Electronic Banking

Financial Services:

Market Assessment Publications Ltd.
Market Study September 2004

In the late 1990s, the concept of electronic banking was heavily promoted and 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 traditional high-street branches were over. Instead, it was thought that cards or electronic purses would take over the role of money in only a few years. When people needed financial services, they would visit the local supermarket or contact their telephone supplier to access a full banking service for all their needs remotely, through a call centre. Alternatively, customers would load their smart card using mobile telephones or manage their financial affairs through interactive television in the evenings.

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

In their anxiety to promote heavy investment in new distribution channels for banking, strategists of the late 1990s overlooked the concept that customers did not want this technology. Instead, many require a friendly and efficient service. Exclusive research conducted for this Market Assessment report by BMRB Access in April 2004 shows that although a significant proportion of the 977 respondents claimed to use their bank electronically, very few of them showed any enthusiasm for electronic banking services. The survey indicates that people are not very interested in automated telephone services, nor in being advised on their financial affairs by their bank. In addition, they are even less interested in using electronic purses or a cashpoint for all their financial affairs, and are not at all interested in interactive television banking or downloading cash to their mobile telephones. In fact, a considerable proportion of the respondents believed electronic banks to be insecure and, as such, would not trust them to handle their affairs. Although many of these respondents were elderly and in the lower 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 wide range of services available to them. In Singapore, the introduction of electronic contactless smart cards has been pioneered by the road charging system and there is a consensus (85%) in favour of these cards.

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

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

Banks need to be able to show that they have mastered electronic banking technology, can offer full security and demonstrate that they can provide a service that meets customer’s needs. When this happens, customers in the UK will be ready to accept the technology that is already being rolled out in Singapore, Hong Kong and South Korea.

Executive Summary

1. Introduction

Overview 3

DEFINITION 4

2. Strategic Overview

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 11

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

ADVERTISING 12

The Consumer 12

MARKET FORECASTS 13

3. Telephone Banking

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

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 Online
Banking Services (£000), Year
Ending March 2004 30

Website Quality 30

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

5. Automated Teller Machines

Background 33

MARKET Size 33

Table 12: The Number of Owned ATMs by Location, 2000-2004 33

CONSUMER TRENDS 34

ATM Usage 34

Table 13: Regular Users of ATMs
by Age Group, 2000-2004 34

Mobile Telephone Usage 35

DISTRIBUTION 35

6. Credit Cards

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

Background 43

Regulations Introduced
Since 1996 43

Table 16a: Regulations Governing Electronic Banking 43

Table 16b: Regulations Governing Electronic Banking 46

Money Laundering Compliance 47

Fraud 49

Identity Fraud 49

Viruses 50

Operational Risk 51

8. Electronic Bill Presentment and Payment

BACKGROUND 53

BACS EBPP 53

Commercial Payments 53

DISTRIBUTION 54

9. Electronic Trading

Background 55

Securities Trading 55

Funds Supermarkets 55

10. An International Perspective

Market Developments 57

Mobile Banking Services 57

Nordea 57

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

Competitor Environment 60

Cashless Payment Instruments 60

Belgium 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 Netherlands
by 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

11. PEST Analysis

POLITICAL Factors 67

ECONOMIC Factors 67

Table 25: UK Economic Indicators
(£m, index 2001=100, index
2000=100 and %), 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 85

In 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 92

Television 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

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

Don’t Know 110

None of These 111

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

13. Company Profiles

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

US INTERNET PAYMENTS 133

Market Leaders 133

Table 39: Forecast Compound
Annual Growth in US E-Commerce-Driven Payment 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

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

Associations 147

Publications 147

General Sources 147

Government Publications 148

Other Sources 148

Bonnier Information Sources 149

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