Online Banking Strategies: Best Practice from Europe

With the advent of online banking in the 1990s, many believed that the online channel had the potential to surpass traditional channels. While the number of customers banking online has increased over the years, traditional channels remain widely used by customers. Nonetheless, online banking has found its place within the distribution strategies of the majority of providers.

Report Highlights


The Nordics continue to be one step ahead of the other European countries in terms of Internet banking penetration. Datamonitor estimates that 43.0 per cent of banking customers in the Nordic region bank online. Fraud is perhaps the major issue affecting the online channel. While all channels are vulnerable to fraud, remote channels such as the Internet tend to be the major focus of fraudsters. Inactive customers remain an issue as many customers are still reluctant to bank online. While banks have been relatively successful in signing up customers to online banking via various marketing approaches, the fact remains that a significant proportion of these customers do not actively use the service.
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CHAPTER 1 INTRODUCTION 11
Who is the target reader? 11
Scope of the report 11
Defining an Internet bank 11
Structure of report 12
CHAPTER 2 INTRODUCTION TO ONLINE BANKING 13
Introduction 13
The number of customers banking online has continued to increase over the years 13
Germany has the highest number of customers banking online 13
A number of factors are behind the growth of online banking 14
However, online banking penetration varies between countries 15
In terms of Internet banking penetration rate, the Nordics remains far ahead 15
A number of factors are behind the varying penetration of online banking 16
Despite the increased popularity of the online channel, expansion is hindered by a number of issues 18
Internet usage is directly affected by fraud issues 18
A number of other factors are negatively impacting on the development of online banking services 21
However, there is now more willingness by banks to integrate the online channel within their multi-channel strategy 24
Depending on their priorities, banks can choose to provide a basic online service or to invest in their online channel as a key differentiator 24
Indeed, the importance of the Internet in the distribution channel mix is contantly being reviewed 25
The online channel offers a number of differentiators 26
However, the Internet is not a fully-fledged sales channel 26
Each distribution channel has its own strengths and weaknesses 27
IT investment spend further reveals that the development of the online channel is a priority for financial services providers 31
However, the branch also remains a key element 32
The willingness of European banks in developing their channel strategy is reflected in their IT spend 32
Going forward, Datamonitor expects IT spend for the online channel to grow at a sustained pace 33
Datamonitor identifies three types of online banking model followed by banks 35
The majority of European banks follow a strategy where the Internet is seen as complementary to the other channels 35
The standalone online bank has fallen from grace 36
Branch-focused banks with an online presence have a larger number of customers banking online than that of standalone Internet banks 38
Key strategic priorities and challenges vary according to the business model chosen 40
CHAPTER 3 BEST PRACTICE STRATEGIES IN ONLINE BANKING IN EUROPE 42
Introduction 42
Egg: personalized customer experience and innovation is at the heart of its success 42
Egg offers a range of products with specific focus on credit cards 43
Cross-selling and significant marketing investment are Egg's main strategies to increase its customer base 43
Egg is aiming at maintaining critical mass via cross-selling its personal loan to its credit card customers 43
Advertising remains a major acquisition tool for Egg 44
The launch of Egg Money has further strengthened the innovative values of Egg and further raised brand awareness 47
Egg Money, launched in September 2005, is a hybrid product combining a credit card, a debit card and overdraft facilities 47
Collaboration with its customers and regular customer satisfaction surveys ensure that Egg enhances customer experience 48
Fineco: a niche player aiming at becoming the bank of choice for digital customers 50
Online banking services are viewed as complementary services by banks in Italy 50
Fineco is the leading online player in Italy 50
Fineco's aim is to be the bank of choice for the 'digital customer' 51
Fineco has a number of competitive strengths 52
Going forward 54
Alliance & Leicester: an online bank with a high street presence 54
The lender is enjoying significant success in terms of Internet sales and servicing 55
A number of critical success factors are behind Alliance & Leicester 's online success 55
OP Bank Group: focusing on encouraging customers to use online self-service functionalities 59
Finland has one of the highest online banking penetrations in Europe 59
OP Bank Group is the leading online banking player in Finland 61
The Internet is fully integrated within OP Bank Group's multi-channel strategy 61
Providing excellent and advanced banking services has contributed in establishing OP Bank Group as the leading online player in the Finnish banking industry 64
OP Bank Group is a pioneer in online innovation 68
OP Bank Group has switched to an integrated infrastructure to enhance customer experience 69
Going forward, sales will be the focus for OP Bank Group 72
Best practice in encouraging usage of online banking and maximizing cross-selling and sales opportunities 72
Players need to look at how to increase returns from the online channel 72
Initiatives in maximizing cross-selling to online customers 73
Initiatives in encouraging dormant registered online customers to use eBanking 76
Initiatives in acquiring new customers 78
CHAPTER 4 THE FUTURE OF ONLINE BANKING 81
Introduction 81
Online banking penetration will continue to increase over the years 81
Online banking penetration will remain the highest for the Nordics but growth will slow considerably 81
A few key trends will shape the future of online banking over the next five years 83
Trend no.1: the Internet will remain a channel of choice for servicing rather than sales 83
Trend no.2: sales of commoditized products will increase although growth will be relatively slow over the next couple of years 83
Trend no.3: the online platform will not play a significant role in the distribution of less commoditized financial products 83
There are a number of measures that financial providers can take to promote and encourage customers to bank online 84
Financial providers should continue to work toward a seamless consumer experience 84
Financial providers should make use of Internet blogs to attract customers 84
Promotional incentives remain the quickest way to acquire online customers 86
Financial providers should add testimonials or success stories to boost confidence about online banking 87
CHAPTER 5 APPENDIX 88
Supplementary data 88
Chapter 2: Introduction to online banking 88
Definitions 89
Account aggregation 89
Bank providing Internet services 90
Internet bank 90
Current readings 90
Relevant links 90
Datamonitor's custom research capabilities 91
Retail Banking team contact details 92

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Table 1: Online banking IT spend by country, 2005-2009 34
Table 2: Branch IT spend by country, 2005-2009 34
Table 3: Examples of standalone online banks and recent closures for a sample of European countries, September 2006 37
Table 4: Number of customers banking online with standalone Internet banks and major banks for a sample of providers, 2005 (Table 1 of 3) 38
Table 5: Number of customers banking online with standalone Internet banks and major banks for a sample of providers, 2005 (Table 2 of 3) 39
Table 6: Number of customers banking online with standalone Internet banks and major banks for a sample of providers, 2005 (Table 3 of 3) 40
Table 7: Advertising expenditure for leading standalone online banks in the UK, 2003-2005 46
Table 8: Fineco's key statistics, 2004 and 2005 51
Table 9: OP Bank Group's service network, 30 June 2006 62
Table 10: OP Bank Group is a pioneer in online innovation 69
Table 11: Percentage of motor insurance consumers who changed their insurer at last renewal, split by how arranged insurance, 2005 87
Table 12: Number of online banking customers, 2002 and 2005 88
Table 13: Internet banking penetration among retail customers, 2005 89
Table 14: Number of active home Internet users for a sample of European countries, February 2005 and December 2005 89



Figure 1: Germany has the highest number of online banking customers in 2005, 2002 and 2005 14
Figure 2: The Nordic region has the highest Internet banking penetration, 2005 16
Figure 3: Among the sample of countries displayed, Sweden has the highest population penetration of active Internet users, February 2005 and December 2005 17
Figure 4: Bankinter in Spain has introduced co-ordinates from the customer's code card each time they sign an operation to decrease the risk of customers falling victims to 'Trojans' 19
Figure 5: Alliance & Leicester two-factor authentication process: We know it's you...You know it's us.... 20
Figure 6: Percentage of UK consumers who have arranged financial products via the Internet, by product sector, 2004 23
Figure 7: Egg and First Direct are examples of standalone online players offering account aggregation to encourage usage from customers, September 2006 25
Figure 8: Rating of retail banking channel options with respect to various banking transactions and services 28
Figure 9: Alliance & Leicester uses its online channel to generate leads for its call center and branches, August 2006 30
Figure 10: Alliance & Leicester is able to reduce application process time by providing useful information online, August 2006 31
Figure 11: European retail banks' distribution channel project priorities 32
Figure 12: The Nordics are the only countries where IT spend for the online channel exceeds IT spend for the branch network, 2005 33
Figure 13: Examples of European banks split by online banking model, 2006 36
Figure 14: European online banking business models and strategic priorities 41
Figure 15: Egg invests significantly in raising brand and product awareness, Q3 2004 - Q3 2005 45
Figure 16: Egg is the biggest advertising spender among standalone Internet banks in the UK, 2003-2005 46
Figure 17: Fineco executed nearly 10 million retail orders in 2005, 2001-2005 53
Figure 18: Alliance & Leicester appeared twice in Moneyfact's current 'Best Buys' table for discounted variable mortgage products targeted at first-time buyers, September 2006 56
Figure 19: Alliance & Leicester uses demonstrations to introduce customers to Internet banking, September 2006 57
Figure 20: High penetration of online banking has led to a significant fall in the number of branches and personnel in Finland, 1970-2004 60
Figure 21: 41 per cent of eBanking users in Finland use OP Bank Group eBanking services, 2005 61
Figure 22: More than 90 per cent of OP Bank Group's basic retail banking transactions are conducted via the electronic channels 63
Figure 23: OP Bank Group has been focusing on encouraging its retail customers to self-serve via the Internet 64
Figure 24: "My economy" service for retail banking customers helps them create their own budgets and analyze their money flows 65
Figure 25: Easy access to daily banking operations via portable devices 65
Figure 26: Advanced interactive tools for stock trading and analyzing the markets, 1 of 2 66
Figure 27: Advanced interactive tools for stock trading and analyzing the markets, 2 of 2 67
Figure 28: Catering for the visually handicapped via a separate 'easy to use' service 68
Figure 29: OP Bank Group has a single integrated customer portal 70
Figure 30: OP Bank Group has reached the third stage of the development of its online banking channel 71
Figure 31: HSBC promotes products inside the online customer's secured site 73
Figure 32: Cahoot is encouraging uptake of other products by displaying all products as if the customer already had them 74
Figure 33: Barclays Bank is using a substantial amount of the screen to promote products 75
Figure 34: In the UK, Lloyds TSB probably has one of the most advanced online marketing strategies to logged in customers 76
Figure 35: Barclays has introduced 'instant access' in the UK 77
Figure 36: Lloyds TSB uses customer information to encourage use of accounts 78
Figure 37: Major high street banks in the UK are wooing students via promotional incentives, September 2006 79
Figure 38: Crédit Lyonnais in France is encouraging existing customers to introduce their friends, September 2006 80
Figure 40: The Nordics will continue to dominate in terms of eBanking penetration in 2010 82
Figure 40: e.LCL, the eBanking website of French bank Crédit Lyonnais, provides a number of articles for its online customers, September 2006 85
Figure 41: Alliance & Leicester uses pop-ups in the mortgage section of its website to offer the services of an online agent, September 2006 86
Figure 42: Datamonitor's core consulting capabilities 92

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