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Why are so many on-line banking ventures--start-ups and incumbents alike--foundering? A business that can conduct such a high proportion of its transactions electronically would seem well suited to move on-line rapidly. Yet, perversely, the rate at which customers around the world are adopting Internet banking varies enormously, from a few percent to double digits, both among countries and among banks within the same country. In an attempt to find out why rates are so variable, McKinsey studied 65 leading banks in ten European countries.[1] The findings show that in bringing customers on-line, factors (the efforts that banks make to attract customers to on-line operations) are almost as important as factors (demand from Internet-savvy customers for electronic services). The study also indicates which elements of those push and pull factors really matter, both for converting existing customers and for attracting new ones; which banks have the best position for success on-line; and what the others can do to catch up. Finally, the study makes it clear that banks will have to pursue on-line customers, however difficult the environment may seem. Despite the presence of more than 2500 Western European banking sites on the World Wide Web--some banks have as many as three, each targeting a different customer segment--only eight million people in the region use the channel either to check their accounts or to make transactions. In other words, about one Western European Internet user in four banks on-line. The study confirms the relatively low adoption rate: by the middle of the year 2000, existing customers who had moved on-line accounted, on average, for only 8 percent of any given bank's customer base. The banking industry was even less successful in acquiring new customers on-line: at the same time, they made up only 2.9 percent of the customer base. The difference between the rates for existing customers converted to the Internet and new ones acquired on it reflects the European banks' low customer churn rate--just under 5 percent a year. So the fact that the on-line acquisition rate is roughly equal to 60 percent of yearly churn means that the Inte rnet could become a fundamental driver of change in the banking industry's market dynamics. McKinsey's study went on to consider the pull factor of Internet use, country by country. It also compared customer conversion rates with push factors such as bank size (measured by the number of customers or employees or by the size of the asset base), cost-effectiveness (the cost-to-income ratio or cost per asset managed), channel diversification (the number of automated teller machines per customer), and organizational structure (whether banks offer only e-banking or include brokerage services as well and whether on-line operations are spun off or integrated). The results confirmed anecdotal evidence that most conversions of existing customers arise from their demand for on-line services: pull accounts for 60 percent of conversions. But that still leaves 40 percent of customers whom banks can try to push on-line. And push factors are the only statistically relevant explanation for differences in the banks' ability to attract new on-line customers (Exhibit 1). Common themes did emerge from the study. Smaller banks convert existing customers and acquire new ones more actively, though the leverage effect of size is especially strong in winning new customers. Smaller banks do twice as well as their larger counterparts among people who switch banks; presumably, they offer the newcomers more in hopes of quickly increasing their share of customers in a business with traditionally low churn off-line. As for the remaining push factors, brokerage is typically a driver for acquiring customers quickly, and their familiarity with other kinds of electronic banking, such as ATMs, does help banks move current customers on-line more quickly, while the potentially huge savings in transaction costs give banks a strong incentive to do so. …
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