FSIs will be far more successful in designing and delivering attractive online services.

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