Magazine article The Journal of Lending & Credit Risk Management

Online Profitability: Just a Credit Application Away?

Magazine article The Journal of Lending & Credit Risk Management

Online Profitability: Just a Credit Application Away?

Article excerpt

Skeptics of Internet banking point out that only 2.8% of online banks currently offer online account access and fewer than a fifth of those offer online financial transactions. However, considering the Internet is less than 24 months into its life-cycle as a commercialized venue, this is an extraordinary adoption rate. How many banks were using ATMs, call centers, or credit-scoring 24 months after they were invented?

One problem with electronic banking in general, and online banking in particular, is the nagging issue of profitability. It's easy to gain consensus that 24-hour service and a fully staffed call center are beneficial to customers. But funding these service improvements remains a dicey proposition. No matter how promising the new program, short-term it's likely to have a negative effect on earnings. Service improvements should be paralleled by incremental revenue generation; interactive financial services delivered through the Web, e-mail, and outbound voice messaging have the potential to satisfy both needs.

With low profit margins and high customer acquisition costs, financial institutions seek new and different ways to book new credit card and credit line accounts. Consumer lending, especially revolving credit, is a promising short-term avenue for turning a financial institution Web site into a profit center. Web-based marketing can be combined with online loan applications to deliver new business.

Bypassing Direct Mail

The profitability of traditional direct mail marketing continues to decline. BAI's Mail Monitor reported that first quarter 1996 response rates for gold cards dropped to 1.1% from 1.4% in 1995 - a 21% decline despite heavy use of teaser rates and other expensive come-ons.

At what point will a business plan predicated on mass mailings cease to be economically viable? With certain households receiving 300 or more solicitations per year, that point is close at hand. Soon, only consumers entering a financial jam will respond, squeezing both ends of the profit equation: higher acquisition costs and higher charge-offs. Internet-based marketing provides a means of breaking through the mailbox clutter and reaching a niche of credit users that no longer responds to traditional mailed solicitations.

Cost Savings

Besides reducing customer acquisition costs, online credit marketing can cut costs in other ways:

* Lower data entry costs: With users doing their own data entry, issuers save time both on the initial entering of data and on the time it takes to fix errors made attempting to decipher written applications.

* Fewer incomplete applications: Online applications are programmed to accept only complete applications, so the lender needn't waste a lot of time tracking down applicants to provide missing data.

Instant Loan Approval

Only Bayshore Trust and Bank of Montreal in Canada, and Beneficial National Bank in the U.S. currently deliver "instant" (one- to two-minute) credit decisions on the Web. By the end of 1997, at least 100 financial institutions will offer real-time loan decisions. By the year 2000, instant online loan approval will be as common as today's ubiquitous preapproved mailer. Banking system vendors will make the technology affordable to even the smallest financial institutions. For example, Affinity Technology, maker of the Automatic Loan Machine, is hoping to leverage the technology used in its loan machines to sell systems for delivery of instant credit via the phone or Internet.

Real-time loan approval will allow credit cards and other forms of credit to be marketed online as "impulse purchases." Instant financing will also be a boon for sellers of big-ticket items on the Internet.

Pro-Affinity Marketing

Experts have said that the affinity card market was saturated since the late 1980s. But MBNA keeps proving them wrong by rolling out hundreds of new partnerships each year - 4,100 at last count. …

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