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Untapped Gold in Online Banking

By Geoff Smith As it's wont to do, the lemming-like banking industry is missing a big opportunity in these troubled times. Sure, bankers must feel queasy. They're losing money from bad business loans. Bankruptcies are on the rise. Investment banking divisions are suffering deep losses. Time to cut Internet spending like everyone else, right? Wrong.

Consider the latest traffic numbers. Investors have sharply slowed their cyber-trading, but bank customers are moving online by the millions. This year, one-fifth of all U.S. households -- 22 million -- will bank online, up 42% from 2000, according to the Online Banking Report, a top sources for such data. The number of people paying their bills online will jump from 3.5 million to 8 million this year, according to OBR.

It's no surprise that the tighter money gets in this recession, the more people want to carefully manage what they have. And online banking is a good way to do that, short of hiring an accountant.

MINING THE MONIED. But banks are wasting this valuable information. They should take a lesson from online brokers who, very early on, recognized that their customers tend to have lots of money and are eager consumers of financial products -- though they may trade far less frequently. Online banking customers have household incomes more than twice as high as offline households, according to Tower Group research. As the economy heads south, this is one group that shouldn't be ignored.

Online brokers quickly caught on to the value of adding a few bells and whistles to their Web sites. While their assets are down due to the bear market, billions of dollars are flowing into the top online brokers for such things as money-market and bond funds. The asset growth rates of the top online brokers have far exceeded the growth of consumer deposits at banks offering ho-hum online banking services.

Lately, the trend among brokers has been to focus new online services on the wealthiest customers, who tend to pay for the most services. Banks should do the same. Most banks treat online services as a glorified ATM machine and erstwhile checkbook. Banks could be much more clever in broadening their reach with online customers. They should treat online banking as a part of their distribution strategy for products such as home-equity loans, mortgage refinancing, and credit cards. They could also create services that help people track their finances, such as Quicken-like accounting features.

MAKE IT EASY. Fidelity, Schwab, and a few other online brokers track tax information for their customers, including the cost basis and tax status of securities their customers own. At a minimum, online banks should let customers track their tax-deductible transactions.

Better yet, banks should let people more easily manage their personal finances. The technical tricks now required to download a financial transaction into accounting software -- like Intuit's Quicken or Microsoft's Money -- is more than many consumers can handle. Banks should let customers automatically categorize transactions, turn their monthly statements into pie charts and bar graphs, and offer budgeting tools.

It's easy to be cynical about banks. The big ones tend to be slow, expensive, and poor on customer service. And gone are the fast-moving innovative Internet startups that might have tried to build such features into online banking -- and pressure big banks to move more quickly. But consumers, many of whom find banking annoying, will appreciate online services that make their financial lives easier.

Have a comment about this column or something to say about your bank's online services, send an e-mail to the address below. Smith covers a wide variety of topics, including personal finance issues, from BusinessWeek's Boston bureau

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