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A Contrarian View on Financial Services

Despite the pervasiveness of online trading these days, most Web-based financial services have yet to win widespread acceptance among consumers, according to a new industry study.

The report from Mercer Management Consulting, entitled "Digital Business Designs in Financial Services," found that since July of 1999, online traffic from new customers and visitors at the Web sites of financial services firms has increased some 150 percent, more than twice as fast as overall Internet usage.

However, the study also found that consumers make online purchases of insurance, loans, and mortgages far less often than they buy computer hardware, books, travel, clothing, and other consumer goods and services online.

In fact, a portion of the study in which 1,200 consumers were surveyed found that only 5 percent of respondents had purchased insurance online. And only 3 percent had taken out online loans or mortgages.

"Consumers still prefer to conduct a large percentage of transactions over 'non-digital' channels," said Mike Riley, a Mercer vice president. "Even a mature channel such as ATMs shows a surprisingly low adoption rate of 50 percent ... This reluctance continues despite the fact that substantial segments of consumers--in some cases more than 40 percent -- express openness to the idea of purchasing financial services online."

The study identifies brokerage and banking firms as the industry's e-business leaders, achieving the highest "Mercer Digital Quotient" -- a weighted indicator of online customer interaction, internal use of information technology, and overall digital capabilities. More than 50 companies were evaluated. The insurance industry has been the least successful.

"The truth is that relatively few financial services companies have been able to translate digital capabilities into superior levels of value creation," Riley said.

The study concluded that among the most successful brokerages are Charles Schwab and Ameritrade, characterized by Mercer as "Reinventors." The majority of banks, such as Wells Fargo and Chase Manhattan, are identified as "Innovators," firms beginning to leverage their digital capabilities. Insurance companies, in contrast, are characterized largely as "Traditionalists"--i.e., slower movers whose digital investments have not been directed at improving core business design.

Interestingly, the study concludes that in all three industry sectors, "old economy" brand name hold the greatest promise as e-business competitors.

Meanwhile, a similar study but focused on Canada, found that banks there "are failing to meet the needs of their online banking customers."

That study conducted by Internet quality measurement firm Gomez, found that banks are achieving an extremely low penetration rate for online transactions. Only one percent of respondents reported having obtained mortgages online, 2.4 percent of respondents reported they had applied for a loan online, and only 2.1 percent said they had purchased a GIC (Guaranteed Investment Contract) online.

"The study shows that a surprising number of institutions still require physical-world activities to fulfill certain basic requirements that could be more efficiently handled over the Internet," said Don Rolfe, managing director for GomezCanada. "Banks will need to offer innovative features, increased breadth of products, pricing advantages and higher customer service levels, in order to give their customers a compelling reason to move their banking relationships online."