Online Pay-Off?

• Author: Bernstel, Janet Bigham
• Position: Online banking rarely turns a profit - Industry Overview - Statistical Data Included

Yikes!

Managers realize today that Internet banking is not going to turn into a big profit center--at least not right away. But striking the right balance between a virtual and physical presence can help enhance customer relationships.

That's important, particularly when trying to retain business and high net-worth retail customers.

Whether you launched your online banking operation four years or four months ago, it's likely that you're still trying to make it pay. You're not alone. Even Internet banking leaders such as Wells Fargo & Co., with an overall 14 percent of the market share, has yet to make a profit off its Internet service.

The Wall Street Journal reported recently that Wells Fargo CEO Richard M. Kovacevich told attendees of the Investment Counsel Association of America annual meeting that after spending over $1 billion in the past two years, the San Francisco-based bank expects its Internet banking operation to be profitable by April 2002. The service was first launched in 1996, and the bank ended the first quarter of 2001 with about 3 million active online users.

During the dot-com glory days, many bankers may have harbored hopes that their Internet operations would be profitable. You would certainly think so from the stampede online. In the past five years the number of community banks launching on the Web increased 198 percent, according to the Community Bank Competitiveness Survey: Web Census 2001, a joint effort of the ABA Banking Journal and the ABA Community Bankers Council. These websites range from simple home pages providing nothing more than brochureware to fully transactional Internet banking portals.

And how have they fared? If there were dreams of great increases in customers and deposits, the reality has been somewhat disheartening. More than one-third of the banks responding didn't think their website brought in new clients. Many just plain didn't know, implying problems in Web tracking systems.

When asked whether their websites made money, Bankers gave three answers in approximately equal numbers: One third of the banks said "no," but expected it to make money in the near future; one third said they didn't know; and one third said "no"--and they don't ever expect it to be profitable. That last answer is the only one that's changed over the past three years, rising by seven points.

As for a clear "yes," only 2.5 percent of those surveyed this year said their websites were profitable.

You've got Net--now what?

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