A collection of observations, ruminations, predictions and random thoughts from Cornerstone Advisors.

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April 9, 2004 by Scott Hodgins Scott Hodgins

Who Needs 18” Rims, Anyway?

Let me start by thanking the numerous check processing-related vendors who educated me on Check 21 after my last article – a spoof of an interview with the last check to ever be processed through the Fed. I get it – for the most part Check 21 is transparent to check writers. 10-4. It was a joke.

I also receive boatloads of passionate feedback from Internet banking sales reps and marketing wizards, saying I’m disproportionately tough on them, their products and their pricing structures. True, true and true – all with good reason.

    “Propaganda is the art of persuading others of what you don’t believe yourself.” –Abba Eban

The latest barrage from the Internet vendors is that, despite snotty consultants railing on them for being too expensive, cost per Internet banking user is going down constantly. The good news is – that’s true. Banks are increasingly treating Internet banking like a commodity, and the Internet banking vendors are starting to be forced to price their products accordingly. The bad news is – monthly bills from Internet banking vendors are still excessively high.

On the other hand, the core providers are very much in lock step with commodity pricing for Internet banking. It’s interesting to note that in the last few pricing schedules for Internet banking (in-house) that I’ve seen proposed by CORE vendors, the five-year price has been nearly identical to the five-year price of their VRU offerings.

But, for a product that is for the most part a glorified VRU, the pricing from the Internet banking vendors is still breathtaking. A lot of this has to do with their punitive “per user” pricing that they use in what is mainly an ASP delivery market.

Let’s take a look at an example. We’ll start in 1996, Internet banking’s infancy, with a $1 billion bank going through an Internet banking system selection. Internet users represented less than 1% of DDA accounts, and the outlook was a reasonable 15% penetration by the end of the third year of the contract. Then we go to the same bank in 2004. Over the years, the bank has had some modest success in driving customers to the Internet channel. Penetration starts at 15% of DDAs and is expected to grow to 25% in three years. Bill pay usage and the number of bills paid per user have grown per industry standards. We are going to compare the three-year costs of Internet banking for 1998 and 2004 at this bank using actual price quotes from a well-known Internet provider with pricing that is representative of the industry at the time.

A high level comparison of the assumptions in this exercise follows:




•  65,000 DDA accounts
•  <5% – 15% DDA penetration
•  10% annual user growth
•  10% bill pay usage
•  5 payments/bill pay user/mo.
•  $1.50 – $2.00 per Internet user
•  $4.95 per bill pay user
•  $5.00 per new bill pay user

•  85,000 DDA accounts
•  15% – 25% DDA penetration
•  10% annual user growth
•  20% bill pay usage
•  8 payments/bill pay user/mo.
•  $1.00 – $1.50 per Internet user
•  $3.95 per bill pay user
•  $0 per new bill pay user

How does this translate in real dollars? Read on, GonzoBankers:

Costs During Course of Three-Year Contract:




$60,000 $25,000

Per Internet User Fees

$260,000 $775,000

Per Bill Pay User Fees

$70,000 $550,000

Per Bill Payment Fees

$25,000 $440,000

Per New Bill Pay User fees

$5,000 $0


$50,000 $5,000

Core Interface

$65,000 $40,000


$50,000 $185,000

Total Three-Year Cost

$585,000 $2,020,000

Average Cost per User per Month



Bank Revenue per User per Mo.

$3.00 – $5.00


Memo: Cost per Account for Core Processing

$0.50 – $0.60

Indeed, the average cost per Internet user has fallen from $4.40 to $2.95 over time, but there is zero revenue potential for banks to charge their Internet-using retail customers. And besides, it’s that $2 million price tag that’s getting the bankers all red-faced wacky. Vendor price reductions are far from keeping reasonable pace with usage and transaction increases, and it is not unheard of to see Internet banking bills that rival or exceed core bills. On a per-account basis, banks’ Internet bills are five times what they pay for core processing. It makes banks feel like they’re paying just a little too dearly for their own success.

That in a nutshell is why the core providers are poised to absolutely destroy the Internet specialists. An in-house Internet banking product from a core provider that is priced like a VRU can go a long way in bridging whatever functionality gaps and regulatory hurdles may exist versus the Internet banking vendor ASPs. Unless your bank is truly differentiating itself in a measurable way via the high-end functionality provided by an Internet banking vendor, you simply have to take a long, hard look at the alternative costs and products available today.

It’s like this. Take your garden variety Honda Civic. It’s a decent, reliable, utterly boring ride with a $15,000 price tag. Now let’s pimp that Civic out. We’ll add the hydraulic suspension. Chrome it from head to toe, and throw in some Virus F40 18” platinum wheels, a musical horn, an air-brushed mural of a beautiful but distant stranger, running boards… the works. Retail price: $31,500. For the tiny minority of people who actually are pimps or who in some way benefit or draw joy from the tricked-out car scene, the extra cost of the upgraded Civic is worthwhile. Otherwise, the pimped-out Honda is just, well, a pimped-out Honda Civic for which you cannot even imagine a viable market.

Don’t get me wrong, there is still a market for a relatively small number of banks and credit unions whose strategy demands the high-end functionality that is typically provided only by the specialist Internet vendors. But for the remaining masses, buying Internet banking is getting increasingly similar to buying sorghum and pork bellies. That’s the challenge for the Internet specialists – either get more price competitive or deliver a stunning set of success stories:

  • Who has a credible tale that lands them on the happy side of the ROI equation?
  • Who implemented your product, decreased branch traffic/staffing as a result, and had a net cost savings
  • Who has been able to significantly reduce customer service staff after implementing a kick-butt Internet banking product?
  • Has anyone ever been able to close a branch or not open a planned branch because of Internet delivery
  • Who is using your product to deliver in a uniquely efficient way or to an otherwise unreachable niche… leading to previously unattainable revenues and profits?

Those are the questions our clients are asking, and an increasing number of them are not getting satisfactory answers. Vendors, if your response begins with, “That’s a very difficult thing to measure…,” you have swung and missed.

So, more and more of our clients opt for the slightly boring but cost-effective and imminently utilitarian offerings from the core vendors. This is a wake up call, Internet banking vendors. The big threat isn’t the pimped-out DI, Corillian, S1 or Online Resources. It’s the stock Honda Civics from Fiserv, Jack Henry, OSI, etc.

Enough outta me.

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