Despite these high expectations, e-banking has often failed to deliver. Customer take-up has fallen short of expectations, while the costs of running an e-bank have spiralled. Early offerings have been plagued with technical and security glitches, leading to a consumer exodus over the summer - customers withdrew more than £400m from Egg in a three-month period.
As the internet has developed banks have struggled to redefine their online businesses, what can the wider community learn from the e-bank pioneers?
The dotcom trap
Success lies in cutting back budgets and exploiting existing brand power. As with many internet ventures, today's disappointments are partly the consequence of yesterday's enthusiasm. Many online banks launched with typically lavish dotcom advertising campaigns, and offered loss-leading products in the rush for market share.
Take Egg, one of the UK's largest e-banks, which spent £17m on advertising, not including the costs of offering its products below cost.
This put pressure on other e-banks to compete, and drove up the cost of customer acquisition to astronomical levels. First-e, which was one of the UK's first online banks, recently canned an advertising campaign and slashed 12 per cent of its workforce as customer acquisition costs spiralled to £250 each.
The assumption that customers would flock online for the higher interest rates and lower fees was a dangerous one. "There was an expectation that customers worldwide would favour internet banking," says Billy Andrews, head of e-banking at Allied Irish Banks.
"But now the integrated approach seems to be what is wanted, people want to use different methods of communication at different times."
Allied Irish recently cancelled its planned internet-only bank, after the disappointing financial performance of its online business.
Consolidation is likely
With razor-thin margins and many products paying more than the UK's base rate, none of the UK's internet banks is currently profitable, according to Benjamin Ensor, research director with Forrester Research.P>Faced with such financial pressure, companies are cutting back on the dotcom glitz, "We will see Europe follow the US, with internet banks pushing into offline businesses - if not by establishing branches, then by working with retail chains to install kiosks and service counters," says Gillespie.
This presents a golden opportunity for bricks-and-mortar companies, which have a solid Old Economy pedigree. Some early US online financial companies, such as Mortgage.com have closed already, leading to apprehension on the part of customers.
"Brand will start to become more important as more dotcoms fall from grace," says Gillespie. "That is where traditional banks have always excelled."
Integrating offline and online operations
The solution here seems to be to redesign the products and implement customer relationship management (CRM), even when banks had only in-the-flesh customers, they did not serve them well.
According to Cap Gemini, e-banks are driving away potential customers with poor customer service. Half of e-banks failed to respond to email enquiries within eight hours, while a third gave inconsistent information through different channels.
Integrating internet services with offline channels is crucial to success, says Gillespie. "Banks are just now starting to realise that the single myopic channel approach will only work for the most simple of services," she says. For more complex services, she believes banks must invest in good CRM technology and middleware.
Giga's research shows that in the US, while 15 per cent of buyers research a mortgage online, only four per cent will start to buy and less than two per cent will get as far as closing the deal. Good email assistance and automated help programs can increase the conversion rate of high-value products.
It's worth taking the time from the start to build integrated systems, believes says Jonathan Etheridge, director of e-futures at First Direct. "A lot of banks did bespoke systems which were faster to market than ours, but we took the time to make sure that the customer could use any method of communication," he says.
All customer service agents at First Direct work from the same database, meaning that a customer can make a transaction using a Wap phone, modify it online, and check its progress at a branch.
Multiple channel
"We spent a lot of time looking at the site from the customer's point of view, but the hardest thing was actually getting people from the business to understand it," Etheridge says. "You can't credibly call yourself multiple channel unless the 2000 call centre agents understand what you're trying to do."
The real complexity and cost of e-banking at First Direct came with new middleware and front-end systems to enable integration, while back-end systems were largely untouched. "We have some old mainframes running Cobol, but they're robust and they do the job," Etheridge says.
Integration with legacy systems and building the ability to cope with multiple channels accounts for the majority of the cost of online banks, according to Giga. Research suggests that of the $8bn spent by e-banks on technology last year, more than $6bn was spent on integration.
Lloyds TSB has spent £500m on ecommerce infrastructure to date. Largely on integration, says Mike Beaven, director of ecommerce at the company. "We have spent the past few years building the infrastructure to support our ecommerce strategy, mainly on integration to deliver the online, real-time banking that is essential to e-banking," he says.
What about security glitches?
The solution is testing, testing and more testing. Most banks know that increasing customer retention is crucially important - and that it's easy to lose customers with one high-profile security problem.
"We recognised that while ecommerce enabled us to set up Egg, we had to address the security issues," says Kevin Iddles, network specialist with Prudential. "Without a secure network, we could not exist."
That's not to say that e-banks have always got it right. Egg, first-e and Barclays have experienced high-profile security and performance glitches - leaving customer details open to public view in several cases. Consequently, security is now a constant concern for their IT staff.
"I have a team of independent people whose job it is to crawl all over everything we do," says Etheridge. "But it isn't always easy given the pace of change - it's hard work to maintain security given constant releases and upgrades."
Security is more serious for banks than other sectors, Etheridge believes. "We have to do better than most. If Amazon falls over or loses a credit card number, it might lose some sales, but for us it is a disaster that costs us our credibility and reputation," he says.
Perception problems
Most analysts agree that the issue is more about perception than reality. Many of the recent problems with security at online banks have been the result of poor testing rather than poor security, Gillespie believes.
"Almost without exception, the problems were down to somebody upgrading the site and not testing it sufficiently," she says. "This isn't about hackers - it's about good management."
It's easy to underestimate the need for testing when you're working at internet speed, Etheridge says. "With hindsight, I don't think we realised how much time would be taken up by testing this thing to create something that was fit for customers," he says. "If we did the same thing again, I would ramp testing up still further - no one can get it right all the time, but testing helps."
Even the attempted robbery of Egg earlier this year doesn't signify a crisis, believes Laura Starita, a research analyst with Gartner.
"This was an old-fashioned crime, not a sophisticated assault on the IT and security infrastructure of Egg," she says. "There is no crisis in internet banking, except for consumers' high degree of concern over internet privacy and security in general."
Combating fading consumer interest?
The solution is to create wider product offerings, and lifestyle portals. Visit any well-run e-bank, and you know what to expect: information about the bank, account access and bill payments. It's all very utilitarian - and ever so slightly dull. Little surprise then that the UK's e-banks haven't fired customers' imaginations, and are struggling to find new ones.
Egg has just 1.2 million customers; Cahoot attracted 45,000 in its first six months, while first-e managed 75,000 in its first year. According to management consultants McKinsey & Co, just one per cent of online customers consider their web service provider to be their main bank.
Deloitte & Touche reports that just 43 per cent of UK consumers carry out some banking online, while only 22 per cent of customers whose banks offered internet banking took advantage of the facility, compared with more than 40 per cent across Europe as a whole.
"With competition increasing, customer service is the only way that e-banks can add value," says Aphrodite Tsakiri, an analyst with Datamonitor. "The internet provides an excellent platform for banks to unleash their imagination in customer service."
"To improve their offerings at internet speed, e-banks must partner with other companies, destroy product boundaries and offer relevant services," says Gillespie. "For example, if you are selling a mortgage, why not offer insurance?"
One step beyond
Taking this theory even further is Lloyds TSB, which offers a range of services on its website, including the usual banking, finance, mortgage advice and loans.
"We also have links to web partners such as news feeds from the Press Association, a link up with Autotrader to provide tips on buying and selling cars, with Lonely Planet to provide information on travel, and with Reallymoving.com to give customers access to tips on moving house," says Lloyds TSB's Beaven. "The aim is to become a one-stop shop."
The company says it is now well on track to attract one million customers by year's end, with 800,000 already signed up.
A similar strategy is in evidence at Citibank, which offers chatrooms, news feeds and links to gardening and travel sites on its finance page. The move is part of a strategy to increase its customer base from 60 million to one billion by 2010.
For those able to navigate the e-bank maze, the results are dramatic. A quarter of First Direct's one million customers now bank online, and 25 per cent of its new customers cite the availability of online banking as a reason for joining the company. In addition, 80 per cent of customers say that they would recommend First Direct to a friend, while 35 per cent of new customers have been referred.
"It might not save us money in the short-term, but that was never the intention," says Etheridge. "We are getting new business, and this is an opportunity to sell stuff."
Key points
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