The Future of Online Banking: Personal and Business Finance Management Tools

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1 The Future of Online Banking: Personal and Business Finance Management Tools December 2009 University of Connecticut School of Business Connecticut Center for Entrepreneurship and Innovation Geoff Cullen Yogesh Sharma Fernando Gamio Kun Chen

2 TABLE OF CONTENTS OVERVIEW... 3 Focus... 3 Methodology... 4 Sources of Primary Research... 4 Techniques... 4 Findings and Analysis... 5 The Future of Online Banking Appendix... 14

3 OVERVIEW Consumers have long desired control over their finances and the extended pain of the economic recession has motivated the need for better online tools to help them monitor and manage their money. Banks and credit unions are looking for a new generation of online banking platform to provide a financial portal that can help customers see all their accounts in one place in real time, track and analyze their spending, and achieve their financial goals. In addition, financial institutions are seeking to provide financial tools not only to their individual customers but also to their small business customers. Therefore financial institutions and online-banking vendors have offered specific financial management tools to fulfill the needs of different customers. In the meanwhile, non-bank websites such as Quicken Online, Mint and new players such as Geezeo, have captured more than one million users for their innovative financial management tools. Based on the trend of people increasingly relying on web-based methods to manage their finances, financial institutions and their non-bank rivals will serve up next-generation financial management tools to millions of online and mobile-banking customers and users. FOCUS The purpose of this white paper is to report the findings of the investigation of the personal and small business financial management tools market. Additionally, the paper includes various voices from final users and financial institutions. Therefore the paper attempts to answer the following primary questions: What factors are important to a customer to maintain a relationship with his primary financial institution? What factors are important in selecting a financial management tool? What features of financial management tools designed for small business? What methods would small businesses prefer to use? What value can financial management tools provide to financial institutions? What features are important to financial institutions in a PFM tool? What the value about instituting the social media in the online banking platform?

4 METHODOLOGY Sources of Primary Research The CCEI team conducted 30+ phone interviews with financial industry subject matter experts (SMEs including academics, industry analysts, authors, industry consultants etc.) to identify pertinent issues not tackled by current research, with each phone interview lasting an average of 45 minutes. Using this research, the team then developed and tested telephone and electronic surveys that were designed to validate/invalidate the key issues identified across a random sample of the broader market(s). These surveys were then deployed (electronically or by phone canvassing) to a random sample of prospective users (small business owners, accountants, bookkeepers and individual consumers) and financial institutions (targeted towards decision makers at credit unions and mid-sized regional banks). The team received in excess of 750 completed responses. The table below summarizes survey participation. Table 1: The survey timeline and responses Launch Date Closing Date Total Responses Small Businesses Owners November 12, 2009 December 8, Individual Consumers November 16, 2009 December 8, Credit Unions November 13, 2009 December 8, Mid-Sized Banks November 13, 2009 December 8, Techniques The CCEI team in conjunction with faculty mentors designed and deployed the electronic surveys through Zoomerang ( The survey designed for small business constituents was sent to small business development centers and family business programs across the US for distribution to their clients (Table 2). The survey for financial institutions was distributed via State Banking Associations. Additionally, the help of Industry analysts was sought to deploy the survey through their networks. Also, the survey was via to individual consumers of banks and credit unions.

5 Table 2: Survey deployment methods Small Business Retail Banking Consumers Credit Unions Mid-Sized Banks Small Business Development Centers run by the Small Business Administration (SBA) across the US, Family Business programs within institutes of higher education across the US, CPA associations across the US CCEI team compiled lists of state & government employees, university students/employees, social media outlets Credit Union Leagues across the US, Industry analysts social media avenues, CCEI compiled credit union executive list Banking/Community Banking Associations across the US, Industry analysts social media avenues, CCEI compiled credit union executive list FINDINGS AND ANALYSIS Voice of Individual Customers The retail banking consumer survey shows that the preferences of selecting financial institutions, features of using online banking and factors of choosing a financial management tool. Question - What factors are important in selecting a financial institution? Question - What factors are important in maintaining a relationship with a financial insitution?

6 The survey data indicates that individual consumers select and retain their financial institutions primarily because of customer service and online banking features. Therefore banks and credit unions can consider developing the online banking platforms which make ends meet to acquire new customers and stick to current customers. In addition, more than 70% of consumers say the physical convenience features are important to choose their financial institutions. Moreover, financial institutions can also offer promotion services such as lower interest rate on loans to maintain their customers' relationships. Comparing to other features, the ATM technology has little influence to the customer retention. Question - What features are important in selecting a financial management tool?

7 In the survey, about 83% of customers say the most important feature of a PFM tool is the ability of see all their account balances and tranactions in a single place. About 77% cite the ability to see their spending categorized, while 32% mention to compare their spending. The data shows that consumers are eager for PFM tools that give them greater control over their financial destiny. Moreover, the survey indicates the uncertian value of the community forum. Although most respondents use social media websites, the value of a community forum included within a financial management suite is still not understood by customers using online banking. Question - Where would you like to use a PFM tool from? The need for better PFM tools is pitting banks and credit unions against software vendors and non-bank FPM websites. The survey indicates that customers trust financial institutions more than non-bank websites (63% vs. 42%) or financial management software (63% vs. 22%). On this score, banks and credit unions have a huge advantage. To keep that trust gap, banks and credit unions should develop the ideal personal financial management package to satisfy their customer desires. Voice of Small Business Customers The small business customer survey shows that the attributes of small business owners selecting financial institutions for their firms, preferred services through online banking and factors of choosing a financial management tool. Question - What attributes are important in selecting a financial institution?

8 The survey data indicates that small business owners consider other attributes such as locations and reputation rather than online banking features when selecting their financial institutions. We can see the preferences of choosing financial institution are diverse depending on different small business customers. But there are still about 70% of respondents who agree that online banking features are important elements in looking for financial institutions. Question - What features of financial management tools small businesses prefer?

9 In the survey, the desire to deposite checks via the internet is the No.1 motivation when selecting a financial institution. In addition, most respondents adopt mobile banking and expect to recieve alerts to inform them on account information, which means that they require real-time data. As more consumers (who are also bsuiness owners) rely on mobile banking, there will be growing pressure to upgrade online banking systems to deliver real-time information. Furthermore, small business owners are also inclined to select features which include invoicing, payroll and budgeting. Question - What methods would small businesses prefer to use? The survey data indicates that small business owners are more likely to try stand-alone software over the financial management tools within online banking (75% vs. 60%), but offerings from financial institutions hold a sizable advantage over non-bank websites (75% vs. 12%). Because most survey respondents using software have turned to more sophisticated tools to manage their money, financial institutions and non-bank websites need to optimize banking systems and provide more features to satisfy their customers' expectations.

10 Voice of Financial Institutions Question - What value can financial management tools provide to financial institutions?

11 The survey illustrates that financial institutions that install PFM tools stand to reap the benefits of increased customer loyalty, higher usage and added revenue. Based on our findings, 82% of credit unions feel that PFM tools would improve customer service, but a majority is skeptical of its ability to reduce operational costs. Moreover, credit unions view PFM as a tool helpful for member retention rather than acquisition. On the whole, credit unions believe the benefits of offering PFM tools whereas banks do not, which indicates that credit unions are likely to implement the PFM tools within an online banking system. Question - What features are important to financial institutions in a PFM tool?

12 Based on our findings, 86% of credit unions surveyed say the most important feature in a PFM tool is budgeting compared to only 13% of regional banks. Our survey also shows that different financial institutions value different features. For example, more than 60% of credit unions answered that all features, except the community forum, in the survey are important, while less than 25% of regional banks describe these features as important in a PFM tool. Question - What features of financial management tools designed for small businesses?

13 From the perspective of financial institutions, the design of PFM tools comprises three key features which stand out for most small business customers: real-time data, remote deposit and cash managment. In addition, more than half of credit unions and banks agree that all product atttributes listed in the survey, besides budgeting, are important to address for small businesses. The product features preferred by small businesses are also very close to those described in the small business customer survey. THE FUTURE OF ONLINE BANKING The result of our investigation indicates that most small business customers would prefer to use more sophisticated software and PFM/BFM tools from financial institutions and non-bank websites. Depositing checks via the internet, real-time information and invoicing are small business customers' priority choices for performing financial management activities through online banking. And of those individual consumers who use a financial management tool with their online banking systems, over 83% cited the ability to consolidate their accounts in a single place, with 77% citing the ability to see their spending categorized. Individual consumers also trust financial institutions more than PFM websites and software vendors. Nonetheless, as the popularity of the BFM software continues to grow, the financial institutions trust advantage may be erased for small business customers. Finally, both customers and financial institutions feel the community forum is one of the least desired features for the financial management tools.

14 APPENDIX The demographic information of the survey respondents is illustrated below:

15 Financial Institutions: Demographics Credit Unions Mid-Sized Banks Asset Size Evenly distributed between $11M to >$1 billion 76% with assets between $1 and $500M All asset ranges were represented ($1 to >$5 billion) Membership Size Ranged between 1-120, % of respondents ranged between 1-90,000 84% with 1 to 30,000 customers None with more than 1M customers Percentage of Customers using Online Banking Number of Branches Organizational Type Position of Survey Respondents Nearly all were between 1-60% Majority was between 30% and 40% 50% had 1-5 branches 5% had 0 branches 5% of >20 branches All ranges (0 to >20) had significant responses Majority were Multiple Group or Community Charter. All charter types were represented. 51% were executive management 24% were marketing managers 79% with 1-40% usage None with > 80% usage 81% with < 10 branches Ranges represented were branches 79% State Chartered and Trust Companies 51% were executive management 21% were IT managers Small Business Owner Demographics: Gender Male: 55%

16 Female: 44% Age 71% between Revenue 77% with less than $5M revenue # of Employees 71% of businesses with less than 20 employees Ownership Structure Sole proprietorships: 30% Partnerships : 25% Limited liability company: 30% # of Equity holders 69% had 2 or less people with 10% or more equity stake Retail Banking Customer Demographics: Gender Male: 53% Female: 47% Age years =54% Education Income 80% with at least an undergraduate degree 61% with income between $25K and $150K