Cover Story: Online Banking – High interest

Customer details left open for all to see. Security glitches. System crashes due to inadequate load testing. Absurd overestimates of customer penetration, foolish lack of attention to providing integrated service.

The doings of some lamented and deservedly vanquished dotcom? Not at all. Rather the story of the amazing shortcomings of the first generation of online banking in the UK. Institutions that are supposed to be bywords for probity and thoroughness stood exposed by some reckless technology choices and poor awareness of customer interaction.

For a while there we seem to have lost the plot, with a love of technology for technology’s sake combining fatally with the desire for putting up some kind, any kind, of web presence. As Anne Engel, a senior analytics consultant with software house Netgenesis, which sells a tool for interpreting customer behaviour patterns from web logs, aptly puts it: “An IP address is not a customer.”

Talk to those involved with the first wave of Internet banking in the UK, and one clear message comes back. It often wasn’t pretty.

“Everyone rushed into getting up some sort of service when the Internet came along, and some of the interfaces were relatively quick and dirty,” says Peter Harrison, principal consultant with KPMG’s Customer Management Group. “There was an assumption that desirable ABC1 type customers would only want to use the Internet, which promised to be a relatively low cost channel. In practice, it seems some of these consumers do, some don’t; what’s important is the sense of a choice of channel, that they can use the phone if they get stuck on the website, for instance.”

Banks originally simply saw the Internet as another way to cut costs and close branches, adds Richard Lowrie, global banking strategist for IBM. The reality has sometimes come as a shock. “It’s actually proven very expensive. Customers want to use all the channels they can. The customer has proven to be much more promiscuous than first thought, and the economic cost associated with creating all these new channels and brands will take a long time to recover,” he says.

“The development of online banking wasn’t handled as well as it could have been,” adds Sue Roberts, sector head director of finance for consultancy Xansa (formerly FI Group). “Many of the early launches had impossible business cases, such as predicting massive revenues very early on or winning such big market share, such as 40%, that would get a huge market guaranteed.”

If the business logic was sometimes a bit wobbly, so was some technology. “Painting a lot of pretty screens is not the same thing as creating an Internet bank,” says David Webber, managing director of Lynx Financial Systems, which has worked with Smile and Halifax’s IF.

As a result, “There has been some regrouping and rethinking about how the market should be approached,” says Doug Enns, managing director, international operations with Sanchez Computer Associates, a provider of direct and online banking software. “Some over- and some under-estimated the demand.”

It’s a fair point that if the first generation didn’t go totally swimmingly, who knew what to expect? At least some banks say things didn’t go to plan, but are anxious to put the “first round” behind them. “Mistakes were made. There was a mad rush to be first,” says Niall Carey, manager of e-commerce at Bank of Ireland’s offshore (and now electronic) subsidiary Fsharp. “In retrospect if we were to do it all over again some things would be different. But we see those as minor, and basically a case of teething problems.”

The last word on the first phase goes to Mike Fox, a management consultant in the markets division of CMG Admiral. “There was time pressure to be seen to be responding. But fundamental to any success is a proper underlying business model or idea,” he says. “It doesn’t matter if it’s the Channel Tunnel or an Internet bank. It’s still all about money in and money out.”

With that irrefutable premise in mind, what is the state of play in the UK online banking market?

The biggest issue is one of figuring out how to make all this pay. If the Internet isn’t going to be a way to help shut branches, what is it? It’s another channel – and one that needs a greater or lesser amount of integration, depending on the original vision and technology choices, with the rest of the bank’s presence.

“The pressure points are profitability and achieving it, customer relationship management and how to understand and serve the customer, and integration of the channels,” says Sanchez’s Enns. For instance, Fsharp’s Carey is clear what he sees as the next steps for his institution, clearly along the lines Enns portrays. “We want to become more like a portal and offer more products, such as stock trading, as well as developing our non-Internet distribution channels – the IFA community is very important in this area, for example.”

We’re back to channels – a crucial concept, and blockage, for Internet banking’s next giant leap forward. “What the customer wants is multi-channel,” says Giga Information Group’s Matha Bennett, a banking specialist and one of its vice presidents of research for Europe. “The trouble is the channel the customer wants at the moment may not be cheapest or the one the financial institution would prefer him to use. Banks will have some bitter pills to swallow as a result.”

Integration isn’t just lateral – across channel – but may be front to back too, suggests Nigel Woodward, manager financial services Europe Middle East and Africa for Sun Microsystems. “Having flung off the new, trendy brand e-operation, the linkage back and intelligent use of years of customer transaction history and behaviour records trends aren’t being harnessed,” he says.

“The challenge remains the building of a customer needs-based offering,” says IBM’s Lowrie. Hence the fetish among online bankers to raise the amount of financial products a customer owns, using the web as one mechanism, a process termed cross-selling. Most banks struggle with the cross-selling average – most are only at about 1.8 (products),” he notes.

Banks that have been able to leverage their existing core systems were able to launch quicker, says KPMG’s Harrison, but some have run into challenges integrating these legacy platforms. “A lot of organisations are now looking to middleware as a way to better integrate these channels,” he says.

Middleware may be an answer at a crassly technical level, but the problem may be more systemic, to do with how banks organise themselves internally. Hence the bugbear of the silo. Banks try to present one face to the world, but are organised around different channels run internally by different departments, with perhaps online run by marketing, mail or fax by the operational centre, and interactive TV and WAP by separate groups yet again.

Anyone trying to change this has to deal with the way bankers – or their staff – see their job. “They may not be that interested in what happens once it leaves their silo of responsibility; there’s a feeling of lobbing it over the fence and it being someone else’s problem,” warns Julian Lovelock, business systems director for Aspace Solutions, a consultancy formed by ex-Big Five management consultants targeting tier two and three financial institutions. “In terms of internal organisation things still aren’t structured around the customer, but around products and channels,” he says.

The answer – apart from going back and re-architecting the entire infrastructure, something not perhaps to be recommended at this stage in the flight – seems to be CRM, a phrase heard as often as “silo” or “cross channel” from the online banking community.

But no-one is na’ve enough to think this is an easily won prize. “CRM is more than just painting the word ‘customer’ across the top of your channels,” says John Randles, chief technical officer with Dublin-based component software house Eontec.

Charles Wendel, president of Financial Institutions Consulting, adds: “CRM: another buzzword, another black box expected to spit out all the answers – it’s just another way to help banks avoid what they hate – strategy.” And Giga’s Bennett sniffs: “CRM – sprinkling of the magic dust? What’s fundamental is having access to a single customer record.”

Their comments convey a reassuring sense of realism. And while people are not simply buying a marketing term, neither are they ignoring the scope of the problem: building a useful picture of the customer. “If you haven’t done the bank’s own week-long course in how to set up a direct debit online, you can sometimes get in trouble,” points out Aspace’s Lovelock.

“Cross channel is more than integrating packages,” warns Enns. “It’s actually more of a business process re-engineering factor.”

It will be interesting to see who’s going to take up this challenge, however. It may well have to be an outsider.

For it seems the internal champions are somewhat laid low at the moment. “The hot-house Internet groups have been humbled, and some are in a scramble to defend their existence,” claims Wendel. “Many of the big Internet groups have been cut down to size, and find they’re now expected to work much more closely with the call centre, branch, or even paper-based processing functions,” adds Lovelock.

In the race to sort these channel priorities out we may yet be in for some surprises, suggests IBM’s Lowrie. “We may see some changes in channel prioritisation as financial organisations find out where their real strengths lie – Egg opening branches (in Boots) may be significant here,” he says.

“There’s a lot of scepticism from US bank executives about the Internet and online now,” says New York based Wendel. “Many agree there’s a basic set of functionality they probably need, but they’re suspicious of too many bells and whistles and the suggestion of building out web portals. Online seems to be about simple transactions, and expectations are shifting from it being seen as a sales to a service and information channel.”

The lesson of the Internet may as well turn out to be ditch trying to be too clever and narrow focus rather than increase it, after all. “All banks are bad at cross-selling. The good ones acknowledge it. But 90% of business comes from the core four products. Maybe they’ll decide to just concentrate on those, and skinny down the product range,” he suggests.

Yet banks at the corporate level know they need help. “People like what’s in the silo because it suits them being in that pigeonhole. Smarter people will be looking at the links between those silos,” says CMG Admiral’s Fox.

In the face of such a host of issues, it’s no wonder some banks are re-evaluating their online initiatives. Lloyds TSB, which has the most visited financial website in Europe according to Jupiter MMXI, beating Egg into second place, has decided not to offer its Evolve brand in the UK, though a Spanish consumer version is up and running.

“We decided not to launch Evolve in the UK because of customer acquisition cost. There are huge fixed costs in terms of systems development for any online bank, which is, after all, a niche market, even if it’s an important and growing niche market,” says Barbara Lauer, Evolve’s European marketing director. Evolve UK is now a joint venture with Goldfish, she adds.

Another option is, at the starkest level, a complete withdrawal from the online market. Don’t expect this, however; the banks couldn’t lose that much face. “No closure. No-one had the appetite for that level of defeat,” says Enns.

But they may want to wash their hands of as much trouble as possible. “Banks won’t nuke their online presences. But they may outsource them,” says Aspace’s Lovelock.

Which brings us to the contribution management consultants can make. “Customers want their CRM and online strategies shaped – but through ways they can give value in order to get value from customers,” as Simon Jenkins, partner in charge of banking and CRM for UK and Ireland with Accenture, points out.

The task in hand is not to proffer just another magic technology – CRM, WAP, online itself – but a way to effect fundamental change in order to maximise the potential of both changing customer expectations and new channels to market.

It won’t be easy. “Banks are very, very bad at facing up to their structural problems and fixing them. Good consultants can do a very valuable job making them,” says Wendel.

But that’s what management consultancy is all about, when applied properly. “Management consultants can challenge current thinking. Some banks can’t work out how to connect their business strategy with their technology solutions,” says Steve Morris, head of sales for banking software and consulting firm Marlborough Stirling, which has worked with Egg and Northern Rock.

At the same time, outside advisers may not be flavour of the month now. “Bankers swing in terms of enthusiasm in a pendulum. Right now a lot of big consultancies have lost a lot of credibility with them,” warns Wendel. And “too many customers have seen five figure cheque solutions that do 75% of the job,” adds Lovelock.

Nonetheless, the second generation of online banking may represent one of the biggest market opportunities for management consultancies this decade, as financial services firms scramble their forces to deal with the challenge of building a flexible, customer-oriented face.

“Financial organisations are very complex. That complexity can either be an attribute or a real drag. Overall, it needs to be simplified. Consultants can help here, especially in terms of helping banks see the wood for the trees,” adds IBM’s Lowrie. “Big organisations like banks need help to change,” says Xansa’s Roberts.

And why change? Because the Internet has shown that at the very least competition can force you to do expensive things like mount online channel delivery – and at the most could produce competitors from left field that banks have no means to combat.

For all the scepticism about Egg, it’s still a bank, owned by a respectable financial institution. It might not always be thus. For as Xansa’s Roberts puts it: “You only have to think of the remark attributed to Bill Gates: ‘We need banking. But do we need banks?'”


“I really loathe and detest banks. Bugger off if you think you’ve got a ‘relationship’ with me.” Not exactly what you might expect from the chief executive of an online bank. But Bob Head, colourful head of the Co-op’s Smile, who was previously at Egg, is not your father’s banker.

Still, he must be doing something right. According to web trackers Gomez, Smile was rated the top UK Internet bank in winter 2000 with an overall score of 7.36 out of 10, winning top marks for customer confidence and on-site resources.

“People like the convenience – we are open all hours – but more the privacy and control they can get from online, as well as the real time aspect,” explains Head.

“CRM is the current fashion sweeping the boardroom. To me it looks like a big black hole. Customer delight is paramount but it can come in many ways, often cheap and cheerful ones. We get 40 to 50 complaints a month, but recently we had a bad case – we’d completely ballsed up with a Mr Smith.

We wrote to him and said we hadn’t had that many other complaints that month because we’d managed to roll them all together and do everything wrong with just him. That’s the kind of attitude that helps us get so many customers at places like Motley Fool bulletin boards saying they like our approach – we don’t ram things down your throat.”


Online banking may still be in its infancy, say analysts, with great potential for securing valuable customers.

Forrester Research surveyed 28,000 European consumers in the second quarter, and found that between November 2000 and May 2001 the rate of growth in the online banking sector hit 45% – translating to 16% of the UK population now using this facility, a number set to grow to 35% (17m) by 2005. Over 45% of these customers are high income, and 39% are well educated.

However, the company also noted that 44% of the banking customer base still don’t see any benefit from going online, “highlighting the poor marketing job done by the high street banks”.

And, according to NetValue, there were 4.7m unique visitors to banking sites in June, which represents 33.8 % of all people online. The average banking site user spent 24 minutes on banking sites.


“It’s best to use tried and tested,” says George Scarlett, IT director of the Halifax’s Intelligent Finance (IF) online bank. This note of pragmatism is part of IF’s whole identity and corporate culture; the bank deliberately chose a non-trendy brand name as part of an effort to project reassurance and stability. “We’re solid and dependable,” he adds.

“IF didn’t forget the traditional, boring practices of good project management and software design,” adds one of Scarlett’s technology suppliers, David Webber, MD of Lynix Financial Systems.

IF assembled five back end systems – current accounts, personal loans, savings, mortgages, and credit cards – to form its offering, linked by a new mid-tier integration system, says Scarlett.

Egg, on the other hand, prides itself on its distinctiveness. Stuart Hayhurst, group account director with marketing services firm Interfocus and a branding expert, praises its unusual identity: “In many ways it’s a camp brand – the Graham Norton of online banking.”

Egg may not like that comparison, but it can’t hurt. It’s just closed its best six months so far, which may or may not be allied to that “k-i-s-s-i-n-g” campaign, with 370,000 net new customers and a forecast to break even by year end, according to a spokeswoman. “We’re encouraged by how we’re doing on cross-selling,” she adds.

Egg also quotes research carried out on its behalf by pollsters MORI which shows healthy growth in its potential market. Five million UK citizens, it says, have now arranged or serviced a financial product online – a growth of over a million in the last 12 months alone.

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