The Economics Of Online Banking

Colin and Jim at Bankwatch and NetBanker recently commented on Forrester’s new online banking projections. Personally, I don’t care how many people bank online — I care what impact online banking has on a bank’s bottom line.

So I thought I’d share with you the results of an analysis I did using Forrester’s consumer research data. (Note: As a Forrester client, I have access to their data, but can’t cite specific numbers here).

What I discovered is that banking customers still:

  • Prefer human channels. While consumers prefer electronic channels (e.g., Web, IVR, and ATM) for account transactions like checking account balances and transferring funds between accounts, they overwhelmingly prefer human channels for service transactions like problem resolution, fee disputes, and address changes. This is true even among younger consumers who are more likely to use and prefer electronic channels.
  • Tend to use one channel. Although many different channels get used, across a range of common interactions, more than seven of ten consumers used only one channel. And, in general, the older the consumer, the more likely he or she is to use just one channel per type of transaction.

But compared to other consumers with online access, online bankers are:

  • Less branch-centric. Not surprisingly, online bankers are more likely to turn to the Web for the range of account activities. And although they still prefer human channels for service interactions, online bankers are more likely to use the phone for help, rather than going into a branch.
  • More multi-channel. Across a range of activities, online bankers were more likely to use multiple channels, particularly for checking balances, transferring funds, and getting help with account problems.

What’s critical here is that these tendencies hold true for each generation. This suggests that adopting online banking changes a customer’s channel behavior, regardless of age. [That doesn’t seem far-fetched, but it is debatable]. And so I set out to answer:

What impact would an increase in online banking adoption have on a bank’s cost structure if new online bankers had the same channel activity and preferences as today’s online bankers?

To answer that, I made some assumptions regarding:

  • Adoption. For the purpose of the analysis, I assumed a bank had about 1.5 million customers, 67% of whom are online (access to the Internet, that is). I assumed that these customers mirrored the overall online population in terms of age distribution and, by generation, the percent that bank online. I assumed that 10% of the non-online bankers in each generation would become online bankers.
  • Channel costs. I assumed the following channel costs per transaction: $6 in the branch, $3 for the call center and mail, $1.25 for IVR, $1.10 for ATM, and $0.25 for Web transactions (I didn’t pull these out of the air — a bank shared this with me a few years ago). I ignored the costs to build new online functionality and any costs that would be incurred to provide technical support for new online banking customers.
  • Transaction volume. I assumed annual transaction volume of 24 account balance inquiries, 12 funds transfers, 4 general account problems, 1 fee dispute, and 1/2 of an address change.
  • Transaction migration. For each of the activities, I assumed that new online bankers would shift their channel activity to mirror the channel behavior of current online banking customers.

The bottom line: Based on these assumptions, a 10% increase in online banking adoption could reduce support costs by about $4 million, or about $70 per new online banking customer.

Interestingly, potential cost reductions don’t occur equally across all channels or activities. The model forecasts:

  • Significant branch cost reduction. Reduced branch activity accounts for 73% of the potential cost reduction. The lion’s share of that impact comes from the decrease in balance checking, funds transfers, and address changes that come out of the branches.
  • Lower call volume — but not for all activities. Similar to the branches, a shift in account balance inquiries, funds transfers, and address changes from the call center to the Web help bring costs down. But for activities like problem resolution and fee disputes, call center costs actually rise because some new online bankers will shift their activity from branches to the call center.

What does it mean?

Who banks online is more important than how many people bank online.
A bank’s ability to migrate their older customers (i.e., over 40) will have a greater impact on short-term cost reduction than sitting around waiting for the wired youth — who won’t need to be persuaded to bank online — to open bank accounts.

The ROI has to be realized. I recently took Forrester’s Charlene Li to task for her ROI of blogging projections, because, as I argued, unless firms made staffing reductions or eliminated certain market research expenditures, they wouldn’t actually see the ROI of blogging. Same concept applies here. If banks continue to build and staff branches, the cost reduction potential of online banking will never hit the bottom line.

If you email me at, I’ll send you the spreadsheet I used to do the analysis. But you have to include your name, company, and title, and your email has to come from your business — not personal — account. In other words, no Yahoo, Gmail, AOL, MSN, etc. accounts.

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5 thoughts on “The Economics Of Online Banking

  1. RE “The ROI has to be realized” – this remains the key, and the ultimate challenge for Banks. I consider the numbers of online bankers important only in that Banks need to be prepared for the shift in customer expectation that accompanies a majority view.

    The other / related issue … unfortunately online banking is a net producer of costs based on the methodology many banks use to assess customer costs, because as you rightly point out, online bankers create more transactions than non-online bankers.

    This to me is a flaw in costing, because the infrastructure supporting online banking is largely a fixed cost, so online banking customer profitability ought not to be penalised.

    But back to cost saving realisation … my thought remains that the utility, capability, and design of branches has to be dramatically re-thought. It won’t be (properly) accomplished by pulling tellers out of existing branches, one by one.

  2. The market in the US is clearly ripe for online only banks with no branch overhead.

    I’ve banked online exclusively for 5 years having become so disillusioned with my previous bank. I’m not sure how easy that would be in the US but here in the UK there is nothing that i can’t do without going into my branch. As far as i am aware, the two banks which top consumer preference polls here are both online or phone only – FirstDirect and Smile.

    What’s stopping this type of service occurring in the US?

  3. Colin, your point about the redesign of branches is right on, and, in my opinion, has been horribly “twisted” here in the US. Too many bankers have tried to redesign branches to be “the branch of the future” or make them a comfy place to gather and hang out, a la Starbucks. Wrong, wrong, wrong.

    My understanding is that in Canada (and this comes from the former Vice Chair of RBC), the branches are utilized by consumers as a place to discuss their financial needs w/ someone at the bank.

    In the US, consumers use the branch to conduct transactions. And I refuse to believe that they spend a whole lot of time talking to anybody about their needs, because: 1) they don’t that they’re getting good advice from someone who has 10 minutes of training on 50 products, and 2) the people who DO know about the products and can help aren’t located at the branch, so the customer has to use the phone.

  4. John — Nothing is stopping that type of service from occurring in the US. ING Direct has done just fine without branches, and now HSBC Direct and Citi have followed with successful online offerings.

    But these offerings pertain mostly to SAVINGS, not checking accounts.

    In my opinion, the biggest factor holding this type of service (online only) back is this: EVERYBODY SCREWS UP.

    Nobody (and no firm) is perfect. So what happens when something goes wrong? No bank has figured out, let alone implemented, an online service capability to handle every kind of problem that comes up. And, by and large, people over the age of 40 in the US don’t want to spend hours on the phone trying to figure out who can fix the problem. They want to go to their local, neighborhood branch and yell at the branch manager.

    Until we Crankys die off (and while not all Boomers are Crankys, there are 78 million Boomers out there) — and for some reason Colin thinks we are dying off soon — an online only bank will remain a niche business, not a mainstream business in the US.

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