Pioneering Internet bank First-e is not worried it will be put out of business by massive rivals such as Barclays or HSBC. Instead, it is confident those banks' success at getting their customers online will ultimately benefit smaller, more agile Internet-only banks.
First-e downplayed the influence of the dot-com stocks downturn in its decision, revealed Monday, to scrap an expensive television advertising blitz. Instead, the bank says it has discovered better, more cost-effective ways of acquiring customers, such as through direct mail and word-of-mouth.
"It's not that the big eat the small, it's that the fast eat the slow," said Richard Thackray, UK country manager. "We've made a lot of mistakes and have learned from them. Frankly, any company who isn't learning hard is doing the wrong thing."
By building consumer confidence in online banking, the big banks are really benefiting dot-coms such as First-e, Egg and Smile, Thackray said. "Their customers discover the Internet is great and that they don't need a branch. And then they'll start thinking, why can't my current account be with First-e instead, which pays five percent interest?" he said.
First-e, like many dot-com startups, hit public consciousness with a mass-market advertising campaign at launch. But since then investors and consumers have grown more wary of Internet companies' free-spending ways, and less investment cash has been available to fund fat marketing budgets.
Instead of burning through its cash and then holding another round of financing, First-e is now attempting to build its business by establishing a good record of service with its consumers and targeting affluent, Internet-savvy customers through direct marketing.
Television advertising, says Thackray, simply does not pay off. He points out the massive dot-com and banking advertising spending going on at the moment: "To cut through that you have to spend more and more and more, and it's not economic," he said.
Industry observers agree that banking, unlike retail, requires an ongoing relationship of trust with consumers -- something that can't be established merely through in-your-face advertising. "It's an industry that requires a lot of trust," said Mikael Arnbjerg, market analyst with IDC. "If you place a lot of money with someone you want to make sure they don't go bankrupt."
Thackray admits the company will eventually need to head back to the mass media to build a brand awareness, but he says First-e is not about to rush anything. "It has to be done in a credible way," he said. "It isn't a matter of 'growth at all costs' -- that mantra has been discredited."
First-e stopped the ad campaign partly because of increased competition, which had raised the cost of marketing per each new consumer to £250 each. It cancelled the advertisements despite a cancellation fee which was rumoured to approach £1.1m, though Thackray denies the fee was at that level.
The bank has signed up about 75,000 new accounts since launch a year ago, and is acquiring 300 to 500 new accounts per day, one third from customer recommendations, Thackray said.
It has weathered customer service problems -- which Thackray said have been resolved -- and an anonymous attack that spoke of alleged "customer confusion".
First-e is also planning to rebrand itself after an upcoming takeover by Spain's Uno-e, but has not yet decided on the new brand. First-e is currently a partnership between First-e Group, which created the online infrastructure, and French bank Banque d'Escompte.
After the acquisition, due for regulatory approval by the beginning of the year, it will be renamed Uno-First Group and will take on two new co-owners: BBVA, a large Spanish bank, and Internet powerhouse Terra Lycos.
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