Jim Bruene, Author at Finovate

Four Bill Payment Pricing Myths

By Jim Bruene Posted on August 3, 2004
Categories: Bill payment

One

We have no choice: to stay competitive, bill payment must
be free.

There is some truth to this. Twenty-two of the fifty largest U.S. banks now
offer bill payment free of charge to their entire online banking base. And the
big banks, especially Bank of America, are making a lot of noise about their
free bill payment services. And it does strike a chord with consumers who
naturally would prefer it be free, and tend to believe it should
be free, because of the incorrect assumption that it lowers the bank’s
processing costs.

However, online users are not naïve. They know there is a downside to free
services. It could be less privacy, inferior product quality, or distracting
advertisements.

Two

We’ll make up the lost fees
with improved retention.

There is no doubt that bill payment usage is correlated with higher
retention. But that’s the case with nearly every add-on service from savings
accounts, to credit cards, to safe deposit boxes, or Saturday branch hours.
Assuming customers like it, every account added increases retention.

It is true that electronic bill payment creates higher exit barriers (aka
“switching costs” or “customer lockin”) than a simple savings account. However,
it’s entirely possible that within a few years someone will invent a wizard that
automatically moves a user’s bill payment setup, merchant info, and history from
one bank to another.

Three

We’ll make up the lost fees with
higher balances.

Again, we’ve seen the research and it points to a strong correlation
between bill payment use and customer profitability. As Bank of America and
others have demonstrated, the “extra” profits from the bill pay group vs. the
control more than make up for the extra costs. In Bank of America’s case, they
showed an overall profit lift of 30%, after netting out the 10% increase in cost
to service the account due to the bill pay subsidy .

This is the best argument for free bill pay, and it may even have been true in
the 2000 to 2003 period analyzed by BofA. Early adopter bill pay users were a
profitable group; they may have had a tendency to add accounts at the bank that
was providing them the latest and greatest services, including bill pay.
Complicating the analysis, however, is the fact that the banks offering free
bill pay, Citi and BofA, for example, also tended to have the best overall
online banking services. Was it the free bill pay or the killer website that
drove the incremental balance growth? Bank America made a billion dollar bet
that it was the bill pay.¹

Four

Eventually payment processing
costs will decline.

Clearly, end-to-end electronic processing has lower transaction costs than
paper. However, electronic bill payment comes with an implicit customer service
component absent from paper checks. When a paper check fails to reach the payee,
no one expects the bank to track down the problem and make it right.

With electronic payments, the banks, and its processor, are required to
troubleshoot and fix problems, even when the error was outside their control. As
quality and volume increase, these costs will decline. But it will be difficult,
if not impossible, for electronic transactions to have lower marginal costs if
customer service expenses are factored in.

¹Bank of America’s stake $400 million stake in CheckFree gave it
extra incentive to promote free bill payment.

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Bill Payment Pricing Research Results

By Jim Bruene Posted on August 2, 2004
Categories: Bill payment

In the U.S. market, the industry standard pricing model has been free online
banking access combined with fee-based bill payment. However, during the
past three years, the fees for bill payment have gradually gone away to the
point where the most major U.S. banks advertise free bill payment, though it
may not apply to all account types or balance levels.

In July, we surveyed the top 50 U.S. banks and found only two that still
charged a monthly fee to all bill payment customers. Nearly half, 22 of 50,
offered bill payment free to everyone. Three banks did not offer bill
payment and the remaining 23 offered it free for certain accounts and/or
balance levels. In total, 45 of the 47 (96%) largest banks with bill payment
offered a free option . For those charging a fee, the average listed price
is $5.63/mo.

Last fall, TowerGroup found 33 of the 50 (66%) largest U.S. banks
providing bill payment free of charge to all or part of their customer base.
Furthermore, Tower found that bill pay penetration increased from 22% of
online banking customers prior to going free, to 38% after the change. This
70% lift was significantly more than what would have been expected without
the price change.

History of Free Bill Payment

Although BofA is largely credited with starting the free bill pay
movement, Citibank was actually the first to go free. In a major branding
campaign in the summer of 1997, the bank hit the streets of Manhattan
touting its no-fee electronic banking message (the fee-free policy also
applied to ATM transactions and other electronic banking transactions).

But until Bank of America’s high-profile move, most major banks held to
a $5 to $7 monthly charge, which not coincidentally covered their monthly
bill to CheckFree. Citibank handled payment processing in-house, which may
have contributed to their willingness to offer it fee-free.

Fees began to crumble in the fall of 2002 when BofA launched a
multi-million dollar television advertising campaign promoting free bill
payment. The campaign proved so popular with viewers that it continues to
this day. At the time, BofA said it was their most-remembered campaign of
all time. In the months and years since, most major U.S. banks have followed
suit. The most recent major to go free was U.S. bank earlier this year (see
Table 1, below).

One notable holdout is Wells Fargo, which last year said that 40%
of its base still paid a monthly fee.¹ Assuming 2 million bill
pay accounts, with 750,000 paying monthly fees of $6.95, Wells Fargo is
bringing in more than $5 million per month in bill payment fees. While it
may lose a few customers to its pricing strategy, the $60 mil/yr can be
reinvested into better services, more marketing, or shareholder dividends.

¹American Banker, Wednesday, June 11, 2003

Table 1

Free Bill Pay Timeline

Bank	Date	Comments
Citibank	1997	Part of high-profile strategy to make all electronic services free-of-charge
AmSouth	2001	Free-for-life promotion netted more than 100,000 signups
Charter One	2001	Became free for all
BofA	May 2002	Became free for all
Nat City	Sep 2002	Became free for all
Fifth Third	Feb 2003	Became free for all
HSBC	Sep 2003	Became free for all
Bank One	Aug 2003	Free for all but basic accounts
US Bank	Jan 2004	Web bill pay free for all consumers, MS Money/Quicken still $4.95/mo
WAMU	May 2004	Also offer free to small biz
Hibernia	Sep 2003	Previously $4.95/mo

Source: Online Banking Report, 7/04

Table 2
Summary of Consumer Bill Pay Fees at Top 50 U.S. Banks

Source: Online Banking Report, 7/04

(1) Free of monthly fees; in a minority of cases, fees apply for
excess usage and/or account inactivity

(2) Excludes Comerica, whose pricing is not disclosed, and MBNA
which charges by the transaction

(3) Average fixed monthly fee, excludes transaction fees for excess
usage

Table 3
Consumer Bill Pay Fees at US Top-10 Banks

Source: Online Banking Report, 7/04

¹In June 2003, Wells Fargo
reported that 40% of its customers received it free-of-charge.

²Wachovia is the other top-10 holdout; it has said that 70% of
customers get it free-of-charge.

Table 4
Consumer and Small Business Bill Pay Fees at Top-50 US Banks
ranked by deposit size, 12/31/03

Source: Online Banking Report, 7/04

Bank of America landing page from Google ad
(8/25/04)

The Bank of America Story

Thanks to an unusual openness, motivated by the strategic importance¹
of its free bill payment policy, Bank of America’s internal research
results have been widely circulated in print. To recap, in a 2.5 year study
of bill pay users compared to a control group of similar customers, the bank
found a 30% profit lift (see Table 5 right). Despite conventional wisdom,
little of it came from increased retention: the main driver was increased
balances.

Normally, we don’t pay much attention to studies correlating bill payment
with higher profits. It’s a function of the early adopter demographics and
will gradually diminish as bill payment becomes a mainstream service.
However, Bank of America’s results deserve a second look because they used a
control group of similar non-bill payment customers to compare profit lift.

We have serious doubts that you will be able to recreate these results
within your own customer base. Here’s why:

What really caused the profit lift? Was it the bill payment in
isolation, or was it the entire online banking experience at BofA’s
award-winning site.

· Did households in the control group already have one foot out the
door? Perhaps the control group didn’t adopt bill payment at Bank of America
because they were already in the process of moving their balances to another
financial institution. If so, the control group was predestined to have
lower profits no matter what factor was evaluated.

· Was the control group really that similar? Although, they may have
been in the same demographic segment, it seems to us that a household using
bill pay in 2001 was fundamentally different in their financial behavior
than one that didn’t use bill pay.

· Would the same profit lift be seen with any new product geared to
affluent customers, e.g., a new diamond credit card? In other words, it may
not be that bill pay causes balances to grow; it’s merely that those
with growing balances tend to sign up for new upscale services regardless of
what they are.

· Finally, even if you take the results at face value, does BofA’s
experience with early adopters during the past three years have any
correlation with what you might expect with mainstream users during 2005 to
2008?

¹Besides the free publicity, the bank has an ulterior motive
for promoting free bill payment across the entire industry. The bank
took a 16% interest (10 million shares) in CheckFree in Q2 2000; the
deal was valued at $400 million at the time.

Table 5

Bank of America Results

index of profitability with 100 = to
profits prior to the household using electronic bill payment

Initial customer profitability	100

+ deepened relationships (+27)	127

+ increased retention (+3)	130

+ reduction in servicing cost (+1)	131

– cost of bill pay service (-9)	122

Source: Bank of America, increase in customer profitability during a
31-month period ending in 2002, results of an analysis of 300,000
customers comparing profits from bill payment users vs. the profits of a
control group of similar households not using bill pay

Results from Online Resources

Online Resources, a major bill payment processor with more than 500
financial institution clients, found that bill pay penetration was 40% for free
vs. 28% for those with monthly fees of $5 or less
(see Table 6 below).

Table 6

Online Resources results
Aug 2003

	Monthly Fee
	Free	<$5	>$5	Lift
% of ORCC client’s charging this fee¹	33%	36%	31%	n/a
Online banking adoption²	18%	14%	13%	30%
% Bill pay conversion²	40%	28%	20%	60%
Bill pay adoption²	7.2%	4.0%	2.5%	120%

Source: Online Resources, 7/04

(1) January 2004 data

(2) June 2004 data

That’s a 30% lift in conversion of online banking users to bill pay; and an
even more impressive 120% lift in total bill payment adoption across the bank’s
checking account base. However, it’s been achieved at a hefty cost. Not only are
the banks giving up the $5 to $6 monthly free from their existing bill pay
customers, they’re paying several dollars per month for a whole new group of
customers.

It’s also difficult to ascertain how much of the increase in online banking
adoption was accounted for by the free bill pay offer. Since the first to offer
free bill pay tended to be more aggressive in their overall marketing of online
banking, some of the lift is from better overall marketing, regardless of the
price.

Results from Compete Inc.

Ecommerce researcher Compete Inc., which has a financial services
practice run by Stephen Franco, a high-profile analyst at US Bancorp Piper
Jaffray during the height of the bank technology boom. He found that banks
offering free bill payment had a higher share of their customer’s electronic
bill payments. At major banks that charge for bill pay, 18% of their customers
used biller-direct payments. In comparison, those offering it free-of-charge had
a third fewer customers (13%) using biller direct services (see Table 7 below).

Table 7

Bank Bill Pay vs. Biller Direct
Feb 2004

		Penetration of:
Segment	Number	Bill pay base	Online banking base
Bank online	28.7 mil	n/a	100%
Any pay online	11.3 mil	100%	39%
Bank only	5.7 mil		20%
Billers only	4.6 mil		16%
Both	1.0 mil		3%

Source: Compete, Inc. 5/04

LowerMyBills landing page from Google ad (8/25/04)

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The “Fee vs. Free” Controversy

By Jim Bruene Posted on August 1, 2004
Categories: Pricing

Free bill payment. It seems inevitable. With Bank of America and other
U.S. mega-banks flogging free bill payment 24/7 , is it possible to still charge
a fee and remain competitive?

We believe you can and should charge bill payment fees to at
least a portion of your online banking base. But you need to expand the list of
features and benefits for the fee-based option to distinguish it from free
services offered by other banks.

Eventually, you will likely divide your online banking base into two or more
segments. The FREE entry-level service receives the usual laundry list of online
banking benefits. The premium level qualifies for an even longer list of
benefits, most notably, pay-anyone bill payment. However, premium customers pay
monthly fees ranging from $5 to $10 or annual fees in the $50 to $100 range

The key to making this work is to get away from calling the monthly charge a
“bill payment fee.” That doesn’t stack up well with BofA and other major banks.
Instead, position the premium service as something with MORE VALUE for
online-savvy households. Make sure there are easily discernable differences
between basic and premium, other than bill payment, for example more extensive
archives or more security options.

If you are going to give up $60/yr in fee income, make sure you let visitors
know. HSBC has two banners on its Personal Internet Banking page.

If you do find it necessary to match the big banks with a free pay-anyone
offering, we recommend the Wells Fargo approach. Dole out free bill
payment judiciously, as an incentive to encourage customers to increase
balances, adopt e-statements, or add an overdraft line of credit.

— Jim Bruene, Editor & Founder
jim@netbanker.com

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Bank of Ameria Wastes Site-Search Opportunity

By Jim Bruene Posted on July 23, 2004
Categories: Bank of America

Bank of America is the virtual poster child for online banking with some 11 million users and an award-winning website. However, after two years of intense advertising of its free bill-payment service along with more than $100 million in foregone fees,* you’d think a search on their site for “bill payment” would take you to a pitch for its online payment service.
Well you’d be wrong. The first page of search results includes very helpful information on how to pay your credit card bill, but no mention of pay-anyone electronic bill payment or presentment. You have to click on See next 6 answers and go to the subsequent page to learn about online bill payment.
Let this be a lesson to add one more task to your marketing project plans:

Optimize site-search results

*Assume 1 million users times $5/mo x 24 months.

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Stockbroker Rankings from SmartMoney

By Jim Bruene Posted on July 12, 2004
Categories: Investment Products

SmartMoney just published its annual stock broker rankings (Note: currently the 2003 survey is posted, the 2004 should be there shortly).
There are now two categories of discount brokers: Premium and Basic. THere was little movement in the premium category year over year other than Vanguard droping from second to sixth and E*Trade making its inagural entry at number 2. Last year it was ninth in the basic category.
The best premium discount brokers:
____2004_________2003
1. Fidelity……….Fidelity
2. E*Trade………Vanguard
3. Schwab……….Schwab
4. USAA………….Quick & Reilly
5. T. Rowe Price..USAA
6. Vanguard…….T. Rowe Price
The basic category was more interesting with OptionsXpress coming out of nowhere to take the number one spot. SmartMoney’s comment, “nearly flawless.”
_____2004____________2003
1. OptionsXpress…….TD Waterhouse
2. Muriel Siebert……..Muriel Siebert
3. TD Waterhouse……Bidwell
4. Ameritrade…………ScottTrade
5. HarrisDirect………..HarrisDirect
6. FirstTrade…………..BrownCo
7. ScottTrade………….FirstTrade
8. Wall Street Access…Ameritrade
9. BrownCo…………….E*Trade (moved to premium)
10. WallStreet*E………Wells Fargo (moved to premium)

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Widespread Misuse of Gartner Online Banking Fraud Estimates

By Jim Bruene Posted on June 16, 2004
Categories: Security & Privacy

By now you’ve probably seen the MSNBC report by Bob Sullivan entitled, Survey: 2 million bank accounts robbed, followed by the subhead, Criminals taking advantage of online banking, Gartner says. The MSNBC article seems to say that 2 million U.S. consumers lost money from their checking accounts due to online banking.
In fact, here is what Gartner actually says in its report:

“Illegal access to checking accounts is the fastest-growing type of consumer fraud, and may
be proliferating through online channels.” (italics are mine)

The report goes on to say that most consumers do not know how they theft occured, only 17% believed that their info was stolen off the Internet, another 10% reported their wallet was stolen, and only 5% recall giving up personal info to phishers.
Gartner also says that 70% of the online consumers reporting losses also report that they banked or paid bills online, “which exposes their (codes) to the Internet.” However, what they don’t say is that close to 70% of ALL online consumers are banking or paying bills online, so it doesn’t look like there is strong correlation between the two.
Finally, let’s not neglect the sample size. It looks staggering in the headlines to say that 2 million people were robbed. But my back-of-the-envelope calculations show that the multi-million number was extrapolated from fewer than 75 respondents reporting a recent unauthorized checking account withdrawal (from Gartner’s survey of 5000 online adults). I’ll let the market research experts debate the exact reliability of Gartner’s extrapolation, but one should be wary.
As bad as the MSNBC article looks for the online banking industry, the NBC Nightly News with Tom Brokaw got even more carried away. They took an even bigger number, 4.5 million, which Gartner said is the number of people who have ever had an unauthorized checking account withdrawal, and mistakenly said that all those people were robbed via online banking. Here is the exact synopsis of the TV feature from the MSNBC website:

“An estimated 4.5 million Americans have had money stolen from their Internet bank accounts.
NBC’s Bob Hager reports.”

This is a great example of a respectable piece of research taken out of context which then begins to have a life of its own as other news media echo the original piece. Hopefully, someone will dig a little deeper and set the record straight. Since I was quoted in the original Sullivan story, before I had seen the actual Gartner research, I will be contacting him to urge a followup.
Just to show that not everyone takes the 2 million number at face value, a story posted today at NBC affiliate WEEK-TV quotes Peoples Bank (Bloomington/Normal, IL) CEO, Ed Vogelsinger as saying that despite having 20% of their base using online banking, so far no one has reported any Internet banking fraud. Way to go Ed.
We urge our readers to take appropriate steps through their PR channels to set the record straight. At a minimum be prepared to rebut the MSNBC numbers if approached by the media. Feel free to send any reporter our way.
Contact: Jim Bruene, Editor, Online Banking Report, at 206-517-5021 or email jim@onlinebankingreport.com.
Reference: “Banks Must Act Urgently to Stop Account Hijackers,” by Avivah Litan, Gartner

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Phishers Target the Royal Bank

By Jim Bruene Posted on June 15, 2004
Categories: Security & Privacy

Phishers struck another blow to the banking system when they demonstrated that they no longer need rely on random blanket emailing blasts. Case in point: within 24 hours of a real systems glitch at Royal Bank, the email thieves sent a massive fraudulent email playing off the legitimate systems outage.
One can only hope that this particular theft didn’t enrich the thieves. Otherwise you have a situation where there is an incentive for a thief to create havoc with a bank’s systems and then cash in through a well-timed phishing fraud.
Read more on the prevention of phishing at Online Banking Report (subscription required).

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Washington Mutual Small Business Resource Center

By Jim Bruene Posted on June 12, 2004
Categories: Innovations, Washington Mutual

Although not as robust as Barclays, Washington Mutual is
the only top-10 U.S. bank with prominently targeting startups. Through its
partnership with StartupNation, the bank has posted several articles on
its website, and also sends users to a cobranded
www.StartupNation.com
website to sign on for more tools and resources including webinars, resources,
and coaching. We don’t know the terms of the relationship, so we can’t judge the
cost effectiveness. However, we definitely like how WAMU is positioning itself
as a supporter of
small business.

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Top 10 Financial Services Providers by Small Business Market Penetration

By Jim Bruene Posted on June 11, 2004
Categories: Small Business

In the 2002 study of small business, TNS (formerly NFO Global Financial
Services) looked at which banks had the largest share of small businesses
relationships and which were ranked highest by small business clients.
SunTrust ranked highest in customer loyalty, followed by Wachovia
and Washington Mutual.

1. Bank of America

Pros:

· Three levels of business online banking: online banking with
bill pay, Business Connect for multi-users with varied levels of
access, and Bank of America Direct to manage all business finances
online.

· Good comparison chart of the three choices

· Resource center with informative articles on starting a
business and other topics

· Protect against online fraud link

Cons:

· Must scroll down to see all choices

· Hard-to-read small blue font for most links

· No separate URL or bookmark helper

2. Wells Fargo

Pros:

· Small business tab

· Excellent navigation and design, all viewable on a single
screen without needing to scroll.

· Clients can view personal and business accounts from a single
sign-on

· Single page, informative Small Business Newsletter

· Customers and non-customers can enter email address to signup
for newsletter

· Relevant and useful tips on product pages

· Product comparison pages as well as best product for your
business quiz

· Push a button to switch from English to Spanish and back again

· Link to Make this your first page at WellsFargo.com

Cons:

· No link to Security on the main page

· Not using liquid layout, so homepage appears small and
off-center at higher resolutions

3. Wachovia

Pros:

· Small business is one of the four main navigation
choices on the top

· Copy and headlines are solutions-oriented, e.g., Meeting
Your Needs, Resource Center

· Excellent navigation and layout on a single page

· Separate small business FAQs

· Relevant products and services packaged into “centers”:
Banking Center, Lending Center, Investing Center, Online Services Center,
Insurance Center, and HR Solutions Center

Cons:

· Must scroll to see information on bottom of screen

· No link to Security

4. U. S. Bank

Pros

· All major links are contained on a single page without
scrolling

· The no-frills style is easy to read

· Two solutions-oriented sections: Achieve Your Goals and

Small Business Center

· Separate Small Business login

· Link to Newsletter subscription

Cons

· Layout and design could be improved

· No link to Security

5. Bank One

Pros

· Product-oriented layout makes it easy to find specific products

· Small link to Security on bottom (not visible on
screenshot)

Cons

· There is no small business section, in fact the term is
not used in any header, although it is mentioned in the opening paragraph;
choices are Business Banking and Commercial, that defies
industry conventions and could cause lost business

· No solutions-oriented areas or resources section

·         Copy is cliché-ridden and not benefits oriented;
for example under Insurance:
   “You’ve invested your heart in your small business.
      We can help you find ways to protect it.”

6. Chase

Pros

· Small business is one of the four primary navigation
choices on the top

· Excellent design and layout that fits on one page without
scrolling

· Solutions-oriented sections: Plan and Learn,
Solutions, and Business Stages

· Link on left to Have Chase Small Business contact you

· Privacy & Security link on top

· Prominent Open an Account and Online Banking: Enroll
Now boxes in upper right

· Liquid layout

Cons

· No quick navigation or separate URL for the small business
page, you have to click on the Small Business section on the home
page, then move your cursor down the cascading menu to the Small Business
Home, it only takes a few seconds but it’s still unnecessary extra
effort

7. Fleet

Pros

· Separate URL
http://www.smallbiz.fleet.com/

· Tabs across the top help users find important subjects

· Link to Small Business Value Package (Note: Fleet also
offers a Small Business Platinum Program with a dedicated
relationship manager, faster funds availability, and priority phone service

· Solutions-oriented areas: Ideas and Information,
Business Tools & Resources

Cons

· Layout and design is a bit overwhelming

8. Citibank

Pros

· Using the drop-down menu you can navigate directly to relevant
business unit pages; the AAdvantage Business Card main page for
example is very well done

Cons

· Poor navigation off the home page: The only way to navigate to
the small business section is to use the drop-down menu on the right;
and because it doesn’t have a Go button, it took us 30 seconds before
we figured out you have to cursor down to Small Business at-a-glance
(screenshot above) in order to move to the small business section

· Poor navigation within the small business section: The four
main choices at the top of the page (Products, Planning, Investing,
and Special Offers) are NOT related to small business, they take you
back to consumer
http://www.citibank.com/ pages, and if you don’t use your back
button, you have to go through the full navigation routine to get back to
small business

· Must scroll down to see all the choices

· Main banking link (Checking, Savings, & Financial Services)
as well as the Online banking link cause a pop-up screen to load
which is dominated by an outdated self-promotion for online personal banking
with 2001 testimonial from Forbes magazine

9. SunTrust

Pros

· Small Business Resource Center is a good area, although
it’s buried under the Online Services tab in the Business
Solutions area

· View only option for online banking, no money movement
allowed

· Ask SunTrust search box in upper right is handy, but it
doesn’t distinguish whether user in searching from business or personal
pages

Cons

· The top navigation bar is a mine field of cascading menus that
launch when the mouse travels over them, an out-of-date and annoying method
for primary navigation

· No dedicated Small Business homepage, other than the
Small Business Resource Center mentioned above and a mid-page link to
Your Small Business Solution which leads to a curious page entitled
Benefits that talks about Total Business Banking, but it’s not
clear if it’s geared to small businesses or not.

· Unclear and vastly different navigation/organization in the
various areas devoted to small business (e.g., Small Business Resource
Center)

10. Washington Mutual

Pros

· Link to content from StartupNation in upper-left corner; the
only bank in top 10 with headline targeting startups (see back page for more
information)

· Good online banking demo with audio highlights

· All the information shows on a single page without scrolling

· Liquid layout

Cons

· No link to Security

· Copy and headlines could be more solutions-oriented

· Layout is a bit sparse for a bank

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Innovators in Small Business Online Delivery

By Jim Bruene Posted on June 10, 2004
Categories: Barclays, Innovations, NetBank, PNC Bank

Innovators in small business online delivery

Table 55

Watchfire/Gomez Small Business Scorecard

Rank	Name	Score Dec ‘03	Number Sm. Biz Clients
1 (tie)	Bank of America	7.6	2.5 mil¹
1 (tie)	National City	7.6	ina
3 (tie)	Key	6.9	ina
3 (tie)	Wells Fargo	6.9	1.3 mil²
5 (tie)	Chase	6.8	300,000¹
5 (tie)	Fleet	6.8	450,000²
5 (tie)	Wachovia	6.8	800,000¹
8	Bank One	6.6	ina
9 (tie)	HSBC America	6.0	ina
9 (tie)	U.S. Bank	6.0	ina

Source: Watchfire, 6/04 <gomezpro.watchfire.com>
Other banks evaluated, but not making the top 10: Bank of New
York, BB&T, Citibank, Citizens Bank, Comerica, Fifth Third Bank
(150,000 clients), LaSalle, PNC Bank (200,000 clients),
SunTrust, UBOC, Washington Mutual (250,000 clients)
¹American Banker, May 18, 2004, BofA total includes
FleetBoston
²American Banker, Oct. 1, 2003

Our first report on small business banking was produced in the fall of 1997
(OBR 29).
At that time, few banks were specifically targeting small businesses. Then,
a Yahoo search for “small business” and “banking” yielded only 19
results compared to 2.5 million today. In the late 1990s, most banks were
still busy building out their consumer interfaces. Even as recently as 2001
(OBR 70/71), we found few major innovations to report on. Our
favorite small business banking service was OneCore
http://www.onecore.com/ which was
shuttered shortly thereafter, at least as a direct provider.

Today much has changed. Everywhere you look, banks are innovating to
serve the small business market more effectively. According to
Watchfire’s GomezPro unit the best small business banking sites
are Bank of America and National City, tied for first place in
its year-end 2003 scorecard (see Table 55, right).

Other online innovators in the small business market:

Barclays Bank (London; $800 billion) uses its
website to target startup businesses with a broad array of support
services that many startups would find essential, including a free
business checking account for the first year. It’s so impressive, we’ve
given it our second Best of the Web award this year
(see next page).
PNC Bank (Pittsburgh, PA; $70 billion) and
NetBank have both announced plans to offer remote check deposits,
something most U.S. banks will support within a few years. One of the
last reasons to visit the branch will be eliminated when clients can
feed paper checks into a scanner instantly depositing the cash into
their account and storing the image into their online banking archive

This service is a shoo-in for an OBR Best of the Web once it goes
live.
NetBank (Alpharetta, GA; $4.1 billion) which
launched a new small business initiative a year ago, has attracted 1,600
businesses with $38 million in deposits ($24,000 average deposit). If it
keeps to the announced third-quarter launch, NetBank may be the first
bank to offer remote paper check scanning

Barclays provides valuable services for startups

Why do the U.K. banks do a better job serving small businesses online
compared to their U.S. counterparts?¹ Perhaps U.S. banks are
underestimating the value of services targeted directly to small business
owners. Or maybe they’ve found it too difficult because business owners
won’t bother switching bank accounts to save a few bucks a month. That’s why
it makes so much sense for Barclays Bank to focus on startups
at its business website <business.barclays.co.uk>. After all, if you
succeed in being a startup’s first bank, you have the inside track to retain
its business over time.

Barclays business homepage (see below) is dominated by a shaded
area asking the important question, Starting a business? Even though
the vast majority of visitors already have a business and a banking
relationship with Barclays, those most likely shopping for services are
startups. The bank also offers Pain relief in a box, a proprietary
business management and accounting program targeted for tiny businesses or
startups that haven’t settled on an accounting software system.

¹Two out of three of our Best of Web winners for small
businesses are headquartered in the U.K.

Barclays’ small business Starter Accounts consist of the following
features and benefits:

Current account (checking) with an overdraft facility; free
for the first 12 months, 18 if you also maintain personal accounts at
Barclays
Savings account
Loans, subject to credit approval of course
Insurance
45-minute free consultation with a business/marketing
consultant
45-minute free consultation with an accountant
30-minute free consultation with an attorney

NetBank and PNC to offer remote deposits

According to recent press reports, both NetBank (American Banker,
May 20) with 1,600 small business clients and PNC Bank (Wall Street
Journal, June 8) with 200,000, will launch remote deposit service for their
business customers. Although details of the yet-to-be-launched services are
sketchy, it is expected that business customers will be able to scan paper
checks into a remote device that transmits images to the bank for immediate
deposit. PNC estimates the scanners will rent for $15 to $25 per month. No word
on pricing from NetBank. The NetBank service is expected in late third quarter
and PNC expects to roll-out by yearend. Alogent
http://www.alogent.com/ is the
technology provider for NetBank.

Benefits for small business owners:

1. Saves time/money: Frees business owners from the daily/weekly
trek to the branch, something 80% of online self-employed households reported
doing during the past 30 days according to Javelin Strategy

2. Improves cash flow: Checks can be deposited immediately rather
than collecting dust waiting for the owner’s next trip to the branch

3. Streamlines record keeping:

i. the original check can be filed as a paper receipt if desired

ii. a back-up electronic image is stored at the bank if questions arrive

4. Improves customer service: Check images can be quickly retrieved
and emailed if
a dispute arises

5. Saves storage space/cost: Paper checks can be destroyed much
sooner, eliminating storage and security issues

6. Improves management control: Owners can spot-check deposit
activity by looking at actual check images, rather than staff-entered accounting
entries

Speaking as both as a small business owner and an industry analyst, this is a
great service and a strong candidate for a Best of the Web award once it
becomes operational.

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Small Business Case Studies: Putting it all Together

By Jim Bruene Posted on June 9, 2004
Categories: Small Business

Case Study: Financial product usage at one small business

Microbusinesses typically purchase a hodgepodge of
services culled from both retail and commercial banking product lines. For
example, at our own small business, we purchase 16 financial products evenly
split between consumer and business products (see Table 52, below).
Nine are sourced from banks, six are from non-banks, and one is a combined
effort. Overall, we spend $6,700 annually in fees, interest paid, and
interest foregone (for checking). But the internal costs for managing our
billings, payments, and banking, are more than three times as much, an
estimated $24,000 per year. We would gladly outsource these to a
high-quality and VERY trustworthy third party, preferably someone with a
regulatory and fiduciary responsibility to safeguard our information and
assets, like a bank.

Table 52

Financial Products & Services Used by One Small Business

Source: Online Banking Report, 6/04 ¹Fees and net
interest foregone (deposits) or paid (loans) assuming 2% cost of funds
²Purchased through US Bank, but processed by CheckFree and user
interface by Microsoft Money

Package accounts targeted to business segments

Most banks offer small business bundles that include checking and
other basic transaction services. However, we believe the online platform
can be used to assemble more valuable offerings targeted to small businesses
with various financial management needs. Table 53 (below) shows ways
that the small business market could be segmented. Table 54 (p 53)
outlines major feature that could be included in package accounts targeted
to the financial management needs of the small business.

Table 53

Potential Business Segments to Target

Virtual financial management packages

Most banks offer small business account bundles that include checking
and other basic transaction. We believe that there is a significant
opportunity to expand into hosted financial and customer management systems
with monthly fees of $100 or more. Following are the pros and cons of moving
into the financial management arena:

Pros

Profitable, incremental fee income
Publicity and image enhancement from being the first in
your market to integrate banking functionality into an overall Web-based
small business management suite
Product differentiation and an impressive unique
selling proposition
Positive word-of-mouth within the local business
community
Powerful retention tool
Potential for licensing to other financial
institutions

Cons

Weak/uncertain demandd: Until recently, small
businesses have been slow to adopt new banking technology. It may take
several years of marketing, sales, and training before you begin to see
a payback.
Development costss: Building a robust, highly secure
new system will be pricey; you will probably want to partner with an
accounting software developer that already has code for the basic
functionality.
Uncertain ongoing servicing costss: Being on the
bleeding edge has its risks; it will be difficult to predict ongoing
costs for system maintenance, software development, and customer
support.
Lack of employee confidence: Financial institution
front-line personnel have been known to steer clear of discussing small
business and/or online banking subjects due to uncertainty with their
operation, cost, and overall value.

Table 54

Features of Virtual Accounting Package Accounts

*Approximate monthly subscription price; additional transaction fees
would apply for certain services.

Package Account Descriptions

Virtual Business Manager

Description: A secure place for small businesses to set up an
online home base, similar to corporate intranets. Possible names: virtual
office, virtual desk, virtual briefcase, or personal intranet. It could also
be marketed to the estimated 39 million U.S. households with a home office.

Functionality: For a financial institution, the key to making it
work is tight integration with banking and financial matters. A further
emphasis on local content/links could keep you ahead of the competition.
Banking and financial management feature are listed in Table 54 (previous
page), including:

Financial calendar/datebook/reminder service
integrated with bill payment
Virtual safe deposit service that automatically
stores financial and other files in secure, encrypted, off-site back-up
files not accessible by anyone but the owner (not even bank personnel);
can be retrieved on CD for disaster recovery
Virtual receptionist that tells visitors how to get
in touch with someone at your business
Company message boards for internal users
Company blogs for external users
Ability to post documents to the Web, which can be
shared with everyone or just authorized employees and/or customers

Virtual CPAA

Description: As its name implies, the Virtual CPA provides
extensive accounts-receivable and accounts-payable services from a Web
interface.

Functionality: In addition to the Virtual Business Manager
features listed above and the banking/financial management features listed
in Table 54, the VirtualCPA could also provide the following features
(for more ideas, see the features built into Intuit’s QuickBooks
http://www.quickbooks.com/

Billing statements and invoicing via email, fax, or
snail mail; includes reminders, and confirmations
Online, cash-based accounting functions including
data entry, categorizing, and basic report generation
Bill-payment/accounts-payable monitoring functions,
such as email notification when payment transactions are awaiting
authorization by business owner; email flags when payment transactions
don’t clear in a reasonable time
Autopay function that pays certain bills
automatically each month when preauthorized by the client
Virtual credit card terminal with integrated email
and accounting
Lock-box service for paper check processing with full
integration to client’s accounting system
Option to share selected information with outside
advisors, such as a CPA

Virtual CFOO

Description: This top-of-the-line service has it all. Just as in
the real world, the Virtual CFO takes the raw data and puts it into a
broader perspective that allows a business to be more profitable.

Functionality: The following features could be added to those
already offered in the Virtual CPA and Virtual Business Manager
modules:

Online payroll with paper or direct-deposit paychecks
and electronic tax payments
Online federal and state tax return preparation and
filing
Full-fledged, double-entry online accounting
Complete disaster-recovery services including a
redundant data center – an area in which banks’ inherent in-house
expertise could be turned into a profit center
Complete Web-based customer file management and
communications including:
– invoicing/billing with Web integration, e.g., bill presentmentt
– payment services/inquiry via the Web
– email/fax/voice messages automatically confirming payment
Access to a CPA-on-calll for accounting and tax
questions; advice could be delivered publicly on your Web, privately
through confidential conversations, or both.
Automatic excess funds allocation to minimize
interest expense and/or maximize interest income. For added value, the
funds “sweep” could go to investment and loan accounts at any financial
institution (not just yours).
E-commerce services for hosting secure transactions
Accounts-receivable management that automatically
notifies the business owner and/or customers when accounts are past due;
includes linkages to a virtual payment window
Bank-branded virtual payment windoww, which clients
can display on their website to increase end-user confidence in paying
by credit card or electronic check (ACH); includes integrated messaging
confirming orders.
Extensive management reporting easily customizable
using drop-down menus; for example, revenue reports by customer,
accounts receivable aging, quarterly P&L; and so on.
Mail-merge capabilities that work across any medium,
email, fax, page, voice message, or snail mail; option to outsource
snail mail services to a mail house; includes label-printing utility.
Retirement plan administration including Web views
for participants
Project tracking module integrated with reminders and
other Virtual Officee services
Employee-expense reporting, cash advances and
reimbursement services
The ability to issue/reload prepaid credit
cards for customer rebates, expense account cash advances, and so on..

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Recommended Online Products and Services for Micro Businesses

By Jim Bruene Posted on June 8, 2004
Categories: Small Business

Small business attitudes are changing as online banking services become
easier to navigate and more useful. While it currently seems impossible to
eliminate the dependence on the branch for physical deposits, with the
widespread adoption of check imaging and electronic payments, most
non-cash-oriented businesses will be able to bank remotely. Both PNC Bank
and NetBank have announced plans to equip their business customers
with paper check scanners that will allow the remote deposit of paper
checks.

But even the best website and product offering cannot substitute entirely
for the human touch. Every business should have a contact available by
phone, email, or instant message. Small business owners should be treated
like private banking clients.

Recommended online products and services

In theory, small and micro businesses represent one of the most
lucrative, and relatively untapped, sources of incremental business. The
reality is that businesses are difficult to reach unless you are competing
for their loan business. A product offering optimized for business will
differ somewhat from one built for consumers. The following sections detail
potential online features for various microbusiness products.

A. Transaction accounts: checking & cards

While the overall banking relationship may revolve around the
commercial loan, online banking is all about the transaction account(s),
e.g., checking and credit card accounts. Smaller businesses often track
their financial progress through their bank accounts, using them as a proxy
for sales, cash flow, and profits. Business users are also more likely than
consumers to value advanced features such as downloads, reporting, alerts,
and multiple authorization levels. Some of the more promising features:

Custom data delivery: Periodic summaries of account
activity whenever (daily, weekly, monthly) and wherever (text email, HTML
email, or fax) the client chooses
Long-term archives: If
Google can provide 1GB of
storage for users of its FREE email service, banks should be able to provide
unlimited archives for a fee

Table 27

Checking & Savings Account Deposit Options

Table 28

Online Features for Transaction Accounts: Data Display, Storage, and
Value Adds

Table 29

Event Triggered Alerts & Authorization Messages to Support
Transaction Accounts

Table 30

Balance, Activity, & Account Management Messages for Transaction
Accounts

B. Payment and billing services

Next to statement information, epayment services are the second most
important drivers to the adoption of online banking by small businesses. And
unlike data access, epayments have the potential to become profit centers
and/or a significant source of online differentiation. Most businesses make
far more payments than consumers, so the importance of electronic
alternatives is magnified. On the other hand, existing businesses already
have a system for payment and billing, so it may be difficult to convert
them to a new one that requires changes in internal procedures or software.

Your best opportunities may be in less systematic services (i.e.
one-offs) such as electronic transfers between a business’s accounts at
other financial institution (account-to-account transfers) and the
occasional rush payment.

Table 31

Online Features for Billing, Payment Processing, & Funds Transfer
Services

Table 32

Online Features for Payment and Accounts Payable Services

Table 33

E-messaging to Support Epayments and Ebilling

C. Credit and loan accounts

Every small business relationship should include a credit component. It’s
the lifeblood of business, and a profitable product for financial
institutions. However, many banks have been reluctant to make commercial
loans to the microbusiness market. Average loan sizes, which are dwarfed by
typical commercial loans, make the effort seem fruitless. Yet profit margins
on the small business segment can be higher. Microbusinesses often use
personal credit, primarily credit cards and home equity secured loans, to
finance their businesses.

We believe every creditworthy microbusiness customer should
have a package of three or four credit lines with your financial
institution: an overdraft line of credit (connected to checking), a home
equity line of credit secured by their personal real estate (if applicable),
a business line of credit, and a business credit card. Even if the total
commitment is no more than $10,000 initially, it will make the business
owner feel like a valued customer; and each line can grow larger over time.

Table 34 contains a number of ways to use the online channel to
strengthen credit relationships with small businesses. Some of the more
important tactics:

Loan/line Hybrid: A flexible financing vehicle that
includes an integrated line of credit and the ability to take out fixed
loans from the overall credit line.
Startup Center: Information, tools, and resources geared
towards startup businesses.

Table 34

Online Features for Lending and Credit

Table 35

Triggered Alerts for Credit and Loans

Table 36

Account Management Messages for Credit and Loans

Table 37

Example: Potential Annual Credit Product Revenue from a Microbusiness¹

Source: Online Banking Report, 6/04

¹Example for illustration purposes only, not based on actual
research results

Table 38

Example: Potential Annual Credit Product Revenue from a Larger Small
Business¹

Source: Online Banking Report, 6/04

¹Example for illustration purposes only, not based on actual
research result

D. Deposit and investment accounts

The online component of deposit and investment accounts is far less
important than for transaction and payment services. However, a robust
online offering can boost deposit-gathering initiatives and improve
retention. Key online components are listed below: Refer to the
Checking/Transaction section for more ideas.

Table 39

Online Features for Investment and Deposit Products

Table 40

E-messaging for Deposits and Investments

E. Financial management & accounting

Although automated accounting and financial management services offer the
biggest potential payback to small business owners, they are challenging to
deliver. However, working through third parties, financial institutions of
all sizes can help cement banking relationships with financial management
services such as:

Visible and easy-to-use data downloading services
Tools to make annual financial updates and tax prep simpler
Online wrap accounts that handle all financial and accounting
needs for an annual fee, see the section on the Virtual CFO, CPA, and
Business Manager

Eventually, it won’t be enough to simply offer robust cash management and
online balance reporting to your business clients. Using the Web as a
platform to build industry- and customer-specific service offerings, we
expect a proliferation of specialized small business services during the
next few years. For example, several years ago QuickBooks opened its
code to developers
http://www.developer.intuit.com/ spawning numerous niche services
built on the small business accounting program. Check out the QuickBooks
Solutions Marketplace
http://www.marketplace.intuit.com/

As the economy continues to improve, big banks will aggressively court
small and mid-size businesses with creative financial management via
Web-based services. These innovations will help counteract the perception
that community banks provide better service. In turn, community banks will
fight back with online offerings that enhance personal service
delivered to local businesses. Luckily, vendor offerings will make even the
most complicated Web-based service affordable to the smaller financial
institution.

Intuit has already built impressive software-to-bank linkages for
QuickBooks and Quicken customers. To some extent, the shrink-wrapped
software is a Trojan horse, positioning Intuit-controlled links to its
partner banks right on the desktops of your best clients. You can fight back
by incorporating billing, accounting, and financial management functions on
your website using account aggregation, instant messaging, and “push”
publishing technologies. Although, it will take time, we think smaller
businesses will be very receptive to financial and management services
running on encrypted, secure, and trusted servers controlled by the bank..

Table 41

Online Features for Financial Management

F. Service & client relations

Online services and other automation tools can be used to help
relationship managers service and cross-sell to small business clients. Used
judiciously, these tools can improve the perception of personalized service,
even while they improve the productivity of the relationship managers by
allowing him or her to handle a larger portfolio. Key components include (see
Table 42 below for more):

Library of recommended preformatted emails that relationship
managers can easily customize and send to clients
Private-banking-like service that treats small business owners
like VIPs
Instant messaging for more private/secure connection between
the client and their business banking officer

Table 42

Online Features for Self-Service

Table 43

Online Features for Client Relations

Table 44

General E-messaging to Support Client Relationship Management

G. Security and privacy

Although business users may understand the tradeoff between convenience
and risk, the stakes are much higher. A breached small business bank account
could cause thousands of dollars of lost productivity and sales, in addition
to any funds that disappear. In addition, larger small businesses are always
up against the threat of insider theft and fraud. So business owners need,
expect, and will pay for more sophisticated security controls. For example:

Additional authentication and/or authorization for outbound
funds transfers or payments
Token- or SMS-based authorization to access the account’s
master level where new payees can be added, permissions can be granted, and
so on
Frequent email messages tracking online account access and
alerting the business owner to any suspicious or out-of-character usage,
e.g., login from an IP address in Liberia
Comprehensive assurances and guarantees that accounts will not
be compromised

Table 45

Online Features for Security & Privacy

Table 46

E-messaging to Support Security & Privacy

H. General website content/features

As branches are gradually replaced by websites as the place where most
banking business is conducted, your online presence will become a critical
part of your overall brand image. Branches will still have a role, but it
will be limited to account openings, cash deposits, and the occasional visit
to the safe deposit box. Websites catering to small businesses will become
far more sophisticated, yet highly customizable and easier to use. Important
features include:

Resources and discounted banking packages for start-up
businesses
Separate URL that business clients can enter to skip the
consumer section

Table 47

General Website Features to Support Small Business

I. Insurance

Compared to consumers, small businesses buy a lot of insurance compared
to consumers. While banks may not be “top of mind” when it comes to
supplying insurance, financial institutions can use their online presence to
change that perception.

Table 48

Online Features for Insurance

Table 49

E-messaging to Support Insurance

J. Online sales and marketing

Even though microbusinesses are difficult to reach through traditional
direct marketing, we believe they will readily seek you out if you provide
credit and payment solutions targeted specifically to them, especially when
in startup mode.

It’s important to make sure everyone, especially the line staff,
understands that microbusinesses are to be actively courted, not avoided.
Typically, bankers roll their eyes and trot out horror stories about past
“nightmares” with flaky microbusinesses. Staff must be educated to the
facts: Microbusinesses can be risky, but with proper pricing and risk
management, the segment provides an excellent source of incremental profits.

In sales efforts, leverage the cachet of the branch manager. A single
telephone call or visit with the local branch manager could be enough to
land an entire microbusiness account. This all-important relationship with a
human must be nurtured after the initial sale. Email, instant messaging, and
other electronic tools can be effective in keeping the communication
channels open.

Some other effective ways to increase your share of the microbusiness
market:

Uncover microbusinesses within your own retail customer base by
looking for random and fluctuating deposit activity.
Develop Web content
that caters directly to the small business segments you are targeting, such
as
- – Part-time businesses
- – Self-employed (including full-time sales) or 1-person business
- – Micro employers with fewer than 5 employees
Use professional copywriters familiar with small business
terminology to create website copy, including FAQs.
Give business bankers “ownership” of the business part of your
Web site to make sure it is up-to-date and speaks to the target markets.
Enlist business owners to evaluate your website and other
marketing material

Table 50

Online Marketing & Sales Tactics for Small Business Acquisition and
Retention

Table 51

E-messaging to Support Small Business Sales & Marketing

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Finovate Blog

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