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.”

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