To be presented at the

BRITISH ACADEMY OF MANAGEMENT CONFERENCE, London 2002

INTERNET BANKING: SOME EMERGING TENDENCIES IN THE UK

Professor Feng Lii
The School of Management
University of Newcastle upon Tyne
Newcastle upon Tyne NE1 7RU, UK
Telephone: +44 (0)191 222 7976; Fax: +44 (0)191 222 8131; E-Mail: Feng.li@ncl.ac.uk
ABSTRACT
In the last few years considerable studies have been undertaken on Internet banking both in
the UK and elsewhere in the world, especially in terms of the development and adoption of
various strategies and business models, channel development and coordination, product and
service offering including new product and service development for the Internet and other
new channels such as mobile phone and iDTV, and a series of other emerging issues. This
paper critically reviews previous studies and highlight a number of useful frameworks, which
are then used to examine Internet banking development in the UK. We identified a total of 26
banks offering Internet services in the UK, and through an online survey of all 26 and a more
intensive case study of 8 of them, we will paint a general picture about Internet banking
development in the UK, identify novel innovations in Internet Banking strategies and business
models, and contribute to our understanding of a series of emerging issues. Several themes
for future research are also highlighted.

INTRODUCTION
Financial deregulation, combined with rapid technological developments and increasing
competition, has facilitated radical changes in the banking industry (Gandy, 1998). Until
recently, the monopolisation of distribution channels has been the cornerstone of most banks
strategy; and in the last few years, the Internet has increasingly been used as a new
distribution channel. The Internet not only allows banks to serve existing customers more
cheaply and conveniently, but also acquire new customers in previously unreachable markets.
At the same time, the Internet lowers barriers to entry in the banking industry, allowing new
players, often equipped with new technologies and new business models, to enter the market

(Dannenberg and Kellner, 1998).

In particular, some emerging strategies and business

models are leading to the deconstruction of the integrated banking value chain and are
challenging the competitiveness of the integrated banking model that has been dominating the
industry for centuries (JP Morgan, 2000; Li, 2001). Social changes, such as the changing
demography and life style of customers, have put new pressure on the banking industry to
evolve (Hamel and Prahalad, 1994; Seitz and Stickel, 1998; KPMG, 2000). The development
of other new technologies such as mobile phones and interactive digital TV (iDTV) has
further complicated the scenario.

Since the late 1990s, considerable studies have been undertaken on Internet banking both in
the UK and elsewhere in the world.

These studies have developed a series of useful

frameworks which can be used to examine the development of Internet banking in the UK.
Through a thorough literature review, we will identify some of the frameworks and key
issues in Internet banking. Then using the evidence gathered from recent empirical work, this
paper will examine the threats posed by new entrants to existing banks, investigate the
various Internet banking strategies and business models that are emerging in the UK, and
discuss a series of emerging issues. We identified a total of 26 banks offering Internet
services in the UK, which were investigated through an on line survey, and supported by a
more intensive case study of 8 of them via semi-structured interviews. The research has
revealed that new entrants in their various forms are posing a serious threat to incumbent
banks, not necessarily in eroding the latters market share and cherry picking their most
profitable customers, but primarily in changing the rules of competition and raising the
general expectation of customers for services from all financial companies. In the last year or
so, a series of new business models have been adopted by both new entrants and existing
players, often based on distinctive strategies and future visions of banking. These and a
series of other related issues will be discussed in detail in the paper.

In the next section, previous studies on Internet banking will be critically reviewed, and
related issues will be highlighted. Following that, the frameworks developed by previous
studies will be used to examine Internet banking development in the UK. The research
design and the background of the empirical work will be illustrated, and some emerging
tendencies will be discussed. This is still a rapidly evolving area, and new research is clearly
needed along several themes, which will be highlighted in the final section of the paper.

INTERNET BANKING: PREVIOUS STUDIES AND THIS RESEARCH

Strong competition in the financial industry, particularly from virtual banks and other new
entrants, are challenging the business models of the established players (Datamonitor, 2000;
Porter, 2001; Li, 2001). This section reviews previous studies on the theory and practice of
Internet banking, and highlights a series of issues particularly in terms of how the new
entrants are challenging the traditional banking strategies and business models; how the
Internet can be used achieve competitive advantage in the banking market; and what Internet
banking business models have been deployed.

Internet banking is the use of the Internet as a delivery channel for the provision of financial
services (Katz and Aspden, 1997). It allows the interactive communication between financial
companies and their customers, where an extensive amount of information can be exchanged
electronically, and banking transactions can be conducted through the Internet and other
technologies such as mobile phone and iDTV. So far most Internet banking transactions are
conducted from the clients PCs, but increasingly other devices - mobile phone, Personal
Digital Assistances (PDAs), and Digital TV - are enabled by some financial institution
offering Internet banking services (Maude, et al, 2000; Reuters Business Insight, 1998b).

In the UK, Internet banking services have been provided by both existing banks with brick
and mortar branches, and branchless, Internet-only banks (Gillard, 2000; Li, 2001), offering
both traditional products and new services such as EBPP (Electronic Business Payment and
Presentment) and account aggregation (Furst, et al, 1998). Internet banking also facilitates
the delivery of products and services in innovative manners (Chia, et al, 2001). The main
benefits to banks can be classified into three main categories (Reuters, 2000c). In the first
year after launching, the banks could gain short-term benefits in competitive equality,
customer retention and customer acquisition. During the 12-18 months, companies would
gain mid-term benefits, such as multi-channel integration, information management,
customer segmentation, consolidated views of customer and customers migration to
appropriate channels.

In the long-term, organisations could expect cost savings, target

products and services, cross-selling and new revenue generation. Implementing Internet
banking also enables the provision of non-traditional banking services such as insurance and
stock brokerage (Marshall, 1998; Ballantyne, 2000). Most of all, Internet banking tends to be
adopted firstly by affluent, young, better-educated, and the usually the more profitable

customers (JP Morgan, 2000). Hence investing in Internet banking is strategically important
to most financial companies.

The Challenge from New Entrants

New entrants are threatening existing banks by offering customers better price and greater
choices, and they often target the most profitable segments of customers in the most lucrative
product range (Boss, et al, 2000). Many of the new entrants are also based on different
business models, geared towards exploiting their superior customer management skills - an
important attribute for success in the financial service industry (Kanter, 2001). This is
especially significant in the UK as Reuters Business Insight (1999b) found that UKs
financial service industry has the highest level of new entrants in Europe, both in the type of
entrants and the product range. These new entrants together are able to offer the full range of
financial products currently available from incumbent banks (Aldridge et al, 1997).
Examples include retailers and utility companies, such as Marks and Spencer in life and
pensions, Kwik-Fit in motor insurance, British Gas in household insurance, Boots in accident
and health insurance, and Tesco in insurance, loan and mortgage (Barnes & Hunt, 2001).

Johnson et al (1995) predicted that information, software, electronic payment and multimedia
companies will also challenge existing players in the financial market.

A series of

entrepreneurial start-ups (e.g., Mondex, First Virtual, DigiCash and CyberCash) have
emerged to provide financial services; and established players from other industries such as
AT&T, AOL, Microsoft, First Data Corporation, and ADP are also predicted to be major
financial institutions in the future (Boulton et al, 2000). Furthermore, according to Beker, et
al (2001) portals are now presenting a real threat to the banking industry. Although portals
have helped opening up the financial world to millions of people by offering free information
about the stock market, banking and insurance products and other financial services (e.g.,
Microsoft's MSN MoneyCentral, Yahoo! Finance, and AOL's Personal Finance), as well as
providing an effective means of advertisement for banks and stock brokers (Smith and
Schmitt, 2001), they are increasingly seeking control of the interface between banks and
customers (Delong and Froomkin, 2001). The changing competitive environment of the
banking industry has called for a radical rethinking of the strategies and business models of
the banking industry that have brought them success in the past (Porter, 2001; Johnson and
Scholes, 1999; Hax, 1991; Henderson, 1989; Andrews, 1987; Rumelt, 1980).

The Internet as Part of a Multi Channel Distribution Strategy

Controlling the distribution channel has been critical to the long-term competitiveness of
most banks, because alternative options, such as differentiation in products, services and
price can be easily copied by competitors hence only brings short term competitive advantage
to the bank (Devlin, 1995; Zenof, 1989). In the last few years, the Internet is increasingly
used as a new distribution channel by many banks (Mols, 1999). Barnes and Hunt (2001)
argued that the Internet has provided financial institutions the opportunity to differentiate in
the market; and the ability of banks to be among the first to master the Internet-based
distribution and communication will determine their competitive position in the future (e.g.,
Ghorab, 1997). By using this channel, many products can be offered at low costs to potential
customers without the constraints of place and time. Indeed, as the number of Internet users
continues to grow rapidly, Internet banking is increasingly seen as a compulsory distribution
channel for most banks (e.g., Porter, 2001; Furash, 1999).

Using the Internet as a distribution channel has three main attractions (Mallen, 1996). The
first one is the convenience of conducting banking transactions from an open and low cost
channel anytime, anywhere.

Secondly, the Internet allows the customers to view their

account details on the screen, which minimises the possibility of miscommunication that may
present when using telephone banking. Lastly, the Internet also allows the provision of new
services, such as real-time trading, EBPP, and fund transfer; and the customers can also
download their account details into financial software so that different scenarios can be
stimulated on the PC, providing a clearer understanding of personal financial dynamics. As
the Internet increases the scope for self-service in banking, it also reduces the need for
physical distribution channels (Boyd, et al, 1994). However, the branches and call centres
still need to be maintained because they are important for complex products and services
(Reuters Business Insight, 2000b; Bekier and Nickless, 1998). It has been argued that bank
branches will need to be transformed into new forms, such as supermarket branches, advisory
centres, investment centres; the ATMs will need to offer extended services; and call centres
need to evolve into multi channel contact centres (Mendoca and Nakache,1996; Bekier and
Nickless, 1998).

Product and Service Offering Online

Devlin (1995) and Zenof (1989) found that even though banking products and services can be
copied fairly easily by competitors, the invention and creativity needed in providing them can

bring a competitive advantage, at least in the short-term, to the bank. At the basic level,
Internet banking means the setting up of a Web page by a bank to give information about its
product and services.

However, at more advanced levels, it involves the provision of

facilities such as accessing accounts, funds transfer, and buying financial products and
services online, which is called transactional online banking (Sathye, 1999).

In relation to transactional online banking, Dayal, et al (2000) further argued that it is

important to always treat the Internet as not only another distribution channel (i.e. one that
exist just to sell or generate leads for offline products), but also as a new medium with its
own capabilities and requirements, i.e., one that exists to successfully build the online brand.
Anybody wanting to build a winning digital brand has to dramatically expand the benefits
they offer to their customers. The best offers should provide a complete and thorough endto-end consumer experience, that is, from the promise made by a product or service all the
way to its delivery to the consumer. Creating digital brands involves the provision of broader
consumer benefits than those of the offline world (Ladderer and Hill, 2001).

According Tower group (2001), the development of online products and services should
consider the objectives of Internet banking. Objectives such as cutting cost, reducing check
volumes, increasing customer base and increasing customer retention should be mapped into
specific product and service offerings.

Jayawardhena and Foley (2000) stated that the

adoption of online products and services should consider customer expectations. Based on
his research Gandy (1998) categorised customer expectations into four categories: view-only
functions, account control functions, new services application functions and reconciliation
functions.

View only functions are concerned with addressing details about balances and the last few
transactions made by the customers, thus reducing the workload of bank staff at both branch
and call centres and the congestion at ATM. Account control functions are required to
provide customers with a broad range of access and control over their accounts, such as
transferring funds between accounts, the creation or amendment of standing orders and
paying bills to third parties (usually utilities companies, e.g. gas and electricity). New
banking service application functions (applying for new accounts- saving accounts, mortgage,
loans, etc) are seen as crucial to banks, as they provide an opportunity to attract new
customers as well as retaining the existing ones. To maximise profit and revenue from their

customer base, it is essential that banks also offer their customers non-core banking services,
such as credit cards, mortgage and insurance through cross selling (Rayport and Sviokla,
1996). Finally, since an increasing number of customers today use individual software
package to manage their finance, banks should offer the facility of integration with software
packages for account reconciliation (Levesque and McDougal, 1996). With this integration,
customers are able to reconcile their accounts by downloading their own financial
information from their bank accounts into financial management software. This framework
will be used to analyse the product and service provision in the 26 banks offering Internet
services in the UK.

Electronic Bill Presentation and Payment (EBPP)

As a new service offered by some Internet banks, electronic bill payment service helps to
solidify and maintain the bank's status as the primary provider of financial services (KPMG,
2000). EBPP services involve the online collection of information from billers about bills
and the payment of those bills, usually for a small monthly fee. With this system, certain
bills are remitted to consumers over the Internet or a paper bill is scanned and presented
online. It allows customers to set up an arrangement in advance to make an automatic funds
transfer to billers through an Internet banking system, direct payment (automated clearing
house), PC banking, a telephone, or a third-party provider.

The purpose of the electronic billing is said to not just obtain payment but also empower the
customer. Thus the shift from paper-based presentment to EBPP will transform billercustomer relationship (Milroy and Li, 2001). Furthermore, it encourages the electronic
alliances (Li and Williams, 1999) between banks, the bill issuers, the customers and the
creditors; as well as streamlining the traditional billing process by eliminating paper work
and reducing lead time in billing operation. Datamonitor predicted that that electronic bill
payment and presentment (EBPP) will grow from $175 million at the end of 2000 to $2.5
billion by the end of 2004 (Electronic Commerce News, 2001).

Account Aggregation
In early 2001, two leading American IT vendors, Yodlee and VerticalOne introduced account
aggregation.

In the US, major players such as Merril Lynch, Chase, Citigroup,

OnMoney.com, Ameritrade, Centura Bank and Fiserv have recently signed contracts with the
two vendors. Account aggregation is usually provided by financial institutions, web portals,

and other companies (aggregators), and it involves the retrieval and display of information
from various financial accounts (e.g., checking, savings, insurance, mortgage, credit card,
investment, and brokerage) and monthly bills. The most common method used today is
screen-scraping, in which the consumer provides the aggregator with his or her ID codes
and passwords; these are then used to access online accounts and to scrape information from
the account site. Generally, a third-party aggregator has no contract with the account-holding
financial institution (AHFI) and the AHFI assumes no responsibility for the accurate display
of this information by the aggregator (Reuters Business Insight, 2000a). Through account
aggregation, customers gain 24-hour access to all of their financial (and some other)
information on one web page, including insurance, brokerage, banking, loans, frequent flyer
miles, personalised news and more. Furthermore, the customers will be able to run analytics
on the newly aggregated portfolio to help them plan for their future, including tax and
accounting tools, and risk calculators providing information on how their total portfolio is
weighted (Klinkerman, 2001).

Unsurprisingly, there has been strong resistance from many banks to account aggregation, as
they do not like the idea of a third party having access to their clients information (Massaro,
2001). Concerns were also voiced because of the rapid growth in the past two years of small
aggregators with few assets. It was feared that these aggregators would create problems for
financial institutions, specifically, that account information would be reflected inaccurately or
that consumers might act in reliance on such data and then turn to banks to solve their
problems. Moreover, there were also concerns that inadequate security would result in a
significant increase in unauthorized transactions for which someone would be financially
liable. This was further magnified because private consumer information was being accessed
in a manner outside the AHFI's control, potentially producing dramatic increases in the
amount of financial data available at small, unknown, non-financial companies web sites.
Issues in terms of customer privacy, the lack of adequate regulation for aggregators, and the
liability when things go wrong also needed to be resolved. However, it has been argued that
mobile access to financial information will serve as a key driver for Internet account
aggregation in the near future (The Banker, 2001).

Mobile Banking
Wireless communications may fundamentally change the way organisations interact with
their customers. Maude et al (2000) discussed some of the transactional services that are

rapidly appearing, for example, stock-trading using a mobile phone or Personal Digital
Assistances (PDAs) (e.g., in Fraser Securities-Singapore, Fidelity-US and Fimatex-France);
mobile bill-payment services (e.g., HSBC, MeritaNorbanken-Scandinavia); and using mobile
phones as POS (point-of-sale) payment devices. They predicted that over the next five years,
as the data transmission speeds increase and mobile devices grow in sophistication, the range
of mobile banking services will increase too. Secure online verification will enable the
customers to apply for a loan using a mobile device for example, and receive an instant
authorisation so that they could use the money to pay for things electronically there and then.

The current mobile technology platforms have limited the actually applications of Mbanking. The speed of transmission is too slow for Internet access in many applications; and
the Internet enabled handsets are still not user friendly (especially the phone keypads) and the
web content is often poorly displayed on the small screen. Security is also a main issue in
current mobile devices (Young, 2000, Lundquist, 2000). However, with the coming third
generation (3G) mobile network, it has been predicted that an entirely new mobile telephony
experience will be on offer, with the ability to send and receive vast quantities of data at high
speeds. The 3G networks will provide graphics and multimedia data at a speed several times
quicker than most PC modems; and with 3G networks, mobile operators will shift away from
offering mostly voice services to offering a variety of data based services, which will provide
the basis for full-fledged M-banking (Heath and Wingfield, 2001). It remains to be seen
whether such predictions will materialise, and when.

Interactive Television Banking

The development of interactive digital TV (iDTV) started in the early 1980s. In the US,
Northeastern Powerhouse Chase Manhattan Bank saw great potential in the ubiquitous TV as
a medium for their earliest home banking pilots (Hoffman, 2001); and interactive television is
seen a means of introducing on-line financial services to a much bigger market than the PC
based Internet (Maude et al, 2000; Bansal, 2001). Today, with the Internet still considered
unfriendly by many, iDTV provides an ideal medium to bring E-commerce to customers,
even for those ignorant of new technologies (Maude et al, 2001). Isabella Fonseca, an
analyst with Celent Communications claimed that interactive TV as a financial distribution
channel should be adopted if financial institutions are to remain competitive (Hoffman,
2001).

The reality, however, has been very different. Contrary to common belief that UK banks will
be leading the way in iDTV adoption, Brine (2001) identified several reasons why its roll-out
has fallen behind all predictions, including digital technology availability, the set-top boxes
and site content. In the UK, the majority of high street banks were quick to recognize the
advantage of digital technology. These banks offering through interactive TV include access
to current, savings and credit card accounts, standing orders and direct debits, bills payment
and transfer money between accounts. Whilst expectations have been running high, some
iDTV experts believe that banking by interactive television is not going to happen anytime
soon as the problems still exist in many areas. The television is not necessarily a good device
for financial services, especially since banks already have their hands full developing and
managing more crucial channels like the Internet, telephone and wireless access (Reid, 2001).
Nevertheless, the potential of this channel is still there and we will examine the provision of
this service by UK banks.

Retail Branches and Call Centres

With the development of Internet banking most incumbent banks are redefining their branch
networks. Branch closure has been happening at a rapid pace, but at the same time some
banks are building mini branches in places like the supermarkets or petrol station, and others
have introduced mobile branches (e.g., Bank of Scotland); or changed the format of their
branches into Cafes (e.g. Abbey National). In addition, new generations of ATMs are used to
perform some functions of branches (e.g., Halifax, with its branch based Web Kiosk).
Through partnership, the post office branch network is also increasingly used as an
alternative to bank branches for some services (e.g. Cahoot).

Today, call centres have become a very important part of the Internet banking services as
they now serve as the supporting channel and are seen as crucial in providing a more
personable customer service due to the need for live assistance for online transactions
(Throne, 2001). In fact in many banks the call centres are increasingly evolving into multi
channel contact centres (Bateman, 2001).

Internet Banking Business Models

Internet banking can be implemented through several business models. The Federal Reserve
Bank of Chicago identified three Internet banking models.

The hybrids model - a

traditional bank with Internet delivery channel known as brick and click; the spin-off e-

bank model - setting up a pure electronic or virtual spin-off bank with its own new brand;
and the alliances model - developing strategic partnerships to create new products and
broaden a partners product offering. Similarly, Sharpe (2000) identified four models that
can be implemented by a traditional bank to have an online presence, i.e., pure Internet only
banking, on-line hybrids extending existing brand presence, on-line bank-branded alliances
with third parties, and on-line white labelling of financial services sold through third parties.
The problem with such classifications is they are not sufficiently detailed to be practically
useful as major differences exist within each category. Lis research (2001) identified eight
business models (Table 1), which will be used to assess the adoption of different business
models by the 26 Internet banks in the UK.

TABLE 1. INTERNET BANKING MODELS IN THE UK

Business Models

Characteristics

New Distribution Channel

Internet as part of multi-channel strategy but no radical change

in the basic strategy and business model of the bank.
Use the Internet to underpin key processes and integrate
different channels, and transform the main brand into an ebrand
Launched by incumbent banks and other financial companies
with its own e-brand name and product range, often based on
new business models
Pure virtual bank set up by non-financial companies.
Aggregate financial product information from multiple
sources and act as the access point for customers, often
focusing on particular product range or customer segments.
A bank out-sources its internet banking solution to a third
party, but the services bear the banks own brand name.
Non-bank company provide Internet banking services through
partnership with an incumbent bank but not bearing the banks
brand name.
Non-bank players with an established brand provides banking
services through the Internet.

E-banking

Baby e-bank

Pure play new entrants

Portal

On-line alliances
White labelling

Brand stretching

Source: Summarised from Li (2001)

Summary
In this section, previous studies on Internet banking are critically examined and a wide range
of issues were discussed. In particular, the review highlighted several emerging issues in
terms of the threats from new entrants, channel development, product and service offering,

business model adoption, new product development and a number of other issues. These
issues provide the frameworks for analysing the empirical evidence gathered from the UK.
The analysis will allow us to paint a general picture about Internet banking development in
the UK, identify novel innovations in Internet Banking strategies and business models, and
contribute to our understanding of Internet banking development in general.

INTERNET BANKING IN THE UK: A SURVEY OF 26 BANKS OFFERING

INTERNET SERVICES
The first part of the empirical work involves an online survey of all banks and building
societies offering internet services in the UK. Our comprehensive research identified a total
of 26 banks (Baby e-banks set up by incumbents are counted as separate banks) (Table 2).
The websites of these banks are examined using the frameworks developed by previous
studies. Secondary information from newspapers, published studies and other sources was
also collected. A relatively complete profile of each of the 26 banks was produced. The
main findings of the survey were summarised in Table3.

TABLE 2: INTERNET BANKING SERVICES IN THE UK.

This is not meant to be a complete list and other companies may also offer banking products
and services through the Internet and other electronic channels in the UK.
1. Abbey National (www.abbeynational.co.uk)
2. Alliance & Leicester (www.allianceandleicester.co.uk)
3. Bank of Ireland (www.bankofireland.ie)
4. Bank of Scotland (www.bankofscotland.co.uk)
5. Barclays Bank (www.barclays.co.uk)
6. Bristol & West (www.bristol-west.co.uk)
7. Cahoot (www.cahoot.co.uk)
8. Citibank (www.citibank.com)
9. Co-operative Bank (www.co-op.co.uk)
10. Egg (www.egg.com)
11. First Direct (www.firstdirect.co.uk)
12. First-e (www.first-e.com)
13. Halifax (www.halifax.co.uk)
14. HSBC (www.banking.hsbc.co.uk)
15. Intelligent Finance (www.if.com)
16. Lloyds TSB (www.lloydstsb.co.uk)
17. Marbles (www.getmarbles.co.uk)
18. NatWest (www.natwest.co.uk)
19. Northern Rock (www.northernrock.co.uk)
20. Nationwide (www.nationwide.co.uk)
21. Royal Bank of Scotland (www.rbos.co.uk)

22. Sainsbury's Bank (www.sainsburysbank.co.uk)

23. Smile.co.uk (www.smile.co.uk)
24. Standard Life Bank (www.standardlifebank.co.uk)
25. Tesco Personal Finance (http://www.tesco.com/finance/home.htm)
26. Woolwich (www.woolwick.co.uk)

TABLE 3. INTERNET BANKING IN THE UK: BUSINESS MODELS, PRODUCTS

AND DISTRIBUTION CHANNELS

Number of Companies (Percentage)

Type of companies:
Banks
Building societies

24 (93%)
2 (7%)

Business Models:
New distribution channel
E-banking
Baby e-bank
Pure play new entrants
Portals
On-line alliances
White labelling
Brand stretching

7 (27%)
10 (38%)
6 (23%)
N/A
6 (23%)
8 (31%)
3 (12%)
N/A

Product offering:
Current account
Savings account
Loan
Mortgage
Credit card

19 (73%)
19 (73%)
15 (58%)
13 (50%)
14 (54%)

Services/Functionality:
View functions
Account control functions
Funds transfer between account
Funds transfer to other
accounts/banks
Bill payments
Bill presentment
Application functions
Integration and reconciliation
functions
Account aggregation
Other Channels
Mobile banking
TV (iDTV) banking

25 (96%)
16 (62%)
12 (46%)
12 (46%)
N/A
26 (100%)
11 (42%)
2 (8%)

16 (62%)
10 (39%)

Internet Banking Business Models in the UK

Using the framework developed by Li (2001), this survey examined the adoption of various
business models in Internet banking in the UK (Table 3). The total percentage is more than
100% as some of the 26 banks are pursuing more than one model. One issue emerged from
the survey is that new entrants especially Internet only banks, non-financial new entrants
and portals - are posing a serious threat to the incumbent banks. Of the 26 companies
offering Internet banking services in the UK, 35% are new entrants, including baby e-banks

(23%) and white labelling (12%). The number of baby e-banks has been growing rapidly
since the success of Egg who pioneered this model (JP Morgan, 2001). The main rationales
for launching baby e-banks include acquiring new customers, exploring the cost
advantageous of being Internet only, creating a new brand to break away from the
constraints of the parents main brand, and exploiting the opportunity of a new technological
platform in offering existing and new services.

In addition, several baby e-banks are

evolving into portals through partnerships with other companies, which led to the
development of new products such as credit cards specially developed for Internet purchases
and E-wallets. Since physical contacts with customers would still be necessary for some
transactions and services, some of these banks have formed partnerships with the Post Office.

Two of the three banks adopting white labelling model are supermarkets. The logic behind
their launch was to exploit their existing customer base, using in-store facilities and direct
phone services as well as the Internet to serve customers. There has been much discussion
about the threat from such new entrants to incumbent banks but so far, despite their financial
success, they have failed to eat into the market share of the main banks.

As has been highlighted in the literature review, the changing competitive environment in the
banking industry has called for a radical rethinking in the strategies and business models of
the banking industry (Porter, 2001; Li, 2001; JP Morgan, 2000; Jayawardhena and Foley,
2000). This is clearly reflected in the results of the survey. Most of the 26 banks are using
Internet banking as part of their multi channel distribution strategy including branches,
telephone, call centres, IFA networks, mobile devices and interactive digital TV - in an
attempt to satisfy customer demands and to remain competitive. However, this can be
achieved via different business models. 38% of the banks have adopted the so-called ebanking business model, using the Internet to underpin all key processes and integrate
different systems and channels, essentially transforming their main brand into an e-brand
supplemented by the physical branches, ATM networks and phone banking. The Internet
technology provides the new platform to link up previous separate systems, enabling the
provision of integrated services anytime anywhere, enhancing customer loyalty and cross
selling. In contrast, 27% of the banks regarded the Internet as a new distribution channel, just
like the branches, ATM and the telephone. These banks generally believe the future is multichannel banking, but the Internet will not redefine the basic strategies and business models of
the banking industry.

Product and Service Offering through the Internet

The product range offered by online banks varies significantly (Table 3), although most of
them offer standard products such as current and saving accounts (73%), as well as more
complex products such as mortgages (50%), loan (58%) and credit cards (54%). 28% banks
offered Internet only products to reflect the low cost of the Internet; while many of the rest
have made it their policy that the product offering on- and off- line should be identical.

Most banks offer viewing function (96%), but other functions vary significantly from bank to
bank, allowing different levels of account control, integration and reconciliation. All banks
offer online application facility, and the integration function is offered by 42% of them. The
integration function allows customers to reconcile their accounts by exporting the
information from their bank accounts to software packages such as word processors,
spreadsheets; financial packages (e.g., Sage); or using specific formats QIF (Quicken), OFC
(e.g., Quicken, Money), OFX (Money), etc. EBPP (electronic bill presentation and payment)
and account aggregation are introduced in a few banks for example, only two (8%) of the
banks allow account aggregation, namely: Citibank and Egg.

An increasing number of banks are providing share dealing service (46%), allowing
customers to deal in shares on the Stock Exchange in real time. Eight of the twenty-six banks
(31%) have forged alliances. The partner companies usually are ISPs (such as BT Click),
technology companies (such as Yodlee), and portals (such as Yahoo). In most cases, Internet
banking is supported by call centre based phone banking. Finally, mobile banking (62%) and
Interactive TV (39%) have been enabled by many banks, but as will be discussed in the next
section, our case studies indicated that due to technological limitations they have so far failed
to up live to expectations, and there is still enormous uncertainty about their future.

KEY ISSUES EMERGING FROM THE CASE STUDIES

The online survey enabled us to paint a general picture about the development of Internet
banking in the UK. Key issues identified from the literature review and emerged from the
survey are then further examined in the second part of the empirical work: case studies of 8
banks offering Internet based services based on semi-structured interviews. The background
of these case studies is summarised in Table 4. Two of the case studies have set up spin off

baby e-banks (which was counted as separated banks in the online survey) and data was also
gathered about them during the interviews.

These 8 case studies were selected from the sample of the online survey so considerable
background knowledge and a fairly detailed profile of each of them was compiled before the
interviews. They were selected for their different characteristics but it was mainly a case of
gaining access through personal contacts. Most banks are very cautious about discussing
their Internet strategies and gaining access to some banks has proved difficult. The targeted
interviewees were senior managers with overall responsibilities for the Internet operation of
the bank (e-directors).

Semi-structured interviews were used for data gathering although in one case it was done
through e-mail and another through the telephone. Not all interviews were recorded as some
interviewees were very cautious about being recorded. A list of questions was prepared
before each interview, but most interviews took the form of free discussions the questions
were mainly used to ensure key issues were covered in the discussions. All interviews were
conducted by two interviewers together so detailed notes were taken during the interview
which were then written up immediately after each interview. Cross-references are made
between materials obtained from different sources. Follow up e-mails and phone calls were
often used to clarify specific points. Traditional concerns about case studies such as the
lack of rigour or basis for scientific generalisation as highlighted by Yin (1994) and Meyers
(1997) are fully recognised in this research, and the views in this paper should be interpreted
within such limitations.

TABLE 4. A SUMMARY OF THE CASE STUDIES

Type of business
Case one
Case two
Case three
Case four
Case five
Case six
Case seven
Case eight

Internet only bank

Incumbent Bank
Incumbent Bank
Building society
Bank w/ spin off
Incumbent Bank
Bank w/ spin off
Incumbent Bank

Internet
banking
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes

Phone
Banking

Mobile
banking
Yes
No
No
Yes
Yes
Yes
Yes
Yes

TV
banking
Yes
No
No
Yes
Yes
No
Yes
Yes

The Threat from New Entrants

Most people interviewed believed that new entrants pose a serious threat to established banks
even though these new entrants have so far failed to gain substantial market share. However,
competing with their low cost base, new technological platform, strategic alliance and
partnership, and best of breed products and services, new entrants have played a key role in
raising the general expectations of consumers and change the rule of competition in the
financial market: incumbent banks have had to compete at all these fronts to maintain their
market position.

The biggest threats come from the Internet only banks, including baby e-banks. Despite the
low cost base of the Internet as a distribution channel, this benefit is difficult to exploit by
most incumbents as their customers often uses this channel alongside other channels. Unless
they can scale back the provision of other channels at the same time, the Internet represents a
significant additional cost to the banks. In contrast the Internet-only banks, as shown by the
first case study and supported by cases 5 and 7, could effectively explore this advantage and
build up a sizeable customer base within a short period of time.

Initially, many established banks felt seriously threatened by this but their views have
evolved in the last year or so. Several people from incumbent banks (e.g. case 7) felt that the
competition between Internet-only banks and incumbents is not necessarily a head on
collision. The market segment of Internet-only banks is very different from the customer
base of most incumbent banks. People switching to Internet-only banks are often thought to
be much more price-sensitive and less loyal compared with the customers of established
banks. Therefore, the price issue is much less a threat than was originally anticipated, and
incumbent banks can compete on customer experience, which is significantly more
sophisticated than simple price competitiveness. Moreover, the loyalty and trust of customers
to established banks means the new entrants have so far failed to stage an equal
competition. Even for baby e-banks set up by incumbent banks, the original brand loyalty
and trust for the parent company have often failed to be transferred to the baby e-banks, and
the brand building exercises have been very costly (Deyoung, 2001). As a result it has been
very hard for the new entrants to successfully compete with the established players and eat
into the latters market share. However, the low price proposition of new entrants has led
customers of established banks to demand similar benefits from their existing banks, putting

enormous pressure on them to reduce prices, and provide more innovative products and
greater choice.

The competition from non-financial new entrants, especially the supermarkets, has also
presented a major threat to the existing banks. Unlike baby e-banks and pure play new
entrants, most non-financial new entrants have strong brand presence. However, according to
some people we interviewed in incumbent banks, the brand presence is only strong in their
core market and is difficult to stretch to financial services. This has led to considerable
difficulties for these companies in building trust that is crucially needed to compete
successfully in banking in the UK. The eighth case study pointed out that two of the most
successful supermarkets have actually been in the financial service industry for quite some
time, yet they have hardly made a dente on anybody especially in terms of market share.
The incumbent banks believe that their customers are loyal as they have a strong brand
reputation, and it is very unlikely for the non-financial competitors to actually compete with
them equally in the short to medium terms.

Nevertheless, the potential threats from non-financial new entrants were recognised by some
incumbent banks, because in the US, new entrants such as GE Capital (General Electric) has
been very successful. Technology companies such as Yodlee and Vertical One, through
software licensing and profit sharing, have enabled the so-called integrators to provide
financial services such as account aggregation, hence attracting customers away from the
incumbent banks own websites. Financial portal are improving market transparency by
allowing customers to compare financial products and services easily - putting enormous
pressure on the incumbent banks to offer the best products, services, rates and prices, and
channels. Incumbent banks are watching developments in these areas closely although most
of them regard the threat as less than imminent.

New Distribution Channels: The Internet, Mobile Phones and iDTV

Today, most banks regard the deployment of Internet as a necessity and are adopting the
Internet as a part of their multi-channel distribution strategy. Of the 8 banks we interviewed,
7 of them use the Internet to complement their existing distribution channels. However,
further discussions with the banks revealed that 3 of them regarded the Internet merely as a
distribution, but 4 of them are using the Internet to underpin and transform key processes and
provide integrated service to customers, essentially transforming themselves into e-banks.

The first, fifth and eighth banks used the Internet to reduce their transaction cost, but the third
case argued that the Internet will not save them cost, because their customers usually use the
Internet and other channels simultaneously. The sixth bank believed that that it is unlikely
that Internet will produce either cost savings or sales increases in the short term.

Similarly, although mobile phones as a delivery channel offers unique opportunities for
financial services institutions, most case studies regarded the current WAP (Wireless
Application Protocol) based mobile devices as an inadequate platform for mobile banking.
Technically the mobile phones today are still inadequate for carrying out complex
transaction, mainly because of the limitations of the second generation platforms of mobile
communication (e.g. GSM) for data transmission. Most banks are currently taking a wait
and see stance in adopting mobile banking, as expressed by the second and the sixth cases;
and to a large extent, the offering of WAP banking services is merely an attempt to stay
competitive by making all channels available to customers. As a senior manager of the first
case stated: You cant afford not to be exploring everything on channels available; and
according to the third case, everyone is waiting for the third generation mobile services to
materialise.

The banks we interviewed are pessimistic about the future of Interactive Digital TV or iDTV
banking, even though it was enabled by several banks. Despite various predictions most
senior managers we interviewed believed that, at least at the current stage, the TV is not a
good device for financial services, as it is mainly used for family entertainment.

The

different platforms for iDTV services and the diverse pricing policies for using iDTV in
different regions of the UK are all discouraging the wide spread adoption of iDTV banking
services. Therefore, TV banking is predicted not to be a mass market. This view was clearly
expressed by case 1, 3 and 6 even though they have enabled such services in some regions.
The only exception is the second case, which predicted that iDTV will become a useful
channel to compliment other existing channels, even though it admitted the technology is not
yet ready today.

Internet Banking Products and Services

All 7 incumbent banks we interviewed do not offer the full range of branch products through
the Internet (one of the case study is an Internet only bank without branches). Rather, the
Internet is used to provide information and offer uncomplicated products. Some products are

only offered through the Internet and are not available through other channels. In fact, five of
the eight case studies offer online products that are different from their branch products to
reflect the cost advantage of the Internet.

One service that has been repeatedly discussed during interviews is account aggregation.
There are obvious potential benefits to customers but the main technique used today (i.e.
screen-scrapping) to aggregate data is prone to fraud.

Account aggregation provides

customers with greater control of their financial matters by giving them 24-hour access to all
of their financial and related information on one Web site, including insurance, brokerage,
banking, loans, frequent flyer miles, and personalised news; as well as the ability to run
analytics on the newly aggregated portfolio to help them plan for their future, including tax
and accounting tools, risk calculators, and many more.

However, account aggregation

threatens the incumbent banks because it allows products from different banks sit side by side
on the customers screen, thereby putting enormous pressure on all banks to come up with
best-in-class products and services.

In the last year or so, all the banks we interviewed are getting together with trade associations
to look at the risks and principles of account aggregation. The seventh case also pointed out
that the FSA (the financial regulator in the UK) is seriously concerned about the legal and
security issues related to this service. Most banks, especially Cases 2, 4 and 8, are reluctant
to introduce this service as yet because of the many unresolved issues, such as security,
legality, liability (who is liable if anything goes wrong) and technical factors. Even case 1
(which implemented this service) recognised the enormous risks involved in account
aggregation.

According to case 1 and 5, the rationale behind the provision of this service is mainly for
customer satisfaction. A senior manager at case 1 claimed that at the end of the day
everyone is going to implement this service as it is what customers want. In contrast, case 2
argued that account aggregation is predominately a US phenomenon and it is unlikely to take
off in the UK due to very different banking platforms even though it is rationally interesting.
Case 8, a large bank with presence in over 70 countries, argued that the UK population is
perhaps even more interested in account aggregation than in the US, but most people are not
willing to use this service due to unresolved legal, security, liability and technical issues.

Several people we interviewed are of the view that the future of this service is yet to be seen
and if used widely it could radically reshape the banking industry.

The Future of the Branch Network and Call Centres

Most banks we interviewed are using the Internet as part of a multi-channel strategy to satisfy
customer needs, and the physical branch network will not be eliminated by this development.
In fact, the fourth case even opened several new branches recently to provide easy access for
customers. The eighth case pointed out that it would not reduce its branches because of the
increasing demand for integrated service. In contrast, the first case an Internet only bank is targeting Internet aware customers, so it has no intention to build a physical presence.
However, several banks we interviewed (cases 3, 4, 5 and 7) pointed out that the nature of the
branches should be redefined with the rapid development of other channels. The fourth case
installed prototype multimedia terminals in selected branches in order to provide a user
friendly system that would enable customers to browse through our complete range of
products and services to meet their expectation more effectively. The fifth bank has plans to
transform its branches from transaction based into more advice-based centres. In the seventh
bank, some of its branches have been changed into Cafes, providing facilities for children and
iDTV for latest product offering. Several banks are also using branch to educate customers
on new technology in order to migrate them to cheaper channels.

Alongside the introduction of Internet banking and new development in branches, call centres
originally developed for phone banking are now evolving into multi channel contact centre,
and are now a cornerstone of most banks multi-channel strategy. For most banks their future
success depends on maintaining a proper balance between the traditional brick and mortar
structure and electronic channels. The contact centres provide the missing link between
them. In several banks, the Internet provides the platform to integrate customer information
on different systems. This enables call centres to manage customer relations in new ways.
Several people we interviewed highlighted problems in integrating different channels so that
information in the database can be retrieved from any channel.

However, the pace of

development is accelerating, as problems with legacy systems are being resolved.

Summary
Through the case studies we have highlighted a series of important issues. The competitive
structure of the banking industry is changing as the Internet has reduced barriers to entry.

New entrants including baby e-banks and non-financial new entrants have put enormous
competitive pressure on incumbent banks to change. The new entrants have adopted many
different business models, including Internet only pure play, baby e-bank, brand stretching,
white labelling, portals. Even though they have so far failed to stage an equal competition
and take away market shares from incumbent banks, they have significantly raised customer
expectations in many ways, forcing incumbent banks to improve their services and develop
more competitive products.

Most people we interviewed believed that the adoption of

Internet banking calls for an increasing integration of all activities and distribution channels
within the bank. It also played a key role in making sense of the overall business processes
and understanding the customers.

CONCLUSIONS AND FUTURE RESEARCH

This research examined the current situation of Internet banking in the UK and discussed a
number of emerging issues. Today, customers are increasingly demanding a Martini style
banking any time anywhere and any place, which calls for a multi-channel strategy and
channel integration in incumbent banks. The Internet has become an important distribution
that can not be ignored.

A wide variety of business models have been adopted for Internet banking in the UK. In
particular, many incumbent banks have realised that the Internet is much more than a new
distribution channel and they are using the Internet to integrate different systems in the banks
and underpin all key business processes essentially evolving from the new distribution
model to the e-banking model. At the same time, some baby e-banks are evolving towards a
click and mortar strategy by expanding their online presence into the offline world - either
through their parents branches, their own new branches, or other physical outlets such as the
post office, petrol stations or supermarkets.

Along with the implementation of Internet banking, the nature of bank branches and call
centres has also evolved. In most cases branches are evolving into leaner, more flexible,
advisory-based rather than transaction based centres, and some banks are using the branches
to educate customers in order to migrate them to cheaper digital channels. At the same time
some banks are adding new functions to their existing branches by developing them into
cafes for example; or building mini-branches within other popular outlets such as
supermarkets, petrol stations and even McDonalds.

The importance of call centres are

increasing rapidly not only to support the back-end of Internet banking implementation but to
act as multi channel contact centres.

This research also discussed issues concerning mobile and iDTV banking.

Today, the

wireless platform for banking has failed to take off, mainly due to the limited technical
capability of WAP phones and other mobile devices for data transmission, even though many
banks have enabled this service. It will be interesting to see what happens when the third
generation mobile devices become widely adopted. The future of iDTV banking is still
uncertain even though the UK is often regarded as a leader in iDTV banking services. The
message from the interviews is generally pessimistic, as the nature of television does not
match with financial services. The different platforms used in providing iDTV services in
different regions, as well as the initial investment required for the service have also hindered
the adoption of TV banking in UK. Nevertheless, the future possibility of this channel cannot
be ruled out.

One interesting development emerged from the research is account aggregation. At the
moment, all leading banks in UK and the FSA are getting together to address the legal and
security issue of this service, and a few banks have started providing it. The demand in the
US has been high and many banks there have or are considering offering this service, but
several banks in the UK have decided not to introduce this service as they believe the
situation in the UK is very different and currently the customer demand is low. However, its
implementation could lead to many radical changes in the banking industry in the UK.

A number other issues were also highlighted in the research but were not discussed in detail.
One is that the implementation of Internet banking represents a significant technical
challenge to most banks. As such, many banks have forged strategic alliances with ISPs,
Portal and telecom and other technology companies. This has enabled banks to reduce time
to market for their Internet banking services and exploit the experiences and skills of the
partners. Another issue that was not discussed in detail is the rapid growth of financial
portals /supermarkets. In fact, some banks are transforming their Internet banking operations
into financial portals in order to exploit the benefits of cross-selling. The eighth case presents
an interesting example. By providing advanced investment and personalization tools and
high degrees of integration between banking, brokerage, investment and other value added
services, it aims to become an one-stop financial shop for its customers.

A lot remain to be done to fully appreciate and conceptualise the complicated issues in the
Internet banking. We believe research along the following themes is particularly needed.
First, this research has only examined Internet banking from the banks perspective. A
thorough examination is also needed from the customers perspective on issues including new
strategies and business models, new products and services, and other innovations
implemented with Internet banking. This is crucial because the success of Internet banking
will depend on the support of customers. Second, with the rapid development of mobile
communications, in-depth studies of, as well as insights from, the telecom industry are
needed to explore mobile banking with regard to the coming 3G platform. The same applies
to iDTV services for banking. Thirdly, continued research is needed to monitor how Internet
banking is evolving in the UK, what new strategies, business models and new products and
services are being developed, and how current strategies and business models are evolving.
In particular, some specific new developments need to be closely monitored such as
account aggregation.

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I acknowledge the research assistance from Gavin Ho, John Rankin, Irene Yousept and Oktavianus Yudistirac.
I am also indebted to the banking executives and managers who participated in the research. Two anonymous
reviewers made valuable suggestions and provided constructive criticisms. Any errors remain the authors.