The Many Faces of E-Service – More than Just Email

 

Description

Examples

Preemptive Bank solves or identifies potential
problems BEFORE user raises the issue or is even aware of the
problem
Alerts, instant messages, text
messaging, voice messaging, pushed account information, satisfaction
surveys
Self-service Users solve their own problems online FAQs, tutorials, calculators,
troubleshooting modules, imbedded help, search, image & statement
archives
Responsive Bank responds to questions online Email, Web inquiry, chat, instant
messaging, call back, co-browsing

Source: Online Banking Report 4/04; partially adapted from a Mar. 31,
2004 presentation by Forrester’s, Catherine Graeber

 

Most people think of email when discussing electronic service. But email
is just one part, albeit an important one, when designing a comprehensive
e-service program. Electronic service consists of three distinct classes of
support:

  •   Preemptive or proactive support: Services that provide
    warnings before problems arise. In the branch environment, it used to be the
    courtesy call when an overdraft situation was first detected. Online it’s
    the triggered account alert telling users their balance has fallen below a
    preset limit or an email confirmation when a deposit is made. These services
    are fantastic for customer satisfaction, although they could have a
    short-term negative impact on fee income.
  •   Self-service or self-guided support: Self-service options are
    growing in acceptance as users begin to understand that high-quality
    Web-based support can deliver accurate answers in a fraction of the time it
    takes to walk through the problem on the telephone with one or more customer
    service reps. While financial institutions can deploy self-service options
    relatively inexpensively, resist the temptation to cut development costs to
    the bone. Bad self-service support can do more harm than good; driving users
    to the phone already in an agitated state after wasting time trying to find
    the answer online.
  •   Responsive or reactive support: This category is most like
    traditional phone support. In theory, questions received electronically
    (email, Web form, or text-based chat) can be handled more economically with
    tools that provide preformatted answer templates for common queries. In
    practice, there is a substantial learning curve before cost savings
    materialize. However, many banks are beginning to see measurable call
    deflection among their online user base. A major credit card issuer told us
    that their online cardholders were making 30% fewer telephone calls, a
    dramatic cost savings. However, users may not be satisfied with e-service
    efforts which will slow adoption. For example, only 25% of users are
    satisfied using email for problem resolution compared to 69% satisfaction
    for the phone and 76% for face-to-face branch interactions

The Forecast: for Financial E-service Households in 2004 to 2013

For 2004, we project growth of 5 million new U.S. financial e-service
households, about 15% fewer newcomers compared to the 6 million added in
2003. Also, the rate of growth will slow to 18% from 2003’s 27%. Because 10
million households use electronic customer service but don’t bank online,
it’s important to capture the email addresses of these users so you can
communicate with them electronically. Only one top-10 U.S. bank currently
allows users to opt-in for email communications even when the user is
already providing their email address in the course of making a web-based
inquiry 

04-mar-c01.jpg

State of Financial E-Service: 2003

Looking at the research, one is tempted to conclude that e-service is
less important than traditional phone and branch service. Customers are
relatively satisfied with their phone and face-to-face experiences at
financial institutions. According to Forrester, the traditional channels
enjoy an average satisfaction rate of 80%, nearly four times the rate of
e-service options which were in the low-20% range. Only the much-maligned
IVR (automated phone) service was lower at 12% (see Table 6, below).
More recent research shows that the Web is gaining ground in all areas
except problem resolution, where only 25% of respondents are satisfied with
the service received (see Table 7, below).

However, even though satisfaction trails other methods, online users
overwhelmingly prefer electronic channels when dealing with their bank. In
research released just this month, Vividence, a customer-satisfaction
research company, found that three times as many users prefer electronic
channels for service compared to the telephone. Jupiter Research also found
similar results in actual behavior at online retailers. It found that during
2002 year-end holiday period that three-quarters of respondents used email and
Web-based options in their initial attempt to contact an online retailer for
service (see column 1, Table 8, opposite).

Financial institutions should be enthusiastic about these consumer
preferences, given the potential cost savings. According to Gartner, email
service can save $2 per interaction compared to the telephone. Furthermore,
Web-based self service can drive costs down more than 80%, to less than $1 per
interaction (see last column, Table 8, opposite). As always, take these
research results with a grain of salt. It’s early in the learning curve for both
providers and users. Weaning users off high-cost delivery channels will be a
long-term process using both carrots and sticks.

 







04-mar-b04.jpg

The Importance of E-Service

Since 1995, e-service has been an important component of online banking
satisfaction. However, many financial institutions chose to defer major
investment in service capabilities on the theory that users were not
demanding it.

While that may have been true three or four years ago, it’s not the
current reality. Today, mediocre service puts you at risk of losing
sales, cost saving opportunities, and ultimately customers. Luckily,
expectations are still relatively low, so you have an excellent
opportunity to impress your customers

Table 2
Online Self-Service Evolution

Phase

Period

Typical Capabilities

Primary Market

Beta 1995 to 1998 Brochure and short FAQ Outliers
Version 1.0 Novelty 1999 to 2001 Longer FAQ, email address, rudimentary Web-based
inquiry, site search with poor results
Early adopters
Version 2.0 Utilitarian 2002 to 2004 Extensive FAQs, good Web-based inquiry, live
chat in certain areas, site search with marginal results
Early mainstream
Version 3.0 Early mainstream 2004+ Deep and detailed online knowledge base with
graphical tutorials, interactive Web-based, live chat in most
high-value areas, site search with instant answers
All online households (70% in U.S)

Source: Online Banking Report,
3/04                                                      

 

Table 3
E-Service Benefits

Improved customer support

  •          Faster and more convenient for experienced online users
  •          Able to interact with the bank in quick bursts when
    questions arise; before the issue festers
  •          Creates a written record of questions and answers to make followup more efficient
  •          Potential for higher quality answers with links to more
    detailed information, attached documents, and so on
  •          Potential for customer to interact with the same rep for
    follow-up questions
  •          Customer can save or print answers for future reference
  •          No more looking up account and phone numbers, then
    navigating tedious phone menus
  •          Efficient and detailed incident tracking to ensure
    satisfactory problem resolution
  •          User satisfaction of finding their own answers
  •          Serendipity: finding useful related information you might
    never have inquired about (e.g., discovering Roth IRAs when looking for
    year-end tax info)

Better market data

  •          Easier to categorize and track customer concerns
  •          Provides a steady flow of user feedback that can be
    captured and tracked over time
  •          Easier to route individual questions/comments so others
    (e.g., marketing dept.) can “hear” what customers are saying, unfiltered
    and in real time

Potential* cost savings

  •          Deflect branch, call center, and email queries
  •          Ability to handle some questions during off-peak times
  •          Ability to route questions to lower-cost centers where
    language fluency is less of an issue (compared to telephone support)
  •          Ability to outsource certain question types, such as tech
    support
  •          Ability to automate answers to routine questions

Source: Online Banking Report, 3/04

*Since most financial institutions are early in the learning curve,
cost savings are mostly unproven. However, long term the impact is
expected to be dramatic.


Service Quality

No matter how much time you spend analyzing service quality, in the end it
all boils down to this: Satisfied customers receive products and services that
meet or exceed their expectations. Table 4 below outlines nine components of
online service quality.

Table 5

Customer Service Expectations Retail Banking

*relative ease of exceeding customer expectations using online service

 

Attribute

Expec-
tation

Import-ance

Ability to Exceed*

Preemptive support

low

high

high

   account alerts

low

high

very high

   personal attention

very low

medium

very high

   identifying potential probs

low

high

high

Self-service

medium

medium

low

   saving time

medium

medium

low

   convenient

medium

medium

low

   quality of results

low

high

high

   search results

medium

medium

low

   maintaining privacy

high

medium

very low

   “do it yourself” satisfaction

medium

medium

low

   providing input to bank

low

medium

medium

   venting

low

medium

medium

   solving the problem

very low

very high

very high

Responsive support

low

very high

very high

   email/web inquiry

medium

high

high

   immediate autoresponse

low

medium

medium

   response time

medium

medium

medium

   thoroughness of response

high

high

low

   personal attention

very low

medium

high

   ability to escalate

low

medium

medium

   efficiency (not restating)

low

medium

medium

   providing input to bank

medium

medium

low

   venting

medium

medium

low

   solving the problem

low

very high

very high

Source: Online Banking Report estimates, 3/04

Because customer expectations are relatively low, there are numerous
opportunities to impress even your most jaded customers and even pick up share
from less-enlightened
competitors.                                                 
 



 

E-Service 2.0* — Service with a :-)

Making the case for improved online customer service is easy. Online banking
customers now prefer it almost 3-to-1 over telephone support (see Table 1,
below
). Done right, e-service
can increase customer satisfaction, decrease support costs, and lead to
increased sales. What’s not to like?

The problem is that costs are front-loaded and benefits are difficult to
measure. Bottom line: You’ll spend hundreds of thousands or more in anticipation
of future, largely hidden, returns. That’s a tough sell in any environment, but
especially in the low-margin financial services arena.

What’s a banker to do? Start by demonstrating the reach of your website to
both online banking users and other bank customers. This requires an effort to
persuade non-online banking users to register so you can track them over time to
measure the entire impact of self-service.

Next, continually add self-service tools and content to improve the online
experience. You can do this in baby steps if need be. For example, add one
capability each quarter, such as an online tutorial
on how to pay bills. If resources are tight, look for college interns or
tap in-house volunteers to do the work.

Table 1

Service Channel Preference

percent of respondents preferring each channel, n = 2000

 

 

Preferred Method of Support

Channel

2004

2003

Change

Any electronic channel

71%

68%

+3%

    Email/online forms

20%

19%

+1%

    Live online chat

21%

28%

(7%)

    Self-service

30%

21%

+9%

        FAQs

21%

12%

+9%

        Online instructions/tutorials

9%

9%

Telephone

28%

31%

(3%)

 

Source: Vividence survey of online banking customers, Mar. ‘04 and Sept. ’03;
Question: “Which would you prefer to use most often?”, n = 2,000 both years

Another option is to outsource the entire process, including live tech
support if desired. Experts such as SafeHarbor, the company powering much
of Washington Mutual and SunTrust’s self-service capabilities, can
provide speedier implementation and state-of-the-art knowledge. In any event,
the day of the annually updated two-page FAQ are over. Customers expect and
deserve more dynamic help as they attempt to do business with you in cyberspace.

— Jim Bruene, Editor & Founder

WAMU & EBAY Test CD Auctions

Washington Mutual testing the waters by selling CDs with
eBay.

In January, Washington Mutual became the first bank to test selling
certificates of deposit with eBay. The test was conducted on a standalone
co-branded site, rather than being integrated with eBay. Users were required to
register to participate in the CD auction. EBay credentials were not accepted
nor did the certificates turn up on regular eBay searches

 

Although not the first to try retail CD auctions, Washington Mutual
(Seattle, WA; $289 billion) is the first bank to team with eBay to add
legitimacy to the unusual deposit-gathering scheme at  http://www.wamucdauction.com/
 
a co-branded site, hosted by eBay. The Bid Your Rate test is
scheduled to run from Jan. 15 through February, with one-hundred $1000, 6-month
CDs auctioned per week, for a total of 600. Apparently WAMU approached eBay with
the idea and paid an undisclosed fee for the development and limited marketing
to eBay users.

Auctioning CDs was tried by several banks in the late 90s, most notably by
PNC
Bank which ran auctions on its website for about a year beginning
in Sept. 1999. Several other smaller banks, including the now-defunct USA
Bancshares
, gave it try but it never caught on. But that was also before
eBay became a cultural icon.

How it Works

04-feb-e02.jpg

It’s much like an eBay auction but the bidding runs in reverse. The
auction begins with a high interest rate and is bid down in increments of 5
basis points. In our tests we found the reserve to be 10% and proxy bidding, as
is customary on eBay, was not used. Your bid was automatically entered at the
lowest rate you selected.

From our observations, the bank needn’t have worried about using a 10%
reserve price since all the CDs were quickly bid down to competitive levels. For
example, at mid-day Feb. 9, the 12 CDs closing later that day had all been bid
down to 2.05% or 2.10% rates. In comparison, that day
http://www.bankrate.com/  pegged the
average U.S. 6-month CD rate at 1.23%, with Stonebridge Bank offering the
highest at 2%. You could also get 2% with a savings account at ING Direct.
In Washington state, Washington Mutual’s website offered a 0.95% rate on 6-month
CDs. That CD featured the option of adding to it at any time during the term for
the same rate.

Apparently the test was promoted on a limited basis with banners and links on
eBay, although we never saw one. However, there is no integration with the eBay
search engine. We tested various search terms and found no mention of the WAMU
CDs. Washington Mutual issued a press release on January 14, but is not widely
promoting the service. We found no mention of it on the bank’s website (Feb. 9)
nor did it appear in site search results.

Here’s what you see after entering a successful bid (in
this case 10%) that’s met the reserve and taken the lead, at least for the
moment. Final winning bid was approximately 2%.

Analysis

At this point, CD purchasing on eBay may be too small a niche for a large
bank to profitably serve. However, it might be a good way to attract hot money,
without repricing your current deposit base, or to create some interest in your
deposit and/or online services. Long-term, we are more optimistic and expect
deposit auctions to eventually become a common practice; after all retail
investors already purchase T-bills directly from the U.S. government in a
similar fashion.

Contacts

Doug Marshall is SVP Deposit Strategy and Product Management at
WAMU; Gary Dillabough is VP Strategic Partnerships at eBay.

 

MBNA’s Bill Pay Choice

The credit card giant offers online payment of outside
bills even if the merchant payee does NOT accept credit cards.

 

 

MBNA ($142 billion, 40 million cardholders) offers something we’d
been expecting for years, a bill payment program that draws payments from a
credit card. The company even posts the transactions as cash equivalents,
offering the same 15- to 45-day float afforded regular card purchases.
However, bill payments do not earn points in MBNA’s reward programs.
Furthermore, payees are limited to those that can be paid electronically by
CheckFree, although that’s now covers 70% of the processor’s volume.

Consumer Benefits

Pros

  •       Added float, as one message board poster said, “why worry
    whether you get a few days float (from your bank), when MBNA provides a
    whole month”
  •       Convenience of tracking more expenditures through the
    card-management system.
  •       Ability to repay over time.
  •       Option of charging bills to an MBNA card or debiting from any
    checking account.
  •       Free, so long as the cardholder initiates at least two payments
    per month from their card account (see fee schedule opposite)

Cons

  •       No real drawbacks, except for the confusing price schedule.
    Consumer advocates might argue that it encourages cardholders to take on
    more debt, but they could already do that by paying bills with convenience
    checks.

Financial Institution Business Case

We’ve long maintained that loan generation is the most important
institutional benefit of online bill payment because. Why? If given the
opportunity, users will likely charge several bills per year to an
integrated credit line .

While you will lose money on convenience users who repay the charges each
month, revolving balances should more than compensate. For example, in our
back-of-the-envelope calculations, we estimate a total net profit of $60 per
year per user of credit card bill-pay, or $600,000 annually across a
10,000-user customer base. 

The Most Confusing Fee Schedule in the World:
MBNA’s Bill Pay Choice may be among the most flexible online, but
its fee schedule is utterly confusing. Perhaps the company should consider
charging a nominal flat fee that’s waived if charging 2 or more bills.

 

Of course, any new credit card program must be monitored closely for abuse,
both outright fraud, by setting up a phony electronic merchant, and less
sinister gaming of the system where a user becomes an electronic merchant on
CheckFree’s system and pays himself each month to earn the float. However, since
no reward points are awarded, there is far less incentive to play games.

Card issuers could limit their exposure by setting a maximum monthly amount
of bill payments, especially for new cardholders.

How it Works

MBNA cardholders must first register for online access at MBNA’s NetAccess
www.mbnanetaccess.com
 After that, they register for Bill Pay Choice. Users can pay bills either by
charging to their MBNA card or debiting any U.S. checking account. MBNA does not
offer its own checking account; however, payments can be drawn from MBNA’s money
market account.

The service is free unless the user pays bills only from their checking
account, in which case the fee is $0.75 per transaction. Users may qualify for
unlimited free checking-account bill payments provided they charge at least two
bills to their card each month.

 

Table 13
Mini Business Case: Card-based bill payment

monthly benefit, assuming 6 payments totaling $1000

 

Factor

Assumptions

Result

Direct Costs  

 

Cost of float 30 days at 2%

$1.67

Cost of transactions 6/mo to CheckFree

$2.00

Cost of service/mo internal

$0.33

  Total cost/mo  

$4.00

Direct Revenues  

 

Increased outstanding balances $167 x 12 months
x 5% spread*

$8.35

Fees from DDA trans  

$0.15

  Total revenue/mo  

$8.50

Net profit/mo  

$4.50

   Annualized  

$54

Intangibles  

 

Extra interchange from increased charge
volume
1% x $300/yr

$3/yr

Increased retention 2% increase x $150/yr

$3/yr

Total per user
   per 10,000 users
 

$60/yr
$600,000

 

Source: Online Banking Report estimates, +/- 33%, 2/04
Revenue assumptions: 1 out of every 10 bills will be revolved (10%); revolving
balances will be repaid in equal installments over 12 months (6 months average
life); interest rate spread = 5% (net of charge-offs)

Website Usability (part 2): Card Application

In part one of our series on website usability, we looked at the
all-important homepage. But the best homepage won’t do you much good unless
you can convert visitors into paying customers. For that you need an
effective sales process capped by an easy-to-use application. Online credit
applications have evolved considerably during the past five years and are
now relatively painless to complete, usually far superior to their paper
counterparts, which are plagued with missing data, illegible markings, not
to mention transcription errors in your own back office.

At OBR, we’ve looked at online application-form design on a number of
occasions, finding a wide variety in quality (see Table 11, below). This
time, we are using a more rigorous approach applying our proprietary OBR
WebCheck criteria www.webcheckanalysis.com
 and scoring Citibank’s application across 54 criteria. Although the
bank’s application is very good, there is still much room for improvement,
as witnessed by its sub-50% score.

Citibank credit card application

Card application

Table 12
Citibank Credit Card Application Process

OBR analysis using WebCheck* criteria




 

Source: Online Banking Report, 2/04 Wt = weight with 5 the highest
importance

Ten Lessons From The Card Marketers

Without expansive brick-and-mortar operations to generate
business, card companies typically devote far more resources to direct
marketing and cardholder retention than retail banks. You can learn a lot by
watching what the card companies do online.

One

Develop a Killer App

Profitable online originations involve good marketing and a great
application. It must be short and sweet and loaded with imbedded help for
every term, otherwise only the desperate or dishonest will submit it. Most
major credit card applications today are a model of simplicity. For example,
Juniper’s online application (below) consists of a single screen
posing just seven questions beyond standard identification information
(name, address, phone number, etc.).


 

Two

Screen Out Improper Applications Before Submission

One of the main problems with non-preapproved credit card applications is
all the worthless applications received. Not only has time been wasted
researching the applicant’s credit report, but also your company must
carefully follow regulatory requirements for communicating denials, lest you
become a target of class-action litigators. Financial institutions,
especially credit card issuers, now start the application process with two
or three screener questions to reduce the number of applicants applying for
products for which they are completely unqualified. This is a win-win,
saving the bank application-processing costs, and helping applicants prevent
lowering of credit scores due to application denial. Juniper uses a popup to
deliver the screener questions (below).

 


 

Three

Segment Your Base with Regular, Gold, Platinum, and So
On

04-feb-b03.jpg

We believe that premium channels will be the next big thing in online
banking. That’s why we selected Money HQ from Online Resources
as our top innovation of 2003. A review of the credit card industry provides
clues as to how online banking may play out. American Express was a
segmentation pioneer, rolling out a Gold Card in 1966, only eight
years after the introduction of its standard charge card. After the huge
success of the Gold strategy, widely copied by bankcards in the late 80s,
the company further segmented its card base with the Platinum in 1984—again,
widely copied by bankcards in the mid-to-late 90s. Now American Express
operates a half-dozen card lines: Green, Gold, Platinum, Optima, Delta
SkyMiles, and Blue, with plenty of sub-segments of each.

We expect to see the same thing happen with online banking. Now that
leaders such as BofA, Wells, and Citibank have offered online banking for 15
years or more, and with penetration closing in on 50% of their checking
account bases, the companies will begin offering different versions of their
online programs. Expect to see differentiation around payment capabilities,
credit access, account aggregation, service levels, human attention, and
account alerts (see Table 9, below).

Table 9
Premium Online Banking Offerings

possible features and benefits

04-feb-b04.jpg

Source: Online Banking Report, 2/04


 

Four

Use Real-time Payments to Drive Users Online

According to Gartner’s latest research,* in the United States, biller
direct payment is used by six million more adults than online bill payment
through a bank, 18 million vs. 12 million. However, according to Gartner,
respondents prefer bank sites for payment by almost two-to-one, 19 million
vs. 10 million, although both options trail preauthorized debit, preferred
by 26 million, and snail mail preferred by 116 million.

Banks can tap into the growing popularity of electronic payments by
offering simpler bill-payment sites that allow users to make one-time
payments or setup preauthorized debits, without a lengthy signup process.

Banks can also win more user by offering more choices, such as paying via
credit card.

Table 10
Bill Payment According to Gartner

millions of U.S. adults paying bills online

04-feb-b05.jpg

Source: EBPP Future Blends Direct Bank Aggregation Models,
Jan 13, 2004, by Avivah LItan, Gartner,
http://www.gartner.com/
 $95,
data from survey fielded May 2003
AutoPay =  preauthorized electronic debit
*Can choose more than one option, so the sum is higher than 100%
**Total the still wants to receive bills via snail mail

Five

Cross-sell

04-feb-b06.jpg

Credit card issuers have long been far more aggressive than banks
pitching ancillary services, such as credit card registration, credit report
monitoring, and credit insurance. They are beginning to take that approach
to online marketing. For example, last year, Chase’s credit card
group sent me more than 40 sales/service email messages. Issuers have also
found profits selling all types of unrelated products and services from
flashlights to magazine subscriptions. While, we don’t think banks should
start pitching knife sets online, they could be more aggressive in selling
related products, especially credit report monitoring, insurance, and value
investments.

 


 

Six

Use Email for Retention

04-feb-b07.jpg

Credit card issuers are much further along in providing email messages to
users. Card companies are using email to remind users of payment due dates,
confirming charges and payments, marketing messages, balance transfer
offers, line increase notifications, credit card check offers, e-statements,
credit report and other ancillary product sales, holiday messages, and other
relation-enhancing messages: even early collection efforts have gone
electronic. Chase is one of the most prolific emailers. During 2003,
we received  at least 70 email messages from the bank about our active
credit card account, 46 of the messages (at least the ones we saved), were
marketing/service oriented (see example left) and the other 24 had to do
with scheduling and confirming payment of the bill (see OBR website for more
examples).

 

Seven

Provide Compelling Online Account Management

Card issuers provide an online experience on par with similarly sized
banks; however, some are becoming more creative with their
account-management websites. For example, American Express offers its
Small Business Dashboard to manage charge card (see screenshot left).
One of its distinguishing features is a credit-status bar that graphically
shows whether the charge account is approaching its limits (e.g., green
means in good standing, yellow means charging privileges at risk,
and red is account suspended).

Card issuers are also making online statements interactive with the
ability to click through to get more information or dispute a charge,
contact the merchant, or re-sort transactions.


 

Eight

Make Transfers Simple

For several years, companies such as Bank of America
www.easybt.com  have
provided simple online balance-transfer solutions for cardholders. Banks too
should make it simple for users to consolidate deposit and loan balances in
a similar manner using account aggregation technology and interbank-funds
transfers. Citibank’s new A2A service and Money HQ from
Online Resources
are on the right track.

Nine

Integrate with Direct Marketing

The latest trend is to provide special URLs and/or application numbers
in preapproved snail-mail solicitations so recipients can respond quickly
online. For example, Fleet’s
www.applybizcard.fleet.com
 This is a win-win, giving the customer faster direct access to the special
offer and providing an interactive environment for the card issuer to
encourage balance transfers or other upsells. This integrated technique will
quickly become a standard practice for financial direct marketing.


 

Ten

Get Rid of the Paper

With ever increasing printing and postage costs, the business case for
e-statements continues to grow stronger. Although paper-suppression efforts are
still in their infancy, we expect credit card issuers will be the first to
successfully wean a critical mass of users off paper. Although it will take
years of marketing efforts, for example, we’ve already received eight messages
from Chase encouraging us to switch to a
credit card e-statement; the formula for adoption is relatively simple: 

Lessons from the Card Marketers

Innovating in online marketing and delivery

Credit cards have
always fascinated me. From my first card in 1982, through my stint as a card
product manager in the late 80s, I’ve been a student of the industry,
watching and learning from the best: American Express, Citibank, First USA,
Capital One, and others.

As we entered the Internet era in the mid-to-late 90s, I fully expected
the credit card issuers to lead the financial services sector online. For a
while, it looked like a good prediction. Many of the early online banking
pioneers, NextCard, Providian/GetSmart, Wingspan Bank,
C2it, Juniper Financial, had their roots, and business plans,
centered on credit cards.

But a funny thing happened as that story was being written. Recession.
Whether it was an unseasoned portfolio (NextCard), problems at the parent
(Wingspan), or an over reliance on sub-prime (Providian), these pioneers
lost their funding and retrenched (Providian, Juniper) or disappeared (NextCard,
Wingspan, C2it).

But as card companies recover from the beating they’ve taken during the
past three years, we are seeing renewed innovation from the sector. For
example, after a decade of struggling to get traction, the card companies
have put online bill payment on the map with their convenient card-payment
options. As a result, card issuers have some of the largest registered user
bases in the financial services arena (Table 1 below):

Table 1

Top 5 Online Cardholder Bases, Year-end 2003
number of online cardholders

Issuer

Online Users

Cardholders (WW)

% Online

American Express

12 mil (e)

60 million

17% to 21%

Citibank

10 mil (e)

140 million

6% to 10%

Discover Card

9 mil (e)

50 million

17% to 20%

Capital One

8 mil (e)

47 million

15% to 18%

MBNA

6 mil (e)

40 million

13% to 16%

         

Source: Companies, (e) Online Banking Report estimates, +/- 25%, 2/04

We still believe that long-term you are better off wrapping your direct
banking efforts around plastic rather than paper ( “Will that be Paper or
Plastic?”
). If NextCard had been more patient in building its portfolio,
they could have been a powerhouse today. So who will take their place as
The Internet Credit Card
? It’s one of the more intriguing opportunities
of the decade.

Table 2

Top 5 Online Cardholder Bases, 2000 to 2003
number of online cardholders

Company

2003 Dec

2002 Dec

2001 Dec

2000 April

American Express

12 mil (e)

8.9 mil

5.2 mil

1.8 mil

Citibank

10 mil (e)

7.6 mil

5.5 mil

1 mil (e)

Discover Card

9 mil (e)

8.0 mil

6.0 mil

ina

Capital One

8 mil (e)

6.3 mil (d)

3.5 mil (d)

ina

MBNA

6 mil (e)

4.5 mil

2.7 mil

ina

Total
    % change

45 mil
29%

35 mil
52%

23 mil
475%

4 mil

Sources: Companies except, (d) Dove, (e) Online Banking Report
estimates, +/-25%, 2/04


 

Online Card Usage

According to a recent Forrester report,1
75% of U.S. credit card customers have online access, and of those 36% (20
million) access their card statements online. More than 60% of those users
(12 million) accessed their account regularly. Fisite Research, a company
founded by ex-Gomez payments analyst, Paul Jamieson, found even higher
usage; with 57% of online cardholders saying they manage some aspect of
their card online2 (see Table 3, right). Whether the true
number is 20 million or 30 million or somewhere in between, we do know that
the use of online credit card management has exploded. Three years ago
(year-end 2000), fewer than five million households accessed cards online (see
full details, Table 5, opposite
). Now, at least five individual card
issuers have online user bases of five million or more (see Table 2,
above
).

There is even a greater disparity in estimates of the number of
cardholders paying their card bill online. Forrester found that just 36% of
online card statement viewers
(7 million HHs) pay their bill online, while Fisite reported 74% of online
card managers paid online.2 Gartner estimated that 22 million
adults pay their card bill online, either directly or through third-party
bill pay.3 Based on these estimates and usage numbers from
individual card issuers, we estimate 16 and 18 million households pay their
card bills online directly at the issuer, up nearly 20-fold since less than
one million users at the beginning of 2003.

1How To Right-Channel Credit Card Customers, by
Catherine Graeber, Forrester Research, Jan. 2004, $675,
http://www.forrester.com/ ,
fielded, Q2, 2003
2The TSYS Summer 2003 Executive Online Credit Card Survey,
Finite Research, $2495,
http://www.fisiteresearch.com/
 fielded May/June 2003; the numbers
may be higher because respondents included pay-anyone third-party
payments in their answers
3EBPP Future Blends Direct Bank Aggregation Models,
Jan 13, 2004, by Avivah LItan, Gartner,
http://www.gartner.com/  $95,
fielded May ‘03

 

Table 3
U.S. Online Credit Card Usage Estimates

Metric

Forrester
HHs

Fisite
HHs*

Gartner
Adults

Credit card households

75 mil*

75 mil*

% of cardholders online

75%
56 mil

% of online cardholders using online card account
management

36%
20 mil

57%
32 mil*

% of online card managers using it regularly

60%
12 mil

% of online card HHs paying their card bill online

36%
7.2 mil

74%
24 mil*


22 mil**

Source: Companies, Online Banking Report, 2/04
*OBR estimates, Fisite reported usage as a percent of cardholders responding
to its online survey fielded summer 2003, household extrapolations by OBR
**Includes online payment direct at card issuer or through third-party bill
pay

Table 4
Online Card Evolution

Phase

Period

Product Positioning

Primary Market

Beta 1997 to 1999 Easy way to apply for a card Geeks and scam artists
Version 1.0 Novelty 2000 to 2001 Cool  to check your card online Early adopters
Version 2.0 Utilitarian 2002 to 2003 Easier way to pay your card bill Early mainstream
Version 3.0 Value-add 2004+ Save time and money with total credit
management
50% of U.S. households

Source: Online Banking Report,
2/04                                                      


 

Forecast

The convenience and reliability of paying card bills
online will continue to drive online credit card growth. For 2004, we
project overall growth of five million new online credit card households
(range: 4 to 7 million), the same number of newcomers as in 2003. However,
the rate of growth will slow slightly to 25% compared to 33% last year. Ten
years from now, online credit card penetration is projected to grow to 47
million, 40% of U.S. households, compared to 19% today.

Table 5
Online Credit Card Forecast

U.S. households using online credit cards at
year-end*

Source: Online Banking Report projections based on industry data (+/-
30%), 2/04


 

 

 

 

Table 6a

Consumer Households Using Online Credit Cards: U.S. vs.
Worldwide

millions of households actively using online banking and/or
online bill payment

Source: Online Banking Report estimates 2/04, accuracy estimated at plus
or minus 30% U.S., 40% worldwide

Table 6b

Annual Growth Rate of U.S. Credit Card Households

millions of U.S. households and percent change from
previous year

Source: Online Banking Report estimates, 2/04; accuracy estimated at
plus or minus 30%

 

Table 7

OBR Definition: Online Credit Card Household

  •         Someone in the household must have done at least ONE of the
    following during the past 6 months:

  •        Viewed balance/available credit or transaction data
    online1 for a general purpose2 credit or charge card

  •        Authorized a card payment at the site of the card issuer
    (not at a third party such as a bank’s pay-anyone bill-pay service)

Does not include:

  •        Online point-of-sale
    transactions using a credit card

  •        Debit or prepaid card account management, application,
    or purchase

(1) Any connection from home, work, school, or other place where data can be
viewed through any device (Web phone, browser, proprietary software,
Quicken, Money, etc.)

(2) Visa, MasterCard, American Express, Discover

Table 8

Gomez Top Card Companies

Q3 2003 Scorecard

04-feb-04.jpg

Source: Gomez, 1/04

“Check’s in the Mail” Good Enough For PSECU

Innovative Upost@home provides real-time credit for
mailed deposit items

04-jan-g01.jpg

In a remarkably simple yet highly innovative service Pennsylvania State
Employees Credit Union
(Harrisburg, PA; 290,000 members; 160,000 online
users) www.psecu.com
 gives qualified members immediate credit for items “deposited” online.
Users logged into online banking simply choose the Move Money tab and
follow the simple instructions. Members then have 10 days to get the deposit
to the credit union via U.S. mail before the items are backed out. There is
no fee.

To limit fraud and errors, only about 20% of the CU’s member base is
eligible for the program. These 65,000 eligible members start with $1500 in
deposit credit, but it can be increased at the discretion of the credit
union to as much as $8000 based on usage. Deposited funds are immediately
available for use and earn interest from the day of the online deposit
entry.

History

PSECU has long used a similar system for ATM deposits offering credit as
high as $20,000. The online version Upost@home, the brainchild of VP
Tom Ruback, was launched in November 2001. However, until
recently it hadn’t been publicized widely outside its member base. Four
months ago a second CU, Pentagon Federal Credit Union’s  http://www.penfed.org/
  launched a service modeled on PSECU’s.  Pentagon Federal’s Trust In
You
program has tighter limits, beginning with only $750, and increasing
to $2500 based on usage.

Results

The CU already had experience with real-time credit of ATM deposits,
suffering minimal losses across its 68,000 users (making about 180,000
deposits/month). So it was confident members would continue to be
trustworthy through a similar online system.

The online version’s volumes are lower, but are building. In December,
nearly 11,000 members made 24,000 deposits, worth $10.5 million. In the
first two years, more than 19,000 members have made deposits of $125
million, $83 million of that in 2003. More importantly for anyone thinking
of recreating the program, the service has lost only $2000 to fraud, while
saving the CU more than $100,000 in interchange.

Active users average two deposit sessions per month, with each session
containing slightly less than two items, for a total of 3.8 items per month.
At an average of $260 per item, total monthly deposits average $1000 per
active user.

Consumer Benefits

Since it’s an unusual benefit, members often need coaxing to try the
feature. PSECU sends online banking users a letter explaining the service.
Follow-ups to non-users contain a $1.37 check that can only be deposited
through the Upost service. Repeat usage is high once members
experience the benefits.

Pros

  •       Added convenience of simply dropping deposits in the mail; no trip
    to a branch or ATM, no waiting in line
  •       Peace of mind knowing an image of each item will be available in
    case of dispute
  •       Earns interest immediately
  •       Can immediately withdraw cash or make payments with the virtual
    deposit
  •       A record of each deposited item is viewable within the check
    register
  •       Preaddressed envelopes are available at no charge (NOT prepaid)

Cons

  •       Must order or provide envelopes and locate and pay for stamps
  •       Must remember to mail within a few days
  •       Failure to mail deposit could result in negative balance and
    bounced checks

Business Case

For a credit union serving 290,000 members through two branches (10 total
teller windows) and 20 deposit-taking ATMs, the remote deposit program is a
win-win. Members like it for all the reasons mentioned above, and the CU
saves more than $0.70 per deposit compared to foreign ATM interchange fees.*
The CU can continue to minimize its bricks and mortar costs (90% of its
members have never set foot on PSECU property) while offering an innovative
benefit to online banking users.

*The CU estimates each Upost deposit cost $1.16 to process
including an “inflated” value for lost float. In comparison, it pays
about $2 for each deposit put into a non-PSECU ATM.

Table 19

Deposit Float

calendar days to receive online deposits, 2003

Source: PSECU, 1/04, deposits processed Jan through Nov 2003

How it Works

Initiating a deposit online is a simple process:

1.    Within the CU’s online banking area, members then choose the
Move Money
tab (screenshot 1).

2.    Choose Start to initiate a new deposit

3.    Member enters five fields: check number, date check written,
amount, who wrote it, who it was made out to (screenshot 2):

4.    Repeat 3 for each deposit item, choose Finished

5.    Write the session number in the space provided on pre-printed or
blank envelope

6.    Drop the deposit into the mail

7.    Deposited items are processed and images posted; the deposit line
is reset

Members receive instant credit for the deposit and can view deposit
details either through the Move Money interface, by selecting
Deposit Details, or by clicking on the deposit within their online
check register. Once the paper items have been processed, members can view
images of the deposited items.

The CU contacts the member by phone if the deposit has not been received
by the eighth day. In 2003, 81% of Upost deposits were received by
day four and more than 98% were received by day eight. Just five out of
every 1000 (0.5%) never arrived.         

 

Table 20

PSECU Online Deposit Activity for 2003

Upost usage by PSECU
members

04-jan-g04.jpg

Source: PSECU, 1/04

Contacts

Greg Smith is CEO, gsmith@psecu.com

Tom Ruback is VP Card Services,
truback@psecu.com

 

04-jan-g07.jpg