International Finance: The Internet
E-Day: Online Banks Invade Europe
Bricks-and-mortar players are caught off guard
British bankers sniffed when London's Prudential Assurance Co. set up an Internet bank called Egg last year. Even if the name didn't deter customers, they figured, the insurer's lack of retail banking knowhow surely would.
Eighteen months later, it's the skeptics who have egg on their faces. The Pru's new bank has scooped up more than $13 billion in deposits. Worse yet, its Net-savvy clients are young and wealthy: desirable and profitable customers with fat balances averaging $30,000, vs. the paltry $5,000 in a typical deposit account at an old-line bank.
Now, once-scornful rivals are scrambling to catch up with Egg and other startups. Barclays Bank PLC, National Westminster Bank PLC, and other British High Street banks are running scared and eagerly promoting their own online services, offering everything from bill payment to stock trading and lending. "There's a growing feeling that the newcomers could demolish the big banks," says David Lascelles, director at the Center for the Study of Financial Innovation in London.
Ditto for the Continent. It is finally dawning on the grand names of European finance that e-banking is a far bigger threat to them than its precursor, telephone banking, because it's so much easier for customers to switch banks online. Even sleepy Italian banks are caught up in the frenzy. Banca Popolare Commercio e Industria, a medium-size, regional cooperative bank, set up its own online operation, OnBanca, in June. All told, more than 1,200 European banks offer online banking today, more than twice as many as six months ago.
It's clear what's energizing them. Online banks don't need costly downtown real estate for branches or legions of back-office workers to run them. That makes it easy and cheap for new entrants to set up in competition. Moreover, the Net accommodates different languages easily, allowing financial services companies to flit across borders. The initial target for first-e, a new online bank based in Dublin, for example, is not Ireland but the lucrative British market. And it plans to move into Germany, Italy, Spain, and France soon.
But it's not just the locals who are getting in on the act. Citibank is promoting its online services heavily in Europe, while BankOne Corp. says that its Internet operation Wingspan Investment Services will start marketing in Britain shortly. "We can do what an established bank does without the cost and the hassle," says first-e's Chief Executive Xavier Azalbert. "What's more, we pass the cost-saving benefits of the Internet to our customers.""FEROCIOUS COMPETITION." The competitive threat from online banks is potentially devastating. For starters, a study by consultants Booz, Allen & Hamilton Inc. shows that worldwide it costs $1.07 to handle a transaction in a bank branch, about 55 cents on the phone, 25 cents through an ATM, and just 2 cents on the Internet. Besides, online banks can track every mouse click made by a client. So they know far more about their customers than their traditional rivals. As a result, say analysts, online banks should find it easier to market new products and to cross-sell more effectively. "The result will be ferocious competition that will end in an unbelievably big shakeup. The Internet will transform banking," says Michael Lafferty, chairman of Lafferty Group, a London-based financial publishing and research company.
Nimble they may be, but the upstarts won't have it all their own way. Some face operational snafus, as Egg did in its early days, when so many customers tried to register that its Web site couldn't cope. Even when they get their automated delivery channels right, that's just the beginning. To prosper, the onliners need a banking license, access to national payments systems, capital for lending, specialized products, and strong customer relationships. "And that's precisely what these new entrants don't have," says a retail banking official at Holland's ABN-AMRO bank. "Nor do they have the marketing skills."
However, traditional banks may get a nasty shock when they see how easy it is for some players to plug such gaps. Consider first-e, which is a cooperation between Banque d'Escompte, a medium-size French bank, and ENBA, a Dublin-based developer of Internet-only financial services. Because it is the subsidiary of a French bank, first-e has a banking license that enables it to set up in low-tax Ireland and then to operate anywhere else in the European Union. It has overcome its lack of access to the British payments system by contracting out its clearing operations to the Royal Bank of Scotland PLC, while online brokerage trades are settled through investment bank Dresdner Kleinwort Benson.
All the same, established players won't go down without a fight. Already, some banks, especially Scandinavian and German ones, have set up successful Internet operations. MeritaNordbanken PLC, which operates in Finland and Sweden, where Internet penetration is the highest in the world, has more online customers than any other bank in Europe. Meantime, Commerzbank's direct-banking subsidiary comdirect has 155,000 online accounts, more than any other bank in Germany. Others have big ambitions. Germany's Deutsche Bank is developing wireless Internet banking with Finnish telecom equipment supplier Nokia. While ABN-AMRO hopes to sign up 7 million Internet customers across Europe over the next five years.HARSH REALITY. The big guys still hold some trump cards. They have the range of services, the capital, and the network of personal relationships that banks need to succeed. Their branch networks offer an alternative that even Internet customers say they sometimes want to use. But to play these cards, the traditional banks have to become less bureaucratic. Old-line thinking has led many, for example, simply to tag online service onto their existing banking operations. "They simply put www in front of their name and put you through to the same old services," says first-e's Azalbert.
That's why the most successful Internet banks to date, such as Commerz's comdirect and Bayerische Hypo-und Vereinsbank's Direkt Anlage Bank (DAB), are separate subsidiaries. Although it is still part of the bank MeritaNordbanken's Internet operation, Solo, is managed as if it were a stand-alone unit. "It's the ones that are away from the politics and bureaucracy that tend to do best," says Angus Hislop, a partner at PricewaterhouseCoopers in London. Indeed, some are doing so well that the likes of comdirect, DAB, and possibly Egg, may be listed separately.
But however Europe bankers choose to slice the cake, they're facing a new and harsh reality. Online bank customers are not a loyal breed: They can shop around readily now for the best deals, so they're no longer as dependent on their bankers. Any bank, online or traditional, that hopes to survive needs to cater to customers' new insistence on good services at a reasonable price. Sounds like a modest demand? Well, it's more than many Europeans have gotten for far too long.By David Fairlamb in FrankfurtReturn to top