Before the printing press, the priests of the Catholic Church had a monopoly over Latin and thus controlled the spiritual currency of the western world, the Bible. Cheap, locally translated bibles changed all that and the priests lost a lot of power within a century.
What is happening with banks and the internet is very similar. For the banks read the Catholic Church and for the future read the cheap locally translated bibles that the internet will bring.
A host of new internet banking institutions will upset the position conventional banks have had for the past 150 years.
Most conventional banks have an internet strategy in some shape or form, but most of these are also essentially defensive or half-hearted. The most forward-thinking, and by definition the best defensive strategy, is Bank One's. It has launched a separate stand-alone internet bank called WingspanBank.com.
Its motto says it all: "If your bank could start over, this is what it would be."
WingspanBank.com points to the shape of things to come. With low costs - and none of those branches - it is able to offer consumers a quid pro quo. It lowers costs by taking away the branch and shares the gain with its customers. For example, on a three-month certificate of deposit it offers a rate of 5.05% compared with the US national average of 4.08%.
What do consumers give up? Not a lot unless they are wedded to their branches. They get to use Bank One's ATMs to access their cash, and they get a higher rate on their checking accounts. They have debit cards that allow them to make purchases, can look at their statements whenever they want and can make transfers. A customer can ask for a personal loan and get a response within 50 seconds.
There is also a chat forum in which customers can talk to each other and experts (via their keyboards) about products. WingspanBank.com is obviously not alone. A quick search on Yahoo! using the phrase "internet bank" threw up 111 banks.
WingspanBank.com is a good defensive strategy for an old-style bank. Although it will cannibalize Bank One's existing clients it will also grab some of its rivals'. However, it is by no means certain that it will be innovative enough to maintain Bank One's position as a pre-eminent bank in the US. Why? Because the internet will change the whole structure of the industry.
The worst thing about the internet for conventional banks is the transparency it creates. Search engines are much quicker than walking between branches, or driving between states, or making phone calls. It is simple to agglomerate information, showing the cheapest loan, the best credit card rates. In fact there are already sites that do this, and then offer links to the vendor (the bank).
An interesting example of this is E-loan, an online provider of mortgages. Its website allows borrowers to search more than 50,000 products offered by 70 lenders and receive, according to E-loan, "unbiased" recommendations. It also reckons it removes half of the cost by removing the need for a commissioned loan agent. Once you borrow via E-loan, the service continues to monitor your mortgage and give advice on refinancing opportunities, alerting you to opportunities to save money over the life of the loan by switching providers.
E-loan was listed in June and had a market capitalization in August of $850 million. Not bad for a firm with only 268 employees.
Mortgages as information products
Forrester Research reckons the market for online mortgage originations will grow from $18.7 billion in 1999 to $91.2 billion in 2003, giving online mortgages a 9.6% penetration of the US market. E-loan reckons mortgage origination is well suited to internet distribution because "mortgages are information products that need no physical delivery or warehousing, and borrower data can be efficiently captured through a website".
E-loan is still essentially using banks. In the future internet firms like E-loan will originate loans of all types and securitize them. The global mortgage market will become dominated by originators, servicers and investors.
What E-loan does cleverest is link. It's fine having a product, but if no-one is visiting your site, it's to no avail. E-loan's logo - and the ability at a click to visit its site - appears on sites as diverse as CBS Marketwatch.com, USATODAY.com and BanxQuote, which updates different banks' rates real-time. It also has a host of real-estate links such as HomeSmart.com, Homes.com, Realty.com, HomeWEB.com, and Owners.com - the latter a site that has marketed over $35 billion in residential properties in 50 US states.
It is also linked to Net.B@nk, the first internet bank, as well as to the latest one, WingspanBank.com.
Seeing off customers
The latter two links perhaps say the most about the way the internet will fundamentally change the way banks work. Both banks - by linking to E-loan - are driving customers to a site where the probability of that customer getting a mortgage from WingspanBank.com (that is, Bank One) or Net.B@nk is dramatically decreased. They are two of 70 banks that E-loan's search engine might throw up. This is a big change.
In the old days (say 1997) if a customer walked through your door and your teller recommended he go next door for a mortgage you would fire that teller. Here we have a business and philosophical volte-face. What can be driving this?
The odd thing is that such a fundamental change has not been recognized by bank investors. Take Lloyds TSB, for example. Bank investors love the UK bank's strategy of focusing on its home market, ditching investment banking and concentrating all its energies on high-margin consumer lending and insurance. It is one of the most valuable banks in the world as a result, with a market capitalization that floats around $75 billion.
Lloyds TSB has done a great job in an unwired UK of offering goodish service, using different brands (such as Cheltenham & Gloucester for mortgages) and having a large branch penetration. Its strategy - lauded by analysts - has worked. No other UK bank has been so successful in selling so many products to the average man who walks through its doors. The UK is not a very competitive banking market, and so these products all have high margins. That's why Lloyds TSB has a return on equity in excess of 30%.