(Report Excerpt) Online Banking Personal Financial Management: A Two-Stage Plan for Retention and Acquisition. inquiry@javelinstrategy.

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1 Online Banking Personal Financial Management: Telephone: Fax: Address: 4309 Hacienda Dr., Suite 380 Pleasanton, CA Web site:

2 Overview Adoption of online banking is beginning to plateau, and online banking personal financial management (PFM) will be the capability that helps reinvigorate interest in the channel and strengthens existing customer relationships. Based on quantitative data, historical industry trends and executive interviews from top FIs and technology vendors, Javelin assessed and created a two-stage implementation plan for online banking PFM. Consumer data provides the basis for feature and platform preference segmentation, followed by a review of vendors in the space. Primary Questions How should financial institutions implement online banking PFM? What is the market potential for online banking PFM? What features of online banking PFM resonate most with consumers? Which customer segments should be targeted with particular features to encourage adoption of online banking PFM? Findings and Analysis In the face of flattening rates of adoption, online banking PFM can be a differentiator that sparks increased customer interaction in the online channel and drives retention, making the FI s online banking site into the customer s primary financial hub and creating a further barrier to exit. With approximately 24% of online bankers interested in online banking PFM, however, banks need to focus on the features most desired by this population in order to attract customers to the channel to manage their finances namely, budgeting tools, valued by 55% of consumers, consolidation of accounts across institutions and pre-categorization of expenses. As online banking PFM solutions are still in their infancy, banks should deploy this capability in two stages, the first focusing on accountholders with multiple products at the institution, the second expanding into cross-bank account aggregation. To increase loyalty of customers who have accounts at various institutions, the ability to aggregate information across accounts must place prominently on an FI s online banking PFM roadmap, evolving online banking PFM beyond its current siloed portrayal of customers intra-bank financial lives to include aggregated, cross-institution information. Audience: Author: Contributors: Publication date: May 2007 Financial Institutions: Online channel, ecommerce, Marketing; Technology vendors: Online banking platform providers, aggregators, Web-based personal financial management companies Jean M. Garascia, Research Associate Bruce Cundiff, Senior Analyst Stephen Matava-Knighten, Research Associate Mary T. Monahan, Editor and Analyst Heather Peters, Research Analyst James Van Dyke, President and Founder Subscribers to Javelin s syndicated research service are invited to submit inquiries related to this or any other topic. Please contact us via inquiry@javelinstrategy.com with such requests. Page 1 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is

3 Declining Adoption Rate for Online Banking Requires Enhanced Functionality to Draw Additional Customers 70 Online Banking Adoption Rates Flattening as Channel Interest Plateaus Figure 1: Number of Consumers Engaging in Online Banking 2003 to In Millions Online banking households Q13: Please indicate the last time you conducted online personal banking (transfer money between accounts, check balances, etc.) [Last 12 mos. only] March 2007; n = 2,699; 3,212; 2,200; 2,200; 2,877 Base: All consumers 2007 Javelin Strategy & Research As adoption rates of online banking capabilities and online banking in general are beginning to plateau, with longitudinal data showing only a 3.5 million-person (approximately 1%) increase in adoption of online banking from 2006 to 2007, financial institutions should incorporate a personal financial management (PFM) capability directly into their online banking offering in order to fuel acquisition and migration to the channel, and increase retention and satisfaction among existing customers. Javelin defines online banking PFM as a set of solutions similar to but distinct from Microsoft Money or Intuit s Quicken that can include but is not limited to budgeting tools, categorization tools, bill pay tools, aggregation functionality, and financial advice, among others, that is available to customers as an additional service or functionality through their FI s online banking site. In order to provide customers with the most value, banks should approach the implementation of online banking PFM with the end goal of providing a holistic view of an individual s complete financial life across all institutions where they are accountholders. Financial institutions that do not have online banking PFM on their roadmap for enhancements to the online channel are missing an opportunity to provide additional value to existing online bankers that can lead to deepening of the relationship and enhanced loyalty as well as reach those customers currently not engaged in the online channel. Javelin calculated that the present Page 2 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is

4 market size of US online households who would currently be likely to use online banking PFM if it were available and marketed today is 15.6 million, which is 26% of the 61 million households that make up the US online banking population a sizable portion. Javelin data shows 33% of US adults are engaging in online banking, and, as mentioned above, adoption of the online channel in the US market is becoming relatively flat. Accompanying this general plateau is also a flattening or even slight decrease in adoption levels of particular capabilities such as electronic bill pay at the bank s site (47% in 2007 versus 45% in 2006), viewing of statements and bills online at a bank s Web site (40% in 2007 and 2006), and online account applications (14% in 2007 for opening a new bank account versus 15% in 2006; 24% in 2007 for applying for a credit card versus 30% in 2006). While adoption rates are flattening, it is important to take into account that more and more people are using the Internet overall, with currently 70% Internet penetration in 2006 (80 million US households) compared to 67% Internet penetration in 2005 (76 million households). Offering online banking PFM can be a differentiator for banks to create more customer interaction with and interest in the online channel and is also a way to get customers to view their primary FI s online banking site as their financial hub that they interact with daily. In terms of acquisition, online banking PFM may be a catalyst to drive people to the channel or attract people who are switching institutions, as 39% of consumers name more online service capabilities as one of the most important criteria when choosing a new bank. Page 3 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is

5 Two-Stage Implementation of Online Banking PFM Implement Online Banking PFM Effectively through Two Stages Figure 2: Development Stages for Implementing Online Banking Personal Financial Management FI Benefit Action Target Audience Stage 1 Stage 2 Increased loyalty of finite, highvalue segment Provide budgeting tools Perfect categorization (autocategorization, tags, allow customers to define/rename categories, remember customer-defined categories) Existing, high-value, online banking customers who have multiple accounts across LOBs Increased loyalty across the board Asset gathering Cross-sell opportunity Provide and perfect cross-institution account aggregation and presentation Additional segments of the online banking population who have multiple accounts with different institutions 2007 Javelin Strategy & Research As online banking PFM solutions are still in their infancy, financial institutions should concentrate on deploying this capability in two stages: Stage 1: Perfecting budgeting and categorization for their current multiple account holding, online banking customers Stage 2: Eventually implementing cross-institution aggregation that will appeal to single account holding customers In order to avoid the difficulties of past cross-institution aggregation attempts and also provide value to consumers by incorporating their most valued capabilities, banks should introduce online banking PFM in two stages as outlined above and in Figure 1. Javelin consumer data provides the basis for delineating the primary functionality for each stage, as budgeting, pre-categorized expenses and consolidating information across institutions are valued at statistically significant rates across consumer segments. The banking industry s jaded history with aggregation technology also played a role in determining which functionalities should be tackled in each stage. It may have been too early for aggregation to be adopted seven or eight years ago, as online banking penetration was not at its current levels, and the technology itself did not create as seamless a consumer experience as is possible today. Budgeting, as the highest consumer priority, should pervade initial online banking PFM feature implementation. A necessary component of accurate budgeting is a robust ability to categorize expenses; this can be done within the institution among the customers who have multiple accounts first. Multiple account-holding customers are the focal point of this stage since the ability to aggregate their various accounts (though within the same bank) in one place most closely approaches the holistic view of a customer s financial life, which is a primary value of online banking PFM. However, the value the holistic view provides is truly only possible through cross- FI aggregation; therefore, in Stage 2, aggregation across FIs needs to be the end goal for FIs. Details surrounding each stage are outlined in the following section. While consumer security concerns may exist at this stage because of potential impact of fraud with respect to aggregating Page 4 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is

6 accounts across institutions, Javelin data shows that identity fraud is actually decreasing. Since consumer perceptions often lag compared to the reality, with time consumers will realize that security is not a danger with aggregation. Additional Web 2.0 features, such as receiving professional financial advice or tips and feedback available through an online community, are desirable for particular consumer groups, as will be addressed in a subsequent section and in Figure 7. Focus on Consumers Top Valued Features for Success in Online Banking PFM Figure 3: Most Valued Features for Managing Finances Budgeting tools Stage 1 55% Consolidating account information across institutions Pre-categorized expenses Stage 2 Stage 1 37% 35% Integration with current tax information 31% Receive professional financial advice 30% Tips and feedback available through an online community 18% Other, please specify 5% 0% 10% 20% 30% 40% 50% 60% Q33: What features are most valuable to you in managing your finances? (Select up to three) Stage 1 Segmentation: Focus on High-value Customers First March 2007, n = 1,312 Base: Consumers who consolidate or are likely to 2007 Javelin Strategy & Research While the differentiator behind online banking PFM lies in its ability to bring together customers financial information from disparate areas, FIs should not expect high adoption among all customers at this early stage. For Stage 1, banks that are incorporating PFM into their online banking platforms need to closely examine what it is exactly that will provide their multiple account-holding customer base the most value in managing accounts and perfect those capabilities. Multiple account-holding customers were chosen as the initial target group because of their relatively higher value to FIs compared to single account-holding customers, as the relationship is typically stronger and may become even more so over time, with loyalty eventually drawing higher balances, and a higher lifetime value for the relationship. Accessibility and userfriendliness, which include the ease of finding PFM capability within an FI s online banking site, ease of registration and uploading accounts, and ease of navigation and manipulation of the tools to customize the experience for each accountholder, are necessary components of the value of Page 5 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is

7 PFM and are integral to making the new technology easier to adapt to and encourage adoption. Robust solutions that speak to a particular pain point for consumers, managing finances quickly, reliably and conveniently, can leave customers hungry for advanced capabilities that can be introduced further down the road. Focusing on the smaller, high-value segment of online bankers, those who have multiple accounts across lines of business (LOBs), in Stage 1 allows banks to test and enhance their initial PFM capabilities among a segment who is already loyal to the institution and who would also derive the greatest value from such a capability. For these customers, the convenience of managing high levels of transactions across multiple accounts within an institution provides more value as it approaches a more complete picture of their financial lives. Because consumers desire to manage finances across disparate accounts conveniently and easily, banks should ensure that their online banking PFM solution addresses those needs through a robustly formulated set of budgeting and pre-categorization tools. The availability of such a solution through online banking can set up barriers to exit through the implementation of the two stages, discouraging customers from looking outside their bank for help with managing finances, and therefore enhancing loyalty to the institution. Saving time is the number one reason people choose to begin banking electronically. That rationale is becoming increasingly widespread with up to 30% of consumers professing that as their primary motivator. Moreover, of all behavior changes that result when consumers adopt online banking, checking account balances is noted among 68% of online bankers, 13% higher than the second most common behavior change (paying bills electronically). Taking into account these two pieces of information, banks should position online banking PFM to appeal to consumers motivation for time saving and play off of their more frequent monitoring of accounts by positioning online banking PFM as a central hub for budgeting. If consumers can do more than check account balances when logging in to their online banking session, they are provided the benefit of budgeting in a way that saves time through a method they are already using more often. Overall, Javelin data shows that budgeting tools are the most valuable for managing finances among 55% of consumers who budget or use PFM, followed by consolidating account information across institutions with 37% and being able to work with pre-categorized expenses at 35%. The short-term focus for banks should be budgeting and pre-categorization, which rely on one another to provide the maximum value to customers. In terms of perfecting pre-categorization of expenses, there is much to be done. Pre-categorization, often based on existing merchant/card industry codes, should be translated from the series of numbers and (not always) related words or phrases to easily understandable terms. Digital Insight s Personal FinanceWorks product, for example, labels transactions from a grocery store with the actual name of the store instead of the merchant code. Going beyond auto-categorization is also a must, and online banking PFM should allow customers to 1) tag their own transactions, which can provide further information as to the nature of the transaction, and 2) rename or re-categorize transactions. These new names or categories also need to be remembered by the system, so that the application recognizes similar subsequent transactions and applies the customers revised labels, saving customers the hassle of having to reassign categories each time. Stage 2: Put Cross-Institution Aggregation on the Roadmap In order to gain the loyalty of customers who have accounts at various institutions and reap the benefits of asset gathering for competitive acquisition, the ability to aggregate information across accounts must place prominently on an FI s online banking PFM roadmap. Stage 2 is therefore Page 6 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is

8 based on expanding the target for online banking PFM and the functionality provided. Javelin research shows that consumers rank consolidating information across institutions as second most valuable in managing finances (37%); however, the danger with aggregated functionality at this point is that the capability currently requires a degree of tinkering and maintenance on the customer side that may turn off mass-market users. User-experience and customer service are, by Javelin data, consumers primary criteria for choosing a new bank and customer service issues is a top reason for switching banks; banks should be advised that until they can be confident that consumers will have a consistent, user-friendly, easily accessible and valuable experience through aggregation of multiple accounts across institutions, they should tackle that aspect more slowly. For account holders with multiple accounts at various institutions, to increase adoption and provide real customer value, easy access to an instant, real-time, updated view of all accounts across institutions must be convenient, robust and reliable. Moreover, registering outside accounts must be as seamless as possible to discourage abandonment during the registration process and rejection of the product as a whole. It is understandable at this point, given the mottled history of the use of aggregators for PFM that FIs may be hesitant to offer a full-blown solution that is capable of the aggregation Javelin recommends. However, the intention to provide this must be present in order to move online banking PFM beyond the novelty stage and construct it as a necessary component of consumers financial lives. Only then can its offering affect consumer behavior and adoption. Competitively speaking, aggregation should finally fulfill its potential to be a predatory product that offers consumers convenience through additional feature functionality for accounts from all institutions. The potential for cross-sell is great: consumers who select one (among several, potentially) of the institutions with which they have a relationship to be their financial hub will eventually prefer in-house accounts or services over outside accounts because of the ease of sign up and maintenance for accounts through online banking PFM. Additional benefits of aggregated online banking PFM to the bank/credit union and end user/customer are various. Customer benefits include a holistic view of accounts and therefore facilitated financial decision making (goals, spending/saving decisions, and awareness of net worth). FI benefits are the ability to view what consumers are using at other FIs, which can result in super-individualized targeting based on product characteristics from other institutions, becoming the hub for a consumer s financial life which results in stickier relationships and potentially increased products per household, not to mention the opportunity to make switching from institution to institution easier and relatively painless, as with QuickSwitch, Digital Insight s product that allows banks to do the majority of the legwork for their banks new customers who decided to switch institutions. Page 7 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is

9 Focus on How Online Banking PFM Contributes to Time Savings and Financial Control to Motivate Online Bankers Figure 4 Reasons for Adopting Online Banking To save time 30% To minimize the use of checks, stamps, and envelopes 16% To get more control over my finances 15% To reduce trips to the bank 11% Because it was free 9% To reduce the clutter of paper 8% To try new things 3% To feel safer from fraud risks 2% Because a friend or relative recommended it 2% Other, please specify 5% Q18: Thinking back to when you first began to use online banking, what was your single most important reason for beginning to conduct your banking electronically? (Select one only) 0% 5% 10% 15% 20% 25% 30% 35% March 2007, n = 1,972 Base: Online bankers 2007 Javelin Strategy & Research An online banking PFM system that incorporates the features outlined above in Stages 1 and 2, namely budgeting and pre-categorization tools, and cross-institution account aggregation, respectively, directly relates to online bankers original motivations of saving time and controlling finances, and that correlation will have to be clearly expressed through marketing if banks expect uptake in the short-term. Javelin data surveying online bankers shows that the dominant reason for beginning online banking is to save time, noted among almost one-third of consumers, followed by minimizing the use of paper and the ability to better manage finances, each favored by approximately 15% respondents. The successful rollout and adoption of online banking PFM will require concentrated marketing efforts on the FI s part, communicating to online bankers with messaging and images that will motivate them to test drive the new capabilities of the system and underscore, with concrete examples, how the system contributes to saving time and better managing finances. Practical examples of this include: Time savings: no need to log on to individual sites for every institution where there is an account Managing finances: reports with graphs are automatically created that show how much a consumer is spending in different categories, so s/he can therefore decide how to change spending habits to more effectively manage his or her money Page 8 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is

10 Copy of the Full Report The full Online Banking Personal Financial Management: A Two-Stage Plan for Retention and Acquisition Report is 28 pages with 17 charts/graphs, and can be purchased online at Page 9 Copyright 2007 Javelin Strategy & Research. All rights reserved. This report is licensed for use by American Banker only. This report is