Faced with deposit runoff to nonbanks and the need for a low-cost source of funds, banks are going outside the traditional branch channel to secure deposit accounts, according to Dan Schatt, senior analyst with Boston-based Celent. Schatt says banks are losing deposits to nonbanks such as PayPal (San Jose, Calif.) and online brokerages.
To counter the trend, "[Banks] are starting to offer more capabilities and better rates online," Schatt says. However, banks still are behind the curve in one area, he adds. "Online banking has evolved quite a bit, yet we are still in the dark ages with online account opening," Schatt asserts.
Traditionally, concerned about Know Your Customer and USA PATRIOT Act rules about customer identity, banks have required customers to come into a branch or send opening deposits and completed paperwork via the mail in order to open an account. Now, however, the Digital Signature Act has made accounts easier to open online, according to Schatt, and nonbanks have helped refine the technology.
Updating online bank account opening processes, says Schatt, is one of several moves banks are making, such as offering personal financial management features, to improve the value proposition for potential customers. Initially, banks only allowed customers to open online deposit accounts by providing a copy of a cancelled check from an existing account. But this method became outdated once PayPal perfected the concept of "challenge deposits," explains Schatt.
In a challenge deposit, PayPal (which has since changed its approach) would make a pair of deposits of just several cents each (the amount varied) to a customer's account. The customer then had to correctly identify the amounts before the bank account could be used to fund a PayPal account.
While some banks still use this method, others, such as New York-based Citibank (more than $1 trillion in assets) and New York-based HSBC Bank ($161 billion in assets), have joined PayPal in moving to what Schatt calls the aggregation method for online account opening. In this method, potential customers provide their online banking identifications and passwords for existing accounts. The new bank then confirms these electronically with the established bank, enabling the customers to deposit funds within seconds of completing an application. "Everything is done in real time," Schatt comments.
Bringing the Bank to Customers
Still, some banks are uncomfortable with straight online account opening. Instead, they are experimenting with other methods to improve the process. Wyomissing, Pa.-based Sovereign Bank ($80 billion in assets), for example, arms its business account officers with a portable scanner, printer and wireless-enabled laptop to allow them to go to businesses to open accounts, saving the new client a trip to the branch.
According to Pete Wilkinson, executive director of Sovereign's operations and automation group, the bank officer scans all pertinent information, such as the authorized user's driver's license. To ensure security, the data is encrypted and transmitted wirelessly via a dual private network to Sovereign's back office. When the transaction is completed, the laptop automatically destroys all the data to prevent the client's information from being compromised, Wilkinson stresses.
"They appreciate that we spend the time at their businesses rather than needing to come into a branch to open an account," relates Cyndi Gadberry, Sovereign's director of commercial marketing. "It provides a subtle benefit for us." **