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The True Cost of Internet Banking

Unfortunately I had my tablet stolen from my bag recently on a trip overseas. Whilst the tablet was insured, with the data protected, and was replaced quickly when I returned home, it got me thinking about some of the costs we take for granted today which perhaps we didn’t not so long ago, and the risks we are happy to accept in return for making our lives that little bit simpler.
Internet banking is undoubtedly the greatest retail banking innovation of the past 20 years. In fact, the British Bankers Association recently found that UK customers make an average of 5.7 million transactions every day – up to 100% growth on the previous year.

As a proposition it embodies perfectly each and every characteristic which makes a product marketable in the digital age: much like the way we engage online with Google or Facebook, it’s fast, it’s free, it’s safe…or is it?

As consumers we consider a product or service to be free if we don’t get charged at the point of use. However, just because we don’t get charged every time we log on to our internet banking accounts it doesn’t mean it is free. Neither are Google or Facebook for that matter.

Whereas online giants sell our data and advertising space, banks use their internet platforms to ‘cost shift’ to the consumer. This occurs when an individual or group underpays for one service and this results in another individual or group overpaying for a different service, hence shifting the true cost of service a to users of ‘service B’. When it comes to internet banking, this happens in two different ways.

A substantial cost shift occurs due to the expense of the online banking infrastructure. These are costly to implement and manage and the consumer pays for these in overdraft charges and or current account fees.

To date, this has worked fine. Customers have been receptive to online banking and this has enabled banks to cost shift more and more. However, the fact that internet banking has a saturation point poses a significant problem for banks. Whilst it is unlikely that internet banking will ever reach a point of decline, it is forecasted that it is not going to grow much more either.  Currently at a 61 percent saturation point in the US, this has been the case since May 2011, cash and the branches are never really going to go away.

In the same way we assume online banking to be free; we also assume that, just as we use a key to lock our houses when we are away, use of a password will protect our online ‘homes’ from the threat of invasion.

The perception around online banking is that, where customers feel secure when visiting their local Branch, this sense of security will be reflected when making transactions online. The recent Heartbleed Virus and associated media epidemic has shown that this simply is not the case, with one online technology company going so far as to suggest that people who bank and shop online should “call in sick” to work and immediately change all their passwords in order to protect their online personal information from the threat of the virus.

The cost of poor internet security measures, whether at the consumer-end or the point of transaction (i.e. the website accessed) can be significant, with money stolen from online bank accounts and personal identifiable information used to commit further fraud. The risk is significant in this respect and the cost of poor security measures can be vast.

Clearly, banks need to negotiate this situation sensitively. On the one hand banks need to ensure that the benefits of online banking continue to outweigh the costs to the consumer; not just in terms of the availability and ease of use of online processing relative to branch transactions, but also to assure that their personal information and accounts will be mitigated against external threats such as hackers and viruses.

Moreover, banks need to ensure that their customers who have not adopted online banking are not alienated by their service models, otherwise they will lose confidence.

In short, internet banking is here to stay, but so are the branch and cash. Banks need to find workable models which combine the two.


Comments: (3)

Paul Love
Paul Love - Konsentus - Nottingham 11 April, 2014, 09:46Be the first to give this comment the thumbs up 0 likes

Internet banking is no longer the sexy new toy for the banks – mobile now has that mantle.

But as you rightly say it has become one of the main channels for a majority of customers to do their day to day banking.

I also agree with you that Branches are here to stay – but banks must do more than finding a workable business model to sustain old and new channels, they need a customer centric model that means customers get the same great service whatever channel they choose to use.


A Finextra member
A Finextra member 15 April, 2014, 12:37Be the first to give this comment the thumbs up 0 likes

An excellent post, thanks Ben.

As you say the convenience and managed security of digital banking have muscled out the traditional models to add cost and complexity to banking.

Building on Paul posts I agree that the term Internet Banking itself has been overtaken by Mobile (and as you imply in your opening in your blog) Tablet Banking. This has shifted the banks challenge on to managing multi channel banking as the key to success or differentiation.

On branches I am afraid I believe things will get worse. The banks will close as many as possible and reduce staff numbers regadless of any pain inflicted on non online adopters. I can see a pay to use model emeging and another bout of political furore on the back of it. Actively managing costs to pay shareholder dividends will make this happen I am afraid.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 15 April, 2014, 14:48Be the first to give this comment the thumbs up 0 likes

Google Ads, Facebook Ads and Promoted Tweets illustrate how, "When the product is free, you are the product". It's only a matter of time before this maxim gains traction in banking, what with technology from Cardlytics and other vendors enabling banks to display targeted offers on their Internet Banking portals. By shifting many activities to self-service under NetBanking, banks are saving a lot in labor costs, which is another element of cost shift that banks are driving with Internet Banking. Just today, I spent more than an hour on my dime initiating an EFT on my bank's website when I could've written a cheque in under five minutes.

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