BANKING BRANCHES OUT ON INTERNET
By Melissa Wahl
Tribune Staff Writer
July 8, 1998
When Banc One Corp. installed the first automated teller machine in a Columbus, Ohio, shopping center in 1970, no one was sure it would catch on.
It took two decades, but the ATM finally became a hit. Today more people prefer to get cash from an ATM than from any other source, including tellers.
Internet banking, now about 2 years old, is enjoying much faster acceptance than ATMs did. Already about a million people bank over the Internet, a figure that is expected to more than double by 2000 and reach 5.4 million by 2002, according to Meridien Research in Newton, Mass.
Already some banks have curtailed promotion of their Internet offerings because they can't handle the volume.
"It will take a much shorter time to get home financial services accepted, because people get out of school today with a computer that will access the Internet," said John Russell, a spokesman for Banc One.
Most Internet banks let customers check balances and transfer funds free. They charge $5 to $10 a month for bill-payment services, and some banks offer loan applications and discount brokerage services on-line.
First Chicago NBD Corp., which launched its Internet bank last month, already has 5,000 customers signed up and is adding 400 a day, said James Grant, who heads remote banking services.
BankAmerica Corp. said it doubled its Internet customer base last year, and expects it to grow by about 70 percent this year. It declined to give specific figures.
Despite the big percentage gains, banks have yet to break even on their Internet offerings. Most large banks spent several million dollars to create their digital banking sites and do not expect to recoup their investments for four to five years.
Wells Fargo & Co. in San Francisco, which has a record 450,000 customers on the Web, predicts that half its customer base will bank that way within five years.
The service will become profitable before that only if customers latch onto the bank's new Internet offerings, such as its recently announced on-line home-equity loan application, said Dudley Nigg, the bank's head of on-line financial services. With that loan application, customers get a response on-line within seconds of submitting their application.
Similarly, Bank of Montreal, parent of Chicago's Harris Bank, responds to mortgage applications in 30 seconds over the Internet.
But Nigg said the on-line bank is worthwhile even if it's not a profit center, because it helps the bank keep customers who are already profitable to the bank. Wells does not want to lose their business, even if they become less profitable by banking on the Internet, he said.
"They're young, well-educated and tend to be affluent. They are very attractive to the organization, because they keep higher balances and tend to have more loans," Nigg said.
People who bank on-line also grow their balances more than traditional customers, something that Nigg sees as evidence that they are transferring balances from other institutions because they find Internet banking so convenient.
Internet banking also could discourage people from switching banks, said First Chicago's Grant.
"Once they have their accounts and financial planning and bill payment set up on your site, it would be an awful lot of work to undo it," Grant said.
Eventually, Internet transactions will cost banks less than a penny to handle, a tiny fraction of the 25 cents or so that an ATM transaction costs and $1.10 for a teller transaction.
At that point, banks will encourage even their unprofitable customers to bank over the Web, just as they encourage ATM use now.
That does not necessarily mean branches will go away, said Ken Kerr of Mentis Corp., an information and communications technology research firm in Durham, N.C.
"When banks offer alternative channels, people don't give up on the branch. They use the branch and the other channels," Kerr said.
Customers' number of transactions also go up when they use alternative channels, experts say. People will run to an ATM for that extra $20 instead of keeping it in a drawer at home, for example.
Still, branch use is expected to decline somewhat, and bankers hope they can convert the facilities into sales and relationship management hubs.
"We're transforming branches into financial-service centers for advice and unique solutions. We're trying to move the routine to other channels," said Jeffrey Chisholm, who heads Bank of Montreal's alternative delivery systems.
Community banks, which have caught the Internet craze as well, certainly do not plan to close their branches. They continue to tout their more personalized services as an alternative to big banks.
But then they are not paying as much to go on-line. Several companies offer cookie-cutter Internet packages that cost banks less than $50,000 to install and $5,000 a year to maintain.
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