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Last October, Patelco, a tiny San
Francisco credit union with just 200,000 customers, launched a full suite
of wireless banking services every bit as sophisticated as those from national
competitors.
It makes sense that big banks would
be the first to offer high-tech services such as electronic bill pay and
online loan applications. After all, banking giants like Wells Fargo and
Citibank have the ready funds to pour into new ventures they believe will
help them attract and retain customers. But why would a tiny institution
such as Patelco find it worthwhile to invest the five to six figures annually
that it costs to be on the bleeding edge of mobile?
It's clear that consumers are taking
to remote banking options. According to a recent report by research firm
Gomez, 18.5 million U.S. consumers, or almost a quarter of adult Internet
users, are banking online. That creates an expectation that wireless banking
will also become popular.
But Patelco has an even stronger basis
than most financial institutions for believing that wireless services might
be attractive to its members because its marketing strategy is designed specifically
to attract customers interested in high-tech alternatives to the teller line
or the ATM. This is clear just looking at the percentages of customers using
online services. While Bank of America, Wells Fargo, and Chase have about
9 percent, 14 percent, and 2 percent, respectively, of their customers using
their online services. Patelco has an almost-unheard-of 28 percent penetration
rate. A full 80 percent of its customers have access to a personal computer,
and 64 percent have Internet access.
This customer profile reflects Patelco's
roots in the communications industry. Although workers from all sectors are
eligible to join, the credit union was founded in 1936 by five PBX installers
to serve their fellows. With 30 branches and assets exceeding $1.9 billion,
Patelco grew to be the fourth largest credit union in California and the
12th largest in the U.S. Its recent wireless banking offering was specifically
designed to attract and keep more technology-hungry customers.
John Shields, Patelco's senior vice
president of e-business, says mobile is a smart marketing move. "Besides
being in the Bay Area, where the main industries are technological," says
Shields, "we actively go after high-tech companies, whose employees generally
make a better salary, can qualify for more loans, have more stable jobs,
and have better job prospects in the future."
Patelco has long tried to attract
customers by offering sophisticated technology. "When the debit card was
introduced in 1994, we offered it a year before Wells Fargo and BofA," says
Anita Macias, Patelco's vice president of marketing. That same year, the
credit union became one of the first to launch online banking.
Shields believes that, although the
upkeep costs of online services run higher than the revenue these services
bring in, the payoff in terms of customer acquisition and retention makes
the investment worthwhile. In fact, industry figures show that customer loyalty
actually increases the more customers use their bank's online services. "Offering
online services has really upped our retention," says Diana Moy, Wells Fargo's
vice president of product development in the Consumer Internet Services Group.
"Our members are 36 percent less likely to leave if they access services
online." Because all but 2 percent of Patelco's wireless customers also bank
online, Shields expects the mobile offering to show the same retention benefits.
THE COSTS OF DOING BUSINESS WIRELESSLY
According to Shields, Patelco's Internet
offering, known to customers as PC-24, has totted up about $380,000 in hardware,
software, development, and ongoing maintenance ($30,000 a year) costs since
its 1995 launch. All in all, it spends about $0.20 a month for each of its
55,000 online banking members, according to Macias. Patelco's research found
that other banks' costs ranged from $0.08 to $0.30.
Patelco didn't spend a considerable
amount to add the wireless interface, which launched in October 2000. Mobile
applications developer MShift took on the job of building the interface,
turning out Patelco's project in five weeks for a $5,000 setup charge plus
a $2,500 monthly fee. By October 2001, after one full year, the wireless
services will have added a grand total of $35,000 to Patelco's electronic
banking expenditures. It will have increased the cost per online banking
member by 25 percent to about $0.25 per user.
The big banks with which Patelco competes
for customers were reluctant to release information about their costs, citing
worries about competitive advantages. But Tom Croen, CIO for First Technology
Credit Union in Beaverton, Ore., says First Tech rents wireless service from
an applications service provider, spending from $7,000 to $8,000 a month
to offer mobile banking to its 78,000 members. That works out to about $1.15
per customer.
Neither Patelco nor analysts expect
to see that investment result directly in increased revenues. "It's sort
of a loss leader," admits Patelco's Shields. "We don't expect to be able
to cross-sell other products, and we're not going to pass the charges on
to customers in the way of fees for using wireless or PC-24 access." Analysts
say that banks that hoped to make money with online banking were disappointed
with the outcome - at this point, it doesn't have a direct impact on the
bottom line either through increased revenue or cost savings. "At best, banks
broke even with Internet banking, and in many cases, they lost money," says
Andy Bartel, Giga Information Group's senior researcher for e-commerce.
DOES WIRELESS EQUAL RETENTION?
What Patelco is hoping is that by
offering wireless options it will have yet another tool to convince customers
to stay. "Banks figure that if they don't have as many options as their competitors,
they'll lose customers," says Bartel. Just by increasing the number of choices
members have, wireless services could increase retention.
"The average customer gives us an
average of $160 in profits annually," says Patelco's Shields. "The longer
they stay, the more services they use. And the more services they use, the
more profitable they become."
Patelco has found that its members
stay with the credit union an average of 9.5 years. But if they accept four
or more of Patelco's services (such as loans, credit cards, checking accounts,
and the like), they stay 10.1 years on average. Customers who use fewer than
four services stay an average of 8.9 years.
Retaining customers pays off in two
ways. First, it costs much less to keep an existing customer than it does
to gain a new one - savings realized by retaining current customers are at
least in the 30 to 50 percent range, according to Chris Musto, vice president
of Gomez's Financial Services Group. Second, those customers are also easier
marks for upsells. "Fundamentally, banks make money by lending," says Bartel.
"And it's easier and cheaper to convince an existing customer to take a loan
with your institution than it is to sell it to a brand-new customer."
"It's pure profit, at a much higher
margin than if I'd had to spend again to attract those customers," says Paul
Jameson, Gomez's senior analyst for banking and payment services.
Not only are Patelco's customers more
enthusiastic users of technology, they're also more affluent than the average.
This is another reason why offering wireless services makes sense for the
credit union. According to Patelco's 1999 membership study (the most recent
available), its members' average income is $75,307, with more than 66 percent
owning their own homes. This kind of customer tends to use the bank for what
Gomez's Jameson calls "a wealth management situation." That does translate
into profit for Patelco. "Our online users are across the board much more
attractive," says Shields. "They carry balances that are about 20 percent
higher [than our other customers] in both savings accounts and loans, and
they use more services, including loans and checking accounts, where there's
almost 100 percent penetration."
LOWER OVERHEAD
While financial institutions aren't
expecting wireless banking to increase revenue, it could bring down costs,
at least theoretically. The cost of serving a customer wirelessly is far
less than using a human to do the same job. The figures are impressive: Management
consultancy McKinsey & Co. estimates that seeing a customer in a branch
costs an average of $1.07. In contrast, serving that customer via mail costs
about $0.73; when using an ATM, the costs drop to $0.27. Serving customers
wirelessly is even cheaper: $0.15 per customer, with Internet services weighing
in at an even more cost-effective $0.10 per transaction - assuming that the
costs of building the infrastructure have already been absorbed.
However, "That's a pretty big assumption,"
says Joe Morford, a financial services analyst for investment brokerage Dain
Rauscher Wessels. "Especially since once you build the infrastructure, you
have to keep building it, maintaining it, keeping it up to date." He bases
this analysis on his observations of the development and maintenance costs
for Internet banking services. For example, Wells Fargo, which launched Web
banking in 1995, plans to spend $375 million this year on Web services, $175
million more than it spent in 2000, Morford says. None of the financial institutions
that brief him has released details on how much of their technology spending
was wireless-specific, he adds.
A WILD BET?
For banking customers, mobile services
are a win-win situation: They get more services for almost no extra outlay
of cash. But for financial institutions, mobile offerings represent a relatively
significant investment in technology. No one can yet prove that mobile offerings
will attract or retain the type of big-money, profitable customer that every
financial institution wants.
Is it the time for financial institutions
to invest heavily in mobile offerings? No. As Gomez's Musto puts it, "Based
on our research, there should be no big rush to be first to market - consumer
adoption of wireless Internet devices is pretty low at this point. We tell
banks that if they don't have a wireless platform installed by the end of
this year, they won't be in trouble."
But for smaller institutions such
as Patelco, mobile offerings could be a service that sets them apart from
direct competitors and puts their service offerings in line with those from
behemoth competitors like Bank of America. Because Patelco is using an application
service provider (ASP) model that hasn't and won't cost the company much,
it's taking minimal risk.
"It's an experiment," said Patelco's
Shields. "If it doesn't work, we'll give it up in a year or two." If the
experiment doesn't succeed, that year or two of trying will cost Patelco
just $35,000 to $75,000; its net income in 2000 was $28 million. Mobile offerings
do have the potential to lock in the very best kind of financial customer.
Patelco thinks they will.
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