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InteractiveBanking in the US:Making the Most of a Multi-Channel World

November 2003

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Interactive Banking in the US

Table of Contents 3

Methodology 7

The eMarketer Difference 8

The Benefits of eMarketer’s Aggregation Approach 9

“Benchmarking” and Projections 9

I US Market Trends, Size & Growth 11

A. Cross-Channel Currents: Online, Branch, ATM, Phone 15

The Branch & The Internet 21

B. The US Banking Market: Total & Online 27

C. Counting Online Banking Customers 32

D. The Online Channel: Banking Priorities 38

II The Banking Customer 45

A. Demographics, Income & Experience 46

Gender, Age, Race/Ethnicity 47

Income 52

Experience 54

B. Overall Online Activities 56

C. What Bank Customers Do Online 60

D. What Bank Customers Want 65

General Attitudes & Expectations About Banking 67

E. Affluent Profits: Make More From the Masses 78

F. Small-Business Banking: Internet Wary? 84

III Electronic Payments 95

A. The Forces Behind Online Bill Payment’s Growth 96

B. The Online Bill Payment Market 102

C. How Consumers Pay Bills 109

Bill Payment Activities & Attitudes 113

D. The Fee Problem 126

E. Banks vs. Billers (aka, Consolidators vs. Direct Payment) 130

Electronic Bill Presentment and Payment (EBPP) 143

F. Automated Clearing House (ACH) 146


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IV Other Interactive Services 151

A. Check Imaging 152

B. Cards: Credit & Debit 157

C. Mortgages & Refinancing 166

V Other Electronic Channels & Projects 171

A. ATMs 172

B. CRM & Customer Service 181

Call Centers 190

C. Wireless 192

VI Financial-Services Technology 195

A. Spending Patterns 197

B. Outsourcing 208

VII Online Banking: Barriers to Growth 211

A. General Security Issues 214

B. Identity Theft: Protecting Consumers & Banks 218

C. Privacy & Trust 236

Index of Charts 243


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Reuse of information in this document, without prior authorization,is prohibited. If you would like to license this report for yourorganization, please contact David Iankelevich [email protected], or 212.763.6037.

Written by David Hallerman

Also contributing to this report:Yael Marmon, director of researchKrikor Daglian, researcherTracy Tang, researcherDavid Berkowitz, senior editorAllison Smith, senior editorKwanza Osajyefo Johnson, data entry associateDana Hill, production artist


November 2003

Welcome to eMarketer

Dear Reader:

The latest Interactive Banking report from eMarketer provides bankers and other financial servicesprofessionals with a wide-ranging study of the shifting developments shaping today’s bankingmarket—along with detailed strategies on how to take advantage of them. The report serves as avaluable guidebook, as well, for marketing and technology companies looking to make inroads intothe lucrative financial-service space.

We use the word “interactive” and not just “online” to describe this 200-page report becausebanking is the definitive cross-channel business. Retail customers increasingly expect similar bankingservices and products no matter what the channel: the Internet, the branch, the ATM, and the callcenter (whether automated or live). While the core of the Interactive Banking report deals with onlinebanking, those other channels must, of necessity, be addressed. And while the report delves mainlyinto consumer retail banking, sections also deal with small-business banking and managed accountsfor the mass affluent.

Along with eMarketer’s unique, cross-researcher, comparative estimate charts for areas such asonline banking customers and online bill payment households, the Interactive Banking reportexamines the reasons for online banking’s growth, the forces that make that growth unstoppable—andwhy the Internet could become even more of a profitable channel for the US banking industry.

In the pages ahead, you’ll find statistics, lists, and detailed information that can help you developbusiness and marketing plans, create presentations, answer questions from management orcustomers, and make critical decisions about ventures that affect all aspects of your financialinstitution’s operations. Like all eMarketer reports, Interactive Banking presents statisticalinformation aggregated from a broad range of authoritative research sources, totaling 57 in all in thisreport. The data and analysis provide anyone working in nearly any enterprise with the answers theyneed, in an easy-to-search format.

If you have any questions or comments concerning eMarketer or any of the material in this report,please call, fax or e-mail us.

David HallermanSenior Analyst

David HallermanSenior Analyst, [email protected]

eMarketer, inc.75 Broad StreetNew York, NY 10004T: 212.763.6010F: 212.763.6020

Methodology 7

The eMarketer Difference 8










Index of Charts 243


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Methodology

US MarketTrends, Size & Growth

The Banking Customer

Electronic Payments

Other Interactive Services

Other ElectronicChannels & Projects

Financial-Services Technology

Online Banking:Barriers to Growth

Index of Charts

eMarketer’s approach to market research is founded on a philosophy ofaggregating data from as many different sources as possible. Why? Becausethere is no such thing as a perfect research study and no single researchsource can have all the answers. Moreover, a careful evaluation andweighting of multiple sources will inevitably yield a more accurate picturethan any single source could possibly provide.

The eMarketer DifferenceeMarketer does not conduct primary research, it therefore has no testingtechnique to defend, no research bias and no client contracts to protect.

eMarketer prepares each market report using a four-step process ofaggregating, filtering, organizing and analyzing data from leading researchsources worldwide.

Using the Internet and accessing a library of electronically-filed researchreports and studies, the eMarketer research team first aggregates publiclyavailable e-business data from hundreds of global research and consultancyfirms. This comparative source information is then filtered and organizedinto tables, charts and graphs. Finally, eMarketer analysts provide conciseand insightful analysis of the facts and figures along with their ownestimates and projections. As a result, each set of findings reflects thecollected wisdom of numerous research firms and industry analysts.

“I think eMarketer reports are extremely useful andset the highest standards for high quality,objective compilation of often wildly disparatesources of data. I rely on eMarketer’s researchreports as a solid and trusted source.”— Professor Donna L. Hoffman, Co-Director, eLab, Vanderbilt University

www.eMarketer.com©2001 eMarketer, Inc.

Analyze

Aggregate

Filter

Organize


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The Benefits of eMarketer’s AggregationApproachObjective: information is more objective than that provided by any singleresearch sourceComprehensive: gathered from the world’s leading research firms,consultancies and news organizationsAuthoritative: quoted in leading news publications, academic studies andgovernment reportsAll in one place: easy to locate, evaluate and compareReadily accessible: so you can make quick, better-informed business decisionsAbove the hype: accurate projections that business people can use with confidenceTime saving: there’s no faster way to find Internet and e-business stats,online or offMoney saving: more information, for less, than any other source in the world

“Benchmarking” and ProjectionsUntil recently, anyone trying to determine which researcher was mostaccurate in predicting the future of any particular aspect of the Internet didnot have a definitive source with which to do this. For instance, over 10firms predicted e-commerce revenues for the fourth quarter 1998 onlineholiday shopping season, and yet no single source could be identified afterthe fact as having the “correct” number. In the Spring of 1999, however, theUS Commerce Department finally began measuring e-commerce B2Cactivity so business people and others could have a benchmark with whichthey could compare and evaluate projections.

eMarketer has adapted its methodology to recognize that certaingovernment and other respected, impartial sources are beginning toprovide reliable numbers that can be consistently tracked over time. Mostof these established sources, however, only measure past results; typically,they do not make predictions.


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Today, eMarketer formulates its essential e-business numbers by firstidentifying the most established, reputable source for a given sector beingmeasured and then adopting that organization’s figures as benchmarks forthe historical/current period. For instance, eMarketer’s US Internet userfigures will be based on a combination of the most recent data from the USCensus Bureau and the International Telecommunication Union. Using thisdata as the benchmark for 2000 and 2001, eMarketer will make projectionsfor subsequent years based on the following factors:

■ a comparative analysis of user growth rates compiled from otherresearch firms

■ additional benchmark data from Internet rating firms, e.g.,Nielsen//NetRatings, comScore Media Metrix, which use panels tomeasure Internet user activity on a weekly and monthly basis

■ an analysis of broader economic, cultural and technological trends inthe US

Similarly, US e-commerce revenues are being “benchmarked” usinghistorical data from the US Department of Commerce, and broadbandhousehold and penetration rate forecasts are being built off baseline datafrom the Organization for Economic Cooperation and Development (OECD).

Through this benchmarking process, eMarketer will be holding itself –and its projections – accountable.

“When I need the latest trends and stats on e-business, I turn to eMarketer. eMarketer cutsthrough the hype and turns an overabundance of data into concise information that is sound and dependable.”— Mark Selleck, Business Unit Executive, DISU e-business Solutions, IBM

IMethodology 7


A. Cross-Channel Currents: Online, Branch, ATM, Phone 15

B. The US Banking Market: Total & Online 27

C. Counting Online Banking Customers 32

D. The Online Channel: Banking Priorities 38







Index of Charts 243


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Index of Charts

No industry in the United States relies more on multiple channels thanbanking. Whether it’s the branch, the Internet, the telephone, or the ATM(just to name the main ones), today’s banking customers expect a full-rangeof services no matter what the touchpoint. The absolute need for multiplebanking channels has even given rise to new buzzwords to label thephenomenon, with terms like “channel blending” and “channel switching.”

No matter what you call it, only a few years ago many bankingexecutives saw the scenario in a different light. They believed that theInternet really did change everything and would reduce—if not replace—their customers’ usage of other channels. That belief echoed anotherattitude prevalent in the 1980s, when bankers believed another electronicchannel, the ATM, would replace the branch.

In both cases, it hasn’t happened.As Marc E. Babej, president of the New York-based marketing

consulting firm Reason Inc., wrote in August 2003 in American Banker, “Inactuality, people supplement channels, taking advantage of the strengths ofa new channel while still relying on established channels for theirparticular strengths.”

The main strengths of the four major banking channels are as follows:■ Internet: interactions with routine parameters, such as checking

balances, transferring funds, paying bills.■ Branch: interactions out of the routine; sales transactions;

opening accounts■ ATM: getting cash, depositing checks, checking account information.■ Telephone: similar to the Internet, routine transactions.

That outline doesn’t mean, of course, that one channel’s strength cannotcross over to another. For example, while the branch may be the best placefor employees to go over the details of new products with customers, theInternet can easily enhance that process by initially drawing the customerto a particular product and delivering detailed background information.

“We have very much a brick, click, and dialapproach. The branch, Internet, and phone are alltied together.…On any piece of the application wewant to show three methods to buy the product, toappeal to every customer preference.”— Mike Dobbins, senior vice president, Charter One Bank; American

Banker, 3 September 2003

In fact, the other side of each channel’s strength is its limitations. TheInternet, for example, is not the best channel for transactions that are outof the ordinary. But by leveraging the strength of each channel, and thenintegrating them so that, for example, when a customer applies for a loanhe can find out the status through any channel, banks can make the mostof the necessity of offering multiple channels.


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However much synchronizing information across channels can lead to better and more profitable banking, both for the customer’s sake and the bank’s, 65.3% of the banking executives surveyed by ForresterResearch earlier this year cited it as the single greatest challenge facing the online channel.

Challenges Relating to the Online Channel Accordingto Banking Executives in the US, 2003 (as a % ofrespondents)

Synchronizing information across channels

65.3%

28.6%

6.1%

RCM/channel profitability measurements

47.6%

42.3%

10.2%

Lack of resources

46.9%

44.1%

9.0%

Reduced development dollars available

39.3%

46.2%

14.6%

Managing expectations of internal business units

38.4%

53.9%

7.8%

Setting the right priorities

34.1%

52.0%

13.8%

Being innovative

33.6%

51.4%

15.1%

A challenge A minor challenge Not a challenge

Note: n=250; numbers may not add up to 100% due to roundingSource: Forrester Research, February 2003

047884 ©2003 eMarketer, Inc. www.eMarketer.com


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Furthermore, the realization among bankers that the Internet won’t replaceexisting channels—and that some customers won’t even use the Internet—has made some institutions feel that online offerings need not be as full-blown as originally intended three years ago.

That the Internet supplements and doesn’t replace can be seen in researchlike this from GartnerG2, which says that while the 50 largest banks in theUS all offer online banking, only 17% of adults were using that channel asof the end of 2002. And that even by 2007, only 30% of customers at those50 institutions will bank online.

Still, as Babej wrote in American Banker, “The availability and perceivedquality of an online presence matters even to customers who won’t betaking advantage of it. Banks who stay behind the curve risk losing notonly credibility but also business from customers who have never usedonline banking and never will.”

Online Banking Penetration at the 50 Largest USBanks, 2001-2007 (as a % of the adult population)

2001 13%

2002 17%

2003 20%

2004 23%

2005 26%

2006 28%

2007 30%

Source: GartnerG2, September 2002



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A. Cross-Channel Currents: Online,Branch,ATM, PhoneA Gallup survey this past April points to the continued tendency towardcross-channel banking. Of the more than 1,000 US adults polled, 83% saidthey visit a branch at least once a month, not counting ATM transactions.And of that group, 17% said they visit a branch four to five times a month,while 12% said they visit more than once per week.

However, even as branch usage continues to be a major component ofconsumer banking, so do several other channels. As reported by AmericanBanker in June 2003, “Use of online services, phone banking, and ATMs allrose compared with Gallup’s previous branch-use survey, in March 2000.”For example, 29% of respondents this year said they bank online at leastonce a month, compared to 7% three years ago. In addition, among the57% who use the ATM regularly, 15% use an ATM two to three timesmonthly, another 15% four or five times, and 18% hit the ATM more thanfive times each month.

“There has been a myth in the industry thatconsumers substitute new channels for older ones.But it never works out that way.”— David Schehr, research director, GartnerG2; American Banker, 8 August

2003

Among the four primary banking channels, consumers use ATMs andbranches nearly equally, according to research from InsightExpress. In asurvey this past spring, the Stamford, CT-based online market research firmfound that 58.6% and 57.0% of respondents regularly conduct transactionsat the ATM and branch, respectively.

Banking Channel Usage* among US Consumers, 2003(as a % of respondents)

Branch 83%

ATM 57%

Internet 29%

Note: n=1,011; *usage at least once per monthSource: Gallup Organization, April 2003



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Index of Charts

The Internet, however, has become nearly as important to consumers, with46.2% saying they bank online regularly. Among the cross-channelchoices, the telephone has become least used, as its strengths tend to bereplicated and improved on by the Internet.

Earlier and significantly different results appear in this CelentCommunications survey from last year. While the majority again preferredthe ATM channel, only 7% of consumers felt the same way about the branch.And for Celent’s respondents, the Internet beat out the traditional branch.

“It’s extremely difficult to keep track of the costsand profitability of a single channel. Mostinstitutions are not measuring the performance ofonline banking appropriately.”— George Tubin, senior analyst, TowerGroup; American Banker, 13 February

2003

Channels US Consumers Use Regularly to ConductBanking Transactions, 2003 (as a % of respondents)

ATMs 58.6%

Branch 57.0%

Internet 46.2%

Telephone 21.8%

Note: n=510; multiple responses allowedSource: InsightExpress, April 2003



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Index of Charts

One probable cause for the variant results is that while InsightExpress askedwhere people bank regularly, Celent asked which channel is most preferred.Comparing the two surveys, then, implies that while customers need to usethe branch regularly, they don’t prefer it. (Note, though, that with differentrespondents, this type of comparison is not scientifically valid.)

Turning from regular use and consumer preference, TowerGroup asked 4,000US households simply which banking delivery channels they use. In this case,nearly every US household goes to the branch, with 94% of respondents,while 27% use the Internet (the same figure as for Celent above).

In a June 2003 brief, Forrester Research examined banking channel usageamong US households according to two classic tendencies: human versusmachine. The Cambridge, MA-based research firm divided consumerpropensities along two scales, ranked from low to high: one, past use ofdigital channels, and two, likelihood to use such channels in the future.And in the language of this study, “digital” includes automated telephoneaccess, in addition to the Web and e-mail; while “human” includes live callcenters and paper mail, in addition to the in-person branch.

Forrester found that nearly half (47%) of online households used digitalchannels in the past but are disposed to human channels in the future,labeled “human-inclined.” More than the other three segments, this group—

Mail1%Telephone2%

Branch7%

ATM63%

Internet27%

US Consumers' Preferred Channels for Banking, 2002

Source: Celent Communications, July 2002


Banking Delivery Channels Used by US Households,November 2002 (as a % of total households)

Branch services 94%

Telephone banking 39%

Online banking 27%

Source: TowerGroup, December 2002



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having used the online channel and then moved away—points to the needfor banks to improve the digital delivery of their services.

Note, too, the 23% who have neither used digital channels nor look tothem in the future. It’s this “human-preferred” segment, more than any,that illustrates the continued need for multiple banking channels, sinceeven these households that are part of the online population simply “reporta much higher level of comfort with person-to-person interactions,”according to Forrester.

When Forrester applied the four views of channel-use to specific banks,some surprising results appeared. Take the digital-preferred segment, forexample, the one with both high experience and high intent in electronicchannels. While E-Trade Bank had a significant number of such customers,at 31%, that’s to be expected, since it’s mainly an online bank. But J.P.Morgan Chase, a traditional bank with many branches, had an even greaterproportion of digital-preferred customers, at 34%.

Banking Channel-Use Segmentation among US OnlineHouseholds, 2003 (as a % of respondents)

High past use of digital channels & low likelihood to use digitalchannels in the future (human-inclined)

47%

Low past use of digital channels & low likelihood to use digitalchannels in the future (human-preferred)

23%

High past use of digital channels & high likelihood to use digitalchannels in the future (digital-preferred)

20%

Low past use of digital channels & high likelihood to use digitalchannels in the future (digital-inclined)

10%

Note: digital channels include Web site, e-mail, or telephonevoice-response unit (VRU); human channels include branch, call center ormailSource: Forrester Research, June 2003



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And, to reinforce the perception that many customers have used electronicchannels but will gravitate toward human ones in the future, each of the 16banks has the greatest share of customers in the human-inclined category—even an online institution like E-Trade.

Most Commonly Used Banks among US Households,by Channel-Use Segment, 2003 (as a % of onlinehouseholds)

Human-inclined

Digital-preferred

Digital-inclined

Human-preferred

Bank of America 51% 19% 9% 21%

Bank One 51% 19% 11% 19%

BB&T 59% 7% 13% 22%

Citibank 52% 22% 5% 20%

E-TRADE Bank 41% 31% 9% 20%

Fleet 43% 20% 13% 24%

J.P. Morgan Chase 39% 34% 10% 17%

Key Bank 53% 19% 10% 18%

National City 44% 19% 9% 28%

PNC Bank 40% 24% 14% 22%

SouthTrust 62% 18% 7% 13%

SunTrust 60% 14% 10% 16%

US Bancorp 40% 26% 15% 18%

Wachovia 46% 21% 4% 29%

Wells Fargo 46% 18% 13% 23%

Washington Mutual 51% 16% 12% 21%

Note: digital channels include Web site, e-mail or telephone voice-responseunit (VRU); human channels include branch, call center or mailSource: Forrester Research, June 2003



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Among smaller banks, more than half of customers used branches in 2002,but that figure is expected to decline to 40.0% by 2006. In contrast,according to research from the ABA Banking Journal, online transactions atUS community banks will soar from a paltry 0.7% in 2002 to 22.5% by 2006.

Leading Consumer Channel* for US Community Banks,2002 & 2006 (as a % of respondents)

Branches

52.5%

40.0%

Drive-up

30.4%

16.7%

Internet

0.7%

22.5%

Mail

2.7%

0.7%

Telephone

2.4%

1.9%

ATM, on-site

1.0%

0.7%

ATM, off-site

0.7%

1.0%

Call center

0.8%

1.8%

Don't know

8.8%

14.8%

2002 2006

Note: n=760; *leading channel by volumeSource: ABA Banking Journal, February 2003



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The Branch & The InternetBecause of their different strengths, the branch and the Internet togetherform one effective tool for banking services. Nevertheless, the influence ofthe Internet on channel usage has meant a sharp decrease in branch visitsamong US consumers. According to Synergistics Research, while theaverage consumer visited a branch 4.4 times per month in 1995, that figurefell to 2.9 by 2001 and remained the same in 2002.

Across the seven-year period shown, that represents a 34% decrease inbranch visits. While part of that decrease may also be attributed toincreased usage of ATMs, more likely the greatest cause has been the rise ofonline banking.

“The branch remains an important touch-point forthe customer and financial institutions arerecognizing that reinvestment in this channel is aprerequisite for future success. Our researchshows that 92% of US consumers still visit a bankbranch at least once a month.”— Mark Sievewright, president and CEO, TowerGroup

Average Number of Banking Branch Visits per Monthby US Consumers, 1995-2002

1995 4.4

1997 4.1

1998 3.5

2000 3.2

2001 2.9

2002 2.9

Note: n=1,041Source: Synergistics Research Corp., December 2002



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Another look at frequency of branch use, this time by occupation, comesfrom an October 2002 GartnerG2 report titled “Financial Providers NeedMultichannel Small Business Strategy.” The primary users of bank branchesare the self-employed; 19% of them go to their bank’s branch more thanonce a week, and 37% visit weekly.

Frequency of Bank Branch Use in the US, byOccupation, July 2002 (as a % of respondents)

Less thanonce ayear

A fewtimesa year

1 to 3times

a month

Once aweek

More thanonce aweek

Workfull-time

4% 19% 32% 32% 8%

Workpart-time

3% 11% 37% 31% 9%

Self-employed 3% 8% 28% 37% 19%

Retired 2% 16% 48% 23% 5%

Full-timehomemaker

2% 16% 38% 32% 6%

Full-timestudent

3% 17% 39% 25% 6%

Source: GartnerG2, October 2002



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The two main reasons customers visit the branch, according to Gartner, areto do things they cannot do online: deposit money and cash a check. Andwhile the next most frequent task, opening an account, is one that can bedone on the Web, it’s typically both easier in-person than online and thebranch also makes it easier to ask the questions that often accompanyopening an account.

US Bank Customers' Reasons for Using Branch OfficeDuring the Past Year, 2002 (as a % of respondents)

Deposit money

81%

Cash a check

71%

Open an account

25%

Get a money order/cashier check

21%

Resolve a problem

21%

Make a payment on loan or mortgage

18%

Apply for loan or mortgage

14%

Close an account

13%

Buy traveler's checks

10%

Seek financial advice

6%

Source: Gartner, 2002; American Banker, August 2002



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Synergistics Research found that branch visits for opening an account werehigher among those 18 to 34 years old than other age groups. At first, thismight appear counterintuitive, since younger people tend to be morecomfortable with the Internet than older demographics and might then beopening accounts online. However, consumers ages 18 to 34 are less likelyto have bank accounts than older groups, and therefore have more of a needto open them. In addition, since opening accounts is still a banking taskeasier done in-person, banks should look for ways to combine the in-branchaccount opening with a push toward online banking—especially in the 18-to-34 group who are open to the benefits of online transactions in general.

It’s not just account openings where consumers prefer traditional channels.According to the 2002 American Interactive Consumer Survey from TheDieringer Research Group, there’s a major disconnect between peoplelooking for information on the Web and following through via the samechannel. For example, while 24.4 million consumers eventually applied fora credit card after seeking online information, 14.3 million actually appliedoffline versus 9.9 million online.

The disparity is even greater for more complex applications such asloans, where 19.8 million researched the products online, and thensubsequently 11.2 million applied offline versus 4.2 million online.

Banking Branch Visits for Account Openings in thePast Year, by Age, 2002 (as a % of respondents)

18 to 34 40%

35 to 49 26%

50 to 64 27%

65+ 11%

Total 26%

Note: n=1,041Source: Synergistics Research Corp., December 2002


US Consumers Who Shop Online for FinancialProducts and Services, 2002 (in millions)

Applied after seeking onlineinformation

Applied online

Applied offline

Creditcards

24.4

9.9

14.3

Loans

19.8

4.2

11.2

Mortgage/refinance

20.3

5.0

8.0

Insurance

19.9

4.0

10.8

Note: online applicants may have applied for products in more than onecategorySource: The Dieringer Research Group, February 2003



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Further research from Dieringer points to potential benefits in making theonline channel easier for applications. While 31% of all US adults appliedfor a new financial account or policy through some channel in the 12months preceding July 2003, 47% of those who use the Internet for theirfinances applied.

“We book the accounts and revenues back to the branch even if the customer has not evenwalked into the branch. We look at [online sales] as complementing our retail strategy. They work together.”— Catherine Palmieri, managing director, Citibank.com; American Banker, 3

September 2003

The simple matter is: Those who use the Internet for financial matters aremore active than those who don’t. Therefore, if they can conclude anapplication through the same channel, the financial institution is morelikely to close the deal.

If the online channel is to compete with the branch for opening accounts,banks need to take three steps, according to Gomez Inc., a Waltham, MA-based Internet research firm. As reported by American Banker in September2003, those steps are: “Instant approval for new accounts, funding thoseaccounts instantly, and making sure customers know where they are in theapplication process and how they can get help if they need it.” Researchfrom Gomez found that online banking customers are nearly 50% morelikely to apply for a deposit account online if they could transfer fundselectronically to set it up.

As might be expected, some banks make opening an account online moreeffortless than others. When Change Sciences Group asked consumers torank the ease of opening a checking account online, they said $118 billion-

Methods Used by US Adults to Apply for FinancialServices Products, 2003 (as a % of respondents)

Applied for a new account or policy online or offline in the last12 months

31%

47%

Relied on provider web sites for new product information*

22%

42%

All US adults Use Internet for finances

Note: *as a % of adults who applied for new financial service productsSource: The Dieringer Research Group, July 2003



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asset National City was the easiest. Based on a scale of 1 to 10, none of thenine listed banks was actually “easy,” but some like $190 billion-assetFleetBoston and $8 billion-asset E-Trade Bank were particularly difficult.That a mainly online bank such as E-Trade makes the account-openingprocess hard is surprising and a sad comment on how banks are not takingfull advantage of the Internet.

US Consumers' Opinions Regarding the Ease ofOpening a Checking Account Online, by Bank, 2003(on a scale of 1 to 10*)

National City 3.97

Wells Fargo 4.42

Bank of America 4.72

Bank One 4.90

Washington Mutual 5.73

Citibank 5.93

J.P. Morgan Chase 6.02

E-Trade Bank 6.85

FleetBoston 7.25

Note: *scale of 1 (easiest) to 10 (hardest)Source: Change Sciences Group, 2003; American Banker, September 2003



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B.The US Banking Market:Total & OnlineThe banking market in the US is a mixture of dominating national banks,with a presence in many sections of the country (such as Citi, Wells Fargo,and Wachovia), large regional banks (such as KeyCorp, Fifth Third Bancorp,and BB&T), and the great mix of thrifts, community banks, credit unions,and other smaller institutions.

And the banking market continues to consolidate, as in late October2003, when Bank of America, the third-largest institution, announced itwould be buying ninth-largest FleetBoston Financial for $47 billion instock. When the deal is closed, the Charlotte, NC-based bank would becomethe second-largest bank ranked by assets, behind only Citi.

In rankings from American Banker, all of the top US bank and thriftholding companies grew by assets from 2002 to 2003. As the now-recedingstock market downturn discouraged investors, money flowed away frombrokerages into the safer realm of banks. And several foreign-ownedbanks, such as the Amsterdam-based ABN Amro and the London-basedHSBC Holdings, have made greater investments in the US market. (Notethat assets listed below for those banks are their US assets only.)


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Top 25 US Bank and Thrift Holding Companies, byAssets, 2002 & 2003 (in billions)

1. Citigroup (New York)

2. J.P. Morgan Chase (New York)

3. Bank of America (Charlotte, NC)

4. Wells Fargo (San Francisco)

5. Wachovia (Charlotte, NC)

6. Bank One (Chicago)

7. MetLife (New York)

8. Washington Mutual (Seattle)

9. FleetBoston Financial (Boston)

10. US Bancorp (Minneapolis)

11. SunTrust Banks (Atlanta)

12. National City (Cleveland)

13. ABN Amro (Amsterdam)

14. KeyCorp (Cleveland)

15. HSBC Holdings (London)

16. Fifth Third Bancorp (Cincinnati)

17. BB&T Corp. (Winston-Salem, NC)

18. Bank of New York (New York)

19. State Street Corp. (Boston)

20. Countrywide Financial (Calabasas,CA)

21. Golden West Financial (Oakland,CA)

22. PNC Financial Services(Pittsburgh)

23. Royal Bank of Scotland(Edinburgh)

24. Comerica (Detroit)

25. MBNA Corp. (Wilmington, DE)

Type ofholding

company

Bank

Bank

Bank

Bank

Bank

Bank

Bank

Thrift

Bank

Bank

Bank

Bank

Foreign*

Bank

Foreign*

Bank

Bank

Bank

Bank

Bank

Thrift

Bank

Foreign*

Bank

Bank

March2002

$1,058.0

$712.5

$619.9

$311.5

$319.9

$262.9

$258.7

$275.2

$192.0

$164.7

$106.2

$100.1

–

$81.4

–

$70.6

$74.9

$76.8

$73.3

$42.6

$59.3

$66.6

–

$50.2

$46.5

March2003

$1,137.0

$755.2

$679.8

$369.7

$348.1

$287.9

$286.9

$277.0

$199.3

$182.2

$120.1

$117.5

$108.1

$86.5

$85.9

$84.3

$79.6

$79.5

$79.1

$73.6

$70.0

$68.6

$67.6

$55.8

$54.6

%growth

7.5%

6.0%

9.7%

18.7%

8.8%

9.5%

10.9%

0.6%

3.8%

10.6%

13.0%

17.4%

–

6.3%

–

19.4%

6.3%

3.6%

7.9%

72.7%

18.0%

3.1%

–

11.1%

17.3%

Note: figures as of 31 March for each year; *US assets only for foreignholding companiesSource: American Banker, July 2003



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The penetration of banking relationships is nearly universal among UShouseholds. In a report titled “Banking & Lending through 2007,” JupiterResearch projects a rise from 94.6 million households banking in 2001 to103.9 million by 2007. In other words, the share of total US householdswith at least one bank account is expected to grow from 88.5% in 2001 to91.2% by 2007.

“In virtually every market, it is the traditional,established brick and mortar banks that areattracting the biggest audiences…the predicteddeath of the brick and mortar bank is proving to beone of the wildest exaggerations of the Internetboom years.”— Richard Goosey, international chief of measurement science,

Nielsen//NetRatings; MediaPost, 10 January 2003

US Banking Households, 2001-2007 (in millions)

2001

94.6

12.3

2002

96.1

11.9

2003

97.7

11.5

2004

99.2

11.1

2005

100.8

10.8

2006

102.3

10.4

2007

103.9

10.0

Households witha bank account

Non-banking households

Source: Jupiter Research, October 2002



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With all those consumer bank accounts, and with the multiple channelaccess to those accounts, the online segment continues to grow apace.According to detailed research from Financial Insite—the Seattle-basedpublisher of the “Online Banking Report”—Citibank has the most onlinebanking customers, at 7.6 million as of November 2002. The other mega-banks with large online customer counts include Bank of America (at 4.4million), Wachovia (at 4.0 million), and Wells Fargo (at 3.3 million).

US Online Banking Customers, by Bank, 2000-2002 (inthousands)

April 2000 November 2001 November 2002

Citibank 1,000 5,500 7,600

Bank of America 2,100 3,700 4,400

Wachovia (First Union) 1,750 3,500 4,000

Wells Fargo (1) 1,700 3,900 3,300

Bank One (First USA) 650 1,800 3,200

FleetBoston 500 1,800 2,600

J.P. Morgan Chase 500 1,100 2,200

US Bancorp (Firstar) (1) 175 1,300 1,400

Fifth Third Bank – 420 1,000

ING Direct 0 250 760

SunTrust 275 350 630

BB&T – – 540

E-Trade Bank (1) 130 450 510

Washington Mutual 300 350 500

AmSouth Bancorp – 325 500

KeyCorp 125 320 400

HSBC – 240 300

National City – 175 225

Golden West Financial – – 200

Regions Financial – 130 181

Sovereign Bancorp – 150 180

Huntington Bancshares – 132 178

Commerce Bancorp – 135 175

NetBank 50 150 150

Golden State – 115 150

America First – 110 145

Note: banks listed in parenthesis merged with named bank during periodshown; (1) 2002 figures reflect only active users, therefore growth ratesmay appear lower than they actually wereSource: Financial Insite and company reports, December 2002



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The banks showing the greatest growth among online customers includeING Direct, the Web-only version of the Dutch ING Group, Fifth ThirdBank, and J.P. Morgan Chase.

Note that some of the figures above count all online banking customers,while others count only active customers. That change in counting methodis why a bank such as Wells Fargo, with an active online presence, appearsto show a decrease in online customers.

US Online Banking Customers, by Bank, 2001 & 2002(as a % increase/decrease vs. prior year)

November 2001 November 2002

ING Direct – 204.0%

Fifth Third Bank – 138.1%

J.P. Morgan Chase 120.0% 100.0%

SunTrust 27.3% 80.0%

Bank One (First USA) 176.9% 77.8%

AmSouth Bancorp – 53.8%

FleetBoston 260.0% 44.4%

Washington Mutual 16.7% 42.9%

Regions Financial – 39.2%

Citibank 450.0% 38.2%

Huntington Bancshares – 34.8%

America First – 31.8%

Golden State – 30.4%

Commerce Bancorp – 29.6%

National City – 28.6%

KeyCorp 156.0% 25.0%

HSBC – 25.0%

Sovereign Bancorp – 20.0%

Bank of America 76.2% 18.9%

Wachovia (First Union) 100.0% 14.3%

E-Trade Bank (1) 246.2% 13.3%

US Bancorp (Firstar)* (1) 642.9% 7.7%

NetBank 200.0% 0.0%

Wells Fargo (1) 129.4% -15.4%

Note: banks listed in parenthesis merged with named bank during periodshown; (1) 2002 figures reflect only active users, therefore growth ratesmay appear lower than they actually wereSource: Financial Insite and company reports, December 2002



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C. Counting Online Banking CustomersAmid the continued channel crossover among US consumers, the onlinebanking sector is on a steady upswing. Projections from eMarketer revealthat the number of US households banking online will rise from 27.8million this year to 43.0 million by 2007.

Last year’s rise to 23.3 million represented a 32.4% increase over the prioryear. While eMarketer predicts that the number of households bankingonline will continue to increase, those growth rates will slacken as moreand more customers sign up for the online channel. By 2007, the increasein online banking households will drop into the single-digit range for thefirst time since the 1990s.

US Households Banking Online, 2000-2007 (in millions)

2000 12.5

2001 17.6

2002 23.3

2003 27.8

2004 32.2

2005 36.3

2006 40.0

2007 43.0

Source: eMarketer, October 2003


US Households Banking Online, 2001-2007 (as a %increase vs. prior year)

2001 40.8%

2002 32.4%

2003 19.3%

2004 15.8%

2005 12.7%

2006 10.2%

2007 7.5%




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Even as market growth declines, by 2005 one-third of all US householdswill bank online. And by 2007, more than half of online households will bedoing at least part of their banking on the Internet.

“In my view, online consumer banking is the mostdramatic banking product that I’ve ever seen. Theones who [bank online] are stickier, they have twoto three times the balances of those that don’t useit, [and] the attrition is lessened one-third.”— Chad Gifford, CEO, FleetBoston Financial; Bank Systems & Technology, 16

December 2002

US Households Banking Online, 2000-2007 (as a % oftotal and online households)

2000

27.2%

12.1%

2001

31.0%

16.9%

2002

36.6%

22.1%

2003

39.5%

26.1%

2004

42.5%

29.9%

2005

45.5%

33.4%

2006

48.2%

36.4%

2007

50.6%

38.7%

Online households Total households

Note: US household estimates based on US Bureau of Census data; USonline household estimates based on eMarketer dataSource: eMarketer, October 2003



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A view of comparative numbers shows that for 2003, estimates ofhouseholds banking online range from IDC’s 21.0 million households at thelow end to Financial Insite’s 32.0 million at the high end.

By 2007, there should be anywhere from 40.0 million householdsbanking online (TowerGroup) to 54.6 million (Jupiter Research).

Comparative Estimates: US Households BankingOnline, 2001-2007 (in millions)

Celent Communications,November 2002

eMarketer, October 2003

Financial Insite, December 2002

Forrester Research, July 2003/May 2002*

IDC, May 2002

Jupiter Research, October 2002

NFO World Group, October 2002

Pew Internet & American LifeProject, November 2002

TowerGroup, January 2003

2001

19.0

17.6

22.0

15.9

14.7

19.5

15.0

–

–

2002

23.0

23.3

28.0

20.4

17.8

25.3

23.0

37.0

25.3

2003

26.0

27.8

32.0

23.6

21.0

31.4

30.0

–

28.8

2004

29.0

32.2

36.0

29.5

24.0

37.6

36.0

–

32.3

2005

33.0

36.3

40.0

33.8

26.5

43.5

39.0

–

34.8

2006

35.0

40.0

43.0

37.5

29.3

49.2

–

–

37.9

2007

–

43.0

45.0

40.5

–

54.6

–

–

40.0

Note: *figures for 2000-2003 from July 2003 and figures for 2004-2007from May 2002Source: eMarketer, October 2003; various, as noted, 2002 & 2003



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The comparative growth rates from the eight researchers all point in the samedirection: a continued upward path but at a slower rate. For example, by2007 all estimates but one (from Jupiter) put the increase into single digits.

Comparative Estimates: US Households BankingOnline, 2001-2007 (as a % increase vs. prior year)


eMarketer, October 2003

Financial Insite, December2002

Forrester Research, July2003/May 2002*


IDC, May 2002

Jupiter Research, October2002

NFO World Group, October2002


2001

35.7%

40.8%

41.9%

101.3%

101.3%

48.5%

–

61.3%

–

2002

21.1%

32.4%

27.3%

28.3%

28.3%

21.1%

29.7%

53.3%

–

2003

13.0%

19.3%

14.3%

15.7%

15.7%

18.0%

24.1%

30.4%

13.7%

2004

11.5%

15.8%

12.5%

25.0%

25.0%

14.3%

19.7%

20.0%

12.3%

2005

13.8%

12.7%

11.1%

14.6%

14.6%

10.4%

15.7%

8.3%

7.8%

2006

6.1%

10.2%

7.5%

10.9%

10.9%

10.6%

13.1%

–

9.0%

2007

–

7.5%

4.7%

8.0%

8.0%

–

11.0%

–

5.5%

Note: *figures for 2000-2003 from July 2003 and figures for 2004-2007from May 2002Source: eMarketer, October 2003; various, as noted, 2002 & 2003



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Comparisons of online banking penetration rates among all UShouseholds—using a baseline of Census Bureau data for all figures—againall show steady growth, rising from Forrester Research’s 7.7% share in year2000 and peaking at Jupiter’s near 50% figure for 2007.

“The online financial services sector is one of lastyear’s success stories.”— Richard Goosey, international chief of measurement science,

Nielsen//NetRatings; MediaPost, 10 January 2003

Comparative Estimates: US Households BankingOnline, 2001-2007 (as a % of total households)


eMarketer, October2003



IDC, May 2002



Pew Internet & AmericanLife Project, November2002


2001

18.2%

16.9%

21.1%

15.2%

14.1%

18.7%

14.4%

–

–

2002

21.8%

22.1%

26.6%

19.3%

16.9%

24.0%

21.8%

35.1%

24.0%

2003

24.4%

26.1%

30.0%

22.1%

19.7%

29.5%

28.2%

–

27.0%

2004

26.9%

29.9%

33.4%

27.4%

22.3%

34.9%

33.4%

–

30.0%

2005

30.3%

33.4%

36.8%

31.1%

24.4%

40.0%

35.8%

–

32.0%

2006

31.8%

36.4%

39.1%

34.1%

26.6%

44.7%

–

–

34.5%

2007

–

38.7%

40.5%

36.4%

–

49.1%

–

–

36.0%

Note: US household estimates based on US Bureau of Census data;*figures for 2000-2003 from July 2003 and figures for 2004-2007 from May2002Source: eMarketer, October 2003; various, as noted, 2002 & 2003



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Nearly all researchers see significant online banking penetration amongonline households, based on eMarketer’s projections of online households.By 2007, all five companies predict nearly half or more of households thataccess the Internet banking online as well.

“Most [bank managers] said they consider the Webas a channel as an expense instead of aninvestment that can generate a meaningful return.”— Len Pagon, president and chief executive officer, Brulant Inc.;American

Banker, 13 February 2003

Growth figures alone, however, fail to tell the whole story about onlinebanking customers and their potential value to the financial institutions.When those customers use the online channel only sporadically, theirworth to banks diminishes—and in fact makes the Internet a cost burden formany institutions. Without compelling services such as bill payment andcheck imaging that entice customers to bank online not only often but in-depth, the growth of online banking customers means less to the industrythan the increased online base implies.

Comparative Estimates: US Households BankingOnline, 2001-2007 (as a % of online households)





IDC, May 2002



Pew Internet & AmericanLife Project, November2002


2001

33.5%

31.0%

38.7%

28.0%

25.9%

34.3%

26.4%

–

–

2002

36.1%

36.6%

44.0%

32.0%

27.9%

39.7%

36.1%

58.1%

39.7%

2003

36.9%

39.5%

45.5%

33.5%

29.8%

44.6%

42.6%

–

40.9%

2004

38.3%

42.5%

47.6%

39.0%

31.7%

49.7%

47.6%

–

42.7%

2005

41.4%

45.5%

50.1%

42.4%

33.2%

54.5%

48.9%

–

43.6%

2006

42.2%

48.2%

51.8%

45.2%

35.3%

59.3%

–

–

45.7%

2007

–

50.6%

52.9%

47.6%

–

64.2%

–

–

47.1%

Note: US online household estimates based on eMarketer data; *figures for2000-2003 from July 2003 and figures for 2004-2007 from May 2002Source: eMarketer, October 2003; various, as noted, 2002 & 2003



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D.The Online Channel: Banking PrioritiesAs you’ll see in the following chapters, several aspects of the Internet makeit a vital component for achieving banking priorities. Core to the value ofonline banking customers are two simple facts: one, they tend to buy moreproducts from their bank; and two, they tend to be more loyal to their bank.

As a quick backup to that statement, consider the July 2003 ForresterResearch report titled “Winning The Changing Financial Consumer.” TheCambridge, MA-based firm found that when the question is “Will youconsider your bank for your next financial purchase?” 49% of customerswho bank online say “yes,” in contrast to only 19% of customers who don’tuse the online channel.

“We see the online channel as driving profits for theentire customer interaction.”— Tim Scholten, senior vice president, Huntington Bancshares; American

Banker, 13 February 2003

As you consider those facts, consider these results from another Forresterreport titled “Banks’ Online Priorities for 2003.” Virtually all of the 250banking executives surveyed in February 2003—from commercial banks,federal savings banks, credit unions, and Internet-only banks—said thatretaining existing customers is a high priority across channels. Nearly asmany respondents cited increasing cross-sell success.

In fact, all seven strategies listed below appear high on bank executivesradar screens—and many of those goals can be approached, if not answeredabsolutely, by the Internet.

Take, for example, the goal of reducing the cost to serve customers.While the online channel may currently be seen as a bottom-line burdenfor many banks, since only a fraction of their customers use it but thetechnological infrastructure is expensive, the same technology scales well.That is, the more customers that use the Internet, the less costly thatchannel becomes.


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Contrast that cost equation with the in-person branch, where the more thatcustomers use it, the more costly it becomes for the bank. Simply put, then,making online banking more attractive to customers for more transactionsreduces operating costs.

Strategies Considered “High Priority” by BankingExecutives in the US, 2003 (as a % of respondents)

Retaining existing customers

98.0%

1.6%

0.4%

Increasing cross-sell success

90.3%

8.9%

0.8%

Acquiring new customers

79.5%

20.5%

0.0%

Creating a sales culture at all customer touchpoints

67.1%

29.3%

3.6%

Reducing the cost to serve customers

66.9%

29.4%

3.6%

CRM

64.8%

31.6%

3.6%

Cross-channel integration

63.7%

32.3%

4.0%

High priority Low priority Not a priority




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The same Forrester report found that for the online channel alone, retainingexisting customers and improving their satisfaction—two clearly relatedgoals—are the top two banking priorities. These results indicate that manybankers understand that the Internet can act as the leverage to reach largerobjectives for the bank as a whole.

Online Channel Strategies Considered “VeryImportant” by Banking Executives in the US, 2003 (asa % of respondents)

Retaining existing customers

94.7%

5.3%

0.0%

Improving customer satisfaction

87.6%

12.0%

0.4%

Acquiring new deposit customers

60.9%

31.0%

8.1%

Acquiring new loan customers

57.9%

34.8%

7.3%

Creating a multichannel customer experience

57.8%

36.9%

5.2%

Improving site navigation and usability

56.3%

37.2%

6.5%

Migrating transactions from higher-cost channels

55.9%

38.5%

5.7%

Very important Important Not important




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In order to make those online strategies work out, several developments forthe online channel were pegged as high priority by the banking executives.Foremost is enhancing customer service, but not far behind are improvingsite content, adding or improving product applications (such as theaforementioned account opening), and offering statements.

Online Channel Development Considered “HighPriority” by Banking Executives in the US, 2003 (as a %of respondents)

Enhancing customer service functionality

69.1%

26.4%

4.5%

Improving site content

66.3%

30.1%

3.7%

Adding/improving online product applications

65.4%

28.9%

5.7%

Offering online statements

63.4%

27.6%

6.9%

Improving site design and navigation

61.8%

31.7%

6.5%

Adding online access to more products

59.1%

34.0%

6.9%

Implementing single sign-on for all online services

52.4%

32.1%

15.4%





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In order to gauge whether or not the online strategies are working or not,the bankers surveyed by Forrester consider simple site traffic growth to bethe prime metric, according to 85.4% of respondents. The related metric ofacquisition rate growth, for both banking and bill pay, was cited by 79.2%.And between those two metrics is the straightforward method of customerfeedback and surveys, mentioned by 82.3% of bankers.

The last metric, calculating the transaction migration from higher-costchannels such as the branch to the Internet, might be least cited notbecause of its lack of perceived value but because it’s more difficult tomeasure. In fact, with 49.2% of respondents saying they don’t measure thisbut plan to, it points to the importance of knowing where each channel fitsinto a bank’s mix of offerings.


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Metrics Used to Determine the Success of the OnlineChannel among Banking Executives in the US, 2003(as a % of respondents)

Site traffic growth

85.4%

11.0%

3.7%

Customer feedback and surveys

82.3%

15.3%

2.4%

Acquisition rate growth for online banking and bill pay

79.2%

15.1%

5.7%

Revenue generated

72.5%

23.9%

3.6%

Number of products sold online

70.9%

21.5%

7.7%

Cross-sell ratio improvement for existing customers

53.3%

35.7%

11.1%

Transaction migration from higher-cost channels

35.2%

49.2%

15.6%

We measure it We don’t measure this,but plan to

We don’t measure this




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Among community banks, the electronic services priorities over the nextthree years are detailed more in a survey from America’s CommunityBankers, a Washington, DC-based trade group. On the non-Internet side,increased offering of debit cards is a high priority. And both improving andoffering online banking and bill payment are two more high-priority targets.

Electronic Services' Priorities over the Next ThreeYears for US Community Banks, 2003 (as a % ofrespondents)

High Medium Low None*

Debit cards 50% 23% 3% 24%

Online banking 46% 18% 12% 24%

E-bill payment 36% 26% 15% 23%

ATM 19% 25% 18% 39%

Merchant services 15% 24% 27% 35%

Credit card 12% 26% 34% 27%

Stored value cards 2% 15% 32% 50%

Note: *or no answerSource: America's Community Bankers, August 2003


IIMethodology 7



A. Demographics, Income & Experience 46

B. Overall Online Activities 56

C. What Bank Customers Do Online 60

D. What Bank Customers Want 65

E. Affluent Profits: Make More From the Masses 78

F. Small-Business Banking: Internet Wary? 84






Index of Charts 243


45



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With the growing cross-channel focus among consumers, looking for manyof the same services no matter where they bank, US banking customers areessentially the same whether they’re banking traditionally in the branch orbanking interactively on the Web.

Still, there are definite skews that make the online customer differ from,and potentially more valuable than, his traditional-only counterpart.

A. Demographics, Income & ExperienceBeginning with the basics, first note that as of 2003, there are 106.6 millionhouseholds in the US, according to Census Bureau data. And according toeMarketer, 66.0% of those households, or 70.4 million, are connected to the Internet.

Total and Online Households in the US, 2000-2006 (inmillions)

2000

45.9

103.2

2001

56.8

104.3

2002

63.7

105.5

2003

70.4

106.6

2004

75.7

107.7

2005

79.8

108.8

2006

83.0

110.0

Online households (2) Total households (1)

Source: (1) US Census Bureau, May 1996; (2) eMarketer, October 2003



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Gender, Age, Race/EthnicityEven though 51% of Internet users are female, according to eMarketer data,they are not as represented among users of online financial services.According to an April 2003 study from Javelin Strategy and Research, asreported in American Banker, “51% of the men who manage theirhousehold finances were using online banking Web sites, compared with43% of women. Even fewer women are paying bills electronically—just42%, versus 49% of the men.”

One possible reason behind the disparity, even though “women managethe finances in most American households,” is that too many banking Websites are designed and marketed with a focus on the technology. Thatapproach tends to appeal more to men than women.

According to research from the Pew Internet & American Life Project,more male Internet users were banking online in 2002 than female, 35%versus 30%, respectively.

In that same November 2002 study from Pew, 36% of US Internet usersages 30 to 49 said they were banking online in 2002. That’s the age groupwith the best balance of Internet comfort and sufficient money to oftenhave multiple bank accounts. But not far behind, at 33%, are youngerusers, the ones with great familiarity and ease with online transactions.

US Adults Banking Online, by Gender, 2002 (as a % ofInternet users of each gender)

Male 35%

Female 30%

Note: n=2,092 adults ages 18+Source: Pew Internet & American Life Project, November 2002


US Adults Banking Online, by Age, 2002 (as a % ofInternet users in each group)

18-29 33%

30-49 36%

50-64 27%

65+ 16%




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When online banking customers are viewed by percentage of the totalpopulation, as GartnerG2 did, similar proportions show up. That is, thelargest share of users in 2002 are found in the 25-to-34 age segment, at28%, followed next by the 35-to-44 group, at 24%.

Just as various age groups approach online banking differently, they dealwith finances in their own way as well. In American Banker’s recentlyreleased annual consumer survey, conducted by the Gallup Organization,52.9% of those ages 18 to 24 cited a bank when asked which type ofinstitution will play the largest role in helping them achieve long-termfinancial goals. In contrast, 42.9% of the 25-to-34 group selected a bank.

“Gen Y-ers are showing signs that they are veryinterested in finance—how to make it, how to saveit, how to invest it. But I don’t see…that financialinstitutions are really catering to that.”— Haden Edwards, principal, Tracey Edwards Co. (advertising firm

specializing in bank marketing); American Banker, 27 August 2003

Online Banking Users in the US, by Age, 2001 & 2002(as a % of adult population in each age group)

18-24

15%

17%

25-34

22%

28%

35-44

18%

24%

45-54

15%

17%

55-64

10%

11%

65+

5%

7%




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And in a July 2003 report titled “Winning the Changing FinancialConsumer,” Forrester Research found that younger consumers—those bornfrom 1965 through 1994—are more likely to do their own research beforemaking financial decisions. That self-directed tendency, cited by 70% ofGeneration X and Y respondents, matches up well with the Internet.

The two younger groups are also more likely to shop around for financialproducts, at 50% of respondents. In order to win over these consumers,banks would do well to present all their products clearly on their Web sites,and allow consumers to buy or apply for them online.

US Consumers Who Do Their Own Research beforeMaking Financial Decisions, by Age, 2003 (as a % ofrespondents)

Generation X/Y 70%

Baby boomers 62%

Seniors 53%

Note: Generation Y defined as those born from 1979 to 1994, Generation Xdefined as those born from 1965 to 1978; baby boomers defined as thoseborn from 1946 to 1964; seniors defined as those born 1945 or earlier Source: Forrester Research, July 2003


US Consumers Who Always Shop around for FinancialProducts, by Age, 2003 (as a % of respondents)

Generation X/Y 50%

Baby boomers 43%

Seniors 36%

Note: Generation Y defined as those born from 1979 to 1994, Generation Xdefined as those born from 1965 to 1978; baby boomers defined as thoseborn from 1946 to 1964; seniors defined as those born 1945 or earlier Source: Forrester Research, July 2003



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While Generations X and Y may be setting the pace for future use of onlinefinancial services, the Baby Boom Generation—those born from 1946through 1964—is where the wealth is. In their peak earning years, this agegroup is the most valued target for banks.

In research of 1,200 baby boomers by Knowledge Networks, incollaboration with American Demographics, the obvious appeared. That is,the higher the respondents’ income, the more likely they bank online.While 22% of the whole generation has online bank accounts, 30% of thoseearning $75,000 or more bank online.

Similarly, greater income is an indicator of more online financial activityamong boomers. For all five tasks shown below, the $75,000-plus group ismore likely to do it than the other two income groups.

Online Financial Accounts Used by US Baby Boomers,by Income, 2003 (as a % of respondents)

Online bank account

Online brokerage account

Online access to other invest-ment portfolio

<$35,000

16%

1%

5%

$35,000-$75,000

24%

6%

20%

$75,000+

30%

14%

30%

Total

22%

6%

17%

Note: n=1,200 adults between the ages of 39 and 57Source: Knowledge Networks in conjunction with American Demographics,May 2003


Financial Services Tasks Performed Online by US BabyBoomers, by Income, 2003 (as a % of respondents)

Check bank account balance/status

Check investment portfolio

Purchase stock/other investments

Pay a bill

Transfer money between bankand/or investment accounts

<$35,000

19%

5%

1%

18%

6%

$35,000-$75,000

28%

19%

6%

21%

12%

$75,000+

36%

29%

14%

29%

19%

Total

26%

16%

6%

21%

11%




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When the baby boom survey looked at online financial accounts by raceand ethnicity, it discovered that a greater proportion of US Hispanics (26%)bank online than do whites or African-Americans. With this tendency,many banks should consider making their Web sites bi-lingual, if theyhaven’t already.

However, when looking at which race or ethnic group performs whichfinancial task online, no clear pattern emerged. For example, while whitesare more likely to check bank account balances online, African-Americansare more likely to pay bills.

Online Financial Accounts Used by US Baby Boomers,by Race/Ethnicity, 2003 (as a % of respondents)

Online bank account

Online brokerage account

Online access to other investmentportfolio

White

22%

6%

17%

African-American

21%

2%

13%

Hispanic

26%

5%

13%

Total

22%

6%

17%



Financial Services Tasks Performed Online by US BabyBoomers, by Race/Ethnicity, 2003 (as a % ofrespondents)

Check bank account balance/status

Check investment portfolio

Purchase stock/other investments

Pay a bill

Transfer money between bank and/orinvestment accounts

White

27%

17%

6%

21%

11%

AfricanAmerican

22%

8%

5%

27%

14%

Hispanic

23%

14%

5%

22%

5%

Total

26%

16%

6%

21%

11%




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Backing up the Knowledge Networks findings above, Pew’s research alsoshows that a greater percentage of Hispanics bank online than do whites orAfrican-Americans.

IncomeEven when the relationship between income and online banking isexamined outside of age group boundaries, as Forrester did in a July 2003brief titled “The Digital Divide Still Haunts the US,” the affinity remains thesame: the greater the income, the more likely a US household will bankonline. This mirrors the relationship between all Internet users and income.

“We’ve found that we’re very typical. People whouse online banking will use other online services,and our Internet customers are of a higher profile—you know, the customer every one wants.”— David Westerburg, vice president, Northwest Savings; American Banker,

23 September 2003

US Adults Banking Online, by Race/Ethnicity, 2002 (asa % of Internet users in each group)

Hispanic 33%

White 32%

African American 30%



Online Banking Households in the US, by Income,1998-2003 (as a % of households within each incomegroup)

<$25,000 $25,000-$49,999 $50,000-$74,999 $75,000+

1998 1% 2% 4% 6%

1999 0% 1% 1% 2%

2000 2% 7% 12% 17%

2001 3% 10% 15% 18%

2002 5% 12% 20% 24%

2003 5% 16% 21% 29%

Source: Forrester Research, July 2003



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Further research from GartnerG2 corroborates the tendency, with a risingstepladder of online banking users as income rises.

And the greater the income, the more potential profits for the bank. Theseare the active customers most valued by any financial services firm.

Online Banking Users in the US, by Income, 2001 &2002 (as a % of adult population in each incomegroup)

<$15,000

5%

7%

$15,000-$29,900

7%

9%

$30,000-$49,900

13%

15%

$50,000-$74,900

18%

21%

$75,000+

22%

28%




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ExperienceResearch backs up common wisdom in another area as well: the longer aperson has been going online, the more likely he or she is to bank online.Here are three data points, in chronological order.

In September 2002, GartnerG2 found that 35% of users who had beengoing online since before 1998 were also online banking users. Contrastthat figure to those who had been going online for two to three years, at17% only half as likely to bank online.

In November 2002, Pew’s research showed that 39% of Internet users withfour or more years of experience going online also bank online. Again, that’sabout twice as much as those users with two-to-three years experience.

Online Banking Users in the US, by Year of FirstInternet Use, 1998-2002 (as a % Internet users)

pre-1998 35%

1998 28%

1999 17%

2000 17%

2001 11%

2002 7%



US Adults Banking Online, by Experience Online, 2002(as a % of Internet users in each group)

1 year 6%

2-3 years 20%

4+ 39%




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Finally, in April 2003, in a RoperASW survey for American Online, nearlyhalf of US adults with five-or-more years experience going online alsobank online, compared to about one in five banking online among the less experienced.

A key fact to note here: Those adults with more Internet experience tend tohave greater incomes and higher levels of education. Here’s one set of datato back that up: The Online Publishers Association and Millward BrownIntelliQuest found among at-work Internet users, at least 44% of thosewho’ve been going online for five years or longer have household incomesof $75,000 or more. Compare that to less-experienced users (those withfour years or less online); only 14% have the same high income level.

Once again, online banking users represent the sweet spot among banking customers.

US Internet Users Who Bank Online, by ExperienceOnline, 2002 (as a % of respondents)

<2 years 19%

5+ years 49%

Note: n=1,001 Internet users ages 18+; respondents saying they regularlyor occasionally bank onlineSource: America Online/RoperASW, April 2003


Demographics of At-Work Internet Users in the US, byExperience Online, 2003

4 yearsor less

5-6years

7-8years

9+years

Total

Male 28% 46% 52% 61% 50%

Female 72% 54% 48% 39% 50%

18 to 34 33% 35% 32% 34% 33%

35 to 55 55% 54% 55% 51% 54%

55 or older 13% 11% 12% 15% 13%

BA degree or higher 36% 64% 59% 67% 59%

Household income $75,000 or more 14% 44% 44% 50% 43%

Note: n=1,053 (total); n=86 (4 years or less); n=255 (5-6 years); n=236 (7-8years); n=282 (9+ years)Source: Millward Brown IntelliQuest, Online Publishers Association (OPA),May 2003


B. Overall Online ActivitiesWhere does online banking fit into other Internet activities? Research fromPew says that in 2002, more users got hobby information, bought products,made travel reservations, played games, or researched financialinformation in general than banked online.

However, when Pew compared those 2002 figures to 2000’s results,banking online appeared to be spreading more rapidly than any of thelisted online activities, with a 164% growth rate.


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In a separate November 2002 report, Pew also found a greater propensitytoward online banking among parents than non-parents (anyone without aminor child living at home), at 34% versus 27%, respectively. However,among all online activities, banking ranks far below things like e-mail,reading the news, or researching hobbies and health information. Still,among just commercial online activities, only buying products is morepopular than banking.

Online Activities of Parents vs. Non-Parents* in theUS, 2002 (as a % of respondents)

Sending or receiving e-mail

92%

94%

Looking for information about a hobby

77%

77%

Reading online news

67%

68%

Looking for health or medical information

67%

60%

Going online just for fun or to pass the time

64%

66%

Visiting a government Web site

61%

59%

Researching for school or training

58%

50%

Buying a product

56%

58%

Sending or receiving an instant message

44%

49%

Performing online banking

34%

27%

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And in RoperASW’s April 2003 survey for AOL, 36% of Internet users saythey bank online. The more common commercial activities are makingpurchases (60%) and booking travel reservations or tickets (50%).

Popular Online Activities among Internet Users in theUS, 2002 (as a % of respondents)

Communicating with friends and family

90%

Doing research of any kind

88%

Getting information about products to buy

77%

Getting driving directions and/or maps

67%

Checking the weather report

66%

Sending/receiving pictures from family and friends

63%

Making purchases

60%

Getting local entertainment information

51%

Booking travel reservations or tickets

50%

Downloading music files

32%

33%

Looking for religious or spiritual information

30%

23%

Looking for weight-loss or general fitness information

27%

22%

Going into a chat room

18%

23%

Parents Non-parents

Note: n=2,259; *Non-parents are defined as those who do not have aminor child living at homeSource: Pew Internet & American Life Project, November 2002


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Communicating with business associates

50%

Online instant messaging

48%

Looking up addresses and/or phone numbers

45%

Listening to music

40%

Banking

36%

Downloading music files

33%

Watching video clips

29%

Tracking stock portfolio

28%

Taking part in an online auction

24%

Filing or paying income taxes

20%

Getting coupons

17%

Trading stocks

10%

Downloading books

10%

Note: n=1,001 Internet users ages 18+Source: America Online/RoperASW, April 2003



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C.What Bank Customers Do OnlineWhat activities engage online banking customers? The fundamental things apply, according to research by ForeSee Results for Forbes.com:viewing statements and checks, paying bills, checking balances, andtransferring funds.

That online bill payment ranks even higher, albeit slightly, than simplebalance checking, is probably due to this survey’s respondents: visitors to the Forbes.com site, who tend to have higher incomes than Internet usersin general.

Activities Conducted by US Online BankingCustomers, 2003 (as a % of respondents)

Pay bills online 19%

View online statements and checks 19%

Check deposit balances 18%

Transfer funds 16%

Manage budgets 4%

Apply for loans 3%

Note: n=847Source: ForeSee Results and Forbes.com, June 2003



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The most common online financial activities among consumers who paybills online also include the basics, according to a recent InsightExpresssurvey: accessing accounts and transferring funds.

Financial Activities Conducted Online by USConsumers Who Pay Bills Online, 2003 (as a % ofrespondents)

Access accounts

57%

Transfer funds among accounts

53%

Order checks

37%

Research financial information

34%

Download account information

32%

Change account information

31%

Manage other accounts

25%

Access bank contact information

25%

Note: n=263Source: InsightExpress, September 2003



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And earlier this year, the Center for e-Service at the Robert H. Smith Schoolof Business at the University of Maryland and Rockbridge Associatesreleased survey results that show the same essential activities ranking one-two: checking accounts and transferring funds.

These are much the same activities done with telephone banking, whichis why the Internet is supplanting that channel for many institutions.

US Adults' Online Financial Services/InsuranceActivities during the Past 12 Months, 2001 & 2002 (asa % of respondents)

Checked information on your bank account

38%

36%

Moved money between bank accounts, made deposits, or madewithdrawls

20%

20%

Applied for a credit card

17%

14%

Paid a bill other than a credit card

16%

23%

Managed a credit card

15%

19%

Paid a credit card bill

15%

20%

Bought or sold stock or securities

10%

9%

Applied for a home mortgage

4%

6%

Signed up for any type of insurance

3%

5%

2001 2002

Note: 2001 n=418, 2002 n=422Source: Center for e-Service at the Robert H. Smith School of Business,University of Maryland; Rockbridge Associates, Inc., February 2003



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How often do banking customers engage in these activities? The ForeSeeResults survey found a sharp difference between online banking customerswho use bill payment versus those who don’t. In essence, those who paybills online also bank online more often, with 51% of respondents usingtheir bank’s Web site daily versus the 27% of non-bill payers who log on totheir bank daily.

When InsightExpress expanded the channel focus, it found that 28% of USconsumers access their primary banking institution by phone, the Internet,or at the branch at least three times per week.

Frequency of Use of Online Banking among US OnlineBankers Using Bill Payment vs. Those Not Using BillPayment, 2003 (as a % of respondents)

Every day

51%

27%

Once a week

39%

56%

Using bill payment Not using bill payment



Less than onceper week

35.4%

1 to 2 times36.6%

3 to 4 times15.4%

5+ times12.6%

Frequency per Week that US Consumers Access TheirPrimary Banking Institution by Phone, Online orBranch, 2003 (as a % of respondents)

Note: n=500Source: InsightExpress, April 2003



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That high frequency of banking access by many consumers is behind thetop answer in the Pew data below. When asked about the “very important”factors in their decision to bank online, 79% cited the ability to bank whenit’s convenient. And in a related reason, 71% said that banking online savesthem time.

Reasons Adults in the US Cite as “Very Important”Factors in Their Decisions to Bank Online, 2002 (as a %of respondents)

I can do my banking when it is convenient for me

79%

Banking online saves me time

71%

Banking online gives me better control over my finances

52%

I can do my banking in private, without having to talk to anybody

41%

There is more banking information available to me online

36%

Banking online saves me money

30%

There are more bank services available to me online

25%




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D.What Bank Customers WantIn order to entice more customers to bank through lower-cost channels,such as the Internet, it’s useful to examine what customers don’t like aboutthe higher-cost branch. The responses in the Synergistics Research surveybelow about banking branch complaints create a mirror image of whatpeople like about banking online in the Pew data above. Inconvenience andtime-eating long lines top the Synergistics list.

So since online banking seems to overcome the primary downsides ofbranches, why don’t more consumers bank online? The TowerGroup foundthat concerns about security continues to be the primary cause of why USonline households don’t bank online. (This report will cover security issues ingreater depth in Chapter VII below, “Online Banking: Barriers to Growth.”)

Complaints about Banking Branches by USConsumers, 2002 (as a % of respondents)

Inconvenient hours 26%

Long teller lines 24%

Staff lacks decision authority 16%

Staff turnover 16%

Tellers too slow 15%

Inconvenient locations 14%

Staff is unknowledgeable 11%

Too long to open accounts 8%

Too long to get account information 8%

Facilities are too cluttered 4%

Note: n=1,041Source: Synergistics Research Corp., November 2002



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Also high on the online-banking-barrier list is lack of comfort aboutconducting banking business on the Internet. For banks to overcome thisbarrier, they need to find ways not only to make the whole online bankingexperience easier, but to market that ease in ways that truly show (and notjust say) how Web banking is a true time saver.

Primary Reasons Why US Online Households Are NotUsing Online Banking, 2002 (as a % of respondents)

Concerned about security

26%

Not comfortable conducting banking business online

22%

Prefer to conduct all banking business face-to-face

21%

Concerned about privacy

6%

None of my current financial institutions offer it

5%

Not sure how to use it

5%

Note: among households not using online bankingSource: TowerGroup, June 2003



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General Attitudes & Expectations About BankingEven with the resistance to online banking among some, consumers appearto be favorably disposed toward banking in general. Earlier this year,InsightExpress asked 500 US consumers about their attitudes concerningvarious aspects of banks and banking.

For one, more consumers believe the quality of banking services hasincreased over the past year, at 25% of respondents, than decreased, at 7%.

“I don’t think banks have done a very good job inthe past of understanding who their customersare. For the first time in the thirty-plus years thatI’ve been in the bank on the consumer side, we’remaking efforts to understand our customer andupgrade service quality.”— Chad Gifford, CEO, FleetBoston Financial; Bank Systems & Technology, 16

December 2002

De-creased

7%

Remained the same68%

Increased25%

US Consumers' Attitudes Regarding the Quality ofBanking Services Received over the Past Year, 2003(as a % of respondents)




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And as services are better, banking usage rises as well. While 15.8% expectto increase their use of banking services either dramatically or somewhat,only 6.2% expect any decrease.

With results like these, is it surprising that 86.0% of consumers are eitherlikely or extremely likely to remain with their current bank?

US Consumers' Likelihood of Remaining with CurrentBank, 2003 (as a % of respondents)

Extremely likely 56.4%

Likely 29.6%

Neither likely nor not likely 9.6%

Not very likely 3.6%

Not at all likely 0.8%



Decrease dramatically2.2%

Somewhatdecrease

4.0%

Stay about the same78.0%

Somewhatincrease13.4%

Increase dramatically2.4%

US Consumers' Opinions Regarding Change of TheirBanking Usage Levels in the Coming Year, 2003 (as a %of respondents)




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However, perhaps it isn’t the positive results per se that keep consumerswith their current provider, but the difficulties involved in changing banks.Forrester Research found that 30% of US consumers switched financialproviders at least once because of dissatisfaction, and an additional 18%switched more than once. But 52% never switched, because they’re boundto their current institution by a network of services, such as direct depositsfrom their employers, long-term certificates of deposit, outstanding checks,and for more and more consumers, online bill payments.

Or as the data from ForeSee Results and Forbes.com shows, US consumersare distinctly less satisfied with commercial banks and online banking thanthey are with online retailers. The Ann Arbor, MI-based research firmwrites, “The failure of a bank to meet expectations means that althoughcustomers may not switch banks, they are far less likely to increase usageof online banking products and services. Our survey shows a troublingover-reliance on ‘trapped’ customers who don’t particularly like their bankbut think it’s too much trouble to leave.”

US Consumers Who Have Switched FinancialProviders Because They Were Not Satisfied With TheirPrevious Provider, 2003 (as a % of respondents)

No, never 52%

Yes, once 30%

Yes, more than once 18%



Satisfaction with Banking vs. Retail among USConsumers, 2003 (based on a 100-point scale*)

Online retail 83

Retail 74

Commercial banks 74

Online banking 73

Note: n=847; *satisfaction measured on a scale of 1 to 100, utilizing theAmerican Customer Satisfaction Index (ACSI) methodologySource: ForeSee Results and Forbes.com, June 2003



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Even with that degree of discontent, “Forrester analysts said that thefindings do not raise the specter of mass flight from large banks,” reportsAmerican Banker. “Only 7% of the respondents said they plan to switchprimary financial providers in the next year. But they do indicate thatbanks are failing in their vaunted plans to sell more products to theircustomer base: Only 26% of the average bank’s customers expressed anyinterest in considering it for their next financial purchase. Forrester termedthis a ‘cross-sell crisis.’”

In its research, InsightExpress found that nearly one-third of USconsumers would deal with the difficulties of switching banks and move toanother institution if it could make them feel like a valued customer.

Don't know34.8%

Would not switch33.0%

Would switch32.2%

US Consumers Who Would Switch Banks If AnotherBank Could Make Them Feel Like a Valued Customer,2003 (as a % of respondents)




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But 49.6% of respondents agreed or strongly agreed with the statement that“switching banks seems too hard to do to make it worth my while.”

US Consumers' Attitudes Regarding Their Loyalty toTheir Current Bank, 2003 (as a % of respondents)

I am very loyal to mybank

My bank values mypatronage

Switching banks seemstoo hard to do to makeit worth my while

My bank tries to under-stand my needs beforerecommending aproduct or service

I stay with my bank outof habit more thanloyalty

I am probably notgetting the lowest feesavailable at my bank

It would not take a lotto make me leave myprimary bank

I am sure that I couldget better service andlower fees at acompetitor to my bank

Stronglyagree

23.2%

20.4%

15.1%

12.3%

9.0%

8.6%

7.2%

5.6%

Agree

26.6%

36.7%

34.5%

36.6%

29.9%

24.5%

18.2%

17.7%

Neitheragree

nordisagree

33.4%

28.7%

29.1%

34.3%

21.9%

27.1%

23.5%

28.2%

Dis-agree

10.8%

6.8%

13.7%

10.0%

24.7%

19.1%

25.1%

23.9%

Stronglydisagree

5.6%

5.4%

6.8%

3.8%

14.5%

16.3%

24.9%

20.3%

Notsure

0.4%

2.0%

0.8%

3.0%

0.0%

4.4%

1.2%

4.2%




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Synergistics Research found that 79% of consumers believe they should betreated like a preferred customer by their bank when they do a lot ofbusiness with that particular institution. How “lot of” is defined may beunclear, but what is clear is that consumers expect more from their banks.

And yet the mixed feelings consumers have about their banks, and theirdoubt that another bank could make them feel valued and preferred, showsup in the same InsightExpress survey cited above, when 85.4% ofrespondents said they are satisfied or extremely satisfied with their bank.

Stronglydisagree2%

Somewhat disagree3%

Somewhat agree16%

Strongly agree79%

US Consumers' Attitudes Regarding Importance ofBeing Treated Like a Preferred Customer*, 2002 (as a% of respondents)

Note: n=1,041; *when the consumer does a lot of business with theparticular bankSource: Synergistics Research Corp., October 2002


US Consumers' Overall Satisfaction with Their Bank,2003 (as a % of respondents)

Extremely satisfied 39.4%

Satisfied 46.0%

Neither satisfied nor unsatisfied 9.6%

Not very satisfied 4.2%

Not at all satisfied 0.8%




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Mixed messages about consumer attitudes toward banks in general andtheir current bank in particular—ready to switch or not, ready torecommend or not—point to some state of confusion about what reallymatters. The three factors that consumers deem extremely importantinclude convenience, customer service, and location, with overall productand service support not far behind.

US Consumers' Opinions Regarding Importance ofBanking Service Features, 2003 (as a % ofrespondents)

Convenience

Customer service

Location

Overall product andservice support byphone, chat, or in-person

The bank's reputation

Time to receive ananswer to questions

Scope of product andservice offerings

Extremelyimportant

55.8%

55.1%

49.4%

43.7%

37.9%

37.1%

36.2%

Impor-tant

39.8%

–

41.6%

45.3%

45.8%

52.2%

52.7%

Neitherimportant

nor notimportant

3.8%

–

7.0%

8.9%

14.5%

8.4%

9.7%

Notvery

impor-tant

0.4%

–

1.4%

1.2%

1.4%

1.4%

1.2%

Notat all

impor-tant

0.2%

–

0.6%

1.0%

0.4%

0.8%

0.2%




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On the other side of the coin, the greatest consumer banking frustrationcomes from fee structure and interest rates, with 20.3% saying they are notsatisfied to some extent. Being nickel-and-dimed and getting less for theirmoney could be cause for switching.

The mixed responses also appears in consumers’ attitudes toward specificbanks they’ve done business with. Even though 84% of customers whowould consider their bank for their next purchase are either satisfied orvery satisfied with the institution, according to Forrester, 56% still alwaystry to shop around for financial products.

US Consumers' Overall Satisfaction with Their Bank,by Type of Service, 2003 (as a % of respondents)

Location

Convenience

The bank's reputation

Customer service

In-store teller assistance

Overall product support byphone, chat/e-mail orin-person

Time to receive an answer

Scope of product and serviceofferings

Fee structure and interestrates

Extremelysatisfied

42.1%

40.2%

39.2%

38.3%

37.1%

30.0%

28.9%

28.7%

21.0%

Satis-fied

38.7%

41.6%

40.4%

42.5%

40.9%

43.8%

45.7%

47.5%

33.3%

Neithersatisfiednor un-

satisfied

11.2%

11.7%

17.2%

14.4%

18.4%

21.2%

21.2%

18.8%

25.4%

Notsatis-fied

6.2%

4.8%

2.4%

3.2%

2.0%

3.4%

3.2%

3.6%

14.5%

Notat allsatisf-

ied

1.8%

1.6%

0.8%

1.6%

1.6%

1.6%

1.0%

1.4%

5.8%




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Those are the averages. But take a bank like J.P. Morgan Chase as oneexample. While 93% of respondents are satisfied with the institution, 75%always shop around. And these are the customers who would consider theirbank—imagine the attitudes among those customers who are notconsidering their current bank for future purchases!

US Consumers' Attitudes* Regarding Banks thatThey've Done Business with, 2003 (as a % ofrespondents)

Bank of America

Bank One

BB&T

Citibank

Comerica

E-Trade Bank

FleetBoston

J.P. Morgan Chase

KeyBank

National City

PNC

SouthTrust

SunTrust

US Bancorp

Wachovia

Washington Mutual

Wells Fargo

Credit unions

Average

Satisfiedor very

satisfied

88%

83%

81%

83%

92%

60%

84%

93%

87%

82%

68%

85%

82%

83%

89%

91%

80%

95%

84%

Like to doown re-

search be-fore making

financialdecisions

71%

61%

73%

73%

86%

75%

72%

81%

62%

62%

74%

75%

63%

64%

61%

66%

66%

66%

70%

Always tryto shop

around forfinancialproducts

52%

37%

52%

58%

76%

70%

55%

75%

57%

48%

70%

63%

36%

58%

47%

54%

49%

48%

56%

If I placemore moneywith a bank,

I'm entitled topreferentialtreatment

43%

56%

52%

48%

66%

31%

59%

78%

46%

56%

69%

50%

64%

35%

45%

50%

38%

42%

52%

Note: *based on yes answers from customers who would consider bankfor next purchaseSource: Forrester Research, January 2003; American Banker, August 2003



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Part of the reason for even satisfied customers continuing to shop around isdue to perception. “According to Forrester, ‘advocacy’—the perception thata company suggests products that are best for the customer rather than forits own bottom line—is the strongest predictor of customer satisfaction andretention, as well as investor retention,” reports American Banker.

So while institutions such as credit unions and local banks are seen asbeing “altruistic” in their product offerings, nearly one-in-five customers ata bank such as Washington Mutual, which has expanded rapidly beyond itsSeattle base during the past five years, see it as looking out for its ownbottom line only.

US Consumers Who Believe Their Bank OffersProducts that Are Best for Their Bottom Line and Notfor the Consumer, by Provider, 2003 (as a % ofrespondents)

Washington Mutual 19.6%

National City 18.9%

US Bancorp 18.3%

Wells Fargo 17.5%

Bank of America 17.1%

FleetBoston Financial 15.9%

Wachovia 14.2%

Bank One 12.8%

Regional or local bank 11.4%

Private bank/trust company 9.8%

Credit union 7.7%

Note: based on US households that use each firm as their primary financialproviderSource: Forrester Research, July 2003



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Consistency is not necessarily a part of the Forrester findings. For example,even with the results above, 35% of Washington Mutual customers wouldconsider it for their next financial purchase.

Attitudes of US Consumers toward Doing Businesswith Their Banks, 2003 (as a % of respondents who dobusiness)

Their credit union

Washington Mutual

Bank of America

Wells Fargo

SunTrust Banks

National City

Wachovia

US Bancorp

Bank One

Citibank

FleetBoston

J.P. Morgan Chase

Will considercurrent provider

for next purchase

44%

35%

30%

29%

29%

28%

28%

28%

25%

24%

23%

14%

Interest in buyingmultiple productsfrom one provider

25%

25%

22%

23%

23%

23%

19%

18%

27%

28%

25%

26%

Source: Forrester Research, March 2003



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E.Affluent Profits: Make More From theMassesIn the eyes of most US banks, the merely affluent make better targets thanthe truly wealthy. While terms like affluent and wealthy might besubjective, for most in the financial-services industry, the target “massaffluent” audience is typically defined as those having between $100,000and $1 million to invest.

“A lot of banks are trying to figure out what theirposition should be. Everyone is trying to lay claimto the high-net-worth. The point is, there aren’tenough millionaires out there for everyone to havea meaningful share.”— Geoffrey Bobroff, analyst, Bobroff Associates Inc.; American Banker, 12

June 2003

While PricewaterhouseCoopers may define affluent at a somewhat lowerlevel in its “2003 Global Private Banking/Wealth Management Survey,”capping it at $500,000, one thing is clear: Most wealth managers, whetherat private banks or brokerage houses, are not targeting the affluent.Instead, 71% of surveyed wealth managers expect to increase the numberof very high net worth clients, but only 14% planned to increase thenumber of affluent clients. “Competition will therefore be most intense forclients higher up the wealth pyramid,” as PwC puts it.

As wealth managers “ignore investors with less than $500,000 of assets inorder to pursue the ultra-wealthy,” reports American Banker, “banks arepositioned to corner the mass-affluent market.”

John K. Fletcher, the leader of PwC’s North American wealthmanagement services unit, told the daily banking publication that “bankswith strong retail arms rather than strong private banking divisions cansucceed with the mass affluent.”

Types of Clients Global Wealth Managers Expect toGain More of in Three Years Time, by Net Worth, 2003(as a % of respondents)

Ultra-high net worth (>$50 million) 49%

Very high net worth ($5 million-$50 million) 71%

High net worth ($500,000-$5 million) 57%

Affluent ($100,000-$500,000) 14%

Source: PricewaterhouseCoopers (PwC), July 2003



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“All the banks and brokerages are going after thetechnologically sophisticated, wealthy clientsbecause they believe this base will be the mostprofitable. But customers with considerable assetsare the ones who are least likely to pay a bank foradvice…Meanwhile, a lot of young customers whoneed investment help will pay for that assistance.”— David Schehr, research director, GartnerG2; Banking Strategies, January-

February 2003

One financial tool banks are using to attract more of the mass affluentmarket are managed accounts. Previously offered mainly to the wealthy,managed accounts—also known as separately or individually managedaccounts—are simply portfolios of stocks created by financial advisors fortheir well-to-do customers. In a managed account, unlike a mutual fund,the investor owns the stocks directly; the portfolio is customized by theadvisor based on the investor’s parameters (i.e., preserving wealth, highgrowth, and so on). As reported by American Banker: “These accounts areof growing importance to banks that want to retain the record inflows ofdeposits they have received since the end of the bull equity market in thespring of 2000, industry insiders and analysts say.”

“Having recurring fee-based revenue from managedaccounts is increasingly the more attractive sourceof revenue for brokerages and banks.”— Jack Rabun, analyst, Cerulli & Associates; American Banker, 7 January

2003

Research from Forrester indicates that next to 529 plans (college savingsaccounts), more US households that invest intend to increase separatelymanaged accounts. That’s more than any other type of investment,including IRAs and 401(k)s.

Type of Investments that US Investor HouseholdsIntend to Increase in the Next Year, 2003 (as a % ofhouseholds that hold each type of investmentinstrument)

529 plan 42%

Separately managed accounts 29%

IRA 28%

Company (other than employer) stock 27%

Mutual funds 26%

401(k)/403(b) account 25%




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“Some banks are marketing separately managed accounts as an alternativeto mutual funds for the mass affluent,” writes American Banker. “Managedaccounts also benefit banks because they have an asset-based feestructure—on average 1.5% to 1.8% annually—that provides a continuousrevenue stream.”

“Banks can reach to the mass affluent from theirretail arms. Banks already have the customers.They already have the technology.…They have thecritical mass to succeed.”— John K. Fletcher, head of North American wealth management services

unit, PricewaterhouseCoopers; American Banker, 14 July 2003

According to Financial Research Corp., there were about 1.9 millionmanaged accounts in the US in Q3 2002. The Boston-based financialservices research firm expects the total to soar to 5.3 million by 2006.

The nature of managed accounts mixes channels for both bank andcustomer. For example, just as the bank might notify customers online tochanges in their portfolio, offline advisors can be notified about customeractivity online. That creates natural occasions for cross-selling.

The Internet is a key channel for banks in their attempts to entice themass affluent customer. However, “even though 94% of the mass affluent isonline, customer satisfaction studies show that pushing technology, ratherthan people, to any segment of this market comes at a cost—and that costmay be wallet share, loyalty, and transactions,” writes Yatish Srivastav,managing director of Sapient’s financial services group, in a recent issue ofAmerican Banker. “While affluent customers don’t want technology toreplace human advice, they will use personalized technology applicationsthat complement adviser service.”


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Finding the balance between the Internet’s technology side and using it toconnect personally with customers is a fine line. In a November 2002Forrester Research report titled “Which Advisors Use Technology,” 89% ofUS financial advisors said their clients think they serve them better if theadvisor uses technology.

Srivastav suggests that banks use five “guiding principles” to create anonline personalization strategy for their mass affluent customers:

■ Be proactive. Don’t just wait for customers to come to you. Use yourcustomer data to alert them at relevant points in time.

■ Target advice and services. Contrary to some original concepts of theInternet portal, customers don’t need, and in most cases don’t want,information on everything. Make product and information viewsrelevant to specific customer profiles.

■ Enable customization. Empowering customers to determine what theywant to see and how they want to see it is a basic step toward makingthem more trusting of online interactions.

■ Take time to educate. The use of industry jargon on Web sites is a keydriver of online transaction abandonment rates. Web pages shouldspeak in the customers’ language and anticipate their needs forexplanations and clarity at key points.

■ Be mindful of privacy concerns, which are still a major factor inhibitingonline service adoption. Clever use of clear visual triggers can provideclients with a sense of comfort without needlessly raising concerns.

US Financial Advisors’ Attitudes toward the WebBeing Important to Their Clients, 2002 (as a % ofrespondents)

Clients want to access their accounts online

93%

Clients think I serve them better if I use technology

89%

Clients want to aggregate their accounts online

88%

Clients want to view their financial plan online

67%

Clients want to generate what-if scenarios online

58%

Thos who view accounts online value me less

23%

Source: Forrester Research, November 2002



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“Banks have to establish themselves as the trustedadviser in order to move into wealth management.They have to win the heart and soul of a customer.”— John K. Fletcher, head of North American wealth management services

unit, PricewaterhouseCoopers; American Banker, 14 July 2003

Perhaps the best way to pitch Internet-focused services to these affluentcustomers is on the Web. In the ForeSee Results survey of Forbes.comvisitors, who represent an affluent segment of potential online bankingcustomers, 28% of respondents said the Web is the most important sourceof online banking information—greater than the branch and far greaterthan traditional advertising venues such as newspapers, TV, or radio.

Most Important Sources of Online BankingInformation for US Consumers, 2003 (as a % ofrespondents)

Web 28%

Bank branch 15%

Bank statement 14%

Friends and colleagues 12%

Newspaper advertising 7%

TV advertising 5%

Radio advertising 1%

Note: n=847 visitors to Forbes.comSource: ForeSee Results and Forbes.com, June 2003



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In addition to the Web, e-mail can be another means for banks to connectwith the mass affluent. A survey by OneFN found that 25% of affluentinvestors made a transaction after receiving an e-newsletter. The 1,000respondents to this survey were 89% male, with an average income of$115,000 and an average investment portfolio of $350,000—clearly in themass affluent category.

And when this survey was taken in September 2002, the down market wasstill affecting investor confidence. Nevertheless, 30% of respondents feltmore comfortable than they did in 2001 about making purchases based one-mail advertising.

Affluent Investors that Made a Transaction afterReceiving E-Mail, by E-Mail Topic, 2002 (as a % ofrespondents)

Investment seminars 17%

Investment newsletters 25%

Options 8%

Publications 23%

Brokerage firms 17%

Note: n=1,000Source: OneFN, 2002; DMNews.com, September 2002


Comfort Level of Affluent Investors When MakingPurchases Based on E-Mail Advertising, 2002 (as a %of respondents)

Feel more comfortable than a year ago 30%

Feel less comfortable than a year ago 26%

Feel the same as a year ago 28%

Note: n=1,000Source: OneFN, 2002; DMNews.com, September 2002



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F. Small-Business Banking: Internet Wary?By virtue of being small, most small-business owners are pressed for time—too much to do, not enough people to do it all. Therefore, you might thinkthat most small businesses would find the time-saving aspects of onlinebanking enough of a draw that the majority of such companies wouldconduct most—or at least some—of their banking on the Web.

The numbers, however, tell a different story.In a report released earlier this year, the National Federation of

Independent Business (NFIB) surveyed over 2,000 of its member firmsabout credit and banking. The Washington, DC-based self-described“lobbying organization” found that, on average, only 11% of US smallbusinesses have done any banking on the Internet.

And the smaller the small business, the less likely it will bank online. TheNFIB data shows that only 7% to 8% of companies with annual sales of$100,000 or less use their bank’s Web channel. Conversely, 23% of largersmall businesses—those with annual sales of $5 million or more—do at leastsome of their banking online.

US Small Businesses Using Online Banking, by AnnualSales, 2001 (as a % of respondents)

<$50,000 7%

$51,000-$100,000 8%

$101,000-$200,000 11%

$201,000-$500,000 11%

$501,000-$1.5 million 8%

$1.501 million-$5.0 million 13%

$5.0 million+ 23%

All firms 11%

Note: n=2,223Source: National Federation of Independent Business, January 2003



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Another indicator of Internet banking usage is years in business, withcompanies that have been around four years or less most likely, at 19%, tobank online. As the NFIB says, this group is “presumably younger peoplewho may be more comfortable with this medium.”

With a definition of small business that includes enterprises with up to $10million in annual sales, NFO WorldGroup surveyed 10,000 companiesbetween May and September of 2002. The Greenwich, CT-based marketresearch firm found that 25% of small businesses banked online in 2002,up from 18% the previous year. With a sampling nearly five times as largeas the NFIB’s, that could explain the large difference in small-businesspenetration rate.

But even the higher NFO figure is similar to eMarketer’s share of total UShouseholds banking online figure of 22.1% in the “Counting OnlineBanking Customers” section above—meaning that small business are nomore likely to bank online than consumers.

US Small Businesses Using Online Banking, by Yearsin Business, 2001 (as a % of respondents)

1-4 19%

5-10 10%

11-15 12%

16-25 10%

26-35 9%

36 or more 11%

All firms 11%

Note: n=2,223Source: National Federation of Independent Business, January 2003


Percent of US Small Businesses Banking Online,1998-2002

1998 6%

1999 12%

2001 18%

2002 25%

Note: n=10,000Source: NFO WorldGroup, October 2002



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“In the end, small businesses value relationshipbanking and want to talk to the president andchief lending officer, and that can’t happen overthe Internet,”— John Scott, finance professor, Temple University; American Banker, 28

March 2003

Research from GartnerG2 runs in parallel with both the NFIB and NFO.According to the Stamford, CT-based company’s October 2002 report titled“Financial Providers Need Multichannel Small Business Strategy,” 13% ofUS small businesses were banking online as of Q3 2002. That’s comparableto the NFIB’s 11% figure for year end 2001.

And then GartnerG2’s 27% estimate for year end 2003 is in line withNFO’s 25% figure for 2002.

Analogous research from Informa Research Services found similar numbersto the NFIB and GartnerG2, with only 12% of small businesses with annualrevenues under $1 million banking online in 2002. However, the Calabasas,CA-based market research company expects that figure to double in 2003to 24%—in line with GartnerG2 and NFO WorldGroup.

US Small Businesses Using Online Banking Channel*,Q3 2002, 2003 & 2005 (as a % of respondents)

Q3 2002 13%

Year end 2003 27%

Year end 2005 45%

Note: *at banks with dedicated small business sitesSource: GartnerG2, October 2002



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And, just as with the NFIB, the larger the small business, the more likely itis to bank online, with 44% of companies having revenues of $1 million to$20 million on the Web in 2003.

But once again, only about one-quarter of small businesses banking onlinepaints a picture of reluctance. Why do so many small businesses still bankonly the old-fashioned way?

US Business Usage of Online Banking, by AnnualRevenues, 2001-2003 (as a % of respondents)

2001

7%

18%

2002

12%

35%

2003

24%

44%

$50,000-$999,999 $1,000,000-$19,999,999

Source: Informa Research Services, September 2003



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As John Scott, a finance professor at Temple University in Philadelphiawho helped conduct the NFIB survey, told American Banker, “It is not thatbanks are offering the wrong products or services or charging excessivefees…but rather that most small-business owners prefer to bank in person.”That’s his take on the matter. The GartnerG2 research shows that 24% ofsmall businesses don’t bank online because their bank doesn’t offer it(remember, switching banks doesn’t come easy) or because they don’t seethe value. That’s the job of the bank; to offer online services and productsfor small businesses that create real value for these busy entrepreneurs.

According to Informa, the increase in online banking among small-business owners is not due to any decrease in banking at the branch. Or asGartnerG2 found last year, 51% of US small businesses that bank (at leastpartially) on the Web employ an equal mix of the traditional branch andonline channels for their primary banking endeavors.

Reasons US Small Businesses Will Not Bank Online,July 2002 (as a % of respondents)

My bank doesn’t offer it 24%

Don’t see the value 24%

Security concerns 18%

Hassle to change bank methods 16%

Tried it--didn’t meet my needs 8%

Lacks key banking functions 5%

Too costly 3%

Tried it--poor customer service 3%

Note: n=129 small businesses with under $10 million in annual revenuesSource: GartnerG2, October 2002


Primary Banking Channel* Used by Small Businessesin the US, 2003 (as a % of respondents)

Note: *among businesses that conduct financial activity onlineSource: GartnerG2, October 2002


Traditional16%

Online banking 33%

Equal mix of traditionaland online banking51%


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Instead, Informa notes that “what has declined is reliance on thetelephone—especially automated telephone systems—as a result of theincrease in online banking usage.…The best way to leverage this trend is toreach out to micro and small business customers by investing in trainingfor the online channel.”

Such training might be for both branch employees and small-businesscustomers, with a focus on those tasks most companies want to accomplishonline. While a survey from the Association for Financial Professionals(AFP) looked at all sizes of US companies, the prime financial-service useof the Internet is for cash management, at 86% of respondents.

Besides such small-business banking basics as checking balances andtransferring funds, online cash management gives smaller companies thefinancial tools to better compete with larger enterprises.

What small businesses want from online services is help with cash flow. AsMark Baumli, Wells Fargo’s senior vice president in charge of businessInternet services, told American Banker, “There are three components tothis. What is my current position? Where is the money? And how much doI have?”

US Companies’ Use of the Internet for FinancialServices Activities, July 2002 (as a % of respondents)

Cash management 86%

Investments 52%

Foreign exchange 45%

Bank loans 39%

Letters of credit 32%

Insurance 31%

Bonds/commercial paper issuance 29%

Derivatives/hedging 21%

Note: n=346 AFP members and prospectsSource: Association for Financial Professionals (AFP), October 2002



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In another October 2002 GartnerG2 report—”Financial Services Online:Deliver What Small Businesses Want”—the researchers asked financialservices providers the reasons why small businesses bank online. Cashmanagement elements such as reducing costs to receive payments andfaster cash flow information were among the top reasons cited.

More than any financial activity online, the AFP expects the greatestincrease for cash management services, at 71%, in 2003.

Reasons that Small Businesses Use Online FinancialServices According to US Banks, Q3 2002 (as a % ofrespondents)

Note: n=71 financial services providers all with assets of at least $1 billionSource: GartnerG2, October 2002


Other2%

General help inrunning business

19%

Faster cash flowinformation

24%Save time26%

Reduce cost to acquirecredit, transfer fundsand receive payment

26%

US Companies’ Expected Use of the Internet forFinancial Services Activities, 2003 (as a % ofrespondents)

Bank loans

Bonds/commercial paper issuance

Cash management

Derivatives/hedging

Foreign exchange

Insurance

Investments

Letters of credit

Increase

24%

23%

71%

28%

47%

29%

47%

32%

Aboutthe same

74%

75%

28%

70%

52%

70%

51%

66%

Decrease

2%

2%

1%

2%

1%

1%

2%

2%




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“People in the field have come to realize that small-business people, like other customers, aredemanding more ease of access. They still wantpersonal contact, but they also want to have theability to look up balances and the status of checkslate at night.”— Steve Cocheo, executive editor, ABA Banking Journal; American Banker,

28 March 2003

In general, when small businesses bank online, they act much likeindividuals. The most popular basic activities, according to GartnerG2, arechecking according balances, transferring funds, and paying bills.


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However, while the tasks themselves are in many cases the same for smallbusinesses as for consumers, how the bank configures them should not be thesame. “Banks are rebuilding their Web sites and online banking platforms forsmall-business customers,” writes American Banker, “recognizing thatneither consumer nor corporate offerings quite fit their needs.”

According to Celent Communications, technology advances help banksgive small businesses the types of sophisticated products previously offeredonly to corporations. As reported in American Banker, “The new solutionsare very modular. That helps small businesses save money; they can useonly those they need.”

Online Banking Activities among Small Businesses inthe US, Q3 2002 & Year-End 2003 (as a % ofrespondents)

Check account balances

89%

89%

Transfer funds

73%

84%

Pay bills

65%

79%

Invest funds

38%

49%

Send invoices

24%

42%

Stop payments

24%

35%

Acquire credit cards

18%

32%

Buy insurance

4%

13%

Positive pay

4%

9%

Q3 2002 Planned by year-end 2003




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And as banks invest more in small-business services online, they also need tocontinue to merge branch and Internet channels—both for services offeredand in how employees engage customers. For example, banks need theirbranch employees to get involved in pitching and explaining online servicesto small-business customers. For motivation, it’s vital that those branchemployees are, in some way, compensated and recognized for those tasks,even when the customers take much of their business away from the branch.

That approach will reap continued profits for the institutions. AsGartnerG2 found, 55% of banks with dedicated small-business sites increasecustomer retention and 23% find revenue growth through cross-selling.

Primary Benefit of Small Business Online BankingChannel* in the US, Q3 2002 (as a % of respondents)

Customer retention

55%

Revenue growth through cross-selling

23%

Lower costs, activity shift from higher cost channels

11%

New customer acquisition

11%

Note: *at banks with dedicated small business sitesSource: GartnerG2, October 2002



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Part of the cross-selling benefit arises because small-business owners oftendon’t have their personal accounts with their primary business bank.According to Synergistics Research, “Small business customers are animportant facet of a financial provider’s customer base because, in additionto the business financial accounts and services, there is also the potential toenhance profitability by acquiring the business owner’s personal orhousehold accounts.”

So which banks are creating the best online services for their small-businesscustomers? In its fourth annual Small Business Internet Banking study,Speer & Associates ranked 92 commercial banks in North and SouthAmerica on the usability of their online small-business services. As reportedin American Banker, five US banks made the top 10. They are, by rank:

1. Wells Fargo3. FleetBoston4. PNC Financial9. Citigroup10. National City

Note: n=600 (small business owners and executives of companies withannual sales of $100,000 to $10 million)Source: Synergistics Research Corp., May 2003

None33%

Some34%

All33%

Incidence of Personal Accounts with Their PrimaryBusiness Financial Services Provider among US SmallBusiness Owners and Executives, 2003 (as a % ofrespondents)


IIIMethodology 7




A. The Forces Behind Online Bill Payment’s Growth 96

B. The Online Bill Payment Market 102

C. How Consumers Pay Bills 109

D. The Fee Problem 126

E. Banks vs. Billers (aka, Consolidators vs. DirectPayment) 130

F. Automated Clearing House (ACH) 146





Index of Charts 243


95



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“Electronic payments” is an umbrella term covering the following types of payments:

■ online bill payments, by both consumers and companies■ electronic bill presentment and payment (EBPP), also called online billing■ electronic checks■ non-Internet electronic payments through networks such as the

automated clearing house (ACH)■ credit card payments online, mainly to Internet retailers■ person-to-person or peer-to-peer (P2P) payments, most notably done

via PayPalFrom the perspective of US banks, the two key aspects of electronicpayments are online bill payments and online billing (aka, EBPP). The firstterm refers to simply paying bills online, whether at the billing company’sown Web site, the bank’s site, or some other third party site, such asYahoo!’s. But online bill payment does not include viewing the bill itself;that element—called both online billing or EBPP—completes the processand makes the electronic version fully competitive with the traditionalpaper method.

A.The Forces Behind Online BillPayment’s GrowthWhether it’s simple online bill payment or full-fledged online billing, thesetwo kinds of e-payments are essential to today’s banking industry for atleast three reasons.

■ One, research shows that customers who pay bills online tend both tohave higher incomes than the average customer and to buy more productsand services from their banks—making them more valuable customers.

■ Two, online bill payment customers tend to be more loyal to theirbanks as well, another source of value.

■ Three, with the increase of e-payments in general, paper check usagehas declined; as that traditional source of revenue shrinks, banks neednew sources to supplement it.

Let’s flesh out those three points with data.In May 2003, comScore released a study showing that consumers who

pay bills at their banks’ Web site hold an average account balance ofapproximately $4,800, which is double the $2,400 average balance of thosewho bank online but don’t pay bills. In addition, comScore says thatyounger and higher income consumers are more likely to pay bills online.

“Our customers with online bill pay have deeper relationships with the bank. They havemore accounts.”— Betty Riess, spokeswoman, Bank of America; Sacramento Business

Journal, 16 June 2003


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Some of the most frequently cited research about the connection betweenonline bill payment and more profitable banking customers comes fromBank of America, which eliminated fees for bill payment last year (findmore about that question in the section “The Fee Problem” below). With agreater absolute number and penetration of online bill payment customersthan any other US bank—2.1 million of its 5.3 million active onlinecustomers as of June 2003—BofA gets it.

The “it” in this case is value. Research from Forrester for the Charlotte,NC-based bank found that not only do online bill payment customers buymore products, such as loans and accounts, than do offline customers, theybuy even more the longer they’ve been paying bills online.

The numbers are spectacular. Take loan balances. After nine months ofbill payment, these online customers have balances 10% greater thanoffline customers. But after 31 months of bill payment, that increases to45% larger balances.

Bank of America's Product Relationships with OnlineBill Payers, by Time Paying Bills Online, 2002 (as a %increase vs. offline customers)

Loan balances

10%

23%

45%

Number of loans

8%

9%

11%

Deposit balances

24%

31%

38%

Deposit accounts

9%

9%

16%

After 9 months After 19 months After 31 months

Source: Forrester Research, Bank of America, 2002; CheckFree, June 2003



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One reason behind the greater likelihood of higher balances and moreproduct purchases by online bill payment customers comes simply frommore frequent contact between them and their bank. Of the polled visitorsto Forbes.com, 51% of bill payers said that they used online banking everyday versus 27% of those who don’t pay bills online.

Loyalty is another major source of customer value. As the rule of thumbsays, the customers you already have give you 80% of your business, whilenew customers give you only 20%.

Data from comScore shows that online banking customers who don’t usebill payments are more likely to discontinue banking online than billpayment customers. Specifically, 34% of non-bill payment customers whobanked online in Q2 2002 became inactive online customers by Q4 2002. Incontrast, only 16% of bill payment customers stopped being active onlineduring the same period.

“Consumers who sign up and begin to pay billsonline at their banks’ Web sites are more thantwice as likely to stay with their banks.”— Avivah Litan, vice president and research director, Gartner

Similarly, 59% of consumers who pay bills online told InsightExpress inSeptember 2003 that because they’re now banking online, they are muchless likely to switch banks.

Frequency of Use of Online Banking among US OnlineBankers Using Bill Payment vs. Those Not Using BillPayment, 2003 (as a % of respondents)

Every day

51%

27%

Once a week

39%

56%





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An even higher number of online bill payment customers, 72%, toldCheckFree—an Atlanta-based online bill payment provider—that they’reless likely to switch banks.

Finally, point three, the decline of paper checks. According to CelentCommunications, “Banks currently derive $4.2 billion in annual fees fromconsumer checks. Revenues come from checkbook distribution, checkdeposits by merchants, retail lockbox services, and non-sufficient funds(NSF) fees.…As consumers choose e-payments over checks, banks aremissing out on revenues. This trend will persist over the next few years asthe check goes away, especially because US banks are overly dependent onNSF fees.”

The specific numbers from Celent show that revenues potentially lost byUS banks as a result of e-payments will be $138 million this year, rising to$271 by 2007.

Attitudes Regarding Banking among Active OnlineBill-Pay Customers in the US, 2003 (as a % ofrespondents)

Definitely would recommend online bill pay 74%

Less likely to switch banks 72%

Very satisfied with online bill pay 68%

Very satisfied with online banking 67%

Source: CheckFree, June 2003


Potential Payments Revenues Lost by US Banks as aResult of Electronic Payments and Check Conversion,2002-2007 (in millions)

2002 $145

2003 $138

2004 $144

2005 $159

2006 $206

2007 $271

Source: Celent Communications, March 2003



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No matter which facet of the electronic payments market you look at,there’s little question that the long-lived era of paper checks is now at thebeginning of a definite downward slide.

“We’ve heard about the checkless society fordecades, and now it is starting to happen.”— Jack Walton, assistant director, Federal Reserve Board; American Banker,

27 October 2003

In the Federal Reserve Board’s most recent annual report, the Fed said thatfor the third year in a row, the number of checks it processed fell. In 2002,the Fed processed 16.59 billion checks. That’s a 1.9% drop from 2001’sfigure of 16.91 billion, which represented a 0.5% drop from 2000’s checkprocessing total.

“The central bank clears [56% of all interbank checks]… so its numbers are considered reflective of the industry as a whole,” reportsAmerican Banker.

Furthermore, in late October 2003, the Fed announced that it will process4.8% fewer checks in 2003 than last year, and expects the volume figure tofall 9% further in 2004. Indeed, the Fed says that 2003 will be the first yearwhen electronic payments will outnumber checks.

And according to the Farragut Group—an Arlington, VA-based financialservices management consulting firm—the volume of paper checks willdrop by 5% by 2005. “We foresee more incentives—or disincentives,depending on how you look at it—[promoting electronic payments] in thecoming years at the point of sale and with electronic bill payments.”

Volume of Checks Handled by the US Federal Reserve,2000-2002 (in billions)

2000 16.99

2001 16.91

2002 16.59

Source: Federal Reserve System, June 2003



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The rising use of bank debit cards, along with credit cards, are two moreelectronic payment forces behind the decreased usage of paper checks.According to Dove Consulting, 60% of US consumers write two or fewerchecks each month to make purchases in stores.

In addition to decreased consumer usage of checks, the lower costs tofinancial institutions for e-payments make them more attractive. TheFederal Reserve annual report says that the cost to the Fed to process acheck remained at 4.5 cents per item in 2002, an increase from 3.6 centsper check in 1995. In contrast, the same ACH payment that cost 3.5 cents in1995 decreased to 1.3 cents in 2002.

Furthermore, the Fed said in late October 2003 that its fees for checkprocessing will rise in 2004, while ACH processing fees will fall.

Another area of less cost: An online bill payment transaction cost thebank about 1 cent, according to a 2002 study from Booz, Allen & Hamilton,the McLean, VA-based consulting firm. Meanwhile, one ATM transactioncosts 27 cents, while a teller transaction costs $1.07.

“Just adding e-bill [presentment] generates $96 peryear for every customer using it.”— Matt Lewis, senior vice president, CheckFree; American Banker, 21 July

2003

20+5%11 to 20

7%6 to 10

11%

3 to 517%

0 to 260%

Number of Checks per Month that US ConsumersWrite to Make Purchases in Stores, 2002 (as a % ofrespondents)

Source: Dove Consulting, May 2003


However, banks aren’t the only players going after this higher income,greater loyalty e-payments customer. The companies doing the billing areequally avid for that customer’s Web site presence, and at this point arewinning the game. Perhaps the key leverage point here is that in nearly allcases, the billing companies charge customers nothing extra to pay their billsonline, while many banks impose a fee. A secondary leverage point workingin favor of the billers is that they can easily deliver the actual bill online,while that capability is still in the future for many banking institutions.

In the following sections, this report will look at how online bill paymentand other e-payment areas are transforming the banking industry.

B.The Online Bill Payment MarketNo matter where the consumer pays the bills, the market for online billpayment is going in only one direction: up.

Estimates from eMarketer indicate that in 2003, 23 million UShouseholds will pay at least one bill online, whether at their bank’s site ordirect to the biller. The number of online bill payment households willnearly double to 44 million by 2006.

The prime movers behind the growth are three-fold: One, the time-savingfactor will become increasingly apparent to consumers, especially as morehave broadband connections at home, which makes the process faster. Two,more and more banks will eliminate fees for online bill payment, makingthe convenience of paying multiple bills on a single site palatable. Three,the technology for implementing full-fledged bill presentment will spread,making the online payment experience fully equal to that in traditional,paper realms.

Online Bill Payment Households in the US, 2000-2006 (in millions)

2000 8

2001 11

2002 15

2003 23

2004 32

2005 39

2006 44




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As a percentage increase versus the prior year, the greatest growth willoccur this year, as US online bill payment households soar by 53.3%. As theservice becomes more established among consumers, strong growth willcontinue through 2006, just not as fast as the current pace.

“The rate at which consumers are adopting onlinebanking and bill payment services ranks these two activities among the fastest growing on the Internet.”— Mike Sinco, director of analytics, comScore Financial Services Solutions;

Silicon Valley Business Journal, 21 April 2003

Online Bill Payment Households in the US, 2001-2006(as a % increase vs. prior year)

2001 37.5%

2002 36.4%

2003 53.3%

2004 39.1%

2005 21.9%

2006 12.8%




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The penetration rate for online bill payment households among all Internetaccess households in the US will pass the 50% mark sometime in 2006. Atthat point, online bill payment will be even more well established thanonline banking in general.

Online Bill Payment Households in the US, 2000-2006(as a % of total and online households)

2000

17.4%

7.7%

2001

19.4%

10.5%

2002

23.5%

14.2%

2003

32.7%

21.6%

2004

42.3%

29.7%

2005

48.9%

35.8%

2006

53.0%

40.0%

Online households Total households

Note: US household estimates based on US Bureau of Census data; USonline household estimates based on eMarketer dataSource: eMarketer, October 2003



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The comparative estimates of online bill payment households in 2003range from TowerGroup’s 16 million figure at the low end up to 31 millionfrom Jupiter Research. Since these estimates are attempting to gauge bothpayments at banking sites and at billing company sites, it can be difficultto pin down.

The comparative growth rates are also across the board. While FinancialInsite, Forrester Research, and TowerGroup saw the greatest growth rates lastyear—ranging from 41.7% to 66.7%—Dove Consulting and Jupiter Research,along with eMarketer, see it this year, ranging from 29.2% to 53.3%.

Comparative Estimates: Online Bill PaymentHouseholds in the US, 2000-2006 (in millions)

2000 2001 2002 2003 2004 2005 2006

Dove Consulting, October 2002 13 15 18 27 40 – –

eMarketer, October 2003 8 11 15 23 32 39 44

Financial Insite, December 2002 6 12 20 25 30 34 37

Forrester Research, May 2002 7 12 17 21 – – –

Jupiter Research, July 2002 – 19 24 31 38 44 52

TowerGroup, June 2002 – 9.5 14 16 19 23 26

Source: eMarketer, October 2003; various, as noted, 2002


Comparative Estimates: Online Bill PaymentHouseholds in the US, 2001-2006 (as a % increase vs.prior year)

2001 2002 2003 2004 2005 2006

Dove Consulting, October 2002 15.4% 20.0% 50.0% 48.1% – –

eMarketer, October 2003 37.5% 36.4% 53.3% 39.1% 21.9% 12.8%

Financial Insite, December 2002 100.0% 66.7% 25.0% 20.0% 13.3% 8.8%

Forrester Research, May 2002 71.4% 41.7% 23.5% – – –

Jupiter Research, July 2002 – 26.3% 29.2% 22.6% 15.8% 18.2%

TowerGroup, June 2002 – 47.4% 14.3% 18.8% 21.1% 13.0%

Source: eMarketer, October 2003; various, as noted, 2002



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Most researchers see at least one in five US households paying bills onlinethis year.

Looking at comparative estimates of online bill payment households as ashare of online households, all researchers (other than Tower) project apenetration rate at or above 40% by the end of next year.

Comparative Estimates: Online Bill PaymentHouseholds in the US, 2000-2006 (as a % of totalhouseholds)

Dove Consulting, October2002



Forrester Research, May2002

Jupiter Research, July 2002

TowerGroup, June 2002

2000

12.6%

7.7%

5.8%

6.8%

–

–

2001

14.4%

10.5%

11.5%

11.5%

18.2%

9.1%

2002

17.1%

14.2%

19.0%

16.1%

22.8%

13.3%

2003

25.3%

21.6%

23.5%

19.7%

29.1%

15.0%

2004

37.1%

29.7%

27.9%

–

35.3%

17.6%

2005

–

35.8%

31.2%

–

40.4%

21.1%

2006

–

40.0%

33.6%

–

47.3%

23.6%

Note: US household estimates based on US Bureau of Census dataSource: eMarketer, October 2003; various, as noted, 2002


Comparative Estimates: Online Bill PaymentHouseholds in the US, 2000-2006 (as a % of onlinehouseholds)

Dove Consulting, October2002



Forrester Research, May2002

Jupiter Research, July2002

TowerGroup, June 2002

2000

28.3%

17.4%

13.1%

15.3%

–

–

2001

26.4%

19.4%

21.1%

21.1%

33.5%

16.7%

2002

28.3%

23.5%

31.4%

26.7%

37.7%

22.0%

2003

38.4%

32.7%

35.5%

29.8%

44.0%

22.7%

2004

52.8%

42.3%

39.6%

–

50.2%

25.1%

2005

–

48.9%

42.6%

–

55.1%

28.8%

2006

–

53.0%

44.6%

–

62.7%

31.3%

Note: US online household estimates based on eMarketer dataSource: eMarketer, October 2003; various, as noted, 2002



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Turning from the number of online bill paying households to the billsthemselves, Celent says that while consumers will pay 500 million billsonline in 2002, that will rise to 3.6 billion by 2007, or a 620% gain. Anddirect debit payments, while increasing at a substantially slower 61% rate,are expected to reach 4.5 billion by 2007.

Projections from Jupiter say that over 1.5 billion bills will be viewed onlinein 2003, rising to over 3.5 billion by 2006. At that point, the viewed billswill comprise 36% of all bills received by US banking households (which,as mentioned above, is about 90% of all households).

In the same May 2003 report, “Online Privacy: Ensuring Secure, PrivateCommunications with Customers,” Jupiter says there will be 126 milliononline biller account enabled in 2003. With the New York-based researchfirm’s estimate of 31 million bill payment households this year, that makesan average of 4.1 biller accounts per household.

Consumer Bill Payments in the US, by PaymentMethod, 2002 & 2007 (in billions)

Direct debit

2.8

4.5

Online bill payment

0.5

3.6

2002 2007



Number of Bills Viewed Online in the US, 2001-2006 (inmillions and as a % of all US bills for bankinghouseholds)

2001 643 (7%)

2002 1,019 (11%)

2003 1,507 (16%)

2004 2,076 (22%)

2005 2,750 (28%)

2006 3,519 (36%)

Source: Jupiter Research, May 2003



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Taking it out to 2006, with 293 million biller accounts among 52 millionhouseholds, that works out to 5.6 accounts per household. The implicationthere, with an average growth of 1.5 biller accounts, is that as morehouseholds pay bills online, they will tend to go directly to biller sitesrather than to consolidators such as banks.

US Online Biller Accounts Enabled, 2002-2006 (inmillions)

2002 85

2003 126

2004 173

2005 229

2006 293




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C. How Consumers Pay BillsBefore we examine the bill payment habits of Internet consumers, let’s establish a foundation and look at their bill payment habits across all channels.

According to recent research from InsightExpress, 87% of US consumersstill use checks to pay bills, more than any other method. Meanwhile, 35%pay bills directly at biller’s Web sites, while 31% go online to their primaryfinancial institution.

That last figure is about the same as an older e-payment method, bytelephone. In that case, the direct debit from the consumer’s accounttypically goes through the automated clearing house network, making itanother form of e-payment.

Note, too, that at this point in time, many consumers use multiplemethods to pay bills: some check, some online, some phone.

When the question doesn’t allow for multiple responses, and asks insteadfor the primary method consumers use to pay bills—as Paymentech did inthe “Bill Pay Preferences Survey” conducted by the polling company thispast July—paper checks still come out on top, at 60%. With the similarpaper payment vehicle, the money order, at 10%, that means 70% ofconsumers still primarily pay bills the traditional way.

Methods US Consumers Use to Pay Bills, 2003 (as a %of respondents)

Write checks

87%

Online via individual (biller's) Web sites

35%

Online through primary banking institution

31%

Phone using telepay services

30%

Online bill-paying service

8%




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Note here that Paymentech uses the term “electronic check” or “e-check” todescribe typical online bill payment: providing a biller with a checkingaccount and bank ABA routing number, for direct debit payment online.

Viewed by age group, and a demographic trend toward online billpayments shows up. For example, while 10% of respondents ages 18 to 34pay bills online primarily, only 6% to 7% of the three older age groups dothe same.

Refusedto answer6%

Don't know6%

Credit card5%

Debit card7%

E-Check*7%

Money order10%

Paper check60%

Primary Method US Consumers Use to Pay Bills, July2003 (as a % of respondents)

Note: n=1,017; *providing a biller with a checking account and routingnumber to make a payment onlineSource: the polling company commissioned by Paymentech, July 2003


Primary Bill Payment Method Used by US Adults, byAge, July 2003 (as a % of respondents)

Paper check Money order E-Check* Debit card

18-34 49% 14% 10% 9%

35-44 59% 11% 7% 9%

45-54 65% 9% 6% 8%

55+ 70% 5% 7% 3%




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Celent Communications sees a similar figure as Paymentech for paperchecks, at 73% of all bill payments in 2002. But by 2007, the Boston-basedconsulting and research firm sees two forms of e-payments—online anddirect debit—rising to a 47% share of all payments.

However, by September 2003, Celent saw check usage dropping to 70%,with online bill payment rising from 4% to 6% of payments.


2002 2007

Directdebit2% Other

21%

Online billpayment

4%

Checks73% Direct

debit26%

Online billpayment21%

Checks52%

Primary Method US Consumers Use to Pay Bills, 2002& 2007 (as a % of all bill payments)


Online payments6%

Direct debit24%

Paper checks70%

Methods of Bill Payment Used by US Consumers, 2003(as a % of total payments)

Source: Celent Communications, 2003; American Banker, September 2003



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As of November 2002, 80% of US consumers told TowerGroup that theyprefer to receive their bills by mail. These results are not so much about the payment side of billing but the presentment side; except for same-amount-each-month bills like mortgage payments, most consumers wantto see the bill itself. And at this point, that means the mail more than thecomputer screen.

Finally, one of the potential time-saving aspects of online bill payment isease of tracking bills, payments, and balances. According to CheckFree,nearly equal numbers of US consumers either balance their checkbookregularly or simply throw statements into a folder or the proverbialshoebox. However, 22% currently use their online banking or bill-paymentservice, a number that’s bound to increase.

Other7%Neutral or

uncertain13%

Mail80%

US Consumers Who Prefer Receiving Their Bills byMail, November 2002



Systems US Consumers Use to Track Bills, Paymentsand Balances, 2003 (as a % of respondents)

Balance checkbook with each statement

44%

Use folder to keep track of bills and payments

43%

Use online banking/bill-pay service

22%

Nothing

19%

Use a financial management software package

15%

Note: n=1,000Source: CheckFree, Greenfield Online, June 2003



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Bill Payment Activities & AttitudesIn a September 2002 survey, 45% of consumers told Gartner that they paybills online to save time, while an additional 10% cited cost savings as theprimary motive to use the service.

Saving time, saving money—two fundamental reasons to pay bills on theWeb. A somewhat higher percentage of consumers, 55%, also citedspending less time paying bills as the main reason to take care of themonline. The two related reasons of wanting to get better organized and toget better control of their money were the next-most important reasons inthe CheckFree survey.

Reasons Why US Consumers Enroll to Pay Bills Online,2003 (as a % of respondents)

Want to spend less time paying bills

55%

Want to get better organized

46%

Want better control of money

40%

Save money on stamps

37%

Travel a lot

31%

Always used online banking

24%

Incentive convinced me

21%

Emergency or late fee made me decide it was time

11%

Major change in life occurred

11%

Ad or direct mail convinced me to enroll

10%

Note: n=1,200Source: CheckFree, June 2003



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Further research from CheckFree on the drivers behind US consumers’usage of online bill payment offers a different, not necessarilycontradictory, focus. The first four listed drivers are all about saving time:having payment history in one place, storing biller information online,paying multiple bills at once, and the ability to pay all bills were cited by87% or more of respondents.

Drivers Behind US Consumers Usage of Online BillPayment, 2003 (as a % of respondents)

Payment history in one place

93%

92%

Stored payee information online

91%

90%

Pay multiple bills at once

88%

82%

Ability to pay all bills

87%

77%

Schedule bills ahead of due date

82%

75%

Support for resolution of payments

83%

57%

Schedule autodebits with control

63%

51%

Recurring payments

66%

51%

Use with personal finance management software

36%

24%

Important Used




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Further indicators that saving time, in all its manifestations, is the maindriver behind online bill payment adoption come from the July 2003 “BillPay Preferences Survey” from Paymentech. While indirect, the fact that thelarger the household the greater the preference for paying billselectronically points to time savings, since the larger the household thebusier it is, typically.

Another driver for online bill payment is the growth of broadband usageamong consumers, since high-speed connections increase nearly all typesof online activities. The Yankee Group found that whether the bill was for acredit card, cable TV, or a cell phone, to name three, people with broadbandconnections are more likely to pay online.

US Consumers' Preferences for Paper Check vs.E-Check* for Paying Bills, by Household Size, July 2003(as a % of respondents)

1

74%

11%

2

70%

10%

3 to 5

64%

14%

6 to 8

44%

25%

Paper check E-Check



Online Bill Payers in the US, by Access Type andService, 2002 (as a % of respondents)

Dial-up High speed

Internet 12% 18%

Credit card 8% 21%

Local 6% 15%

Long distance 6% 15%

Wireless 6% 15%

Cable 4% 16%

Utilities 3% 15%

Source: Yankee Group, June 2003



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While 55% of respondents to the Paymentech survey have never paid a billonline through direct debit, 11% used that method more than ten timesduring the past year and 4% pay that way for every bill.

Meanwhile, many consumers continue to dip their toes into the onlinebill-pay waters, with 19% of respondents using e-checks six or fewer timesduring the past year.

US Consumers' Frequency of Usage of an E-Check*during the Past Year, July 2003 (as a % of respondents)

Once

6%

Two to three times

8%

Four to six times

5%

Seven to ten times

2%

More than ten times

11%

Every time a bill is paid

4%

Do not know, unsure, depends

4%

Refused to answer

6%

Never

55%




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The results above viewed usage among all consumers. But when just thoseadults who prefer to pay bills online were surveyed, 25% used e-checksover ten times during the past year and 18% for every monthly statement.

Somewhat counterintuitive results appear in the breakdown of e-checkusage by age. While the youngest users tend to adopt more online activitiesthan older ones, in the case of bill payment the two age groups that havemost likely paid bills online through direct debit are the 35 to 44 segment(at 41%) and the 45 to 54 cohort (at 39%).

Frequency of E-Check* Usage among US Adults to PayBills Online during the Past Year, July 2003 (as a % ofrespondents who prefer to pay bills online)

One to three times 16%

Four to ten times 14%

Over ten times 25%

For every monthly statement 18%

Never 22%



US Consumers' Usage of an E-Check* during the PastYear, by Age, July 2003 (as a % of respondents)

18 to 34

50%

35%

35 to 44

49%

41%

45 to 54

55%

39%

55+

62%

31%

Never used an e-check Used an e-check




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In fact, while the Internet may be the prime venue for electronic billpaying, when it comes time to set up the payment account, the telephonestill rules. According to Paymentech, 50% of those consumers who’ve usede-checks established the account on the phone directly with the biller.

Methods US Consumers Use to Set Up E-Check*Payments, July 2003 (as a % of respondents)

By telephone with biller company

50%

On Web site of biller company

23%

Through bank

22%

Through payment service (e.g., Paytrust, Princeton eCom,Metavante, DST Output)

4%

Do not know, unsure, depends, don't remember

3%

Other

3%

Note: n=386 (consumers who've used e-checks); *providing a biller with achecking account and routing number to make a payment onlineSource: the polling company commissioned by Paymentech, July 2003



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With all the time-saving benefits of online bill payment, only 12% of USconsumers are more likely to do business with a company if it allowselectronic payment. A surprising 7% are less likely (why?!?), while for astriking 70% of respondents, it makes no difference.

Refused to answer6%

Do not know, unsure, depends5%

Less likely7%

No difference70%

More likely12%

Likelihood that US Consumers Will Do Business with aCompany If It Accepts E-Checks*, July 2003 (as a % ofrespondents)




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According to 16% of the 1,017 US consumers polled by Paymentech, thesingle biggest benefit of paying bills electronically is less chance of latecharges. A close 15% cite not having to mail it as their biggest benefit.

Biggest Benefit for US Consumers from Paying a Billby E-Check*, July 2003 (as a % of respondents)

Less chance of late charges

16%

Not having to mail it

15%

Can do it from home or office

12%

Money immediately deducted from account

9%

Easier to manage bank account

7%

More secure than paper check

3%

Other

5%

Do not know, unsure, depends

25%

Refused to answer

8%




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With multiple responses allowed, the InsightExpress survey found thatpaying bills in less time (77%) and making last minute payments (74%) arethe two main benefits claimed by consumers who pay bills online.

However, consumers may be somewhat naïve about online bill payment as ameans to reduce possible late charges and its allowing them to make lastminute payments. First off, last-minute payments rarely occur, since ittypically takes five to seven business days for most payments to be processed.

“We have to inspect every [online bill payment]check by hand, and determine whether it has allthe information we need. It is not cost-effective forus to process these checks.”— Cindy Murray, executive vice president, ABN Amro; American Banker, 19

May 2003

In addition—and this is the hidden secret of online bill payment—“fewpeople realize that most of these electronic transactions are eventuallytransformed into paper checks cut by the bank or its vendor and courieredto the payee,” reports American Banker. In fact, “less than half of homebanking payments are sent to billers in electronic format. The rest areturned into paper checks, which arrive without payment coupons at banklockboxes. They must be processed by hand, which is expensive and time-consuming—as well as a recurring source of data entry errors.”

Benefits Associated with Online Bill Payment, by USConsumers Who Pay Bills Online, 2003 (as a % ofrespondents)

Pay bills in less time

77%

Make last minute payments

74%

Reduced need to visit post office

58%

Cost savings from not needing postage

56%

Schedule payments in advance

47%

Centralized payment history and record keeping

41%

Make bill payments when traveling

39%




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Dove Consulting—a Boston-based financial services market research firm—said in May 2003 that about 60% of all online consumer banking paymentsend up as paper checks, and the fact that there are so many glitches involvedin this process threatens the vitality of online bill pay. “Late payments are theNo. 1 source of customer complaints with home banking.”

This lag between initiating online payment and it being recorded by thebiller is one reason that savvy consumers prefer paying directly at eachbiller’s Web site.

“The consumers think that everything goes through the system electronically [for bills paidonline]. That’s what I would think if I wasn’t in the business.”— Mark Havlik, team manager, Wachovia; American Banker, 19 May 2003

With all that, a significant majority of active customers are happy with online bill payment, with 74% of respondents to CheckFree’s April2003 survey saying they would recommend the service, and 68% sayingthey’re very satisfied. (Note that CheckFree is a company in the online billpayment market.)

Attitudes Regarding Banking among Active OnlineBill-Pay Customers in the US, 2003 (as a % ofrespondents)

Definitely would recommend online bill pay 74%

Less likely to switch banks 72%

Very satisfied with online bill pay 68%

Very satisfied with online banking 67%




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And among the affluent Forbes.com visitors surveyed by ForeSee Results,those using online bill payment are more likely to recommend their bank’sWeb site and to purchase more services from the bank.

Satisfaction isn’t the only story, however, from US consumers. A significant43% of inactive online bill payment customers told CheckFree they don’tintend to use the service again. Finding out what makes them tick isimportant to financial institutions trying to take advantage of the morevaluable bill payment customer.

Attitudes Regarding Their Bank among US CustomersUsing Online Bill Payment vs. Those Not Using BillPayment, 2003 (based on a 100-point scale*)

More likely to recommend bank Web site

79

64

More likely to purchase more services from bank

65

51


Note: n=847; *satisfaction measured on a scale of 1 to 100, utilizing theAmerican Customer Satisfaction Index (ACSI) methodologySource: ForeSee Results and Forbes.com, June 2003


Don't intend to use43%

Intend to make apayment57%

Intent to Use Bill-Pay Services among Inactive OnlineBill-Pay Customers in the US, 2003 (as a % ofrespondents)




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Not all bills paid electronically are done online through direct debit usingbank routing and customer account numbers. When consumers pay billswith credit or debit cards, their three main motivations are incentive/reward programs, convenience, and ease of use, cited by 18% to 19% ofrespondents. The lag time between bill payment and credit card payment,or float, was mentioned by 16% of consumers in the Dove survey.

What US Consumers Like Best about Paying Bills witha Credit or Debit Card, 2002 (as a % of respondents)

Incentives/rewards 19%

Convenient 19%

Ease of use 18%

Delayed payment 16%

Dependability 11%

Only option available 10%

Saves time 6%

Bill consolidation 6%

Avoid checks 6%

Saves money 4%

Note: multiple responses allowedSource: Dove Consulting, May 2003



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How banks promote their online bill payment services is not so much byadvertising by through cross-channel methods. That is, while 30% ofconsumers heard about the bill-pay services on their bank’s Web site, anadditional 25% heard about it in person, from a bank employee in a branch.

Another means to promote online bill payment says it’s good for theenvironment. The September 2003 study from Wells Fargo says that“viewing and paying bills online reduces the amount of wood, water andenergy that would otherwise be used to make paper. Based on US PostalService data, each household sent or received an average of 20 bills,statements and checks each month in 2002, representing a yearly tally ofmore than 771,000 tons of paper.”

Therefore, if all US households paid their bills online, it would offer someof the following possible benefits:

■ Save more than 29 trillion BTUs, more than enough energy to provideresidential power to the city of Jacksonville, FL for one year.

■ Save 18.5 million trees each year, or the amount of lumber needed for216,054 typical single-family homes.

■ Save more than 15.8 billion gallons of wastewater a year, more thanthat generated by the city of Fresno, CA.

■ Reduce toxic air pollutants by 2.2 billion tons of CO2 equivalents, akinto having 390,326 fewer cars.

■ Reduce by 1.7 billion pounds the solid waste generated in a year, equalto the raw tonnage generated by Detroit in a year’s time.

■ Save landfill space and curb the amount of toxic chemicals—includingmethane gas—released into the atmosphere as paper decomposes. Acontributor to global warming, methane gas has 21 times the heat-trapping power of carbon monoxide

Ways US Consumers Heard about Online Bill PaymentServices, 2003 (as a % of respondents)

Bank Web site 30%

Account manager in branch 25%

Word of mouth 19%

Brochure or signage at bank 18%

Teller at branch 11%

Direct mail advertisement 11%

Bill insert 11%

TV or radio 6%

Magazine or newspaper 5%




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Clever and true—the environmental tact seems appropriate for a SanFrancisco-based bank like Wells Fargo.

For more about consumers and online bill payments, see eMarketer’s“Electronic Payments” report at:http://www.emarketer.com/products/report.php?electronic_payments_jun03

D.The Fee ProblemAs the Wells Fargo data at the close of the previous section shows, all theclever promotions in the world won’t help banks overcome the majorstumbling block in building its base of online bill payment customers.Some banks get it. Some banks don’t. The “it” is simple: Consumers havelittle desire to shell out a fee in order to pay their bills online.

In fact, the single most important factor when deciding whether to paybills online is price, according to 26% of consumers in a Collective Dynamicssurvey sponsored late last year by CheckFree, US Bancorp, and Visa USA. Theelement of price was cited by twice as many people as the next mostimportant factor, the specific provider, mentioned by 13% of respondents.

“Consumers universally reject any direct fees foronline access, because they generally feel likethey’re being charged for something that costs theprovider less money.”— James Van Dyke, founder, Javelin Strategy and Research; Banking

Strategies, November-December 2002

http://www.emarketer.com/products/report.php?electronic_payments_


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In separate research from CheckFree—the Atlanta-based electronicpayments company—consumers in the US cited fees as their major concernwhen considering online bill payment, more than privacy or loss of control.

Actually, consumers alleviate those fee concerns merely by not paying billsat their banking Web site. Instead, more and more consumers pay billsdirectly at each biller’s Web site, at no extra charge. Research fromTowerGroup indicates this trend toward direct payment will increase, goingfrom 56% of customers this year up to 61% by 2005. (For more on thebattle between banks and billers, see the next section, “Banks vs. Billers.”)

US Consumers' Concerns Regarding Adoption ofOnline Bill Payment, 2002 (on a scale of 0 - 10*)

Fees 6.7

Privacy 6.4

Control 6.1

Glitches 5.8

Reliability 5.6

Data security 5.3

Hackers 5.3

Absence of paper trail 5.1

Lack of comfort 4.6

Note: n=1,063; *scale of 0 (no concern) to 10 (extreme concern)Source: CheckFree, October 2002


Share of Electronic Bill Presentment and PaymentMarket, Biller-Direct vs. Consolidators, 2001-2005 (as a% of customers)

2001

41%

58%

2003

56%

43%

2005

61%

40%

Biller-direct Consolidators*

Note: *the majority of consolidators are bank Web sitesSource: TowerGroup, August 2003; American Banker, August 2003



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Bearing in mind that the majority of bill-payment consolidators arebanking Web sites, this drop of bill-pay customers is worrisome.

Consider May 2003 research from comScore Networks indicating thatonline banking customers who actively use their bank’s bill-paymentservices have an online attrition rate of only 16%, compared to 34% amongcustomers who do not pay bills at their bank’s site. In addition, comScorefound that active users of banking online bill payment have double theaverage account balances than those carried by the average online bankingcustomer. And Gartner says that a bank’s bill payment customers are twiceas likely to stay with it as well as keep balances that are 40 to 50% higher.

Customers continue to make their distaste for bill-pay fees clear. Next toconcerns about online security, 61% of consumers told InsightExpress thatany fee imposed is a disadvantage of online bill payment.

“The race is definitely on for control of consumerrelationships with their billing and payments.Banks are very proactive now in offering billpayment services. In some cases they’re payingconsumers to sign up for it instead of charging.”— Avivah Litan, research director, Gartner; Bank Systems & Technology, 27

June 2003

Disadvantages Associated with Online Bill Paymentby US Consumers Who Do Not Pay Bills Online, 2003(as a % of respondents)

Security of online bill payment account

75%

Any fee imposed by an online bill payment service

61%

Credibility of the company providing the online bill paymentservice

51%

Requirement to install and/or configure software

41%

Recourse for possible errors incurred while paying bills online

41%

Time required to learn how to pay bills online

32%

Skills or lack of a customer service organization

28%




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Flipping the coin, 51% of consumers in the same survey said that morethan any other factor, free online bill payment would encourage them touse the services.

So the cost of bill payment services counts for a lot. You might think thenthat the triple threat of consumer distaste for bill payment fees, directbillers stealing the online bill-payment thunder from banks, and the greatervalue of customers who pay bills online would convince banks to droptheir bill-payment fee charges.

You might think that—and you’d be partially right. More and more banksare eliminating their bill-pay fees, such as HSBC Bank USA, which got ridof fees for online bill payment starting in September 2003. The subsidiaryof HSBC Holdings PLC of London joined Bank of America, Bank One, FifthThird Bancorp, and several other banks in rescinding bill-payment fees.

“Online bill payment in the US has grown over 40%in the last year and this is in no small part thanksto the effort Bank of America has put intopromoting bill payment in conjunction with itsprovider CheckFree.”— Alex Brutin, analyst, Celent Communications; East Bay Business Times, 2

June 2003

Elements that Would Encourage US Consumers WhoDo Not Pay Bills Online to Try an Online Bill PaymentService, 2003 (as a % of respondents)

Free online bill paying/banking

51%

Limitation of liability should an unauthorized individual accessaccount

37%

Nothing; will not try any online bill payment service

36%

No software installation required

35%

Service provided by a company with which already do business

35%

24/7 customer service organization that can help with any issues

31%

Reduction in monthly bank fees

29%




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In fact, the research on the positive effects of BofA’s no-cost bill paymentserved as inspiration to HSBC. As John Camp, the Buffalo, NY-based bank’ssenior vice president and manager of personal e-business, told AmericanBanker, “We’ve seen similar trends like those Bank of America released—once [customers] become online bill payers they become more valuableover time.…HSBC’s online bill-pay customers are 38% more profitable thanthe average customer paying bills in traditional format.”

The profits are there, the competition of direct billers is clear. When willall banks get it?

E. Banks vs. Billers (aka, Consolidators vs.Direct Payment)The competition between banks and the billing companies to persuadeconsumers to pay bills at their Web sites presents a shifting market. Only afew years ago, most industry analysts believed that the combination ofconsumer trust in banks and the convenience of paying all bills at a singlesite meant that the consolidator model—with banks as the premier centralbilling place—would win out over the direct payment model at biller’s sites.

However, even with the logic behind the bank-consolidator model,consumers continue to gravitate to direct payments. For example, in aSeptember 2002 Web-based survey of more than 1,000 online adults, 79%of consumers told Gartner that they view their bills at a biller’s site, while10% said they viewed bills through a bank consolidation service. As theStamford, CT-based research company said, “Consumers are drawn tobillers’ sites because they can find their bills easily and the service is free.”

“They see that the [online bill payment] market isslipping away from them. That’s why you’ve gotbanks like Chase and Bank of America payingconsumers to use their service. They don’t want tolose that interface and that revenue.”— Avivah Litan, research director, Gartner; Bank Systems & Technology, 27

June 2003


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In a later Gartner study, this done with Dove Consulting, 60% of onlineconsumers prefer to pay directly at the billing company, while only 9%prefer their bank. The 27% who cited e-mail? That channel could be eitherbiller or bank, but most frequently it’s the biller who notifies customers by e-mail.

According to CheckFree, consumer usage of online bill payment methodshas taken two divergent paths. While those going directly to billers’ sitessoared from 12.5% in February 2001 to 28.1% in October 2002, those goingto consolidators (mainly banks) crept up from 16.4% to 19.7% during thesame period.

Other4%

Bank9%

E-Mail27%

Biller direct60%

Where Online US Consumers Prefer to View and PayBills, 2002 (as a % of respondents)



US Consumer Use of Biller-Direct vs. Pay Anyone*Online Bill-Payment Methods, February 2001-October2002 (as a % of respondents)

February 2001

12.5%

16.4%

December 2001

24.7%

18.1%

October 2002

28.1%

19.7%

Biller direct Pay anyone

Note: n=1,063; *pay anyone also called consolidatorSource: CheckFree, June 2003



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One factor to keep in mind among all these bank versus biller figures is thata fair share of consumers choose both methods. The CheckFree data showsthat more people go both to billing company and consolidator than go onlyto a consolidator.

Dove Consulting also found that a significant share of US consumers usemultiple methods to pay bills electronically. While 34% claim to use onlyone method, 38% use two to five methods.

Don't pay online63%

Pay anyoneonly

9%

Both biller direct andpay anyone*

11%Biller direct only17%

Methods US Consumers Use to Pay Bills Online, 2002(as a % of respondents)

Note: n=1,063; *pay anyone also called consolidatorSource: CheckFree, June 2003


None29%

Five1%

Four6%

Three10%

Two21%

One34%

Number of Electronic Payment Methods that USConsumers Use to Pay Bills, 2002 (as a % ofrespondents)




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Earlier data from Forrester Research also illustrates the banking industry’sdeclining share of online bill payment customers. For example, while 58%of new online bill payers went to their banks’ site in 1999, that group fellby 20 points in only two years.

“Presentment is not something you need to hurry upwith. Eventually, many customers will do it, but nota lot care to do so now. We’re not saying don’t do it,we’re saying there are other things to do first.”— Chris Musto, vice president for research, Gomez Inc.; American Banker,

21 July 2003

Percent of New Online Bill Payers Who Pay at aFinancial Institution's Web Site, 1997-2001

1997 or earlier 78%

1998 63%

1999 58%

2000 41%

2001 38%

Source: Forrester Research, March 2002; Dove Consulting, May 2003



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More recent Forrester data further indicates the shift toward billers, with14% of all US online households paying at the billing company’s site and9% at their bank’s site. According to Forrester, “Consumers who use billersites exclusively tell us they do so because it’s free, easy, and fast. Womenrated these reasons even higher than men.…But there is a glimmer of hope:36% of consumers said that they’d be willing to switch to their banks’ sitesif bill presentment and payment were free.”

“While the pervasiveness of current biller-direct billdelivery will take some time to dissipate, a varietyof forces will contribute to the growing use ofconsolidator sites.”— Elizabeth Robertson, senior analyst, TowerGroup

Type of Web Site US Online Households Used to PayTheir Bill Online in the Last Three Months, 2001-2003(as a % of respondents)

2001

9%

5%

2002

11%

7%

2003

14%

9%

Biller site Bank site

Source: Forrester Research, January 2003



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Research from TowerGroup chimes in along with Gartner, CheckFree, andForrester. While banks, the vast majority of consolidators, had 58% ofonline bill payment customers in 2001, they now have only 43%. And theNeedham, MA-based consulting and research firm expects that figure todrop to 40% by 2005. However, Tower projects a slight rebound to 45% by 2007.

Share of Electronic Bill Presentment and PaymentMarket, Biller-Direct vs. Consolidators, 2001-2005 (as a% of customers)

2001

41%

58%

2003

56%

43%

2005

61%

40%


Note: *the majority of consolidators are bank Web sitesSource: TowerGroup, August 2003; American Banker, August 2003



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When viewed not by share of customers but by share of bills presentedonline, billers are beating up on banks badly. Tower says that billingcompanies will issue 98% of the total 1.5 million online bills issued thisyear, with banks at a paltry 2%. The only good news in the projections isthat by 2007, banks will have increased their share of bills to 11%, “and willcontinue to climb thereafter,” according to Tower.

“People are not hunting all over the Web to pay theirbills. They get an e-mail from the biller and click onit. They are being chauffeured to the site. It’s apretty easy process.”— Ron Shevlin, principal analyst, Forrester Research; American Banker, 25

August 2003

Online Bills Issued at Biller-Direct vs. ConsolidatorWeb Sites, 2003-2007 (as a % of total online billsissued)

2003

98%

2%

2004

97%

3%

2005

95% 5%

2006

92% 8%

2007

89% 11%


Note: *the majority of consolidators are bank Web sitesSource: TowerGroup, August 2003



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In high contrast to the Gartner, Forrester Research, and Tower data, a surveyfrom InsightExpress in September 2003 found almost equal numbers ofconsumers paying online at biller sites (35%) and at their bank (31%).

Also, in counterpoint to most of the projections above (most notably fromTower), Jupiter Research sees steady growth among consolidators for billsviewed online by consumers. From 2003 through 2006, Jupiter expectsbilling companies’ share to drop from 77% to 60%.

Methods US Consumers Use to Pay Bills, 2003 (as a %of respondents)

Write checks

87%

Online via individual (biller's) Web sites

35%

Online through primary banking institution

31%

Phone using telepay services

30%

Online bill-paying service

8%



Types of Web Sites that US Consumers Use to ViewTheir Bills Online, 2001-2006 (as a % of viewed bills)

2001

89% 11%

2002

83% 17%

2003

77% 23%

2004

71% 29%

2005

65% 35%

2006

60% 40%

Biller site Bill consolidator site




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Consumer willingness to pay bills at multiple Web sites, rather than takeadvantage of consolidator convenience, is due to several factors. The rise ofbroadband connections at home, especially among the higher incomehouseholds that tend to bank and pay bills online, encourages visits toseveral sites when it’s time to pay bills.

“I always thought that customers would want to go to one place to pay their bills, but we’re notseeing that.”— Angeline DePauw, director of finance operations, Verizon

Communications; American Banker, 25 August 2003

Research last year from Harris Interactive for CheckFree found that nearlyhalf of US consumers, or 47%, are willing to visit six to ten sites to pay bills.

In parallel with that willingness, more and more billing companies allow—and typically encourage—online payments. Dove found that the number offully operational US biller sites has soared from a mere 304 in 1999 toapproximately 3,400 last year.

Number of Web Sites US Consumers Are Willing toVisit to Pay Bills, 2002 (as a % of respondents)

0-2 5%

3-5 29%

6-10 47%

11+ 18%

Source: CheckFree, Harris Interactive, March 2002; Dove Consulting, May2003


Number of Fully Operational US Biller Web Sites withEBPP Capabilities, 1999-2002

1999 304

2000 700

2001 1,845

2002 3,400




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Credit card issuers are the type of company most likely to get direct onlinepayments from consumers, according to TowerGroup. Of course, manycredit card issuers are banks; but in terms of bill payment, the issuer maynot be the consumer’s primary financial institution. Utility bills, such astelephone and Internet service, are also common among online billpayment customers.

Types of Bills US Consumers Review Online,November 2002 (as a % of consumers who reviewbills online)

Credit card 54%

Long distance telephone 24%

Internet service 24%

Local telephone 18%

Wireless 18%

Utility 14%

Cable/satellite 7%

Insurance 7%

Mortgage 7%

Note: TowerGroup has determined that 13% of US households used onlinebill payment services in 2002; multiple responses allowedSource: TowerGroup, December 2002



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However, in a February 2003 report titled “EBPP and the Consumer,” TheYankee Group said that Internet provider bills are most likely to be paidonline, almost twice as often as credit card bills.

“Whoever can give the most convenient interfaceand keep it [EBPP] free will win. Right now it’s thebillers.”— Avivah Litan, vice president and research director, Gartner; American

Banker, 7 May 2003

US Consumers Viewing and Paying Bills Online, by BillType, 2002 (as a % of respondents)

Internet

13.1%

11.0%

Credit card

6.9%

7.8%

Wireless

6.1%

2.7%

Long distance phone

5.4%

5.7%

Local phone

5.2%

3.6%

Cable/satellite

4.5%

1.6%

Utilities

4.3%

2.0%

Pay online View online

Source: Yankee Group, February 2003



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Direct debit accounts with billers, where the payment is typically madethrough the ACH network, will increase from 9.1 billion last year to 12.0billion next year, according to Dove Consulting.

Those figures represent steady growth rates, with percentages in the mid teens.

Direct Debit Accounts with US Billers, 2000-2004 (inbillions)

2000 6.9

2001 7.9

2002 9.1

2003 10.5

2004 12.0



Direct Debit Accounts with US Billers, 2000-2004 (as a% increase vs. prior year)

2001 14.5%

2002 15.2%

2003 15.4%

2004 14.3%




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The two top reasons why US consumers choose to pay bills online directlyto the biller are preventing late payments, at 33%, and a simple response toan e-mail invitation from the biller, at 28%.

In fact, more and more billers are offering incentives to convinceconsumers to pay online. For example, AT&T will send their customers a$20 Amazon.com gift certificate if they sign up to pay their phone billonline. And American Express will credit customers’ accounts with $5 ifthey pay online.

“Not all banks can afford to do that [make online billpayment free], so the rich get richer and the poorget poorer. You’re going to see more consolidationin the banking market, and a lot of it may be drivenby these electronic applications.”— Avivah Litan, research director, Gartner; Bank Systems & Technology, 27

June 2003

For banks to win back their share of online bill payment customers frombilling companies, they too need to make it free and offer incentives for itsuse. TowerGroup believes that “While the pervasiveness of current biller-direct bill delivery will take some time to dissipate, a variety of forces willcontribute to the growing use of consolidator sites. These include abuilding demand among consumers for a range of electronic bill deliveryalternatives…and an increasing emphasis on improving ‘pay anyone’functionality among consolidators.”

Reasons Why US Consumers Choose Biller-DirectOnline Bill Payment, 2002 (as a % of respondents)

Payment would otherwise have been late

33%

Responded to e-mail invitation from biller

28%

Convenience vs. paper checks

15%

Easier/simpler

12%

Credit card company convinced me

11%

Received an incentive

10%




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Electronic Bill Presentment and Payment (EBPP)In addition to the absence of fees, another key reason consumers gravitateto the billing company over the bank is bill presentment. And for the onlinebill payment market as a whole, no matter where the bills are paid, billpresentment is an essential piece for building consumer adoption. Asreported in American Banker, both bankers and billers agree that “e-billingservices cannot go much further until the presentment piece matures.”

With bill presentment in place, online bill paying exactly parallels thetraditional paper method, where consumers can read all the details of theirbills before making payment. While bill presentment might not matter asmuch for bills that are the same amount each month, like most mortgages,it’s a key element for most consumers when the bill varies each month, likemost credit cards.

“We think 100% of our online banking customersshould be using bill pay, but as long as you see billpay as a stand-alone product [withoutpresentment], you will only get a fraction of youronline customers to use it.”— Avid Modjtabai, executive vice president, Internet services group, Wells

Fargo; American Banker, 17 June 2003

According to Dove Consulting, while merely 4% of consumers look only ata bill’s bottom line, 63% say they inspect billing statement details closely.

Only look atthe amount4%

Quickly scanthe details33%

Closely inspect the details63%

Degree to which US Consumers Review Their Bills,2002 (as a % of respondents)




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However, many banks still do not offer bill presentment, while most billing companies that allow online payment include a statement as part ofthe service.

In fact, in their competition with direct billers, some major banks aregoing in two directions at once. In July of this year, Chicago-based BankOne announced that it would eliminate its monthly fee for bill payment. Atthe same time, it announced that it would be dropping bill presentment.

“But at the same time most banks have high hopes for online billpresentment,” writes American Banker, “which has lagged online billpayment in popularity largely because of the logistical difficulties involvedin getting myriad corporate billers to deliver invoices.”

“There had not been great customer demand foronline bill presentment.”— Calmetta Coleman, spokeswoman, Bank One; San Francisco Business

Times, 28 July 2003

In fact, if online bill payment alone attracts valuable customers, then thebill presentment component multiplies that effect. Research fromCheckFree—which supplies presentment services to online bill paymentleader Bank of America—claims that customers who use presentment are86% more active than bill payment customers who don’t receive anelectronic statement. Presentment-enabled customers also make 37% morepayment, which “translates into more cross-selling opportunities and aneven stronger relationship with the bank,” reports American Banker.

“I’m really shocked that Bank One is abandoningsupport for presentment right now.…We are justgetting to the point where there is critical mass forpresentment. I think their timing is really horrible.”— James Van Dyke, founder and principal, Javelin Strategies and Research;

American Banker, 21 July 2003

According to CheckFree, more banks are offering presentment. Thecompany says that as of March 30 this year, 842 financial institutions wereoffering online bill presentment through it, nearly twice as many as oneyear earlier. In addition, CheckFree said it delivered 285% more bills duringthat 12-month period.

“Customers tell us they like presentment because itis easier for them to see their bills and to pay themin one place. It mimics real life. We think it’s one ofthe reasons our bill-pay program has grown nomuch over the last year.”— Stephanie Smith, senior vice president, Bank of America; American

Banker, 21 July 2003


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Even with the extra benefits of bill presentment on top of online payments,the majority of consumers refuse to pay a fee to use such services. Whetherthey use online banking or not, online bill payment or not, the branch ornot, 64% or more of US consumers told TowerGroup they will not pay a feeto receive bills online.

For more about online bill presentment, see the eMarketer report“Electronic Payments” at:http://www.emarketer.com/products/report.php?electronic_payments_jun03

Consumers in the US Who Will Not Pay a Fee to UseEBPP, November 2002 (as a % of consumers)

Online households 74%

Offline households 70%

Do not use online banking 77%

Use online banking 66%

Do not use online bill pay 77%

Use online bill pay 64%

Use branch 73%

Do not use branch 68%





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F.Automated Clearing House (ACH)For most banks and billers alike, one key mechanism behind online billpayment is the automated clearing house (ACH) network. The ACH systemis a 30-year-old electronic network that settles payments amongapproximately 20,000 financial institutions and other parties.

ACH statistics reflect the sharp growth of online bill payment. Forexample, during Q1 2003, more than $48 billion in online bill paymentswere made through the network. According to National AutomatedClearing House (NACHA)—the network’s Herndon, VA-based tradeorganization—that figure for one quarter is half the amount of last year’stotal online figure of $96 billion.

Besides online bill payments, the ACH network is a major component forother electronic payments such as direct deposits and direct paymentsmade through non-Internet channels.

The total volume of transactions across the network has soared from 6.88billion in 2000 to 8.94 billion last year. These increase represent double-digit gains for all three years shown.

The value of ACH transactions has also increased substantially, but notquite as sharply as the volume. Last year, $24.4 trillion dollars flowedthrough the network, a 10.2% jump from 2001’s $22.1 trillion figure.

Volume of Transactions in the Automated ClearingHouse (ACH) Network, 2000-2002 (in billions and as a% increase vs. prior year)

2000 6.88 (12.4%)

2001 7.99 (16.2%)

2002 8.94 (11.9%)

Source: National Automated Clearing House Association (NACHA), April2003


Value of Transactions in the Automated ClearingHouse (ACH) Network, 2000-2002 (in trillions and as a% increase vs. prior year)

2000 $20.3 (6.5%)

2001 $22.1 (9.2%)

2002 $24.4 (10.2%)




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That the ACH volume is increasing more rapidly than the value is duelargely to electronic transactions, which are often of lower value than ACHtransactions were in the 1990s. The average value of an ACH transactionfell from $2,950 in 2000 to $2,728 in 2002.

In addition to its usage for payments, NACHA officials, along with theFederal Reserve Bank of Cleveland and financial-services sponsors such asWachovia, are currently testing the system as a means for deliveringsummary billing information. By making the ACH network a means for billpresentment, financial institutions hope to capture more of the online billpayment market.

Since various debit methods, such as automatic debit and debit cards, areamong the methods US consumers most use to pay bills electronically,according to Dove Consulting research, further use of the ACH network forenhancing the online bill payment process offers significant promise.

While banks are not required to originate ACH payments, all banks arerequired to receive them. That’s why the origination market is far moreconcentrated than the receiving market. In NACHA’s list of the top ACHoriginators, the top five banks accounted for 49% of all ACH payments,while the top 50 originated 91% of 2002’s ACH payments. On the otherhand, the top five receiving banks accounted for 22% of all ACH payments,while the top 50 received only 47% of 2002’s ACH volume.

Average Value of a Transaction in the AutomatedClearing House (ACH) Network, 2000-2002 (in dollarsand as a % decrease vs. prior year)

2000 $2,950 (-5.5%)

2001 $2,765 (-6.3%)

2002 $2,728 (-1.3%)



Methods US Consumers* Use to Pay BillsElectronically, 2002 (as a % of respondents)

Automatic debit 45%

Credit card 29%

Online biller 23%

Debit card 20%

Online bank 17%

Note: multiple responses allowed; *of those who pay bills electronicallySource: Dove Consulting, May 2003



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In addition, according to NACHA, “Since 83% of ACH payments are to orfrom consumers, a financial institution’s received volume can be anindicator of the use of direct deposit and direct payment by its customers.”

Among the 25 US financial institutions that are the largest originators ofACH transactions, all but two increased their total payments in 2002 ascompared to the prior year. And “while some major banks make an effort todevelop ACH transactions into a business line by offering originationservices to large clients, many banks do not,” reports American Banker.

25 Largest Originators of ACH* Payments among USFinancial Institutions, 2002 (in millions of transactionsand as a % increase/decrease vs. prior year)

1. J.P. Morgan Chase (New York)

2. Bank One (Chicago)

3. Wells Fargo (San Francisco)

4. Wachovia (Charlotte, NC)

5. Bank of America (Charlotte, NC)

6. KeyCorp (Cleveland)

7. FleetBoston (Boston)

8. Northern Trust (Chicago)

9. Citigroup (New York)

10. US Bancorp (Minneapolis)

11. Mellon Financial (Pittsburgh)

12. PNC Financial (Pittsburgh)

13. National City (Cleveland)

14. Marshall & Ilsley (Milwaukee)

15. AmSouth (Birmingham, AL)

16. ABN Amro North America (Chicago)

17. EFS National Bank (Memphis, TN)

18. SunTrust (Atlanta)

19. Capital One Financial (Falls Church, VA)

20. Bank of New York (New York)

21. First National of Nebraska (Omaha, NE)

22. Comerica (Detroit)

23. Allfirst Financial (Baltimore)

24. Citizens Financial (Providence, RI)

25. HSBC Holdings USA (Buffalo, NY)

Debits

432.8

488.9

257.4

165.9

122.7

169.5

42.4

65.4

90.9

49.4

85.4

27.0

24.9

48.5

53.1

45.9

3.3

18.9

41.8

11.9

21.3

9.0

17.2

3.6

5.0

Credits

425.1

192.2

254.5

264.4

223.8

109.1

139.5

94.4

68.1

109.4

64.6

84.0

71.5

39.5

32.0

31.4

59.4

43.1

0.1

27.8

16.3

27.1

18.6

30.7

29.0

Total

858.0

681.1

511.9

430.3

346.4

278.6

181.9

159.8

159.1

158.8

150.0

111.0

96.4

88.0

85.1

77.3

62.7

62.0

41.9

39.7

37.6

36.0

35.8

34.3

34.1

%change

36.0%

15.8%

1.8%

3.0%

-0.9%

26.7%

9.9%

14.6%

30.9%

28.9%

34.1%

18.9%

10.4%

18.4%

1.9%

23.6%

31.2%

-1.8%

157.6%

40.7%

4.0%

1.7%

15.6%

26.4%

29.7%

Note: listed by holding company; volumes do not include on-ustransactions; total may not equal debits and credits because of rounding;*ACH=automated clearing houseSource: National Automated Clearing House, April 2003



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Looking at ACH transactions from the receiving side, Bank of Americatopped the first-time list with its 507.6 million payments. That’s almost asmuch as the volume combined of the second- and third-place banks, WellsFargo and Wachovia. According to Wachovia, the banks with the highestvolume of inbound ACH files are the ones with a large base of customerswho have accepted electronic transactions.

And several of the top 25 originators for 2002 are not on the receiverslist. This includes Northern Trust, Bank of New York, and Comerica.

As the leading online bill payment bank, BofA says it’s been promotingACH deposits “as an efficient and safe way to get paid,” as reported inAmerican Banker. More important, the bank says its “bigger motivator isthat the relationship with the customer becomes deeper.”

25 Largest Receivers of ACH* Payments among USFinancial Institutions, 2002 (in millions oftransactions)

Debits Credits Total

Bank of America (Charlotte, NC) 220.2 287.4 507.6

Wells Fargo (San Francisco) 147.7 182.7 330.5

Wachovia (Charlotte, NC) 109.7 143.2 252.9

Bank One (Chicago) 93.2 105.0 198.2

Washington Mutual (Seattle) 72.7 85.3 158.0

US Bancorp (Minneapolis) 56.5 67.9 124.4

FleetBoston (Boston) 44.5 74.4 119.0

SunTrust (Atlanta) 42.4 52.8 95.2

KeyCorp (Cleveland) 53.5 26.0 79.4

National City (Cleveland) 31.6 44.1 75.7

J.P. Morgan Chase (New York) 17.3 55.1 72.4

PNC Financial (Pittsburgh) 29.6 38.7 68.3

Fifth Third Bancorp (Cincinnati) 25.5 37.3 62.8

BB&T (Winston-Salem, NC) 25.4 30.6 56.0

AmSouth (Birmingham, AL) 23.0 26.5 49.5

Citigroup (New York) 21.2 26.9 48.1

SouthTrust (Birmingham, AL) 20.5 24.4 44.8

Navy Federal Credit Union (Merrifield, VA) 17.0 26.0 43.0

Citizens Financial (Providence, RI) 16.3 24.3 40.6

Regions Financial (Birmingham, AL) 19.3 21.0 40.3

HSBC Holdings USA (Buffalo, NY) 16.1 22.9 39.0

Union Planters (Memphis, TN) 18.1 20.6 38.7

ABN Amro North America (Chicago) 15.4 19.1 34.5

Unionbancal (San Francisco) 14.8 18.9 33.7

Mellon Financial (Pittsburgh) 7.7 23.5 31.2

Note: listed by holding company; volumes do not include on-ustransactions; *ACH=automated clearing houseSource: National Automated Clearing House, October 2003



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Banks and billing companies alike appreciate the ACH network for itssavings. When Dove compared the cost per payment transactions amongdifferent vehicles, it found that direct debit and payments at billercontrolled Web sites cost a mere three cents each. That’s far less thanchecks, at $2.00 per transaction, and all other payment methods.

For more about the ACH network and its multiple uses, see theeMarketer report “Electronic Payments” at:http://www.emarketer.com/products/report.php?electronic_payments_jun03

Cost per Payments Transaction for US Companies,2002

Checks $2.00

Over the counter $1.00

3rd party agent $0.56

Bill concentrator $0.40

Credit card $0.38

Debit card $0.32

Lockbox $0.14

Direct debit $0.03

Biller controlled Web site $0.03




IVMethodology 7





A. Check Imaging 152

B. Cards: Credit & Debit 157

C. Mortgages & Refinancing 166




Index of Charts 243


151



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While bill payment is the most prominent electronic banking offeringbesides the basics of transferring funds and checking balances, otherservices such as check imaging, credit and debit cards, and online mortgageoriginations generate added revenue streams for interactive banking.

Even the basics such as transferring funds can be supersized through theInternet. Take Citibank. In September 2003, it initiated a service that “letsits customers move funds online from any Citi account to any otheraccount—even an account at another financial institution,” reportsAmerican Banker. The New York-based mega-bank sees the service asespecially useful for customers to fund “brokerage accounts quickly andeasily. If the brokerage account is with Citi’s Smith Barney division, theservice is free; if it’s with an institution other than Citi, it costs $3 for fundsavailability within three days and $10 for next-day availability.”

This kind of creative use of the Web to enhance interactive bankingservices points the way toward fully making the online channel thesignificant profit center it was touted as during the heady days of theInternet boom.

A. Check ImagingLike Citi’s instant funds-transfer across institutions, check imaging is justthe kind service that would be cumbersome or impossible to deliver on anyother channel. Here, again, Citibank is at the forefront of online services.While more and more banks give customers Web access to images of thefronts and backs of cancelled checks, Citi adds full access to seven years ofmonthly bank statements, ready to download as PDF files.

Unlike bill payment, where the majority of consumers prefer billingcompany Web sites, 85% of respondents to a Dove Consulting survey saythey want to view check images at their bank’s site.

Other9%Biller

6%

Bank85%

Web Site Where US Consumers Would Like to ViewCheck Images, 2002 (as a % of respondents)




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Banks are starting to invest increasingly in the technology for checkimaging. That will become even more a factor when the new CheckClearing for the 21st Century Act—called “Check 21 Act” for short—takeseffect next year. The bill, signed into law on October 28, 2003, makesdigital check images legally acceptable documentation for clearing checktransactions. And that could spell the demise of the traditional paper check.

“One of the areas of greatest interest from our[bank] customers in the past year has been theneed for online check imaging. Check imaging canmove costs out of the back office, and we believe itcontributes directly to profitability.”— Stephanie Chaufournier, senior vice president, Online Resources;

American Banker, 31 March 2003

With that new law in mind, along with making imaging an online servicefor banking customers, Celent Communications projects that IT expensesfor check imaging will rise by 247% in only three years, growing from$860 million to $2.98 billion.

In order to keep pace with this rapid change, approximately two-thirds ofeach year’s check imaging IT spending will be outsourced to technologyspecialist companies.

Check Imaging IT Expenses in the US, In-House andOutsourced, 2003-2005 (in millions)

2003

$310

$550

$860

2004

$730

$1,370

$2,100

2005

$1,070

$1,910

$2,980

In-house Outsourced Total

Source: Celent Communications, 2003; Bank Technology News, August2003



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Along with the new changes in the law and a definite online bankingattraction, the costs for storing digital checks are substantially lower thanfor paper checks. And, as is typical with technology changes, those costsare dropping, too. TowerGroup said that as of last year, the cost for onlinecheck imaging fell to seven cents per megabyte, down from 25 cents inyear 2000.

According to market research firm Global Concepts, “about half of paperchecks written in the US are being imaged and stored in digital archives, andthat by 2006 or so that should be close to 100%,” writes American Banker.

“Within the next few years, [check] imaging is going to become the norm. We are now past thetipping point.”— Steve Ledford, president, Global Concepts; American Banker, 31 March

2003

Among community banks, 47% were deploying check imaging in 2002,according to research from the Independent Community Bankers ofAmerica. An additional 41% of small bank respondents plan to evaluate thetechnology in the near future.

Cost per Megabyte* of Online Digital Check Imaging,1998, 2000 & 2001

1998 $0.70

2000 $0.25

2002** $0.07

Note: *Sub-second access time; **TowerGroup estimateSource: TowerGroup, 2002; Bank Technology News, April 2002



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That makes a mere 12% of community banks that have no interest oranswer regarding usage of check imaging. “Paradoxically, large banks,which usually lead in bank technology, have been slower than small onesto implement check-imaging systems,” reports American Banker. “Giantscale makes it much more expensive, and small banks can switch moreeasily than large banks saddled with hybrid legacy systems can.”

No answer4%

Nointerest

8%

Plan to evaluate innext 12 to 18 months

41%Currently using47%

US Community Bank Usage of Check ImageTechnology, 2002 (as a % of respondents)

Source: Independent Community Bankers of America, IndependentFinancial Institution Network, 2003; American Banker, February 2003



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Research from the ABA Banking Journal also shows the importance ofcheck imaging among community bank products. On the plan-to-offerside, 12.1% of respondents plan to offer check imaging, more than for anyother product other than online banking itself.

Products US Community Banks Offer or Plan to Offer,2002 (as a % of respondents)

Offer Planto

offer

Significantrevenue

generator

Residential mortgages 86.8% 2.9% 73.0%

Debit cards 85.2% 3.2% 28.7%

Credit life 71.8% 1.2% 33.1%

Phone banking 70.4% 3.9% 17.0%

ACH origin 65.9% 4.5% 18.4%

Online banking 65.5% 12.1% 17.7%

Credit cards 57.7% 1.6% 24.8%

Check-image statements 57.4% 12.1% 22.0%

Fee-based overdrafts 49.3% 5.9% 70.6%

Annuities 45.9% 6.6% 35.1%

Mutual funds 43.9% 7.5% 37.5%

Cash management 43.0% 7.9% 27.3%

Life insurance 41.8% 5.4% 23.8%

Stock brokerage 37.6% 5.3% 26.6%

Accounts receivable financing 32.5% 1.4% 35.4%

Personal trust 31.4% 2.6% 45.7%

401(k) plans 29.0% 2.9% 28.6%

Financial planning 28.1% 6.8% 17.3%

Equipment leasing 20.2% 1.7% 29.8%

P&C insurance, personal 19.1% 3.7% 46.1%

P&C insurance, business 17.9% 3.4% 42.7%

Title insurance 12.3% 2.8% 43.0%

Farm insurance 11.6% 1.4% 50.0%

Online brokerage 10.9% 4.1% 15.4%

Real estate brokerage/management 6.7% 2.6% 61.2%

Factoring 5.8% 1.2% 51.4%

Auto leasing 5.3% 0.7% 14.3%

Debt cancellation cont. 2.5% 0.8% 7.7%

Muni-bond underwriting 1.8% 0.4% 18.2%

Travel agency 1.7% 0.4% 30.0%

Note: n=760Source: ABA Banking Journal, February 2003



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B. Cards: Credit & DebitCredit cards and debit cards blend well across channels. They can beapplied for online or offline, and used both ways, too. Projections fromTowerGroup indicate that by 2005, the share of new credit cards applied foronline will nearly double from today’s figure to 35%.

The credit card market is dominated by two companies: Visa andMasterCard. Of the nearly 52 billion credit card transactions worldwide lastyear, Visa claimed more than two-thirds and MasterCard more than one-quarter, according to The Nilson Report. American Express trails the two,with a bit more than 5% of the total transactions.

Volume of Credit Card Transactions Worldwide, byCompany, 2001 & 2002 (as a % of total volume)

2001 2002

Visa 67.2% 67.5%

MasterCard 25.8% 26.3%

American Express 5.5% 5.1%

JCB 1.0% 0.9%

Diners Club 0.4% 0.3%

Total (in billions) 45.63 51.64

Source: Nilson Report, 2003; American Banker, July 2003


And for four of the five major credit cards, except Diners Club, transactionslast year increased—by double digits for Visa and MasterCard, and withmodest gains for Amex and JCB.

Volume of Credit Card Transactions Worldwide, byCompany, 2001 & 2002 (in billions)

Visa

30.68%

34.86%

MasterCard

11.79%

13.58%

American Express

2.52%

2.63%

JCB

0.45%

0.46%

Diners Club

0.19%

0.15%

Total

45.63%

51.64%

2001 2002




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Volume of Credit Card Transactions Worldwide, byCompany, 2002 (as a % increase/decrease vs. prioryear)

MasterCard 15.2%

Visa 13.6%

American Express 4.5%

JCB 4.4%

Diners Club-18.3%

Total 13.2%




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Translated to absolute dollars, consumers and businesses spent more than$4 trillion using credit cards last year.

Volume and value do not match up directly. For example, while Amex had5.1% of all transactions, it claimed 7.5% of the money spent by credit cards.

Value of Credit Card Transactions Worldwide, byCompany, 2002 (in billions)

Visa $2,649.11

MasterCard $1,146.69

American Express $313.88

JCB $46.04

Diners Club $29.30

Total $4,185.00



Value of Credit Card Transactions Worldwide, byCompany, 2002 (as a % of total transactions)

Visa 63.3%

MasterCard 27.4%

American Express 7.5%

JCB 1.1%

Diners Club 0.7%




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The average value per credit card transaction illustrates, to a degree, howeach card is positioned. Each Diners Club and American Expresstransaction, for instance, averages $189 and $119, respectively. Thatreflects the more upscale customers each company looks for. In contrast,both Visa and MasterCard, with average values of $76 and $84,respectively, are “the people’s cards,” relatively speaking.

Retailers get more chargebacks from online transactions than ones made inperson. However, a new customer authentication program from the largestcredit card association, called Verified by Visa (VBV), shifts the liability forchargebacks from the online merchant to the issuing bank. In order toprotect themselves, banks must deploy corresponding servers that respondto merchant requests for VBV authentication. The added responsibility ofchargeback liability under VBV “gives banks ample incentive to adopt andpromote the program,” writes Bank Systems & Technology magazine.

Average Value per Credit Card Transaction, byCompany, 2002

Diners Club $189.10

American Express $119.18

JCB $99.05

MasterCard $84.43

Visa $76.00

Total $81.04




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As a password-based system, VBV also protects consumers at the onlineretailers who’ve signed up for the program. As of November 2002, however,only a tiny percentage of consumers had signed up for the program.Interestingly, those with lots of experience online and those with little were less likely to sign up for VBV than those with a moderate amount oftime (intermediate).

US Consumer Awareness and/or Usage of the Verifiedby Visa (VBV) Program*, by Online Experience**,November 2002 (as a % of respondents)

Signed up for VBV

2%

2%

5%

2%

Heard about VBV

4%

3%

2%

1%

Heard about VBV but am undecided

18%

15%

13%

8%

Heard about VBV but don’t intend to sign up

15%

16%

13%

14%

Have not heard about VBV

60%

65%

68%

75%

Newbie Intermediate Net Vet Super Net Vet

Note: n=396 (Newbies), n=535 (Intermediates), n=635 (Net Vets), n=761(Super Net Vets); *VBV is a service offered by some banks that protectsyour existing Visa credit card online with a personal password; **"SuperNet Vets" have 5 or more years online experience; "Net Vets" havebetween 2 and 5 years online experience; "Intermediates" have between 1and 2 years online experience; "Newbies" have less than 1 year onlineexperienceSource: Jupiter Research, May 2003



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Banks offer debit cards in two basic formats: signature and PIN (personalidentification number). “Banks have been actively promoting signaturedebit over [PIN] debit at the point of sale because of the higher interchangefees it accrues,” reports American Banker. “They have also pushed signaturedebit in a variety of ways, including loyalty reward programs, advertising,and even using penalty fees to discourage the use of PIN debit.”

But for consumers, PIN debit transactions offer a singular benefit thatsignature debit does not: they can get cash back. However, according toPulse EFT Association, the Houston-based electronic funds transfernetwork, consumers request cash back only about 17% of the time at POS.

In addition, in most circumstances, consumers must use a PIN-baseddebit card for online transactions, not a signature-based one.

Considering the banking industry’s promotion of signature debit cards, itmakes sense that its market share since 1998 outstrips PIN debit cards. In2002, there were $496 billion in signature transactions and $180 billion inPIN transactions in the US, according to the RAM Research Group.However, with the online utility for PIN debit cards, it also makes sense thatthe growth rate for those cards last year was higher than for signaturecards, 44% versus 18%, respectively.

PIN (or Online) and Non-PIN (or Offline or Signature)Debit Transactions in the US, 1998-2002 (in billionsand % growth)

1998

$55 (25%)

$160 (44%)

1999

$71 (29%)

$219 (37%)

2000

$90 (27%)

$302 (38%)

2001

$125 (39%)

$421 (39%)

2002

$180 (44%)

$496 (18%)

PIN (or online)* Non-PIN (or offlineor signature)**

Note: *excludes cash advances at ATMs or the point-of-sale; **includespurchases and cash advances for VISA and MasterCard-branded debitcardsSource: RAM Research Group; CardWeb.com, April 2003



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The loyalty programs banks use to promote signature debit cards shows upwhen 19% of US consumers say that incentives and rewards are what they likebest (along with convenience) about paying bills with a debit or credit card.

The six leading banks in POS debit card volume (which can be either typeof debit instrument) are the same six, in the same order, as in the ACHReceivers chart above. For these banks, the heavily promoted debit card is aprime source of ACH transactions.

What US Consumers Like Best about Paying Bills witha Credit or Debit Card, 2002 (as a % of respondents)

Incentives/rewards 19%

Convenient 19%

Ease of use 18%

Delayed payment 16%

Dependability 11%

Only option available 10%

Saves time 6%

Bill consolidation 6%

Avoid checks 6%

Saves money 4%

Note: multiple responses allowedSource: Dove Consulting, May 2003


Point of Sale Debit Card Volume, by FinancialInstitution, 2002 (in billions)

Bank of America $39.4

Wells Fargo $23.4

Wachovia $14.2

Bank One $11.0

Washington Mutual $10.9

US Bancorp $10.0

Merrill Lynch $8.9

FleetBoston $7.2

J.P. Morgan Chase $5.5

Citigroup $5.3

Source: Nilson Report, 2003; American Banker, May 2003



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But for about two-thirds of smaller community banks, debit cards are notprofit streams but loss-leaders, according to the ABA Banking Journal.

Still, to remain competitive with large national or regional banks,community banks need to offer debit cards. More than any other electronicservice, debit cards have been given the highest priority over the next threeyears, according to recent research from America’s Community Bankers, aWashington, DC-based lobbying group.

Yes37.7%

No62.3%

Profitability of Debit Card Programs* for USCommunity Banks, 2002 (as a % of respondents)

Note: n=760; *on a standalone basisSource: ABA Banking Journal, February 2003


Electronic Services' Priorities over the Next ThreeYears for US Community Banks, 2003 (as a % ofrespondents)

High Medium Low None*

Debit cards 50% 23% 3% 24%

Online banking 46% 18% 12% 24%

E-bill payment 36% 26% 15% 23%

ATM 19% 25% 18% 39%

Merchant services 15% 24% 27% 35%

Credit card 12% 26% 34% 27%

Stored value cards 2% 15% 32% 50%

Note: *or no answerSource: America's Community Bankers, August 2003



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Just as with fees for online bill payment, consumers resist and resent feesimposed by banks for the use of debit cards. And yet 26.8% of communitybanks charge a fee for debit card transactions. And among those banks,41.6% never waive the fee for any reason.

When community banks impose fees, the majority typically set a flatmonthly fee, while more than one-third charge a per transaction fee.

So which comes first? That about two-thirds of community banks say debitcards are unprofitable or that more than one-quarter impose a fee? Withoutfees, more consumers apply for and use debit cards. The more they use thecard, the more money that banks can collect from those ACH transactions.However, as with much of banking technology, scale tells. Making a profitoff debit card volume, and not fees, tends to succeed more with larger thansmaller institutions.

Debit Card Policies at US Community Banks, 2002 (asa % of respondents)

Offers debit cards usable for purchases

90.6% 9.4%

Automatically issues debit cards with all consumeraccounts

93.7%6.3%

Charge consumer fee of any kind

26.8*% 73.2%

Yes No

Note: n=760; *of banks that charge fee, 41.6% never waive itSource: ABA Banking Journal, February 2003


Types of Debit Card Fees that US Community BanksCharge Customers, 2002 (as a % of respondents)

Flat monthly fee

51.6%

Per transaction

37.7%

Per transaction after set number of free transactions

10.7%

Note: n=760; replies from the 26.8% of banks that charge debit card feeSource: ABA Banking Journal, February 2003



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C. Mortgages & RefinancingLike access to basic banking services, mortgage lending is another bankindustry offering that works best when integrated across multiple channels.By 2005, the share of mortgage originations made online will more thandouble from today’s figure to 12%, according to TowerGroup. Similarly,online home equity loan applications will rise to a 15% share.

However, with historically low rates this year creating record-levelmarkets, success may be hurting online mortgage and refinancingoriginations. In June, a survey done by Empirix for American Banker“tested 15 mortgage sites’ ability to handle surging demand for refis, andfound substantial differences. In one case, more than 5% of users trying toclick their way to a refi application page would have found themselveswaiting at least 30 seconds or staring at an error message.”

According to the daily banking newspaper, “A potential borrower whocannot even get to an application on the first attempt may stop trying.Though loading times are only part of a consumer’s experience on a Website, they may be the most likely to lead to an unpleasant experience,damaging the company’s reputation.”

Scalability issues such as this can be resolved—and will certainly need tobe as more mortgages originate online. According to Jupiter Research, whilethis year’s 111,000 online mortgage originations represent 2.1% of total USoriginations, the online share will rise by 2007 to 6.7%, or 401,000 total.

US Online Mortgage Originations, 2001-2007 (inthousands and as a % or total mortgage originations)

2001 46 (0.9%)

2002 78 (1.5%)

2003 111 (2.1%)

2004 162 (3.0%)

2005 228 (4.1%)

2006 307 (5.3%)

2007 401 (6.7%)




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Beginning from a small base, the double-digit growth rates for onlinemortgage originations will far surpass the low single-digit rates shownbelow for all originations.

Unlike the steady rise of online mortgage originations, the onlinerefinancing market will travel a zigzag path, according to Jupiter. Forexample, while the New York-based research firm predicts 162,000 onlinemortgage originations in 2004, refi applications will hit 215,000. But by2005 and beyond, they project more mortgage than refinancingoriginations online.

However, by 2007, online refi originations should represent 11.9% of thetotal market, a greater share than mortgages’ 6.7%. Since refis are simplerloans than the original mortgage, their quicker drift to online applicationsis a logical conclusion.

US Online and Total Mortgage Originations, 2001-2007(in thousands and as a % increase vs. prior year)

Onlineoriginations

Onlinegrowth rate

Totaloriginations

Totalgrowth rate

2001 46 – 5,111.1 –

2002 78 69.6% 5,200.0 1.7%

2003 111 42.3% 5,285.7 1.6%

2004 162 45.9% 5,400.0 2.2%

2005 228 40.7% 5,561.0 3.0%

2006 307 34.6% 5,792.5 4.2%

2007 401 30.6% 5,985.1 3.3%



US Online Refinance Originations, 2001-2007 (inthousands and as a % of total refinance originations)

2001 166 (2.5%)

2002 206 (3.4%)

2003 241 (4.6%)

2004 215 (6.1%)

2005 133 (7.8%)

2006 173 (9.8%)

2007 299 (11.9%)




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With the expectation that mortgage refinancing will decrease as UShouseholds lock in today’s low rates with new loans and as future rates rise(making refinancing less attractive), Jupiter predicts negative growth ratesfor online applications in both 2004 and 2005. However, even then theonline originations will fall less than total originations.

Not only are consumers and financial institutions moving more to onlineoriginations, but so are real estate agents. As the parties who oftenrecommend ways to finance to potential buyers, these agents are favorablydisposed to online lending, according to a survey by Crestwood Associateson behalf of E-Loan, an online lending marketplace. For example, 67% ofrespondents said that they helped customers with online pre-approvals.

Attitudes of Real Estate Agents toward OnlineLending in the US, July 2003 (as a % of respondents)

Given homebuyers more loan options 88%

Helped customers with pre-approvals 67%

Interest rates more competitive 66%

Made mortgage lending faster 59%

Note: n=308 licensed and practicing real estate agentsSource: Crestwood Associates commissioned by E-LOAN, Inc., August 2003


US Online and Total Refinance Originations, 2001-2007(in thousands and as a % increase vs. prior year)

Onlineoriginations

Onlinegrowth rate

Totaloriginations

Totalgrowth rate

2001 166 – 6,640.0 –

2002 206 24.1% 6,058.8 -8.8%

2003 241 17.0% 5,239.1 --13.5%

2004 215 -10.8% 3,524.6 --32.7%

2005 133 -38.1% 1,705.1 -51.6%

2006 173 30.1% 1,765.3 3.5%

2007 299 72.8% 2,512.6 42.3%




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The main reason why real estate agents recommend online mortgageoriginations is to obtain better interest rates, according to 70% of respondents.

Whether online or offline, nine of the top ten home mortgage lendersoriginated more money in loans in 2002 compared to the prior years. Thetwo largest originators, Wells Fargo and Washington Mutual, had 12.08%and 11.44% market shares, respectively. And in a somewhat concentratedindustry, the top ten made up 55.67% of last year’s mortgage lending.

Reasons Why Real Estate Agents Recommend TheirClients Go to Online Lenders, July 2003 (as a % ofrespondents)

Obtain interest rates 70%

Learn about different mortgage options 66%

Get pre-approved for a loan 45%

Apply for a loan online 33%

Note: n=308 licensed and practicing real estate agentsSource: Crestwood Associates commissioned by E-LOAN, Inc., August 2003


Top 10 Home Mortgage Originators in the US, 2001 &2002 (in billions and as a % increase/decrease vs.prior year)

Wells Fargo Home Mortgage (DesMoines, IA)

Washington Mutual (Seattle)

Countrywide Financial (Calabasas,CA)

Chase Home Finance (Edison, NJ)

ABN Amro Mortgage (Ann Arbor, MI)

Bank of America (Charlotte, NC)

National City Mortgage (Miamisburg,OH)

GMAC Residential Holdings (Horsham,PA)

Cendant Mortgage (Mount Laurel, NJ)

Homecomings/GMAC-RFC(Bloomington, MN)

Top 10 total

2001

$196.7

$175.5

$138.2

$184.2

$81.7

$84.1

$56.9

$51.8

$44.5

$35.7

$1,049.3

2002

$329.2

$312.0

$251.9

$155.7

$117.8

$88.1

$79.5

$71.6

$59.3

$52.6

$1,517.6

%growth

67.34%

77.72%

82.28%

-15.48%

44.19%

4.74%

39.77%

38.20%

33.15%

47.21%

44.62%

Marketshare2002

12.08%

11.44%

9.24%

5.71%

4.32%

3.23%

2.92%

2.63%

2.17%

1.93%

55.67%

Note: market share is based on estimated loan originations of $2.725trillion in 2002Source: National Mortgage News, 2003; American Banker, April 2003


V

Methodology 7






A. ATMs 172

B. CRM & Customer Service 181

C. Wireless 192



Index of Charts 243


171



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From the ATM to the call center, electronic channels other than the Internetcontribute both to the banking industry’s profitability and to the costs ofdoing business. But in today’s multi-channel world, banks can’t affordeither to skimp on channels or to have them act as separate silos.

A.ATMsAs the original impersonal electronic banking channel, the ATM hasbecome as ubiquitous as the local convenience store. In fact, only four ofthe ten largest ATM network operators in the US are major banks: Bank ofAmerica, US Bancorp, Wells Fargo, and Wachovia.

Other operators, such as eFunds, deploy ATMs for both retail merchantand financial institution customers, while E-Trade’s extensive ATMnetwork enables its mainly online customers to access cash easily, amongother functions.

“We look at the ATM as a storefront. We own thatreal estate, so to speak.”— Steve Gutterman, chief operating officer, E-Trade Bank; American Banker,

6 May 2003

With approximately 352,000 ATMs in the US, no single player has anoverwhelming market share; number one eFunds’ network of machinesrepresent less than 5% of the total, while the top ten add up to about a 25% share.

10 Largest ATM Network Operators in the US, byNumber of ATMs, January 2003

eFunds 16,845

E-Trade 15,050

Bank of America 14,280

Cardtronics 9,011

American Express 7,300

US Bancorp 6,677

Wells Fargo 6,352

ATM Express 4,950

Wachovia 4,561

Financial Tech 4,015

Source: Nilson Report, May 2003



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Consumer usage of ATMs is reflected in their colloquial name: cashmachines. About 77% of all ATM transactions in 2001 were cashwithdrawals, with an additional 11% account inquiries, and 9% deposits,for a total of 97%.

More recent estimates from TowerGroup indicate that cash withdrawals,deposits, and account information requests comprise 83% of the totalnetwork activity, as of July 2003.

“Because it has become both so prevalent andconvenient, for many people the ATM is the bank.”— Jerry Silva, senior analyst, TowerGroup

While the types of transactions conducted at ATMs are simple, that’s what alarge portion of retail banking consists of. And with such simpletransactions making up most of their regular banking, 63% of consumerstold Celent Communications last year that the ATM is their preferredchannel. Trailing are the Internet, at 27%, and the branch, at a mere 7%.

Other1%Transfers2%

Deposits9%

Inquiries11%

Withdrawals77%

Types of Transactions Taking Place at US FinancialInstitutions' ATMs, 2001

Source: Dove Consulting, March 2002


Mail1%Telephone2%

Branch7%

ATM63%

Internet27%

US Consumers' Preferred Channels for Banking, 2002

Source: Celent Communications, July 2002



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Research from InsightExpress this year found that a similar number ofconsumers, 58.6%, use the ATM regularly to conduct banking transactions.And while the traditional branch seems less-preferred than the ATM, as inthe Celent data above, it’s still used regularly by nearly as many consumers.

Banks prefer ATMs, too, since although “ATMs are far from being full-service branches, they are also much cheaper,” reports American Banker.For example, “E-Trade [Bank] can install 500 machines for the cost ofbuilding one branch, which typically have start-up expenses of at least$2.5 million.”

“What has happened is most banks have gottenthrough the process where they thought they wouldsubstitute transaction channels. [They] are buildingonto existing systems in terms of convenience.YourATMs are important, but if you can build a humanrelationship, there is a payoff for that.”— Dennis Jacobe, chief economist,The Gallup Organization;American Banker,

20 June 2003

The low cost of ATM installation, along with the competition among bankand non-bank network operators, has lead to a saturated market. “Unableto count on growth from new installations, many banks are adding moreservices to their current machines, both to provide additional value to bankcustomers who use the machines, and also to generate more revenue fromnon-customers,” writes Banking Strategies magazine.

Channels US Consumers Use Regularly to ConductBanking Transactions, 2003 (as a % of respondents)

ATMs 58.6%

Branch 57.0%

Internet 46.2%

Telephone 21.8%

Note: n=510; multiple responses allowedSource: InsightExpress, April 2003



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According to TowerGroup estimates, worldwide revenues from advancedATM functions will rise from $1.27 billion in 2002 to $1.48 billion by 2006.Tower reports in “Advanced ATM Functionality: Beyond Movie Tickets andPostage Stamps” that banks will be forced to add these advanced functionssince the volume of cash transactions has decreased and yet the number ofATMs has increased.

The most offered advanced ATM functions include mini-statements (at32%), postage stamp dispensing (at 23%), and bill payment to the financialinstitution (at 21%), according to Dove data.

Revenue from Advanced Functionality* at ATMsWorldwide, 2002-2006 (in billions)

2002 $1.27

2003 $1.32

2004 $1.39

2005 $1.42

2006 $1.48

Note: "advanced functionality" includes statement printing, sales ofpostage stamps, movie tickets, other items of value; as well as billpayment (to accounts outside of bank), check cashing, wire transfers,money orders, cellphone top-ups, advertising and person-to-personpaymentsSource: TowerGroup, November 2002


Advanced ATM Functions Offered by US FinancialInstitutions, 2002 (as a % of respondents)

Mini-statements 32%

Stamp dispensing 23%

Bill payment to financial institution 21%

Slideshow advertising 17%

Coupon dispensing 12%

Full statements 7%

Full-motion video advertising 7%

Source: Dove Consulting, March 2002



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According to Diebold, the Canton, OH-based ATM manufacturer, checkimaging is another advanced feature gaining popularity. With ATMs,however, the imaged check isn’t one already cashed. Instead, ATM checkimaging allows the machine to “display an image of the check beingdeposited and verify the amount,” reports Banking Strategies. “Thecustomer can then collect the funds to the penny. Many consumers like thisadded convenience, which also saves the bank some processing costs.”

“Now, customers withdraw cash [from our ATMs]and they leave. We’re trying to increase the numberof transactions per visit to two to three or four.”— Steve Gutterman, chief operating officer, E-Trade Bank;American Banker,

12 August 2003

Of the seven functions shown in the Dove chart above, some like stamps,advertising, and coupons could appeal to non-customers. However, “thedemand for stamps was less than expected while the cost of filling themachines and dispensing the stamps was higher—not to mention the factthat the stamps were tying up a canister that could be used to hold morecash,” writes Banking Strategies.

According to Tower, “non-financial content currently accounts for 1% oftotal US ATM traffic. [But] with pressure growing to generate additionalATM-related revenues, non-financial electronic transactions are beingaggressively explored as possible cost-effective revenue streams.” To avoidfunctions that don’t have the costly physical element such as stampdispensing, some ATM operators are looking at recharging value in prepaidmobile phone cards, also called “mobile top-up.”


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While ATM content like mobile top-up is in only limited US deploymenttoday, Tower expects 7% of all top-up to occur at ATMs by 2007,generating $124 million in annual revenues for ATM operators.

Perhaps more important than that 7% share is its implications, according toTower. “Prepaid mobile is itself indicative of a broader trend: the rise ofnew types of content available at the ATM and elsewhere, whose purchasecan be partially or totally transacted outside of the established financialservices payment networks.”

“All those other ancillary services make up less than1% of ATM transactions. They’re a rounding error.”— Les Reidl, senior vice president, Speer & Associates; American Banker, 12

August 2003

These non-financial ATM offerings have received mixed reviews frombanks. For example, “E-Trade has been testing the cell phone top-upfeature at 150 ATMs in Boston for six months,” writes American Banker.“Though executives would not disclose just when they plan to make it morewidely available, they said they were eager to do so promptly.”

On the other hand, “PNC, however, elicited little demand for phone cardswhen it offered them at ATMs,” reports Banking Strategies. “[ThePittsburgh-based bank] notes that consumers who purchase a lot of phonecards typically don’t carry ATM cards.”

Venues for Recharging Value* in Pre-Paid MobilePhones, 2002 & 2007 (as a % of activity)

Physical (electronic/scratch card)

72%

32%

Internet

14%

33%

Mobile/over the air

1%

24%

ATM

7%

Agent/IVR

13%

4%

2002 2007

Note: *recharging value also called "top-up"Source: TowerGroup, July 2003



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Perhaps it’s best to keep these advanced ATM functions in perspective. Notewhat Speer & Associates told American Banker: “Cash withdrawals haveaccounted for more than 80% of ATM transactions for the past 20years…balance transfers and inquiries make up about 10%, and deposits5%. All those other ancillary services make up less than 1% of ATMtransactions. They’re a rounding error.”

Whether these extra offerings are non-financial or are standard—butATM-atypical—bank offerings such as mini-statements or productmarketing, advanced functions demand advanced ATMs. However,according to Tower, it has been too costly for banks to upgrade their ATMsto the Web-enabled platforms that make these advanced functions feasible.However, government agencies and card associations may nonetheless forcebanks to do so in order to comply with security and access requirements.

When Synergistics Research looked at ATM security concerns earlier thisyear, 77% of US consumers said they prefer new identification methods forATMs, in order to increase security.

Don't prefernew methods

21%

Prefer new methods77%

Don't know2%

US Consumers Who Prefer New IdentificationMethods for ATMs, 2003 (as a % of respondents)

Note: n=300Source: Synergistics Research Corp., May 2003



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The Atlanta-based market research firm found that a large segment ofconsumers are ready for measures beyond the PIN and ATM card. Twobiometric methods of identification were most acceptable: fingerprint orhandprint scans, at 45% of respondents, and eye scans, at 27%.

Just as with advanced functions, new methods of identification demandup-to-date ATM systems. By 2005, Celent Communications anticipates that65% of US banks’ ATMs will be converted to the Windows operatingsystem, up from 12% at the end of 2003. That upgrade from the now-outdated OS/2 or DOS systems will cost banks $133 million from this yearthrough 2005.

“People get really annoyed to be given offers theydon’t need. We have to make them relevant.”— David Lewis, chief marketing and information technology officer, ING

Bank; American Banker, 6 August 2003

None/don't know6%

Voice10%

Signature12%

Eye scan27%

Finger orhandprint scan45%

US Consumers' Opinions Regarding the MostAcceptable Security Measure for ATMs, 2003 (as a %of respondents)

Note: n=300Source: Synergistics Research Corp., May 2003



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This o/s changeover is part of a “trend among US banks to convert theirATMs to open systems,” according to Celent, with open systems beingdefined as “technologies that utilize hardware, software, languages, andprotocols which are acknowledged by the industry as being sufficientlywell-known and accessible.”

However, the Boston-based consulting and research company says that“64% of the banks adopting Windows have no plans to turn on advancedfunctionalities in the next 18 months” at their revamped ATMs. “The moveto open systems will have little to do with advanced functionalities, butwith basic maintenance needs and economics, and vendors’ pressures.”

But what of the 36% who do have plans for advanced ATM functions?For Wells Fargo, that means Web-enabled ATMs used to conduct one-to-one marketing. “Wells has been marketing one-to-one on ATMs since 2001and now does so on about 60% of its fleet,” writes American Banker, usingthe machines to promote its own products, such as credit cards, auto andhome equity loans, savings and insurance products, and even mortgages.

“Wells tailors a pitch to the card and the transaction behavior takingplace at the ATM in real time. For example, if a customer tries to withdrawmore money than is available in an account, a screen will pop up saying,‘You are pre-approved for overdraft protection.’”

“One things the banks have done really, really wellhas been to train their customers to completelyignore the ‘please wait’ screen [on ATMs] by tryingto sell them products that don’t pertain to them at all.”— Jerry Silva, senior analyst, TowerGroup; American Banker, 3 September

2003

Operating Systems Used at US Banks’ ATMs,2002-2005

2002

5% 95%

2003

12% 88%

2004

28% 72%

2005

65% 35%

Windows OS/2, DOS

Source: Celent Communications, September 2003



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The changes in technology, along with the need to make today’s widelydispersed ATM networks more profitable, will bring more marketing to thelocal cash machine.

B. CRM & Customer ServiceJust as Wells Fargo uses ATMs to pitch services based on the consumer’sbehavior and history with the bank, that kind of targeted marketing is atthe heart of customer relationship management (CRM) endeavors. But forthe US banking industry, CRM does not come easy. “CRM represents a seachange in banking culture—ending the emphasis on selling individualproducts in favor of compiling a customer’s financial profile and using it tobuild a more profitable relationship,” writes American Banker.

Perhaps the biggest mistake banks make with CRM is viewing it as atechnology solution. In fact, “these days bankers often avoid using theacronym CRM, which has been tainted by negative publicity,” reportsAmerican Banker.

“CRM is really a loaded term. It’s almost as if thephrase ‘customer experience’ has replaced CRM.”— Kathleen Khirallah, senior research analyst, TowerGroup; American

Banker, 3 June 2003

Instead, successful CRM projects first need to get employees on board and aviable process in place, since success means working across multiple,sometimes competitive, channels within the bank. Then banks need enoughhistorical data on customers to make it useful. And only then does CRMbecome an implementation of the technology.

Similarly, Cap Gemini Ernst & Young advocates a three-step CRMprogram. As reported in American Banker: “First, you have to have a modelof how you expect a customer to interact with you across all your channels.Second, you have to have data that shows how customers are interactingwith you today. Then you have to have an integrated technology andprocess infrastructure to close that gap.”

The promise of CRM is at long last to seize what Banking Strategies calls“the Holy Grail of retail banking…to deploy in-depth and updated customerinformation at every point where customers contact the bank.”

“It’s all about getting the right information to theright people at the right time. It’s making sure yoursupport staff has the information they need tocommunicate with customers in a meaningful way.”— Leah Rubenstein, senior vice president, PNC Financial Services; Banking

Strategies, May-June 2003


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With a thriving CRM system in place, a branch assistant manager wouldknow, for example, not to pitch a long-term certificate of deposit to acustomer who needs to keep his money liquid because he has a mortgagepending in the bank’s pipeline, and instead would try to sell the customeran appropriate insurance policy for a new homeowner.

That’s the ideal world of CRM. But, in fact, banks “rarely enjoy this levelof comprehension in the real world,” writes Banking Strategies, because“the computer systems that hold the data for banks’ various deliverychannels often don’t talk to each other. That means information capturedby a branch employee might not be available to someone in the call center,and vice versa.”

The “silo” problem, where one department in a bank—or its computersystems—fails to communicate fully (or at all) with another, is not endemicjust to CRM projects. But for those endeavors, among the solutions banksare looking toward for creating enterprise-wide data sharing are Web-based services. That term describes a type of middleware application whichallows disparate legacy systems, that previously could not communicate, toshare data in real time.

“Most banks’ CRM efforts have been silo-oriented.You may have a CRM initiative that results in amarketing effort by the call center, but themarketers are not sharing that information withthe other channels.”— Charles Bruney, senior vice president, Speer & Associates; Banking

Strategies, May-June 2003

While Web-based services don’t offer a final answer yet, because ofproblems such as a multiplicity of technology communications standards,TowerGroup projects that US retail banks will spend more than $1.8 billionon these systems by 2005, up from $242 million last year.

US Retail Banks' Web Services Spending, byTechnology Application, 2002 & 2005 (in millions andas a % increase vs. prior year)

2002 2005 % change

Customer interaction $213 $1,743 719%

Customer knowledge $25 $66 168%

Deposit accounting $4 $36 831%

Total $242 $1,845 662%

Source: TowerGroup, 2003; Banking Strategies, May 2003



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“A single system not only gives you the operatingefficiency, but as you understand your customersmore, it allows you the cross-sell ability.”— Chad Gifford, CEO, FleetBoston Financial; Bank Systems & Technology, 16

December 2002

The need for data communication across departments is clear: Whencustomer information is shared equally among channels, marketingresponse rates improve dramatically. According to Gartner, “Traditionalcampaigns generate response rates of only 2.3% to 3.3%, but being able torespond to customer triggers every day yields response rates of between16% and more than 50%,” as reported in American Banker.

“For the [banking] leaders, successful CRM has less todo with what product they need to force out thedoor to the customer, and a lot more to do with whatthey need to do to meet the customer’s needs.”— Tom Richards, research director, Financial Insights;American Banker, 3

June 2003

With success rates like that, it’s little wonder that 71% of the 100 largest US banks are either pursuing or considering CRM projects, according to TowerGroup.

Actively andpublicly

12%

Actively but quietly27%

Neither pursuing norconsidering it

29%

Considering it32%

US Banks that Are Pursuing CRM Projects, 2003 (as a% of 100 largest banks)

Source: TowerGroup, 2003; American Banker, June 2003



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And CRM is not just on the large bank radar screen. Among the communitybanks surveyed by the Independent Community Bankers of America, 57%are either using or plan to evaluate CRM software in the near future.

Even though CRM is not a technology process alone, IT spending by USfinancial services companies on CRM will soar from $3.4 billion this yearto $5.9 billion in 2008, according to the February 2003 Jupiter Researchreport titled “CRM Through 2008.”

An even higher spending figure comes from Financial Insights, whichexpects banks to shell out $6.9 billion on CRM projects in 2003, or 3%more than 2002’s outlay. The bulk of this spending will focus on analyticalCRM, according to the Framingham, MA-based division of IDC. Thedifference between this projection and Jupiter’s above might likely be dueto different interpretations of CRM and its elements.

Behind these CRM technology spending estimates are clear businessgoals, according to the February 2003 Forrester Research report titled“Banks’ Online Priorities for 2003.” Among the 250 banking executivessurveyed, 72.2% cited analyticals, along with reporting tools, as a highpriority. The only priority higher, according to 73.6% of executives, iscustomer profiling and segmentation.

No answer11%

Currently using14%

No interest32%

Plan to evaluate innext 12 to 18 months43%

US Community Banks’ Usage of CRM Software, 2002(as a % of respondents)

Source: Independent Community Bankers of America, InFinet Resources,2003; American Banker, February 2003


CRM Spending by US Financial Services Companies,2003 & 2008 (in billions)

2003 $3.4

2008 $5.9

Source: Jupiter Research, February 2003



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The third most important priority hits bottom line, with 66.4% of therespondents from a cross-section of financial institutions—commercialbanks, federal savings banks, credit unions and internet-only banks—citingmeasuring the profitability of customers, hence of the CRM endeavors.

CRM Efforts Considered “High Priority” by BankingExecutives in the US, 2003 (as a % of respondents)

Customer profiling and segmentation

73.6%

20.5%

5.9%

Analytics and reporting tools

72.2%

24.9%

2.9%

Customer profitability measurement

66.4%

26.1%

7.5%

Common customer database

61.8%

28.2%

10.1%

Campaign management

53.8%

37.5%

8.8%

Lead management

52.3%

33.9%

13.8%

Centralized contact management

51.5%

37.2%

11.3%





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Community banks, in some ways, have advantages over larger institutionswhen it comes to CRM activities and sharing customer data across theinstitution. Unlike large banks, which by and large operate various isolatedlegacy systems, smaller banks “typically either stored much of theircustomer data in the same system from the beginning or had it integratedfor them by outside processors,” as TowerGroup told American Banker.

Furthermore, by virtue of their smaller size, community banks generallyfind it easier to make the changes among employees, and how they deal withcustomers, that are needed more for successful CRM than is the technology.

“People lost sight of CRM as a strategy and thoughtof it only as a technology. Banks didn’t necessarilythink about rewriting their policies and procedures manuals.”— Kathleen Khirallah, senior research analyst, TowerGroup; American

Banker, 3 June 2003

Community banks understand how essential it is to make their systemsefficient for customer relationship endeavors. In a Grant Thornton poll of518 US community bank executives, 76% cited as an important businessissue updating or expanding technology to better track customer needs,

Business Issues Important to US Community Banks,2001-2003 (as a % of respondents)

Retaining key employees

Developing new sources of revenue

Updating/expanding technology to better track customerneeds

Expanding services for business customers

Offering Internet banking services

Measuring customer profitability

Planning for management succession

Expanding traditional banking services

Offering broker/dealer services

Offering insurance services

Offering non-traditional services (e.g., travel agency,business advisory)

2001

89%

–

–

73%

77%

71%

57%

–

41%

33%

19%

2002

91%

86%

–

68%

68%

68%

57%

61%

23%

27%

18%

2003

93%

87%

76%

75%

72%

69%

61%

53%

29%

21%

15%

Note: n=518Source: Grant Thornton LLP, March 2003



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Since the technology side of CRM is really only a support to the human side,things like using e-mail for rapid responses to inquiries can increasecustomer responses to later cross-marketing. Surprisingly, more communitybanks require same-day responses to customer voice mail and papermessages than to e-mail, according to the ABA Banking Journal survey.

US Community Banks that Require Same-DayResponses to Customers, by Channel, 2002 (as a % ofrespondents)

E-Mail

62.8% 37.2%

Voice mail

64.2% 35.8%

Paper messages

68.7% 31.3%

Yes No




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Index of Charts

In order to know what their customers want and how they feel about theinstitution, community banks tend to use traditional, non-technologymethods. That includes mailed customer surveys, simply monitoring howlong customers need to wait on line in the branch, and having the CEO callcustomers. Size matters: When it comes to really having customerrelationships, small banks typically do it better than large ones.

Methods US Community Banks Use to Check Qualityof Customer Service, 2002 (as a % of respondents)

Mailed customer surveys 38.4%

Monitoring teller line wait 25.5%

CEO calls to customers 23.1%

Mystery shoppers 22.1%

Director visits to branches 21.0%

Lobby visits with customers 20.5%

Ex-customer exit interviews 17.1%

Monitoring phone pickup time 11.3%

Customer focus groups 11.0%

Complaint hotline 2.5%

Recording of call-center conversations 2.5%

Customer town meetings 2.1%

None 23.4%




189


Methodology



Electronic Payments





Index of Charts

Whether the bank is small or large, 62.6% of US consumers polled byInsightExpress say their bank focuses its resources on customer service.Almost equally important, with responses from 60.0% of the 500consumers, is keeping them happy as a customer.

If consumers truly feel this way, the implication is that banks aresucceeding with the human side of customer relationship management.

US Consumers' Opinions Regarding the Areas onwhich Their Bank Focuses Resources, 2003 (as a % ofrespondents)

Customer service

62.6%

Keeping me happy as a customer

60.0%

Its image and brand perception in the marketplace

43.0%

Marketing for new customers

34.0%

Trying to understand my financial goals

31.4%

Marketing new products

25.4%

Other

7.2%




190


Methodology



Electronic Payments





Index of Charts

Call CentersFrom the customer’s point of view, “relationship” often refers to being ableto get help about services and products when that help is needed. Besidesthe branch and, increasingly, the Internet, the call center works as animportant electronic channel for customer service.

In fact, more banks are combining channels for customer service—callcenter and Internet together. Synergistics Research found that 72% ofconsumers find some value in being able to call or chat with a live bankingrepresentative while they bank online. “Indeed, providing this level of‘humanization’ for [Internet] banking may actually increase usage of theonline channel,” according to the Atlanta-based research company.

“The person in the call center has more power toimpact that brand than anything I do.”— Kathelen Spencer, director of corporate communications, Aflac;

American Banker, 19 August 2003

Don't know2%

Not at all valuable20%

Not too valuable7%

Somewhat valuable27%

Very valuable45%

US Consumers' Opinions Regarding the Value ofDirect Online Call Center Connections to Their Banks,2003 (as a % of respondents)

Note: n=862 (ages 18+, with household income of $25,000 or more)Source: Synergistics Research Corp., March 2003



191


Methodology



Electronic Payments





Index of Charts

Looking at staffed call centers in general, not just for financial services,Synergistics came to the conclusion that resolving problems is the mainactivity, with a 64% response rate from the 544 surveyed consumers.Activities nearly as important are getting account information (at 58%) andbasic customer service (at 57%).

When the channel is an automated voice response call center, gettingaccount information is far and away the main consumer activity, accordingto 79% of respondents.

Staffed Call Center Activities Used by Consumers inthe US, 2003 (as a % of respondents)

Resolve problems 64%

Account information 58%

Customer service 57%

Transfers 33%

Bill payment 20%

Open account 13%

Note: n=544 staffed call center usersSource: Synergistics Research Corp., March 2003


Voice Response Activities Used by Consumers in theUS, 2003 (as a % of respondents)

Accunt information 79%

Customer service 36%

Transfers 34%

Resolve problems 33%

Pay bills 19%

Open accounts 4%

Note: n=308 voice response usersSource: Synergistics Research Corp., March 2003



192


Methodology



Electronic Payments





Index of Charts

C.WirelessAs of 2003, the use of cell phones or PDAs for banking activities is still atthe cutting edge. Results in American Banker’s 2003 annual consumersurvey, conducted by the Gallup Organization, show that edge isgenerationally based. While 14% of those ages 18 to 24 say they are veryinterested in conducting financial transactions over a cell phone or a PDA,only 4% of the general population feels the same way.

However, warns American Banker, “These customers know they areusing lower-cost channels, and they expect to be charged less as a result.”

Earlier data from IDC shows the two basic banking services USconsumers want to access through wireless devices are accountinformation and funds transferring.

Banking Services that US Consumers Want to Accessvia Wireless Devices, 2002 (as a % of respondents)

Rate and product checks 29.7%

Alerts 60.6%

Pay bills 60.6%

Find nearest ATM 65.4%

Transfer funds 77.0%

Access account information 94.0%

Note: *based on survey respondents interested in wireless bankingSource: International Data Corporation (IDC), 2002; American Banker, July2002



193


Methodology



Electronic Payments





Index of Charts

While low on the list below from Pointsec Mobile, storing bank accountinformation did make the top ten list of PDA uses, according to 25% of respondents.

Top 10 Uses of PDAs According to PDA Owners in theUS, 2003 (as a % of respondents)

Business calendar

85%

Business name/address storage

80%

Personal name/address storage

79%

Personal calendar

75%

Entertainment - games/music, etc.

48%

Documents/spreadsheet creation

35%

Password/PIN storage

33%

Receive/view e-mail

32%

Bank account information storage

25%

Corporate information storage

25%

Source: Pointsec Mobile, July 2003



194


Methodology



Electronic Payments





Index of Charts

As of 2002, only 3% of companies in the US financial services industrywere using wireless data systems, according to Yankee Group. However,14% of the 36 respondents said they planned to adopt such systems during2003, while an additional 58% cited a time-frame of up to two years forwireless data systems.

At this point, however, banks have a major concern with the wirelesschannel, even if some customer do not—security risks. “Many banks havefelt that allowing customers to access information over wireless networks istoo risky,” reports Banking Strategies, “especially considering the relativelysmall demand for such services in the US.”

For much more about wireless, see the eMarketer brand-new report“Wireless Worldwide” at:http://www.emarketer.com/products/report.php?wire_world_nov03

Don’tknow

6%No plans11%

In 2+ years8%

In 12-24 months58%

In the next year14%

Already using3%

Planned Adoption of Wireless Data Enabled Systemsin the US Financial Industry, 2002 (as a % ofrespondents)

Note: n=36Source: Yankee Group, October 2002


http://www.emarketer.com/products/report.php?wire_world_nov03

VI

Methodology 7







A. Spending Patterns 197

B. Outsourcing 208


Index of Charts 243


195



196


Methodology



Electronic Payments





Index of Charts

Few industries devote more dollars to technology than financial services.And after several years of lowered spending because of the recession, banksare starting to invest more, especially in replacement of older systems andnew technology.

That’s why 35% of value-added resellers say that banks and otherfinancial companies offer the greatest IT sales growth opportunities, onlysurpassed by the health care industry.

Markets that VARBusiness 500 Companies BelieveOffer the Greatest IT Sales Growth Opportunities, Q12003 (as a % of respondents)

Health care 61%

Banking/finance 35%

Federal government 34%

Education 29%

Manufacturing 22%

Note: VAR=Value-Added Reseller; n=83 executives from the VARBusiness500Source: VARBusiness, July 2003



197


Methodology



Electronic Payments





Index of Charts

A. Spending PatternsSeptember 2003 estimates from TowerGroup illustrate the steady upswingof IT spending by large US banks (large defined as those with $20 billion ormore of assets, or approximately 40 banks). Last year’s tech spendingreached $22.0 billion, with a budgeted increase to $22.9 billion this yearand a projected $24.1 billion next. (However, in breaking news at the endof October 2003, just prior to publication of this report, Tower revised thoseIT spending projections downward, to $19.3 billion last year, to $20.1billion in 2003, and to $21.2 billion next year.)

The Needham, MA-based advisory and research company says that mostof those dollars go to consumer banking, since it generates substantiallymore revenues than business banking. For example, “consumer bankingaccounts for two-thirds of Bank of America’s revenues and 72% of those atWells Fargo,” reports American Banker.

IT Spending at Large* US Banks, by Type, 2002-2004 (inbillions)

2002 2003 2004

Internal $11.0 $10.8 $11.1

Hardware $4.6 $4.6 $4.8

Software $3.8 $4.3 $4.5

Services $2.6 $3.2 $3.6

Total $22.0 $22.9 $24.1

Note: 2002 (actual), 2003 (budgeted), 2004 (projected); *large defined as$20 billion or more of assetsSource: TowerGroup, September 2003



198


Methodology



Electronic Payments





Index of Charts

Bank spending on services will show the largest gains, up by 23.1% thisyear and 12.5% in 2004. Among the services being upgraded are electronicbill payment and presentment systems, which alone Tower expects toincrease by 62% a year over the next several years.

And the greatest share of large bank IT spending will go to internalsystems, such as for branches and for replacing isolated legacy systems.

IT Spending at Large* US Banks, by Type, 2003 & 2004(as a % increase/decrease vs. prior year)

Internal

-1.8%

2.8%

Hardware

0.0%

4.3%

Software

13.2%

4.7%

Services

23.1%

12.5%

Total

4.1%

5.2%

2003 2004



IT Spending at Large* US Banks, by Type, 2002-2004 (asa % of total spending)

2002 2003 2004

Internal 50.0% 47.2% 46.1%

Hardware 20.9% 20.1% 19.9%

Software 17.3% 18.8% 18.7%

Services 11.8% 14.0% 14.9%

Total $22.0 $22.9 $24.1




199


Methodology



Electronic Payments





Index of Charts

When Tower examined IT spending by purpose—maintenance, replacement,and new technologies—at all US commercial banks, it found “only nominalincreases in total IT spending,” at 2.7%. Viewed by purpose, the greatestspending gains this year over last will be for new technologies, at 8.1%.

Translated to dollars, Tower says total spending in 2003 will be $33.8billion, and will rise to $38.3 billion by 2007.

Furthermore, the breakdown of the projected $34.7 billion spending in2004 shows $22.8 billion, or 65.7%, going to consumer banking.

US Commercial Bank IT Spending, by Purpose, 2003(as a % increase vs. prior year)

New technologies 8.1%

Replacement 7.4%

Maintenance 1.5%

Total 2.7%

Source: TowerGroup, September 2003


US Commercial Bank IT Spending, by Purpose, 2003,2004 & 2007 (in billions)

Maintenance Replacement New technologies Total

2003 $27.4 $2.7 $3.7 $33.8

2004 $27.8 $2.9 $4.0 $34.7

2007 $28.9 $4.1 $5.3 $38.3



IT Spending at US Commercial Banks, by Type, 2004 (inbillions)

Consumer banking $22.80

Wholesale banking $8.02

Payment services $3.88




200


Methodology



Electronic Payments





Index of Charts

The lion’s share of technology spending is on simple maintenance, the costof keeping up existing IT infrastructures, ranging from an 81.1% share thisyear down to 75.5% by 2007. Spending on new technologies will show thegreatest shift, going from a 10.9% slice in 2003 to 13.8% in 2007.

“When IT budgets are under pressure, it’s easy tosay spending will be cut. But that’s not happening.Projects take time and require large investments.It’s like a train at full speed. You need to brakeslowly.”

— Virginia Garcia, senior analyst, TowerGroup; American Banker, 4September 2003

Tower claims the shift will be due to “efficiencies achieved through long-term cost management projects.” Once that “thriftiness—a strategy knownin the industry as strategic cost management—starts to show results, bankswill spend more freely on projects that are not dedicated to maintaininglegacy systems,” writes American Banker about the Tower study.

US Commercial Bank IT Spending, by Purpose, 2003,2004 & 2007 (as a % of total and in billions)

Maintenance Replacement New technologies Total

2003 81.1% 8.0% 10.9% $33.8

2004 80.1% 8.4% 11.5% $34.7

2007 75.5% 10.7% 13.8% $38.3




201


Methodology



Electronic Payments





Index of Charts

Much of the IT spending referred to above applies across all possiblebanking channels. However, TowerGroup research “shows that while thebranch represents only one-third of total customer interactions within theretail banking sector, it commands the majority of technology investmentand operational expense for banks (as compared with other deliverychannels such as call centers, ATMs, and the Internet).”

That investment for US banks, thrifts, and credit unions will rise from$3.5 billion total in 2003 to $4.1 billion in 2005.

IT Spending on Branch Technology by US Banks,Thrifts and Credit Unions, 2001-2005 (in billions)

2001

$0.9

$1.1

$0.9

$2.9

2002

$1.0

$1.2

$0.9

$3.1

2003

$1.1

$1.4

$1.0

$3.5

2004

$1.2

$1.5

$1.0

$3.7

2005

$1.3

$1.7

$1.1

$4.1

Top 30 commercial &retail banks (1)

Remaining commercial& retail banks (2)

Thrifts & credit unions Total

Note: (1) banks with $20 billion or more assets; (2) banks with less than$20 billion assetsSource: TowerGroup, May 2003



202


Methodology



Electronic Payments





Index of Charts

Among the three categories of financial institutions, the larger pool ofsmaller commercial and retail banks will spend the largest share on branchtechnology—40.0% in 2003, up to 41.5% in 2005.

Tower says that three drivers are behind the increased spending on branch technology.

■ First, there is the cost and availability of maintenance for existingbranch technology infrastructures, which are often based on 20-year-old technologies.

■ Second, customers continue to use and be loyal to the branch channel.■ Third, financial firms need to leverage the branch channel by integrating

customer information as part of a comprehensive CRM strategy.

IT Spending on Branch Technology by US Banks,Thrifts and Credit Unions, 2001-2005 (as a % of total ITspending)

2001

31.0%

37.9%

31.0%

2002

32.3%

38.7%

29.0%

2003

31.4%

40.0%

28.6%

2004

32.4%

40.5%

27.0%

2005

31.7%

41.5%

26.8%

Top 30 commercial &retail banks (1)

Remaining commercial& retail banks (2)

Thrifts & credit unions




203


Methodology



Electronic Payments





Index of Charts

“It’s kind of hard to achieve any organic growthwithout any IT spending.”— William Wray, chief information officer, Citizens Financial Group;

American Banker, 5 September 2003

The greatest spending increase across the banking industry will occur thisyear, with a 12.9% growth rate. Next year, as those projects get integratedinto banking operations, spending gains will slow to a 5.7% rate. But in2005, additional branch IT spending will bring a 10.8% gain, according to Tower.

While TowerGroup sees branch technology spending surging, an August2003 study from Financial Insights does not. “While there is considerableinterest in branch renewal, IT spending on branches remains surprisinglymodest,” according to the Framingham, MA-based unit of IDC.

Financial Insights says that spending on new outposts will dominate overallbranch IT spending until 2005. At that point, spending on enhancements inexisting branches will step up, reaching more than 40% of total branch ITspending by 2007. And of branch IT enhancements, the largest 29 banks willaccount for anywhere from 80% to 90% of 2007’s spending.

IT Spending on Branch Technology by US Banks,Thrifts and Credit Unions, 2002-2005 (as a % increasevs. prior year)

Top 30commercial

& retailbanks (1)

Remainingcommercial

& retailbanks (2)

Thrifts &creditunions

Total

2002 11.1% 9.1% 0.0% 6.9%

2003 10.0% 16.7% 11.1% 12.9%

2004 9.1% 7.1% 0.0% 5.7%

2005 8.3% 13.3% 10.0% 10.8%




204


Methodology



Electronic Payments





Index of Charts

Outside of just the branch channel, bank technology spending projectionsother than from TowerGroup show comparable growth curves. Researchfrom IDC says that 75% of US banks intend to increase IT spending in 2003on support and delivery channels.

While smaller banks may not be spending as much on IT projects as theindustry as a whole, increases are also expected. According to the ABABanking Journal, 46.8% of community banks anticipate higher technologyspending this year, while only 18.3% say they’ll spend less.

Decreasespending in 20035%No change

20%

Increase spending in 200375%

IT Spending Plans for Support and Delivery Channelsamong US Banks, 2003 (as a % of respondents)

Note: n=60Source: International Data Corporation (IDC), August 2003


Same35.1%

Lower18.3%

Higher46.6%

Anticipated 2003 Technology Spending by USCommunity Banks, 2002 (as a % of respondents)




205


Methodology



Electronic Payments





Index of Charts

However, that increase is a drop-off from 2002’s figure, when 54.9% ofcommunity banks had higher technology spending.

Technology Spending Comparison to Previous Year byUS Community Banks, 2002 (as a % of respondents)

Higher 54.9%

Lower 14.9%

Same 30.2%




206


Methodology



Electronic Payments





Index of Charts

Over the past two calendar years, the two main IT spending priorities forcommunity banks have been core systems and Internet banking.

Top Technology Spending Priorities* for USCommunity Banks, 2001 & 2002 (as a % ofrespondents)

Core systems

39.7%

31.7%

Internet banking

18.0%

16.7%

Item processing

10.8%

11.5%

Training

11.2%

11.0%

Customer management systems

8.5%

10.7%

Branch automation

7.6%

8.7%

Tech consulting

1.3%

2.9%

ATMs

1.8%

2.0%

Call center

1.2%

1.7%

2001 2002

Note: n=760; *selected as top priority by respondentsSource: ABA Banking Journal, February 2003



207


Methodology



Electronic Payments





Index of Charts

The various technology spending increases—by channel, by purpose, or bybank size—mean that the US banking industry is devoting more and moreof its revenues to IT. According to the October 2002 “2003 Worldwide ITBenchmark Report” from Meta Group, IT’s share of company revenues willrise from 5.16% in 2001 to 6.26% in 2003.

US Banking Industry IT Spending, 2001-2003 (as a % ofcompany revenues)

2001 5.16%

2002 5.37%

2003 6.26%

Source: META Group, October 2002



208


Methodology



Electronic Payments





Index of Charts

B. OutsourcingMuch of the bank IT spending examined in the section above is outsourced.Estimates from TowerGroup say that nearly 20% of the money banks spendon IT goes to third-party technology companies.

The types of functions typically outsourced by US retail banks, accordingto Accenture, include credit card processing and “some aspect” of IT.

The most common, and straightforward, reason why banks don’t outsourceis having sufficient staff to manage functions internally, according to 50%of respondents. But a significant 40% don’t believe it’s cost-effective.(However, considering these figures represent 10 senior managers, it maybe hard to extrapolate from them.)

External and Internal Functions Outsourced by USRetail Banks, September 2002 (as a % of respondents)

Credit card processing 75%

Some aspect of human resources 55%

Some aspect of IT 55%

Mortgage processing 40%

Note: n=30 senior managers at 30 banks with over $3 billion in assetsSource: Accenture, February 2003


Reasons Why US Retail Banks Do Not Outsource,September 2002 (as a % of respondents)

Have sufficient staff to manage functions internally

50%

Don’t believe it is cost-effective

40%

Fear loss of control over key business functions

30%

Note: 33% of the 30 senior finance professionals surveyed do notoutsource any internal or external functionsSource: Accenture, February 2003



209


Methodology



Electronic Payments





Index of Charts

Smaller banks don’t always have sufficient staff to manage IT functions.Among US community banks, 37.3% cite third-party vendors orconsultants as their chief source of overall technology expertise.

In this case, the smaller banks tend to spend more than Tower’s average ofapproximately 20% on outsourcing, with 38.5% of respondents saying thatthey outsourced their data processing in 2002 according to the ABABanking Journal.

Chief Source of Overall Technology Expertise at USCommunity Banks, 2002 (as a % of respondents)

Bank's IT staff 54.0%

Vendors 25.1%

Consultants 12.2%

Bank holding company's IT staff 7.0%

Correspondent bank 1.7%



Site management1.1%

Outsourcing38.5%

In-house*60.4%

How US Community Banks Handle Data Processing,2002 (as a % of respondents)

Note: n=760; *core system owned (81.6%) or leased (18.4%)Source: ABA Banking Journal, February 2003


VII

Methodology 7









B. Identity Theft: Protecting Consumers & Banks 218

C. Privacy & Trust 236

Index of Charts 243


211



212


Methodology



Electronic Payments





Index of Charts

All the good news about online banking—an increasing customer base,more profitable customers, lower costs than most other channels—may beundercut by the barriers to its growth. Trepidation about security, fraud,and violated privacy continue to plague not only banks and other financialservices firms, but online commerce in general. But for most people,financial information is more sensitive than data about shopping habits, sothese issues are at the forefront for both consumers and companies.

“Online banking adoption has stalled becauseconsumers are still concerned about security,despite the fact that e-security measures in placeat most financial institutions are really very good.”— George Tubin, senior analyst, TowerGroup

Research from TowerGroup says that concerns about security are theprimary reason why 26% of US online households do not bank online.According to Tower, these security concerns are a key dynamic in thelagging growth of online bill payment in particular.

A similar barrier, discomfort conducting banking business online, wascited by 22% of respondents. And 6% of households mentioned concernsabout privacy.

Primary Reasons Why US Online Households Are NotUsing Online Banking, 2002 (as a % of respondents)

Concerned about security

26%

Not comfortable conducting banking business online

22%

Prefer to conduct all banking business face-to-face

21%

Concerned about privacy

6%

None of my current financial institutions offer it

5%

Not sure how to use it

5%

Note: among households not using online bankingSource: TowerGroup, June 2003



213


Methodology



Electronic Payments





Index of Charts

From the point of view of those in the financial business, the barriers are notall that different. In a study by the Association for Financial Professionals(AFP), 84% of US financial and treasury professionals named security ofinformation and communications as the most important barrier toconducting operations online. Fears about fraud, detailed as authenticationof counterparty, was mentioned next, by 79% of respondents.

Barriers to Using the Internet to Transact FinancialBusiness According to US Financial and TreasuryProfessionals, July 2002 (as a % of respondents)

Security of information/communications

84%

14%

2%

Authentication of counterparty

79%

18%

3%

Enforceability of contracts/repudiation

57%

36%

7%

Inability to integrate data with internal systems

54%

38%

8%

Credit quality of counterparty

52%

38%

10%

Company reluctance to conduct e-commerce and onlinetransactions

25%

45%

30%

Lack of personal advice/counsel

17%

51%

32%

Highly important Somewhat important

Not at all important




214


Methodology



Electronic Payments





Index of Charts

A. General Security IssuesGeneral fears about security stymie fuller growth of online banking—general, because if consumers looked closely at online security amongfinancial institutions, they’d see that “banks have been ahead of the curvein implementing Internet IT security measures against threats like hackers,viruses, and network sabotage,” according to TowerGroup. And while itvery well might be a hacker type who would steal an individual customer’spersonal information, “these aren’t the fraudulent activities that mostconcern consumers, who view them as attacks against the entireinstitution—not their individual assets.”

But it’s not really incumbent on the consumer to look closely at a bank’sonline security measures so much as it is important for the bank tocommunicate clearly to its customers about key points such as Internetsecurity, preventative measures from the bank and by the consumer, andbank policies about security breaches.

“With each new technology, we’ve stepped furtherback from the customer. The accumulation of datathrough technology has outpaced the policies andprocedures used to protect it.”— Don Ghee, senior operating risk manager, J.P. Morgan Chase; Bank

Systems & Technology, 27 May 2003


215


Methodology



Electronic Payments





Index of Charts

In fact, 91% of consumers surveyed by MasterCard International said that it’s important for Web sites to contain information about their security safeguards.

However, even though “most online banking sites tell consumers aboutsecurity technologies like…encryption, this kind of technical data does littleto communicate the broader measures in place to protect consumers, or theresponsibilities a bank has if something goes wrong,” Tower says. “And itdoes nothing to help consumers understand what they can do to keeppersonal information from inadvertently falling into the wrong hands.”

“Complexity is the enemy of security.”— Brian O’Higgins, chief technology officer, Entrust; Banking Strategies,

March-April 2003

What can consumers do? For example, with the rise of broadband and itsalways-on Internet connections among US households, bank customers areeven more exposed to online security problems. According to research bythe National Cyber Security Alliance for American Online, 67% ofbroadband households don’t have a properly and safely configured firewall.

US Consumers' Opinions Regarding Online Privacyand Security, October-November 2002 (as a % ofrespondents)

Important that Internet sites contain information about theirsecurity and privacy safeguards

91%

I am concerned that online shopping will promote unsolicitedcommunications/other junk mail

71%

I am very concerned with security and fraud issues

70%

I am very concerned that my credit card number will beintercepted by “hackers”

61%

I am very uncomfortable with providing personal informationwhen registering at Web sites

52%

My bank is making an effort to protect my card informationonline and protect me from fraud

49%

The Internet is becoming more secure all the time

38%

Note: n=1,024Source: MasterCard International, April 2003



216


Methodology



Electronic Payments





Index of Charts

Tower and other experts say “bankers may have to take on more of a role ineducating their customers about online security in order to protect boththemselves and the customers,” reports Banking Strategies.

“Anybody who does business on the Internet has aresponsibility to educate customers about safecomputing practices. The challenge is discussingsecurity concerns in a way the general populationcan easily understand.”— Pete Murphy, chief information officer, AmSouth Bancorp; Banking

Strategies, March-April 2003

TowerGroup advises that to reassure online customers, banks mustconspicuously address three key areas in plain, non-technical language.

■ One, the security measures in place to protect consumer data, and howthose measures work;

■ Two, the steps consumers must take to protect their own personalinformation; and

■ Three, a bank’s indemnification policy for any unauthorized activity.More than reassurance is needed, however, since the Internet reality is that “security threats are increasing rather than receding. The morecomplex Internet systems become, the more vulnerable they are,” writesBanking Strategies.

Whatever added measures banks take to protect their online services andcustomer information will “unfortunately add to expenses at a time whenbanks are anxious to squeeze some profitability out of their onlineoperations,” continues Banking Strategies. “But the risk of not takingaction is grave. Financial and legal liability can be enormous whencriminal elements or mischief-makers penetrate a bank’s customer files. Aninstitution’s very reputation as a safe haven for customer funds is at stake.”

Broadband Households in the US Who Do Not HaveCritical Security Features, 2003 (as a % ofrespondents)

Don’t have a properly and safely configured (PSC) Firewall

67%

Don’t have recently updated anti-virus software

62%

Don’t have parental controls*

97%

Note: n=120 consumers surveyed in their homes; *asked of householdswith children under age 18Source: National Cyber Security Alliance/America Online, May 2003



217


Methodology



Electronic Payments





Index of Charts

“As soon as you start talking about Web stuff, evenbefore you have something running, you need todiscuss security.”— Robert Garigue, chief information officer, Bank of Montreal Financial

Group; Banking Strategies, March-April 2003

There is some good news on the horizon. Research earlier this year fromBarry Leeds & Associates found that more and more US consumers agreethat Internet-based financial transactions are safe and secure. While thesefigures also include use of credit cards for online shopping, the sense ofsecurity has increased from 49% of respondents in 2000 to 70% this year.

In fact, at this point, nearly half of consumers believe that online financialtransactions are more secure than ones done on the telephone. For the Internetto compete equally with traditional electronic communication channels likethe telephone points to more positive gains in the next few years.

For more information about security matters, see eMarketer’s“Security Online” report at:http://www.emarketer.com/products/report.php?security_on_feb03

US Consumers Who “Completely/Strongly Agree” thatInternet-Based Financial Transactions Are Safe andSecure, 2000-2003 (as a % of respondents)

2000 49%

2001 56%

2003 70%

Note: n=846Source: Barry Leeds & Associates, July 2003


US Consumers Who Believe that Internet-BasedFinancial Transactions Are More Secure thanTelephone-Based Financial Transactions, 2000-2003 (asa % of respondents)

2000 32%

2001 41%

2003 47%

Note: n=846Source: Barry Leeds & Associates, July 2003


http://www.emarketer.com/products/report.php?security_on_feb03


218


Methodology



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B. Identity Theft: Protecting Consumers & BanksIdentity theft is not a problem for banks alone. However, the nexus ofmoney, credit cards, account information, and customers’ personal data,along with a bank’s liability, makes identity theft a particular obstacle forthe financial services industry as it tries to build the online channel.

Typically, identity theft is all about money. According to Star Systems, aMaitland, FL-based electronic payments network, identity theft is definedas “a criminal’s wholesale takeover of another person’s identity [including]name, date of birth, Social Security number, bank and/or loan accountnumber, for fraudulent financial gain.”

One connection between banking and identity theft shows up in datafrom the Federal Trade Commission’s recently released “Identity TheftSurvey Report.” The two types of existing accounts most misused are creditcards (at 67%) and checking or savings (at 19%).

US Identity Theft Victims, by Type of Existing AccountMisused, March-April 2003 (as a % of respondents)

Existing credit card 67%

Checking/savings 19%

Telephone service 9%

Internet 3%

Insurance 2%

Source: Synovate for the US Federal Trade Commission, September 2003



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Supporting data comes from Star Systems. The five main ways identitytheft has harmed its victims are all financially related—from credit cards tobanking accounts to loans.

There’s little question that identity theft is a pernicious and escalatingproblem for both US consumers and financial institutions alike. And whilesome portion of identity theft occurs because of offline shenanigans—suchas a waiter copying a customer’s credit card data when processing paymentin a restaurant—the ease of grabbing information online makes the Internetone of today’s main avenues for identity theft’s increase.

Ways US Victims of Identity Theft Have BeenVictimized, 2002 (as a % of respondents)

Had credit cards in your name issued to another person

29%

Had banking accounts in your name opened by another person

23%

Had loans opened in your name by another person

21%

Take over of your currently existing bank account

18%

Credit cards used for unauthorized purchases

14%

Some other theft or fraud committed with your personalinformation

13%

Had a driver's license in your name issued to another person

9%

Had your checks used or made duplicate checks

8%

Had your Social Security number used

4%

None of the above

17%

Note: n=109; multiple responses allowedSource: Star Systems, April 2003



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“It often takes more than a year to discover thatyou’ve been a victim [of identity theft], thatsomebody’s gotten your information and they’vebeen using it to commit fraud. Once it’s discovered,it can take years to clean up the problem.Meanwhile, the fraudster is still out thereperpetrating more fraud.”

— Barbara Span, vice president, Star Systems; Bank Systems & Technology,27 May 2003

While identity theft may not be the most cited type of online fraud, its costsfar outweigh the numbers of incidents. The Internet Fraud ComplaintCenter—a Richmond VA-based organization created by a partnership betweenthe Federal Bureau of Investigation and the National White Collar CrimeCenter—found that 15% of those consumers who reported online identitytheft in 2002 suffered a loss, with the median loss per complaint at $2,000.

Online Fraud in the US: Complaints and AverageMonetary Loss, 2002

Auction fraud

Non-delivery (merchandiseand payment)

Investment fraud

Business fraud

Credit/debit card fraud

Confidence fraud

Check fraud

Communications fraud

Identity theft

Nigerian letter fraud

% of complainantswho reported $

loss

87%

82%

75%

75%

62%

58%

56%

36%

15%

<1%

Median $ loss pertypical complaint

$320

$176

$570

$220

$120

$1,000

$1,100

$174

$2,000

$3,864

Source: Internet Fraud Complaint Center, April 2003



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And while identity theft may plague the online world less than other typesof fraud, identity theft was by far the most cited of fraud complaints acrosschannels, mentioned by 43% of respondents to an earlier FTC study.

Research from Gartner Dataquest indicates that as of June 2003, 3.4% ofUS consumers said they were victims of identity theft, up from 1.9% inFebruary 2002.

Top Fraud Complaint Categories in the US, 2002

Identity theft

43%

Internet auctions

13%

Internet services and computer complaints

6%

Advance-fee loans and credit protection

5%

Shop-at-home/catalog sales

5%

Foreign money offers

4%

Prizes, sweepstakes and lotteries

4%

Business opportunities and work-at-home plans

3%

Telephone services

2%

Health care

2%

Magazines and buyers club

2%

Other

11%

Source: US Federal Trade Commission (FTC), January 2003


Percent of US Consumers Who Have Been Victims ofIdentity Theft in the Past Year, February 2002 & June2003

February 2002 1.9%

June 2003 3.4%

Source: Gartner Dataquest, July 2003



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And in the recent FTC study, it found that 4.6% of consumers had theiridentity stolen during the past year.

“It’s very professional. Organized crime is not onlyin loansharking and drugs, but is also in identitytheft. There are gangs getting out of the drugbusiness because identity theft is more lucrative.”— Don Ghee, senior operating risk manager, J.P. Morgan Chase; Bank

Systems & Technology, 27 May 2003

But the spread of identity theft is more far-reaching than those figuresindicate. When the examined time period expands to the past five years,the FTC found that some form of identity theft was perpetrated on morethan one in ten consumers (or 12.7% to be exact). Based on Census Bureaupopulation figures for 2003, that means nearly 37 million people in the UShave been touched by identity theft since 1998.

US Identity Theft Victims in the Past Year, by Type ofTheft, March-April 2003 (as a % of respondents)

Misuse of existing credit card or credit card number

2.4%

New accounts and other fraud

1.5%

Misuse of existing non-credit card account or account number

0.7%



US Identity Theft Victims in the Past Five Years, byType of Theft, March-April 2003 (as a % ofrespondents)


6.0%


4.7%


2.0%




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Fears about identity theft don’t come just from an individual’s experiencesbut also from friends, family, and colleagues. Results from Star Systemsindicate that 19.2% of US consumers have personally known a victim ofidentity theft. Again, that translates to almost 56 million people.

Those fears, spread among that many people, set up significant barriers tothe usage of the Internet for financial purposes. And once identity theft hasoccurred, apprehension about future victimization shoots up. Amongvictims, 47% are very or somewhat concerned that false accounts or otherfraud will occur in their name. And 49% are concerned about the misuse ofnon-credit card account or account number information.

“Like most people, I’m not overly worried abouthaving my credit card stolen because I know I’m notliable for fraudulent activity. But what if someonegets into my online bank account? The fact that themajority of consumers are uncertain about theanswer to that question explains their continuinghesitation when it comes to online banking.”— George Tubin, senior analyst,TowerGroup

US Consumers Who Have Been or Who KnowPersonally a Victim of Identify Theft, 2002 (as a % ofrespondents)

Yes

5.5%

19.2%

No

94.3%

80.7%

Don't know

0.3%

0.1%

Have been victim Know victim personally

Note: n=2,000Source: Star Systems, April 2003



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Interestingly, 45% of victimized respondents are not at all concerned aboutcredit card misuse. Chances are they know their liability is limited to $50.This response points to how, as mentioned in the section above, banks needto educate customers about the institution’s indemnification policy for anyunauthorized activity, whether online or offline.

Further education regarding identity theft might address the methods bywhich personal information was taken from victims. While 16% ofrespondents to the Star Systems survey cited a lost or stolen wallet, only5% mentioned financial institution records and 4% Internet transactions.In fact, online banking is typically not the method used by identity thieves.

US Identity Theft Victims’ Level of Concern aboutFuture Victimization, by Type of Theft, March-April2003 (as a % of respondents)


28%

19%

21%

31%


20%

29%

26%

25%


14%

22%

18%

45%

Very concerned Somewhat concerned

Not very concerned Not at all concerned




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However, the black hole of knowledge indicated by the 35% of respondentswho don’t know how they became victims of identity theft remains abarrier to greater adoption of online financial services.

Methods by which Personal Information Was Takenfrom US Victims of Identity Theft, 2002 (as a % ofrespondents)

Lost or stolen wallet

16%

Financial institution records

5%

Driver's license process

4%

Home burglary

4%

Internet transaction

4%

Stolen mail or mail fraud

4%

Loan or mortgage application process

2%

Stolen checks or checkbook

2%

Telephone fraud

1%

Other

22%

Don't know

35%

Note: n=109Source: Star Systems, April 2003



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Furthermore, identity theft is a time bomb. While it might take a month orless for most identity theft victims to learn about the misuse of an existingaccount, for the majority of victims it takes one month or more to discoverthe creation of a new account in their name or other fraud.

And those false new accounts take longer to resolve, too, with 39% ofvictims saying it took three or more months to straighten things out.Meanwhile, credit records are stained, which can encroach on getting anew job, a mortgage, or other vitally important areas.

“Lenders have always been willing to accept acertain amount of risk, and fraud losses have beenan area of complacency. It’s critical, though, thatthey revisit their assumptions on the fraud issue,and now is the time.”— Christine Pratt, senior analyst, TowerGroup; Bank Systems & Technology,

27 May 2003

Length of Time It Took for US Identity Theft Victims toDiscover the Theft, by Type of Theft, March-April 2003(as a % of respondents)

Less than one week

17%

41%

39%

One week to one month

17%

37%

28%

1-5 months

33%

19%

25%

6 months or more

24%

3%

8%

New accountsand other fraud

Misuse of existingnon-credit cardaccount or accountnumber

Misuse of existingcredit card or creditcard number only




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Again, the fallout from identity theft is so severe, that victims, friends andfamily of victims, or just the plain wary are leery of mixing up finances andthe Internet. That suspicion is more based in perception than reality, whichputs the burden on banks to dispel the danger.

Length of Time It Took for US Identity Theft Victims toResolve the Problem, by Type of Theft, March-April2003 (as a % of respondents)


25%

17%

15%

39%


45%

33%

13%

10%

Misuse of existing credit card or credit card number only

57%

17%

15%

9%

Resolved within one week Resolved in 8-30 days

Resolved in 1-2 months Resolved in 3+ months




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Individuals certainly take precautions to prevent identity theft, such as the88% of respondents to a FindLaw survey earlier this year who said theyreview all bank and credit card statements for fraud, along with the 77%who shred or destroy unneeded financial documents.

In fact, online banking and bill payment may reduce identity theft.According to Javelin Strategy & Research’s recently released report,“Online Banking and Bill Paying: New Protection from Identity Theft,”using the Internet for financial services can “actually help protectconsumers and businesses from two of the most common kinds of identitytheft: fraudulent opening of a new accounts and unauthorized use ofexisting accounts.”

The Pleasanton, CA-based consulting firm says that “By viewing andpaying bills and statements online, consumers and businesses eliminateone of the most common means of identity theft—stealing personalinformation contained in bills, bank statements, and credit cards that aredelivered to a person’s mailbox, or in the signed, outgoing check used topay the paper bill.”

More important, however, is that “frequent account monitoring is thesingle greatest step consumers can take to fight identity fraud. Consumersthat view and pay their bills and bank online are nearly four times morelikely to monitor their transactions frequently than those who wait forpaper bills and monthly statements.…This earlier detection can reduceidentity theft by more than 18%.”

“There’s a lot of things that financial institutionscompete on, but we don’t compete on security.It’s not in any of our best interests if any bank gets compromised.”— Don Parker, head of information services, Comerica; Bank Systems &

Technology, 27 May 2003

Precautions Taken by US Adults to Prevent IdentityTheft, 2003 (as a % of respondents)

Review bank/credit card statements for fraud

88%

Shred/destroy credit card receipts or other financial documents

77%

Check credit reports

64%

Never give out social security number

51%

Note: n=1,000Source: FindLaw, March 2003



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Furthermore, Javelin offers 20 ways for online banking customers toreduce the risk of identity theft. While positioned for the consumer, manyof these 20 suggestions can be turned around and used by financialinstitutions both to educate their customers and to allay fears.

20 Ways for Online Banking Customers to Reduce Riskof Identity Theft, 20031. Sign up for bill presentment and payment, preferably through a singletrusted provider such as a financial institution or portal, where paymentinformation, passwords, settings and monitoring can be consolidated.

2. When comparing sites for viewing e-statements, look for a no-liabilityguarantee of payment, an easy-to-use site, and extended-hours customerservice.

3. Sign up for e-mail based account "alerts."

4. Request that the paper copies of all statements and bills be "turned off"by your provider. If you print out paper copies, store them safely.

5. View online statements and bills weekly, particularly for financialaccounts.

6. Sign up for automatic deposits of any regular payments.

7. Use hard-to-guess unique passwords, change them regularly, and recordthem in a safe place.

8. Don't respond to e-mails that ask you to log in or update data. Only login to secure sites after directly typing and double-checking the URL.

9. When buying or selling at auction sites use P2P payments, and takeextra precautions with parties that lack a success rating.

10. Avoid transacting with high-risk or unknown online merchants such asthose in the adult sector (where fraud is more common).

11. Retrieve paper mail promptly and never place checks in your personaloutgoing mailbox.

12. Never give out your Social Security number or other private informationunless you have no other option, and avoid divulging such information overthe phone.

13. If account activity looks suspicious or important mail is delayed, checkwith the merchant or biller immediately.

14. If fraud is detected, contact credit bureaus and take advantage of allrecourse and protection methods.

15. Destroy pre-approved offers of credit and other private information.

16. Add your name to all available telemarketing deletion lists, and askcallers to place you on their "do not call" list.

17. Don't discard a computer without thorough deletion of personal data.

18. Photocopy contents of wallet in case of theft.

19. View credit reports at least one per year.

20. If you need more confidence before using bill payment, make your firstcheck out for $1.00, payable to yourself, and see what happens.

Source: Javelin Strategy & Research, October 2003



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Javelin’s somewhat counterintuitive, but certainly logical, point of view isbacked up by results from the FTC survey. That is, another way to find outabout, if not always prevent, identity theft is by monitoring accounts,something 52% of FTC respondents said they did to discover the misuse oftheir personal information.

However, financial institutions are leaving online doors wide open foridentity theft, according to a recent report from the Aberdeen Group. TheBoston-based IT market intelligence firm notes that many banks forcecustomers to use their Social Security numbers as the primary identity forlogging on to their online accounts.

Remember that an individual’s Social Security number is a keycomponent in identity theft. And as the Aberdeen Group puts it: “Noamount of electronic security is going to reduce the risk of having theseSocial Security numbers—and their owners’ identity data—stolen, fleeced,bartered, and otherwise lost to the Internet winds.”

The costs of such fraud are high—not just to consumers but to thefinancial institutions as well. “Unauthorized access to Social Securitynumbers is the number one reason why identity theft rates are high ($221billion in 2003) and are skyrocketing (300% compound annual growthrate),” reports the Aberdeen Group.

How US Identity Theft Victims Discovered the Misuseof Their Information, March-April 2003 (as a % ofrespondents)

Monitoring account 52%

Company notification 26%

Theft victim 9%

While obtaining credit 8%

Other 7%




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That $221 billion figure covers both consumer and company costs. Anothertake on consumer losses comes from Star Systems, which shows that while13% of identity theft victims said the fraud was either in the $1 to $500range, or the $501 to $1,000 range, an additional 13% said the fraudamount was more than $10,000.

Total Dollar Amount of Identity Theft Fraud in the US,2002 (as a % of respondents)

$0 5%

$1-$500 5%

$501-$1,000 13%

$1,001-$2,000 8%

$2,001-$3,000 8%

$3,001-$4,000 2%

$4,001-$5,000 6%

$5,001-$6,000 1%

$7,001-$10,000 6%

$10,001+ 13%

Don't know 25%




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More recently released data from the FTC shows that when the identitytheft involves setting up new, fraudulent accounts, $5,000 or more is lost in36% of the cases.

Value Obtained by US Identity Thieves, by Type ofTheft, March-April 2003 (as a % of identity theftvictims)

<$100

12%

22%

23%

$100-$499

13%

30%

30%

$500-$999

10%

11%

14%

$1,000-$4,999

19%

20%

23%

$5,000+

36%

5%

6%

New accounts and otherfraud

Misuse of existing non-credit card account oraccount number

Misuse of existing creditcard or credit card numberonly




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However, since financial services companies typically bear the cost ofidentity theft fraud, most victims of identity theft (67%) actually lost nomoney, according to Star Systems. They do, however, lose time. Researchfrom Javelin Strategy & Research says that an average victim of identitytheft spends more than 60 hours of personal time clearing his accounts andcredit records.

“While identity fraud is nightmarish for the individual, it’s no walk in thepark for lending institutions either,” according to TowerGroup, since theytypically must eat the losses. Tower says its “conservative estimate” of USlender losses due to identity theft total more than $1 billion annually.

Those are just lender losses. According to Javelin, “The average costassociated with fraudulent accounts is more than $10,000 per case and$32.9 billion annually.”

Total Dollar Amount Paid by US Victims of IdentityTheft, 2002 (as a % of respondents)

$0 67%

$1-$500 7%

$501-$1,000 2%

$2,001-$3,000 2%

$5,001-$6,000 >1%

$7,001-$10,000 3%

Don't know 14%

Refused/no answer 5%




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When just the financial institutions are measured, as CelentCommunications did in a report titled “ID Theft: Protecting the Customer—Protecting the Institution,” losses due to identity theft will hit $2.15 billionthis year and jump to $3.68 billion by 2006.

In addition to the actual loss from theft, financial institutions are burdenedby indirect costs such as spending on technology, legal fees, personnel todeal with the problem, and training and consumer education. Celent saysthese costs will rise from $1.38 billion this year to $2.36 billion in 2006.

These loss figures are all over the map. To summarize: For this year alone,Tower says it will cost lenders $1 billion. Javelin says it will cost businesses$32.9 billion. Celent says it will cost financial institutions, in both directand indirect losses, $3.5 billion. Such great variance implies how difficult itis to judge the real losses from identity theft.

Costs Incurred by US Financial Institutions due toIdentity Theft, 2001-2006 (in billions)

2001 $1.04

2002 $1.36

2003 $2.15

2004 $2.78

2005 $3.33

2006 $3.68

Source: Celent Communications, August 2002


Indirect Costs Incurred by US Financial Institutionsdue to Identity Theft, 2001-2006 (in millions)

2001 $541

2002 $733

2003 $1,376

2004 $1,833

2005 $2,200

2006 $2,357

Note: CAGR=34%; costs include dollars spent on technology, legal fees,personnel and training and consumer educationSource: Celent Communications, August 2002; Paymentech, March 2003



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And more than just those losses might plague financial-servicescompanies. As the Aberdeen Group correctly puts it, the “financial servicesindustry needs to eliminate their firms’ use of Social Security numbers asdigital identity credentials [before] publicity flames [are] stoked high by thenewly enacted California statute, Senate Bill 1386.”

That law, which applies to all companies doing business with residents ofthe Golden State (meaning any national firm, as well as local or regionalfirms), says that any company which “owns or licenses computerized datathat includes personally identifiable data must disclose any breach of thesecurity of its systems, following discovery or notification of the breach inthe security of the data.”

Better to close the open door by letting customers choose their own log-on identity than to notify those customers that your institution’s onlinebanking log-on procedure is to blame for incidents of identity theft.

“When you think of all the crimes that are at thiscrossroads—money laundering, access to ourfinancial system by terrorists, ID theft and fraud—it suggests that financial institutions need to lookat more than just the minimum standard.”— Barbara Span, vice president, Star Systems; Bank Systems & Technology,

27 May 2003

Other initiatives on the table include “proposed standards [by the fourbanking and thrift agencies] that would require banks to warn customerswhen their private information has been stolen,” reports American Banker.“Banks already have to safeguard confidential data, but under this proposalthey would have to develop programs to take action when they believecustomers have been or could soon be victims of identity theft.”

Standards like these present a dual-edged sword. While “some industryrepresentatives said they were concerned that the guidelines could forcebanks to needlessly send customer notices and that the cost of putting a‘red flag’ alert on accounts could be high,” these standards could create justthe kind of protection that will entice even more of the valuable onlinecustomer to bank and pay bills on the Internet.


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C. Privacy & TrustEven when consumers believe their financial data is secure online and thatthey are relatively safe from the depredation of identity theft, they toooften feel unsure that their bank will respect their privacy.

In a survey of the 25 largest US banks last year, the Ponemon Institutefound that a mere 25% of consumers feel very confident that their bankwill honor its commitment to protect customer privacy. Mere, because thisis at the five most-trusted banks! At the five least-trusted, only 8% ofconsumers feel confident.

“People’s information is so generally abused, it’shard to believe that anybody will respect it. It’s notas if the industry hasn’t sown the seeds ofconsumer mistrust all on its own.”— Jaime Punishill, senior analyst, Forrester Research; American Banker, 19

August 2003

US Consumers' Opinions Regarding Privacy Policies atthe 25 Largest US Banking Companies, 2002 (as a % ofrespondents)

Recalled bank sending privacy notice/policy in the mail

74%

46%

Actually read bank's privacy notice/policy

55%

33%

Understood bank's commitment to protect their personalinformation

69%

29%

Feel very confident bank will honor its commitment to protectcustomer privacy

25%

8%

Privacy is not important to me

1%

2%

5 Most-trusted banks* 5 Least-trusted banks*

Note: n=5,757; *top 5 most-trusted banks in survey were WashingtonMutual, Citizens Bank/Mellonbank, US Bancorp/Firstar, Wachovia/FirstUnion and National City; the ranking of the other banks in the study wasnot revealedSource: Ponemon Institute, November 2002



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The state of the world has affected the US consumer’s level of concernregarding personal financial privacy, according to Star Systems. Whileprior to the September 11 attacks, 21% of respondents rated their privacyconcerns highly (either an 8, 9, or 10), immediately after the event 32%cited high privacy concerns. And even more than a year later, in December2002, 30% of consumers continued to hold a high level of concernregarding financial privacy.

Even with these privacy concerns, 34% of US consumers trust their bank—more than any other institution—to store their personal data online,according to Jupiter Research. This data includes such personalinformation as a credit card account.

US Consumers’ Level of Concern* Regarding PersonalFinancial Privacy Prior to September 11, Immediatelyafter and Today, December 2002 (as a % ofrespondents)

Prior toSeptember

11

Imme-diatelyafter

December2002

1 23% 17% 16%

2 10% 7% 7%

3 11% 8% 9%

4 6% 5% 5%

5 17% 17% 16%

6 4% 5% 7%

7 6% 8% 8%

8 8% 9% 9%

9 2% 5% 4%

10 11% 18% 17%

Don't know, refused, no answer 2% 2% 2%

Note: n=1,000; *on a scale of 1 to 10 where 1 means not at all concernedand 10 means extremely concernedSource: Star Systems, April 2003



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However, while consumers may trust banks more than other entities, aneven greater share of respondents (50%) trust no one with their data online.

Entities that US Consumers Trust to Store PersonalData* Online, November 2002 (as a % of online users)

My bank

34%

Visa or MasterCard

17%

Credit card issuer

12%

My employer

11%

Microsoft or MSN

6%

Yahoo!

5%

America Online (AOL)

5%

American Express

5%

My ISP (other than AOL or MSN)

5%

The government

4%

eBay

4%

Amazon.com

3%

College or alumni association

3%

An airline I frequently travel with

3%

None

50%

Note: n=2,327; *personal data such as credit card information, contactsand calendarSource: Jupiter Research, May 2003



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And when it comes to companies that US consumers might trust to storetheir personal data online—at least from the viewpoint of companyexecutives—credit card issuers and banks (often the same) are top rated,according to the May 2003 Jupiter report titled “Online Fraud: Who HasMore Risk—Consumers or Retailers?”

Companies that US Consumers Trust to StorePersonal Data* Online According to US Executives,December 2002 (as a % of respondents)

Credit card issuers

62%

Major banks

59%

Online retailers

38%

VeriSign

30%

State or federal governments

21%

Large off-line retailers

12%

Credit bureaus

11%

Portals or ISPs

9%

Microsoft

8%

America Online (AOL)

5%

Insurance companies

5%

Companies on the behalf of their employees

5%

Other

8%

No company

12%

Note: n=66; *personal data including payment informationSource: Jupiter Research, May 2003



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In the end, online consumers trust banks with their personal informationmore than any organization other than their employer. According to theJuly 2003 Forrester Research report titled “Winning The ChangingFinancial Consumer,” consumers trust banks more than brokerage firms,consumer products manufacturers, retailers whether online or offline, andeven charitable organizations.

Last year’s Consumer WebWatch survey of US Internet users offeredcomparable results. As you can see, 45% of respondents trust financialcompanies most of the time, in contrast with 29% who feel the same levelof trust for large corporations.

Level of “Trust”* US Online Consumers Have withOrganizations, 2003 (on a scale of 1 to 5**)

Employer 3.52

Bank 3.42

Utility company 2.99

Brokerage 2.90

Local telephone company 2.82

Consumer products manufacturer 2.78

Offline retailer 2.74

Cable or satellite TV company 2.73

Charity organization 2.69

Credit card company 2.61

Online retailer 2.49

Note: *consumers were asked how much they trusted each organizationwith their personal information; **1=do not trust at all to 5=trust a lotSource: Forrester Research, July 2003



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Just as eMarketer noted in last year’s banking report, it’s worth notingagain: Yet what are banks but large corporations? These distinctions thatInternet users made in the January 2002 Consumer WebWatch survey andagain in the July 2003 Forrester report point to the special place bankshave in the minds and hearts of consumers.

Therefore, in today’s environment where Americans have lost trust withmany types of large institutions, banks must make certain not to squanderthat singular trust. That trust, when combined with a proactive approach toInternet security, can help bring down the barriers that make manyconsumers balk at banking online.

For more analysis and data about privacy issues, see eMarketer’s“Privacy in the Information Age” report at:http://www.emarketer.com/products/report.php?privacy_on_feb03

US Internet Users Who Trust Selected Organizations"Most of the Time”, January 2002 (as a % ofrespondents)

Small businesses

59%

Newspapers and television

48%

Charities and other non-profit organizations

46%

Financial companies such as banks, brokerages and stockbrokers

45%

Federal government in Washington

40%

Healthcare companies

34%

Web sites that provide advice to consumers regardingproducts/services to buy

29%

Large corporations

29%

Web sites that offer products/services for sale

26%

Note: n=1,500Source: Princeton Survey Research Associates for Consumer WebWatch,January 2002


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Table of Contents 3

Methodology 7The eMarketer Difference 8



I US Market Trends, Size & Growth 11Challenges Relating to the Online Channel According to Banking Executives inthe US, 2003 (as a % of respondents) 13

Online Banking Penetration at the 50 Largest US Banks, 2001-2007 (as a % of theadult population) 14

A. Cross-Channel Currents: Online, Branch, ATM, Phone 15Banking Channel Usage* among US Consumers, 2003 (as a % of respondents) 15

Channels US Consumers Use Regularly to Conduct Banking Transactions, 2003(as a % of respondents) 16

Banking Delivery Channels Used by US Households, November 2002 (as a % oftotal households) 17

US Consumers’ Preferred Channels for Banking, 2002 17

Banking Channel-Use Segmentation among US Online Households, 2003 (as a %of respondents) 18

Most Commonly Used Banks among US Households, by Channel-Use Segment,2003 (as a % of online households) 19

Leading Consumer Channel* for US Community Banks, 2002 & 2006 (as a % ofrespondents) 20

The Branch & The Internet 21

Average Number of Banking Branch Visits per Month by US Consumers,1995-2002 21

Frequency of Bank Branch Use in the US, by Occupation, July 2002 (as a % ofrespondents) 22

US Bank Customers’ Reasons for Using Branch Office During the Past Year, 2002(as a % of respondents) 23

US Consumers Who Shop Online for Financial Products and Services, 2002 (inmillions) 24

Banking Branch Visits for Account Openings in the Past Year, by Age, 2002 (as a %of respondents) 24

Methods Used by US Adults to Apply for Financial Services Products, 2003 (as a% of respondents) 25

US Consumers’ Opinions Regarding the Ease of Opening a Checking AccountOnline, by Bank, 2003 (on a scale of 1 to 10*) 26

B. The US Banking Market: Total & Online 27Top 25 US Bank and Thrift Holding Companies, by Assets, 2002 & 2003 (in billions) 28

US Banking Households, 2001-2007 (in millions) 29

US Online Banking Customers, by Bank, 2000-2002 (in thousands) 30


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US Online Banking Customers, by Bank, 2001 & 2002 (as a % increase/decreasevs. prior year) 31

C. Counting Online Banking Customers 32US Households Banking Online, 2001-2007 (as a % increase vs. prior year) 32

US Households Banking Online, 2000-2007 (in millions) 32

US Households Banking Online, 2000-2007 (as a % of total and online households) 33

Comparative Estimates: US Households Banking Online, 2001-2007 (in millions) 34

Comparative Estimates: US Households Banking Online, 2001-2007 (as a %increase vs. prior year) 35

Comparative Estimates: US Households Banking Online, 2001-2007 (as a % oftotal households) 36

Comparative Estimates: US Households Banking Online, 2001-2007 (as a % ofonline households) 37

D. The Online Channel: Banking Priorities 38Strategies Considered “High Priority” by Banking Executives in the US, 2003 (asa % of respondents) 39

Online Channel Strategies Considered “Very Important” by Banking Executivesin the US, 2003 (as a % of respondents) 40

Online Channel Development Considered “High Priority” by Banking Executivesin the US, 2003 (as a % of respondents) 41

Metrics Used to Determine the Success of the Online Channel among BankingExecutives in the US, 2003 (as a % of respondents) 43

Electronic Services’ Priorities over the Next Three Years for US CommunityBanks, 2003 (as a % of respondents) 44

II The Banking Customer 45A. Demographics, Income & Experience 46

Total and Online Households in the US, 2000-2006 (in millions) 46

Gender, Age, Race/Ethnicity 47

US Adults Banking Online, by Age, 2002 (as a % of Internet users in each group) 47

US Adults Banking Online, by Gender, 2002 (as a % of Internet users of each gender) 47

Online Banking Users in the US, by Age, 2001 & 2002 (as a % of adult population ineach age group) 48

US Consumers Who Always Shop around for Financial Products, by Age, 2003 (asa % of respondents) 49

US Consumers Who Do Their Own Research before Making Financial Decisions,by Age, 2003 (as a % of respondents) 49

Financial Services Tasks Performed Online by US Baby Boomers, by Income, 2003(as a % of respondents) 50

Online Financial Accounts Used by US Baby Boomers, by Income, 2003 (as a % ofrespondents) 50


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Financial Services Tasks Performed Online by US Baby Boomers, byRace/Ethnicity, 2003 (as a % of respondents) 51

Online Financial Accounts Used by US Baby Boomers, by Race/Ethnicity, 2003 (asa % of respondents) 51

Income 52

Online Banking Households in the US, by Income, 1998-2003 (as a % ofhouseholds within each income group) 52

US Adults Banking Online, by Race/Ethnicity, 2002 (as a % of Internet users ineach group) 52

Online Banking Users in the US, by Income, 2001 & 2002 (as a % of adultpopulation in each income group) 53

Experience 54

US Adults Banking Online, by Experience Online, 2002 (as a % of Internet users ineach group) 54

Online Banking Users in the US, by Year of First Internet Use, 1998-2002 (as a %Internet users) 54

Demographics of At-Work Internet Users in the US, by Experience Online,2003 55

US Internet Users Who Bank Online, by Experience Online, 2002 (as a % ofrespondents) 55

B. Overall Online Activities 56Online Activities of Parents vs. Non-Parents* in the US, 2002 (as a % ofrespondents) 57

Online Activities of Parents vs. Non-Parents* in the US, 2002 (as a % ofrespondents) 58

Popular Online Activities among Internet Users in the US, 2002 (as a % ofrespondents) 58

Popular Online Activities among Internet Users in the US, 2002 (as a % ofrespondents) 59

C. What Bank Customers Do Online 60Activities Conducted by US Online Banking Customers, 2003 (as a % ofrespondents) 60

Financial Activities Conducted Online by US Consumers Who Pay Bills Online,2003 (as a % of respondents) 61

US Adults’ Online Financial Services/Insurance Activities during the Past 12Months, 2001 & 2002 (as a % of respondents) 62

Frequency per Week that US Consumers Access Their Primary BankingInstitution by Phone, Online or Branch, 2003 (as a % of respondents) 63

Frequency of Use of Online Banking among US Online Bankers Using BillPayment vs. Those Not Using Bill Payment, 2003 (as a % of respondents) 63

Reasons Adults in the US Cite as “Very Important” Factors in Their Decisions toBank Online, 2002 (as a % of respondents) 64

D. What Bank Customers Want 65Complaints about Banking Branches by US Consumers, 2002 (as a % ofrespondents) 65


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Primary Reasons Why US Online Households Are Not Using Online Banking, 2002(as a % of respondents) 66

General Attitudes & Expectations About Banking 67

US Consumers’ Attitudes Regarding the Quality of Banking Services Receivedover the Past Year, 2003 (as a % of respondents) 67

US Consumers’ Opinions Regarding Change of Their Banking Usage Levels in theComing Year, 2003 (as a % of respondents) 68

US Consumers’ Likelihood of Remaining with Current Bank, 2003 (as a % ofrespondents) 68

Satisfaction with Banking vs. Retail among US Consumers, 2003 (based on a 100-point scale*) 69

US Consumers Who Have Switched Financial Providers Because They Were NotSatisfied With Their Previous Provider, 2003 (as a % of respondents) 69

US Consumers Who Would Switch Banks If Another Bank Could Make Them FeelLike a Valued Customer, 2003 (as a % of respondents) 70

US Consumers’ Attitudes Regarding Their Loyalty to Their Current Bank, 2003 (asa % of respondents) 71

US Consumers’ Overall Satisfaction with Their Bank, 2003 (as a % of respondents) 72

US Consumers’ Attitudes Regarding Importance of Being Treated Like aPreferred Customer*, 2002 (as a % of respondents) 72

US Consumers’ Opinions Regarding Importance of Banking Service Features,2003 (as a % of respondents) 73

US Consumers’ Overall Satisfaction with Their Bank, by Type of Service, 2003 (asa % of respondents) 74

US Consumers’ Attitudes* Regarding Banks that They’ve Done Business with,2003 (as a % of respondents) 75

US Consumers Who Believe Their Bank Offers Products that Are Best for TheirBottom Line and Not for the Consumer, by Provider, 2003 (as a % of respondents) 76

Attitudes of US Consumers toward Doing Business with Their Banks, 2003 (as a% of respondents who do business) 77

E. Affluent Profits: Make More From the Masses 78Types of Clients Global Wealth Managers Expect to Gain More of in Three YearsTime, by Net Worth, 2003 (as a % of respondents) 78

Type of Investments that US Investor Households Intend to Increase in the NextYear, 2003 (as a % of households that hold each type of investment instrument) 79

US Financial Advisors’ Attitudes toward the Web Being Important to TheirClients, 2002 (as a % of respondents) 81

Most Important Sources of Online Banking Information for US Consumers, 2003(as a % of respondents) 82

Comfort Level of Affluent Investors When Making Purchases Based on E-MailAdvertising, 2002 (as a % of respondents) 83

Affluent Investors that Made a Transaction after Receiving E-Mail, by E-MailTopic, 2002 (as a % of respondents) 83


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F. Small-Business Banking: Internet Wary? 84US Small Businesses Using Online Banking, by Annual Sales, 2001 (as a % ofrespondents) 84

Percent of US Small Businesses Banking Online, 1998-2002 85

US Small Businesses Using Online Banking, by Years in Business, 2001 (as a % ofrespondents) 85

US Small Businesses Using Online Banking Channel*, Q3 2002, 2003 & 2005 (as a% of respondents) 86

US Business Usage of Online Banking, by Annual Revenues, 2001-2003 (as a % ofrespondents) 87

Primary Banking Channel* Used by Small Businesses in the US, 2003 (as a % ofrespondents) 88

Reasons US Small Businesses Will Not Bank Online, July 2002 (as a % ofrespondents) 88

US Companies’ Use of the Internet for Financial Services Activities, July 2002 (asa % of respondents) 89

US Companies’ Expected Use of the Internet for Financial Services Activities,2003 (as a % of respondents) 90

Reasons that Small Businesses Use Online Financial Services According to USBanks, Q3 2002 (as a % of respondents) 90

Online Banking Activities among Small Businesses in the US, Q3 2002 & Year-End2003 (as a % of respondents) 92

Primary Benefit of Small Business Online Banking Channel* in the US, Q3 2002(as a % of respondents) 93

Incidence of Personal Accounts with Their Primary Business Financial ServicesProvider among US Small Business Owners and Executives, 2003 (as a % ofrespondents) 94

III Electronic Payments 95A. The Forces Behind Online Bill Payment’s Growth 96

Bank of America’s Product Relationships with Online Bill Payers, by Time PayingBills Online, 2002 (as a % increase vs. offline customers) 97

Frequency of Use of Online Banking among US Online Bankers Using BillPayment vs. Those Not Using Bill Payment, 2003 (as a % of respondents) 98

Potential Payments Revenues Lost by US Banks as a Result of ElectronicPayments and Check Conversion, 2002-2007 (in millions) 99

Attitudes Regarding Banking among Active Online Bill-Pay Customers in the US,2003 (as a % of respondents) 99

Volume of Checks Handled by the US Federal Reserve, 2000-2002 (in billions) 100

Number of Checks per Month that US Consumers Write to Make Purchases inStores, 2002 (as a % of respondents) 101

B. The Online Bill Payment Market 102Online Bill Payment Households in the US, 2000-2006 (in millions) 102

Online Bill Payment Households in the US, 2001-2006 (as a % increase vs. prior year) 103


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Online Bill Payment Households in the US, 2000-2006 (as a % of total and onlinehouseholds) 104

Comparative Estimates: Online Bill Payment Households in the US, 2001-2006 (asa % increase vs. prior year) 105

Comparative Estimates: Online Bill Payment Households in the US, 2000-2006 (inmillions) 105

Comparative Estimates: Online Bill Payment Households in the US, 2000-2006 (asa % of online households) 106

Comparative Estimates: Online Bill Payment Households in the US, 2000-2006 (asa % of total households) 106

Number of Bills Viewed Online in the US, 2001-2006 (in millions and as a % of allUS bills for banking households) 107

Consumer Bill Payments in the US, by Payment Method, 2002 & 2007 (in billions) 107

US Online Biller Accounts Enabled, 2002-2006 (in millions) 108

C. How Consumers Pay Bills 109Methods US Consumers Use to Pay Bills, 2003 (as a % of respondents) 109

Primary Bill Payment Method Used by US Adults, by Age, July 2003 (as a % ofrespondents) 110

Primary Method US Consumers Use to Pay Bills, July 2003 (as a % of respondents) 110

Methods of Bill Payment Used by US Consumers, 2003 (as a % of total payments) 111

Primary Method US Consumers Use to Pay Bills, 2002 & 2007 (as a % of all billpayments) 111

Systems US Consumers Use to Track Bills, Payments and Balances, 2003 (as a %of respondents) 112

Percent of US Households Who Prefer to Receive Their Bills by Mail, November2002 112

Bill Payment Activities & Attitudes 113

Reasons Why US Consumers Enroll to Pay Bills Online, 2003 (as a % of respondents) 113

Drivers Behind US Consumers Usage of Online Bill Payment, 2003 (as a % ofrespondents) 114

Online Bill Payers in the US, by Access Type and Service, 2002 (as a % ofrespondents) 115

US Consumers’ Preferences for Paper Check vs. E-Check* for Paying Bills, byHousehold Size, July 2003 (as a % of respondents) 115

US Consumers’ Frequency of Usage of an E-Check* during the Past Year, July2003 (as a % of respondents) 116

US Consumers’ Usage of an E-Check* during the Past Year, by Age, July 2003 (as a% of respondents) 117

Frequency of E-Check* Usage among US Adults to Pay Bills Online during thePast Year, July 2003 (as a % of respondents who prefer to pay bills online) 117

Methods US Consumers Use to Set Up E-Check* Payments, July 2003 (as a % ofrespondents) 118


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Likelihood that US Consumers Will Do Business with a Company If It Accepts E-Checks*, July 2003 (as a % of respondents) 119

Biggest Benefit for US Consumers from Paying a Bill by E-Check*, July 2003 (as a% of respondents) 120

Benefits Associated with Online Bill Payment, by US Consumers Who Pay BillsOnline, 2003 (as a % of respondents) 121

Attitudes Regarding Banking among Active Online Bill-Pay Customers in the US,2003 (as a % of respondents) 122

Intent to Use Bill-Pay Services among Inactive Online Bill-Pay Customers in theUS, 2003 (as a % of respondents) 123

Attitudes Regarding Their Bank among US Customers Using Online Bill Paymentvs. Those Not Using Bill Payment, 2003 (based on a 100-point scale*) 123

What US Consumers Like Best about Paying Bills with a Credit or Debit Card,2002 (as a % of respondents) 124

Ways US Consumers Heard about Online Bill Payment Services, 2003 (as a % ofrespondents) 125

D. The Fee Problem 126Share of Electronic Bill Presentment and Payment Market, Biller-Direct vs.Consolidators, 2001-2005 (as a % of customers) 127

US Consumers’ Concerns Regarding Adoption of Online Bill Payment, 2002 (on ascale of 0 - 10*) 127

Disadvantages Associated with Online Bill Payment by US Consumers Who DoNot Pay Bills Online, 2003 (as a % of respondents) 128

Elements that Would Encourage US Consumers Who Do Not Pay Bills Online toTry an Online Bill Payment Service, 2003 (as a % of respondents) 129

E. Banks vs. Billers (aka, Consolidators vs. Direct Payment) 130US Consumer Use of Biller-Direct vs. Pay Anyone* Online Bill-Payment Methods,February 2001-October 2002 (as a % of respondents) 131

Where Online US Consumers Prefer to View and Pay Bills, 2002 (as a % ofrespondents) 131

Number of Electronic Payment Methods that US Consumers Use to Pay Bills,2002 (as a % of respondents) 132

Methods US Consumers Use to Pay Bills Online, 2002 (as a % of respondents) 132

Percent of New Online Bill Payers Who Pay at a Financial Institution’s Web Site,1997-2001 133

Type of Web Site US Online Households Used to Pay Their Bill Online in the LastThree Months, 2001-2003 (as a % of respondents) 134

Share of Electronic Bill Presentment and Payment Market, Biller-Direct vs.Consolidators, 2001-2005 (as a % of customers) 135

Online Bills Issued at Biller-Direct vs. Consolidator Web Sites, 2003-2007 (as a %of total online bills issued) 136

Types of Web Sites that US Consumers Use to View Their Bills Online, 2001-2006(as a % of viewed bills) 137

Methods US Consumers Use to Pay Bills, 2003 (as a % of respondents) 137

Number of Fully Operational US Biller Web Sites with EBPP Capabilities,1999-2002 138


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Number of Web Sites US Consumers Are Willing to Visit to Pay Bills, 2002 (as a %of respondents) 138

Types of Bills US Consumers Review Online, November 2002 (as a % ofconsumers who review bills online) 139

US Consumers Viewing and Paying Bills Online, by Bill Type, 2002 (as a % ofrespondents) 140

Direct Debit Accounts with US Billers, 2000-2004 (as a % increase vs. prior year) 141

Direct Debit Accounts with US Billers, 2000-2004 (in billions) 141

Reasons Why US Consumers Choose Biller-Direct Online Bill Payment, 2002 (as a% of respondents) 142

Electronic Bill Presentment and Payment (EBPP) 143

Degree to which US Consumers Review Their Bills, 2002 (as a % of respondents) 143

Consumers in the US Who Will Not Pay a Fee to Use EBPP, November 2002 (as a %of consumers) 145

F. Automated Clearing House (ACH) 146Value of Transactions in the Automated Clearing House (ACH) Network, 2000-2002 (in trillions and as a % increase vs. prior year) 146

Volume of Transactions in the Automated Clearing House (ACH) Network, 2000-2002 (in billions and as a % increase vs. prior year) 146

Methods US Consumers* Use to Pay Bills Electronically, 2002 (as a % ofrespondents) 147

Average Value of a Transaction in the Automated Clearing House (ACH) Network,2000-2002 (in dollars and as a % decrease vs. prior year) 147

25 Largest Originators of ACH* Payments among US Financial Institutions, 2002(in millions of transactions and as a % increase/decrease vs. prior year) 148

25 Largest Receivers of ACH* Payments among US Financial Institutions, 2002 (inmillions of transactions) 149

Cost per Payments Transaction for US Companies, 2002 150

IV Other Interactive Services 151A. Check Imaging 152

Web Site Where US Consumers Would Like to View Check Images, 2002 (as a % ofrespondents) 152

Check Imaging IT Expenses in the US, In-House and Outsourced, 2003-2005 (inmillions) 153

Cost per Megabyte* of Online Digital Check Imaging, 1998, 2000 & 2001 154

US Community Bank Usage of Check Image Technology, 2002 (as a % ofrespondents) 155

Products US Community Banks Offer or Plan to Offer, 2002 (as a % of respondents) 156

B. Cards: Credit & Debit 157Volume of Credit Card Transactions Worldwide, by Company, 2001 & 2002 (as a %of total volume) 157


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Volume of Credit Card Transactions Worldwide, by Company, 2002 (as a %increase/decrease vs. prior year) 158

Volume of Credit Card Transactions Worldwide, by Company, 2001 & 2002 (inbillions) 158

Value of Credit Card Transactions Worldwide, by Company, 2002 (as a % of totaltransactions) 159

Value of Credit Card Transactions Worldwide, by Company, 2002 (in billions) 159

Average Value per Credit Card Transaction, by Company, 2002 160

US Consumer Awareness and/or Usage of the Verified by Visa (VBV) Program*,by Online Experience**, November 2002 (as a % of respondents) 161

PIN (or Online) and Non-PIN (or Offline or Signature) Debit Transactions in theUS, 1998-2002 (in billions and % growth) 162

Point of Sale Debit Card Volume, by Financial Institution, 2002 (in billions) 163

What US Consumers Like Best about Paying Bills with a Credit or Debit Card,2002 (as a % of respondents) 163

Electronic Services’ Priorities over the Next Three Years for US CommunityBanks, 2003 (as a % of respondents) 164

Profitability of Debit Card Programs* for US Community Banks, 2002 (as a % ofrespondents) 164

Types of Debit Card Fees that US Community Banks Charge Customers, 2002 (asa % of respondents) 165

Debit Card Policies at US Community Banks, 2002 (as a % of respondents) 165

C. Mortgages & Refinancing 166US Online Mortgage Originations, 2001-2007 (in thousands and as a % or totalmortgage originations) 166

US Online Refinance Originations, 2001-2007 (in thousands and as a % of totalrefinance originations) 167

US Online and Total Mortgage Originations, 2001-2007 (in thousands and as a %increase vs. prior year) 167

US Online and Total Refinance Originations, 2001-2007 (in thousands and as a %increase vs. prior year) 168

Attitudes of Real Estate Agents toward Online Lending in the US, July 2003 (as a% of respondents) 168

Top 10 Home Mortgage Originators in the US, 2001 & 2002 (in billions and as a %increase/decrease vs. prior year) 169

Reasons Why Real Estate Agents Recommend Their Clients Go to OnlineLenders, July 2003 (as a % of respondents) 169

V Other Electronic Channels & Projects 171A. ATMs 172

10 Largest ATM Network Operators in the US, by Number of ATMs, January 2003 172

US Consumers’ Preferred Channels for Banking, 2002 173

Types of Transactions Taking Place at US Financial Institutions’ ATMs, 2001 173

Channels US Consumers Use Regularly to Conduct Banking Transactions, 2003(as a % of respondents) 174


253


Advanced ATM Functions Offered by US Financial Institutions, 2002 (as a % ofrespondents) 175

Revenue from Advanced Functionality* at ATMs Worldwide, 2002-2006 (in billions) 175

Venues for Recharging Value* in Pre-Paid Mobile Phones, 2002 & 2007 (as a % ofactivity) 177

US Consumers Who Prefer New Identification Methods for ATMs, 2003 (as a % ofrespondents) 178

US Consumers’ Opinions Regarding the Most Acceptable Security Measure forATMs, 2003 (as a % of respondents) 179

Operating Systems Used at US Banks’ ATMs, 2002-2005 180

B. CRM & Customer Service 181US Retail Banks’ Web Services Spending, by Technology Application, 2002 & 2005(in millions and as a % increase vs. prior year) 182

US Banks that Are Pursuing CRM Projects, 2003 (as a % of 100 largest banks) 183

CRM Spending by US Financial Services Companies, 2003 & 2008 (in billions) 184

US Community Banks’ Usage of CRM Software, 2002 (as a % of respondents) 184

CRM Efforts Considered “High Priority” by Banking Executives in the US, 2003 (asa % of respondents) 185

Business Issues Important to US Community Banks, 2001-2003 (as a % ofrespondents) 186

US Community Banks that Require Same-Day Responses to Customers, byChannel, 2002 (as a % of respondents) 187

Methods US Community Banks Use to Check Quality of Customer Service, 2002(as a % of respondents) 188

US Consumers’ Opinions Regarding the Areas on which Their Bank FocusesResources, 2003 (as a % of respondents) 189

Call Centers 190

US Consumers’ Opinions Regarding the Value of Direct Online Call CenterConnections to Their Banks, 2003 (as a % of respondents) 190

Voice Response Activities Used by Consumers in the US, 2003 (as a % ofrespondents) 191

Staffed Call Center Activities Used by Consumers in the US, 2003 (as a % ofrespondents) 191

C. Wireless 192Banking Services that US Consumers Want to Access via Wireless Devices, 2002(as a % of respondents) 192

Top 10 Uses of PDAs According to PDA Owners in the US, 2003 (as a % ofrespondents) 193

Planned Adoption of Wireless Data Enabled Systems in the US FinancialIndustry, 2002 (as a % of respondents) 194



254


Markets that VARBusiness 500 Companies Believe Offer the Greatest IT SalesGrowth Opportunities, Q1 2003 (as a % of respondents) 196

A. Spending Patterns 197IT Spending at Large* US Banks, by Type, 2002-2004 (in billions) 197

IT Spending at Large* US Banks, by Type, 2002-2004 (as a % of total spending) 198

IT Spending at Large* US Banks, by Type, 2003 & 2004 (as a % increase/decreasevs. prior year) 198

IT Spending at US Commercial Banks, by Type, 2004 (in billions) 199

US Commercial Bank IT Spending, by Purpose, 2003, 2004 & 2007 (in billions) 199

US Commercial Bank IT Spending, by Purpose, 2003 (as a % increase vs. prior year) 199

US Commercial Bank IT Spending, by Purpose, 2003, 2004 & 2007 (as a % of totaland in billions) 200

IT Spending on Branch Technology by US Banks, Thrifts and Credit Unions, 2001-2005 (in billions) 201

IT Spending on Branch Technology by US Banks, Thrifts and Credit Unions, 2001-2005 (as a % of total IT spending) 202

IT Spending on Branch Technology by US Banks, Thrifts and Credit Unions, 2002-2005 (as a % increase vs. prior year) 203

Anticipated 2003 Technology Spending by US Community Banks, 2002 (as a % ofrespondents) 204

IT Spending Plans for Support and Delivery Channels among US Banks, 2003 (as a% of respondents) 204

Technology Spending Comparison to Previous Year by US Community Banks,2002 (as a % of respondents) 205

Top Technology Spending Priorities* for US Community Banks, 2001 & 2002 (as a% of respondents) 206

US Banking Industry IT Spending, 2001-2003 (as a % of company revenues) 207

B. Outsourcing 208Reasons Why US Retail Banks Do Not Outsource, September 2002 (as a % ofrespondents) 208

External and Internal Functions Outsourced by US Retail Banks, September 2002(as a % of respondents) 208

How US Community Banks Handle Data Processing, 2002 (as a % of respondents) 209

Chief Source of Overall Technology Expertise at US Community Banks, 2002 (as a% of respondents) 209

VII Online Banking: Barriers to Growth 211Primary Reasons Why US Online Households Are Not Using Online Banking, 2002(as a % of respondents) 212

Barriers to Using the Internet to Transact Financial Business According to USFinancial and Treasury Professionals, July 2002 (as a % of respondents) 213



255


US Consumers’ Opinions Regarding Online Privacy and Security, October-November 2002 (as a % of respondents) 215

Broadband Households in the US Who Do Not Have Critical Security Features,2003 (as a % of respondents) 216

US Consumers Who Believe that Internet-Based Financial Transactions Are MoreSecure than Telephone-Based Financial Transactions, 2000-2003 (as a % ofrespondents) 217

US Consumers Who “Completely/Strongly Agree” that Internet-Based FinancialTransactions Are Safe and Secure, 2000-2003 (as a % of respondents) 217

B. Identity Theft: Protecting Consumers & Banks 218US Identity Theft Victims, by Type of Existing Account Misused, March-April 2003(as a % of respondents) 218

Ways US Victims of Identity Theft Have Been Victimized, 2002 (as a % ofrespondents) 219

Online Fraud in the US: Complaints and Average Monetary Loss, 2002 220

Percent of US Consumers Who Have Been Victims of Identity Theft in the PastYear, February 2002 & June 2003 221

Top Fraud Complaint Categories in the US, 2002 221

US Identity Theft Victims in the Past Five Years, by Type of Theft, March-April2003 (as a % of respondents) 222

US Identity Theft Victims in the Past Year, by Type of Theft, March-April 2003 (as a% of respondents) 222

US Consumers Who Have Been or Who Know Personally a Victim of IdentifyTheft, 2002 (as a % of respondents) 223

US Identity Theft Victims’ Level of Concern about Future Victimization, by Typeof Theft, March-April 2003 (as a % of respondents) 224

Methods by which Personal Information Was Taken from US Victims of IdentityTheft, 2002 (as a % of respondents) 225

Length of Time It Took for US Identity Theft Victims to Discover the Theft, byType of Theft, March-April 2003 (as a % of respondents) 226

Length of Time It Took for US Identity Theft Victims to Resolve the Problem, byType of Theft, March-April 2003 (as a % of respondents) 227

Precautions Taken by US Adults to Prevent Identity Theft, 2003 (as a % ofrespondents) 228

20 Ways for Online Banking Customers to Reduce Risk of Identity Theft,2003 229

How US Identity Theft Victims Discovered the Misuse of Their Information,March-April 2003 (as a % of respondents) 230

Total Dollar Amount of Identity Theft Fraud in the US, 2002 (as a % of respondents) 231

Value Obtained by US Identity Thieves, by Type of Theft, March-April 2003 (as a %of identity theft victims) 232

Total Dollar Amount Paid by US Victims of Identity Theft, 2002 (as a % ofrespondents) 233

Indirect Costs Incurred by US Financial Institutions due to Identity Theft, 2001-2006 (in millions) 234


256


Costs Incurred by US Financial Institutions due to Identity Theft, 2001-2006 (inbillions) 234

C. Privacy & Trust 236US Consumers’ Opinions Regarding Privacy Policies at the 25 Largest US BankingCompanies, 2002 (as a % of respondents) 236

US Consumers’ Level of Concern* Regarding Personal Financial Privacy Prior toSeptember 11, Immediately after and Today, December 2002 (as a % ofrespondents) 237

Entities that US Consumers Trust to Store Personal Data* Online, November 2002(as a % of online users) 238

Companies that US Consumers Trust to Store Personal Data* Online Accordingto US Executives, December 2002 (as a % of respondents) 239

Level of “Trust”* US Online Consumers Have with Organizations, 2003 (on a scaleof 1 to 5**) 240

US Internet Users Who Trust Selected Organizations “Most of the Time”, January2002 (as a % of respondents) 241

Index of Charts 243


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Latin America Online: Demographics, Usage & E-CommerceA comprehensive update of the leading trends in e-business and online retailing,with a focus on six countries that form the "core" of the region’s online market.


Interactive Banking: Integrating Online into Traditional ChannelsA comprehensive overview of the interactive banking market. "Interactive," notjust "online," because banking is being transformed into a cross-channel business.


Retail Industry OnlineCovers the three major areas of retailers’ business operations that have beenimpacted by the Internet: 1) IT and e-business spending, 2) online advertising and 3)selling to consumers online.


North American Wireless Market: On the Road to 3GAs mobile voice penetration approaches 50%, a heated marketing battle is shapingup between North American wireless operators. Find out why--and what it meansfor your business.


Asia-Pacific Online: Access, Demographics and UsageA comprehensive update of the leading trends in Internet usage and userdemographics in the Asia-Pacific region, with a focus on eight "core" countries.


Asia-Pacific E-Commerce: B2B & B2CProvides a thorough analysis of the demographic characteristics, usage patternsand category preferences of online shoppers in the Asia-Pacific region.


Online Selling & eCRMA compilation of the latest survey and forecast data examining the current trendsfacing companies operating commercial Web sites.


Broadband & Dial-Up AccessExamines the residential broadband and dial-up Internet access markets in 27countries across four regions. The report covers technologies, major players andtrends in broadband access costs.


E-Mail Marketing: Strategies, Stats, Techniques & ToolsGathering the latest findings from leading researchers, the report tracks the steadygrowth of e-mail marketing and shows why it is rapidly becoming one of amarketer's sharpest tools.


The Pharmaceutical Industry OnlineAn essential reference tool covering all aspects of the pharmaceutical industryonline from companies using the Internet for trading, to the consumer using theInternet to research and buy pharmaceuticals.



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Online Investing: Brokers, Investors, Statistics, and Market TrendsProvides a wide-ranging analysis of the trends and strategies that shape today's interactive investing market - along with guidelines on how to takeadvantage of them.


Europe E-Commerce: B2B & B2CProvides a comprehensive review of data from leading research firms andgovernment organizations regarding revenue forecasts for B2B and B2C e-commerce.


CPG OnlineA comprehensive review of how CPG companies are working with each other andwith the consumer online. It is the ideal resource for retailers, wholesale/distributors, consultancies and marketers.


Europe Online: Access, Demographics and UsageAn overview of Internet users and usage in the 12 "core" countries that bestrepresent the region's market, including Internet penetration rates in each country,how users are accessing the Internet, and why.


The Benefits of BroadbandA review of all available research quantifying the economic benefits of broadband.The report covers supply and demand for broadband in the US, and analyzes directand indirect benefits of widespread adoption.


North America E-Commerce: B2C & B2BA comprehensive overview of e-commerce in the US and Canada, including analysisof online shoppers versus buyers, the factors that influence people to buy onlineand the demographics of online buyers.


PDA Market reportReviews the status of the worldwide PDA/handheld computer market from theperspective of data-centric devices, and analyzes the trends that are shaping itsfuture growth.


Interactive TV: Reality & OpportunityAn overview of worldwide iTV usage and revenue prospects, television commerce,iTV advertising, video-on-demand, personal video recorders and iTV services.


E-Commerce Trade and B2B ExchangesA comprehensive update of the leading trends shaping e-business decisions in2002, focusing on the multiple channels businesses are using to migrate theirbusiness-to-business (B2B) trade onto the Internet.


Online AdvertisingA definitive, objective look at the online ad market, including the pros and cons of emerging ad formats and the role of online advertising within a traditional media campaign.



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North America OnlineA comprehensive overview of the North American Internet user and market,focusing on US and Canadian user demographics, access and usage.


Travel Market WorldwideProvides a clear picture of the current situation in the travel industry, withinformation and statistics regarding travel purchased both online and offline.


For more information, or to order a copy, contact eMarketer at:

Phone: 212.763.6010 Fax: 212.763.6020

eMail: [email protected] Web: www.emarketer.com

For Sales Inquiries: For Media Inquiries:Nick Lovett David [email protected] Director of Media Relations212.763.6010 [email protected]

212.763.6038

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