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    Market Assessment 2004

    Third Edition September 2004Edited by Isla Gower

    ISBN 1-84168-710-3

    Electronic Banking

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    Key Note Ltd 2004

    Electronic Banking Foreword

    In todays competitive business environment, knowledge and understandingof your marketplace is essential. With over 25 years experience producing

    ighly respected off-the-shelf publications, Key Note has built a reputations the number one source of UK market information. Below are just a few of

    the comments our business partners and clients have made on Key Notesrange of reports.

    The Chartered Institute of Marketing encourages the use of market research asan important part of a systematic approach to marketing. Key Note reports havebeen ava ilable in the Institutes Information and Library Service for many yearsand have helped our members to build knowledge and understanding of theirmarketplace and their customers.

    he Chartered Institute of M arketing

    We have enjoyed a long-standing relationship with Key Note and have always

    received an excellent service. Key Note reports are well produced and arealways in demand by users of the business library.

    Having subscribed to Market Assessment reports for a number of years, wecontinue to be impressed by their quality and breadth of coverage.

    he British Library

    Key Note reports cover a wide range of industries and markets they aredetailed, well written and easily digestible, with a good use of tables. Theyallow deadlines to be met by prov iding a true overview of a particular marketand its prospects.

    NatWest

    Accurate and relevant market intelligence is the starting point for everycampaign we undertake. We use Key N ote because they have a report on justabout every m arket sector you can think of, and the information iscomprehensive, reliable and accurate.

    Walter Thompson

    Market Assessment reports provide an extremely comprehensive source ofinformation for both account handling and new business research, with

    excellent, clear graphics.

    Saatchi & Saatchi Advertising

    James DonovanSales & Operations

    Manager

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    Electronic Banking Contents

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    Contents

    Executive Summary 1

    1. Introduction 3

    OVERVIEW.......................................................................................................................................3

    DEFINITION......................................................................................................................................4

    2. Strategic Overview 5

    MARKET DYNAMICS AND SEGMENTATION .............................................................................5

    Payment Services ..............................................................................................................................5

    Table 1: UK Personal Transactions by Payment Method by Volume(million and index 2000=100), 2000-2004.......................................................................................5

    Industry Value...................................................................................................................................6

    Table 2: UK Annual Clearing Values (m and index 2001=100), 2001-2003 .................................7

    Market Share ....................................................................................................................................7

    DISTRIBUTION .................................................................................................................................8

    Table 3: The Number of ATMs and Value of ATM Transactions(number, index 2000=100 and m), 2000-2004 ..............................................................................9

    Figure 1: The Number of ATMs, 2000-2004 ....................................................................................9

    Table 4: The Number of UK Bank Branches (number and index 2000=100),31st December 2000-2004..............................................................................................................10

    Figure 2: The Number of UK Bank Branches, 31st December 2000-2004....................................10

    COMPETITIVE STRUCTURE..........................................................................................................11

    Table 5: Risk-Weighted Assets of UK Retail Banks by Value (m), 2002.....................................11Figure 3: Risk-Weighted Assets of UK Retail Banks by Value (m), 2002....................................11

    ADVERTISING ................................................................................................................................12

    THE CONSUMER ...........................................................................................................................12

    MARKET FORECASTS ...................................................................................................................13

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    3. Telephone Banking 15

    BACKGROUND..............................................................................................................................15

    MARKET SIZE ................................................................................................................................15

    Table 6: The Number of Telephone Banking Users(million and index 1996=100), 1996-2004.....................................................................................15

    Figure 4: The Number of Telephone Banking Users (million), 1996-2004 ..................................16

    Market Shares .................................................................................................................................16

    CONSUMER TRENDS ....................................................................................................................17

    Telephone Banking Usage ............................................................................................................. 17

    Table 7: Usage of Telephone Banking by Type of Service (%), 2003 ..........................................17

    Automated Telephone-Based Access ............................................................................................17

    Mobile Telephone Services ............................................................................................................18

    The Future of Wireless Banking.....................................................................................................19

    Interactive Television......................................................................................................................20

    MARKETING ACTIVITY ................................................................................................................20

    ADVERTISING ................................................................................................................................21

    4. Internet Banking 23

    BACKGROUND..............................................................................................................................23

    ING Direct........................................................................................................................................24

    MARKET SIZE ................................................................................................................................25

    Table 8: The Number of Internet Banking Users(million and index rebased 2000=100), 1999-2004.......................................................................25

    Figure 5: The Number of Internet Banking Users (million), 1999-2004.......................................26

    CONSUMER TRENDS ....................................................................................................................27

    Frequent Users................................................................................................................................27

    Less Frequent Users ........................................................................................................................27

    Rare Users........................................................................................................................................27

    Security Concerns............................................................................................................................28

    Trust.................................................................................................................................................28

    MARKETING ACTIVITY ................................................................................................................28

    ADVERTISING ................................................................................................................................28

    Main Media Advertising Expenditure ...........................................................................................28

    Table 9: Main Media Advertising Expenditure on Online Current Accounts(000), Year Ending March 2004 ...................................................................................................29

    Table 10: Main Media Advertising Expenditure on General OnlineBanking Services (000), Year Ending March 2004.......................................................................30

    Website Quality ..............................................................................................................................30

    Table 11: Customer Satisfaction Ratings of Online Banks Websites, April 2004 .......................31

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    5. Automated Teller Machines 33

    BACKGROUND..............................................................................................................................33

    MARKET SIZE ................................................................................................................................33

    Table 12: The Number of Owned ATMs by Location, 2000-2004 ................................................33CONSUMER TRENDS ....................................................................................................................34

    ATM Usage......................................................................................................................................34

    Table 13: Regular Users of ATMs by Age Group, 2000-2004 .......................................................35

    Mobile Telephone Usage ...............................................................................................................36

    DISTRIBUTION ...............................................................................................................................36

    6. Credit Cards 37

    BACKGROUND..............................................................................................................................37

    MARKET SIZE ................................................................................................................................37

    Table 14: UK Plastic Card Transactions by Volume(million and index 2000=100), 2000-2004.....................................................................................37

    CONSUMER TRENDS ....................................................................................................................38

    ADVERTISING ................................................................................................................................39

    Main Media Advertising Expenditure ...........................................................................................39

    Table 15: Main Media Advertising Expenditure on Plastic Cards by Type(000), Year Ending March 2004 ...................................................................................................40

    DISTRIBUTION ...............................................................................................................................41

    7. Regulation 43

    BACKGROUND..............................................................................................................................43

    Regulations Introduced Since 1996 ...............................................................................................43

    Table 16a: Regulations Governing Electronic Banking ................................................................ 43

    Table 16b: Regulations Governing Electronic Banking ................................................................ 46

    Money Laundering Compliance.....................................................................................................47Fraud ............................................................................................................................................... 49

    Identity Fraud .................................................................................................................................49

    Viruses .............................................................................................................................................50

    Operational Risk .............................................................................................................................51

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    8. Electronic Bill Presentment and Payment 53

    BACKGROUND..............................................................................................................................53

    BACS EBPP .......................................................................................................................................53

    Commercial Payments ....................................................................................................................53DISTRIBUTION ...............................................................................................................................54

    9. Electronic Trading 55

    BACKGROUND..............................................................................................................................55

    Securities Trading ...........................................................................................................................55

    Funds Supermarkets .......................................................................................................................55

    10. An International Perspective 57

    MARKET DEVELOPMENTS ..........................................................................................................57

    Mobile Banking Services ................................................................................................................57

    Nordea.............................................................................................................................................57

    Table 17: The Number of E-Banking Customers and Monthly Paymentsfor Nordea (000), 2000-2004..........................................................................................................58

    COMPETITOR ENVIRONMENT ...................................................................................................60

    Cashless Payment Instruments.......................................................................................................60Belgium ...........................................................................................................................................60

    Table 18: Cashless Payment Transactions in Belgium by Volume (%), 2000-2004......................60

    France ..............................................................................................................................................60

    Table 19: Cashless Payment Transactions in France by Volume (%), 2000-2004 ........................61

    Germany..........................................................................................................................................61

    Table 20: Cashless Payment Transactions in Germany by Volume (%), 2000-2004 ....................62

    The Netherlands .............................................................................................................................62

    Table 21: Cashless Payment Transactions in the Netherlandsby Volume (%), 2000-2004.............................................................................................................63

    Singapore........................................................................................................................................63

    Table 22: Cashless Payment Transactions in Singapore by Volume (%), 2000-2004 ..................64

    Sweden............................................................................................................................................64

    Table 23: Cashless Payment Transactions in Sweden by Volume (%), 2000-2004 ......................65

    The US .............................................................................................................................................65

    Table 24: Cashless Payment Transactions in the US by Volume (%), 2000-2004 ........................66

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    11. PEST Analysis 67

    POLITICAL FACTORS ....................................................................................................................67

    ECONOMIC FACTORS ..................................................................................................................67

    Table 25: UK Economic Indicators (m, index 2001=100, index 2000=100and %), 2000-2004..........................................................................................................................68

    Table 26: UK Financial Indicators (% and index 2001=100), 2000-2004......................................70

    SOCIAL FACTORS..........................................................................................................................71

    TECHNOLOGICAL FACTORS .......................................................................................................72

    12. Consumer Dynamics 75

    OVERVIEW.....................................................................................................................................75

    Table 27: Customer Views on Electronic Banking (% of respondents), 2004 .............................75

    FREQUENCY OF USE ....................................................................................................................77

    At Least Once a Week ....................................................................................................................77

    At Least Once a Month ..................................................................................................................78

    Table 28: Usage of Electronic Banking Services by Frequency(% of respondents), 2004...............................................................................................................79

    Rarely...............................................................................................................................................81

    Table 29: Usage of Electronic Banking Services by Frequency(% of respondents), 2004...............................................................................................................82

    USAGE OF ELECTRONIC BANKING ............................................................................................85In the Last 5 Years ..........................................................................................................................85

    In the Last Year...............................................................................................................................85

    Table 30: Usage of Electronic Banking (% of respondents), 2004...............................................86

    SECURITY AND TRUST .................................................................................................................88

    Security............................................................................................................................................88

    Trust.................................................................................................................................................89

    Table 31: Customer Views on Security and Trust Issues of Electronic Banks(% of respondents), 2004...............................................................................................................90

    FAVOURED SERVICES ..................................................................................................................92Television Services ..........................................................................................................................92

    Automated Telephone Services.....................................................................................................93

    Table 32: Favoured Electronic Banking Services (% of respondents), 2004................................93

    FAVOURED DISTRIBUTION CHANNELS ....................................................................................96

    Cashpoints.......................................................................................................................................96

    Mobile Telephones.........................................................................................................................96

    Table 33: Favoured Distribution Channels for Electronic Banking Services(% of respondents), 2004...............................................................................................................97

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    Electronic Purses .............................................................................................................................99

    Table 34: Favoured Distribution Channels for Electronic Banking Services(% of respondents), 2004.............................................................................................................100

    SUGGESTED SERVICES ...............................................................................................................102

    Messages .......................................................................................................................................102

    Money Handling Suggestions ...................................................................................................... 103

    Table 35: Suggested Services for Electronic Banking (% of respondents), 2004 ......................104

    REASONS FOR CHANGING BANK ............................................................................................107

    Convenience..................................................................................................................................107

    Interest Rates ................................................................................................................................107

    Table 36: Reasons for Changing Bank (% of respondents), 2004..............................................108

    OTHER RESPONSES ....................................................................................................................110

    Dont Know...................................................................................................................................110

    None of These...............................................................................................................................111

    Table 37: Other Responses (% of respondents), 2004................................................................111

    13. Company Profiles 115

    CAHOOT.......................................................................................................................................115

    EGG ...............................................................................................................................................118

    Table 38: The Number of Egg Customers (million and index 1999=100), 1999-2004...............120

    FIRST DIRECT ...............................................................................................................................121

    ING DIRECT ..................................................................................................................................123

    INTELLIGENT FINANCE ..............................................................................................................125

    NATIONWIDE ..............................................................................................................................127

    SMILE ............................................................................................................................................130

    14. The Future 133

    US INTERNET PAYMENTS..........................................................................................................133

    Market Leaders.............................................................................................................................133Table 39: Forecast Compound Annual Growth in US E-Commerce-DrivenPayment Industry Revenues (%), 2003-2005...............................................................................134

    Payment Methods.........................................................................................................................135

    CONSUMER ISSUES ....................................................................................................................136

    The Economy.................................................................................................................................136

    Table 40: Forecast UK Economic Indicators(m, index 2001=100, index 2000=100 and %), 2004-2008 .......................................................137

    Table 41: Forecast Financial Indicators (% and index 2001=100), 2004-2008...........................138

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    SUPPLIER ISSUES .........................................................................................................................138

    Barriers to Entry............................................................................................................................138

    Regulations ...................................................................................................................................138

    MARKET DYNAMICS..................................................................................................................139

    Table 42: Forecast UK Personal Transactions by Payment Method by Volume(million and index 2004=100), 2005-2009...................................................................................139

    PEST ANALYSIS ...........................................................................................................................140

    Political Factors.............................................................................................................................140

    Economic Factors ..........................................................................................................................140

    Social Factors.................................................................................................................................141

    Technological Factors...................................................................................................................142

    15. Further Sources 147

    Associations...................................................................................................................................147

    Publications...................................................................................................................................147

    General Sources ............................................................................................................................147

    Government Publications.............................................................................................................148

    Other Sources................................................................................................................................148

    Bonnier Information Sources.......................................................................................................149

    Key Note Research 151

    The Key Note Range of Reports 153

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    Key Note Ltd 2004 1

    Electronic Banking Executive Summary

    Executive Summary

    In the late 1990s, the concept of electronic banking was heavily promotedand in the first wave of the application of the Internet before the rise and

    fall of dotcom companies banks were advised that the days of traditionalhigh-street branches were over. Instead, it was thought that cards orelectronic purses would take over the role of money in only a few years.When people needed financial services, they would visit the localsupermarket or contact their telephone supplier to access a full bankingservice for all their needs remotely, through a call centre. Alternatively,customers would load their smart card using mobile telephones or managetheir financial affairs through interactive television in the evenings.

    In the preceding years, the majority of these visions from 1997 haveevaporated or have been delayed until an appropriate market for theseservices is identified. However, Singapore may well be the first place tooperate using mostly electronic money by 2008. In addition, the bank Nordeahas a significant proportion of customers who bank electronically and theelectronic bank Intelligent Finance (IF) claims a healthy share of the mortgagemarket.

    In their anxiety to promote heavy investment in new distribution channels forbanking, strategists of the late 1990s overlooked the concept that customersdid not want this technology. Instead, many require a friendly and efficientservice. Exclusive research conducted for this Market Assessment report byBMRB Access in April 2004 shows that although a significant proportion ofthe 977 respondents claimed to use their bank electronically, very few of

    them showed any enthusiasm for electronic banking services. The surveyindicates that people are not very interested in automated telephoneservices, nor in being advised on their financial affairs by their bank. Inaddition, they are even less interested in using electronic purses or acashpoint for all their financial affairs, and are not at all interested ininteractive television banking or downloading cash to their mobiletelephones. In fact, a considerable proportion of the respondents believedelectronic banks to be insecure and, as such, would not trust them to handletheir affairs. Although many of these respondents were elderly and in thelower social grades, it would be politically unwise to disregard their opinions.

    In Scandinavia, Nordea bank does not face such problems and has a large,

    international clientele of remote customers who are happy with the widerange of services available to them. In Singapore, the introduction ofelectronic contactless smart cards has been pioneered by the road chargingsystem and there is a consensus (85%) in favour of these cards.

    However, in the UK, consumers are more cautious and banks now accept thattheir branches are a valuable part of a multichannel distribution system.Despite this, branch closures have not been forgotten. Cashpoints are beingupgraded, although providers are increasingly charging for their use. Inaddition, plastic cards are being used increasingly for both payments andborrowing. Debit cards are now more popular than credit cards, leading to along-term decline in margins on card operations.

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    2 Key Note Ltd 2004

    Executive Summary Electronic Banking

    Regulations are becoming more onerous, and the technological demands onbanks to comply with Basel II, Sarbanes-Oxley and Anti-Money Laundering(AML) requirements are expensive. Alternatively, opportunities to review thetechnological structure of the bank to ensure fraud is revealed early, as wellas to know the customer, will lead to greater efficiency and effectivenessonce customer-relationship management (CRM) has been realised.

    Banks need to be able to show that they have mastered electronic bankingtechnology, can offer full security and demonstrate that they can provide aservice that meets customers needs. When this happens, customers in the UKwill be ready to accept the technology that is already being rolled out inSingapore, Hong Kong and South Korea.

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    Key Note Ltd 2004 3

    Electronic Banking 1. Introduction

    1. Introduction

    OVERVIEW

    Key Note previously published reports on electronic banking in 1997and 2000. This Key Note Market Assessment report examines the majorsuccesses in electronic banking, which centre on the mass transfer ofpayments to electronic means and the replacement of physical paymentsmade by cash and cheque by automated methods. The report also focuses on:

    the way in which banks have tailored their retail operations toaccommodate customers who want remote access to their accounts

    the disappointing progress of mobile telephone banking and interactivetelevision, which were both perceived as being exciting concepts in 1997

    the growth of the cashpoint and its potential as an electronic outpostof the bank

    the growth of pure-play electronic banking services and the technologicalissues of security and fraud

    the development of plastic cards and the implications of smart cards

    payment trends in other countries

    relevant political, economic, social and technological issues that are likely toaffect electronic banking over the next 5 years.

    In addition, the following seven areas of electronic banking are consideredin detail:

    telephone banking

    Internet banking

    automated teller machines (ATMs)

    credit cards

    regulation

    electronic bill presentment and payment (EBPP)

    electronic trading.

    Key Note commissioned exclusive consumer research for this report, whichwas conducted by BMRB Access in April 2004 among 977 adults aged 15and over. The findings were analysed to provide an insight into customerattitudes towards electronic banking, the degree to which customers usebanking of this type and customer opinion relating to some of the proposalsthe industry has presented for exploiting technological advances.

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    4 Key Note Ltd 2004

    1. Introduction Electronic Banking

    DEFINITION

    Electronic banking began several decades ago, when computers were firstintroduced to the payments process. Until the late 1980s, automation wasconfined to the back-room task of processing payments. Now, technology has

    been applied to cutting the costs of processing transactions by eliminatinghuman mediation during the procedure. Technology has also been applied tothe control of processes, ensuring that fraud or errors do not occur andidentifying risks when they are exposed.

    For the customer, automation began with the cashpoint (the ATM) and plasticcards that are issued by banks are a highly visible sign of electronic banking.The development of telephone-mediated banking, which requires a highdegree of fast access to bank records at call centres, is another electronicbanking example. Internet banks with bill-paying facilities, accountswitching abilities and services that offer online shopping, insurance orinvestment are only the latest technological developments in banking.

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    Key Note Ltd 2004 5

    Electronic Banking 2. Strategic Overview

    2. Strategic Overview

    MARKET DYNAMICS AND SEGMENTATION

    Electronic banks comprise payment services, in which direct automatedpayments can replace cheques and cash, as well as customer services. Thisreport examines payment systems and covers the market for credit cards,debit cards, store cards and affinity cards. In addition, facilities for borrowingand investment through remote access to the bank are discussed, anddistribution channels, such as the telephone, television and the Internet, arecovered.

    Payment Services

    The credit card and personal loans markets are booming, fuelled by highhouse prices and subsequent consumer confidence. Key Note estimates that,in 2004, the volume of UK personal transactions will reach 9.9 billion, a rise of7.1% on 2003. Plastic cards are estimated to account for the largest share(58%) of the total.

    Between 2000 and 2004, the number of payments made by electronic meansincreased, while cheque payments fell. Plastic card transactions grew by50.9% in volume to an estimated 5.74 billion and the number of automatedtransactions increased by 32.7% to 2.91 billion over the 5-year period.However, cheque transactions decreased by 21.5% in volume to an estimated1.25 billion.

    Table 1: UK Personal Transactions by Payment Methodby Volume (million and index 2000=100), 2000-2004

    % Change

    2000 2001 2002 2003 e2004 2000-2004

    Cheque 1,593 1,545 1,447 1,353 1,250 -21.5

    Index 100 97 91 85 78

    Plastic card 3,805 4,272 4,696 5,189 5,742 50.9

    Index 100 112 124 136 151

    Table continues...

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    6 Key Note Ltd 2004

    2. Strategic Overview Electronic Banking

    Although plastic cards remain the most popular method of payment in theUK, the rate of growth has slowed since the early 1990s. For example, in 1990 the last year in which the volume of cheque payments increased thenumber of plastic card payments rose by 20.9%.

    Industry Value

    Between 2002 and 2003, the total payments industry increased its daily valueof transactions from 340bn to 364bn. Of this, 95.8% can be attributed to

    CHAPS (Clearing House Automated Payments Settlement). This provides aninter-bank electronic same-day value sterling credit transfer service betweensettlement banks in the UK, using enhanced real-time gross settlement(RTGS). CHAPS is connected to the trans-European automatedreal-time gross settlement express transfer (TARGET) system, which connectsall EU RTGS systems through their central banks. In 2003, CHAPS europayments recorded the largest growth among clearing sectors, with a valuerising to 145bn.

    CHAPS comprises the largest share of the electronic banking market, since itincorporates all payments between banks and large companies. In the UK,this aspect of banking has been electronic for sterling settlement since 1984,

    and on a real-time basis from 1996.

    ...table continued

    % Change2000 2001 2002 2003 e2004 2000-2004

    Automated 2,195 2,361 2,528 2,707 2,912 32.7

    Index 100 108 115 123 133

    Total 7,594 8,178 8,671 9,249 9,904 30.4

    Index 100 108 114 122 130

    e Key Note estimates

    includes an estimate for in-house items

    excludes plastic card cash acquisition at automated teller machines (ATMs) andbranch counters

    includes intra-bank items, but excludes CHAPS (Clearing House AutomatedPayments Settlement) payments; personal automated payments are those where the

    payer is a personal customer, business automated payments are those where the payeris a company

    does not sum due to rounding

    Source: APACS Yearbook of Payment Statistics 2004, Table 8.6/Key Note

    Table 1: UK Personal Transactions by Payment Methodby Volume (million and index 2000=100), 2000-2004

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    Key Note Ltd 2004 7

    Electronic Banking 2. Strategic Overview

    In 2003, CHAPS recorded an annual clearing value of 88.58bn, an increase of4.3% on 2001.

    BACS Payment Schemes Ltd manages electronic payments, while BACS Ltdprocesses direct debits, direct credits and standing orders. Standing orderswere submitted on magnetic tape from 1968 and by telecommunications linksfrom 1999. Payments are handled electronically on the basis of a 48-hourcycle over a 3-day period. Although the technology could support fasterpayment cycles, it is thought by many in the industry that a delay might makeit easier to identify fraud or money laundering before a deal has beencompleted.

    Market Share

    In 2003, payments made by debit cards reached 130.47bn in value, anincrease of 21% on 2002. This comprises 54% of card purchases made in theUK. Debit cards have been increasingly popular since their introduction in thelate 1980s and, in 1997, overtook credit card purchases. The growth andsustained popularity of debit cards is the result of the convenience of nothaving to pay cash and the avoidance of paying interest on the balance of thedebt after a free credit period.

    Table 2: UK Annual Clearing Values

    (m, index 2001=100 and %), 2001-2003

    % Change

    2001 2002 2003 2001-2003

    CHAPS 84,927,816 82,278,534 88,576,506 4.3

    Index 100 97 104

    Cheque and credit

    clearing company 1,402,998 1,364,989 1,318,949 -6.0

    Index 100 97 94

    BACS 2,166,065 2,381,518 2,574,367 18.8

    Index 100 110 119

    CHAPS Clearing House Automated Payments Settlement

    standing orders and direct credits, direct debits and Euro direct credits

    Source: APACS Yearbook of Payment Statistics 2003-2004, Table 1.1

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    8 Key Note Ltd 2004

    2. Strategic Overview Electronic Banking

    In terms of purchases, charge cards account for a 9% share of the plastic cardmarket. In 2003, cards of this type were used to buy 22.04bn worth ofpurchases, which represents a growth rate of 0.1%. During the 1990s, chargecards experienced rapid growth, but this has slowed dramatically since 2000.

    In general, charge cards were perceived as being a status symbol, as the user

    paid a considerable fee to obtain the card. These cards offer particularprivileges, such as access to club lounges at airports. However, with thecollapse in share values over the past 3 years, it may be that charge cards areno longer fashionable as executive perks. Alternatively, the high price ofexecutive air travel might have caused some companies to send their staff oncheaper airlines where charge cards are not accepted.

    Apart from the cards industry, the lowest growth rate applies to televisionbanking. In 2004, it is difficult to identify how many banks still offerinteractive television services and to quantify the number of customers thathave taken up the channel at home. Industry sources suggest that the totaluptake may be no more than 15,000 to 20,000 homes.

    Similar difficulties face the market for wireless application protocol- (WAP-)based telephone banking. Although the use of short messaging service (SMS)messaging for alerting customers of the state of their account has beenadopted more widely, the number of customers enrolled and registered forsecure banking through their mobile telephone after more than 7 years ofpilots and research is likely to be less than 200,000.

    DISTRIBUTION

    Electronic banking services are distributed by remote means. As such,obtaining cash is still a problem, since the electronic transmission of creditthrough mobile telephones is still in the future.

    It is now possible to withdraw money from supermarket checkouts using acashback facility in conjunction with a cheque guarantee card. Industryestimates suggest that, in 2003, around 13.7m was withdrawn in this way.

    The distribution of automated teller machines (ATMs) is increasing rapidly,although usage per machine is falling. This can be attributed to theintroduction of an increase in competition, as independent ATM providersentered the market in 2000. Key Note estimates that, in 2004, the number ofATMs will reach 51,129, a rise of 10% on 2003. The value of transactions isestimated to reach 152.12bn, an increase of 5.6% on 2003.

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    Key Note Ltd 2004 9

    Electronic Banking 2. Strategic Overview

    Table 3: The Number of ATMs and Value of ATM Transactions(number, index 2000=100 and m), 2000-2004

    % Change

    2000-2000 2001 2002 2003 e2004 2004

    Number of ATMs 33,000 36,666 40,825 46,461 51,129 54.9

    Index 100 111 124 138 155

    Value of ATM

    transactions (m) 113,013 127,428 136,364 144,123 152,124 34.6

    Index 100 113 121 128 135

    e Key Note estimates

    ATM automated teller machine

    the value of withdrawals cover all ATM transactions in the UK, including those onforeign-issued cards; withdrawals from convenience ATMs, those owned by companiesindependent of banks or building societies and deployed in retail locations are includedfrom 2001

    Source: APACS Yearbook of Payment Statistics 2004, Table 5.4/Key Note

    Figure 1: The Number of ATMs, 2000-2004

    ATMs automated teller machines

    Note 2004 Key Note estimates

    Source: APACS Yearbook of Payment Statistics 2004, Table 5.4/Key Note

    0

    10,000

    20,000

    30,000

    40,000

    50,000

    60,000

    Numbe

    rofATMs

    2000 2001 2002 2003 2004

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    2. Strategic Overview Electronic Banking

    In 2000, the number of bank branches ceased to fall significantly and, in 2003and 2004, recorded small rises of 0.6%. It is expected that the numbers willremain at around the same level for the next few years, as institutionsredesign them to become more attractive and act as sales offices for financialproducts rather than being just a row of tills.

    Table 4: The Number of UK Bank Branches(number and index 2000=100), 31st December 2000-2004

    % Change

    2000 2001 2002 2003 e2004 2000-2004

    Branches 11,481 11,233 11,176 11,241 11,310 -1.5

    Index 100 98 97 98 99

    Association for Payment Clearing Services (APACS) members (figures for APACSmembers are included only for the years in which the institutions were members)

    e Key Note estimates

    Source: APACS Yearbook of Payment Statistics 2004, Table 6.1/Key Note

    Figure 2: The Number of UK Bank Branches,

    31st December 2000-2004

    Association for Payment Clearing Services (APACS) members (figures for APACSmembers are included only for the years in which the institutions were members)

    Note: 2004 Key Note estimates

    Source: APACS Yearbook of Payment Statistics 2004, Table 6.1/Key Note

    11,000

    11,050

    11,100

    11,150

    11,200

    11,250

    11,300

    11,350

    11,400

    11,450

    11,500

    Numbe

    rofbranches

    2000 2001 2002 2003 2004

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    Electronic Banking 2. Strategic Overview

    COMPETITIVE STRUCTURE

    In the UK, the financial services industry comprises a small number of verylarge banks and a larger number of small banks. In 2002, the largest bank interms of the value of risk-weighted assets was RBS (with 234bn), followed by

    HBOS (187.14bn) and Barclays (172.75bn).

    Table 5: Risk-Weighted Assets of UK Retail Banksby Value (m), 2002

    RBS 234,000

    HBOS 187,142

    Barclays 172,748

    HSBC 123,864

    Lloyds TSB 122,400

    Abbey 78,705

    A&L 20,034

    Northern Rock 17,384

    B&B 13,200

    Source: Company accounts

    Figure 3: Risk-Weighted Assets of UK Retail Banksby Value (m), 2002

    Source: Company accounts/Key Note

    RBS

    HBOS

    Barclays

    HSBC

    Lloyds TSB

    Abbey

    Northern Rock

    B&B

    A&L

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    In 2000, the last mergers of the major banks occurred when Barclays tookover the Woolwich, RBS took control of NatWest and the Bank of Scotlandmerged with the Halifax to form HBOS. None of the five largest banks inTable 5 are able to merge with each other, as this would be unacceptable interms of market concentration. The 2004 proposed merger of Abbey NationalPLC with Banco Santander Central Hispanica (SCH) brings an interesting

    addition to the competitive mix. However, at the time this report waspublished (September 2004), HBOS is seriously interested in making a bid forAbbey, although Abbey and SCH are keen to finalise the deal. Industryanalysts suggest that a bid by HBOS would be likely to be referred to theCompetition Commission (as a merged HBOS/Abbey bank would control 37%of the UK mortgage market), which would make a merger unlikely until 2005.

    Each bank has its own electronic distribution network; HBOS operatesIntelligent Finance (IF), cahoot is part of the Abbey National Group, while theothers retain electronic banking as part of their mix of distribution channels.

    Outside this group of very large institutions, electronic banks are operatedindependently.

    ADVERTISING

    The advertising of electronic banks is often independent of the parent bank.Where a bank advertises itself, it tends to emphasise the fact that it containsfriendly staff in its branches who are keen to give financial advice. It is knownfor institutions to use knocking copy, which alleges that other banks areremote and unfriendly, and do not listen to the customer. This may no longer

    be true of NatWest, as its branches are being refurbished by RBS, but theimages presented by some of its rivals tend to preserve an image of strengthand power.

    Electronic banking is difficult to advertise, as the technology is intangible andis couched in terms of user satisfaction or fashionability.

    Advertising of banking services is currently overtaken in terms of spend bycredit card advertisers, who compete fiercely for the high levels of debt takenout by consumers while interest rates were low. In addition, many customersmight want to transfer to a new bank with lower introductory interest rates.

    THE CONSUMER

    Predominantly, the electronic bank consumer is young and short of time.Most are quite heavy users of the electronic banking channel, but banks havereported that, on average, electronic banking customers visit branches once amonth. The first wave of users in the early 2000s are now beginning to startfamilies and there is also an increasing number of older users who alreadyhave small families. In addition, older customers (up to middle age) are nowusing electronic banking, although very few people over the age of 55 yearshave been converted to this channel. In 10 to 20 years time, this picture will

    have changed, as many more older people will routinely use electronicbanking.

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    Electronic Banking 2. Strategic Overview

    In 2003 and 2004, customers have experienced greater prosperity thanbefore, with real incomes rising considerably faster than interest rates. Thismeans that customers have been attracted by the higher interest ratesoffered on savings accounts by electronic banks, since they are higher thanthose offered on conventional accounts. In addition, customers have beenpaying more money into their accounts while they decide how to spend it.

    However, these new customers are expected to be less loyal than traditionalbank customers, since they have been attracted by convenience and highinterest rates. As such, they could easily find another bank that offers morefavourable terms.

    MARKET FORECASTS

    The market for electronic banking will expand rapidly. Initially, there will be agrowing demand for technology platforms to handle regulatory demands

    and compliance levels, as well as for higher standards of auditing and riskmanagement.

    Payments are dynamic so are likely to rise as the economy becomes wealthierand will be increasingly electronic in nature. In addition, there will be agrowing demand for smart cards, and associated software and hardware.Security and anti-fraud measures will also be in demand. Improved websitedesign, as well as more sophisticated straight-through processing systems, willbe needed to cope with the increased pressure on online banking distributionchannels, as customers become more familiar with them.

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    3. Telephone Banking

    BACKGROUND

    Telephone banking is only made possible through the high degree of bankautomation. Bank staff in call centres can access web pages, on whichcustomers accounts and personal details are held, as the customer phones in.When the bank has outsourced the telephone banking operation to anothercountry, this process has to be completed speedily and backup systems arerequired in case of failure.

    First Direct (part of HSBC) was the first to enter the market in 1995 andtelephone banking user numbers were first recorded in 1996. After a delay,First Direct was followed into the market by most other banks, some of whichestablished separate telephone banking operations, while others simply

    made telephone access available to all their customers.

    The principle was based on call centres, which were staffed 24 hours a day,7 days a week. Staff were able to access customer accounts online throughinternal websites. However, these became more sophisticated over time and,by 1997, it was possible to make website access available to customers.

    MARKET SIZE

    In 1996, the first year in which telephone banking user numbers were

    collected, 3.6 million customers used this type of service. The number of usershas steadily increased year-on-year and Key Note estimates that, in 2004,there will be 15.7 million telephone banking users.

    Table 6: The Number of Telephone Banking Users(million and index 1996=100), 1996-2004

    1996

    1997

    1998

    1999

    2000

    2001

    2002

    2003

    e

    2004

    %Ch

    ange

    1996

    -2004

    Users (million) 3.6 5.0 5.8 7.1 9.9 11.5 12.7 14.5 15.7 336.1

    Index 100 139 161 197 275 319 353 403 436

    e Key Note estimate

    Source: APACS Yearbook of Payment Statistics 2004, Table 8.13/Key Note

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    Market SharesA pioneer in telephone banking was Nationwide the largest buildingsociety which emphasised the role of its branches in the roll out of itsoperations. In contrast, First Direct was established as a standalone operationby HSBC, deliberately avoiding the branch environment. First Direct wasaimed at an entirely different customer segment to the main bank, whileNationwide targeted its main markets with an emphasis of inclusion of all itsmembers in the service.

    In 2004, telephone banking is a standard service offered by all the main banksto all their customers and only the smaller building societies, which operate in

    a small geographic area, do not offer a service.

    Figure 4: The Number of Telephone Banking Users(million), 1996-2004

    Note: 2004 Key Note estimates

    Source: APACS Yearbook of Payment Statistics 2004, Table 8.13/Key Note

    0

    2

    4

    6

    8

    10

    12

    14

    16

    18

    1996 1997 1998 1999 2000 2001 2002 2003 2004

    Users(million)

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    CONSUMER TRENDS

    At first, it was thought that customers would not want to use remotetelephone services and would stay loyal to the branch. However, as telephoneservices were developed, customers became accustomed to using both and

    began to demand that branches also stay open for longer hours.

    Telephone Banking Usage

    Consumers have a variety of banking needs that are frequently satisfied bytelephone banking. In 2003, 78% of users checked their account balancethrough telephone banking. This was followed by 58% of telephone bankingusers who queried their account and 41% who checked their statement.

    As many of the uses in Table 7 are simple, it would seem reasonable, inprinciple, to modify the basis of telephone banking to automate certainaspects. This would reduce the pressure on call centre staff and allow them toconcentrate on selling more complex products to customers. The key tosuccess will be in the training of customers and in convincing them that theservice is secure.

    Automated Telephone-Based Access

    Automated, voice-operated electronic ordering systems have been availablefor some years and could be adapted to the banking environment. Exclusiveresearch conducted for this report in April 2004 by BMRB Access indicates thatsuch a service would be welcomed by a minority of customers. Respondents tothe survey were asked whether they agreed with the following statement:

    I think it is a good thing to be able to manage my accountthrough an automated telephone service.

    Table 7: Usage of Telephone Banking by Type of Service(%), 2003

    Checking account balance 78

    Account queries 58

    Checking statement 41

    Paying bills or making other payments 40

    Setting up standing orders or direct debits 40

    Source: APACS Yearbook of Payment Statistics 2004, Table 8.13

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    This option was fairly popular, receiving an 11% response. There was moreenthusiasm from men (13%) than from women (10%) and the ideaparticularly appealed to those aged between 25 and 44 years (15%) and tothose aged under 25 years (13%). However, older respondents (aged 65 yearsand over), were not very enthusiastic and just 3% agreed with the statement.

    Skilled workers in social grade C2 (14%) reacted more favourably thanprofessional and managerial respondents in social grades AB and C1(13% and 12%, respectively), but unskilled workers (Ds) and those in group Ewere less enthusiastic still (8% and 6%, respectively). Such a service appealedto Londoners (17%) more than people in any other region.

    Full-time workers (17%) were more favourable than those who work parttime (11%), are not working (8%) or are retired (6%) to the idea ofautomated telephone banking services. It appealed most to people inhouseholds of three people (14%), but not to single people (7%) or those inhouseholds of five or more (8%). As for the marital status of the respondents,those who are married (13%) favoured the idea more than those who aresingle (12%). 13% of people living with children liked the idea of anautomated telephone service, but only 10% of childless residents were. At15%, mortgage payers were more disposed to an automated service than anyother group, although private tenants (11%) were more enthusiastic thancouncil tenants (8%).

    Overall, the respondents who were most keen on an automated telephonebanking service were younger, skilled men in full-time jobs with smallhouseholds and mortgages to pay. This suggests that a telephone servicewould appeal to time-constrained people who do not have complex financialaffairs (such as professional customers), but not to people who are on small

    incomes and who might find the telephone difficult or expensive to use.

    Mobile Telephone Services

    In the late 1990s, some banks explored the feasibility of offering electronicbanking through wireless application protocol- (WAP-) enabled mobiletelephones. Although enthusiasts welcomed the idea, they found that theweb-based software was unsuitable for the limited functionality of a smallmobile device. Pilots run by Abbey, Egg and Nationwide were launchedbetween 1999 and 2000. They were linked with the Nokia 7110 mobiletelephone, which was frequently donated to customers as an incentive to use

    it. In 2001, Egg abandoned WAP and, in June 2003, was joined by Abbey andHBOS. HBOS admitted that only a tiny fraction of its 1.5 million registeredInternet banking customers had taken up WAP. The reluctance to use it waslinked to the slowness of the service. With the development of moreappropriate software, and the introduction of mobile telephones withenhanced screens, WAP-enabled banking might become more practical. Inparticular, the development of the mobile telephone as a form of electronicpurse is keenly awaited in the industry. HBOS aims to return to wirelessbanking technology when the third generation (3G) of mobile telephone,with its greater functionality, becomes more widespread, possibly in 2005or 2006.

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    The Future of Wireless Banking

    The introduction of 2.5 generation handsets has advanced mobile telephonyconsiderably. Users are now developing a taste for selecting polyphonicringtones using WAP and looking at images on their mobiles. It is possiblytime, in 2004, for banks to reconsider their position and return to the market,

    relying on a widespread habit of text messaging using short messagingservice (SMS) techniques. In 2003, 2.45 billion SMS messages were sentworldwide.

    The introduction of wireless networking (WiFi) to personal data appliances(PDAs), such as Palm Pilot and to the new generation of laptops, means thatbanks can now provide customers with the facility to operate their financialaccounts in a crowded public area. An initial enthusiasm by US banks duringthe 1990s faded in the early 2000s because, just like WAP, WiFi was usedmainly for messages, not for financial purposes.

    In 2005, there will be a larger number of 3G mobiles on the market and theintroduction of WiMAX, superseding WiFi, will enhance the usability ofnotebooks or laptops. WiMAX is a new standard that allows 70 megabytes ofdata per second to be downloaded up to 50 kilometres from the base station.This makes it cheaper and faster than many broadband networks. Therefore,banks will be tempted to exploit the new technology to launch new bankingchannels. However, the majority of customers will not take up this option.

    Respondents to the survey conducted by BMRB Access for this report wereasked whether they agreed with the following statement:

    I would like to download cash to my mobile telephone fordaily purchases.

    This option was the least popular of all suggestions, with only 1% ofrespondents agreeing with it. It was preferred by men (2%), while only 1% ofwomen approved. Nobody over the age of 54 agreed and only 2% of thoseunder 25 years favoured the idea. Less than 0.5% of respondents in socialgrade AB agreed with this option and only 2% of C1s, C2s and Ds agreed withit. The statement was most popular with respondents in the South West (5%),but there was no support at all in the North, the North West, the WestMidlands, East Anglia and London. Only 2% of respondents who workapproved, while no retired people agreed with the idea of mobiletelephone-based cash.

    The larger the household, the greater the support for mobile telephonebanking services. In addition, the idea was supported by 1% of married andsingle respondents.

    There was most support from the 5% of respondents with children agedbetween 5 and 9 years, but the average for all young families was only 3%.People with no children (1%) did not support the idea. At 2%, private tenantswere more supportive than house owners (1%).

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    Overall, there was a small core of support for mobile telephone-based cashamong people living in large households, with primary school aged children,who are young and work in manual professions. It would take a considerablemarketing effort to give this idea a reasonable market share. It may wellsuffer from the anxiety respondents suffer about security, given the high levelof mobile telephone theft in the UK.

    Interactive Television

    Interactive television was first launched in the UK in 1999, through satellitetelevision and cable television providers. Early innovators in the bankingindustry include Abbey, HSBC, Barclays, Bank of Scotland and Egg. Alliance& Leicester, Lloyds TSB, NatWest, the Bank of Scotland, and Royal & SunAlliance also experimented with interactive television. Subscribers tointeractive television pay a subscription to BskyB, NTL, Telewest or anotherprovider and can access the interactive channel through their set-top box.

    Egg abandoned its interactive television channel in 2003, having apparentlyrecruited just 1,300 of its 3.2 million clients to the service. Other banks havealso withdrawn, although Nationwide remains a provider of interactivetelevision banking services.

    Industry experts believe that the interactive television business model is stilltoo unstable for a sufficiently risk free, profitable and customer-centredchannel to be developed. With the collapse of iTV Digital in 2001, thedevelopment of interactive television was set back, as 1.3 million homes hadsigned up with iTV. This left the cable operators Telewest/NTL with 2 millionsubscribers, and BT and Kingston with 80,000 subscribers. BskyB is the largestsupplier of digital television, with well over 5.7 million homes by 2004.

    However, interactive television has achieved greater penetration in the UKmarket than any other in Europe. The UK holds around 45% of the interactivedigital television in Europe, with 44% shared between France, Italy and Spain.The balance is shared among Germany and smaller countries.

    Surveys show that television viewers have a lean back attitude andprogrammes that use interactive methods are content based, predominantlysports and news. Viewers do not bring an Internet-type attitude to televisionviewing, which is seen as entertainment.

    MARKETING ACTIVITY

    RBS is offering customers the chance to win six prizes, such as free mobilecommunication time worth 150, if they switch to mobile telephone banking.

    From April 2004, RBS customers are able to reload their mobile telephones atthe banks 1,359 automated teller machines (ATMs), provided they have anOrange, Vodafone, O2, T-Mobile or Virgin Mobile subscription.

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    ADVERTISING

    Banks do not advertise their telephone banking services as such, insteadchoosing to emphasise their product ranges. Telephone banking is now anestablished distribution channel that is offered by almost all banks.

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    4. Internet Banking

    BACKGROUND

    Internet banking offers great opportunities to the financial services industry,including the following:

    a huge potential customer base

    large economies of scale in investment

    the possibility for services to be delivered using standardised modularsoftware

    easy management of software

    a common browser front end

    the possibility to be equipped with good security protocols

    the easy application of prepackaged communications software, enablingcustomers to communicate directly with the bank

    instant access to the bank for all connected customers

    significant prospects for development and for adding value cheaply.

    However, Internet banking also has some outstanding weaknesses, including

    the following: customer security, although improved, remains an issue, not least in terms

    of customer perceptions

    restrictions on the capacity of networks to cope with traffic remains forcustomers who do not also buy a broadband package

    regulations, which can be complex to interpret

    fierce competition and poaching of customers with stronger offers iscommon

    brand loyalty has yet to be established.

    Affluent bank customers are increasingly accepting products from a variety ofInternet providers to reduce the cost of banking and create flexibility. Forexample, customers are able to subscribe to a savings account with ING Direct,with a rate of 4.7% (as at June 2004) and take a credit card from Egg, with a0% charge.

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    This requires traditional banks to offer special rates for their Internet-basedproducts and to integrate their distribution channels more thoroughlythrough a simplified systems architecture. In the UK, Smile (from theCo-operative Bank), cahoot (part of the Abbey National Group) andIntelligent Finance (IF [from HBOS]) offer a 24-hour service, supporting theirInternet operations using call centres. Their advantages lie in speed and a

    single customer view, as they keep their core banking platforms separatefrom the parent bank.

    How long the phenomenon of the Internet-only bank will survive is notknown, but Internet banks in Scandinavia eventually succumbed to theadvanced electronic services offered by organisations such as Nordea. Nordeahas nearly ten million online customers in three countries and offers moreproducts than niche banks. The opportunity to obtain advanced products atgood rates from one bank persuaded customers to stay. All customers,whether corporate, state or private, use the same method (electronicsignatures and bank codes) to access the bank. This means that private

    customers can pay in real time for services or goods by an electronic billpresentment mechanism and the bank code can be used as an electronicsignature for utility contracts or for tax payments. Customers can also obtaintheir pay slips and invoices electronically.

    In 2004, the personalisation of customer web pages is also being introducedby Nordea, which allows customers to alert the bank about important events,such as a wedding, so financing can be arranged in advance.

    Mainstream UK banks and building societies compete by offering highinterest savings accounts online, hoping to attract customers who want alltheir multichannel usage with one bank. They are confident that customers

    who left for online banks that offer high interest rates will return to themainstream banks once they realise the convenience of getting all theirservices from one bank and through a variety of distribution channels.

    Notably, Barclays Bank is using its in-house technology department, Enable,to integrate its channels by mid-2005. It aims to connect the call centres andonline channels so call centre staff can continue with a query that originatedonline with full information about the transaction.

    A central problem for banks is the need to clean and analyse customer dataand to create databanks that are standard across the entire organisation. It isalso important to run single identification and validation systems, rather than

    a variety within each bank. Such developments are being led by firms such asChordiant, which co-ordinates multichannel connections for RBS and Barclays,and Aspace, whose 4TRESS software enables seamless multichannel accesswith standardised authentication, authorisation and audit for banks.

    ING Direct

    ING Direct, which is based in the Netherlands as a subsidiary of ING Bank,operates in Australia, Canada, France, Germany, Italy, Spain, the UK and theUS.

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    Electronic Banking 4. Internet Banking

    The bank has apparently captured $17bn in deposits from US bankingoperations between 2000 and 2003, and made its first profit of 151m in2003, up from a loss of 48m in 2002. Between 2002 and 2003, its funds rosefrom 55.2bn to 99.4bn. The US success came partly from offeringmortgages and mutual funds more attractively than traditional banks.

    In 2004, ING Direct is the 35th-largest US bank in terms of deposit balances,after 3 years of operation. The companys technological advances allowed itto cross-sell effectively as a result of observing customer transaction patterns.

    The companys success is partly based on using an enterprise platform for itsmultichannel integration, rather than the mix of systems used by traditionaloperations. This means that it was quicker to launch its products, better ableto plan its development and could operate at a low cost from the start.

    Hewlett-Packard provided the core technology and services for the UKlaunch, taking only 8 months to design and implement. For example,transactions take half as many steps as would be expected in a traditional

    banking environment. ING has also developed back office integration withother banks clearing systems so that money transfers can be completedquickly and efficiently. Call centre staff are also able to see the same screensand operate similar processes to customers.

    MARKET SIZE

    Since its inception in 1996, the market for Internet banking has expandeddramatically. At the time, forecasts were even more drastic and it was evensuggested that the banking market would be transformed as majortraditional banks lost customers to the new, flexible Internet banks. Take-upwas comparatively slow to start with but, from 2000, Internet banking beganto reach a mass market. By 2003, it was established as a major distributionchannel to rival telephone banking. Key Note estimates that, in 2004, therewill be 14.5 million Internet banking users, a rise of 19.8% on 2003.

    Table 8: The Number of Internet Banking Users(million and index rebased 2000=100), 1999-2004

    % Change1999-

    1999 2000 2001 2002 2003 e2004 2004

    Users (million) 2.0 3.3 6.0 7.8 12.1 14.5 625.0

    Index 1,000 1,650 3,000 3,900 6,050 7,250

    Table continues...

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    According to some surveys, the percentage of adults with access to theInternet has risen to two-thirds of the population. Those with regular accessnow exceed 50%, with the expectation that broadband subscribers will bringthe total up to 60% by the end of 2004.

    ...table continued

    % Change1999-

    1999 2000 2001 2002 2003 e2004 2004

    Index rebased

    (2000=100) 61 100 182 236 367 440 -

    e Key Note estimate

    Source: APACS Yearbook of Payment Statistics 2004, Table 8.13/Key Note

    Figure 5: The Number of Internet Banking Users(million), 1999-2004

    Note: 2004 Key Note estimates

    Source: APACS Yearbook of Payment Statistics 2004, Table 8.13/Key Note

    Table 8: The Number of Internet Banking Users(million and index rebased 2000=100), 1999-2004

    0

    2

    4

    6

    8

    10

    12

    14

    16

    1999 2000 2001 2002 2003 2004

    Users(million)

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    CONSUMER TRENDS

    In the survey conducted by BMRB Access in April 2004 for this report,respondents were asked about their attitude towards Internet banking inrelation to how frequently they used the service, whether they were

    concerned about security and if they trusted the service.

    Frequent Users

    28% of respondents claimed that they contact their bank electronically atleast once a week. Of these, 30% were men and 27% were women. Overall,respondents who claimed to use electronic banking services regularly areaffluent and from a professional background. They are likely to have youngchildren and either rent or buy their property outright. In addition, they arelikely to have large households, a full-time job and are either married orsingle. The data suggests that frequent use of a banks electronic services is

    compatible with high levels of current expenditure and low time availability.

    Less Frequent Users

    Less than half as many respondents (13%) claimed to contact their bankselectronically monthly or more as do so weekly (28%). Overall, respondentswho stated that they use electronic banking less frequently than weekly, butat least monthly, tend to be female, from a managerial or clericalbackground, with smaller families. Less frequent users are also more likely tobe part-time workers. In summary, these respondents have more time thanthose who use electronic banking more frequently and are slightly less

    affluent. This might be because they are able to visit bank branches moreeasily or require cash less frequently.

    Rare Users

    More respondents (15%) said that they make rare contact with their bankelectronically than those who do so at least once a month (13%). However,this question addresses two groups those who use their bank electronicallyrarely and those who do not use electronic access at all. Rare users tend to bein the middle social grades (C1s and C2s), with small households, possiblyunemployed and not married, but with teenage children and a mortgage.

    This suggests that banks need to focus marketing activity to convince peoplewith families to use these channels more frequently.

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    Security Concerns

    At 18%, the second-largest response among the sample of respondents wasto the statement that they are concerned with the security aspects ofelectronic banking. People who are worried about the security of electronicbanking are typically men aged between 35 and 54 years, professional or

    managerial, living in the South of England, East Anglia and the WestMidlands, are working, have mortgage debt and possibly live in a largehousehold. Young people seem less worried, as do private tenants. Olderpeople who have paid off their housing debts or are council tenants, are leastworried, perhaps because they do not have large accounts to worry about.

    Trust

    A surprisingly large percentage of respondents (17%) claimed that theywould not trust Internet banking. Those who were more likely not to trustbanking of this type are generally older, in the lower social grades, living in

    the East Midlands, retired, possibly widowed, have paid off their mortgagesand are living on their own.

    MARKETING ACTIVITY

    Marketing activity by Internet banks has been based on establishing theirunique, new brands. It is clear from the style of advertisements for First Directand IF that they are designed for the practical, but time-poor, youngprofessional. This type of consumer is likely to be happy with televisionadvertisements with black and white explanations of the products on offer.Others might be drawn by more unusual methods, such as those used bycahoot. Campaigns tend to be carefully focused on the middle class and theoffice worker.

    Marketing has yet to involve major promotions or sponsorships, which aregenerally the province of the parent organisation, with larger and morediverse marketing briefs.

    ADVERTISING

    Main Media Advertising Expenditure

    Current accounts are the basic services offered by Internet banks. In the yearending March 2004, Smile recorded the largest main media advertisingexpenditure on its current account of 1.7m, capitalising on its high standingwith customer satisfaction surveys.

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    Smile and First Direct advertise their general online banking services, as wellas their current accounts. cahoot and Egg have also advertised widely. All fourare competing vigorously for the same market niche, which might account forhigh main media expenditure levels in the year ending March 2004.

    Bradford & Bingleys Marketplace, which is a portal to a wide range offinancial products and services, is a type of financial supermarket. Here, thebank shows a much wider range of products than would be expected from asmall bank. It is directed at a slightly different market, with a greateremphasis on investment products.

    Overall, in the year ending March 2004, main media advertising expenditureon general online banking services reached just over 3m. Of this, Smileonline banking accounted for the largest share (25.5%), followed byBradford & Bingleys Marketplace (23.4%) and First Direct banking services(18.1%).

    Table 9: Main Media Advertising Expenditure onOnline Current Accounts (000), Year Ending March 2004

    Smile Internet current account 1,676

    First Direct Internet/online bank 206

    Intelligent Finance (IF) current account 141

    Black and White Mortgage 80

    Sub-threshold brands 29

    Total 2,133

    does not sum due to rounding by source

    Source: Nielsen Media Research

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    4. Internet Banking Electronic Banking

    Website Quality

    Table 11 contains the findings of a customer satisfaction survey relating toonline banks websites. The survey covers customers assessments of websitespeed, ease of use and the login process. It also includes aspects thatcustomers rate as being less important, such as customer support, the initialregistration process and attractiveness of design.

    The ranking of Smile as first, and its parent Co-operative Bank as third,supports the opinion that the customer-centred view is important. FirstDirect, ranked second, was the first to establish remote-site banking, so itsexperience in speedy delivery has paid off. Nationwide was the first providerto offer an Internet banking service and its performance reflects itsmember-centred approach.

    It is perhaps surprising that IF appears so far down, along with its parentHalifax. This may prompt some of its customers to move to other, more

    convenient, providers.

    Table 10: Main Media Advertising Expenditure on GeneralOnline Banking Services (000), Year Ending March 2004

    Smile online banking 774

    Bradford & Bingleys Marketplace 711

    First Direct banking services 549

    Egg online banking 445

    cahoot interactive banking 418

    Yahoo! personal finance 76

    Sub-threshold brands 68

    Total 3,041

    Source: Nielsen Media Research

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    Electronic Banking 4. Internet Banking

    Table 11: Customer Satisfaction Ratingsof Online Banks Websites, April 2004

    Score Change

    Average bank 3.9 0.2

    Smile 4.5 -0.1

    First Direct 4.4 0.2

    Co-operative Bank 4.3 0.5

    Nationwide 4.1 0.3

    HSBC 4.0 0.1

    cahoot4.0 0.2

    Lloyds TSB 3.8 0.3

    RBS 3.8 0.1

    NatWest 3.8 0.5

    Egg 3.7 0.1

    Barclays 3.7 0.1

    Halifax 3.7 -

    IF 3.6 0.1

    Alliance & Leicester 3.6 0.4

    overall opinion, mean score out of 5

    compared with the first quarter of 2003

    Note: table shows scores for all online banks for which 95+ ratings were collected in thefirst quarter of 2004.

    Source: Virtual Online Banking Survey, April 2004

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    4. Internet Banking Electronic Banking

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    Electronic Banking 5. Automated Teller Machines

    5. Automated Teller Machines

    BACKGROUND

    Automated teller machines (ATMs) are also known as cash dispensers or cashmachines. They are computerised self-service devices that allow the holder ofan appropriate cash card with a personal identification number (PIN) towithdraw cash from their account and access other banking services.

    In 1967, the cards that were introduced were cheque guarantee cards. Thesehad a value of 50 and could only be used for withdrawing cash. However,the original Barclaycard and Access (from a consortium led by the thenMidland Bank) soon developed credit card functions and became widely usedin retail shops. At the same time, the ATM became widely spread andconsortia developed to embrace most banks and building societies. Only in

    the 1990s have ATMs been developed in other retail sites and provide agreater variety of functions.

    MARKET SIZE

    The number of owned ATMs is growing fast and more than matches currentdemand. Between 2000 and 2003, the number of ATMs rose by 40.8% to46,461. Key Note estimates that, in 2004, the number of ATMs will increase bya further 5.3% to 48,931. The majority of ATMs (an estimated 67.3% in 2004)are located in banks or building societies.

    Table 12: The Number of Owned ATMs by Location, 2000-2004

    2000 2001 2002 2003 e2004

    Bank or building society 29,102 30,072 31,317 32,025 32,920

    Independent ATM deployer 3,898 6,594 9,508 14,436 16,011

    Total 33,000 36,666 40,825 46,461 48,931

    Of which:

    Located at branch 19,151 19,145 19,227 19,367 19,420

    Located elsewhere 13,849 17,521 21,598 27,094 29,511

    Table continues...

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    5. Automated Teller Machines Electronic Banking

    According to the Association for Payment Clearing Services (APACS), the

    number of transactions made through ATMs rose by only 4.6% between 2002and 2003. This situation is partly caused by the introduction of independentATM operators, which can make a profit from the fees charged for thewithdrawal of cash. The location of ATMs at non-branch outlets gives banksmore publicity, makes money available when customers need it, and benefitsboth shops and banks.

    CONSUMER TRENDS

    ATM UsageTable 13 shows that the most regular users of ATMs are under the age ofretirement and, in particular, aged 44 years or younger. In 2004, people agedbetween 25 and 44 years are estimated to account for highest usage(of 80%), followed by those aged between 16 and 24 years (78%). Peopleaged 65 years and above are more likely to use cash or cheques and it isestimated that only 41% will use ATMs in 2004.

    ...table continued

    ATMs automated teller machines

    e Key Note estimates

    the figure for 2003 may be affected by a change in the reporting basis

    includes those ATMs at supermarkets and other retail outlets, post offices, leisure/social outlets, public transport, motoring/services and workplace sites, together withmobile units and those which cannot be classified

    Source: APACS