Posted Friday, July 18, 2003
Ten years ago, online banking was causing paranoia in the banking industry. Brick-and-mortar bank branches were doomed; so many people banking online would make them obsolete, many thought.
Oops. Time for a reality check. Bank branches not only have survived, they're as popular as ever, while many Internet-only banks have done a disappearing act. What's even more interesting is that traditional banks now badly want businesses (and consumers too) to do their banking online. Why? Because it costs them less to provide service online than it does through tellers and telephones.
My bet is that, if you're not already, your business will be doing at least some of its banking online in the not-too-distant future. Banks will make it worth your while.
Among consumers, online banking is steadily growing. Nearly two-thirds of all U.S. households now have Internet access, and of that number, about 25% are banking online in 2002, according to Jupiter Media Metrix. That latter figure is projected to grow to 59% by 2005.
For big businesses: Most corporations moved their treasuries online long ago, and many now link to multiple banks and money managers. The Boeings of the world have been doing online finance for at least a decade.
What about smaller businesses? Adoption here has been mixed. There's steady growth on the larger end, with as many as 30% of businesses with annual revenues between $1 million and $10 million now banking online, according to industry estimates. But for businesses with yearly revenues of less than $1 million, the adoption rate is below 15%, according to industry estimates. Some are concerned about the security of their data, others feel online banking "de-personalizes" the relationship, analysts say. Banks have a challenge changing minds on both fronts.
Even so, I believe the pace of adoption among small businesses will speed up in the years to come, particularly if banks walk their talk.
Why? Here are my reasons.
1. As I said, banks want more customers banking online. Not only does it cost banks less to service customers online, but — as they see it — it engenders more customer loyalty. Rightly or wrongly, banks feel that customers are less apt to switch banks if they have developed a relationship online. Certainly, it also makes cross-selling products easier, especially to businesses with diversified banking needs. For banks, the Internet is not only a distribution channel, but also a marketing channel.
2. Banks are now tailoring online products and services for small businesses. This wasn't happening 10 years ago, or really even five. It's been more recently that banks began paying attention online to small businesses' needs regarding transaction volumes, account management, credit cards and expenses. (For an example of this, check out the Microsoft bCentral credit card product offered through Bank One's First USA.) "Banks woke up to the fact that a couple of years ago, the small-business market was underserved," says Ken Kerr, senior research analyst at Gartner. "They see the online channel now as a way to give more attention to small businesses."
3. Newer finance and accounting solutions have made online banking tasks even easier. Businesses can easily track payments and import financial data to financial software packages such as Microsoft Money 2002 Deluxe & Business, and to accounting packages such as Microsoft Great Plains' Small Business Manager (see SBM's Financial Suite). As a result, double-entry bookkeeping is less of a chore; you pay your bills online and import data so that you don't have to enter it twice.
4. You can hook into online billing and international banking services more easily. Online banking and online bill paying are not mutually exclusive. You can have one without the other. In fact, online bill paying currently lags behind online banking by about 3 to 1, according to Bruene. The value of automating both processes at once is the synergies and cost savings your business can reap. For more on online bill paying, which offers even more in potential savings than online banking, see this story. Also, if you sell products internationally, an online account is likely to make it easier to convert foreign currency and to work with international branches, if necessary.
5. It'll save you money — part one. I'm making a bet here. Internet-only banks now offer the lowest fees and highest yields on interest-bearing accounts than traditional banks. But disregard them. What you want is a traditional bank that offers online banking, and more than half of all U.S. banks today do. If these banks really want more small businesses to be banking online, as they say, I expect them to dangle carrots — such as lower account fees, higher yields on interest-bearing accounts and credit cards with low interest rates for online customers as an incentive. Some already have. Let's see where we stand in 2003.
6. It'll save you money — part two. For those of you who have money in the bank, it'll be easier and cost you less to move it around online. Internet-based cash-management services are a "killer app" for larger small businesses, says R. Jay Tejera, banking analyst for Ragen MacKenzie. And most banks will allow you to transfer funds to other banks, an important feature to a small business, says Jim Bruene, editor of the Seattle-based Online Banking Report. You can also get better loan rates and deals on other banking services with an online account, says Jim Van Dyke, research director for Jupiter Media Metrix.
7. It'll save you money — part three. Another sign banks want you to bank online: Many are offering special discounts on non-bank products and services, such as PCs, wireless rates, air fare, hotel reservations and rental cars, for those who sign up. Expect these offers to continue over time. "Here's a case where banks are not only trying to sell you products; they're trying to help you run your business better," says Gartner's Kerr.
8. It's a more convenient channel. No, I'm not suggesting here that you abandon your relationship with your banker. In fact, it is highly recommended that you stay with your current bank, and sign up for the online banking services there. With an online account, you'll simply be adding another channel. You'll be able to examine your cash positions much more quickly and have up-to-date information at your fingertips. If you need to see a banker in person, you still can.
9. You'll get over any technophobe issues. If your business doesn't have PCs, and has no plans to get any, online banking obviously is not for you. But, at last count, more than 80% of small businesses in the United States had at least one PC. And banks are continuing to upgrade their online banking services, so that they are user-friendly and not intimidating. "It's the bank's job to provide you a product that is easy to use and not just for the tech savvy," says Jupiter's Van Dyke. "If the product is intimidating, you're probably at the wrong bank."
10. You'll get over your security concerns. Yes, hackers can break into your online account and create havoc. Your employees can break into your online account and create havoc. But they also can break into your offices, or get access to paper-based records, and create as much havoc. "The security concerns are real, but the actual losses from security lapses are imagined," argues Bruene. "Online banking is far more secure than paper-based. There are more holes in paper-based banking, but fewer fears." I think it's an issue of Internet security overall. And I think that will improve — I'm an optimist — and that security will become less of a concern (and less of an excuse).