Retail banks not built for online business

More than 30 banks are expected to launch an online business in Europe in the next three months, but many are expected to fail because their business model is flawed.

David Pannell, management consultant of Durlacher Research speaking at e-Financial Services Forum earlier this week, said the majority will be "Internet spin-offs of bricks and mortar" as opposed to 'green field' banks.

"I'm not convinced of their business model," he added. "The current online financial services market is poorly served in the Internet area."

He believes that although online financial offerings offer convenience, they are difficult to differentiate and lack new value propositions.

"Tailoring accounts to the needs of the individual is vital. Very few are moving towards true personalisation or starting to build communities," he said.

Pannell said it costs about £20 million to build an Internet bank at speed for a green field, but the downside is that, "they have no links into branches".

Customer loyalty will be flaccid as people, "open three or four bank accounts, and experiment much more," he said.

Although high street banks "have got into the Internet space" they are using "defensive options", said Pannell, and are not exploiting the true potential of online financial services.

"They see the Internet as a distribution channel which is supply driven," he said.

To succeed, they should build a "sustainable business model" focusing on community as well as transactions and content to "create a passion around investing."

Sherry Coutu, chief executive of Interactive Investor International, provider of Internet personal financial services, said they try to think about what the customer might want and not be supply driven.

"The biggest problem online is abandoned shopping carts - customers buying half a mortgage and leaving. Knowing who this person is and where they are in their life cycle and building community is crucial," she added.

Pannell believes that partnerships will often be with portals such as that between Yahoo and Natwest: "Portals will lead, not the financial services institutions."

Wireless application service providers may also enter the space, and some may apply for banking licences.

"The explosion of WAP usage will enable a new range of mobile data and mobile commerce applications," he said.