Electronic Banking 2004

Market Assessment 2004
Third Edition September 2004

Edited by Isla Gower
ISBN 1-84168-710-3
Electronic Banking
Electronic Banking Foreword
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 Key Note Ltd 2004

Electronic Banking Contents
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 .....................................11
Figure 3: Risk-Weighted Assets of UK Retail Banks by Value (£m), 2002....................................11
ADVERTISING ................................................................................................................................12
THE CONSUMER ...........................................................................................................................12
MARKET FORECASTS ...................................................................................................................13

Contents Electronic Banking
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 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 33
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 .......................................................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.....................................................................................................47
Fraud ...............................................................................................................................................49
Identity Fraud .................................................................................................................................49
Viruses .............................................................................................................................................50
Operational Risk .............................................................................................................................51

8. Electronic Bill Presentment and Payment 53
BACKGROUND ..............................................................................................................................53
BACS EBPP .......................................................................................................................................53
Commercial Payments ....................................................................................................................53
DISTRIBUTION ...............................................................................................................................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 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 67
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
(% 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 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 .............................................................................................................................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 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


Electronic Banking Executive Summary
Executive Summary
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.
 Key Note Ltd 2004 1

Executive Summary Electronic Banking
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.
2  Key Note Ltd 2004

Electronic Banking 1. Introduction
1. Introduction
OVERVIEW
Key Note previously published reports on electronic banking in 1997
and 2000. This Key Note Market Assessment report examines the major
successes in electronic banking, which centre on the mass transfer of
payments to electronic means and the replacement of physical payments
made by cash and cheque by automated methods. The report also focuses on:
• the way in which banks have tailored their retail operations to

accommodate customers who want remote access to their accounts
• the disappointing progress of mobile telephone banking and interactive

television, which were both perceived as being exciting concepts in 1997
• the growth of the cashpoint and its potential as an electronic outpost

of the bank
• the growth of pure-play electronic banking services and the technological

issues 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 to
affect electronic banking over the next 5 years.
In addition, the following seven areas of electronic banking are considered

in 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, which
was conducted by BMRB Access in April 2004 among 977 adults aged 15
and over. The findings were analysed to provide an insight into customer
attitudes towards electronic banking, the degree to which customers use
banking of this type and customer opinion relating to some of the proposals
the industry has presented for exploiting technological advances.

1. Introduction Electronic Banking
DEFINITION
Electronic banking began several decades ago, when computers were first
introduced to the payments process. Until the late 1980s, automation was
confined to the back-room task of processing payments. Now, technology has
been applied to cutting the costs of processing transactions by eliminating
human mediation during the procedure. Technology has also been applied to
the control of processes, ensuring that fraud or errors do not occur and
identifying risks when they are exposed.
For the customer, automation began with the cashpoint (the ATM) and plastic
cards that are issued by banks are a highly visible sign of electronic banking.
The development of telephone-mediated banking, which requires a high
degree of fast access to bank records at call centres, is another electronic
banking example. Internet banks — with bill-paying facilities, account
switching abilities and services that offer online shopping, insurance or
investment — are only the latest technological developments in banking.

Electronic Banking 2. Strategic Overview
2. Strategic Overview
MARKET DYNAMICS AND SEGMENTATION

Electronic banks comprise payment services, in which direct automated
payments can replace cheques and cash, as well as customer services. This
report examines payment systems and covers the market for credit cards,
debit cards, store cards and affinity cards. In addition, facilities for borrowing
and investment through remote access to the bank are discussed, and
distribution channels, such as the telephone, television and the Internet, are
covered.
Payment Services
The credit card and personal loans markets are booming, fuelled by high
house prices and subsequent consumer confidence. Key Note estimates that,
in 2004, the volume of UK personal transactions will reach 9.9 billion, a rise of
7.1% 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 means
increased, while cheque payments fell. Plastic card transactions grew by
50.9% in volume to an estimated 5.74 billion and the number of automated
transactions increased by 32.7% to 2.91 billion over the 5-year period.
However, cheque transactions decreased by 21.5% in volume to an estimated
1.25 billion.
Table 1: UK Personal Transactions by Payment Method

by 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...

2. Strategic Overview Electronic Banking
Table 1: UK Personal Transactions by Payment Method

by Volume (million and index 2000=100), 2000-2004
...table continued
% Change
2000 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) and
branch counters
§ — includes intra-bank items, but excludes CHAPS (Clearing House Automated
Payments Settlement) payments; personal automated payments are those where the
payer is a personal customer, business automated payments are those where the payer
is a company
†† — does not sum due to rounding
Source: APACS Yearbook of Payment Statistics 2004, Table 8.6/Key Note
Although plastic cards remain the most popular method of payment in the
UK, 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 — the
number of plastic card payments rose by 20.9%.
Industry Value
Between 2002 and 2003, the total payments industry increased its daily value
of transactions from £340bn to £364bn. Of this, 95.8% can be attributed to
CHAPS (Clearing House Automated Payments Settlement). This provides an
inter-bank electronic same-day value sterling credit transfer service between
settlement banks in the UK, using enhanced real-time gross settlement
(RTGS). CHAPS is connected to the trans-European automated
real-time gross settlement express transfer (TARGET) system, which connects
all EU RTGS systems through their central banks. In 2003, CHAPS euro
payments recorded the largest growth among clearing sectors, with a value
rising to £145bn.
CHAPS comprises the largest share of the electronic banking market, since it
incorporates 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.

In 2003, CHAPS recorded an annual clearing value of £88.58bn, an increase of

4.3% on 2001.
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
BACS Payment Schemes Ltd manages electronic payments, while BACS Ltd
processes direct debits, direct credits and standing orders. Standing orders
were submitted on magnetic tape from 1968 and by telecommunications links
from 1999. Payments are handled electronically on the basis of a 48-hour
cycle over a 3-day period. Although the technology could support faster
payment cycles, it is thought by many in the industry that a delay might make
it easier to identify fraud or money laundering before a deal has been
completed.
Market Share
In 2003, payments made by debit cards reached £130.47bn in value, an
increase of 21% on 2002. This comprises 54% of card purchases made in the
UK. Debit cards have been increasingly popular since their introduction in the
late 1980s and, in 1997, overtook credit card purchases. The growth and
sustained popularity of debit cards is the result of the convenience of not
having to pay cash and the avoidance of paying interest on the balance of the
debt after a free credit period.

In terms of purchases, charge cards account for a 9% share of the plastic card
market. In 2003, cards of this type were used to buy £22.04bn worth of
purchases, which represents a growth rate of 0.1%. During the 1990s, charge
cards 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 particular
privileges, such as access to club lounges at airports. However, with the
collapse in share values over the past 3 years, it may be that charge cards are
no longer fashionable as executive perks. Alternatively, the high price of
executive air travel might have caused some companies to send their staff on
cheaper airlines where charge cards are not accepted.
Apart from the cards industry, the lowest growth rate applies to television
banking. In 2004, it is difficult to identify how many banks still offer
interactive television services and to quantify the number of customers that
have taken up the channel at home. Industry sources suggest that the total
uptake 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 been
adopted more widely, the number of customers enrolled and registered for
secure banking through their mobile telephone — after more than 7 years of
pilots 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 credit
through mobile telephones is still in the future.
It is now possible to withdraw money from supermarket checkouts using a

cashback facility in conjunction with a cheque guarantee card. Industry
estimates 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 the
introduction of an increase in competition, as independent ATM providers
entered the market in 2000. Key Note estimates that, in 2004, the number of
ATMs will reach 51,129, a rise of 10% on 2003. The value of transactions is
estimated to reach £152.12bn, an increase of 5.6% on 2003.

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

ATM — automated teller machine
† — the value of withdrawals cover all ATM transactions in the UK, including those on
foreign-issued cards; withdrawals from convenience ATMs, those owned by companies
independent of banks or building societies and deployed in retail locations are included
from 2001
Figure 1: The Number of ATMs, 2000-2004
60,000
Number of ATMs
50,000
40,000
30,000
20,000
10,000
0
2000 2001 2002 2003 2004
ATMs — automated teller machines

Note — 2004 Key Note estimates

In 2000, the number of bank branches ceased to fall significantly and, in 2003
and 2004, recorded small rises of 0.6%. It is expected that the numbers will
remain at around the same level for the next few years, as institutions
redesign them to become more attractive and act as sales offices for financial
products 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 APACS
members are included only for the years in which the institutions were members)
Figure 2: The Number of UK Bank Branches†,

31st December 2000-2004
11,500
11,450
Number of branches
11,400
11,350
11,300
11,250
11,200
11,150
11,100
11,050
11,000
2000 2001 2002 2003 2004
† — Association for Payment Clearing Services (APACS) members (figures for APACS
members are included only for the years in which the institutions were members)
Note: 2004 Key Note estimates

COMPETITIVE STRUCTURE
In the UK, the financial services industry comprises a small number of very
large banks and a larger number of small banks. In 2002, the largest bank in
terms 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 Banks

by 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 Banks

by Value (£m), 2002
Northern Rock
B&B
Abbey
A&L
RBS
Lloyds TSB
HSBC HBOS
Barclays
Source: Company accounts/Key Note

In 2000, the last mergers of the major banks occurred when Barclays took
over the Woolwich, RBS took control of NatWest and the Bank of Scotland
merged with the Halifax to form HBOS. None of the five largest banks in
Table 5 are able to merge with each other, as this would be unacceptable in
terms of market concentration. The 2004 proposed merger of Abbey National
PLC with Banco Santander Central Hispanica (SCH) brings an interesting
addition to the competitive mix. However, at the time this report was
published (September 2004), HBOS is seriously interested in making a bid for
Abbey, although Abbey and SCH are keen to finalise the deal. Industry
analysts suggest that a bid by HBOS would be likely to be referred to the
Competition 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 operates
Intelligent Finance (IF), cahoot is part of the Abbey National Group, while the
others retain electronic banking as part of their mix of distribution channels.
Outside this group of very large institutions, electronic banks are operated
independently.
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 contains
friendly staff in its branches who are keen to give financial advice. It is known
for institutions to use ‘knocking copy’, which alleges that other banks are
remote 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 the
images presented by some of its rivals tend to preserve an image of strength
and power.
Electronic banking is difficult to advertise, as the technology is intangible and

is couched in terms of user satisfaction or fashionability.
Advertising of banking services is currently overtaken in terms of spend by

credit card advertisers, who compete fiercely for the high levels of debt taken
out by consumers while interest rates were low. In addition, many customers
might 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 have
reported that, on average, electronic banking customers visit branches once a
month. The first wave of users in the early 2000s are now beginning to start
families and there is also an increasing number of older users who already
have small families. In addition, older customers (up to middle age) are now
using electronic banking, although very few people over the age of 55 years
have been converted to this channel. In 10 to 20 years’ time, this picture will
have changed, as many more older people will routinely use electronic
banking.

In 2003 and 2004, customers have experienced greater prosperity than

before, with real incomes rising considerably faster than interest rates. This
means that customers have been attracted by the higher interest rates
offered on savings accounts by electronic banks, since they are higher than
those offered on conventional accounts. In addition, customers have been
paying more money into their accounts while they decide how to spend it.
However, these new customers are expected to be less loyal than traditional
bank customers, since they have been attracted by convenience and high
interest rates. As such, they could easily find another bank that offers more
favourable terms.
MARKET FORECASTS
The market for electronic banking will expand rapidly. Initially, there will be a
growing demand for technology platforms to handle regulatory demands
and compliance levels, as well as for higher standards of auditing and risk
management.
Payments are dynamic so are likely to rise as the economy becomes wealthier
and will be increasingly electronic in nature. In addition, there will be a
growing demand for smart cards, and associated software and hardware.
Security and anti-fraud measures will also be in demand. Improved website
design, as well as more sophisticated straight-through processing systems, will
be needed to cope with the increased pressure on online banking distribution
channels, as customers become more familiar with them.


Electronic Banking 3. Telephone Banking
3. Telephone Banking
BACKGROUND
Telephone banking is only made possible through the high degree of bank
automation. Bank staff in call centres can access web pages, on which
customers’ accounts and personal details are held, as the customer phones in.
When the bank has outsourced the telephone banking operation to another
country, this process has to be completed speedily and backup systems are
required in case of failure.
First Direct (part of HSBC) was the first to enter the market in 1995 and
telephone banking user numbers were first recorded in 1996. After a delay,
First Direct was followed into the market by most other banks, some of which
established 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 through
internal 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 users
has 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
1996-2004
% Change
e2004
1996
1997
1998
1999
2000
2001
2002
2003
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

3. Telephone Banking Electronic Banking
Figure 4: The Number of Telephone Banking Users

(million), 1996-2004
18
16
14
Users (million)
12
10
8
6
4
2
0
1996 1997 1998 1999 2000 2001 2002 2003 2004
Market Shares
A pioneer in telephone banking was Nationwide — the largest building
society — which emphasised the role of its branches in the roll out of its
operations. In contrast, First Direct was established as a standalone operation
by HSBC, deliberately avoiding the branch environment. First Direct was
aimed at an entirely different customer segment to the main bank, while
Nationwide targeted its main markets with an emphasis of inclusion of all its
members in the service.
In 2004, telephone banking is a standard service offered by all the main banks
to all their customers and only the smaller building societies, which operate in
a small geographic area, do not offer a service.

CONSUMER TRENDS
At first, it was thought that customers would not want to use remote
telephone services and would stay loyal to the branch. However, as telephone
services 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 by
telephone banking. In 2003, 78% of users checked their account balance
through telephone banking. This was followed by 58% of telephone banking
users who queried their account and 41% who checked their statement.
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
As many of the uses in Table 7 are simple, it would seem reasonable, in

principle, to modify the basis of telephone banking to automate certain
aspects. This would reduce the pressure on call centre staff and allow them to
concentrate on selling more complex products to customers. The key to
success will be in the training of customers and in convincing them that the
service is secure.
Automated Telephone-Based Access

Automated, voice-operated electronic ordering systems have been available
for some years and could be adapted to the banking environment. Exclusive
research conducted for this report in April 2004 by BMRB Access indicates that
such a service would be welcomed by a minority of customers. Respondents to
the survey were asked whether they agreed with the following statement:
“I think it is a good thing to be able to manage my account
through an automated telephone service.”

This option was fairly popular, receiving an 11% response. There was more
enthusiasm from men (13%) than from women (10%) and the idea
particularly appealed to those aged between 25 and 44 years (15%) and to
those aged under 25 years (13%). However, older respondents (aged 65 years
and over), were not very enthusiastic and just 3% agreed with the statement.
Skilled workers in social grade C2 (14%) reacted more favourably than

professional and managerial respondents in social grades AB and C1
(13% and 12%, respectively), but unskilled workers (Ds) and those in group E
were less enthusiastic still (8% and 6%, respectively). Such a service appealed
to Londoners (17%) more than people in any other region.
Full-time workers (17%) were more favourable than those who work part
time (11%), are not working (8%) or are retired (6%) to the idea of
automated telephone banking services. It appealed most to people in
households of three people (14%), but not to single people (7%) or those in
households 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 are
single (12%). 13% of people living with children liked the idea of an
automated telephone service, but only 10% of childless residents were. At
15%, mortgage payers were more disposed to an automated service than any
other group, although private tenants (11%) were more enthusiastic than
council tenants (8%).
Overall, the respondents who were most keen on an automated telephone

banking service were younger, skilled men in full-time jobs with small
households and mortgages to pay. This suggests that a telephone service
would appeal to time-constrained people who do not have complex financial
affairs (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 electronic
banking through wireless application protocol- (WAP-) enabled mobile
telephones. Although enthusiasts welcomed the idea, they found that the
web-based software was unsuitable for the limited functionality of a small
mobile device. Pilots run by Abbey, Egg and Nationwide were launched
between 1999 and 2000. They were linked with the Nokia 7110 mobile
telephone, 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 and
HBOS. HBOS admitted that only a tiny fraction of its 1.5 million registered
Internet banking customers had taken up WAP. The reluctance to use it was
linked to the slowness of the service. With the development of more
appropriate software, and the introduction of mobile telephones with
enhanced screens, WAP-enabled banking might become more practical. In
particular, the development of the mobile telephone as a form of electronic
purse is keenly awaited in the industry. HBOS aims to return to wireless
banking technology when the third generation (3G) of mobile telephone,
with its greater functionality, becomes more widespread, possibly in 2005
or 2006.

The Future of Wireless Banking

The introduction of 2.5 generation handsets has advanced mobile telephony
considerably. Users are now developing a taste for selecting polyphonic
ringtones using WAP and looking at images on their mobiles. It is possibly
time, in 2004, for banks to reconsider their position and return to the market,
relying on a widespread habit of text messaging using short messaging
service (SMS) techniques. In 2003, 2.45 billion SMS messages were sent
worldwide.
The introduction of wireless networking (WiFi) to personal data appliances

(PDAs), such as Palm Pilot and to the new generation of laptops, means that
banks can now provide customers with the facility to operate their financial
accounts in a crowded public area. An initial enthusiasm by US banks during
the 1990s faded in the early 2000s because, just like WAP, WiFi was used
mainly for messages, not for financial purposes.
In 2005, there will be a larger number of 3G mobiles on the market and the
introduction of WiMAX, superseding WiFi, will enhance the usability of
notebooks or laptops. WiMAX is a new standard that allows 70 megabytes of
data 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 banking
channels. However, the majority of customers will not take up this option.
Respondents to the survey conducted by BMRB Access for this report were
asked whether they agreed with the following statement:
“I would like to download cash to my mobile telephone for
daily purchases.”
This option was the least popular of all suggestions, with only 1% of
respondents agreeing with it. It was preferred by men (2%), while only 1% of
women approved. Nobody over the age of 54 agreed and only 2% of those
under 25 years favoured the idea. Less than 0.5% of respondents in social
grade AB agreed with this option and only 2% of C1s, C2s and Ds agreed with
it. 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 West
Midlands, East Anglia and London. Only 2% of respondents who work
approved, while no retired people agreed with the idea of mobile
telephone-based cash.
The larger the household, the greater the support for mobile telephone
banking services. In addition, the idea was supported by 1% of married and
single respondents.
There was most support from the 5% of respondents with children aged
between 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 tenants
were more supportive than house owners (1%).

Overall, there was a small core of support for mobile telephone-based cash
among people living in large households, with primary school aged children,
who are young and work in manual professions. It would take a considerable
marketing effort to give this idea a reasonable market share. It may well
suffer from the anxiety respondents suffer about security, given the high level
of mobile telephone theft in the UK.
Interactive Television
Interactive television was first launched in the UK in 1999, through satellite
television and cable television providers. Early innovators in the banking
industry include Abbey, HSBC, Barclays, Bank of Scotland and Egg. Alliance
& Leicester, Lloyds TSB, NatWest, the Bank of Scotland, and Royal & Sun
Alliance also experimented with interactive television. Subscribers to
interactive television pay a subscription to BskyB, NTL, Telewest or another
provider and can access the interactive channel through their set-top box.
Egg abandoned its interactive television channel in 2003, having apparently

recruited just 1,300 of its 3.2 million clients to the service. Other banks have
also withdrawn, although Nationwide remains a provider of interactive
television banking services.
Industry experts believe that the interactive television business model is still
too unstable for a sufficiently risk free, profitable and customer-centred
channel to be developed. With the collapse of iTV Digital in 2001, the
development of interactive television was set back, as 1.3 million homes had
signed up with iTV. This left the cable operators Telewest/NTL with 2 million
subscribers, and BT and Kingston with 80,000 subscribers. BskyB is the largest
supplier of digital television, with well over 5.7 million homes by 2004.
However, interactive television has achieved greater penetration in the UK

market than any other in Europe. The UK holds around 45% of the interactive
digital 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 and
programmes that use interactive methods are content based, predominantly
sports and news. Viewers do not bring an Internet-type attitude to television
viewing, which is seen as entertainment.
MARKETING ACTIVITY
RBS is offering customers the chance to win six prizes, such as free mobile
communication time worth £150, if they switch to mobile telephone banking.
From April 2004, RBS customers are able to reload their mobile telephones at
the bank’s 1,359 automated teller machines (ATMs), provided they have an
Orange, Vodafone, O2, T-Mobile or Virgin Mobile subscription.

ADVERTISING
Banks do not advertise their telephone banking services as such, instead
choosing to emphasise their product ranges. Telephone banking is now an
established distribution channel that is offered by almost all banks.


Electronic Banking 4. Internet Banking
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 modular
software
• 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, enabling
customers 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 for

customers who do not also buy a broadband package
• regulations, which can be complex to interpret

• fierce competition and poaching of customers with stronger offers is
common
• brand loyalty has yet to be established.

Affluent bank customers are increasingly accepting products from a variety of
Internet providers to reduce the cost of banking and create flexibility. For
example, 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 a
0% charge.

4. Internet Banking Electronic Banking
This requires traditional banks to offer special rates for their Internet-based
products and to integrate their distribution channels more thoroughly
through a simplified systems architecture. In the UK, Smile (from the
Co-operative Bank), cahoot (part of the Abbey National Group) and
Intelligent Finance (IF [from HBOS]) offer a 24-hour service, supporting their
Internet operations using call centres. Their advantages lie in speed and a
single customer view, as they keep their core banking platforms separate
from the parent bank.
How long the phenomenon of the Internet-only bank will survive is not
known, but Internet banks in Scandinavia eventually succumbed to the
advanced electronic services offered by organisations such as Nordea. Nordea
has nearly ten million online customers in three countries and offers more
products than niche banks. The opportunity to obtain advanced products at
good rates from one bank persuaded customers to stay. All customers,
whether corporate, state or private, use the same method (electronic
signatures and bank codes) to access the bank. This means that private
customers can pay in real time for services or goods by an electronic bill
presentment mechanism and the bank code can be used as an electronic
signature for utility contracts or for tax payments. Customers can also obtain
their pay slips and invoices electronically.
In 2004, the personalisation of customer web pages is also being introduced

by 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 high

interest savings accounts online, hoping to attract customers who want all
their multichannel usage with one bank. They are confident that customers
who left for online banks that offer high interest rates will return to the
mainstream banks once they realise the convenience of getting all their
services 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 and
online channels so call centre staff can continue with a query that originated
online with full information about the transaction.
A central problem for banks is the need to clean and analyse customer data
and to create databanks that are standard across the entire organisation. It is
also important to run single identification and validation systems, rather than
a variety within each bank. Such developments are being led by firms such as
Chordiant, which co-ordinates multichannel connections for RBS and Barclays,
and Aspace, whose 4TRESS software enables seamless multichannel access
with 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 the
US.

The bank has apparently captured $17bn in deposits from US banking

operations between 2000 and 2003, and made its first profit of €151m in
2003, up from a loss of €48m in 2002. Between 2002 and 2003, its funds rose
from €55.2bn to €99.4bn. The US success came partly from offering
mortgages 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 company’s technological advances allowed it
to cross-sell effectively as a result of observing customer transaction patterns.
The company’s success is partly based on using an enterprise platform for its
multichannel integration, rather than the mix of systems used by traditional
operations. This means that it was quicker to launch its products, better able
to plan its development and could operate at a low cost from the start.
Hewlett-Packard provided the core technology and services for the UK

launch, 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 with
other banks’ clearing systems so that money transfers can be completed
quickly and efficiently. Call centre staff are also able to see the same screens
and operate similar processes to customers.
MARKET SIZE
Since its inception in 1996, the market for Internet banking has expanded
dramatically. At the time, forecasts were even more drastic and it was even
suggested that the banking market would be transformed as major
traditional banks lost customers to the new, flexible Internet banks. Take-up
was comparatively slow to start with but, from 2000, Internet banking began
to reach a mass market. By 2003, it was established as a major distribution
channel to rival telephone banking. Key Note estimates that, in 2004, there
will be 14.5 million Internet banking users, a rise of 19.8% on 2003.

(million and index rebased 2000=100), 1999-2004
% Change
1999-
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...


(million and index rebased 2000=100), 1999-2004
...table continued
% Change
1999-
1999 2000 2001 2002 2003 e2004 2004
Index rebased
(2000=100) 61 100 182 236 367 440 -
e — Key Note estimate
Figure 5: The Number of Internet Banking Users

(million), 1999-2004
16
14
Users (million)
12
10
8
6
4
2
0
1999 2000 2001 2002 2003 2004
According to some surveys, the percentage of adults with access to the

Internet has risen to two-thirds of the population. Those with regular access
now exceed 50%, with the expectation that broadband subscribers will bring
the total up to 60% by the end of 2004.

CONSUMER TRENDS
In the survey conducted by BMRB Access in April 2004 for this report,
respondents were asked about their attitude towards Internet banking in
relation 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 at
least once a week. Of these, 30% were men and 27% were women. Overall,
respondents who claimed to use electronic banking services regularly are
affluent and from a professional background. They are likely to have young
children and either rent or buy their property outright. In addition, they are
likely to have large households, a full-time job and are either married or
single. The data suggests that frequent use of a bank’s 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 banks
electronically monthly or more as do so weekly (28%). Overall, respondents
who stated that they use electronic banking less frequently than weekly, but
at least monthly, tend to be female, from a managerial or clerical
background, with smaller families. Less frequent users are also more likely to
be part-time workers. In summary, these respondents have more time than
those who use electronic banking more frequently and are slightly less
affluent. This might be because they are able to visit bank branches more
easily or require cash less frequently.
Rare Users
More respondents (15%) said that they make rare contact with their bank
electronically than those who do so at least once a month (13%). However,
this question addresses two groups — those who use their bank electronically
rarely and those who do not use electronic access at all. Rare users tend to be
in the middle social grades (C1s and C2s), with small households, possibly
unemployed and not married, but with teenage children and a mortgage.
This suggests that banks need to focus marketing activity to convince people
with families to use these channels more frequently.

Security Concerns
At 18%, the second-largest response among the sample of respondents was
to the statement that they are concerned with the security aspects of
electronic banking. People who are worried about the security of electronic
banking are typically men aged between 35 and 54 years, professional or
managerial, living in the South of England, East Anglia and the West
Midlands, are working, have mortgage debt and possibly live in a large
household. Young people seem less worried, as do private tenants. Older
people who have paid off their housing debts or are council tenants, are least
worried, perhaps because they do not have large accounts to worry about.
Trust
A surprisingly large percentage of respondents (17%) claimed that they
would not trust Internet banking. Those who were more likely not to trust
banking of this type are generally older, in the lower social grades, living in
the East Midlands, retired, possibly widowed, have paid off their mortgages
and are living on their own.
MARKETING ACTIVITY
Marketing activity by Internet banks has been based on establishing their
unique, new brands. It is clear from the style of advertisements for First Direct
and IF that they are designed for the practical, but time-poor, young
professional. This type of consumer is likely to be happy with television
advertisements with ‘black and white’ explanations of the products on offer.
Others might be drawn by more unusual methods, such as those used by
cahoot. Campaigns tend to be carefully focused on the middle class and the
office worker.
Marketing has yet to involve major promotions or sponsorships, which are

generally the province of the parent organisation, with larger and more
diverse marketing briefs.
ADVERTISING
Main Media Advertising Expenditure

Current accounts are the basic services offered by Internet banks. In the year
ending March 2004, Smile recorded the largest main media advertising
expenditure on its current account of £1.7m, capitalising on its high standing
with customer satisfaction surveys.

Table 9: Main Media Advertising Expenditure on

Online 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
Smile and First Direct advertise their general online banking services, as well
as their current accounts. cahoot and Egg have also advertised widely. All four
are competing vigorously for the same market niche, which might account for
high main media expenditure levels in the year ending March 2004.
Bradford & Bingley’s Marketplace, which is a portal to a wide range of

financial products and services, is a type of financial supermarket. Here, the
bank shows a much wider range of products than would be expected from a
small bank. It is directed at a slightly different market, with a greater
emphasis on investment products.
Overall, in the year ending March 2004, main media advertising expenditure
on general online banking services reached just over £3m. Of this, Smile
online banking accounted for the largest share (25.5%), followed by
Bradford & Bingley’s Marketplace (23.4%) and First Direct banking services
(18.1%).

Table 10: Main Media Advertising Expenditure on General

Online Banking Services (£000), Year Ending March 2004
Smile — online banking 774

Bradford & Bingley’s Marketplace 711
First Direct — banking services 549
Egg — online banking 445
cahoot — interactive banking 418
Yahoo! — personal finance 76
Total 3,041
Website Quality
Table 11 contains the findings of a customer satisfaction survey relating to
online banks’ websites. The survey covers customers’ assessments of website
speed, ease of use and the login process. It also includes aspects that
customers rate as being less important, such as customer support, the initial
registration 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. First
Direct, ranked second, was the first to establish remote-site banking, so its
experience in speedy delivery has paid off. Nationwide was the first provider
to offer an Internet banking service and its performance reflects its
member-centred approach.
It is perhaps surprising that IF appears so far down, along with its parent
Halifax. This may prompt some of its customers to move to other, more
convenient, providers.

Table 11: Customer Satisfaction Ratings

of 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
cahoot 4.0 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 the
first quarter of 2004.
Source: Virtual Online Banking Survey, April 2004


Electronic Banking 5. Automated Teller Machines
5. Automated Teller Machines
BACKGROUND
Automated teller machines (ATMs) are also known as cash dispensers or cash
machines. They are computerised self-service devices that allow the holder of
an appropriate cash card with a personal identification number (PIN) to
withdraw cash from their account and access other banking services.
In 1967, the cards that were introduced were cheque guarantee cards. These
had a value of £50 and could only be used for withdrawing cash. However,
the original Barclaycard and Access (from a consortium led by the then
Midland Bank) soon developed credit card functions and became widely used
in retail shops. At the same time, the ATM became widely spread and
consortia developed to embrace most banks and building societies. Only in
the 1990s have ATMs been developed in other retail sites and provide a
greater variety of functions.
MARKET SIZE
The number of owned ATMs is growing fast and more than matches current
demand. Between 2000 and 2003, the number of ATMs rose by 40.8% to
46,461. Key Note estimates that, in 2004, the number of ATMs will increase by
a 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...

5. Automated Teller Machines Electronic Banking
Table 12: The Number of Owned ATMs by Location, 2000-2004

...table continued

† — 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 with
mobile units and those which cannot be classified
According to the Association for Payment Clearing Services (APACS), the

number of transactions made through ATMs rose by only 4.6% between 2002
and 2003. This situation is partly caused by the introduction of independent
ATM operators, which can make a profit from the fees charged for the
withdrawal of cash. The location of ATMs at non-branch outlets gives banks
more publicity, makes money available when customers need it, and benefits
both shops and banks.
CONSUMER TRENDS
ATM Usage
Table 13 shows that the most regular users of ATMs are under the age of
retirement and, in particular, aged 44 years or younger. In 2004, people aged
between 25 and 44 years are estimated to account for highest usage
(of 80%), followed by those aged between 16 and 24 years (78%). People
aged 65 years and above are more likely to use cash or cheques and it is
estimated that only 41% will use ATMs in 2004.

Electronic Banking 5. Automated Teller Machines
Table 13: Regular Users of ATMs by Age Group†, 2000-2004
2000 2001 2002 2003 e2004
16-24 80 83 80 74 78
25-44 76 76 80 80 80
45-64 59 61 58 63 64
65 and over 42 40 40 41 41
† — cardholder using ATMs at least once every 3 months

The BMRB Access survey, which was commissioned exclusively for this report,
addressed the question of whether customers would like to use a cashpoint
for all their financial affairs. This is in response to a plan presented by banks
outlined in the Financial Times (28th July 2004):
“Leading banks are looking at software for a new
generation of cash machines that personalise transactions,
allowing ATMs to greet customers by name, automatically
offer their usual service and even remind them about dates
or bills outstanding”.
Only 8% of respondents agreed that they would like to use a cashpoint for all
their financial affairs. More men (9%) than women (7%) were likely to agree
with the statement. In addition, younger customers (aged between 15 and
24 years) were the most likely to want to use a cashpoint for all their financial
affairs (at 13%), followed by those aged between 45 and 54 years (11%).
The typical customer who would want to use a cashpoint for all their financial
affairs is young, a skilled worker, living as a tenant, perhaps with a toddler or
is single and in full-time work. In addition, a typical person would be
time-poor and is likely to have relatively simple financial affairs.
Alternatively, professional respondents in social grade AB, with mortgages

and living in London and the South East, did not approve of this option. In
addition, the Welsh, Scots, and those in the North and West Midlands strongly
disapproved. This could be related to a feeling that cashpoints would not be
the best place to handle mortgage or investment queries. Older people are
also less likely to want to deal with all their financial affairs at a cashpoint.

5. Automated Teller Machines Electronic Banking
Mobile Telephone Usage

Respondents were also asked whether they would like to download cash to
their mobile telephone for daily purchases. As outlined in Chapter 3 —
Telephone Banking — this option was the least popular of all suggestions,
with only 1% of respondents agreeing that they would like to use this service.
The low penetration of responses indicates that there is a small core of
support for mobile telephone-based cash services. In general, ATMs are the
preferred way of accessing cash and considerable marketing would be
required to make the usage of mobile telephones for daily purchases
desirable.
DISTRIBUTION
The distribution of ATMs (as shown in Table 12) is expanding rapidly beyond
the traditional bank branch. Indeed, ATMs are infiltrating into shopping
centres, railway stations and leisure facilities where people tend to spend
their money.
ATMs still tend still to be located in draughty, outdoor areas, while

branch-based cashpoints are often in sheltered foyers available only to
customers with bank cards.
However, where suppliers can charge customers for the use of the machine,
their deployment by private companies is growing fast. Should cashpoints be
located in post offices, their distribution would be greatly enhanced, even
though the number of post offices is being reduced. The insistence that
pensions and other benefits be paid into bank or building society accounts
changes the focus of the socially excluded. This group can no longer visit the
post office to obtain cash, but have to rely either on cashback at a
supermarket or a cashpoint. ATMs tend to be located where most money is
spent, so might be difficult for the less mobile to reach.
APACS data show that, in 2003, payments of wages and salaries in cash fell to
just 7% of adults. In addition, payments by cheque dropped to 9%, while
83% of wages are paid directly into a bank account (other methods of
payment account for 2%).
In 2004, statistics reveal that ATMs account for over 75% of cash withdrawals,
but cost £20,000 to install and are costly to maintain. In 2004, HBOS
outsourced 800 ATMs to Cardpoint to manage for £40m, suggesting that
banks do not find cashpoints particularly profitable and believe them to be
difficult to maintain. It may well be that cashpoints will eventually be
operated completely by third parties. However, this has security and control
implications.

Electronic Banking 6. Credit Cards
6. Credit Cards
BACKGROUND
The use of plastic cards is increasing fast and cards are becoming the main
means of obtaining cash. The strong growth of debit cards suggests that
consumers are increasingly seeing the card as an alternative to cash rather
than a means of obtaining credit. In addition, the very low growth in the use
of store cards reflects the bad publicity they received when their high interest
rates were revealed.
MARKET SIZE
Key Note estimates that, in 2004, the number of plastic card transactions in
the UK will reach 8.3 million, a rise of 7% on 2003. Debit cards are estimated
to account for the largest share (44.7%) of the total in 2004, followed by cash
acquisition (30.9%) and credit/charge cards (22.9%).
Table 14: UK Plastic Card Transactions† by Volume

% Change
2000-
2000 2001 2002 2003 e2004 2004
Debit cards 2,337 2,696 2,994 3,364 3,716 59.0

Index 100 115 128 144 159
Cash acquisition‡ 2,092 2,250 2,342 2,457 2,569 22.8

Index 100 108 112 117 123
Credit/charge cards 1,451 1,562 1,687 1,822 1,903 31.2

Index 100 108 116 126 131
Table continues...

6. Credit Cards Electronic Banking
Table 14: UK Plastic Card Transactions† by Volume

...table continued
% Change
2000-
2000 2001 2002 2003 e2004 2004
Store cards§ 125 133 138 130 127 1.6

Index 100 106 110 104 102
Total ††6,006 6,641 7,161 ††7,774 8,315 38.4

Index 100 110 119 129 138

† — includes cash acquisitions at automated teller machines (ATMs) and at branch
counters
‡ — excludes cashback
§ — since 2001, the data has been provided by the Finance & Leasing Association, hence
the growth rate for 2000-2001 cannot be compared with other years
†† — does not sum due to rounding
Source: APACS Yearbook of Payment Statistics 2004,Table 8.3/Key Note
CONSUMER TRENDS
The financial services industry is contemplating the development of payment
systems to deliver cash to retail customers cheaply and easily. In addition, the
industry is keen to replace cash as a medium of exchange as far as possible, as
a result of the high cost of physical cash handling. In fact, the electronic purse
is being increasingly used in the rest of Europe.
Respondents to the BMRB Access survey, conducted in April 2004, were asked
whether they agreed with the statement that they would like to use their
cash card as an electronic purse, even for the smallest purchases.
Slightly more people (9%) were interested in this option than in using a
cashpoint for all their financial affairs (8%). Overall, more men (10%) than
women (8%) were keen on the idea and it appealed more to those aged
between 15 and 34 years. Views among different social grades were fairly
even, between 8% and 11%, except for grade E, which recorded a lower
penetration of 3%. People living in households of five or more were much
more enthusiastic (16%) than others, while only 6% of people living on their
own were happy with the idea.

Overall, there is a clearly definable pocket of respondents who would be

interested in using cash cards as electronic purses. These are young people, of
varying social grades, living in the English regions, residing in large
households and renting privately. Alternatively, they might have young
families and hold a mortgage. People who like the idea of an electronic purse
tend to work part or full time and are possibly time poor.
Whether the industry will be able to produce a card that is sufficiently

attractive to the consumer might depend on whether people can be
persuaded to act like customers in Singapore and accept some more controls
in their lives.
ADVERTISING
Main Media Advertising Expenditure

In the year ending March 2004, main media advertising expenditure on
plastic cards reached £83.4m. Credit cards accounted for the majority of this
(92.1%), followed by debit cards (6.6%) and charge cards (1.2%).
In the credit cards category, Capital One recorded the highest main media
advertising expenditure of £14.9m. Capital One advertises frequently on
prime-time television to people who feel threatened by their debts. In
addition, it promotes comparatively low interest rates for people switching
from other cards and is clearly aiming to gain a major market share. The
theme of most advertisements is the advantageous initial interest rate, rather
than any other benefits that cards can be used to obtain. The purpose of the
heavy advertising for credit cards is to capture a greater market share of a
very high margin distribution channel. Other significant spenders in 2004
include Egg (£14.6m) and Mastercard (£10.8m), which both aim to grow and
defend market shares.
However, the advertising expenditure on credit cards might not benefit the
industry in the long term, as the trend towards debit cards, which offer much
lower margins, strengthens. In the year ending March 2004, main media
advertising expenditure on debit cards was £5.5m, led by Switch cards
(accounting for a significant 98.3%), which are now amalgamating with
Maestro.
In the charge cards category, American Express recorded a main media

advertising expenditure of £911,000 in the year ending March 2004, in order
to overcome the sluggish charge cards market.

Table 15: Main Media Advertising Expenditure on Plastic Cards

by Type (£000), Year Ending March 2004
Expenditure (£000)
Type of Card
Credit Cards
Capital One 14,916
Egg 14,580
Mastercard 10,809
Mint 6,233
Lloyds TSB 5,369
MBNA 4,167
American Express range 3,831
M&S &More 3,708
RBS 3,479
Co-operative Bank 2,048
Halifax 1,697
Barclaycard 1,446
NatWest 843
cahoot 645
Visa 404
Morgan Stanley 397
Abbey 338
Goldfish 325
Smile 192
HFC (Marbles) 167
Saga 162
Citicard 141
Alliance & Leicester 112
Total credit cards 76,846
Debit Cards
Switch 5,437
HSBC 86
Total debit cards 5,531
Table continues...

Table 15: Main Media Advertising Expenditure on Plastic Cards

by Type (£000), Year Ending March 2004
...table continued
Expenditure (£000)
Type of Card
Charge Cards
American Express charge card 911
Total charge cards †1,034
Total 83,411
† — does not sum due to rounding
DISTRIBUTION
Cross-border issuing and the acquiring of Mastercard cards have been
arranged throughout the EU, which enables cardholders to use their cards
everywhere. In addition, cards are issued to the same standards everywhere,
meaning that payments can be handled conveniently and flexibly. Cards allow
bank customers to use a whole range of financial distribution channels; for
example, making purchases over the Internet or by telephone and accessing
services in a bank branch or at an automated teller machine (ATM). Money
transfer by card is also being developed; for example, through the Maestro
MoneySend programme.
Banks could make more use of the convenience of cards to make their
product mix more attractive to existing customers. However, even though the
card is an important platform for the electronic bank to deliver its services,
card companies do charge high fees.


Electronic Banking 7. Regulation
7. Regulation
BACKGROUND
Regulations Introduced Since 1996

Electronic banking activities are surrounded by large amounts of regulation.
Tables 16a and 16b show that there is a formidable list of regulations that any
bank offering an electronic banking service will have to comply with. The
tables list 17 headings, which banks must comply with, and indicate which
legislation incorporates which regulations. Corporate Governance requires
the most (16 out of the 17) headings to be met.
The critical areas with which every regulation requires compliance are
business process management, discovery processes, disaster recovery
procedures, network security procedures, policy management guidelines,
retrieval routines and search tools. There is considerable overlap between the
many regulations’ requirements, but it is important for banks to take an
overall view.
Table 16a: Regulations Governing Electronic Banking
Corporate Performance Management

Business Activity Management
Business Process Management

Business Intelligence/Analysis
Digital/E-mail Archiving
E-mail Management
Disaster Recovery
Collaboration
Discovery
Data Protection Act 1988 X X X X X

Freedom of Information Act 2000 X X X X X
Human Rights Act 2000 X X X
Regulation of Investigatory Powers Act 2000 X X X X
Table continues...

7. Regulation Electronic Banking

...table continued


E-mail Management
Disaster Recovery
Collaboration
Discovery
Regulation of Investigatory Powers Act
(Communications Data) Order 2003 X X X X
Access to Health Records Act 1990 X X X X
Proceeds of Crime Act 2002 X X X X X X
Money Laundering Regulations 2003 X X X X X X X
Electronic Communications Act 2000 X X X
Electronic Signature Regulations 2002 X X X X
Privacy and Electronic Communications
(EC Directive) Regulations 2003 X X X
Electronic Commerce (EC Directive)
Regulations 2003 X X X
Basel II (Capital Adequacy Directive) X X X X X X X X
Companies (Audit, Investigations
and Community Enterprise) Bill X X X X
Financial Services Modernization Act 1999 X X X X X X
Health Insurance Portability
and Accountability Act 1996 X X X X
Securities and Exchange Commission Act
1934 17a 3/4, NASD 30 10/31 10 X X X X X
Table continues...


...table continued


E-mail Management
Disaster Recovery
Collaboration
Discovery
Department of Defense Directive 5015.2 X X X X X
Patriot Act 2001 X X X X X X
Sarbanes-Oxley Act 2002 X X X X
Corporate Governance X X X X X X X X X
Source: Butler Group 2004/Banking Technology July/August 2004, page 28

Table 16b: Regulations Governing Electronic Banking
Enterprise Content Management

Identity Access Management
Records Management
Policy Management
Network Security
Retrieval
Profiling
Search
Data Protection Act 1988 X X X X X X X
Freedom of Information Act 2000 X X X X X X X
Human Rights Act 2000 X X X X
Regulation of Investigatory Powers Act 2000 X X X X
Regulation of Investigatory Powers Act
(Communications Data) Order 2003 X X X X
Access to Health Records Act 1990 X X X X X X X
Proceeds of Crime Act 2002 X X X X X
Money Laundering Regulations 2003 X X X X X X
Electronic Communications Act 2000 X X X X
Electronic Signature Regulations 2002 X X X X
Privacy and Electronic Communications
(EC Directive) Regulations 2003 X X X X
Electronic Commerce (EC Directive)
Regulations 2003 X X X X
Basel II (Capital Adequacy Directive) X X X X X X
Companies (Audit, Investigations
and Community Enterprise) Bill X X X X X X
Financial Services Modernization Act 1999 X X X X X X
Health Insurance Portability
and Accountability Act 1996 X X X X X
Table continues...

Table 16b: Regulations Governing Electronic Banking

...table continued
Enterprise Content Management

Identity Access Management
Records Management
Policy Management
Network Security
Retrieval
Profiling
Search
Securities and Exchange Commission Act
1934 17a 3/4, NASD 30 10/31 10 X X X X X X X
Department of Defense Directive 5015.2 X X X X X
Patriot Act 2001 X X X X
Sarbanes-Oxley Act 2002 X X X X X
Corporate Governance X X X X X X X
Source: Butler Group 2004/Banking Technology July/August 2004, page 28
The compliance requirements mean that all banks will conform to a standard
of good practice. If they actually implement all the procedures, it should
mean that fraud will be detected and rogue traders discovered before they
bankrupt their employer.
Fines for non-compliance have already been imposed on Abbey and RBS.
Money Laundering Compliance

The Financial Action Task Force (FATF), is an international organisation with
31 member governments that aims to fight terrorism through freezing the
financing of terrorist groups. However, this task has been made difficult by
financial deregulation, tax havens such as the Cayman Islands, the
introduction of the euro and the ‘dollarisation’ of black markets.

The FATF has published 48 recommendations, of which 40 refer to money

laundering. Compliance since June 2003, when the principles were published,
is checked by a team of experts under the auspices of the World Bank and the
International Monetary Fund (IMF). At the same time, FATF is working with
the United Nations (UN) to help developing countries upgrade their financial
systems to meet minimum security standards, by means of technical
assistance.
The recommendations require Anti-Money Laundering (AML) software to

meet the compliance requirements of countries in which a bank operates and
accommodate all the regulations of each country. Systems can be rules based,
filtering transactions and matching customer data against a list of banned or
restricted individuals, businesses or states. It should be possible to do this fast
enough to identify prohibited assets and freeze them before the transaction
has been completed.
The alternative, and probably the only cost-effective way, is to establish

neutral networks, where artificial intelligence — involving adaptive learning
systems — is used to develop statistical models to evaluate the probability
that any transaction will be a money laundering transfer. Such systems have
to build up a profile of the customer and of the account. Each new
transaction is compared with these probability profiles and any deviation
beyond a certain tolerance level will lead to the transaction being examined
more closely.
It is not possible for the UK banking industry to comply with the stringent
AML measures imposed following the events of 11th September 2001 and the
Sarbanes-Oxley Act in the US without applying sophisticated electronic
controls. They will also have to comply with the Basel II capital adequacy rules
and International Accounting Standards in 2005.
The Financial Services Authority (FSA) requires banks to implement the Know
Your Customer (KYC) controls introduced in the US in 2002. It also requires
them to report all instances of suspicious activity to the National Criminal
Investigation Service (NCIS). However, only software and hardware designed
to operate securely and with strong built-in information diagnostics is able to
undertake this work within the short time scale specified by government.
Compliance requires investment in sophisticated neural networks, which can

monitor up to 40 million transactions a day. Of course, these data can be used
for other purposes, once figures have been collected, cleaned, validated and
entered into the bank’s data warehouse. The bank has to create a standard
set of procedures for extracting and cleaning, tagging and checking for
consistency. Some banks have not followed enterprise-wide database
management and they operate in silos, keeping their transactions separate.
For this reason, it is vital that major banks invest in platforms that meet
regulatory approval. One example is the Erase Compliance Manager from
NetEconomy, which has been installed at Abbey, as well as in other
organisations to provide that level of control.

It is possible to use the same data to upgrade knowledge about customers in

order to increase cross-holding of products and adjust savings behaviour. This
can be used as part of the bank’s development of customer-relationship
management (CRM) activities. In addition, the data can be used to follow the
KYC regulations that require all organisations to make an effort to know
where all of their customers’ money has come from and where it may be
going.
AML technology is very useful for detecting fraud, since any unusual scenario,
for whatever reason, will be reported. However, there is some pessimism
among suppliers that AML teams might be unable to see the wider potential
of the databases they use. Banks might well feel that they have to ensure
compliance now, and think about fuller use of their electronic records later. In
the UK, Searchspace offers a neural network-based AML system, which can be
easily justified in terms of fraud prevention, as this activity can be costed.
Fraud
The trend towards electronic payments is expected to reduce cheque fraud
and it should become increasingly possible to verify payments more quickly.
However, some banks appear to be moving in the opposite direction; in July
2004, the basic Halifax chequeing account had to have its clearing cycle
lengthened from 4 to 6 working days in order to reduce the incidence of bad
cheques being passed. Electronic payments should make a difference if basic
bank accounts become electronic. However, the BMRB Access survey results
suggest that the market segments at which basic accounts are aimed are
suspicious of electronic banking channels.
It is also likely that the nature of fraud is changing with the development of
electronic payments. Internet methods can be used to test whether stolen
account numbers work and whether money can be extracted from people’s
accounts quickly and remotely. The openness of the Internet is as likely to
allow customers to make fraudulent claims about their losses as to permit
increased professional fraud.
Identity Fraud
Identity theft is increasing, which follows a trend seen in the US. In the US,
7 million thefts took place in 2003, an annual increase of 80%. Not only can
thieves take and use real credit cards and identification, but they can also
penetrate personal computers (PCs).
New account fraud occurs when a criminal uses a false identity, either stolen
or created, to open a new bank account. The fraudster borrows money, takes
out a credit card or uses a mobile telephone at the expense of an innocent
party. In fact, much of this fraud is disguised as credit card loss and written off
after a period of months. Only if the real customer becomes aware of the
transactions does the bank realise that fraud is being perpetrated. Use of a
synthetic identity means that fraud may never be detected. As hackers
become more sophisticated, more accounts are being hijacked and the
amount diverted is increasing. False identity is clearly increasingly being used
for those transferring drug profits.

Payment fraud takes place when criminals use stolen information to pay for
goods or services. This is common in transactions when the card is not
present, such as when goods are purchased over the Internet. With this type
of fraud, the main victims are merchants that sell products online. For
example, if a genuine customer proves that they did not make the relevant
purchase, it is the merchant that assumes the loss. With the development of
databases of customer information by retailers and financial services
providers, there are increased risks that databases will be penetrated by
fraudsters and then exploited rapidly by electronic number crunching. It is
easier to break into the systems of smaller financial services providers, with
less sophisticated firewalls and controls.
Account takeover fraud occurs when criminals use a customer’s online current
account to transfer funds to another account, which they can then access
independently. With the growth of electronic bill payment facilities, this has
rapidly become more easy to do. Such fraud can also be perpetrated at
cashpoints, using false card slots that are attached to the real slot with an
integral digital reader. This copies the information on the customer’s credit
card and a small camera hidden beside the cashpoint records the keystrokes
of the customer’s personal identification number (PIN). Alternatively, a
membrane with a memory can be spread across the keyboard to record the
keystrokes. It is easier to open an account as a small business and avoid the
rigorous screening undergone by personal customers.
In self-reported surveys, ‘phishing’ is believed to have affected 3% of online

users in the US (according to a 2003 US survey of 5,000 online adult users by
Gartner). They recalled passing personal information to a site that they
subsequently believed was mimicking an official bank website. Half of these
users reported subsequent fraud in the establishing of new accounts, in the
passing of cheques or in takeover of their accounts.
Counter-phishing methods are being developed under the US Financial

Services Technology Consortium, but the onus remains on bank customers to
be vigilant and to install effective source and destination validation for all
their messages on domestic PCs. Banks also have a responsibility to educate
customers and explain how to detect a real, rather than a false, website. Since
the regulation of the Internet is very loose, such fraudsters are unlikely to be
caught.
Viruses
Deloitte Touche Tohmatsu surveyed the threats that global banks identified
in early 2004 in its 2004 Global Security Survey. This revealed that viruses and
worms caused serious concern to a number of banks, followed by loss of
customer data and inadequate patch management. Cyber terrorism was a
major threat for less banks and alteration of the firm’s website was a threat
for fewer still.

Patches are supplied by software vendors to try and fill the gaps in their
programs that viruses have exploited. The more virus attacks there are, the
more patches that have to be developed and delivered fast. This means that,
in practice, a patch is inadequately tested before installation and can
interfere with other processes. The need to reboot bank systems before a
patch can be activated means that it is possible for a patch to be installed and
recognised without actually having been activated. Eventually, patches make
the original software unrecognisable and impossible to maintain or to
integrate with other software. It is expected that, by 2007, vendors will have
created larger security and systems configuration products that include patch
management, making it easier to incorporate virus solutions. However, a
major problem is with legacy systems, such as the venerable source of the
Microsoft code, which cannot be replaced since it forms the core of current
Microsoft products.
To counter viruses, it is recommended that banks establish a series of controls,

starting with firewalls to block unusual entry attempts, intrusion detection
systems to identify unauthorised traffic and anti-virus software. Each entry
point to a bank’s platform, as well as the products of other vendors, need to
be protected. It is also necessary for banks to keep an inventory of all the
machines on their network, so that attempts by criminal hackers to create
new ones can be quickly identified.
Operational Risk
Operational risk is a major problem for banks, which need to retain
continuous reconciliation of their accounts and be scrupulous in safeguarding
customers’ assets. Such controls are increasingly likely to be automated and
can manage a variety of activities, as well as monitoring transactions at the
same time. The UK company Accurate Software produces an operational risk
controller, NXG, that can reconcile nostro and internal ledger accounts.
Advantages of an automated system are as follows:
• reconciliation — it is possible to match incomings and outgoings at the

same time
• exception management — standard transactions can be discounted and the

exceptions are analysed, which saves large amounts of staff time
• workflow — so transactions can be set off on an entry process to the system

and end up in exactly the right place
• software can be used to provide information relating to competitive activity

and can be used as an early warning of problems ahead.


Electronic Banking 8. Electronic Bill Presentment and Payment
8. Electronic Bill Presentment and

Payment
BACKGROUND
Electronic bill presentment and payment (EBPP) is a major activity in the US,
where bill payment is more complex than in the UK. The European practice of
establishing standing orders or direct debits to pay regular bills is not so
common in the US, where payments are generally made by paper cheques.
EBPP has been piloted by Royal Mail and Lloyds TSB, with little success so far.
The Association for Payment Clearing Services (APACS) and IBM set up a
partnership to offer a technological solution, but the major banks were
unable to agree on the cost of development or on what technology to
choose.
BACS EBPP
BACS, the bank-owned association for clearing services between banks, has
gone into partnership with CheckFree — the major US supplier of EBPP — to
provide an EBPP service to UK banks and billers. BACS is determined to
develop commercial opportunities and CheckFree is seeking new
opportunities outside the US. The BACS/CheckFree project is a white-label
product, which will appear to the customer as if it belonged to the bank, with
the bank logo. The system is designed to operate through the customers’
bank, rather than through a third-party site that connects the bank with the
biller.
As at May 2004, the joint venture planned to have one bank and one biller
working together by the end of the year. In addition, it aimed to add two
more banks and up to five billers during the next 6 months. The project
should appeal to major companies, particularly utilities, that have been
unable to persuade their customers to pay through their websites. The
participants believe that the key to success in this project is to persuade billers
to take part.
Commercial Payments
Microsoft Office has produced InfoPath software, which can be integrated
with Swift messaging protocols to improve Swift connectivity to Swiftnet. This
will allow banks to offer their corporate customers electronic payment
systems using the commoditised Microsoft messaging service with the bank’s
brand name. This automated financial services payments chain will cut
current fee levels by between 80% and 90%. The software has been trialled
by Siemens KAG, an investment manager.

8. Electronic Bill Presentment and Payment Electronic Banking
DISTRIBUTION
Electronic payments remain the core electronic function of banks, which
would be unable to operate without them. The adoption of electronic
methods by banks’ front offices among other distribution channels should be
a matter of sales strategy and profitability, as well as of customer needs and
wants, rather than of technological sophistication. Back-room rules for
money transmission can be complex and sophisticated. However, when the
processes have been automated, the rules can be applied easily. In this way,
complex processes no longer form a barrier to the fast transmission of money.
It is possible to run an electronic bank successfully, even if the only outlet is a

physical branch network with personal advisers for customers’ financial
needs. However, real-time same-day settlement of bills electronically will be a
worthwhile goal for retail banks.

Electronic Banking 9. Electronic Trading
9. Electronic Trading
BACKGROUND
Securities Trading
Away from the retail trading environment, the development of electronic
banking for trading in financial securities is an exciting concept. For example,
the development of seamless trading between clients through their brokers is
increasingly feasible.
An example of this development is the Electronic Trading Services (ETS) arm

of the Bank of America Securities (BAS), which has established a joint venture
with Microsoft, Bloomberg and Linedata. The venture is called the Electronic
Trading Alliance.
Microsoft’s .Net framework is the basis, while Linedata integrates access to

ETS products using its LongView trading order management system. In
addition, Bloomberg market data and trading screens will be connected to
the ETS platform.
Small brokers will be able to use the trading platform and its anonymous
algorithmic servers without heavy investment. In addition, traders will be able
to use their existing screens. It is expected that direct connection with
institutional investors will lead to more accuracy, faster trades and increased
volume.
Users comprise four groups: broker dealers, order management companies,

technology vendors and electronic trading pioneers.
Funds Supermarkets
The development of online banks has seen the introduction of funds
supermarkets on banks’ websites. For example, Bradford & Bingley set up its
Marketplace portal to provide customers with a range of financial products
that they can apply for electronically. Legal & General, a life insurer, has also
established a supermarket for its banking customers. In addition, several
online banks, such as First Direct, have expanded their offerings to include
share dealing services without advice.
The proposed restructuring of the financial advice industry will allow

financial services providers to offer a much wider range of products, including
online trading. They will, of course, have to be very careful to separate the
simple ‘execution-only’ services, where a customer buys and sells equities or
bonds through the supermarket site, from advice-led services, where the
customer is advised by professionals from the bank before choosing an
investment. However, this raises regulatory issues, as the adviser’s employer is
liable if the advice is inaccurate. Following the financial crisis of 2000,
electronic dealing shrank severely and firms such as Charles Schwab left the
UK online stockbroking scene. However, there are signs of a revival, as the
stock market begins to rise, albeit hesitantly.

9. Electronic Trading Electronic Banking

Electronic Banking 10. An International Perspective
10. An International Perspective
MARKET DEVELOPMENTS
Mobile Banking Services

Wireless application protocol- (WAP-) based banking has been more
successful in the Netherlands than in the UK. In 2001, a pilot scheme operated
by O2 in the Netherlands achieved a subscriber base of over 500,000 people in
a few weeks, many of whom used the banking services available through the
wireless network.
The Netherlands’ financial services industry is known for the ease with which
funds can be transferred immediately and electronically between customers.
This means that mobile transactions are considerably easier than for UK
customers.
The growth of WAP is dependent on the availability of a large number of

WAP-enabled mobile telephones, simple software and a large number of
enthusiastic customers with money to save or spend.
Nordea
Nordea is the largest Scandinavian bank and is one of the few truly
international banks in Europe. Its operations cover retail, corporate and
institutional banking, as well as asset management and life insurance. It has
1,240 branches and 11 million customers. Of these customers, 3.9 million were
electronically connected in August 2004, making Nordea a world leader in
electronic banking.
Electronic banking was first based in Finland, before moving to Sweden,

Norway and Denmark. Subsequently, the service was extended to Estonia,
Latvia, Lithuania and Poland. The Swedish state holds 19% of shares.
In 11 regional banks, retail banking is expanding healthily, with an increase in

personal lending of 13% by volume in 2003. In addition, deposits rose by 3%,
lending margins by 1.6% and deposit margins by 1.7%. As customers increase
their volume of business and number of products, prices fall and service levels
rise.
In 2004, Nordea is focusing on its customer-centric business models. By

creating bundles of products and services that are available through all
channels, Nordea will roll out its customer concept in Norway, Poland and the
Baltic countries. In addition, it will implement a customer-relationship
management (CRM) system for the entire area.
In 2004, Nordea estimates that it will have 4.1 million e-banking customers
(a rise of 13.9% on 2003) and will record 16 million monthly
e-banking payments (an increase of 20.3%).

10. An International Perspective Electronic Banking
Table 17: The Number of E-Banking Customers

and Monthly Payments for Nordea
(000 and index 1997=100), 2000-2004
% Change
2000-
2000 2001 2002 2003 e2004 2004
Customers 2,200 2,900 3,400 3,600 4,100 86.4

Index 440 580 680 720 820
Monthly payments 8,100 8,900 12,100 13,300 16,000 97.5

Index 450 494 672 739 889
Source: Nordea Annual Review, 2003/Key Note
Other important statistics from Nordea include the following:
• Between 1999 and 2003, Nordea’s banks reported a reduction in manual

transactions and an increase of 49% in automated and self-service
transactions.
• The number of Nordea Netbank users increased from 3.2 million at the end
of 2002 to 3.9 million in August 2004.
• By the end of August 2004, 351,000 customers registered to undertake

online trading in shares.
• In 2003, customers logged on to Nordea sites 130 million times, an increase

of 25% on 104 million logins recorded in 2002. Between January and
August 2004, customers logged on 107 million times, 25 million more than
the same period in 2003.
• The total number of payments made by electronic banking rose from

121 million in 2002 to 146 million in 2003, an increase of 20.7%. Between
January and August 2004, Netbank customers made 111 million payments ,
18 million more than in the same period in 2003.
• In business electronic banking, Nordea has set up 2,060 direct electronic

payment contracts with merchants, of whom 730 are represented on Sols
market — Nordea’s electronic marketplace. Nordea’s e-business services also
include e-invoice, e-identification, e-signature and e-salary.

• Bo Harald, the Head of Electronic Banking, estimates that soon 50% of

invoices paid by Nordea customers are paid through the Netbank, although
this proportion is growing fast.
• In 2003, Nordea gave its shareholders a total return of 47.9%.

In 2002, Nordea reported that almost 100,000 people used its mobile services
in the Baltic area. The WAP service was piloted in Finland using general
packet radio service (GPRS) telephones supplied by Nokia. Nordea reported
that there were 300,000 logons to its mobile services each month, including
account enquiries made by short message service (SMS) messaging.
Nordea has not reported the use of its WAP services since, indicating that
there has been little further dramatic take up of the medium. However, SMS
messaging remains a popular form of contacting the bank.
In May 2002, Nordea announced a pilot project with Nokia, using a mobile
telephone equipped with a subscriber identity module (SIM) card issued by
Nokia and a chip card issued by Nordea. Customers wanting to access
Nordea’s banking and sharedealing services logged on and placed orders
using the wireless identity module (WIM) chip card, which allowed their
identity to be confirmed. In addition, this enabled digital signatures to be
supplied for transactions to be authorised. The results of the pilot project
have yet to be publicised. This follows another pilot using the same
technology with Visa in 2001, again with a dual chip Nokia mobile telephone,
for customers buying from the grocer Ruoka.net and the cinema Kinopalatsi.
Nordea offers a one-bank-shopping concept, founded in the provision of its

services to its Nordic customers abroad, although this has now been extended
to customers in all its locations. The introduction of electronic banking makes
this concept much easier to implement.
Nordea’s aims are to focus on creating value for customers and shareholders,
as well as to concentrate on its strengths and core activities. The bank
provides a broad set of easily accessible and competitive financial services and
solutions, speedily adjusting to market conditions. It aims to beat its
competitors in terms of better solutions and continuous improvement.
Nordea also believes in reducing complexity by becoming a single bank with a
common culture. It stresses consolidation and integration of processes,
production and technology, through a joint venture with IBM and Nordic
Processor. This has led to significant cuts in IT development costs and IT
production consolidation in an outsourcing agreement.
The agreement, which covers 10 years, is valued at €2.2bn, with an annual

value of over €330m. In November 2003, 900 Nordea employees transferred
to Nordic Processor. The aim is for Nordea to pay only for the use of IBM
systems and technology in its on-demand service, consolidating several
platforms, and standardising networks and desktop computers. The IBM
environment supplied covers resource provisioning, asset tracking, workflow
scheduling and infrastructure monitoring.

COMPETITOR ENVIRONMENT
Cashless Payment Instruments
Belgium
Belgium was an early adopter of debit cards and Key Note estimates that, in
2004, the vast majority of payments (81.1%) will be undertaken using credit
transfers or debit/credit cards. Between 2000 and 2004, direct debits are
estimated to experience the largest growth of 4 percentage points. Over the
same period, cheques are expected to have lost market share to the point of
being rarely used, as electronic purses (the Proton card from Banksys and
Mister Cash) have overtaken them. The dominance of Dutch-owned banks,
such as ING, means that electronic methods are being introduced across
borders.
Table 18: Cashless Payment Transactions in Belgium

by Volume (%), 2000-2004
2000 2001 e2002 e2003 e2004
Credit transfers 46.7 47.8 47.2 45.7 44.3

Debit/credit cards 32.8 33.3 35.7 36.3 36.8
Direct debits 11.8 11.2 10.7 10.7 11.8
Card-based e-money 3.6 3.8 4.1 4.3 4.7
Cheques 5.0 3.8 3.5 3.2 2.4
Source: Bank for International Settlements CPSS, Red Book statistical

update April 2003, Table 13 (www.bis.org)/Key Note
France
Payments made by cheque are highly popular in France, giving customers a
clear paper record of their expenditure. New tills mean that cheques can be
written electronically and are accepted for even small values, although they
still have to be signed. However, overall, cheque payments experienced an
estimated decrease of 8.1 percentage points between 2000 and 2004.
The growth in use of debit/credit cards of 7 percentage points over the 5-year
period means that this instrument has gradually overtaken the cheque in
popularity. Credit transfers have become a fourth option for payment, losing
their place over time to direct debits. The use of cards such as Moneo is
expected to grow rapidly once it has been widely accepted.

Table 19: Cashless Payment Transactions in France

by Volume (%), 2000-2004
2000 2001 e2002 e2003 e2004

Direct debits 16.6 16.8 17.1 17.4 17.8
Card-based e-money n.a. neg. neg. 0.1 0.3
Cheques 37.9 35.4 33.2 31.5 29.8

n.a. — not available
neg. — negligible

Germany
Cheque usage in Germany is low and decreasing — Key Note estimates that,
in 2004, cheques will account for just 1.9% of all cashless payment
transactions in Germany, a fall of 1.1 percentage points on 2000. At the same
time, the use of debit/credit cards for cashless payments is rising and is
estimated to account for 16.7% of transactions in 2004.
Credit transfers are, by far, the most popular form of cashless payment and
are estimated to account for 47.6% of all cashless payment transactions in
2004. Direct debits are, however, beginning to fall slightly in popularity. The
take-up of electronic purses, such as the Geldkarte, is still very small and will
take some years to penetrate the market significantly.

Table 20: Cashless Payment Transactions in Germany

by Volume (%), 2000-2004
2000 2001 e2002 e2003 e2004

Direct debits 37.8 36.4 36.3 35.7 35.3
Cheques 3.0 2.3 2.2 2.0 1.9

The Netherlands
In the Netherlands, the most popular instrument of cashless payment is
debit/credit cards, with an estimated 38.1% share in 2004. However, the
estimated rise in debit/credit card payments by 8.5 percentage points
between 2000 and 2004 is at the expense of credit transfers, which fell by
3.5 percentage points over the same period.
Cheques are very minor forms of payment in the Netherlands, accounting for
an estimated 0.1% of all cashless payment instruments in 2004. The use of
electronic purses is rising faster in the Netherlands than in Germany, but has
yet to attain the levels experienced in Belgium. The same Banksys technology
is being used in the Chip Knip, as in the Belgian Proton electronic purse.

Table 21: Cashless Payment Transactions in the Netherlands

by Volume (%), 2000-2004
2000 2001 e2002 e2003 e2004

Direct debits 29.2 28.2 28.6 29.1 28.5
Cheques 0.5 0.2 0.1 0.1 0.1

Singapore
Singapore data relating to cashless payment transactions are recorded in a
slightly different way than to those from other countries (see note in
Table 22). Regardless of this, the pattern of payments is dramatically
different. While cheques are still frequently used — recording an estimated
26.7% share of cashless payment transactions in 2004 — their use is shrinking
fast. In addition, the usage of debit/credit cards is also decreasing, although
they still record a large share (an estimated 27.3% in 2004). Direct debits are
not a significant medium and card-based e-money is the dominant payment
means. This is based on public transport ticketing requirements (the FeliCa
card), card mounted transponders and the ExxonMobil Speedpass contactless
card. The FeliCa system, developed by Sony, is designed for contactless
operation once it has been loaded at an automated teller machine (ATM) or,
in due course, through a mobile telephone.

Table 22: Cashless Payment Transactions in Singapore

by Volume (%), 2000-2004
2000 2001 e2002 e2003 e2004
Credit transfers 4.7 5,2 5.1 4.9 4.9

Direct debits 5.6 5.8 5.4 5.6 5.6
Cheques 29.6 28.2 27.7 27.6 26.7

Note: figures cover Interbank transactions only. Payments by debit/credit cards exclude
credit card transactions. Credit transfers include large value transactions.

The Singapore Government, which, according to a survey, is supported by

85% of the population, has declared that electronic money will replace paper
and metal from 2008.
Singapore has the benefit of being a small, urban economy with a highly
technologically skilled population that welcomes innovation. Similar
developments are occurring in Hong Kong and South Korea. The contrast
with the European market is significant.
Sweden
In Sweden, the dominant cashless payment method remains the credit
transfer, although this is slowly losing its dominance to debit/credit cards —
between 2000 and 2004, usage of credit transfers decreased by an estimated
9 percentage points, while debit/credit cards increased by the same amount.
No other payment method has achieved a significant market share. Direct
debits maintain an 8.4% share of payments, while electronic purse payments
remain very low at 0.2%.

Table 23: Cashless Payment Transactions in Sweden

by Volume (%), 2000-2004
2000 2001 e2002 e2003 e2004

Direct debits 8.0 8.2 8.3 8.5 8.4
Cheques 0.2 0.2 0.2 0.2 0.1

The US
In the US, cheque payments are very important, although they are yielding
their control gradually to debit/credit card payments. Credit transfers are a
relatively uncommon method of transferring funds, as are direct debits. The
electronic purse has yet to make any impact on the US cashless payments
sector.

Table 24: Cashless Payment Transactions in the US

by Volume (%), 2000-2004
2000 2001 e2002 e2003 e2004

Direct debits 2.6 3.1 3.5 3.3 3.7
Card-based e-money n.a. n.a. n.a. n.a. n.a.
Cheques 57.7 53.5 51.6 50.0 48.4

n.a. — not available
Note: a Federal Reserve study of the cheque clearing system, published in August 2002,
estimated that the number of cheques paid in in the US was 49,500 million in 1995 and
42,500 million in 2000. Values for other years are derived from these estimates.

The US has a unique banking sector, in which there are many small banks.
Traditionally, regulations have made it difficult for collaboration between
banks to take place. The main card consortia offer the only common clearing
platform, so it is natural that cards should become the major non-physical
payment form.
Experiments with electronic purses in the US, as elsewhere in Western

countries, have generally failed when they have been based on private sector
agents. Experiments have performed better on university campuses or in
small urban areas. The core difficulty is creating a sufficiently large base of
merchants prepared to accept purses for payment on small items. In areas
where the government requires large numbers of people to use a smart card
system, such as in a congestion charging scheme, the incentives become
greater and the economics of the electronic purse are transformed.

Electronic Banking 11. PEST Analysis
11. PEST Analysis
POLITICAL FACTORS
Electronic banks are able to create credit quickly and easily. In this way,
favoured customers can rapidly become highly endebted as they spend freely,
while others who have no credit are denied a service. This intensification of
income inequalities tends to destabilise society and increase tensions.
Electronic banks can transfer funds anywhere in the world immediately,

which makes money laundering, fraud and the financing of terrorist
networks much easier than in the past. Again, this might lead to
destabilisation in the economy.
However, monitoring and control mechanisms can be established to provide

an audit trail. Political control, as exemplified by the US Patriot Act (2002) and
the Know Your Customer (KYC) rules, means that customers’ personal
backgrounds are closely scrutinised when they apply to join a bank. Electronic
operations make it much easier to trace their transactions and to identify how
they use their money. In theory, this allows governments to identify terrorists
and fraudsters more easily and provides proof for court action. If terrorists are
caught by these methods, it makes society safer and is politically acceptable.
However, the potential for political control of individuals means that a

government wishing to suppress opposition can use the banking system and
its electronic controls to ‘spy’ on individuals, abusing their civil rights and
denying them access to funds.
Using cards to purchase goods means that a customer’s shopping profile can
be built up. This provides the companies that collect an electronic profile of
customers’ habits with valuable knowledge. However, there is a risk that this
information could be passed to third parties who do not have the welfare of
the customer as their first concern.
ECONOMIC FACTORS
Evidence from UK economic indicators point to an increase in wealth. The
savings ratio is beginning to rise again under the influence of higher incomes
and employment rates, and reached 6.1% in the first quarter of 2004.
Household investment and gross domestic product (GDP) are also rising
healthily. The Chancellor of the Exchequer has stated that the current
increase has lasted longer than any period of economic growth since the
industrial revolution.

11. PEST Analysis Electronic Banking
Between 2000 and 2003, retail sales have grown steadily and the rate of
unemployment is low by historical standards. The annual change in the retail
price index (RPI) shows lower inflation in 2004 than in 2003, but this is still
above both the old inflation target of 2.5% and the new target of 2%. Gross
disposable income is also rising fast.
These indicators all point to an expansion in the demand for banking services,
as households have growing income levels, which are being channelled into
savings or investment.
Table 25: UK Economic Indicators

(£m, index 2001=100, index 2000=100 and %), 2000-2004
2000 2001 2002 2003 †2004
Savings ratio 5.5 6.7 5.5 6.0 6.1

Household investment
(£m) 39,182 43,603 49,607 54,628 15,218
GDP at basic prices
(index 2001=100) 97.1 100.0 103.6 107.1 108.8
Retail sales‡
(index 2000=100) 100.0 108.3 116.3 119.9 §123.6
Unemployment rate
(%)†† 3.6 3.2 3.0 2.9 ‡‡2.7
Annual change
in RPI (all items [%]) 2.9 1.8 1.6 2.9 2.6
Gross disposable
income (£m) 654,649 702,774 724,296 752,592 §§ 782,230
Table continues...

Table 25: UK Economic Indicators

(£m, index 2001=100, index 2000=100 and %), 2000-2004
...table continued
† — first quarter
GDP — gross domestic product
‡ — December, by value at constant market prices
§ — figure for May
†† — claimant % of workforce
‡‡ — figure for June
RPI — retail price index
gross disposable income — total resources less taxes and social contributions
§§ — annual estimate
Source: Economic Trends, Quarterly National Accounts Supplement/Labour

Market Trends/Monthly Digest of Statistics © Crown copyright material is
reproduced with the permission of the Controller of HMSO (and the
Queen’s Printer for Scotland)/Key Note estimates
Debt levels are also increasing, rising to just over £1bn in June 2004. This is
due, in part, to growing credit card sales and rising house prices.
The interest rate ceased to fall in 2003 and its rise is associated with worries
that the economy is expanding too fast, encouraging a return to faster
inflation. Equity prices fell heavily until 2003, but have begun to recover
slowly in 2004. This recovery is likely to be uncertain in the light of problems
in Iraq and Russia (with the supply of oil to the US economy) and the threat of
terrorism. A return to equity investment requires a general feeling of
confidence by investors that share prices will rise. In the meantime, the rise in
house prices has continued, as households invest in property instead of
shares. However, house prices have shown some signs of slowing in 2004.

Table 26: UK Financial Indicators

(% and index 2001=100), 2000-2004
2000 2001 2002 2003 †2004
Base rate‡ (%) 6.0 5.1 4.0 3.7 3.9

Equity prices
(FT all-share index 2001=100) 113.6 100.0 83.0 73.8 82.8
House prices
(Department of Environment
mix-adjusted series 2001=100) 92.5 100.0 116.1 134.3 141.8
† — first quarter
‡ — set by Bank of England
Source: Financial Statistics July 2004, National Statistics © Crown copyright

material is reproduced with the permission of the Controller of HMSO (and
the Queen’s Printer for Scotland)
A combination of economic distortions and increasing wealth means that the

demand for savings funds, well-managed and good value investment funds
and efficient house purchase lending facilities, can only increase.
The capacity of electronic banks to create credit and transfer funds could
have an effect on monetary policy. If enough individuals drew enough credit
from their banks, it might lead to a significant expansion in the money
supply, which could not be controlled by monetary policy. In this way,
operations intended to reduce inflation would be rendered ineffective if the
money supply remained out of control.
The development of a single currency in the EU and of a European Central

Bank (ECB) mean that, in theory, one country’s monetary problems could
become a wider issue, as interest rates are no longer an adequate control on
money supply. This makes international electronic banks more powerful
players in the economic management of Europe.
Electronic banks can clearly identify, by use of customer relationship

management (CRM) software, customers who are profitable and those who
are not. This allows them to withdraw funds from the areas that are poor and
where the cost of providing a banking service is greater than the revenue
(in terms of interest on loans and fees on services). This intensifies income
inequality and works against the EU’s goal of convergence between its
regions.

On the other hand, electronic banking is a highly efficient way of channelling

funds to those who need them efficiently and at a low cost. Cheap credit
financed the economic revival in the late 1990s and sustained spending
during the early 2000s. This supports the view that more efficient banks lead
to greater economic prosperity.
Business surveys indicate that small businesses do not feel constrained by lack
of access to banking finance. The growth of electronic banking is, therefore,
supporting investment and economic growth.
The ease with which customers can transfer from one electronic bank to
another means that competition between banks is intense. As such, customer
services will improve to prevent customer mobility and banks will reduce their
fees. Electronic banks can offer much cheaper services than their traditional
rivals, which will have a positive effect on the economy.
The impact of increased automation can be felt in the employment of bank

staff. The automation of the back office means that staff can be reduced in
number or redeployed when call centres in remote areas are established.
However, the outsourcing of much of the back-room activity to third-world
countries might have some negative effect on the UK job market. However,
while unemployment in the UK remains low, the urgency of this issue is not
great.
The early development of electronic banking — with breakthroughs by

supermarkets such as Tesco and Sainsbury’s, British Gas (Goldfish), and
insurers such as Prudential, Scottish Widows and Legal & General, which offer
standalone operations — was predicated on an economic model of market
segmentation. Electronic banking was thought to appeal to a specific group
of people who would not want to use traditional banking brands. However,
with maturity, it is clear that the customer base of the major banks associates
high transition costs with moving banks. In addition, the challenge of the
new technology has not had as much economic effect as was feared.
Traditional banking operators, such as Nationwide, have innovated so that
they have incorporated electronic services within their main brand name.
Other traditional banks simply created new brands to compete with the
supermarkets and even the supermarket banks relied on the back offices of
established banks to deliver their services.
Economically, the major challenge to the leading banks has come from
smaller banks. These have developed a reputation for competence so have
the economic strength to buy into the traditional marketplace.
SOCIAL FACTORS
The ease of access to funds through an electronic bank means that those with
credit can spend freely. Consumers can fuel an inflationary boom by
demanding extra goods and services. However, at the same time, those
excluded by processes such as automated credit scoring methods, are denied
funds to help them establish or sustain businesses or buy cars to enable them
to travel to work. This can lead to intensified social tensions.

The threats to security posed by phishing, hacking into user sites and identity
theft increase an atmosphere of distrust. In addition, the seizing of credit
cards and intimidation of card holders is a possibility in areas where crime is
rife.
On the other hand, electronic banking means that funds can be obtained
anywhere, at any time, through the use of cashpoints (in urban areas) or by
the use of cards, electronic wallets or downloading funds to a mobile
telephone. This will be a great improvement for people living in remote areas
from which physical bank branches have been withdrawn.
However, customers want to have personal discussions with people in their

bank when making important choices, such as taking out a mortgage and
choosing investments or a pension. The BMRB Access survey conducted for
this report indicates that there is little support for electronic access for
complex financial transactions. The development of cheap electronic services
may well mean that a face-to-face discussion with a trained financial adviser
could become much more expensive. In addition, it will prove difficult for
those who are not close to a physical branch.
The development of electronic banking is allowing banks to redeploy their

staff. There is a trend, pioneered by HSBC and developed by Abbey and
NatWest, to revamp the branch and introduce more and better trained staff
to the sales area. This includes employing ‘greeters’ who guide customers on
entering the branch, which follows the practice of US banks.
Customers that rely on telephone banking are increasingly experiencing the

outsourcing of services to overseas call centres, such as India. However,
customers may well feel uneasy about discussing their financial affairs with
somebody so far away.
TECHNOLOGICAL FACTORS
The technological issues in electronic banking centre around the speed with
which banks can upgrade their IT structures to accommodate the new
electronic possibilities. While Barclays, for example, uses its legacy systems of
the 1990s to manage customer accounts, its rival NatWest — which was taken
over by RBS in 2001 — has had its entire IT operation restructured and
modernised. In this way, it is in a much better position to improve its
electronic services. Similarly, Abbey will be expected to replace its IT platform
with the more sophisticated and customer-oriented IT architecture provided
by Banco Santander Central Hispanica (SCH [if the proposed merger takes
place]).
Meanwhile, pure electronic bank operations can introduce and develop IT

rapidly and exploit first mover advantage in the market.
Technological advances in security systems are urgently needed in order to

keep ahead of hackers and identity thieves. Again, development is hampered
by the need to ensure that IT can be introduced widely and cheaply. The
introduction of CHIP and personal identification number (PIN) technology
was slowed by the need to persuade merchants to change their reader
devices and by the financial arrangements between merchants and banks.

Any technology that makes it easier to identify a customer properly and to

reduce tampering with cashpoints by card fraudsters has to justify the capital
cost of replacing all the cashpoints in the country.
Technological advances in straight-through processing have revolutionised

the internal processing of financial transactions. It is now possible to
automate the entire process from a customer authorising a payment to the
crediting of another customer’s account. This opens the possibilities of
outsourcing the process to another country, such as India or Cambodia.


Electronic Banking 12. Consumer Dynamics
12. Consumer Dynamics
OVERVIEW
Key Note commissioned exclusive research for this report to investigate
customer attitudes towards electronic banking. Between 1st and 7th April
2004, BMRB Access conducted a survey among 977 adults in Great Britain and
recorded their reaction to a series of statements regarding electronic banking
services. Responses were analysed in terms of age, sex, geographical region,
social grade, family size and type, working status and accommodation type.
The statement that the largest penetration of respondents agreed with was
that they contact their bank electronically at least once a week (28%).
However, this was followed by those who are concerned with the security
aspects of electronic banking (18%) and those who would not trust an
electronic bank with their affairs (17%).
Table 27: Customer Views on Electronic Banking

(% of respondents), 2004
“Thinking about electronic banking (that is, using a cashpoint, an automated

telephone service, a mobile telephone, a television, or a computer to pay bills,
withdraw money or transfer funds), with which of the following statements do you
agree?”
% Rank
S1: I contact my bank electronically at least once a week 28 1

S2: I contact my bank electronically at least once a month 13 7
S3: I rarely contact my bank electronically 15 5=
S4: I have started using electronic banking in the last 5 years 15 5=
S5: I have started using electronic banking in the last year 6 13=
S6: I am concerned about the security aspects
of electronic banking 18 2
S7: I would not trust an electronic bank with my affairs 17 3
S8: I think it is a good idea to use my bank account
through my television 2 16=
S9: I think it is a good thing to be able to manage my
account through an automated telephone service 11 9
S10: I would like to use a cashpoint for all my financial affairs 8 12
Table continues...

12. Consumer Dynamics Electronic Banking
Table 27: Customer Views on Electronic Banking

...table continued
“Thinking about electronic banking (that is, using a cashpoint, an automated

telephone service, a mobile telephone, a television, or a computer to pay bills,
withdraw money or transfer funds), with which of the following statements do you
agree?”
% Rank
S11: I would like to download cash to my mobile telephone

for daily purchases 1 18
S12: I would like to use my cash card as an electronic purse,
for even the smallest purchase 9 10=
S13: I would like my bank to send me messages about the
state of my account 9 10=
S14: I would like my bank to suggest better ways of
handling my money, given my circumstances 12 8
S15: I would change my bank if it did not offer the most
convenient electronic service 5 15
S16: I would change my bank if it offered a higher interest
rate on its electronic account 6 13=
S17: Don’t know 2 16=
S18: None of these 16 4
Weighted sample: 977 Base: all adults aged 15+
Source: BMRB Access April 2004
The order of priorities suggests that there is a sufficiently large proportion of

customers who use electronic banking channels. In addition, 6% of
respondents claimed to use electronic banking for the first time in 2004.
Although this indicates a trend towards electronic bank usage by retail
customers, this is not at the pace that was forecast 5 years ago. Worryingly
(as mentioned above), 18% of respondents said that they are concerned with
the security aspect of electronic banking, while 17% do not trust electronic
banking services. This is a serious problem, as a bank’s reputation is its most
valuable asset. In this way, a bank that has little or no credibility will not be
able to attract a large number of savers or borrowers.

At 15%, the proportion of respondents who rarely use an electronic banking

service is not surprising and indicates that, for many people, banking services
are to be used as little as possible. However, the same penetration of
respondents claimed to have used electronic banking in the last 5 years,
indicating a solid, albeit slow, progress for these channels of distribution. A
smaller proportion of respondents (13%) stated that they use electronic
banking services at least once a month, which again indicates steady usage.
12% of respondents indicated that they would like their bank to suggest how
they could use their money better, so electronic banks could make this
offering. In addition, the 11% who thought that it would be a good idea to
be able to manage their account through an automated telephone service,
might represent an important market to electronic banks. However, the idea
of using an automated teller machine (ATM) or cashpoint as a focus for all
financial transactions is popular with only 8% of respondents,
television-mediated services appeal to 2% and the use of mobile telephones
to download cash to just 1%. Such developments need considerable
marketing initiatives if they are to be seriously considered as viable
distribution channels.
Only 5% of respondents claimed that they would move bank on the basis of
the quality of its electronic services, although at 6%, respondents showed a
lack of willingness to move bank for a higher interest rate. However, the
success of ING Direct indicates that there are some depositors who are happy
to do so.
FREQUENCY OF USE
At Least Once a Week

At 28%, this response was the most frequently agreed with. Of the
respondents who agreed with the statement that they contact their bank
electronically at least once a week, 30% were male and 27% female. Adults
aged between 35 and 44 years old were the most likely to agree with the
statement (at 42%), followed by 25 to 34 year-olds (38%) and 15 to
24 year-olds (34%). Older respondents were far less likely to access their
accounts as frequently as once a week and just 8% of those aged 65 years and
older claimed to do so.
Social grade appears to be a very significant factor in the frequency of

contacting a bank electronically. ABs were the most likely to access their
accounts frequently (36%), followed by C1s and C2s (both at 27%) and
Ds (26%). Penetration for those in socio-economic group E was significantly
lower at 15%. The regional breakdown of respondents shows that the
frequent use of a bank electronically is most likely in the South West (39%)
and least likely in Wales (13%).
Interestingly, 38% of respondents who work full time said that they contact
their bank electronically more than once a week, while just under a quarter
(24%) of those not in work and 13% of the retired do so. In addition, the
larger the household, the more likely the members are to use a bank
electronically.

At 32%, single respondents were slightly more likely to use their bank
frequently than those who are married (30%). The age of children in the
household was also significant, with 41% of respondents with children under
5 years old using electronic banking services frequently, compared with 36%
of people with teenage children. Respondents who rent property (30% to
32%) and those who own their property with a loan (34%) were also keen
electronic bank users.
Overall, the findings suggest that frequent use of a bank’s electronic services
is associated with high levels of current expenditure and low time availability.
At Least Once a Month

Less than half as many respondents (13%) claimed to contact their banks
electronically monthly or more as do so weekly (28%). A slightly higher
penetration of these respondents were female (14%) than male (11%).
Respondents who said that they contact their bank electronically this
frequently were more likely to be aged between 55 and 64 years (19%),
although penetration was fairly similar among those aged between 15 and 44
years old.
In terms of social grade, managerial and professional respondents in

socio-economic group AB (17%) and clerical workers in group C1 (16%) both
claimed to use electronic banking services fairly frequently, but interest tailed
off for lower grades (10% for C2s and 8% for Ds). Part-time workers (18%)
were more likely than those who work full time (13%) to use electronic
resources at this frequency.
In general, respondents who claimed to contact their bank electronically at

least once a month are likely to have more leisure time and be slightly less
affluent than those who use electronic banking services more frequently. In
addition, they might be able to visit bank branches more regularly or require
cash less frequently.


S1: “I contact my bank electronically at least once a week.”

S2: “I contact my bank electronically at least once a month.”
Sample S1 S2
Profile % PP % Pen % PP % Pen %
All 100 100 28 100 13

Sex
Male 48 51 30 43 11
Female 52 49 27 57 14
Age
15-24 15 19 34 15 13
25-34 16 22 38 18 14
35-44 19 28 42 21 14
45-54 16 16 29 12 10
55-64 14 10 20 21 19
65+ 20 6 8 12 8
Social Grade
AB 25 32 36 33 17
C1 29 28 27 35 16
C2 21 20 27 17 10
D 16 15 26 10 8
E 9 5 15 4 6
Marital Status
Married 59 64 30 67 14
Single 25 28 32 17 9
Divorced 5 5 26 5 12
Widowed 8 2 8 7 11
Separated 2 1 14 4 26
Working Status
Full time 38 51 38 37 13
Part time 16 19 33 23 18
Not working 21 18 24 14 9
Retired 25 12 13 25 13
Table continues...


...table continued

Sample S1 S2
Standard Region
London 13 13 30 14 15
South East 20 22 31 27 17
South West 9 12 39 8 11
Wales 5 2 13 10 26
East Anglia 4 5 35 3 8
East Midlands 7 9 35 5 9
West Midlands 9 9 29 9 13
Yorkshire and Humberside 9 7 21 2 3
North West 11 11 29 9 11
North 5 4 23 3 7
Scotland 9 5 14 10 14
Size of Household
1 19 15 22 13 9
2 34 30 24 42 16
3 20 23 33 19 12
4 19 22 32 19 12
5+ 8 11 39 6 10
Presence of Children
Aged 0-4 12 17 41 12 13
Aged 5-9 12 17 40 14 14
Aged 10-15 18 23 36 15 11
Any aged 0-15 31 42 38 30 12
None 69 58 24 70 13
Table continues...


...table continued

Sample S1 S2
Tenure
Owned with mortgage/loan 43 52 34 50 15
Owned outright 30 19 18 25 11
Rented from council 12 13 32 7 8
Rented from someone else 14 15 30 15 13
Rent-free from council 1 † † ‡ 6
Rent-free from someone else 1 1 25 3 33
† — nil response ‡ — less than 0.5% response

Weighted sample: 977 Base: All adults aged 15+
PP = Purchasing Profile Pen = Penetration
Rarely
More respondents (15%) claimed to make rare contact with their bank
electronically than those who do so more frequently than once a month
(13%). Rare users were more likely to be male (17%) than female (14%) and
respondents aged between 45 and 55 years (22%) were the most likely to use
electronic banking services rarely.
Respondents who agreed with the statement tended to be in

socio-economic groups C1 (18%), C2 (19%) and D (16%), while fewer
respondents in groups AB (11%) and E (8%) claimed to rarely contact their
bank electronically. In terms of standard regions, respondents in the North
(30%) were the most likely to use electronic banking services rarely, while
respondents in East Anglia, and Yorkshire and Humberside (both at 9%) were
the least likely.
21% of respondents who agreed with the statement do not work, compared
with 15% of those who work full time and 14% of part-time workers.
Respondents from households of three people (20%) were the most likely to
rarely contact their bank electronically and single people, at 20%, were more
likely than married people (14%) to agree.

Respondents with children aged between 5 and 15 years claimed to rarely

contact their bank electronically, while fewer respondents with young
children or no children at all were not as likely to agree with the statement.
In addition, respondents who own their own homes outright or have a
mortgage were more likely to agree (17%) than private renters (9%).
Overall, this statement addresses two groups: those who use their bank
electronically very frequently and those who do not use electronic access at
all. In this way, the small penetration of respondents aged between 35 and 44
years and from social grade AB who agreed that they rarely use their bank
electronically mirrors the penetration of respondents who claimed to use
their bank electronically more than once a week.
On the other hand, the small proportion of older people and those in the
lower social grades who agreed with the statement that they rarely use their
bank electronically suggests a considerable penetration of respondents do
not use modern banking channels at all. Rare users tended to be in the
middle social grades, with small households, possibly unemployed and
unmarried, but with teenage children and a mortgage.
Overall, these findings suggest that electronic banks have some marketing to
do in order to convince people with families to use these channels more
frequently. The penetration of respondents who agreed with none of the
statements (see Table 37) confirms the significant differences between people
who use Internet banking and those who reject it.

S3: “I rarely contact my bank electronically.”
Sample S3
Profile % PP % Pen %
All 100 100 15

Sex
Male 48 53 17
Female 52 47 14
Age
15-24 15 17 17
25-34 16 16 15
35-44 19 15 12
45-54 16 23 22
55-64 14 13 14
65+ 20 15 12
Table continues...


...table continued
Sample S3
Social Grade
AB 25 18 11
C1 29 35 18
C2 21 25 19
D 16 17 16
E 9 5 8
Marital Status
Married 59 54 14
Single 25 34 20
Divorced 5 3 10
Widowed 8 6 10
Separated 2 3 25
Working Status
Full time 38 38 15
Part time 16 14 14
Not working 21 28 21
Retired 25 19 12
Standard Region
London 13 11 14
South East 20 19 14
South West 9 8 15
Wales 5 4 11
East Anglia 4 2 9
East Midlands 7 7 14
West Midlands 9 11 18
Yorkshire and Humberside 9 5 9
North West 11 13 19
North 5 10 30
Scotland 9 9 16
Table continues...


...table continued
Sample S3
Size of Household
1 19 20 16
2 34 28 12
3 20 26 20
4 19 20 16
5+ 8 6 13
Aged 0-4 12 10 13
Aged 5-9 12 14 18
Aged 10-15 18 22 19
Any aged 0-15 31 36 18
None 69 64 14
Tenure
Owned with mortgage/loan 43 47 17
Owned outright 30 34 17
Rented from council 12 10 13
Rented from someone else 14 8 9
Rent-free from council 1 † †
Rent-free from someone else 1 1 10
† — nil response

USAGE OF ELECTRONIC BANKING
In the Last 5 Years

15% of respondents agreed with the statement that they have started using
electronic banking in the last 5 years and there were marginally more men
(16%) than women (14%) who agreed with the statement. Respondents aged
between 15 and 44 years were equally likely to have started using electronic
banking in the last 5 years (18%), while only 7% of those aged 65 years and
above claimed to do so. Respondents who agreed with the statement were
more likely to be in social grade C1 (19%) and be from the South East (25%).
In terms of working status, a higher penetration of respondents who work

full time (19%) or part time (18%) agreed that they have started using
electronic banking in the last 5 years, compared with those who do not work
(11%) or are retired (10%). Respondents from households with two members
were more likely to have started using these services in the last 5 years than
those in single-person or larger households.
Families with toddlers (up to the age of 4 years) were more likely to have
agreed with the statement (19%), although those with teenagers were also
well represented. Respondents who are buying a home with a mortgage
(20%), were more likely than tenants (9% of council tenants and 11% of
private tenants) to have started using electronic banking in the last 5 years.
Overall, this category includes young people with families, notably living in
the South East, working in clerical occupations, either in a full-time or
part-time job. Alternatively, they are young single people buying their own
home. It excludes some groups, such as middle-aged, London-based
professional full-time workers, who are heavy users of the Internet and may
well have started using electronic banking more than 5 years ago.
In the Last Year

Only 6% of respondents said that they had started using electronic banking in
the last year. This suggests that, over time, its popularity is growing.
Considerably more male respondents (8%) than female (3%) claimed to have
started using electronic banking in the last year and new users were more
likely to be aged between 15 and 24 years. A slightly higher penetration of
professional and managerial respondents in social grade AB (8%) than skilled
manual workers in group E (6%) started in the last year. From a regional
perspective, more respondents from East Anglia (10%) agreed with the
statement than those in other regions. Respondents from the North (1%) and
the East Midlands (2%) were the least likely to have started using electronic
banking services in the last year.
At 9%, full-time workers were the most likely to have started using electronic
banking in the last year. This compares with 5% of respondents who work
part time, 2% of those who do not work and 3% who are retired. There was
no significant difference between people living in small or large households,
although respondents living in households of five or more people were the
most likely to have agreed with the statement.

The profile of respondents who claimed to have started using electronic

banking in the last year suggests that new users are young, in professional or
managerial/clerical occupations, in full-time employment, are single renters
or mortgage payers and are, perhaps, living in East Anglia.
Overall, there is no indication that the pattern established over the last
5 years is changing. Electronic banking is mainly the preserve of the affluent,
young and time-deprived white-collar worker.
Table 30: Usage of Electronic Banking

S4: “I have started using electronic banking in the last 5 years.”

S5: “I have started using electronic banking in the last year.”
Sample S4 S5
All 100 100 15 100 6

Sex
Male 48 51 16 72 8
Female 52 49 14 28 3
Age
15-24 15 18 18 25 9
25-34 16 20 18 17 6
35-44 19 23 18 24 7
45-54 16 16 15 21 7
55-64 14 14 15 2 1
65+ 20 9 7 11 3
Social Grade
AB 25 29 17 34 8
C1 29 36 19 33 6
C2 21 17 12 19 5
D 16 14 13 12 4
E 9 4 7 2 1
Marital Status
Married 59 58 15 64 6
Single 25 28 17 29 7
Divorced 5 7 20 1 1
Widowed 8 5 9 † †
Table continues...


...table continued

Sample S4 S5
Working Status
Full time 38 48 19 63 9
Part time 16 19 18 16 5
Retired 25 18 10 16 3
Standard Region
London 13 6 7 15 6
South East 20 33 25 20 6
South West 9 12 21 11 7
Wales 5 3 9 7 7
North West 11 10 13 14 7
North 5 4 11 1 1
Scotland 9 6 11 9 6
Size of Household
1 19 16 13 19 6
2 34 42 18 35 6
3 20 19 14 16 5
4 19 17 14 19 6
5+ 8 6 11 11 8
Aged 0-4 12 15 19 6 3
Aged 5-9 12 11 14 8 4
Aged 10-15 18 20 17 23 7
Any aged 0-15 31 36 17 30 5
None 69 64 14 70 6
Table continues...


...table continued

Sample S4 S5
Tenure
Rent-free from council 1 ‡ 6 † †

SECURITY AND TRUST
Security
At 18%, the second-largest response among the sample was to the statement
that respondents are concerned about the security aspects of electronic
banking. Respondents who showed the most concern were male (19%) and
aged between 35 and 44 years (24%), or 45 and 54 years (21%). Interestingly,
younger respondents (aged between 15 and 24 years) showed the least
concern for security (11%). Professional and managerial respondents in
socio-economic group AB were much more concerned than any other group
(26%), while those in group E showed the least concern (11%). Regional
analysis of the sample shows that respondents with the greatest worry are
located in the South West and East Anglia (both with 26%), as well as in the
West Midlands (25%) and the South East (24%).

Working respondents (21%) were more concerned than the retired (17%) or
those not working (11%) and, at 20%, married respondents showed more
concern than those who are divorced (16%), single (15%) or widowed (14%).
Respondents from households of five or more people (23%) were much more
concerned than those from smaller households — just 14% of respondents
from single-person households expressed concern about the security aspects
of electronic banking. In addition, respondents paying off a mortgage
showed more concern for security than those who already own their home, or
are private or council tenants.
People who are most worried about the security of electronic banking are
typically men in early middle age, from a professional or managerial working
background with mortgage debt and possibly living in a large household.
Young people and private tenants seem less worried, while older people,
those who have paid off their housing debts and council tenants, are least
worried. This is perhaps because people in these groups are less likely to have
large bank accounts to worry about.
Trust
At 17%, a surprisingly large penetration of respondents (more than the
penetration who started using electronic banks in the last 5 years) claimed
that they would not trust electronic banking services. These respondents
comprised slightly more females (17%) than males (16%) and were
significantly older than respondents to the other statements. Respondents
who said that they did not trust electronic banks were most likely to be aged
65 and above (30%), or be between 55 and 64 years old (21%).
Comparatively, just 9% of respondents aged between 15 and 24, and 35 and
44 agreed with the statement. At 20%, respondents in social grade C2 were
the most likely to distrust electronic banking.
29% of retired respondents were suspicious of electronic banks, compared

with 17% of part-time workers and only 11% of those who work full time.
Respondents in households with toddlers were the least distrustful of
electronic banks (8%), but respondents from households with no children
were much more cautious (19%). In addition, at 12%, respondents who are
paying mortgages were more likely to trust an electronic bank than the 24%
of respondents who own their homes outright.

Table 31: Customer Views on Security and Trust Issues

of Electronic Banks (% of respondents), 2004
S6: “I am concerned about the security aspects of electronic banking.”

S7: “I would not trust an electronic bank with my affairs.”
Sample S6 S7
All 100 100 18 100 17

Sex
Male 44 51 19 47 16
Female 56 49 17 53 17
Age
15-24 15 10 11 9 9
25-34 18 15 16 10 11
35-44 19 25 24 10 9
45-54 14 18 21 18 19
55-64 12 14 17 18 21
65+ 22 18 16 35 30
Social Grade
AB 14 37 26 22 15
C1 28 29 18 26 16
C2 22 16 14 24 20
D 16 13 14 18 18
E 19 6 11 9 17
Marital Status
Married 59 67 20 60 17
Single 25 21 15 19 13
Widowed 8 7 14 14 29
Working Status
Full time 38 44 21 26 11
Part time 16 18 21 16 17
Not working 21 13 11 15 12
Retired 25 24 17 43 29
Table continues...


...table continued

Sample S6 S7
Standard Region
London 13 8 11 8 11
South East 20 26 24 23 20
South West 8 13 26 8 16
Wales 4 4 12 5 16
North West 10 6 11 11 17
North 5 5 16 3 8
Scotland 8 9 19 10 19
Size of Household
1 19 15 14 25 22
2 34 34 18 39 19
3 20 20 18 14 12
4 19 21 19 16 14
5+ 8 10 23 5 12
Aged 0-4 13 12 18 6 8
Aged 5-9 14 13 19 8 11
Aged 10-15 20 20 20 13 12
Any aged 0-15 34 32 18 21 12
None 66 68 18 79 19
Table continues...


...table continued

Sample S6 S7
Tenure
Rent-free from council 1 † † 1 26
Rent-free from someone else 1 1 20 † †
FAVOURED SERVICES
Television Services
Only 2% of respondents agreed with the statement that they think it is a
good idea to use their bank account through their television. Male
respondents (3%) were more likely than females (1%) to favour the idea. In
addition, respondents aged between 25 and 34 years (5%), and in social
grade C1 (4%) were most favourable towards the idea. A regional breakdown
reveals that there was more enthusiasm in the North West (7%) than
anywhere else, but only 3% of respondents in London and none in the West
Midlands liked the idea of using their bank account through their television.
At 4%, respondents who are not working were more enthusiastic than
workers (between 2% and 3%). Respondents from households of four people
(4%) were the most likely to welcome the idea, while those in smaller
households (between 2% and 3%) and larger households (nil response) did
not agree with the statement. At 5%, families with toddlers were relatively
keener than all the other groups and tenants, whether council or private,
were happier with this option (5%) than mortgage payers (2%).

Automated Telephone Services

The option of being able to manage bank accounts through an automated
telephone service received an 11% response. As usual, there was more
enthusiasm from males (13%) than females (10%) and it particularly appealed
to respondents aged between 25 and 44 years (15%), as well as to those aged
under 25 (13%). However, respondents in the 65 and above age group did not
respond well to the suggestion (3%). C2s (14%) were the most likely to agree
with the statement, followed by ABs (13%) and C1s (12%). Automated
telephone services appealed most to Londoners, while respondents in the
North (6%), the South West (7%) and Wales (8%) were relatively
unenthusiastic.
Overall, the respondents who showed the most interest in an automated

telephone banking service were younger, skilled men in full-time jobs with
small households and mortgages to pay. This suggests that a telephone
service would appeal to time-constrained people who do not have complex
financial affairs (such as professional customers) and not to people who are
on small incomes, or might find the telephone difficult or expensive to use.
Table 32: Favoured Electronic Banking Services

S8: “I think it is a good idea to use my bank account through my television.”

S9: “I think it is a good thing to be able to manage my account through an automated
telephone service.”
Sample S8 S9
All 100 100 2 100 11

Sex
Male 44 69 3 54 13
Female 56 31 1 46 10
Age
15-24 15 28 4 18 13
25-34 18 33 5 21 15
35-44 19 6 1 24 15
45-54 14 27 4 17 12
55-64 12 3 ‡ 13 11
65+ 22 3 ‡ 6 3
Table continues...


...table continued

Sample S8 S9
Social Grade
AB 14 † † 29 13
C1 28 48 4 29 12
C2 22 21 2 25 14
D 16 20 3 12 8
E 19 11 3 5 6
Marital Status
Married 59 52 2 69 13
Single 25 43 4 26 12
Divorced 5 2 1 1 2
Widowed 8 3 1 1 2
Separated 2 † † 3 14
Working Status
Full time 38 47 3 57 17
Part time 16 12 2 16 11
Retired 25 3 ‡ 12 6
Standard Region
London 13 17 3 18 17
South East 20 21 2 21 12
South West 8 4 1 6 7
Wales 4 6 3 3 8
West Midlands 10 † † 9 12
Table continues...


...table continued

Sample S8 S9
Standard Region
North West 10 32 7 10 10
North 5 5 2 3 6
Scotland 8 2 ‡ 8 10
Size of Household
1 19 26 3 12 7
2 34 25 2 37 12
3 20 20 2 25 14
4 19 29 4 20 12
5+ 8 † † 5 8
Aged 0-4 13 24 5 13 13
Aged 5-9 14 8 2 15 14
Aged 10-15 20 13 2 19 12
Any aged 0-15 34 37 3 36 13
None 66 63 2 64 10
Tenure
Rent-free from council 1 2 7 † †
Rent-free from someone else 1 † † ‡ 4


FAVOURED DISTRIBUTION CHANNELS
Cashpoints
Only 8% of respondents agreed that they would like to use a cashpoint for all
of their financial affairs, making it one of the least popular options. Again,
male respondents (9%) were more in favour than females (7%) and those
aged between 15 and 24 years were the most likely to agree with the
statement (13%).
At 10%, full-time workers were happier with the concept than respondents
who work part time (8%) or are retired (4%). The larger the household, the
happier respondents were with the idea of using a cashpoint for all their
financial affairs — those living in households of four or more people were the
most likely to agree with the statement (11%).
Respondents with children aged 4 years or younger were the most likely to
agree with the statement (12%), although respondents with no children were
the least likely (7%). At 11%, private tenants were much happier than
mortgage payers (8%) or council tenants (7%) to use a cashpoint for all their
financial affairs.
The typical customer who would want to use a cashpoint for all their financial
affairs is a young, skilled worker who is living as a tenant, perhaps with a
toddler, or is single. They would be in full-time work, so are likely to be time
poor. In addition, they are likely to have relatively straightforward financial
affairs.
Professional and managerial respondents with mortgages and living in

London and the South East did not approve of this option. This could be
related to a feeling that cashpoints would not be the best place to handle
mortgage or investment queries.
Mobile Telephones
The option to download cash to a mobile telephone for daily purchases was
the least popular of all suggestions, with only 1% of respondents claiming
that they would like to use this channel. No respondents aged 55 years and
over agreed with the idea, which was most popular among respondents in
the 25 and 34 year-old age group (3%). Less than 0.5% of ABs and only 1% of
Es agreed with the idea. Regionally, using a mobile telephone for daily
purchases was most popular in the South West (5%), but there was no
support at all in East Anglia, the West Midlands, the North or the North West.
Only 2% of workers approved and no retired people agreed with the idea of
mobile telephone-based cash.
Overall, there was a small core of support for mobile telephone-based cash
among people living in large households, those with primary school aged
children, young people and manual workers.
It would take a considerable marketing effort to provide this idea with a

reasonable market share. It may well suffer from concerns relating to security,
given the high levels of mobile telephone theft in the UK.

Table 33: Favoured Distribution Channels for Electronic

Banking Services (% of respondents), 2004
S10: “I would like to use a cashpoint for all my financial affairs.”

S11: “I would like to download cash to my mobile telephone for daily purchases.”
Sample S10 S11

All 100 100 8 100 1

Sex
Male 44 54 9 58 2
Female 56 46 7 42 1
Age
15-24 15 26 13 19 2
25-34 18 19 9 33 3
35-44 19 18 8 23 2
45-54 14 22 11 24 2
55-64 12 6 3 † †
65+ 22 9 4 † †
Social Grade
AB 14 14 4 9 ‡
C1 28 30 8 35 2
C2 22 30 11 26 2
D 16 18 9 21 2
E 19 8 7 9 1
Marital Status
Married 59 51 7 58 1
Single 25 38 12 27 1
Widowed 8 3 3 † †
Separated 2 ‡ 1 † †
Working Status
Full time 38 50 10 53 2
Part time 16 17 8 28 2
Retired 25 12 4 † †
Table continues...


...table continued

Sample S10 S11

Standard Region
London 13 4 3 5 ‡
South East 20 20 8 17 1
South West 8 15 13 34 5
Wales 4 1 1 9 2
East Anglia 4 9 17 † †
West Midlands 10 6 5 † †

North West 10 17 13 † †
North 5 5 7 † †
Scotland 8 3 3 11 2
Size of Household
1 19 14 6 † †
2 34 27 6 24 1
3 20 22 9 26 2
4 19 26 11 30 2
5+ 8 10 10 20 3
Aged 0-4 13 18 12 20 2
Aged 5-9 14 16 10 51 5
Aged 10-15 20 24 10 40 3
Any aged 0-15 34 40 10 70 3
None 66 60 7 30 1
Table continues...


...table continued

Sample S10 S11

Tenure
Rented from council 15 11 7 4 ‡

Rent-free from council 1 1 17 † †

Electronic Purses
9% of respondents were interested in the option of using their cash card as
an electronic purse, for even the smallest purchases. The idea particularly
appealed to men (10%) and respondents aged between 15 and 34 years
(both with 13%). In terms of social grade, penetration was fairly similar for
ABs, C1s, C2s and Ds (ranging between 8% and 11%) although, at 3%, Es
were the least keen on the idea. Regional differences were more marked,
with respondents showing more enthusiasm in the South West (17%) and in
the East Midlands (14%), and less in the North (4%).
At 12%, part-time workers were slightly more enthusiastic than full-time

workers (11%), while only 7% of respondents who do not work or are retired
were interested in electronic purses.
Respondents living in households of five or more people were much more

enthusiastic (16%) than others, while only 6% of people living on their own
were happy with the idea. It appealed to single people (13%) more than to
married people (9%), but not to the widowed (3%).

12% of families with children were happy with the idea of loading money
onto a cash card, but only 8% of people with no children agreed. With
regards to tenure, the idea was popular with private tenants (11%) and
mortgage payers (10%), but not with council tenants or outright house
owners (7%).
Overall, there is a clearly definable pocket of respondents who would be

interested in using cash cards as electronic purses. These people are young, of
varying social grade, live in the English regions in large households and rent
privately. Alternatively, they may have young families and hold a mortgage.
These people also tend to work full or part time and are likely to be time
poor. Although less affluent customers are unlikely to be interested, those in
professional and managerial occupations are just as likely as any other group
to accept the idea.

S12: “I would like to use my cash card as an electronic purse, for even the smallest
purchase.”
Sample S12
All 100 100 9

Sex
Male 44 54 10
Female 56 46 8
Age
15-24 15 22 13
25-34 18 24 13
35-44 19 22 11
45-54 14 14 8
55-64 12 10 7
65+ 22 9 4
Social Grade
AB 14 29 10
C1 28 26 8
C2 22 22 9
D 16 19 11
E 19 3 3
Table continues...


...table continued
purchase.”
Sample S12
Marital Status
Married 59 59 9
Single 25 35 13
Divorced 5 2 4
Widowed 8 3 3
Separated 2 † †
Working Status
Full time 38 44 11
Part time 16 21 12
Not working 21 16 7
Retired 25 18 7
Standard Region
London 13 15 11
South East 20 25 12
South West 8 17 17
Wales 4 3 5
East Anglia 4 2 5
East Midlands 8 12 14
West Midlands 10 5 5
Yorkshire and Humberside 9 6 6
North West 10 8 7
North 5 2 4
Scotland 8 5 5
Size of Household
1 19 13 6
2 34 31 8
3 20 21 10
4 19 20 9
5+ 8 14 16
Table continues...


...table continued
purchase.”
Sample S12
Aged 0-4 13 12 9
Aged 5-9 14 15 11
Aged 10-15 20 24 12
Any aged 0-15 34 40 12
None 66 60 8
Tenure
Owned with mortgage/loan 39 49 10
Owned outright 27 24 7
Rented from council 15 10 7
Rented from someone else 15 16 11
Rent-free from council 1 † †
Rent-free from someone else 1 1 8
SUGGESTED SERVICES
Messages
9% of respondents claimed that they would like their bank to send them
messages about the state of their account. 10% of male and 8% of female
respondents agreed that they would like this service. The concept was much
more warmly welcomed by respondents under the age of 35 than by older
repondents, especially those aged 55 years and over. At 11%, C1s were the
most likely to want their bank to send them messages about the state of their
account. In terms of region, respondents in the North West were the most
likely to want this service (14%), while respondents in the North were the
least likely (4%).

12% of respondents who work part time were keen to be told about their
account, compared with 11% of full-time workers. The majority of retired
respondents were against the idea, with just 4% agreeing with the
statement. The larger the household, the more interest there was in receiving
messages from banks — penetration ranged from 8% of respondents in
single-person households to 14% of respondents who live in households of
five or more people. However, only 7% of two-person households agreed.
Single people (11%) were more interested than married people (9%), while
only 2% of people who had been widowed supported this option.
Notably enthusiastic about the idea were respondents with primary school
aged children (14%). As a whole, 11% of respondents with children agreed
with the idea, compared with 8% who had none. Private tenants were more
enthusiastic than home buyers, while council tenants and respondents who
owned their house outright were least likely to welcome the idea.
Overall, the type of customer who wants to be sent messages from their bank
regarding the state of their account is under 35, living in rented
accommodation, in a large household, or with children and in a part-time
clerical job. This option might appeal most to the type of customer who
would use an overdraft facility quite frequently.
Money Handling Suggestions

12% of respondents claimed that they would like their bank to suggest better
ways of handling their money, given their circumstances. Again, this option
was most favoured by men, with 13% of male respondents agreeing with the
statement. There was a clear negative correlation between age and wanting
bank advice — 18% of respondents under the age of 25 said that they would
welcome suggestions, compared with just 6% of those in the 55 to
64 year-old age group. While respondents in socio-economic group C1 were
particularly keen on getting advice (15%), those in groups D and E were not
so enthusiastic.
Full-time workers were most likely to agree with the statement (15%), while
those who work part time were much less enthusiastic (10%). At 14%,
respondents living in households with four members were much keener than
those in households of two (9%) and single respondents (16%) were more
favourable than those who are married (10%).
Overall, the findings suggest that the type of customer who would appreciate
suggestions for better ways of handling their money are young. Older
customers may well have grown disillusioned with bank advice, or believe
that they have no resources to save any more. On the other hand, they might
believe that they can find better advice elsewhere. There is an identifiable
market for bank suggestions, making it a possible candidate for electronic
banking investment.

Table 35: Suggested Services for Electronic Banking

S13: “I would like my bank to send me messages about the state of my account.”
S14: “I would like my bank to suggest better ways of handling money, given my
circumstances.”
Sample S13 S14

All 100 100 9 100 12

Sex
Male 44 53 10 54 13
Female 56 47 8 46 10
Age
15-24 15 23 13 23 18
25-34 18 25 13 22 16
35-44 19 21 10 21 13
45-54 14 17 9 15 11
55-64 12 5 3 7 6
65+ 22 10 4 12 7
Social Grade
AB 14 26 9 25 11
C1 28 36 11 38 15
C2 22 17 7 19 10
D 16 18 10 13 9
E 19 3 3 6 8
Marital Status
Married 59 60 9 53 10
Single 25 32 11 36 16
Divorced 5 5 8 7 17
Widowed 8 2 2 3 4
Separated 2 1 6 1 4
Working Status
Full time 38 49 11 50 15
Part time 16 22 12 14 10
Retired 25 12 4 15 7
Table continues...


...table continued
circumstances.”
Sample S13 S14

Standard Region
London 13 15 10 13 12
South East 20 18 8 22 13
Wales 4 6 11 7 16
North West 10 17 14 12 13
North 5 2 4 7 16
Scotland 8 11 10 4 5
Size of Household
1 19 17 8 20 12
2 34 28 7 27 9
3 20 21 9 22 13
4 19 22 10 24 14
5+ 8 12 14 8 12
Aged 0-4 13 15 11 18 17
Aged 5-9 14 20 14 17 16
Aged 10-15 20 22 11 15 10
Any aged 0-15 34 39 11 35 13
None 66 61 8 65 11
Table continues...


...table continued
circumstances.”
Sample S13 S14

Tenure
Rent-free from council 1 † † ‡ 9
Rent-free from someone else 1 † † ‡ 4


REASONS FOR CHANGING BANK
Convenience
A comparatively small penetration of respondents (5%) would change their
bank if it did not offer the most convenient electronic service. Although this
might be related to a general unwillingness to change banks, it may also
indicate that the electronic services offered are only a small part of the reason
why people choose a bank.
Unusually, this response was more favoured by females (6%) than males (5%).
Respondents aged between 35 and 44 years, and 25 and 34 years were the
most likely to change banks at 9% and 8%, respectively. However, only 3% of
those in the 55 and 64 year-old age group and 1% of those aged 65 and
above agreed with the statement. C1s were most likely to state that they
would change their bank if it did not offer the most convenient electronic
service (8%), while Ds and Es were least likely to agree, both with 1%.
Respondents in the North West (9%), London and the South West (both 8%)
were the most likely to agree with the statement.
Respondents who work part time (8%) and full time (7%) are more likely
than those not working (5%) or the retired (1%) to change their bank. In
addition, people living in large households were much more likely to say that
they would switch (15%) than those in smaller households.
Interest Rates
At 6%, the penetration of respondents who agreed with the statement that
they would change their bank if it offered a higher interest rate on its
electronic rate was low. Respondents aged between 35 and 44 years were the
most likely to agree with the statement (11%), while those in the 55 to
64 year-old age group were the least likely (1%). 9% of ABs and 7% of C1s
agreed that they would change banks, and penetration continued to
decrease through the other social grades. Respondents living in the South
West (13%) were much more interested in changing their accounts for more
interest than those in other areas, notably Wales, and Yorkshire and
Humberside, both with 1%.
9% of respondents who work full time and 8% of part-time workers agreed

with the statement, although those who do not work or are retired were less
inclined to agree with the statement.
Respondents with children (10%) were more likely to agree with the
statement than those without (4%). In addition, those with a mortgage (9%)
or renting privately (8%) were much more likely than council tenants (2%) to
say that they would change banks for a higher interest rate.

Table 36: Reasons for Changing Bank (% of respondents), 2004
S15: “I would change my bank if it did not offer the most convenient electronic service.”
S16: “I would change my bank if it offered a higher interest rate on its electronic
account.”
Sample S15 S16

All 100 100 5 100 6

Sex
Male 44 44 5 52 6
Female 56 56 6 48 6
Age
15-24 15 19 7 19 7
25-34 18 23 8 21 8
35-44 19 30 9 35 11
45-54 14 16 6 15 6
55-64 12 7 3 2 1
65+ 22 4 1 8 2
Social Grade
AB 14 28 6 36 9
C1 28 43 8 31 7
C2 22 22 6 21 6
D 16 4 1 10 4
E 19 2 1 2 2
Marital Status
Married 59 59 5 66 7
Single 25 34 8 30 7
Divorced 5 5 5 3 3
Widowed 8 † † † †
Separated 2 2 5 2 5
Working Status
Full time 38 51 7 56 9
Part time 16 24 8 21 8
Retired 25 7 1 9 2
Table continues...


...table continued
account.”
Sample S15 S16

Standard Region
London 13 18 8 12 6
South East 20 24 7 25 8
South West 8 13 8 18 13
Wales 4 † † 1 1
North West 10 18 9 18 10
North 5 3 3 5 6
Scotland 8 2 2 3 2
Size of Household
1 19 12 4 11 3
2 34 31 5 27 5
3 20 21 6 18 5
4 19 16 4 29 9
5+ 8 20 15 15 12
Aged 0-4 13 19 9 27 13
Aged 5-9 14 16 7 19 9
Aged 10-15 20 28 9 25 8
Any aged 0-15 34 42 7 50 10
None 66 58 5 50 4
Table continues...


...table continued
account.”
Sample S15 S16

Tenure
Rent-free from council 1 † † † †
Rent-free from someone else 1 † † 1 4
OTHER RESPONSES
Don’t Know
Only 2% of the respondents did not know how to reply to the statements.
This is a positive response, as it indicates that the questions were reasonably
clear and addressed the concerns of respondents. In general, respondents
who did not know how to respond were male, aged between 35 and 54 years
or 65 years and above, not working, in the lowest social grade and living in
rented accommodation. It is possible that customers in this group have less
use for banking services.

None of These
A high penetration of respondents (16%) rejected all the statements,
suggesting that they have no interest in electronic banking facilities. These
respondents were more likely to be women (18%) than men (14%) and in the
older age groups (55 years and above). In addition, respondents in
socio-economic groups D and E were the most likely to reject all the
statements. In terms of region, respondents in Yorkshire and Humberside
recorded the highest penetration of 35%, followed by Wales (21%) and
Scotland (18%).
Overall, respondents who did not agree with any of the statements are
unlikely to become a prime target market for electronic banks, since their
financial requirements are unlikely to generate income for financial services
providers.
Table 37: Other Responses (% of respondents), 2004
S17: “Don’t know.”

S18: “None of these.”
Sample S17 S18

All 100 100 2 100 16

Sex
Male 44 58 2 42 14
Female 56 42 1 58 18
Age
15-24 15 † † 12 13
25-34 18 16 1 11 11
35-44 19 31 3 14 12
45-54 14 25 2 11 12
55-64 12 5 1 16 18
65+ 22 23 2 36 30
Social Grade
AB 14 6 ‡ 19 12
C1 28 29 2 22 12
C2 22 4 ‡ 21 16
D 16 19 2 22 22
E 19 41 7 17 30
Table continues...


...table continued

Sample S17 S18

Marital Status
Married 59 39 1 54 15
Single 25 34 2 19 12
Widowed 8 4 1 17 33
Working Status
Full time 38 36 1 26 11
Part time 16 † † 10 11
Retired 25 21 1 37 24
Standard Region
London 13 21 3 9 12
South East 20 † † 16 13
Wales 4 10 3 7 21
East Anglia 4 † † 4 15
North West 10 2 ‡ 11 17
North 5 13 4 6 17
Scotland 8 21 4 10 18
Size of Household
1 19 36 3 26 23
2 34 22 1 38 18
3 20 22 2 16 13
4 19 11 1 13 11
5+ 8 9 2 6 13
Table continues...


...table continued

Sample S17 S18

Aged 0-4 13 9 1 7 10
Aged 5-9 14 25 3 4 5
Aged 10-15 20 9 1 14 13
Any aged 0-15 34 35 2 20 11
None 66 65 1 80 19
Tenure
Rent-free from council 1 6 16 1 19



Electronic Banking 13. Company Profiles
13. Company Profiles
CAHOOT
Corporate Strategy
The corporate strategy of cahoot is entirely separate to that of its parent, the
Abbey National Group. cahoot focuses on the following operations:
• current accounts — with or without interest, with or without a fee

• savings accounts
• flexible and fixed loans
• general insurance — travel, mortgage protection, personal protection and
personal accident.
In addition, the company offers fixed-rate bonds investors, as well as

mortgage services. Other offerings include a virtual online payment card, the
cahoot webcard, for shopping on the Internet through its current account. In
addition, customers who use a cahoot credit card to buy services or products
on partner shopping websites can also earn cash bonuses.
The company’s strategy is to capture a different market segment to the

traditional Abbey customer, who is typically middle-aged and from a clerical
or skilled manual background. There is sufficient market differentiation to
prevent the danger of cannibalisation of customers (where Abbey customers
would leave to join cahoot).
Strengths and Weaknesses
• Strengths
• Founded in June 2000, cahoot is a relatively new operation so does not

need to battle against the conservative reputation of its parent.
• By offering a limited range of products, cahoot is able to keep its costs

down.
• cahoot’s early strong recruitment of new customers, low margins and very
competitive credit card offering meant that its losses were quickly halved
and, in 2002, the business expanded. This was particularly advantageous for
the company in the savings market.
• Weaknesses
• The company does not have an established reputation or image on which to

draw. In this way, it has to obtain and keep a significant share of customers
who want to bank entirely remotely.

13. Company Profiles Electronic Banking
• cahoot products have suffered in the medium term. This is because the
ending of the introductory favourable interest rates on deposits led to a net
fall, as new customers left the company for other providers offering low
rates for new customers (commonly known as ’interest rate tarts’).
• In 2003 and 2004, cahoot has made moderate progress as a result of fierce
competition from Smile and Intelligent Finance (IF), coupled with
uncertainty surrounding Abbey National PLC.
New Product Development

cahoot was one of the pioneers of wireless application protocol- (WAP-)
based mobile telephone banking. In addition, the company planned to
operate a digital television interactive access channel in 2004. The
WAP-enabled telephone allows access to current account balances and recent
statements, as well as direct debit checking and cancelling. Standing orders
can also be checked and cancelled. For example, customers are able to
transfer money between accounts through their mobile telephone and can
find out the balance on their cahoot credit card. It is also possible to send
customers short messaging service (SMS) messages regularly to make them
aware of the state of their account.
Brand Development
The uncertainties surrounding the future of Abbey National — given its
recent radical restructuring and refocus on retail banking — do not seem to
have affected cahoot. In fact, the company is at the centre of the retail
banking development strategy of Abbey. Its new owners will be keen to
exploit the market niche achieved by cahoot so far and develop its brand
further. Areas to be considered include its reputation as a value-for-money
service and the development of further customer-friendly services.
Innovations
The introduction of more sophisticated mobile telephones and the evolution
of smart card technology will provide cahoot with the opportunities to restart
its mobile distribution channels using third generation (3G) mobiles or to
develop smart card-based services.
cahoot reports that, in 2003, 63,000 customers used its webcard — a

security-cleared card used for online shopping — to reduce the possibility of
card crime.
In 2002, the company gained several awards for its credit card and authorised
overdraft, and for best planning, research and evaluation.

Appointments
cahoot’s head of IT, Lesley Vanbeck, is key to cahoot’s development in new
electronic channels and Tim Sawyer, as head of cahoot and previously head of
Marketing and Business Development, has a reputation for innovation in
strategy and in cards.
Advertising
The level of advertising for cahoot has been intense and television driven,
targeting a young market of users who appreciate the ironies of its
advertisements’ sepia tones and oddball punchlines.
Distribution
cahoot claims that it achieved 239,000 new accounts by the end of 2001, with
another 86,000 estimated to have been added in 2002. During 2002 and 2003,
credit card sales rose by more than 25%, driving credit card sales for the
Abbey National Group.
Profitability
cahoot still reports a loss, despite the £35m investment made by the Abbey
National Group into its development in 2000 and 2001.Forecasts for 2004
suggest that cahoot might break even by the end of the year.
Future Company Developments

The future for cahoot depends on the strategy outlined by Banco Santander
Central Hispanica (SCH), if its bid for Abbey National is successful. It is too
early to say whether cahoot is a long-term profitable venture, but on the
basis of its credit card sales in particular, it is going to be a positive
contributor to the Abbey balance sheet.

EGG
Corporate Strategy
Egg was founded by Prudential in 1998, partly to channel the funds of
maturing policy holders and partly to enter banking, which is more profitable
than insurance. As at June 2004, Egg had 3.4 million customers.
Egg states that it aims to be the preferred provider of online banking services
and to offer, through a web portal, Egg Shop. This is a range of services from
a number of different partners in the retail trade. In addition, Egg
intermediates the purchase of general insurance and of investment funds for
its clients through Egg Invest, a funds supermarket.
Egg offers a base banking product, comprising current and savings accounts,
then invites its clients to use its other services through the website.
• Strengths
• Egg is the world leader in electronic banking, with a large number of

customers and a good range of strong and appealing products and services.
As a result of its early launch and marketing, Egg is well known and broke
even at the end of the 2001/2002 financial year. According to
Nielsen//NetRatings, it is the most visited online financial services provider
in the world.
• Egg has the financial backing of the second-largest insurer in the UK —

79% of the company is owned by Prudential Insurance PLC.
• Egg succeeded in attracting £5bn in deposits within 7 months of its launch,

partly as a result of the novelty of its name. In addition, the company
offered a high margin on its interest rates at 0.5% above the Bank of
England base rate for the first 18 months. This policy of offering high
interest rates made it very difficult for other entrants to gain market share.
• Although electronic banking customers are fickle, Egg reported that 87% of
its credit card customers remained loyal once the introductory promotional
discounted interest rate expired.
• Weaknesses
• Egg experienced a dip in customer numbers and some changes in loyalty

after the interest rates began to fall in 2000. Egg Savings reported an
outflow of £1.1bn at the end of 2001, mainly from individuals moving large
balances to the best performing provider.

• Egg had ambition to expand abroad and, in 2002, bought Ze-Bank in France
with the aim of repeating its UK success in France. However, the project
failed. French Ze-Bank clients were alienated by their treatment by Egg
France (as a result of the abrupt ending of services available to them when
Egg took over, according to the French press) and the product only
attracted 133,000 customers. This was well under take-off levels which,
after 2 years, should have reached nearly one million. Egg France spent
£280m in marketing and developing the French operation. Egg is still
threatened by the failure of its French expansion, which represented much
of its growth path from 2000 and cost the company its profits in 2003 and
2004.
• Egg lacks the marketing advantages of face-to-face contact with customers

(in common with other pure-play electronic banks).
• Prudential failed to sell Egg over a 7-month period and has withdrawn it
from the market. However, Prudential has apparently lost confidence that
Egg is a viable venture on its own and it appears that other companies think
the risk is too high. In this way, Prudential is committed to giving Egg
convincing support in the medium term.
• Egg is threatened by its rivals, which operate as followers in the market.

These competitors provide funds supermarkets with larger and wider
offerings.
• The company is also threatened by issues surrounding database and access

security.

Egg began as a telephone bank, but soon became an Internet-mediated
operation. As it was established in 1999, Egg introduced the Egg Card, a
credit card that relies on Internet messaging for clients to identify their debt
and to make payments via its online billing and payment facility. The Egg
Card concept was further developed by an agreement with Boots PLC to issue
a combined credit card and loyalty card, which would incorporate the Boots
Advantage card. However, this experiment failed as a result of the lack of
interest. Despite this, a later development on the same basis for Sainsbury’s,
Debenhams and other major chains (the Nectar card) did succeed.
In 1999, the company’s rapid development of the portal concept, Egg Shop,
was innovative and has been more successful than similar projects by Barclays
and NatWest. This might be the result of careful marketing to a specific
market segment who would be receptive to online buying in a way Barclays
and NatWest customers were not yet ready for. The Egg Card can be used for
online shopping under the Visa brand and can only be requested online. This
works well with the Egg Shop and there is sufficient variety of products
(4.5 million products from 225 retailers) to give the concept a critical mass in
order to succeed.

In 2000, the introduction of Egg Invest to trade mutual funds in a funds

supermarket was another rapid innovation, this time to generate a steady
income from the management fund business in the form of management
fees. The supermarket offers 220 funds or more from 17 financial services
providers and can be used for trading in individual savings accounts (ISAs) and
personal equity plans (PEPs). The service uses Microsoft Services Network’s
MoneyCentral channel.
Egg’s online share dealing service, provided by Xest, allows the purchase of
shares on the London Stock Exchange and on the Alternative Investment
Market (AIM).
From April 2002, Egg offered person-to-person (P2P) online payments for
small sums. This would have been useful for transfers to and from the
eurozone, but the collapse of Egg France has robbed it of an obvious market
advantage.
Innovations
Launched in 2002, Egg Money Manager is an innovation that is intended to
help customers understand and manage their money more effectively.
Eventually, the technology that was developed to deliver this service to
customers will be able to customise bank communications. In this way, banks
will be able to advise their customers individually not only about the state of
their accounts, but also to advise them on lifecycle planning.
In 2002, Egg dropped WAP banking as a result of a lack of interest.
Distribution
By mid-2004, Egg reported that it has 3.4 million customers and holds 5%
(2.9 million customers) of the UK credit card market.
Table 38: The Number of Egg Customers

1999 2000 2001 2002 2003 †2004
Customers (million) 0.8 1.2 1.9 2.6 3.1 3.4

Index 100 150 238 325 388 425
† — as at 30th June 2004
Source: Egg
The company also distributes Egg Loans (personal loans) through its card
product.

Profitability
In 2002, Egg was the first electronic bank to report a net profit of £1.2m. This
was a marked improvement on the £63m loss recorded in 2001. During the
first half of 2004, Egg UK made a profit of £35m and increased its customer
base by 292,000 to reach 3.4 million customers. Overall, the company
recorded a loss of £1m, as a result of the loss of £32.2m from the French
operations. Egg’s profit was derived notably from cross-sales generated by its
account holders and its 1.7 million credit cards. Profit was also generated
from personal loan sales (Egg Loans) and Egg Invest, and Egg Insure
cross-sales are seen as the path to future profits.
Future Company Developments

The withdrawal from France might force Egg to change its strategy to
become a global brand. It might find the US market more congenial, but the
level of competition is particularly fierce there. If the mistakes made in France
are fully analysed, the company might be able to relaunch successfully
elsewhere. In the short term, Egg’s dominant position in the UK market is
unlikely to be challenged.
FIRST DIRECT
Corporate Strategy
First Direct is a subsidiary of HSBC Bank PLC. Its services are directed at
professional and managerial grade users who have specific and clear banking
needs that are met by telephone or WAP distribution channels, or by Internet
methods. First Direct’s aim is to provide a rapid, tailored service to the
time-poor customer. The telephone, WAP and Internet services are
integrated, but are separate from HSBC.
In 1989, First Direct began as a telephone bank linked to a call centre and
offered current account services. In 1999, the company launched Internet
banking following a trial of PC banking in 1998. Now, after the launch of its
website in 2000, First Direct offers a savings account, personal loans, a credit
card, mortgages, general insurance (travel, home, motor and personal),
investment funds, pension products and share dealing. Its wealth
management service (’capital’) was established in January 2001, followed by
WAP-based mobile telephone banking in April 2001.
In July 2001, the flexible linked mortgage package was launched and the
low-cost portfolio managed investment product appeared in January 2002.

• Strengths
• First Direct offers a wider variety of products than its rivals and focuses
much more clearly on the affluent user. It offers three different credit cards,
including both Classic and Gold Visa. In addition, the company offers two
types of mortgage (a SmartMortgage and ordinary mortgages), a share
dealing service, and the SmartInvest investment service, capital online and
capital investment services, along with ISAs.
• The company also offers life insurance, critical illness insurance, income
protection and a stakeholder pension, which gives it the strength of a niche
player.
• In 1999, First Direct was an early adopter of text messaging to mobile

telephones. By 2004, the company boasts not only 585,000 Internet banking
customers, but also 350,000 SMS banking customers.
• As a subsidiary of HSBC, First Direct has the backing of the UK’s only global
bank. This means that expansion outside the UK would not be problematic.
• An additional strength is First Direct’s reputation for good customer service,

which it has established over 15 years. In 2004, the Virtual Online Banking
Survey (VOBS) found that 94% of First Direct’s Internet banking customers
considered it very good or excellent (the average being 76%).
• Weakness
First Direct must consider that the demand for telephone banking is
beginning to fall away, as many people migrate to its online banking service
instead.

Following IF, First Direct has launched a low-rate off-set mortgage in 2004,
undercutting its rivals. It has also introduced account aggregation.
Brand Development
First Direct makes it easy for new customers to switch accounts and join the
company from another operator. The company sees its main market as busy
professionals seeking a brand to trust and it aims to develop a trustworthy
brand through openness, consistency and service quality.

Distribution
First Direct is a multichannel bank and emphasises the importance of the
personal aspect of its call centres. It combines online, telephone and mobile
telephone services. The company has one million customers overall, of whom
550,000 are online and 385,000 are mobile telephone based. Although First
Direct has a smaller number of customers than Egg, it has a higher value of
customer, mainly professional or managerial.
The WAP-based banking channel was reported to be used by 4,200 registered

customers in 2003.
Profitability
As a subsidiary of HSBC, the financial data for First Direct are aggregated in
the HSBC Group accounts.
ING DIRECT
Corporate Strategy
ING Direct has developed its corporate strategy on the basis of savings
accounts paying approximately 0.25% above major market rivals. It relies on
volume sales, rather than on charging its customers more. The company’s
annual gross margin is approximately 0.5% and it generates profit through
efficient operation.
Beginning in Canada in 1997, ING Direct had already been launched in seven
countries before entering the UK in 2003. The company has activities in
Germany (as ING-DiBa), Australia, Spain, the US, France and Italy. Its strategy
is to use a high-rate, no fee, no-minimum savings account to enter the
market. When it reaches a minimum consumer base, ING Direct sells a focused
range of other financial products, such as mortgages, investment funds or
unit trusts, electronic brokerage, pensions and life insurance. The company
targets large, mature markets, offering value for money and higher levels of
service than its competitors.
• Strengths
• ING Direct UK attracted 500,000 customers within its first year. It was also
awarded the prize of ’the most favoured UK savings account’ by Motley
Fool in November 2003 and ‘Best Savings Account Provider’ in the Personal
Finance Awards, 2004.
• ING Direct boasts that its costs are a fifth of those of its main retail rivals. In
addition, the company claims that 99% of its customers would recommend
the account to friends.

• ING Direct has to offer a very tight bundle of products to ensure that it
retains its margins and becomes profitable. Although it normally proves
very difficult to launch foreign operations, ING has been successful with
this.
• The absence of a telephone-based service and an Internet television

channel reduces the company’s costs so is seen as a strength rather than a
weakness.
• Weakness
• It remains to be seen how ING Direct will fight off its rivals in the UK market
if they decide to raise their interest rates in a price war. ING has to introduce
successful and secure products over a period of several years before it is
accepted.

The ING savings account is very simple, offering no bonuses or introductory
rates, no minimum deposit, no fees or charges and no withdrawal notice
period. In addition, there are no differences between small and large
deposits.
Brand Development
The ING Direct US operation, launched in 2001, has reached a total of $20bn
in assets and made a profit in its second year, 3 years ahead of its planned
breakeven date.
Innovations
ING Direct raised the standards of customer service by ensuring that 82% of
calls were answered in 20 seconds and 98% of letters processed within 24
hours.
Advertising
ING Direct focuses on direct marketing by mail or e-mail rather than the
television advertising it used when it was launched. It claims that the cost of
this direct marketing is low. US data suggest that a new account based on a
direct marketing approach costs $15, while a new account generated by a
television advertisement would cost ten times that amount.
Promotions for its existing clients include trips on the Orient Express with
lunch or an evening orchestral performance.
Distribution
ING Direct increased its worldwide funds base by 71.7% in the year ending
September 2003, from €55.2bn to €94.8bn. The UK start-up in the same year
contributed €7.3bn. This total represents the deposits of 8.1 million clients,
up from 5 million at the end of 2002.

Profitability
ING Direct reached profitability at the end of 2002, with profits from all its
operations except for France and the UK.
INTELLIGENT FINANCE
Corporate Strategy
Intelligent Finance (IF) aims to offer telephone and Internet banking services
to a more affluent and sophisticated clientele than is typical of its parent
company’s (HBOS) customers. It centres its product offering on current and
savings accounts (interest calculated daily). Since its launch in late 2000, IF has
progressively added other products and services — notably in mortgages,
house insurance, personal loans and credit cards — to its offerings. The
development of IF cost HBOS £120m.
• Strengths
• IF has the advantage of being a subsidiary of the newest and most dynamic
of the five major UK banks, HBOS, which itself has adopted the strategy of
breaking the cartel of the big four (Barclays, HSBC, RBS and Lloyds TSB). This
gives it considerable capital security and backing for initiatives aimed at
gaining more market share.
• In 2002, IF reported that it had captured 8% of the new mortgage lending

market. This reflects the strength of its parent, HBOS, as the largest market
player and a temporary ‘blip’ for Nationwide as it restructured its mortgage
portfolio.
• Weaknesses
• IF was a late entrant to the electronic banking market and, as such, it had to
fight hard to gain market share. The company now has 600,000 clients,
many of whom might have come from its rivals who entered the market
earlier. Having gained these customers, IF has to work hard to keep them.
• IF has a limited portfolio of products and focuses on mortgage services.

However, its rivals are expanding their ranges.
• IF is rated by the VOBS as offering lower-quality customer service than some

of its rivals.
However, these weaknesses can be overcome if the company increases its

product offerings and takes advantage of the infrastructure of HBOS in terms
of physical face-to-face branch contact.


IF was launched into a market in which banks were beginning to offer
aggregated accounts. In this way, its key selling point was to be the first
electronic bank to offer an account that balanced credits against debt, thus
reducing the cost of debt. It also offered an off-set mortgage, which was still
a novelty at the time.
Like Smile, IF offers both an automated electronic online banking service and
a parallel telephone service, where customers can talk to real staff.
Brand Development
IF has introduced new services for Independent Financial Advisers (IFAs),
offering direct access to brokers. It has also expanded to provide services to
sole traders. This is in line with the HBOS strategy of expanding and
broadening its offerings to small business in order to reduce the dependence
of businesses on the big four banks. Offering an online, electronic service to
businesses is an interesting development.
Innovations
Around the time it was launched, IF was hampered by software problems, so
was forced to launch its Internet service at a later date. Concerns relating to
the security of the service were met by the installation of high specification
encryption technology, which renders the service much more resistant than
many of its rivals to fraud attempts.
In 2004, IF started offering fixed and tracker rate mortgages.
Appointments
Between 1999 and 2002, Jim Spowart managed the IF project. In November
2002, he was replaced by Grenville Turner.
Advertising
IF advertised extensively in newspapers and on posters, notably arguing that
the net interest rate paid on loans would be reduced by the credit balance in
the current account. Its advertisements were serious and in black and white.
The impression was of a bank that was serious about looking after its
customers’ interests and not in making banking fun.
Distribution
IF offers both online and telephone banking 24 hours a day, 7 days a week. In
addition, its website is reported to be visited 2 million times each week.
Customers can withdraw money from Halifax or the Bank of Scotland
branches, or through automated teller machines (ATMs) throughout the
country. In 2004, IF has 820,000 customers, an increase of 25% on 2002.

Profitability
In 2003, IF was able to break even and, by the end of the year, the company
had assets of £15.5bn. Mortgages and loans rose by 25% and deposits
increased by 27%.
The departure of Jim Spowart in 2002 to a new post with responsibility for
expanding the IF concept in Europe and in the US, indicates a wish to follow
in the footsteps of Egg and make similar profits abroad from remote access
electronically as at home. In theory, this should mean very cheap services and
products that can undercut local competitors. Emulation of ING Direct might
be a more effective model.
NATIONWIDE
Corporate Strategy
Nationwide was the first of the conventional building societies to attempt to
broaden its general services into the electronic distribution of products. As
with the banks (and unlike its colleagues in the building society movement),
Nationwide has a national presence, so expects its customers to access its
facilities everywhere in the UK.
This strategy was followed by major banks such as Barclays and Lloyds TSB,
and eventually all the major financial institutions followed suit. However, in
1997, Nationwide had considerable market advantages as leader and pioneer,
enabling it to attract new customers and consolidate its image as an
innovator in providing good value and convenience. This led to the highly
popular e-savings accounts, which offered higher interest rates than its rivals,
and to the introduction of television and WAP-based banking services.
However, these were not so successful. Nationwide’s innovations were
expensive and its rivals watched its progress with interest before entering the
market themselves.
Nationwide viewed the new distribution channels as being complementary to

its branch activities, which remained the main sales point for customers and
doubled up as ‘training locations’ for customers learning how to use
electronic banking. In this way, the branches were seen as an integral part of
the same distribution continuum as electronic banking access.

• Strengths
• Nationwide is the only large mutual savings institution left in the UK. It acts
as a market leader in terms of campaigning for issues such as the removal of
introductory discounts on mortgages or for reducing charges for the use of
cash machines.
• Nationwide prides itself on being ranked top in terms of good service by

the National Complaints Culture Survey in 2003.
• Nationwide has declared that it is not going to move its call centres
offshore and that it is investing heavily in its branches.
• The company reports a high level of retention of borrowers when their

fixed rate and tracker rate products mature.
• The company prides itself on being the third-largest deposit taker in the UK
and on offering savings accounts at interest rates 0.43% above the average.
E-savings accounts were a major driver of this increase, offering a higher
rate of interest than conventional accounts.
• In 2003/2004, Nationwide issued 222,000 new credit cards, with total cards
in issue at 868,000.
• Weaknesses
• The costs of taking a stand can be high. Nationwide’s share of net new
mortgages fell significantly in 2002, as it was charging higher interest rates
for starter mortgages. However, it maintains that it believes that the same
products should be available for all its members.
• As a mutual, Nationwide is continually under threat from ’carpet baggers’

— individuals who seek to force the building society to demutualise and
return some of its assets to members as cash or in the form of shares. This
means that it has to work hard at proving to members that it is providing
value for money and fair rates.
• Nationwide cannot offer products for business advantage alone and must
always consider members’ views. The approval and loyalty of members
cannot be measured as easily as profits.
• Nationwide’s Internet television and mobile WAP distribution channels

appear to remain insignificant when compared with Nationwide’s very
large online banking register.

Nationwide offers Internet television for customers with a set-top box or
through Kingston Interactive television. This allows them to access account
balances for up to 13 months and transfer money between accounts. Credit
card holders are able to find out their credit limit, available balance and next
payment date. In addition, money can be transferred to Nationwide accounts
instantly.

Customers who wish to use the service have to obtain a set-top box from iTV
Active, Bush Internet or Freedomland, a telephone point and a television with
a scart socket. In addition, they need to obtain a customer number, supply
memorable data and a pass number. The set-top box has to be connected to
the Internet. By typing the web address on the browser, the home page is
displayed on the screen and can be activated by using the customer number,
memorable data and the pass number.
WAP telephone services are available by using one of 16 specific Nokia WAP
telephone models. Users can access their account balances and latest
transactions, transfer money and pay bills that have already been set up on
the customer’s current account. Credit card transactions, credit limit, available
balance and next payment date can also be viewed.
Customers have to activate the WAP services with their network provider,
must register for Nationwide Internet banking and have memorable data and
their pass number to hand. Activation can either be online, by telephone or
at a branch, and the customer receives a message containing the settings for
Mobile Internet Banking within 20 seconds. The settings have to be saved into
the telephone’s connection settings and labelled ‘Nationwide’. On making a
call to Nationwide, a secure connection can be obtained and the home page
appears. The user signs on with the customer number, memorable data and
pass number, and can then operate the account. It is possible to download the
security certificate to the mobile, eliminating one confusing stage, except,
perhaps, with Nokia 7110 phones. All messages are scrambled using 128 bit
encryption.
Innovations
From mid-2004, Nationwide has screened BA advertisements on 119
cashpoints in BP service stations and on the London underground (not in
branches). Nationwide believes advertising revenues from ATMs could make a
contribution to its profits within 2 years. The same system is to be used for
in-house advertising in branches. Nationwide is the first financial institution
in Europe to carry advertising in this way. The technology was developed by
I-design, which can also place advertisements on the receipt slip.
Advertisements run on the screen when it is idle, as well as displaying a short,
tailored clip during the transaction. The ATM gives a branded thank you
message and prints a reminder on the receipt slip. Poster Publicity estimates
that the campaign will reach 1.3 million people, 40% of whom will take away
a receipt.
During 2003, Nationwide launched online sales of equity ISAs and unit trusts
through its Internet distribution channel. In the future, debit cards will be
able to be used to make lump sum payments to all Nationwide funds.
In November 2003, Nationwide launched the website ’Cash Matters’, which is

directed at young people. This includes advice on how to find the best current
and savings accounts, as well as tips for safe online buying. Other topics
include car finance, plans for saving and spending at college, renting and
buying a home, and issues surrounding pay and tax.

Advertising
Nationwide runs ‘lifecycle’-themed advertisements. These suggest that a busy
young person has many responsibilities and Nationwide is a trustworthy,
secure location for funds while setting up home, having a family, bringing
them up and retiring. Its protagonist is a young urban woman and the style is
one of busyness and happy activity. It lacks irony or jokes and does not refer
to other advertisements or to films, unlike advertisements for some major
banks.
Distribution
In 2003, Nationwide commanded 12.8% of the net residential mortgage
market, making it the fourth-largest mortgage lender. The company has
2.7 million current accounts and, in 2003, savings by members rose by 8%
from £61m to £65.9m.
Chief Executive Philip Williamson reports that 20% of sales are online or
telephone based, and 25% of current account holders use the Internet
banking service.
Profitability
In 2003, net profits for Nationwide were £262.7m, a rise of 12.7% from
£233.2m in 2002. In 2003, the company recorded a pre-tax profit of £426.8m.
SMILE
Corporate Strategy
In 1999, Smile was launched as the first truly electronic bank. It was aimed at
a younger, more affluent market than the skilled working class customer base
of its parent, Co-operative Bank. Its strategy was to exploit a new market
segment without cannibalising the Co-op’s traditional customers.
Smile’s strategy is based on principles of value (to the customer), transparency

(so customers know what they are being charged and why), service,
commerce (making interchange profitable to all parties) and accountability
(to its customers). The company believes in being ethically and ecologically
sound in all its practices, although this means that it does not offer the
cheapest online services.

• Strengths
• Smile has major strengths as the only ethical electronic bank.

• The customers who Smile have retained will be strongly loyal, as they
believe in its philosophy.
• The company concentrates on customer retention by means of quality of

service and the participation of customers in its activities.
• The aim of avoiding cannibalism has largely been achieved. 80% of its
customer base is new to the Co-operative Bank and has a much younger age
profile (under 30).
• Weakness
• Customers who might have been initially attracted by the company’s

novelty will have left early when rivals offered cheaper services or more
favourable interest rates. In this way, Smile’s ethical philosophy might have
reduced its growth somewhat.

Initially, Smile focused on developing a website that was very secure and
which would be difficult for hackers to enter or reproduce. It also created an
image of customer service at a high level and of ethical banking. Smile will
not lend for unethical purposes and adopts the Co-operative Bank’s code of
ethics.
Smile offers current accounts and savings accounts, including a student

account, personal loans, and motor insurance. It offers mortgages online and
opportunities for investing in ethical funds and unit trusts, as well as in the
Stock Market. It has linked up with Fidelity, the largest fund manager in the
UK, to make a funds supermarket (Smile Invest) of 32 investment providers,
offering 474 funds, available to customers.
Smile also offers travel packages through a website link to a travel agency
site.
Brand Development
Brand development has been very much based on a combination of clear and
simple IT, and the ethical stance of the Co-operative movement. This makes it
stand out from the other banks, whose ethics are not so transparent. The
ethics have provided the background for television advertising for Smile.
The company spent its first year developing a market presence and
establishing a good level of market penetration. In 2000/2001, it moved from
providing simple current account and savings account provision to embrace
mortgages and investments, in association with financial advisers supplied by
the Co-operative Bank.

Innovations
Smile has developed its site security to levels beyond those of its main rivals. It
also offers a telephone banking service, which customers can use as a fail
safe.
The quality of Smile products has been recognised in the form of awards, such
as the ’Best Internet Banking Provider’ in 2002.
Smile has also been praised for its website, credit card offering, current
account and savings account, by The Guardian/The Observer Consumer
Finance Awards.
Advertising
In the first year of its operation, Smile advertised heavily both on television
and in print, spending £23m. However, this amount was reduced in later
years. It sponsored the British Comedy Awards from 2000 to 2003, boosting its
own image at the same time as a bank for the young and fashionable.
Distribution
Smile customers can withdraw funds from over 17,000 post offices, as well as
from Co-operative retail outlets and cash machines. The company is a
member of the Link consortium of 20,000 ATMs.
In 2002, Smile achieved half a million customers within 3 years of its launch
and is making moves to franchise its operations abroad. The company will
focus on Co-operative Banks in EU countries.
Profitability
No financial data have been made available for Smile in the aggregate
accounts for the Co-operative Bank.

Electronic Banking 14. The Future
14. The Future
US INTERNET PAYMENTS
The future of electronic banking can be seen in a current trend in the US,
where an old-fashioned cheque culture is already giving way to online
payments at low cost. Cheque processing is falling by between 3% and 5%
each year and new, expensive cheque imaging equipment is going to take
many years to pay off.
In 1999, a Federal Reserve study showed that the top 25 bank holding
companies relied on payments for 40% of their income. In this way, they are
unlikely to wish to lose this revenue to electronic payments providers.
However, card profitability is falling and, in 2003, the estimated revenue per
card was $5 (according to Bernstein Research). Now, customers do not make
their payments through bank systems, but directly to their suppliers’ websites.
Although costs are falling, the banks are raising their interchange fees.
Consequently, debit card usage is increasing rapidly and is forecast to grow
from 8.5% of the payments market in 2002 to 15.1% in 2007. The Nielsen
reports, which forecast the 2007 shares, also predict that prepaid cards will
double their share, pre-authorised payments will rise and remote payments
will also grow. However, credit cards will become the dominant payment
method and increase market share, while it is forecast that cheque
transactions will fall over the same period.
Market Leaders
In the US, the two leading market players are PayPal and BillMeLater.
Citigroup and Bank One have both introduced pilot online person-to-person
(P2P) payment systems, c2it and eMoneyMail, respectively, but have
withdrawn them as a result of competition from the market leaders.
Citigroup now provides electronic transfers through CashEdge Inc, offering
free inward transfers, but charging $10 for outward transfers. In addition,
retailers can replace credit card payments, which carry high interchange fees
that they pay to the accepting bank using e-cheques. The credit card industry
dominates the payments market, with 73% of US households holding cards,
but Wal-Mart is keen to offer its customers online payment options to
promote its Internet site.
Banks can fight back by marketing the online bill payment feature on their
websites, which is directly connected to the customer’s current account. In this
way, funds can be transferred electronically, albeit at a price in the UK.
Wells Fargo operates a P2P payment service through its online bill payment
facility. Wells Fargo offers an electronic remittance service for its Mexican
customers by means of a link with Bancomer — the largest Mexican bank —
by automatic transfer from a sweep account. Bank of America offers credit
card money transfer to Mexico on a same-day basis through its SafeSend
facility.

14. The Future Electronic Banking
According to the US Department of Commerce, US online sales rose by 25%

from the fourth quarter of 2002 to the fourth quarter of 2003, reaching
$17.2bn (1.9% of total sales). Retail sales rose by 4.2% over the same period,
suggesting a rapid growth in online sales that will take 2 to 3 years to become
significant. Credit card issuers captured an income of $5.7bn from online
payments in 2003 and revenue is likely to rise to $9bn in 2005.
Between 2003 and 2005, alternative payment providers are expected to

experience the largest growth of 55%, followed by cheque authorisation
providers (50%).
Table 39: Forecast Compound Annual Growth in US

E-Commerce-Driven Payment Industry Revenues
(%), 2003-2005
% Change 2003-2005
Payment Provider
Alternative providers 55
Cheque authorisation providers 50
Issuing bank 24
Merchant processor 24
Card associations 24
Individual card networks 24
Acquiring bank 24
Fraud management 18
Gateway 18
Source: Celent Communications
PayPal is the largest provider of P2P payments, with a claimed client base of
40 million customers in 38 countries. According to industry sources, around
13 million of these customers are active. The success of PayPal was initially
derived from online gaming, but its success now mainly comes from its close
association with its owner, eBay. Auction payments accounted for nearly 70%
of its payment volume in 2003 and the company is now trying to diversify
outside eBay. Many PayPal accounts are paid for using credit cards.

Payment Methods
The nature of the US payments industry means that the e-cheque is being
developed as a substitute for credit or debit card payments. The e-cheque has
a sizeable potential market, as a quarter of US households do not have credit
cards and cheque authorisation companies — which settle e-cheque
payments through the ACH (American Clearing House) — are expanding fast.
Its share of the US electronic payments market is forecast to rise from 3% in
2000 to 9% in 2005, to reach $17.9bn. In this way, banks that experience their
credit card fees of $1.50 or more per transaction being eroded will seek to
charge for ACH transactions. However, this will make them unpopular with
customers. Debitman Card Inc offers ACH card transactions for 9 cents, while
First Data Corporation allows bill payment via electronic funds transfer
formats. It is likely that the new personal identification number- (PIN-) based
credit card transaction methods from Visa and Mastercard will prove less
popular.
Store value cards are also growing in popularity; for example, Starbucks cards
were distributed to 16 million customers in 30 months, who hold a combined
value of $400m on the cards. Stored value cards are usually bought from the
merchant’s share, as a result of the fees charged on the cards. Researchers
Financial U+Insights believe that the market for store value cards will rise to
$349bn by 2007, of which 42% would be accounted for by payroll card
purchases. Payroll cards eliminate the dangers and expense of distributing
cheques on payday and paying cheque-cashing fees. Visa/MasterCard
members, faced with a high-fee stored value card, are likely to leave in order
to develop a cheaper, more popular product with retail traders. Alternatively,
they might develop micropayment services.
BillMeLater, operated by I4Commerce Inc, provides online payments through

an instant loan service, based on Social Security number and date of birth for
an immediate reference to a credit reference agency. A favourable check
means that a bill can be sent to the customer and I4Commerce pays the
merchant, carrying the risk for both credit and collection. Fees paid to
BillMeLater are 40% lower than to a credit card supplier.
BillMeLater has been bundled with other alternative online payment

providers, such as Telecheck Internet Check Acceptance and Verified by Visa in
a bundle called First Data Encompass. This is owned by First Data, the leading
US credit card transaction processor, which is taking a strategic position as a
provider of new payment services.
CheckFree Corporation reported that 60% of new online bill payers go to the
website of the biller to pay and can use up to ten separate sites a month. This
is a result of banks charging more and, in many cases, not allowing electronic
payments.
Since the failure of Citigroup to offer a P2P payment service, it would be

wiser for banks to bundle a variety of payment options in future offerings in
order to retain their customers. The credit card business is hugely profitable,
but is unlikely to stay the lead product forever. In this way, banks will need to
move on in support of their customers’ changing needs.

Non-banks will continue to exploit the banks by developing innovative

services, such as last minute payments at low cost, alternative authorisation
services at lower cost, direct authentication, which banks are resistant to as it
undermines the high interchange fees they charge.
Boston Consulting Group has forecast that bank fee income for payments will
fall by 3.4% each year until 2008, possibly as a result of the electronic
payments revolution.
CONSUMER ISSUES
The Economy
Key Note estimates that the savings ratio will rise in line with increases in the
base rate (see Tables 40 and 41), as the return to savings rises. However,
inflation is likely to worsen on the back of higher house prices and wages.
This will eventually reduce the propensity to save. Household investment will
continue to rise, as higher incomes are converted into property and other
assets, and the demand for financial investments will grow. However, it is
likely that investors will be more cautious than they were in the 1990s.
Given no major changes in the economic environment globally, UK gross

domestic product (GDP) should continue to rise, with increased technological
efficiency and productivity, coupled with a fully employed workforce. Retail
sales are expected to rise more slowly, reflecting the pattern of lower prices
set for goods in the late 1990s, but there will be few falls in sales.
Unemployment will begin to rise again in the late 2000s, as interest rate
changes begin to have some effect on economic growth and, eventually, on
price increases.
Gross disposable income is also forecast to increase, reflecting favourable pay

settlements and a greater demand for labour.

Table 40: Forecast UK Economic Indicators

(£m, index 2001=100, index 2000=100 and %), 2004-2008
2004 2005 2006 2007 2008
Savings ratio 6.1 6.2 6.3 6.1 5.9

Household investment
(£m) 60,872 68,453 75,876 79,563 84,970
GDP at basic prices
(index 2001=100) 108.8 111.4 114.3 116.9 118.4
Retail sales†
(index 2000=100) 123.6 127.4 129.9 132.1 134.1
Unemployment rate (%)‡ 2.7 2.8 2.7 2.9 3.1
Annual change in RPI
(all items [%]) 2.6 2.8 3.1 3.2 2.8
Gross disposable
income (£m) 782,230 801,468 824,574 851,234 876,342
GDP — gross domestic product

† — December, by value at constant market prices
‡ — claimant % of workforce
RPI — retail price index
gross disposable income — total resources less taxes and social contributions
Source: Key Note estimates
Want more detail? Order further customised analysis through IRN Research on
keynote@irn-research.com. See Further Sources for more on this service.
Key Note forecasts that base rates will rise significantly to 2006, before
stabilising as inflationary pressures are overcome. Equity prices will recover
slowly, but not sufficiently to reward short- or medium-term investors. House
prices will moderate their rise slowly as a result of higher interest rates, but
there will be no major environmental change to reduce the demand.
Alternative investment opportunities will remain unattractive and prices will
start to rise again as interest rates ease.

Table 41: Forecast Financial Indicators

(% and index 2001=100), 2004-2008
2004 2005 2006 2007 2008
Base rate† (%) 3.9 5.3 5.5 5.4 5.4

Equity prices
(FT all-share index 2001=100 82.8 87.5 94.5 98.3 101.6
House prices
(Department of Environment
mix-adjusted series index 2001=100) 151.8 166.5 179.4 191.5 204.1
† — set by Bank of England
SUPPLIER ISSUES
Barriers to Entry
There are unlikely to be any barriers to entry to the UK market. Under EU
agreements, it is possible that some of the electronic standalone banks might
be wound down if they do not sustain levels of 650,000 customers or more. As
discovered by Egg, expansion into other markets might not be so easy, unless
companies follow the example of ING Direct.
Regulations
The multiple regulations now in force will gradually become second nature
and the electronic banking industry will get used to implementing them.
However, industry insiders believe that a determined fraudster will still be

able to circumvent the controls. There will never be complete security as long
as an individual accesses an insecure computer at home.

MARKET DYNAMICS
Key Note forecasts that the trend towards electronic payments and electronic
banking will continue over the next 5 years. Between 2005 and 2009, the
number of cheques is expected to decrease by 19.5%, whereas plastic card
usage is forecast to rise by 36.9%. This increase is likely to occur as plastic
cards become more secure with their PIN facilities and card providers add
more facilities to the cards. Automated payments — which include
intra-bank items, but not Clearing House payments, and where the payer is a
personal customer — will grow steadily. Automated payments might begin to
accelerate when customers are motivated to use their cards more sparingly
and when they are better reassured about security.
Table 42: Forecast UK Personal Transactions

by Payment Method by Volume
% Change
2005-
2005 2006 2007 2008 2009 2009
Cheque† 1,110 1,040 986 931 894 -19.5

Index 89 83 79 75 72
Plastic card‡ 6,320 6,950 7,520 7,980 8,650 36.9

Index 110 121 131 139 151
Automated§ 3,190 3,413 3,678 3,890 4,047 26.9

Index 110 117 126 134 139
Total 10,620 11,403 12,184 12,801 13,591 28.0

Index 107 115 123 129 137
† — includes an estimate for in-house items

‡ — excludes plastic card cash acquisition at automated teller machines (ATMs) and
branch counters
§ — includes intra-bank items, but excludes CHAPS (Clearing House Automated
Payments Settlement) payments; personal automated payments are those where the
payer is a personal customer, business automated payments are those where the payer
is a company

PEST ANALYSIS
Political Factors
In the future, civil liberties are likely to be the most sensitive issue related to
electronic banking. Given legislation such as the Patriot Act, customers might
become more sensitive to privacy issues. Banks will have to ensure that their
routine procedures comply with customer privacy requirements and
demonstrate this to customers. Findings from the survey conducted by BMRB
Access for this report suggest that electronic banks as such do not command
customer trust. In this way, it will be important for banks to prove that they
are trustworthy.
Equally, if electronic banking becomes a much larger part of the financial

services industry, its costs will come under political scrutiny. It will be unlikely
that any bank could increase its margins by raising the costs of its electronic
products without facing some form of protest. The Wanless report on small
business banking in the early 2000s could be followed by others.
Economic Factors
Electronic banking was forced on traditional banks by innovators, often
themselves from a traditional bank (such as First Direct) and often supported
by banks from outside the core of the four ‘big banks’, such as the Bank of
Scotland. This competitive attack has transformed the UK banking market
and made its more vulnerable players attractive targets for other banks to
take over. Domestic takeovers are unlikely given the size of the major players,
but takeover by overseas banks is a possibility. The proposed takeover of
Abbey National by Banco Santander Central Hispanica (SCH) in 2004 gives the
bank an opportunity to enter a vigorous market and increase its profits,
exploiting Abbey’s retail strengths and its cahoot online bank brand.
It is possible that this will be followed by other overseas operators

considering the purchase of the smaller mortgage banks. Such a development
can only increase the levels of competition in the UK banking market and
make it easier to arrange cross-border banking.
The banking industry will continue to spend heavily on electronic distribution

channels, as well as on technology platforms and software.

In its 1998 survey, the Centre for the Study of Financial Innovation (CSFI)
found a strong preference within the industry for expenditure on Internet
access. With the rapid rollout of standalone Internet banks and the
development of integrated Internet banking channels, this expenditure was
beneficial as the advance of independent banking suppliers was halted. In
addition, spending on proprietary technology platforms remained a major
preoccupation of banks. The mergers of RBS and NatWest, Halifax and Bank
of Scotland, and the proposed takeover of the Abbey National Group by SCH
(or possibly HBOS), indicate a trend whereby the simpler of the two bank
structures is adopted and the older technology is replaced by a single
platform, or by linked platforms, with far fewer processing centres. Takeovers
seem likely to be funded on the promise of synergy savings. For the largest
banks, the sheer size of their legacy systems will make it extremely difficult to
create fast and cheap electronic delivery of financial services. In particular,
Lloyds TSB and Barclays will have to face this dilemma in the next few years.
Now that banks have their electronic distribution channels, it will not be
possible to retrench and they will be committed to continued, expensive,
investment in them. The original view, that it would be simple and cheap to
establish a website and Internet service, turned out to be naïve.
Social Factors
The 1998 CSFI survey dismissed the branch as an important delivery channel in
the banking technology revolution. Customer surveys then, and in 2004,
consistently show a preference for face-to-face interaction with bank staff
and a distrust of electronic channels. The trend back towards the bank branch
as a marketing centre where banks can cross-sell products, is partly the result
of a realisation that those customers who adopt new distribution channels
are much less likely to stay with their bank. For example, Nationwide — an
early innovator in electronic banking in 1997 — has introduced terminals in
its branches where staff can help customers use the online service. This trend
is likely to intensify over the next 5 years.
The image of the bank is still changing. More customers are using the new
electronic banks, as well as traditional banks’ electronic offerings. They will
increasingly expect all banks to offer them easy, simple online access, online
loans and insurance.
Given the clear indications in consumer surveys that there is a strong age
divide between those who are happy to use electronic banking channels and
those who are not, banks will increasingly see their branch services as social
channels focused on the older customer and on customers with complex
financial needs. The surveys show that few customers want sophisticated or
complex services delivered electronically.
The migration of back-office operations and call centres to third parties will
continue to be contentious, firstly because of the loss of UK jobs and secondly
due to prejudice. Cultural factors might be one reason why banks that have
cut their costs in this way might rethink their operations.

Technological Factors
In 1998, a survey by the CSFI identified the major IT concerns of banking
regulators, IT specialists, financial services professionals and industry
observers. Major concerns were as follows:
• security
• unreliability
• uncertain regulatory environment
• legal uncertainty
• lack of user-friendliness
• lack of decision and risk analysis tools
• cost considerations
• difficulty of getting a connection.
Security
Security remains a major concern. The introduction of public key
infrastructure (PKI) and temporary passwords can overcome the problems of
tampering with payments and ensure that individuals obtain secure
connections. However, security must be balanced with access. If it is made too
tight, customers will become frustrated and revert to different types of
payment. If it is made too loose, then fraud can take place simply by a
customer leaving their details on the screen and somebody else using the
same computer. Technological advances, such as iris recognition or finger
impressions, are proving difficult in pilot tests, as over 7 billion card
transactions are made in the UK each year. In this way, even the smallest error
rate would reject millions of transactions. Even if they do prove reliable, the
cost of implementing such security devices on every terminal or personal
computer (PC) will be so high that it would take many years to achieve.
The development of chip and PIN technology, still being implemented in the
UK as late as 2004, was seen by the industry as a much more cost-effective
way of cutting fraud. Both the International Biometrics Foundation and the
Association for Payment Clearing Services (APACS) are sceptical about
biometrics as a solution to security problems related to cards.
However, experiments based on smart cards are showing promise. A smart

card, which is held by the customer, stores their biometric data (for example
DNA [deoxyribonucleic acid]) on the card, obviating a vast central database of
fingerprints or eye images that would have to be closely guarded. This
possibility might become more commercially feasible once biometric
passports are issued. Oberthur Card Systems is piloting a system with the
Savings and Postal Cheque Bank in Cote d'Ivoire, where customers present
their smart card and the bank uses a fingerprint reader to authenticate them
within 3 minutes.

In the US, Biopay has also piloted a system at 27 shops, where cheque cashing
is operated with fingerprint identification. Sagem, a terminal manufacturer,
claims that its biometric filing system cannot be searched to identify people
and can produce a unique identity document. Gemplus also believes that the
smart card is the most secure way of operating a biometric-based identity and
bank card acting as both the key to the customer’s bank account and as a safe
for the individual’s identity.
This development is a technology-based bid for the future, since only 20% of
the smart card market (itself still very small in the UK) uses any biometric
data.
However, mistakes in rolling out electronic products and errors in

maintenance have been reported. In 2002, Barclays Bank customers reported
that they could access other customers’ accounts when they opened their
accounts on the Barclays website. Similar problems were encountered when
HBOS launched its Intelligent Finance (IF) website in 2001, forcing it to delay
the launch of the online version for several months. Since then, errors have
been only rarely reported.
Training customers to be aware of security issues, and change their passwords

and maintain privacy when using their banking site online, is a much cheaper
alternative. Banks will have to focus on customer education and training to
reduce the incidence of fraudulent use of their sites.
Bank staff fraud is likely to be as prevalent with electronic banking as with

traditional banking. Tighter audit controls are likely to be installed as part of
compliance with more stringent financial regulations. There have been cases
already of outsourced services being used by staff at the remote site to
undertake fraudulent activity. Auditing controls also have to be enforced on
third-party suppliers.
Unreliability
In 1998, the probability that a bank’s electronic facilities would be offline and
would not be able to obtain a line was high. At this time, the amount of
Internet traffic was far less than in 2004. The solution to this problem lay in
the take-up of broadband connections, which offer much faster access, carry
considerably more data capacity and can be left on all the time. At first, this
was available only by satellite or cable. With the eventual rollout of
asymmetric digital subscriber line (ADSL) technology by British
Telecommunications (BT), broadband became available through the ordinary
landline network. By 2004, it was obtainable in 80% of the UK. Since
broadband has the potential to offer video access if operated at high enough
speed, reliability is no longer a major problem for most people.
Banks have now realised that electronic banking services cannot be

understaffed. Service at call centres has become much better over the last 5
years and, in some cases, the outsourcing to other countries with a higher
calibre of staff has recently shown an improved level of effectiveness.

Uncertain Regulatory Environment

Under the influence of Anti-Money Laundering (AML) regulations and the
backlash from the events of 11th September 2001, the regulatory
environment has improved. There is no likelihood of any relaxation of current
regulations, which regulators are under strong political pressure to enforce
and tighten where possible. This presents electronic banks with a barrier to
progress; they have to comply with laws that insist customers prove, if
necessary, their identity and justify the transfer of large sums of money. At
least this barrier applies to all banks, so there is no discrimination on grounds
of competitive advantage.
Legal Uncertainty
It is now possible to use electronic, digital signatures on documents. However,
customers opening direct debit arrangements still need to submit the direct
debit application as a hard copy with a signature before it can be activated.
Legal certainty has been provided under Acts requiring much tighter analysis
of applications by customers opening accounts.
Lack of User-Friendliness
Early websites, designed by people with little training in marketing, lacked
customer awareness. With heavy investment and the rapid improvement in
web design skills, banks have been able to create sites that are much more
user-friendly. However, one particular problem is the desire to present a
‘trendy’ image with complex graphics. Until most customers have broadband
access, such screens will take a long time to load and make online banking a
slow and frustrating process.
The difficulty of designing appropriate pages means that wireless application

protocol- (WAP-) enabled mobile telephones have not been a successful
distribution channel, despite the promise this service had in 1998. The
introduction of improved screens on the new generation of telephones being
sold in 2004 might boost the use of mobiles for payment purposes, but on the
evidence of the BMRB Access customer survey, the interest in this application
is slight. Not least, customers view their mobile telephone as something that
can be easily lost or stolen. The possibility that a thief might then gain access
to customers’ bank accounts adds to the security concerns.
Lack of Decision and Risk Analysis Tools

In 2004, the development of new decision tools and risk management
procedures is still being researched. Software development is driven by
investment banking, where the consequences of poor decisions or
inadequate hedging of risks are financially very damaging.

Business process management (or workflow analysis) is increasingly applied,

along with straight-through processing and exception management. It can be
applied as a simple process with one database and simple tasks, but its
application to a large, complex bank is more difficult. The Patriot Act and the
requirements of the Basel II Accord on capital adequacy are driving banks
towards daily checks of all their transactions to ensure the integrity of their
data. The aim of the software currently being developed is to eliminate
transaction breaks, which require human intervention. Exception
management requires the incorporation of human expertise into a set of
rules that can be applied, often in the form of neural networking, to a vetting
process. Depending on sensitivity settings, this process can identify not only
fraud, but also other faults in the system.
In some cases, the Six Sigma quality instrument is being applied in banks,
requiring daily analysis of data for defects. This style of management, seeking
evidence of risk all the time, is likely to become much more widespread in the
next few years.
Cost Considerations
The introduction of electronic distribution channels has added more to the
costs of banking than had been expected. There is no sign that these costs will
cease to rise, given the burden of regulation and security safeguards
required. Many banks will continue to be disappointed that customers do not
migrate from branches and will continue to use, on average, two distribution
channels for their banking affairs.
Difficulty of Getting a Connection

Once broadband is widely used, connections should not be a problem for
most customers. In the UK, broadband is likely to continue to be charged for,
adding to the costs of electronic access for the less wealthy customers.
However, in many communities, there are increasing numbers of terminals
that can be used for banking online, notably in libraries and community
centres.
It will remain much more difficult for the socially excluded to operate bank
accounts. Plans to introduce terminals to post offices have still to be finalised,
while most benefits and pensions are now paid into accounts rather than in
cash. Post office numbers are being reduced and plans for the Post Office to
offer its own banking products under the Universal Bank concept have made
it difficult for it to strike a deal with commercial banks. Some bank accounts
can be accessed through post offices, but online access is unlikely in the short
term.


Electronic Banking 15. Further Sources
15. Further Sources
Associations
Association for Payment The Association of Corporate
Clearing Services Treasurers
Mercury House Ocean House
Triton Court 10-12 Little Trinity Lane
14 Finsbury Square London, EC4V 2DJ
London, EC2A 1BR Telephone: 020-7213 9728
Telephone: 020-7711 6223 E-mail: enquiries@treasurers.co.uk
Fax: 020-7711 6329 http://www.treasurers.org
E-mail: stats@apacs.org.uk
http://www.apacs.org.uk
Publications
Financial Times Marketing Week
1 Southwark Bridge Centaur Communications Ltd
London, SE1 9HL 12-26 Lexington Street
Telephone: 020-7873 3000 London, W1R 4HQ
Fax: 020-7873 3194 Telephone: 020-7970 4000
E-mail: newsdesk@ft.com Fax: 020-7970 6721
http://www.ft.com E-mail: info@marketing-week.co.uk
http://www.marketing-week.co.uk
Haymarket Marketing and Media
Publications
174 Hammersmith Road
London, W6 7JP
Telephone: 020-8267 4656/4150
Fax: 020-8267 4915/4504
E-mail: campaign@haynet.com
E-mail: craig.smith@haynet.com
http://www.marketing.haynet.com
General Sources
BMRB International Nielsen Media Research
Hadley House 1st Floor Atrium Court
79-81 Uxbridge Road Bracknell
Ealing, W5 5SU Berkshire, RG12 1BZ
Telephone: 020-8566 5000 Telephone: 01344-469 100
Fax: 020-8579 9809 Fax: 01344-469 102
E-mail: mailbox@bmrb.co.uk E-mail: nmrcommunication@
http://www.bmrb.co.uk nielsen.co.uk
http://www.nielsenmedia.co.uk

Further Sources Electronic Banking
Government Publications
Financial Services Authority National Statistics
25 North Colonnade 1 Drummond Gate
Canary Wharf London SW1V 2QQ
London, E14 5HS Telephone: 020-7533 6262
Telephone: 020-7676 1000 Fax: 020-7533 6261
E-mail: enquiries@fsa.gov.uk E-mail: pressoffice@ons.gov.uk
http://www.fsa.gov.uk http://www.statistics.gov.uk
Other Sources
Bank for International Settlements First Direct
Centralbahnplatz 2 40 Wakefield Road
CH4002 Basel Leeds, LS98 1FD
Switzerland Telephone: 01132-766 100
Telephone: 00-416 1280 8080 E-mail: info@firstdirect.com
Fax: 00-416 1280 9100 http://www.firstdirect.com
E-mail: info@bis.org
http://www.bis.org ING Direct
• Red Book statistical update (the full 410 Thames Valley Park Drive
publication is available free on the Reading
BIS website — www.bis.org) Berkshire, RG6 1RH
Telephone: 0800-376 5050
cahoot E-mail: info@ingdirect.co.uk
Abbey National House http://www.ingdirect.co.uk
2 Triton Square
Regents Place Intelligent Finance
London, NW1 3AN 1 Baird Road
E-mail: info@cahoot.co.uk Kirkton Campus
http://www.cahoot.co.uk Livingston
Edinburgh, EH547AZ
Egg Telephone: 0131-658 3988
1 Waterhouse Square E-mail: info@if.com
142 Holborn Bars http://www.if.com
London, EC1N 2ST
Telephone: 020-7526 2500 Nationwide Building Society
Fax: 020-7526 2655 Pipers Way
E-mail: info@egg.co.uk Swindon, SV38 1NW
http://www.egg.com Telephone: 08457-302 010
Fax: 01793-589 3006
Financial Action Task Force E-mail: info@nationwide.co.uk
2 rue Andre Pascal http://www.nationwide.co.uk
75775 Paris
Cedex 16
France
E-mail: contact@fatf-gafi.org
http://www.oecd.com/fatf

Electronic Banking 15. Further Sources
Nordea Smile (Co-operative Bank)

Hamngatan 10 PO Box 1,011
Stockholm Balloon Street
Sweden Manchester, M60 4EP
Telephone: 00-468 614 7852 Telephone: 0161-477 1927
E-mail: info@nordea.com E-mail: info@smile.co.uk
http://www.nordea.com http://www.smile.co.uk
Bonnier Information Sources

Bonnier PLC Databases available via Juniper, Plum,
Field House Blueberry and Damson include:
72 Oldfield Road
Hampton • Directory information on all live
Middlesex, TW12 2HQ and dissolved companies
• Analysed financial information of
ICC Credit every trading British company
Telephone: 020-8481 8800 • Database of all 4.9 million
Fax: 020-8941 6014 directorships
E-mail: creditmarketing@icc.co.uk • Images of the latest directors’
http://www.icc-credit.co.uk reports and accounts
ICC Credit delivers services geared • Full text annual reports and
towards maximising the effectiveness accounts of UK quoted PLCs
of your credit management process. • Stockbroker research
These range from reporting through • Shareholders’ information
decision and investigation services to
IRN Research
integration and data management
Telephone: 020-8481 8831
services.
Fax: 020-8783 3691
ICC Information Ltd E-mail: info@irn-research.com
Telephone: 020-8481 8800 http://www.irn-research.com
Fax: 020-8941 6014
IRN offers a range of research
msn: ICC_FRMMGR@msn.com
solutions to management,
Internet: webmaster@icc.co.uk
information and marketing
ICC can provide information via: professionals on an ad hoc,
continuous, contract or outsourced
• Juniper (WindowsTM online service), basis.
updated daily
• Plum (Internet), updated daily • Bespoke market research and
• Blueberry (CD-ROM — Credit Index, consulting
Company Index and Broker 50), • Information consultancy
updated monthly • Information management services
• Damson (Bulk Data Supply via EDD, • Content/report production
EDI, ISDN, magnetic tape and DAT)
IRN Research is the exclusive compiler
of raw data to the entire Key Note
report range and can provide
customised analysis of data used in
many tables in this report.
For more information and prices,
please e-mail: info@irn-research.com

Further Sources Electronic Banking
Key Note Ltd Prospect Swetenhams Ltd

Telephone: 020-8481 8750 Telephone: 020-8481 8730
Fax: 020-8783 0049 Fax: 020-8783 1940
E-mail: sales@keynote.co.uk E-mail: info@
http://www.keynote.co.uk prospectswetenhams.com
http://www.
Market Report prospectswetenhams.com
• Debt Management
(Commercial & Consumer) Prospect Swetenhams offers list
£380 broking, list management, owned
data and data processing services,
Market Assessment Reports publishing more than 300 business
• Consumer Borrowing in Europe reports.
• Consumer Credit & Debt
• Customer Services in Financial Business Ratio Report
Organisations • Finance Houses
• EMU — The Impact on the UK £275
Financial Services Industry
Based on analysed company financial
• Financial Services Marketing accounts, Business Ratio Reports and
to the ABs Financial Surveys focus on key players
• Financial Services Marketing within 120+ specific industry areas in
to the C1C2DEs the UK, while Regional Leads Reports
• Financial Services Marketing are based on companies trading in
to Start-up Businesses and the key geographical areas across the UK.
Self-Employed
• Financial Services Marketing
to the Retired & Elderly
• Financial Services Marketing
to the Over 60s
• Financial Services Organisations
on the Internet
• Independent Financial Advisers
• Personal Banking
• Personal Loans
• Plastic Cards in Europe
• Savings & Investments
• Savings Trends in the Eurozone
• Small Businesses & Banks
£799 each

Electronic Banking Key Note Research
Key Note Research

Key Note is a leading supplier of market information, publishing an extensive range of
consumer, industrial, business-to-business and services titles. With over 25 years’ experience,
Key Note represents clear, concise, quality market information.
For all reports, Key Note undertakes various types of research:
Online searching is carried out by product code or free search method, and covers the period
from the last edition of the report to the current day.
The internal ICC Juniper database is used to select company information relevant to the
particular report. The financial information extracted may then be backed up by further
online searching on particular companies.
Trade sources, such as trade associations, trade journals and specific company contacts, are
invaluable to the Key Note research process.
Secondary data are provided by BMRB International (TGI) and Nielsen Media Research for
consumer/demographic information and advertising expenditure respectively. In addition,
various official publications published by National Statistics, etc. are used for essential
background data and market trends.
Interviews are undertaken by Key Note for various reports, either face-to-face or by
telephone. This provides qualitative data (‘industry comment’) to enhance the statistics in
reports; questionnaires may also be used.
Field research is commissioned for various consumer reports and market reviews, and is
carried out by either BMRB International (BMRB Access) or NOP Solutions (National Opinion
Polls).
Key Note estimates are derived from statistical analysis and trade research carried out by
experienced research analysts. Up-to-date figures are inserted where possible, although there
will be some instances where: a realistic estimate cannot be made (e.g. the number of disabled
people in the UK); or external sources request that we do not update their figures.
Key Note Editorial Manager, 2004

Key Note Research Electronic Banking

Electronic Banking The Key Note Range of Reports
The Key Note Range of Reports

Key Note publishes over 180 titles each year, across both the Key Note and Market
Assessment product ranges. The total range covers consumer, lifestyle, financial
services and industrial sectors.
Title Edition Published Title Edition Published
Market Reports and Reports Plus Childrenswear 5 2004
A
Chilled Foods 12 2004
Access Control 6 2004 China & Earthenware 21 2004
Accountancy 8 2004 Cigarettes & Tobacco 19 2004
Aerospace 12 2003 Cinemas & Theatres 9 2001
Agrochemicals & Fertilisers 3 2002 Clothing Manufacturing 12 2000
Air Freight 1 2001 Clothing Retailing 5 2004
Airlines 15 2004 Commercial Radio 8 2004
Airports 8 2004 Commercial Vehicles 11 2004
Animal Feedstuffs 11 2001 Computer Hardware 5 2003
Automatic Vending 19 2004 Computer Services 7 2004
Automotive Services 3 2002 Computer Software 5 2003
Autoparts 16 2002 Confectionery 22 2003

Consumer Internet Usage 4 2000
B
Consumer Magazines 12 2003
Baths & Sanitaryware 12 2003
Contraception 2 2002
Bearings 1 2001
Contract Catering &
Betting & Gaming 16 2003
Foodservice Management 16 2003
Biscuits & Cakes 11 2003
Contract Cleaning 18 2004
Book Publishing 16 2003
Cooking Sauces & Food
Bookselling 12 2004 Seasonings 1 2003
Bread & Bakery Products 19 2004 Corporate Hospitality 4 2004
Breakfast Cereals 12 2004 Cosmetics & Fragrances 17 2004
Breweries & The Beer Cosmetic Surgery 4 2004
Market 23 2004
Courier & Express Services 13 2003
Bricks & Tiles 13 2001
Credit & Other Finance
Bridalwear 3 2002 Cards 12 1999
Builders’ Merchants 14 2004 D
Building Contracting 7 2003 Dark Spirits & Liqueurs 2 2001
Building Materials 11 2003 Debt Management &
Business Press 12 2004 Factoring 13 1999
Bus & Coach Operators 7 2003 Debt Management
(Commercial & Consumer) 3 2004
C
Defence Equipment 9 2002
Cable & Satellite TV 10 2004
Design Consultancies 3 2000
Cameras & Camcorders 3 1999
Digital TV 2 2003
Camping & Caravanning 13 2002
Direct Marketing 15 2004
Canned Foods 13 2003
Discount Retailing 4 2003
Carpets & Floorcoverings 15 2002
Disposable Paper Products 10 2002
Catering Equipment 7 2004
Domestic Heating 13 2003
CCTV 6 2003
Dry Cleaning & Laundry
CDs & Tapes 2 1999
Services 4 2004
Chemical Industry 9 2001

The Key Note Range of Reports Electronic Banking
E Health Foods 22 2003
Electrical Contracting 7 2002 Heating, Ventilating & Air

Conditioning 9 2002
Electrical Wholesale 3 2004
Home Furnishings 15 2002
The Electricity Industry 4 2004
Home Shopping 10 2003
Electronic Component
Distribution 12 2002 Horticultural Retailing 15 2002
Electronic Component Hotels 18 2003

Manufacturing 11 2002 Housebuilding 16 2003
Electronic Games 4 2003 Household Appliances
Employment Agencies 14 1999 (Brown Goods) 10 2004
(see Recruitment Agencies) Household Appliances

(White Goods) 15 2004
Equipment for the Disabled 3 2001
Household Furniture 16 2002
Equipment Leasing 12 2003
Household Detergents &
Estate Agents 14 2004 Cleaners 14 2004
Ethnic Foods 11 2003 I
Exhibitions & Conferences 7 2004 Ice Creams & Frozen
F Desserts 9 2004
Factoring & Invoice Industrial Fasteners 8 2001
Discounting 2 2003 Industrial Pumps 5 2000
Fast Food & Home Delivery Industrial Valves 8 2001
Outlets 20 2004
Insurance Companies 11 2004
The Film Industry 4 2002
Internet Usage in Business 7 2003
Finance Houses 11 2000
IT Security 6 2004
Fire Protection
Equipment 6 2001 IT Training 9 2004
Fish & Fish Products 12 2004 J
Fitted Kitchens 10 2002 Jewellery & Watches 20 2004

Food Seasonings 1 1999 K
Football Clubs & Finance 2 2002 Kitchenware 5 2004
Footwear 14 2004 L
Franchising 8 2003 Laboratory Equipment 9 2001
Free-To-Air TV 8 2004 Lighting Equipment 14 2002
Freight Forwarding 13 2002 Lingerie 6 2004
Frozen Foods 19 2003 M
Fruit Juices & Management Consultants 10 2003
Health Drinks 10 2004 Market Forecasts 2 2004
Fruit & Vegetables 18 2004 Meat & Meat Products 16 2003
Further & Higher Education 4 2002 Medical Equipment 15 2003
G Metal Recycling 4 2004
Garden Equipment 10 2001 Milk & Dairy Products 19 2004
The Gas Industry 3 2004 Mobile Phones 5 2003
Giftware 13 2004 Mortgage Finance 3 1999
Glassware 12 2004 N
Greetings Cards 20 2004 New Media Marketing 3 2002
H Newspapers 15 2001
Hand Luggage & Leather Nursing Care 2 1999
Goods 11 2003
O
Health Clubs & Leisure
Centres 6 2004 Office Furniture 19 2004

The Offshore Oil & Gas Soft Drinks (Carbonates &

Industry 3 2004 Concentrates) 15 2004
Ophthalmic Goods & Sports Clothing & Footwear 10 2003
Services 14 2004 Sports Equipment 13 2004
OTC Pharmaceuticals 11 2004 Sports Sponsorship 3 2003
Own Brands 10 2003 Stationery (Personal &
P Office) 20 2004
Packaging (Glass) 12 2003 T
Packaging (Metals & The Take-Home Trade 14 2002
Aerosols) 12 2003 Telecommunications 18 2003
Packaging (Paper & Board) 13 2002 Timber & Joinery 17 2003
Packaging (Plastics) 14 2003 Toiletries 17 2004
Paper & Board Top Markets 2 2004
Manufacturing 14 2002
Tourist Attractions 5 2001
Pensions 2 1998
Toys & Games 19 2004
Personal Banking 11 2000
Training 12 2003
Photocopiers & Fax
Machines 13 2004 Travel Agents & Overseas
Tour Operators 17 2004
Plant Hire 12 2001
U
Plastics Processing 10 2003
Poultry 1 2003 The Under-16s Market 1 1998
Power Tools 2 2004 V
Premium Lagers, Beers & Vehicle Leasing & Hire 16 1998

Ciders 5 2002 Vehicle Security 6 2003
Printing 9 2003 Videoconferencing 3 2003
Private Healthcare 17 2004 Video & DVD Retail & Hire 7 2002
Protective Clothing & Equipment 4 2002 W
Public Houses 20 2004 Wallcoverings 15 2002
R Waste Management 7 2003
Rail Travel 5 2001 Water Industry 3 2004
Ready Meals 7 2004 Water Utilities 3 1999
Recruitment Agencies Windows & Doors 18 2003
(Permanent) 4 2004
Wine 16 2004
Recruitment Agencies
(Temporary/Contract) 4 2003 Winter Holidays 1 1999
Renewable Energy 1 2003 Market Reviews
Restaurants 19 2004 Business Information in the
Retail Chemists 13 2003 UK 2 1998
Road Haulage 17 2002 The Catering Industry 16 2003
Rubber Manufacturing & Clothing & Footwear

Processing 8 1999 Industry 9 2003
Rugby Clubs & Finance 1 1999 UK Computer Market 11 2004

UK Construction Industry 8 2001
S
Contracted-Out Services 2 2004
Sauces & Spreads 9 2003
Defence Industry 7 2003
Shopfitting 12 2004
Distribution Industry 8 2004
Short Break Holidays 4 2001
DIY & Home Improvements
Slimming Market 8 2000
Industry 9 2004
Small Domestic Electrical
Drinks Market 15 2003
Appliances 9 2003
The Energy Industry 5 2002
Snack Foods 16 2003

The Food Industry 15 2003 Clothing Retailers 2000

Healthcare Market 9 2003 Coffee and Sandwich Shops 2004
UK Insurance Market 7 2003 Commercial Dynamics in
UK Leisure & Recreation 13 2003 Financial Services 2002
Mechanical Handling 1 2001 Commercial Insurance for

Small Businesses 2002
Motor Industry 9 2003
Condiments and Sauces 2004
The Office Equipment
Market 7 2004 Confectionery 1999
Packaging (Food & Drink) Consumer Credit and Debt 2004

Industry 1 2003 Contraception 2002
Passenger Travel in the UK 4 2004 Cooking and Eating Habits 2003
UK Pharmaceutical Industry 3 2000 Cross-Border Shopping 2000
Process Plant Industry 1 2000 Customer Loyalty in Financial Services 2000
The Publishing Industry 10 2004 Customer Magazines & Contract
Retailing in the UK 7 1998 Publishing 2004
The Security Industry 10 2004 Customer Relationship

Management 2003
Sports Market 1 2004
Customer Services in
UK Travel & Tourism 10 2003 Financial Organisations 2003
Market Assessment Reports The C2DE Consumer 2002
A D
The ABC1 Consumer 2004 The DINKY Market 2004
Activity Holidays 2003 Direct Insurance 2003
Advertising Agencies 2003 Direct Mortgages 2003
Airports and Airlines 1999 Distance Learning — The Quiet
Revolution 1999
Alternative Healthcare 2003
Domestic Lighting and
Audio-Visual Retailing 2000
Electrical Products 2000
All-Inclusive Holidays 2000
Domestic Telecommunications 2004
B
Duty-Free Retailing 1999
Baby Foods 2004
E
Baby Products 2001
Eastern European Lifestyles 1999
Baths and Showers 2000
Eastern European Travel 1999
Beds, Bedrooms and
E-Commerce: The Internet
Upholstered Furniture 2000
Grocery Market 2004
Betting and Gaming 2002
E-Commerce: The Internet Leisure &
Book Retailing on the Internet 2004 Entertainment Market 2004
Bottled Water 2003 Electronic Banking 2004
Bridalwear 2002 Empty Nesters 1998
Broadcast Media 1999 EMU — The Impact on the UK
Building Materials 1998 Financial Services Industry 2003
Business Postal Services in the UK 2002 E-Shopping 2002
The Business Travel Market 2002 Estate Agents and Services 2004
C Ethnic Foods 2002
Cable and Satellite Services 2002 European Electricity Industry 2002
Call Centres 2003 European Gas Industry 2002
Canned Foods 1999 European Long-Term Insurance 2003
Charity Funding 2003 European Pharmaceuticals Market 1999
Childcare 2003 European Short Breaks 2001
Chilled and Frozen Desserts 1998 European Telecommunications 2002

European Tourist Attractions 2000 Leisure & Entertainment on

the Internet 2002
European Water Industry 2002
Lifestyle and Specialist Magazines 2004
F
Financial Services Marketing to ABs 2004 Low-Fat & Low-Sugar Foods 2003
Financial Services Marketing to ABC1s 2000 The Luggage Market 2000
Financial Services Marketing to M

C1C2DEs 2004 Market Forecasts 2004
Financial Services Marketing Marketing in the Digital
to Over 60s 2004 Age 2003
Financial Services Marketing to Marketing to Children 4-11 2003
Start-Up Businesses and the Medical & Health Insurance 2004
Self-Employed 2003
Men and Women’s Buying Habits 2004
Financial Services Marketing to the
Retired and Elderly 2003 Men’s Toiletries 2003
Financial Services on the Internet 1998 Millennium Youth 2002
Financial Services Organisations on Motor Finance 2000
the Internet 2002 N
The Fish Industry 2001 Neutraceuticals 2003
Forecourt Retailing 2003 The Newspaper Industry 2003
Fresh and Frozen Foods 1999 Newspapers and Magazines 1999
Functional Foods 2004 Niche Marketing in the Financial
Funding in Higher Education 2002 Services Industry 1999
G Non-Food Sales in Supermarkets 2002
Garden Leisure and Equipment 1999 O
General Insurance 2001 Off-Trade Spirits 2004
Global Waste Management 2004 Off-Trade Wines 1999
The Green and Ethical Consumer 2002 Opticians and Optical Goods 2004
The Grey Consumer 2004 Organic Food 2003
H OTC Pharmaceuticals 2000
Haircare 1999 Out-of-Town Shopping 1999
Healthy Eating 2004 Over-40s Consumer 2002
Holiday Purchasing Patterns 2004 P
Home Entertainment 2002 Pay TV 2004
Home Gym Equipment 1998 Pension Extenders 2002
Hot Beverages 2002 Pensions 2004
Hotels 1998 Personal Banking 2003
I Personal Communications 1999
Ice Cream 1998 Personal Lines Insurance 2003
In-Car Entertainment 2000 Personal Loans 2003
Independent Financial Advisers 2003 Pet Market 2003
Individual Savings Accounts 1999 The Pink Pound 1998
Insurance Prospects 2002 Plastic Cards in Europe 2001
Internet Advertising 2001 Plastic Cards — Time to Get Smart 1999
Internet Service Providers 2001 Plus-Size Fashion 2001
Issues and Challenges in the UK Life Private Sector Opportunities in
Assurance Market 2002 Education 2001
IT Recruitment 2001 Promotions and Incentives 1999
L Public Transport 2001

R Teenage Magazines 2001

The Railway Industry 2004 Telefinancial Services 1998
Ready Meals 2001 Teleworking 2003
Recycling and the Environment 2000 Top Markets 2004
Restaurants 1999 Travel Foods 1998
Retail Credit 2000 Trends in Dry Cleaning 1998
Retail Development 2001 Trends in Food Shopping 2003
S Trends in Leisure Activities 2003
Savings and Investments 2004 Tweenagers 2001
Saving Trends in the Eurozone 2002 U
Singles Market 2003 UK Banking 1999
The Slimming Market 2002 UK Beer Market 1999
Shopping Centres 2003 The UK Heating Market 1998
Short Breaks 2004 The UK Overseas Package
Small Businesses & Banks 2002 Holiday Market 1999
Small Business Finance 1999 UK Tourism 1999
Small Kitchen Appliances 1998 Urban Regeneration 1999
Small Office Home Office Consumer 2001 Utilities 2004
Small Office Home Office Products 2001 V
The Soup Market 2001 Vegetarian Foods 2004
Sponsorship 2000 Vehicle Breakdown Services 2003
Sports Footwear and Clothing 1999 Vitamins and Supplements 2002
Supermarket Own Labels 2003 W
Supermarket Services 2003 Western European Lifestyles 1999
Sweet & Salty Snacks 2002 White Goods 2000
T Women Over 45 2003
Technology in Retail Distribution 1998 Working Women 2003
Teenage Fashionwear 2000
© Key Note Ltd 2004
All rights reserved.
No part of this publication may be reproduced, copied, stored in an electronic retrieval system or transmitted save with
written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988.
Published by Key Note Ltd, Field House, 72 Oldfield Road, Hampton, Middlesex TW12 2HQ, Telephone: 020-8481 8750
Stringent efforts have been made by Key Note to ensure accuracy. However, due principally to the fact that data cannot
always be verified, it is possible that some errors or omissions may occur; Key Note cannot accept responsibility for such
errors or omissions. Details supplied by Key Note should only be used as an aid, to assist the making of business decisions,
not as the sole basis for taking such decisions.
Under the new Privacy and Electronic Communications Regulations 2004, it is unlawful for a business to make an unsolicited
sales & marketing call to a corporate subscriber if it is either registered with CTPS or has requested NOT to receive such calls.
Key Note Ltd holds and regularly updates (every 28 days) its data in accordance with the regulations and ensures that its
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Key Note Ltd does not hold itself liable for any subsequent legalities.
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Market Assessment 2004

Third Edition September 2004

In today’s com petitive business environment, knowledge and understanding

“The Chartered Institute of M arketing encourages the use of m arket research as

“M arket Assessm ent reports provide an extremely comprehensive source of

 Key Note Ltd 2004

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

 Key Note Ltd 2004

 Key Note Ltd 2004

5. Automated Teller Machines 33

 Key Note Ltd 2004

8. Electronic Bill Presentment and Payment 53

10. An International Perspective 57

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

 Key Note Ltd 2004

11. PEST Analysis 67

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

12. Consumer Dynamics 75

 Key Note Ltd 2004

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

13. Company Profiles 115

14. The Future 133

 Key Note Ltd 2004

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

15. Further Sources 147

Key Note Research 151

The Key Note Range of Reports 153

 Key Note Ltd 2004

 Key Note Ltd 2004

In their anxiety to promote heavy investment in new distribution channels for

 Key Note Ltd 2004 1

Regulations are becoming more onerous, and the technological demands on

2  Key Note Ltd 2004

• the way in which banks have tailored their retail operations to

• the disappointing progress of mobile telephone banking and interactive

• the growth of the cashpoint and its potential as an electronic outpost

• the growth of pure-play electronic banking services and the technological

• the development of plastic cards and the implications of smart cards

In addition, the following seven areas of electronic banking are considered

 Key Note Ltd 2004 3

4  Key Note Ltd 2004

MARKET DYNAMICS AND SEGMENTATION

Table 1: UK Personal Transactions by Payment Method

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

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

 Key Note Ltd 2004 5

Table 1: UK Personal Transactions by Payment Method

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

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

e — Key Note estimates

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

6  Key Note Ltd 2004

In 2003, CHAPS recorded an annual clearing value of £88.58bn, an increase of

Table 2: UK Annual Clearing Values

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

Cheque and credit

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

CHAPS — Clearing House Automated Payments Settlement

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

 Key Note Ltd 2004 7

It is now possible to withdraw money from supermarket checkouts using a

The distribution of automated teller machines (ATMs) is increasing rapidly,

8  Key Note Ltd 2004