Analyst: Online Banks Focus on Features at Customer Expense

Banks and other financial institutions are moving so fast to roll out new online features that they are missing out on numerous opportunities to gain customers, according to an analyst who worked on a newly released study of the industry.

“It’s a little bit like an arms race,” James Van Dyke, research director atJupiter Media Metrix (Nasdaq: JMXI), toldthe E-Commerce Times. “Sometimes it seems like they’re watching theircompetitors better than they’re watching the customers.”

In doing so, Van Dyke said, banks are missing out on potential growth because the number of households accessing bank accounts online is growing faster than the overall U.S. banking population, according to figures released by Jupiter on Tuesday.

For banks, the trend presents an opportunity to deepen customerrelationships by adding services like online bill payment, the report said.

Banks need to get away from the outdated idea of thefinancial supermarket — with one institution offering a broad array ofproducts — and move more toward acting like financial concierges thatgive individual consumers what they want, Van Dyke said.

Too Much

Companies that rush new products onto the market also risk alienating customers when the technology that those products use does not work, according to Van Dyke.

“The convenience consumers want can only be met when the products aretruly integrated,” he said. “Sometimes it’s an issue of delivering productsbefore they’re fully baked.”

Moreover, he said, throwing feature after feature on the market ends up creating less convenience for consumers, not more, as banks “drown them in choices.” A better idea would be to follow the model of (Nasdaq: AMZN), which targets new products to customers based on their previous choices.

Post No Bills?

In the new study, Jupiter said that online billing could be a huge source of revenue for banks. Some 44 percent of online banking households currently pay their bills online, according to the report, which predicted the figure will rise to 61 percent in 2006.

Customers who pay bills online tend to be loyal ones, the report said, as “high switching costs” deter shopping around.

Loan Rangers

Loans are also a growing and potentially lucrative market for online financial service providers, Jupiter said. A separate survey of consumers found that one-third of those who use online financial services have also applied for credit over the past year.

Eighty-five percent of the applications were for credit cards, 15 percent were for car loans, 12 percent were for loan consolidation and 10 percent were mortgageapplications, the Jupiter survey found.

The survey also found that online lending is an “effective acquisition point” for companies to gain customers, because banks and others can offer features that work well on the Web, like instant approval.

Saving Privacy

Yet even as online payment systems grow in popularity and become easier touse, many consumers remain wary of purchasing items over the Internet,fearing their credit-card data or other personal information will be stolenor sold, Jupiter said.

“Despite the increasing level of comfort online, financial providers need tocontinue offering services that are designed to meet the unique needs ofusers who are not yet comfortable accessing their accounts online,” said Van Dyke.

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