Before embarking on new product and marketing strategies,
perform a reality check on users’ expectations.

Source: Online Banking Report, 9/04 Notes: 1We call it the illusion of real-time
processing, because users don’t so much care whether a transaction is processed
in real-time, what they care about is that they can SEE that you have accepted
their transaction and have adjusted balances accordingly; the actual
debiting/crediting can occur behind the scenes in batch mode. 2It’s extremely
difficult to describe what’s “right” in words, but we know it when we see it.

Last year, we predicted there would be 32 million U.S. households banking
online by year-end 2003. Actual results appear to
be slightly higher, with an estimated 33 million households as of Dec. 31.*

The payments area continued to be a major factor in the household growth,
as direct bill-pay at billers’ websites increased 20-fold, from 1 million
users at the beginning of 2001 to 20 million at year-end 2003.

Not only is online banking penetration growing, but the level
of usage is also increasing. Power Users, households that access bank
accounts AND pay bills, have grown five-fold in the past three years; from
3.5 million to 23 million. Less than half use their bank’s pay-anyone
bill-pay service, electing instead to go directly to the biller’s site to
settle the bill.

For 2004, we project an overall growth of 4 million new online
banking/bill-pay households (range: 2 to 5 million), about 20% fewer
newcomers compared to the 5 million added in 2003. Also, the rate of growth
will slow to 12% from 2003’s 18% (range: 7% to 14%). Online banking
penetration is projected to grow to 34% of U.S. households, compared to 31%
today.

*More precisely, the year-end total is somewhere in between 29 and 36
million households based on our estimated accuracy of minus 12% and plus
10%.

Table 7
Online Banking Forecast Summary

U.S. households using online banking and/or
epayments*

Source: Online Banking Report projections based on industry data (+/-
20%)

Table 8
Consumer Online Banking¹ and Bill Payment Forecast
millions of U.S. households using online banking and/or bill
payment each month

Source: Online Banking Report, 12/03            HHs = households      n/o
= not offered
Accuracy estimates: US: 1994 to 2003: +/- 12%; 2004 to 2006: +/- 15%; 2007
to 2009: +/- 20%; 2010 to 2013: +/- 25%; WW: +/- 35%

Table 9
Small Business Online Banking¹³ Forecast
millions of U.S. small businesses using online banking

Source: Online Banking Report, 12/03
Accuracy estimates: 1994 to 2003: +/- 25%; 2004 to 2013:  +/- 35%

Table 8 & 9 Footnotes

1)       See account definition, in table posted this month

2)       Has used at least 1 of the 7 listed online banking/payment
services during the past 6 months (+/- 15%)

3)       Has accessed at least 1 of the 4 account types during the past 6
months (+/- 20%)

4)       Includes any insured deposit account (does not include brokerage
cash accounts or money-market mutual funds) (+/- 20%)

5)       Includes users accessing credit and charge-card accounts online
even if they don’t use an online checking account (+/- 30%)

6)       Includes users of account aggregation (e.g., Yodlee, uMonitor)
at any site, bank or non-bank (+/- 40%)

7)       Includes email notifications and statements (+/- 30%); excludes
marketing- or service-oriented newsletters and messaging

8)       Has used any of the 3 listed epayment services during the past 6
months; does not include online purchases using a credit or debit card (+/-
25%)

9)       Pays bills to multiple billers at a third-party site (not the
biller’s site); the third party can be a bank, non-bank, Quicken, or Money
(+/- 25%)

10)   Pays bills directly at the biller’s Web site, or directly with the
biller in response to an email message (+/- 35%)

11)   Remits/sends money to any person or business using interbank funds
transfer, does not include online POS payments using electronic funds
transfer (+/- 35%)

12)   We have less information on worldwide usage, so our estimate (+/-
35%) is less precise than for the United States (+/- 15%)

13)   Includes online access for any checking, credit card, or loan
account used to process business transactions (can be a personal account if
used for business purposes)

14)   We use a broad definition of small businesses, including any
individual or entity producing $50,000 or more in annual revenues, includes
self-employed contractors and sole proprietors.

Table 10
What Others are Saying: Topline U.S. Online Banking Forecasts from
Major Research Companies
millions using online banking and/or bill payment each month

Source: Companies, 9/01 through 12/03

Notes: (1) Month/year the most recent data was collected; (2) Estimates
from 2001 and earlier were number of individual users, 2002 and beyond are
households with at least one member using online banking; the figures are
relatively comparable because up until recently very few households had more
than one person using online banking;
(3) Year 2000 estimate was made in Dec. 2000, 2001 through 2003 estimates
made in July 2003 and cited by eMarketer, 2004 to 2006 estimates made in May
2002; Forrester clients may access current forecasts at its website; (4) As
cited by the Wall Street Journal, 9/4/2002; (5) Estimates are not year-end,
the data is collected in late first or early second quarter of each year; we
assigned its market size estimates to the prior year’s year-end, e.g., we
assigned the March 2002 estimate to the year-end 2001 column; (6) Jupiter
clients can access new online banking forecasts published Dec. 2003; (8)
User base as of Sept. 2001 includes: 30.3 million tracking balances online,
17.6 million transferring funds online, 32.2 million doing at least one of
the two; in Feb. 2002, Digital Insight quoted Gartner as estimating that
18.3 million households banked online at year-end 2001

Table 11
Comparison of Online Banking Definitions: What’s Tracked

Source: Companies, 12/03           *Often left to the interpretation of
the survey respondent; who may or may not consider these activities part of
“online banking”

2003 Results

During 2003, online banking continued to grow at a rapid clip, adding 5 to 6
million new households, bringing the U.S. total to around 33 million, an 18%
increase over 2002. Worldwide totals grew at a faster clip, up an estimated 25%
to 30%, or 25 to 30 million households, ending 2003 at more than 130 million.  

Table 3

Consumer Households Using Online Banking: U.S. vs. Worldwide

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

Source: Online Banking Report estimates, accuracy estimated at plus or minus
12% U.S., 25% worldwide

Table 4

Annual Growth Rate of U.S. Online Banking Households

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

Source: Online Banking Report estimates, 12/03; accuracy estimated at plus
or minus 12%

Definitions

As the market has matured, we’ve noticed much less variance in the estimates
from most major researchers. Most of the differences can be explained by
variances in the definition of what constitutes and online banking household.
For example, Gartner counts all banking products, including
checking/deposit accounts, credit cards, bill payment, and email payments, while
Jupiter tracks payment accounts separately . Another major difference:
Gartner tracks individual online users while Jupiter, Forrester,
and most others track household usage.

At OBR, we track at the household level because it’s consistent with how
financial providers usually look at the market. And like Gartner, we use the
broadest definition of an online banker (Table 4, below) including
deposit-account access, electronic bill payment, credit card access, and
biller-direct payments. 

Table 5

OBR Definition: Online Banking Household

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

•        Viewed balance or transaction data online* for a
  checking account, credit card, or loan/mortgage

•        Authorized a bill payment online at any bank, non-bank,
  portal, or biller site

•        Transferred funds online using third parties such as PayPal, MSN, or Yahoo

Does not include:

•        Viewing a nonfinancial billing statement online but
  paying it by paper check, preauthorized debit, or credit/debit card

•        Point-of-sale transactions whether paid by credit card,
  debit card, electronic check, PayPal, and so on

*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.)

Table 6
OBR Track Record: Accuracy of Prior Forecasts
millions of U.S. households banking online

Source: Online Banking Report, 1998 – 2003
Fore = Forecast; Act = Actual results; Err = Error (difference between forecast
and actual)

Table 1

Online Banking Timeline
number of U.S. households using online banking/bill payment

Source: Online Banking Report estimates based on industry data plus or
minus 15%, 12/03

Every spreadsheet and business plan needs a prediction of
future demand. So every year we gather forecasts made by prominent researchers
and analysts, compare and contrast their results, layer on our own insights, and
develop a 10-year forecast. Accuracy is estimated at plus or minus 15% for years
one through three, plus or minus 20% for years four through seven, and plus or
minus 25% for the out-years.

Over the years we’ve demonstrated a respectable track record . Our first
comprehensive forecast made six years ago (year-end 1997), predicted that online
banking usage would increase nearly 6-fold (560%) from 4.5 million in 1997 to 29
million households by year-end 2003. That prediction was nearly dead-on, perhaps
10% low, with an estimated
29 to 35 million households banking online today.

Table 2
Online Banking Evolution

Source: Online Banking Report,
12/03                                                       

To many long-time bankers, online banking hadn’t proved its worth prior to
2003. However, with usage surpassing 30% of all U.S. households, and with
leaders such as Bank of America pushing past 40%, even the skeptics are
beginning to recognize the potential. By the end of the decade, total U.S.
penetration is expected to approach 50%.

Unlike many new technologies, online banking delivers on three levels:
improved customer satisfaction, increased sales, and cost savings. Now that
these institutional benefits have actually been documented, the rest of the
decade promises to see an extraordinary build-out of online capabilities, much
like the explosion of ATMs in the late 1980s as the channel became profitable.

Looking back at the last year, three changes stand out:

• The onslaught of email spam and scams causing short-term headaches and
  long-term credibility problems.
• The change in U.S. press coverage from somewhat negative to very
  positive (except for the phishing problem).
• The marked rise in awareness (by financial services execs) of the online
  channel’s upside potential.

On the innovations front, it may not have been 1997 again, when seven of the
20 all-time top financial innovations debuted, but there were several
significant developments including:

• OBR’s Innovation of the Year, premium fee-based online banking (Money
  HQ from Online Resources)
• Real-time credit of online deposits, both electronic (E*TradeBank)
  and an “honor system” for mailed paper items (PESCU and Pentagon
  FCU)

The next few years promise a whirlwind of activity as financial institutions
implement fixes to email-security concerns, expand the level of email-alert
services, dramatically increase online cross-selling and self-service, and see
tangible benefits from the investments of the past six or seven years. Online
banking initiatives will once again be prominent on the radar screens of top
execs. Enjoy the spotlight.

— Jim Bruene, Editor & Founder