A number of Europe's private banks are reviewing their internet strategy following several online banking flops during the first half of 2001. Many now realise that while this new technology presents complex issues in terms of integration into financial services, the technology is nonetheless here to stay. Their task now is to find a way to harness this to serve profitably client demands. In order to get a solution, it is vital to understand the recent errors of their peers, says Fiona Fleck, who reflects on how past performance can be a route map to future success. A year ago at the peak of the dotcom gold rush when analysts were predicting that the future of banking, both retail and private client, was online, many saw the internet as a cost effective and faster means of expanding with no need for an expensive brick and mortar branch network. Since then, several online ventures have been scaled back or dropped with the experiences being shuffled under the carpet. Bankers and analysts alike now say these ventures fell below expectations because of a key misconception: that private clients would transfer their focus wholesale to this medium of wealth management. Indeed, banks assumed that the internet was a means of exclusively tapping wealth created by a new generation of hi-tech millionaires as well as targeting a growing pool of "mass affluents" who could not afford private banking services but were not satisfied with e-brokerages and funds. Private banks judged that these clients were internet savvy, wanted access to financial information online and possessed a better understanding of markets than traditional "old money" private banking clients. Consequently, for a brief moment in time, the traditional relationship management role was in threat of being disintermediated entirely in the name of technology, efficiency, distribution and economy. But, as history has shown, the idea was short-lived. Claudia von Turk, a banking analyst at Pictet & Cie in Geneva, said one reason why online banks had not been very successful was because clients still required some kind of physical presence. "Not everyone wants to spend hours surfing the internet. For many of these people their time is very valuable and if you have the choice you would rather pay someone else to manage your assets for you," she said. The experience has shown that, under pressure to find an online solution, many private banks committed before fully reviewing their client base or business profile to see if the demand was there. "There have been a lot of misunderstandings about the benefits of the internet and what it can offer businesses and financial institutions," said Dr Peter Cook, the recently appointed head of e-business at HSBC Republic. "In mass market banking you can cut transactional costs by using an internet service. The cost benefits are not so clear cut in private banking, where there is a greater emphasis on closer personal relationships with clients." Cook has been tasked by HSBC Republic to identify the appropriate solution for the private bank. Vontobel case study The most dramatic débâcle was Zurich-based Bank Vontobel's internet subsidiary – Y-O-U. At its inception in March 2000, Y-O-U was an ambitious project that aimed to capture young, upwardly mobile, affluent clients with an average investment of about £55,000. Weeks before the planned launch this spring the mid-sized Swiss private bank withdrew from the project and sacked the chairman, chief financial officer and chief of corporate finance for letting costs spin out of control. The initiative cost £100m, cut the bank’s year 2000 profits by a third and severely dented the reputation of the venerable house. With hindsight, analysts say the problem was that Vontobel’s managers had no real IT strategy expertise and had relied on external consultants who dazzled them with e-hype, "ran wild" with the costs and produced brilliant but bafflingly complex software. “Consultants and analysts were very bullish about online banks and said 'it's now or never'," one financial analyst in Geneva recalled. Vontobel felt under pressure to make the investment to prevent its existing clients going to rival firms and to entice new accounts from hi-tech millionaires and the mass affluent. Ultimately, they were led more by market euphoria than a basic assessment on Vontobel’s core business positioning. "Some tools they developed were very powerful but also very complex and it would have taken a long time for clients to learn how to use them. These may be suitable for asset managers but not for clients," the Geneva-based analyst added. Vontobel represents a case study in the risks of an online strategy but other private client online ventures have also been less successful than expected. Like Vontobel, they underestimated costs, overestimated the number of clients and got their strategies wrong. Sweden's SEB financial services group has shelved plans to begin marketing its online UK service this spring citing market volatility. ABN AMRO abandoned its joint venture with Dutch telecoms company, KPN, to build Money Planet, a standalone financial services supermarket brand for the Netherlands, Belgium and Germany. Deutsche Bank launched a pan-European private client portal, moneyshelf, last September to target 1.2m private investors, wealthy individuals and corporate clients by 2005. Due to the low client numbers, the bank announced it was lowering some fees while dispensing with others and it still only has about 50,000 customers in Germany. Finally, Charles Schwab said it would cut as many as 180 jobs from its UK-based operations as part of a global cost-cutting programme announced in March and that it was also considering withdrawal from the UK due to lower than expected customer numbers. In April, the brokerage only had 800 customers. Private banks need patience Ricardo Payro, online strategy chief for Bank Syz & Co., in Geneva, said that retail banks save time and money by getting clients online while private banks could stand to lose out because the internet undermines part of the relationship manager’s intermediary role. Payro believes the solution cannot be separated from the complete wealth management package. "You can't force a private banking client to use the internet like the retail banks can, otherwise they will switch banks. You need to offer real added value online service for them to prefer e-banking over existing options," he said. Bank Syz & Co., like many European private banks, is giving clients online access to their accounts. Another to concur with Payro’s viewpoint is Claudia Grüter, head of marketing virtual banking at Credit Suisse Private Banking. She said CSPB was pursuing a multi-channel approach, offering clients various ways of accessing the bank and services, such as FundLab as well as online property, mortgage and insurance web sites. "These services are tailored to clients' needs. Our clients profit from a combination of personal guidance by our experts and online banking around the clock," she said. At the top end of private banking this appears to be the more reasoned application of online services. Banks in this sector who state they never had any illusions about the internet are often the most positive. Ian Ewart, director at Union Bancaire Privée, said giving clients online access to their accounts had cost £1.5m and had helped client–adviser relations. "We were never over-ambitious, all we wanted was to provide a secure environment for clients to communicate with us and the possibility of giving a secure means to look at their accounts. It has really supplied them with info and data to enrich the service," he said. The solution, it appears, is to keep the ambitions in check and recognise that being online is only one part of the complete package. Very little can replace the direct contact of a relationship management. Consider anything else, and the client may not like it.