Is Internet Banking Profitable Yet

Retail banking via the internet e-banking, hasn't taken off yet, despite perennial predictions that it is about to. The good news is that it isn't slowing down much either, despite the recent trashing of dot com firms and their stocks, according to Celent Communications, www.Celent.com a Boston research firm. The numbers speak for themselves. Since 1996 the number of active end users (those who do at least one e-banking transaction per month) has grown steadily from close to a million to an estimated 16 million by the end of this year. That's a growth rate of about four million users year by year, a pace Celent says will continue for the next two years before it shows signs of leveling off. Last October, Celent was retained by Digital Insight (DI), digitalinsight.com, a leading e-banking services provider, to analyze how profitable its solutions have been for its client financial institutions. Celent used the methodology of that study to create a profitability model that any bank could apply. The bottom line looks good: Over five years, a typical bank with 50,000 customers, offering a full plate of e-banking services, could achieve a positive net present value of more than $5 per customer, or a return on investment of more than 60%. Those figures measure the net of revenues over costs, based on outsourcing the services to Digital Insight. Services incorporated into the model are home banking, bill payment, cash management, cross-selling, and e-commerce services. The model calculates cashflows for implementing different modules--either separately or in combination. For a bank just starting e-banking services, the biggest expense is the one-time setup fee. That cost is modestly offset by subsequent savings from home banking (e.g., fewer statements mailed; fewer phone inquiries), but the net effect is a sharp loss in the first year. Over the ensuing four years, the biggest contributor to profits is revenues from cross-selling new products. Cash management is the next-best source--with monthly fees for basic corporate services and reports, as well as for funds transfer operations and transactions, followed by the value of retained customers and finally online lending. Fully 65% of all positive cashflow comes from cash-management transactions and fee revenues. A banker who wants to get the biggest bang for the buck would do well to concentrate on the billpay service. The model shows that increasing billpay usage by one-half can triple the payoff in positive cashflow. The Celent/DI model uses some 15 assumptions (and default numbers where estimates aren't available). The main ones are: * Annual percentage change in retail customer base (5%) * Share of commercial customers (1%) * Customers lost if internet banking is not offered (5%) * Home banking penetration in five years (20%) * Bill payment users at end of year one and year five (5%, 15%) * Percentage of electronic payments (40%) The full report can be found on the Celent website. VENDORS ANALYZED In March, Celent followed up with an analysis or eleven Leading providers or e-banking services. The study discusses each vendor's finances and products (including some that have been discontinued due to mergers). It then shows a net score for each vendor, based on weighted criteria: that include breadth of features; customization/flexibility; scalability; systems integration; speed of deployment; support for an integrated financial portfolio; multichannel support; cost of solution; customer support; experience; and financial stability. Celent identified the four top-performing e-banking solutions grouped according to the size of the financial institutions that were being targeted by each vendor. …