The Bankwatch

Tracking the consumer evolution of financial services

BankerVision: Can an “Internet only” bank work?

Great question, that I cannot resist.

can an Internet-only bank work?

Source: BankerVision: Egg Internet bank

So I will leap in to the fray with an answer than might be expected from someone who is bullish on internet banking.

I say yes it will work. I say this despite the evidence against.  We have the evidence, mbanx, Wingspan, and possibly Egg.  But let me qualify.  The first two failed because their costs were higher than their revenue.

  • fulfillment costs:  account opening kits cost a lot, and getting them to customers is expensive
  • account opening costs:  accounts opened but many customers did not follow up and complete
  • Internet adoption:  In the 90’s internet adoption was in single/ low double digits.  The scale and understanding wasn’t there
  • email vs phone handling:  customer service via email is incredibly expensive and more expensive than via telephone …by about 2 – 2.5 times
  • culture:  the objectives were not aligned to succeed. Verbally they supported, but the financial targets, were in conflict with the mother bank
  • insufficient automation:  mbanx (Bank of Montreal) and Wingspan(BancOne) were brands plugged into an existing bank.  The mother banks’ had siloed product systems designed to support a branch bank.
  • service level:  trying to be full service right out of the gate with no prior experience is an expensive proposition.  Customers were very happy, but the lengths staff were going to, to make customers happy were just unaffordable

Now the evidence in favour – ING. ING designed the right business strategy, and bought the right infrastructure to support an online operation, right away. 

  • In Canada they invested in Sanchez that provided the flexibility and cost base required
  • the focussed on one product at a time, and designed to be successful at it. Again in Canada, they focussed on high interest deposit accounts with pricing based on their ability to afford.  With 1.2 million customers, and 22 billion in deposits, they have been successful.

So yes, an internet bank will succeed, if it is designed to succeed.  The customer value proposition must be tempered to align with doability/affordability.  I am not sure where Egg are in that equation, but I suspect they are on the right track, and the loan loss thing is a management issue, not an internet bank issue.


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Written by Colin Henderson

November 1, 2006 at 20:52

12 Responses

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  1. Hi Colin,

    Your arguments are all the correct ones, and I think that they agree with the point I was making also… that the Egg thing is about management and that their losses are not only in line with the market at present, but have nothing whatsoever to do with the internet-only nature of their business.

    As you correctly point out ING have a successful internet only bank. Hard to argue that the business model is broken given that data point.

    James Gardner

    November 1, 2006 at 21:56

  2. James … yes I think we are aligned.


    November 1, 2006 at 22:03

  3. I believe the failure of most internet-only banks thus far can be summarized into one point: traditional banks tried to apply some or all of what they knew to internet banking and it didn’t work. Simple as that. Colin, you touched on this by saying when you talked about fulfillment costs, automation, culture, etc. I think anyone who tried to make that transition was dead in the water the moment they started.

    You might as well ask a bunch of airline mechanics to tear apart a 747 and make it into a helicopter. Just doesn’t work. You have to get helicopter people, and you have to give them helicopter parts to work with.

    Dan Dickinson

    November 2, 2006 at 11:48

  4. Nice summary. I too believe internet only banks can work and they need to invest in some of the kinds of technologies and approaches used by companies like egg and ING. I blogged about one egg system before –

    James Taylor

    November 3, 2006 at 10:51

  5. The statement “will succeed if it is designed to succeed” is very true – question remains: how do you design to succeed?

    Perhaps the “Internet” part is not the main success factor of successful design – not even for an Internet bank.

    ING Direct chooses over-banked countries where ING has no retail bank presence. ING is not always offering the best savings rates and is mostly not the first direct bank in a country. In Italy, for example, Comdirect launched 6 months earlier with an interest rate of 6% whereas ING Direct would offer 5% on the savings accounts. Yet after 4 months ING Direct had 32,000 customers and Comdirect only 800.

    What ING Direct does well for itself, indeed as mentioned in earlier comments, is to create limited amount of products. Products that do not require large back office operations and support. In fact, these services are often outsourced to the back offices of other banks as customers ‘connect’ their checking accounts from there to ING Direct.

    What ING Direct does well for its customers is providing an experience. ING Direct is as much a brand as it is a distribution channel; in fact, it is a branded distribution channel into which its products and prices have merged. ING Direct is an online experience which penetrates the offline reality. The offline reality, the phone, has played a crucial role in the ING Direct success. The off line traditional marketing campaigns (TV commercials and such) were another key strategic pillar to build the brand in a way it became preferred to other brands.

    I doubt if an Internet only bank, if defined as only accessible via a web site, will work for the current generation of customers.

    An interesting way to study if an Internet only bank would work would perhaps be to test the thought to its extremes: open up a bank in Second Life and see what happens.

    david garceran nieuwenburg

    November 4, 2006 at 11:54

  6. David … Thanks for the comprehensive comment. At a minimum an internet only bank would need call centre support; that much we know. But the SL idea is a good one.


    November 4, 2006 at 13:18

  7. Hi Colin, you are right but call center support also comes from airlines, Dell or an insurance company. For ING Direct the phone means more – actually ING Direct is modelled after the Postbank in the Netherlands: a bank that invited to do business at home, over the phone (there was no Internet).

    But there are some Internet-banks-only. They use the phone as call center support; in Japan for example think of eBank, an e-Mail payment oriented bank. Also Sony Bank, Japan Net Bank (Sumitomo Mitsui Finance Group), IYBank (Ito Yokado group – a department store group with wide coverage of ATMs) renamed Seven since October last year seem heavily Internet-only positioned. All these banks became profitable after 3-4 years.

    In Japan further, Yahoo Japan entered the trading business last year through a partnership with Nikko Cordial and online brokerage E*Trade Securities and together with Aozora Bank Yahoo Japan is moving into online financial services this year.

    Except for eBank (run by President Taiichi Matsuo, former LTCB) all other Internet banks had strong parents with deep pockets to establish the online brand or leverage the existing brand (Sony). Although these banks are definitely not modeled after a phone bank, they are marketed strongly in the offline world. And eBank is marketed and operates more like a Paypal.

    Are the Eggs and First Directs doing their positioning in the offline world as well as the Japanese examples or ING Direct?

    david garceran nieuwenburg

    November 4, 2006 at 21:59

  8. This is a crucial point you make. Its too simplistic for me to merely say ‘call centre support’.
    Re the offline positioning, I am less clear on that. Are you referring to advertising, direct mail etc, which ING does heavily in Canada.


    November 4, 2006 at 22:20

  9. In regard to call center support we can look at, for example, ING Direct Spain, which started in 1999. That time 100% of the operations were done over the phone. In 2002 55% was done on the Internet, 10% IVR and 35% phone. In 2006 these figures are respectively 78%, 9% and 13% (Dick Harryvan’s presentation on the 12th Investor Relation Symposium 27 September 2006 in London). ING Direct is trying to move more and more towards actions on the Internet but its success so far does rely on being an Internet bank per se.

    And indeed, the marketing budget of ING Direct is considerable. As you mention in Canada ING Direct is omnipresent in the offline world. Same in all other countries. In Australia the highly popular Scottish comedian Billy Connolly was behind a strong TV and other “traditional media” campaign.

    In each country ING Direct’s traditional media marketing campaigns are rather strong and win many prizes.

    For an Internet bank in the early 2000 up till now, the delicate mix between Internet and offline presence could still to be a critical differentiator for success.

    david garceran nieuwenburg

    November 5, 2006 at 00:32

  10. […] Source: BankerVision: Can an “Internet only” bank work? « Bankwatch […]

  11. Hi Colin,

    Thank you for your thoughtful and entertaining blog.

    Our company provides lending and fund management systems in Australia.

    I was surprised to read your comment that email support costs up to 2.5 times phone support. One of our customers is investigating increasing their proportion of email support because of the more efficient queuing it offers and the increasing reluctance of customers to wait for a voice operator, which can only be solved by expensive over-manning.

    Could you elaborate a little on why you believe email costs so much?

    Thanks and regards,


    David Doust

    November 22, 2006 at 16:36

  12. Its all about the time involved for salaried people. If you get someone on the phone, simple things can be addressed fairly quickly. With an email, the question has to first be understood, and often customers are not clear. Then the answer is typed out and sent. This is not to say that CRM, automated email systems, and email queing cannot mitigate, however this was the result with early email handling at Banks. Remember that the sophistication of phone handling is high, while the same was not true with email, which is only now starting to drive different ways to drive call centre organisation.

    I am curious to know any newer stats on this.


    November 22, 2006 at 17:38

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