The UK's high street banks have already undergone one revolution during the past two decades - and a very bloody one at that. The number of branch networks has been reduced, staffing numbers have been decimated and layers of management have been removed, all in the interests of greater efficiency.
Deregulation of the financial services industry by the last Conservative government had some very unwelcome consequences for banks and customers alike. Countless surveys have shown falling levels of customer satisfaction and confidence.
Branch closures, including the swinging cuts announced by Barclays as recently as this year, higher charges and the perception that banks are becoming as remote from their customers as their regional call centres, have done untold damage.
However, ecommerce offers the potential of reversing or at least halting the decline by raising customer service standards, increasing the choice of retail financial products, reducing charges, and giving consumers new and more convenient ways to manage their money.
So what is the situation so far? Sad to say, the early days of the second banking revolution have not been promising. All of the problems that are currently making 'dotcom' a dirty word have afflicted the biggest and supposedly brightest of the UK's banks.
Scarcely any of the services launched by high street institutions have got off the ground first time. Egg, the Prudential's ambitious arm's-length online banking venture, suffered persistent problems. The company's stock market debut was marred by a computer failure that left investors temporarily unable to trade their shares. Egg's decision to launch a credit card was hit by further crashes that delayed the transfer of balances from customers' existing credit cards, which cost many of them money in additional interest charges.
More recently, Abbey National's Cahoot offering also got off to a shaky start. The website crashed on its first day of operation, causing the company to regret its slogan, 'because life's complicated enough'. Less than a week ago, the Halifax postponed the launch of its IF service as staff admitted that they were not sure it would work.
Howard Davies, head of banking regulator the Financial Services Authority, issued a strongly worded warning to the banks in June amid fears that few were making adequate provision for security. After meetings with the banks, Davies said that, while he was broadly satisfied systems were hacker-proof, internal security still left something to be desired. He also took a swipe at the banks' record on system performance, which he said could do enormous damage to customer confidence.
Although few customers will have been impressed by the banks' inability to estimate demand accurately, Davies was not entirely unsympathetic to the situation, however. "It is enormously difficult in the internet environment to predict and manage the volume of customers you will obtain. Many banks have significantly misjudged volumes, making estimates that turn out to be too cautious," he said.
It's not all bad news, however. Once Cahoot recovered from what Tim Murley, its managing director, acknowledged was an "extremely embarrassing" launch, customers signed up in droves - a week later, the service was home to 10,000 new accounts.
By February this year, less than a year after Egg launched, it had become the biggest of the internet-only banking service providers with 800,000 customers. Barclays, which offers internet access to its existing current account holders through its online service, has more than one million customers online. While few other services come close to these figures, it is still early days.
And although the long-term viability of some of these services may be questionable, there is no doubt about the appeal they hold for consumers. A recent survey revealed that one in three home internet users had visited a financial services website at least once. The study included insurance and other non-banking services, but the top three sites were all banks - Egg, Barclays and Nationwide in that order.
So why have banks decided to go online in the first place? The short answer is to win new customers, but it would be simplistic to leave it there. The following factors also play a part:
- lower cost of account servicing
- cross-selling opportunities
- customer retention
- because they have to.
Cutting admin costs
Internet services cost a good deal less to run than high street branches. Extending the principle of self-service banking from a hole in the wall to home computing promises to cut the costs of administering customer accounts. When customers do their own change of address notifications, bank records are immediately updated. Statements can be issued without incurring postal charges - and whenever the customer wants. Funds can be transferred between accounts and responses made to queries without bank staff needing to intervene.
The savings, of course, will come from institutions having a smaller payroll and undertaking further branch closures, so in this sense the internet is nothing more than a tool for completing phase one of the banking revolution (if you don't like the sight of blood, look away now).
But how far these savings will be offset by other costs is another matter. IT investment levels are a significant factor. Barclays alone has pledged £345m for ecommerce projects this year - a mind-blowing £180m more than it spent last year. No wonder it is so keen to increase cash machine charges.
Others have also acknowledged that online banking will create a need for more staff in some areas, at least into the short term. HFC Bank, which provides the marbles internet credit card and now the better-known Goldfish brand online, says that it has significantly increased staff numbers in its call centres. If customers need assistance, HFC argues, there will be times when a website alone, however good, will not be enough.
Another important motive is the potential of using the internet to deliver a range of new services to existing customers. Launching a new mortgage, insurance or loans product is an expensive business, requiring an enormous investment in market research, advertising, mail-shots and the rest. But the cost of acquiring new customers online is widely believed to be significantly lower.
Again though, the economics are unproven and could be less favourable than they appear at first glance: for every pound spent on the IT infrastructure, many ecommerce ventures are spending another five on PR, TV and national newspaper advertising and other high-ticket marketing items.
Even so, banks are better positioned than some other types of financial services institutions to exploit cross-selling opportunities. Because customers with online bank accounts will visit their websites more frequently than, say, customers with online insurance policies, it should be easier for banks to poach business from insurance companies than vice versa. The relationship could even be complementary, with banks simply acting as brokers, earning commission on referred sales.
For the biggest and best established of the high street banks that have millions of customers and the most to lose if the internet revolution doesn't go their way, customer retention is a key objective. Offering an online service is no longer just a glamorous optional extra. Customers not only expect such a service, but will walk away from banks that do not offer one.
Winners and losers
So which banks do we tip to emerge victorious from the revolution - the aristocrats of the high street or the peasants of dotcom street? The latter have the advantage of lean organisations with low overheads and no baggage, but face the serious disadvantage of having no customers. The smart money should be on the aristocrats. "We have a customer base a dotcom would die for," crowed the chairman of Barclays to investors a few months ago.
As a result, NatWest is running a TV advertising campaign that cleverly exploits the current disaffection with banks and pokes fun at new internet banks with silly names. But the most important message is simply a reminder to customers that they do not need to choose between conventional banks - with their branches, staff, printed statements, cash machines and track records - and the speed and convenience of an online service. It claims they can get all these things from one source.
Speculation about winners and losers will not matter much to consumers, however. The new wave of internet banks means the already fierce competition for products such as credit cards and loans has now reached a frenzy. APRs are going down like there's no tomorrow - witness the single-digit introductory rates for Egg and marbles.
A side-effect is that customer loyalty (some prefer to term it customer inertia) is weakening, and consumers are becoming more promiscuous. The internet has upped the ante, and so far the industry's response has been to raise the bar on customer service.
Could it be that the tide of traditionally rotten service from banks is about to turn? The internet banking revolution won't stop there, but if that's all it achieves, it will have been worth it - as millions of disaffected customers would testify to.
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