Report: Online Banking Gaining Ground

Online banking is growing in popularity, with nearly 23 million Americans expected to pay their bills and access their financial accounts online by 2004, according to research firm IDC.

In 1999, some six million households used the Internet to do at least some of their banking, according to the firm.

“Banks of all sizes are acknowledging that consumer demand for online banking is reaching a critical point,” said Shaw Lively, research manager for online financial services at IDC. “As the number of U.S. online banking households grows, banks will need to stop thinking about the Internet as an alternative channel, and instead think of it as a mainstream channel every bit as important as branches, call centers and ATMs.”

Cash Management Tool

Most people who use the Internet for financial services rely on it for keeping track of their accounts — checking whether checks have cleared, for example — said Lively. “Online banking appeals to the kind of people who want to touch their money all the time,” he said. “First and foremost, it’s a cash management tool.”

Yet online bill payment is growing in popularity, with about 50 percent of customers who bank online using the service, according to Lively. He added that although many people remain leery of relying on the Internet for account withdrawals, the technology is solid. The hurdle that banks must overcome is primarily psychological, Lively said. To encourage more people to use the services, banks are offering incentives, such as cash bonuses, for online payments.

Full Service vs. ‘Virtual’

According to Lively, the largest banks, like Citigroup, Wells Fargo and Bank of America, are making good progress with their online services. “They’re fast approaching, or have already crossed, the 10 percent mark,” he said, referring to customers who have converted to the Internet.

That progress poses a risk for financial companies that operate only over the Internet. “A full service bank has a physical presence” with a large network of ATMs and 24-hour telephone support, said Lively. “They can build multi-product packages around that.”

Online banks, said Lively, will have to compete for “niche” customers who don’t care so much about ATM access. “As more ‘traditional’ banks come online, the ‘virtual’ banks will need to adjust their business models to remain relevant,” he said.