October 30, 2007 at 11:35 pm by Banking Unwired Online banking is in a precarious position these days. The Web-based, rich internet application revolution of Web 2.0 is here to stay, while online banking remains stuck in decade-old technology. It lags far behind even more traditional mainstream Web applications in interaction design, speed, ease of use, and capability. It’s no wonder that several new technology start-ups have already lapped existing banks in delivering key financial services we commonly associate with banks, such as:

Other companies are simply using technology to bypass banks altogether, in areas such as:

Despite being exponentially outnumbered and outspent, these companies are providing a glimpse into what online banking can and should become. Granted many of these companies are targeting a niche audience (typically young and more tech savvy), they are also about innovation. When Wells Fargo became the first major bank to offer online banking during the fledgling years of the internet, few would have guessed it would become as ubiquitous as it is today. Innovation by definition means going into uncharted territory, but it also means resolving an unmet need. Aside from a handful of banks, few actually create new functionality. Usually, they leverage other, more nimble technology players. In the recent Finovate conference highlighting the top 20 “innovative companies in the financial, banking and lending industries,” none (repeat none) of the companies were actually financial service firms. The question is why?

The easy answer is that banks are by nature slow to act and risk aversed. The other possible answer is that technology is not a bank’s core competency — banks sell financial products, not technology products. Another explanation is perhaps the least obvious one: banks have not found a way to monetize and thereby prioritize building new online services for their customers. While direct banks have seen the value of online services, especially as a way to cut cost, retail banks feel compelled to maintain a common level of service for both online and in-branch customers. This is changing, albeit slowly, with the likes of Citibank and E-Trade creating online-only accounts, but the rate of change elsewhere is barely noticeable.

As Google’s Eric Schmidt is apt to say, “Don’t bet against the Internet.” But ironically, by not aggressively seeking to improve online banking, banks may be making their riskiest bet to date. Much like a software company improves its products, banks ought to continually improve their offerings through integrated, customer-focused applications that make money both less painful and perhaps a little more manageable. Only time will tell if banks ante up.

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