It was a question pregnant with serious implications for banks going online. The Wall Street Journal screamed in its front-page story in its 24 September, 1998 edition: "With 20 million of us buying products and services online, could tommorow's generation of consumers view Internet banking as a commodity "Better than Beer?" The Journal went on to quote Student Monitor, a market research organisation: "More students say that Internet is "in" their campuses."

Of the 1,200 college students surveyed at 100 campuses, as much as 73 per cent of them listed the Internet as a popular pastime compared to 71 per cent which voted for drinking beer.

That should keep some Indian bankers hoping that the country's new generation chooses the Internet over whatever their favourite pastime is. For instance, the ICICI bank is putting in considerable efforts towards building lifetime bonds with this new generation. Says H N Sinor, managing director and CEO of the Mumbai-based ICICI Bank: "The idea is to catch them young. We want to be with them at every stage of their career."

Net banking opportunities
Sure, that seems a logical way of looking at this emerging hope called Internet banking. Bankers see quite a few opportunities emanating from the Internet. Says Sinor of ICICI Bank: "Today, everything is moving on the Net. Business opportunities are immense, but in what form will they come, we do not know." Bankers like Sinor see themselves playing vital roles in sector-specific exchanges and in payment gateways for B2B and B2C exchanges.

Look at how the HDFC Bank views Internet banking. Says managing director Aditya Puri: "We will offer bill and tax payments, and financial advisory services. We will distribute mutual fund products, offer investment advice to customers, provide latest financial news and sell banking products." Call that a one-stop shop, or better still a financial services portal, or by whatever name. Online banking is very much here.

A delivery channel
Fine. But, the ground reality is that the Internet does not throw up business opportunities. It just helps the banks to do what they are already doing more efficiently and cost-effectively. E-commerce and Net-based cash management could be the cream that comes along with the online banking cake.

Where Internet banking scores is that it would enable banks not only provide all traditional banking services efficiently, but also help customers transact without being physically present. There are Net opportunities on the corporate banking side too.

During the next 12 to 18 months, corporate banking services will be available over the Net in India. Opportunities here include giving advances to corporates on their letters of credit, moving funds into concentration accounts within or outside their primary banks, originating ACH transactions and initiating payment of bills over the Net.

Still, the question remains. Does the Internet have relevance? Yes, the Internet holds more relevance to the wannabes. Says Bandi Ram Prasad, chief economist of the Indian Banks Association (IBA): "Internet has more relevance for those who want to emerge as leaders. That is why these banks are pursuing it more aggressively."

Some of the compulsions behind banks going online are: to be able to provide quality services or products at a value-for-money cost to customers who are more demanding than ever and to be able to meet the needs of future customers. Thus, the Internet will largely act as the bankers' newfound key delivery channel.

There are other benefits too: Internet banking helps banks get new customers and consolidate the existing ones. Then there is this what Sinor calls "indirect benefit" of cost-saving. When competition is tough and products and prices tend to be similar, customers are bound to choose the bank they like the best for some obvious reasons.

Such reasons might have less to do with banking and more to do with their outside interests. In order to retain customers, banks would have to offer what the customers desire at the click of the mouse. For them, time is devil and speed is god, as they say it in Silicon Valley. Internet is certainly the answer for them.

Why another channel?
It could be an answer. But, one needs to understand what Internet banking is all about. "It is an extension of traditional banking, just another channel. No way it is meant to replace the entire gamut of banking," says IBA's Prasad. Adds K Ramachandran, a banking analyst and head of research with the Mumbai-based Birla Sunlife Securities: "Banks have to adopt Internet banking in various degrees to avoid becoming obsolete. Some initiatives in Net banking is therefore a must."

So, banks need not rush into Internet banking regardless of who they are, what their business goals are and whether Internet fits into their scheme of things. These banks should answer certain key questions on why do they need another channel.

These questions are: can they position themselves as market leaders and attract customers through Internet banking, are they taking to Internet banking as a defensive measure to avoid losing customers to rivals, can they use Internet banking to increase satisfaction and loyalty, can they ensure long-term cost savings, can they solidify the bond they have with customers, is Internet banking a foundation for offering future online products and services such as online bill payments, can they provide superior customer service via the Internet, can they cross-sell banking products and services, can they appeal to customers over a wider geographical area and can they establish a different image in the online world?

Internet basically helps a banker achieve significant cost-reduction as it is an efficient and cost-effective channel to service customers. So, banks should ask themselves whether their customers want this. For this, they need to analyse their customer profiles. They need to analyse whether the "health club effect" will work on them.

Studies have shown that existence of workout facilities in a hotel can play a major role in a customer's choice of one hotel over another. This is the "health club effect". Besides, a bank needs to keep in mind its overall goal, its core skills and its resource strength while venturing into this new channel.

Emerging scenario
All said and done, sustainability is going to be a major challenge for banks going online. Survival strategies might vary depending on the strengths and operational profiles of banks. However, in future, banks would fall under one of these four categories: one, they could be financial service-providers using multiple channels including the Internet. Banks such as HDFC Bank, ICICI Bank and Citibank are likely to be major players in this category.

Two, they could become more progressive brick-and-mortar banks with a focused Internet banking strategy. Those banks which have desirable client profiles and the capacity to upgrade technologically belong to this category.

Some of the new private sector banks such as Global Trust Bank, UTI Bank and some older private sector banks such as Vysya Bank, which have a strong focus on customer delivery, are likely candidates here.

What about the other two categories? Three, cent per cent virtual banks, which are still a long way off in India. And four, some banks will continue being conventional banks with toothless and unfocused Net banking initiatives.

How would the Net banking landscape look like tomorrow? Experts forecast that there will not be more than seven or eight players in the top category. Do not be surprised if you are not going to find banking behemoths such as the State Bank of India (SBI) in that list.

For, banks such as SBI will score low on service standards, backroom capabilities, employee mindset and sensitivity to customer needs.

Serious players
Fine. Successful Net banking players foresee a large canvass to play. But, to try and grow using innovative ways, they need volumes after all.

For instance, HDFC Bank is using the cable television network to spread its Net banking canvass. ICICI Bank is tying up with computer manufacturers such as Compaq, software training companies such as NIIT and Internet service providers such as Satyam Online to widen its reach.

That is why Net banking-watchers such as Ramachandran of Birla Sunlife Securities believe the two banks which are better positioned to succeed are ICICI Bank and HDFC Bank. Says he: "These banks are serious about Internet banking. They have done much more than their foreign counterparts. The reason for this, to my mind, is their varying degree of retail focus." True, the HDFC Bank and the ICICI Bank are planning to go big with their retail thrust and are willing to invest in e-trade infrastructure.

Incentivising initiatives
Net banking is a volume game. These two banks have a huge commitment in terms of investments and the market is no longer a seller's market. Says Puri of HDFC Bank: "Convergence has led to a paradigm shift in the sense that it is no longer a seller's market but a buyer's market. We are financial service-providers who have to offer what the customer wants."

So, the two real challenges banks going online are likely to face are: getting volumes at lower costs and enabling customers save cost and time by obviating the need to visit bank branches. Consider this: at the rate of Rs two per transaction, the 3,000 transactions ICICI Bank puts through every month costs just Rs 6,000 against Rs 1,29,000 at Rs 43 for traditional brick-and-mortar banks. So, the moot question here is this: how do you get customers latch on to the Net? HDFC Bank's Puri is talking of incentivising. Says Puri: "We are going to introduce concessional products soon on the Net." Similarly, ICICI Bank's Bank@campus aims at making a student take to the Net and forget about visiting to the bank branch.

Tie-ups possible
In a bid to spread the message of Net banking far and wide, online banks could collaborate with other banks to set up kiosks and cybercafes. How about aligning with those banks having a strong local presence in commercial centres such as Sivakasi and Moradabad? Says Puri of HDFC Bank: "Right now, that does not seem to make commercial sense to us. We believe in profitable growth."

Foreign banks are not keen to develop such strategies. They have small stakes in the whole Internet banking game. They account for just about eight per cent of the country's banking business.

Instead of fanning out into non-traditional markets and customer segments, foreign banks seem to be thinking about using the Internet to service their existing clientele better. Explains Ramachandran of Birla Sunlife Securities: "Foreign banks have lagged behind with a few exceptions such as Citibank. Probably because major initiatives need a big commitment from the headquarters."

There is another reason behind foreign banks being averse to spread their operations to non-metros. Says Rajiv Jamkhedkar, manager (retail assets) of the Hongkong and Shanghai Banking Corporation (HSBC): "The issue here is not just accessibility, but being able to service them. Unless we have the capacity to do that, we will not branch out."

Need for focus
The implicit message for those banks contemplating big Internet initiatives: always play your strengths up and never fight on somebody's turf. That is why some are planning to become niche players. Look at the community banks in the USA, which have been great success stories. These banks have been able to build their reputation by providing personal services, besides Internet-based commercial banking products.

So, banking players planning to go online should do some homework first. They should understand their customer base and its needs. They must know whether their customers want Internet banking, what do they expect from Internet banking and how do they plan to use Internet banking.

Virtual banks
What about 100 per cent virtual banks then? Can they become a reality in India? Well, technically it is very much possible. Says Prasad of IBA: "We have financial portals already out there. Why not banks? But the issue here is viability." The virtual bank Egg is yet to make money. Says Puri of HDFC Bank: "Technically, it is possible. But, we do not know whether we would want to do that at this stage. Prudential Egg has not made money. Whenever it has tried raising its price, customers have switched. We are examining the feasibility of a cent per cent virtual bank."

But, there are technology breakthroughs that indicate such virtual banks could become a reality. For instance, the application service provider (ASP) is nothing but a virtual bank on rent. Advantages here are many. Says Rangesh Nayar, vice president of the Mumbai-based Tata Consultancy Services: "Your investments are limited here. You pay as you use." And what more, upgradations, if needed, can be done by the solution-provider.

Scope for alliances
Another possibility in Internet banking is this: banks can come together and form a banking portal that offers banking services to corporate clients. Such a B2B exchange can pool in the strengths of all the partners.

A B2B banking exchange can also be used as a platform for putting through transactions among banks. Such transactions could relate to inter-bank transfer of funds and inter-bank call money operations.Banks can even use the Internet to swap portfolios, branches, clients and ATMs. In short, banks can leverage the Net to strike merger and acquisition deals among them.

In Internet banking, all sorts of alliances could happen. There could be alliances between banks, between banks and content-providers, between banks and banking technology suppliers, between banks and depositories, between banks and regulated markets such as stock exchanges and between banks and logistics management companies such as couriers. In short, the Net should be fully exploited by banks for providing customers value-added products.