Banking dot-com

You’ve used an automated banking machine (ABM) to deposit your pay cheque, you’ve phoned into a banking call centre to inquire about your accounts or get more financial information, and you’ve picked up the latest IT equipment – making the payment with your debit card. Now, financial institutions are banking on consumers’ love of the Internet in a bid to make it the next major delivery channel, analysts say.

Online banking is not exactly new. It is an outgrowth of ABMs, the Interac debit card system, plus telephone and PC banking, suggests Charles Stewart, vice-president of financial services with Toronto’s CAP-Gemini Ernst & Young Canada.


Canadian banks and consumers have been quick to take to the introduction of the new ways of banking. The big motivation for consumers has been the convenience that comes with online banking, says David Saffran, senior vice-president of financial services practice with the Angus Reid Group in Toronto.

According to a study conducted by Angus Reid and the Royal Bank and released in June, nearly one in five Canadian Internet users has already tried Internet banking, nearly one in three say they will soon, and nearly everyone who has tried it says they will do it again.

“Canada is up there at the front of the pack,” says Gus Schattenberg, vice-president of the Angus Reid Group in Vancouver. The study found that Canada ranked eighth out of the 30 countries surveyed in online banking use, well ahead of the United States – which ranked 14 th.

“We see in our research that the Internet is becoming huge and people don’t want to travel all over looking for a bank machine. Of course…their banking needs are more complex and online banking would provide benefits to them,” says Saffran.

According to Saffran, online banking users formed what he terms an “adoption hierarchy.” In the hierarchy’s first tier, people principally used the Internet for information and e-mail. Second-tier users tended to use the Internet to gather information on financial services, while the final tier contained those who adopted online banking.

According to Schattenberg, the delivery of services over the Internet is a necessary channel that Canadian banks must have in order to meet customer demand and remain competitive. The success of online banking in Canada is a result of Canadian banks having two great strengths, he says. The first is that Canada’s major banks, unlike their US counterparts, have a national focus that comes as a result of Canada having a chartered banking system.

The second strength for Canada’s major banks is that because they are national banks, they have large existing customer bases that make the implementation of new channels such as online banking commercially viable.

“Interac – that’s the model for Canadian banking online,” explains Angus Reid’s David Saffran. “Banks started with simple services, and they learned from the ATM and telephone banking that there were a lot of advantages to self-service distribution.”

However, another reason for the major banks’ eagerness to get into the online banking game is the threat of competition from other “new” banks making use of electronic channels. That’s the case with ING Direct, a subsidiary of ING (International Netherlands Group). After selling insurance in Canada for 40 years, the bank changed course three years ago and became a self-service-only bank.

“Canadians were not being served in the traditional way, and in the (bank) merger debate, Canadian consumers were saying there has got to be a way to be served better,” says Annette Borger, director of communications with ING Direct.

At first, ING offered strictly savings account services – cash withdrawal and deposit – by telephone or over the Internet. Services now offered by ING include an investment savings account, US dollar savings accounts, loan accounts and mutual funds.

“Canadians are waking up to the Internet,” says Borger, pointing out a recent study by Canadian Facts – a subsidiary of CF Group Inc. in Toronto – which determined that 40 per cent of Canadian households have Internet access and 60 per cent of Canadians have Internet access from somewhere. “When we started three years ago it was just us,” she says.

However, Canada’s major banks have gotten into the act very quickly.

“Pure online players have made a very small dent, and the ones who have done the best are the established banks that are already signing up existing customers,” says CAP-Gemini Ernst & Young’s Charles Stewart.

In its 1999 annual report, CIBC reported that it already had a half-million customers using online banking as compared to 100,000 with First USA or the U.S.-based Wingspan – which has 200,000 customers.

“There may be a love-hate relationship Canadians have with their banks,” Stewart explains. “With strictly online banks, often people are not sure where their head office is. With the major banks you know you can always go to the branch.”

The fact that some of Canada’s major banks have been around for between 100 and 150 years gives Canadian consumers confidence and trust in dealing with these banks online, Stewart says.

Although security and privacy concerns remain high for those who use online banking, it is not enough to deter them, says Angus Reid’s David Saffran.

“Customers have been more concerned about our change from 48- to 128-bit encryption,” says Chuck Hounsell, senior vice-president of ebank with TD Canada Trust. The attempt to improve security has caused some frustration with customers who have had to reconfigure their personal systems, Hounsell admits.

The ability to provide customers with an interface that is easy to use and access is one of the key aspects in making online banking work, he stresses.

For the banks, the use of online and other electronic transactions allows them to take costs out of their system, Stewart says. However, he cautions that this depends on their back-end operations and how functional and dependable they are. For example, while an Internet transaction may be a fraction of the cost of a teller transaction, if the computer systems serving those customers are unreliable, you lose customers, Stewart explains.

“The key is customer satisfaction. It’s the fact that they get 24 hour a day and seven days a week online service,” says Stewart. “Right now customer satisfaction tends to be high and access levels are very good (with online banking).”

Part of the reason for the demand in self-service is that there “is a high level of frustration in branch transactions,” Stewart says. For example, a customer may wait in line only to find that the person who can help with a specific concern is not available. This can make for an unpleasant banking experience, says Stewart.

Stewart says that the major banks are not driving customers to online banking in order to cut costs. Rather, consumers are demanding the services.

TD Canada Trust’s Chuck Hounsell agrees.

“While online banking is a very big part of our business, we view ourselves as a multi-channel financial institution,” Hounsell says. “It’s not to save costs but to provide a better interface so that customers can access their whole financial picture. The customer gets a better ability to control and understand their financial services.”

While almost all financial transactions can be done electronically, either by telephone, ABM, debit card or Internet, it is the transactions that require a signature – such as opening a mutual fund account – that require customers to visit their branch, says Hounsell.

However, Stewart points out that recent legislation – the Personal Information Protection and Electronic Documents Act – now recognizes the legality of a “digital signature.”

Online banking is not just a hit with consumers. According to Angus Reid’s David Saffran, it is in the small business sector where it is really taking off. “Their needs are more frequent, as they’re managing cash flow and require a daily picture on where they’re at,” he says.

How far online banking can go remains to be seen, say analysts. The demand for services has been greatest by consumers, but with the development of business-to-business initiatives and other e-commerce initiatives, there remains great opportunity for the banks.

Saffran says that one of the growth areas is in the providing of access to financial services by wireless technologies. Last month, TD announced its wireless service for wireless banking transactions and brokerage services.

TD Canada Trust’s Hounsell agrees, and said there were a number of developments in the United States, including account aggregation – where a customer can get access to all his financial holdings by accessing one financial institution.

Stewart points out that analysts have been predicting that the business-to-business portion of Internet commerce will be nine to 10 times that of consumers, and this is a unique opportunity for financial institutions such as Canada’s banks.

However, he adds that there are a number of different players from a variety of industries examining the development of supporting financial infrastructure, and he expects there will be a lot of industry initiatives with partnerships and alliances.