Banks Could Teach Music Firms How to Click

These are cynical times, and journalists are a cynical bunch. But that's no reason not to give proper credit to a large corporation -- indeed, pretty much to an entire industry --that figures out how to do right by consumers while doing right by itself.

This thought occurred to me a few weeks ago while I was reviewing my Bank of America checking account via the bank's Web site. By chance, I discovered that BofA had quietly added a new function: A click of the mouse brought up the image of any check that had been written and cleared within the last few months.

That reminded me of how much BofA's online service had improved over the five years or so that I had been a regular user. Electronic bill payment was easier and faster, with most payments made within two days. I can order checks, stop payments, download my monthly statement to my home computer, even receive electronic bills -- all free. The check-image feature wasn't one I ever would have thought to request, but there it was. When was the last time a big consumer-service company offered you a convenience you hadn't asked for?

This isn't meant to be an advertisement for Charlotte, N.C.-based Bank of America Corp. or a general endorsement of its services over those of competing retail banks. Like any other huge institution, this one commits enough embarrassing mistakes to make its slogan, "Higher Standards," sound sometimes like an exercise in corporate irony. (Consider its admitted complicity in an illicit "market-timing" scam uncovered this fall that victimized investors in mutual funds.)

But even experts seem to have noticed that BofA, along with other big banks, has found a way to make the Internet work for its retail customers as well as for itself. For a couple of years, the dot-com crash led Silicon Valley to think there was no money to be made in pushing online technology at consumers, but the banks have quietly shown the logic in spending heavily to lure their clientele online and to make sure their systems are secure and reliable.

This didn't happen overnight. The first electronic-home-banking experiments date back to 1995, when customers of San Francisco-based Wells Fargo & Co. and a few other institutions could check their balances and see their transaction histories on a Web page.

"Almost every bank stumbled when it first came online," Chris Musto, the vice president for research at Gomez Inc., a technology consulting firm, told me.

"The customer representatives didn't even know how to use the service, and some banks had issues with outages. But they know now that they have a vested interest in maintaining a very reliable Web site because it's your money, and if you ever have trouble accessing your money, it's very bad for the bank."

At this point, according to Musto, about 1 in 4 banking customers nationwide access their accounts online.

BofA has found that its attrition rate among online users is 80% lower than among those who do their banking in person. Sanjay Gupta, who heads a 200-person online banking team at BofA split between San Francisco and Charlotte, also notes that users of the bank's online bill-paying service maintain 38% higher deposit balances at the bank. That's presumably because they concentrate more of their overall transactions in the online account.

Those statistics, Gupta says, were enough to convince the bank that it should make online banking and bill paying free for all account holders -- a move that has helped build its online customer base to 6.6 million users, growing by 50% a year.

Some banks, including Wells Fargo and Washington Mutual Inc., still charge a monthly fee for bill paying unless the user maintains a minimum balance of several thousand dollars. Some experts think this is being penny-wise and pound-foolish, because it's almost impossible to make online services pay for themselves.

Years ago, it was assumed that banks promoted online or telephone bill paying because they profited from the "float": If the bank debited your account for a payment you ordered on a Monday but the payment didn't clear until Friday, it earned four days' interest on your money.

But that was never a profit generator. "The float pales in comparison to the effect online bill pay has on your retention of customers and the higher balances customers maintain," Musto says. The expansion of electronic bill payment, moreover, has cut the period that funds remain in transit to only a day or two.

It's easy to say that the banks don't deserve credit for only doing what they must to keep customers happy. But developing and maintaining a reliable and user-friendly Web service is a lot harder than it looks. Just consider the hash that other industries have made of their ventures online, starting with a business for which the Internet should have been a lifeline: recorded music. (For those under 40 who may not be familiar with this industry, it was a profitable business prominent during the last century.)

It became obvious as far back as 1997 that music in digital form could be easily transmitted over a network and played from a computer. Instead of snapping to attention, the music labels snoozed. Napster arrived two years later, introducing the concept of home-cooked music piracy to the masses. In response, the industry rolled out a few sites offering downloadable pop tracks at exorbitant prices, ensuring that tens of millions of users would opt for free samples instead.

The appearance this year of numerous pay-per-download services -- such as Apple Computer Inc.'s iTunes, RealNetworks Inc.'s Rhapsody and Roxio Corp.'s redesigned Napster -- has hardly solved the problem. Leaving aside that the free-music horse has long ago left the barn, the new sites are highly variable in ease of use; they all seem to offer different catalogs; and none has found the right balance between subscription and pay-as-you-go models. The industry's defense is that these are new services still finding their way, but that only underscores its dereliction in waiting so long.

Many other industries are also squandering a chance to build customer loyalty through their online services. A recent survey by the San Mateo, Calif., market research firm Vividence Corp. found that among customers of telecommunications services -- encompassing phones, Internet and cable TV -- users of online Web sites are twice as likely to change their providers over any six-month period as offline customers. Among the reasons Vividence cited was that the longer those customers spent on the companies' Web sites, the more chances they had "to experience frustrations." Until telecom companies start offering online users valuable promotional deals or convenient account management options, Vividence says, this phenomenon will continue.

By contrast, the banks have plainly learned how to use online offerings to keep customers in the house.

This is a lesson first taught by Time Warner Inc.'s America Online unit and Yahoo Inc. They recognized that once a user gave out or as an e-mail address, he or she would be loath to move to another service because that would mean informing all those correspondents of the switch. The concept was known as "stickiness." A savvy bank, by the same token, knows that once a user has built up a critical mass of payees in its bill-paying service, he or she will be reluctant to go through the process with some other bank.

Could anyone have predicted that an industry once known for the insensitivity of its customer relations would become a leader in deploying new technology, even given its aggressive rollout of automated teller machines in the 1970s? Starting with the founding of Inc., in 1994, the received wisdom in the cyberspace community was that a successful online service would only be held back by bricks and mortar. It will be a long time before banks, no matter how sophisticated their Internet systems, can dispense with local branches or ATMs. People, after all, still need cash. "But the banks aren't into the Web as a fad," Musto says. "This is part of the mainstream."


Golden State appears every Monday and Thursday. Michael Hiltzik can be reached at

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