Confidence Crisis in Online Services Sector

Caroline Maxwell, Investorsoffshore.com, London

08 January 2001

With the double whammy announcement in December that Reuters and Alliance and Leicester, two major players in the financial industry, are shelving plans for standalone internet services, the issue becomes more pressing- is the brave new world of virtual banking fast becoming a pipe dream?

As reported in Tax-news.com, Reuters, one of the sector's largest information providers, put on hold plans to launch an online equity trading scheme under its Instinet brand name due to fears that the launch of a new retail product under the Instinet flag could damage the reputations of both organisations, given the recent difficult market circumstances. These have been caused by an exodus of private investors from the market, alarmed by the value of technology stocks, which appear to have gone into free-fall. The launch of this new service had already been put back once, in May 2000.

In the banking sector, Alliance and Leicester had been planning a standalone wealth management service for 'mass affluent' investors, due to launch early this year. However, fifteen million pounds into the venture, the UK mortgage bank dropped these plans with almost undignified haste, stating that: 'We have always been in the sceptics camp as far as standalone Internet strategy is concerned' (which begs the question - why spend £15m to convince yourself of what you already know?)

At its inception, the developing technology was heaped with praise, heralded as the start of a shiny, sparkly, brand-new, era for the finance sector. So why are the big boys refusing to commit to a new way of doing business? And are they right not to get involved: are a few cases of cold feet really going to jeopardise the future of a potentially revolutionary force?

Among the reasons cited by these, and other financial service providers who have thrown in the virtual banking towel ( for example Allied Irish Banks in October of last year, or the Tokyo based Sanwa Bank) are lack of client confidence in standalone virtual banks, the need for a 'personal touch', and greater volume of trade demonstrated by integrated banks as opposed to their e-rivals. The newness of the concept of a 'mass affluent' audience may also figure in the institutions' reluctance - the very rich have been around since time immemorial, meaning that the services they demand from a banking arrangement are a great deal better known to the banks. The mass affluent on the other hand, are something of an unknown quantity, and until service providers know exactly what the needs of this group are, they are unlikely to make any sudden, or particularly bold moves. So apparently, it's all your fault after all: 'the wrong kind of money'!

Supposedly, it is security and privacy concerns which are causing the public to stick with integrated, as opposed to wholly virtual banks. People want to be assured that their assets are 100% safe, and that confidential information stays that way, and although the development of technologies such as SSL 128-bit encryption means that institutions can deliver 99.9% peace of mind, in the eyes of the public, this just isn't enough. (Especially not for actor Roger Moore, whose Swiss banking information was accidentally exposed to millions over the internet by Credit Suisse in a November blunder. The Swiss bank claims that responsibility for the gaffe lies with the organisation which organises royalty payments to Mr Moore, but the fact remains that mistakes do still happen, and in the virtual world, they happen a lot more publicly.)

Reliability is also a concern: although many of the blips experienced by online users are not the fault of the banks (such as connectivity problems and 'traffic jams'), they put internet-only banking at a disadvantage, and until the problems inherent in the medium can be rectified, some are deciding that it just isn't worth the hassle.

Another concern is charges accrued due to the lack of physical facilities. An entirely virtual bank will not usually provide an ATM service, meaning that those still dependent on actual cash (surely all of us to some degree?) are obliged to use another bank's ATM, thus accruing charges which can sometimes negate the savings and incentives offered by internet banking.

These concerns, coupled with the fact that the high-tech industry's bubble has apparently burst (dot-coms dropping like flies, falling tech share prices, etc) mean that after the headlong rush of the last couple of years, the finance industry is now taking a step back, and adopting something of a 'wait and see' attitude. This raises a problem, however, in that whilst everyone is waiting, there will be no progress in this area for anyone to see!

The big players in the financial sector need to come down on one side of the fence or the other, as there is very little benefit to be gained from the current attitude of thus far and no further: 'We've got a website - what more do you want?' In order to do this, however, they need the confidence of the public. Who need to be assured that the system works. And so it goes on…

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