Toward Perfect Information

Better informed customers reward businesses that respect their savvy

In the industrial economy, many smart business models presupposed dumb customers. Often customers lacked the knowledge, time, tools, or inclination to effectively comparison shop. This was particularly true in the banking industry, with its impenetrable legal and accounting jargon. The upshot: If a bank's products seemed reasonably competitive, customers simply stuck with the devil they knew.

But today, life for the banks is much more complex. They may not have been toppled by dot-com banking startups, but banks are nevertheless being forced by the Internet to fundamentally rethink their value propositions. First, Internet-equipped customers are visiting financial Web sites and growing more astute by the day. Second, customer use of online banking continues to increase, which means a bank's competitors are just a mouse click away. Third, new companies are entering the financial services arena via the Internet, aggregating the products companies offer, providing new kinds of value, and making comparison shopping effortless. As use of the Internet grows, banks run the risk of having many of their products become commodities.

Aggregators Aggravate the Situation

New online aggregators are bringing the products of lending institutions together to offer one-stop shopping, so that obtaining a loan is as easy as buying a plane ticket from an airline agent. While many of these startups went bust in last year's dot-com shakeout, some, such as LendingTree Inc., are rapidly expanding.

With LendingTree.com, a prospective borrower fills out an online application form. Depending on the borrower's demographic profile, LendingTree will forward the loan application to a subset of more than 100 participating banks and lenders. A highincome, low-risk borrower's application goes to one group of companies, while a low-income, high-risk application goes to a different group.

The participating lenders are not fly-by-night operators. Currently, seven of the top 10 banks, ranked by total assets, and six of the top 10 mortgage originators participate. LendingTree began with mortgages but has now expanded to include home equity loans, auto loans, personal loans, and credit cards. Lenders pay LendingTree a fee per applicant and an additional fee for each loan they actually secure.

Customers have responded warmly to LendingTree's aggressive TV ad campaign that depicts bankers lining up to grovel for a homeowner's mortgage.

Currently it is originating $1.5 billion in loans per quarter. Applications for loans were up 79 percent in the first quarter of 2001 compared to the fourth quarter of 2000, and revenue has tripled from last year. The company says it will become profitable in the first quarter of 2002.

A company taking a different, but equally effective, approach to the customer is Homestore.com Inc., which also owns Realtor.com This company focuses on the entire home ownership experience. The mortgage is just one item in an experience that may involve 20 to 30 events, such as reshingling the roof or buying a new furnace.

Homestore doesn't try to provide all these services itself. Rather, it partners with other leading Web properties in each market space, such as America Online Inc., iPIX (property of Internet Pictures Corp.), Cox Interactive Media, iWon Inc., Excite (property of At Home Corp.), SMARTpages.com (property of Southwestern Bell Yellow Pages Inc.), and WSJ.com (property of Dow Jones & Co. Inc.). Homestore.com's success of capturing customer loyalty is reflected in the fact that despite the dot-com crash, Homestore.com has a market cap of more than $3.9 billion.

Friendly Self Service

In the new economy, banks face intense competition from entirely new directions. The U.S. Treasury runs a Web site that enables the public to directly purchase T-bills, notes, and bonds. Sales in the past 12 months totaled $3.3.billion.

In Japan, Sony Corp. is forming an online bank targeted at the country's middle class. Sony says the bank will use sophisticated software to offer customized "one-to-one" service to customers, with its customers enjoying better service and higher returns compared to traditional banks.

Embrace Change

Rather than surrender to an online, en masse revolt and deterioration of their competitiveness, bankers should embrace customer savvy and offer services to match.

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Consider this hypothetical example: When you ask to deposit $5,000 to your savings account, the teller (or a pop-up window on your browser) says: "Are you sure? That will only pay you 0.25 percent interest. In our previous business model, we took your money and bought T-bills, which was very lucrative for us. In our new business model, we prefer to help you buy the T-bill yourself. You make substantially more money and view us as a trusted advisor."

This shift in mentality will be key to the banks' survival in an arena that will become increasingly competitive.

Don Tapscott [dtapscott@itemus.com] is chair of itemus inc. (www.itemus.com) and coauthor of Digital Capital (Harvard Business School Press, 2000).