Westpac makes an online U-turn

Westpac has confirmed it considered using the Bank of Melbourne brand for a dedicated online bank, before scrapping the plan in favour of a bricks and mortar strategy designed to win back market share in Victoria.

After many months preparing the brand for the online market, what spooked management?

Westpac has wholeheartedly embraced the multiple brand approach with its retention of St George and Bank SA, but it seems the bank's senior management wasn't quite as sold on the need for a dedicated online brand.

Westpac will now triple its branches in Victoria, staffing them with more skilled relationship managers, financial planners and local business managers.

Bank of Melbourne chief executive Scott Tanner is betting on a preference for regional brands over online ones, recently telling Business Spectator customers using an online bank are more likely to be “totally price driven”.

Looking at the history of online brands in Australia, it's clear to see why Westpac's early thinking might have shifted.

No online brand has ever made serious inroads into capturing major banking market share, either in deposits or mortgages. Westpac killed the Dragon Direct brand not long after acquiring St George, the Commonwealth Bank gave up on HomePath in 2008, and ANZ scrapped One Direct in 2009, with just 10,000 customers.

Offshore, UK insurance group Prudential set up an online bank Egg in 1998, which after some success was sold to Citigroup in 1997 for around $1 billion. In March Citi offloaded the credit card component of its Egg business to Barclays as it pulled back from the European lending market. The rest of the Egg business remains on the market.

Closer to home we've had new speculation ING Direct is also for sale. In fact, Dutch parent ING has been shopping the ING Direct deposit book around since the global financial crisis first hit.

UBank, launched by NAB in 2008, refuses to provide any current data on its performance, but cannibalisation of the parent's less competitive product range remains a concern for senior management.

In reality, UBank is more of an experiment of new technology for NAB than a serious play for a new segment of customers.

UBank operates on core banking technology from Oracle, technology largely untested by any major bank in the world, but chosen as part of parent NAB's Next Generation core banking overhaul.

At yesterday's half-year results presentation, NAB chief Cameron Clyne emphasised the big technology improvements on the way, with a component of NAB's new core banking platform to be in the market towards the end of the year.

He also revealed NAB's recent headline-grabbing advertising campaign was the cheapest campaign the bank has ever run, and is delivering on market share.

The campaign was heavy on online and social media channels and therein lies the rub: As more customers move online, marketing to them online becomes more effective and the need for distinct campaigns, and for that matter, dedicated online brands, diminishes.

NAB justifies UBank's price undercutting of its parent by arguing UBank's cheaper cost base.

But as branches process fewer transactions compared with internet and mobile banking, and NAB sacrifices margins regardless of channel and boosts customer service, both to gain market share, the distinction between the online brand and its parent becomes less clear.

Customers that are attracted to the better rates offered by online brands are quick to move when they spot a more attractive deal.

And when it comes to channels, customers continue to vote with their feet, preferring those that allow them to transact quickly and efficiently.

That's why online banking downtime gets so much press coverage. Westpac only had to be down for an hour yesterday before mainstream media outlets were screaming 'meltdown'

It's a sure sign the days of online customers versus the rest are numbered and online brands that fail to differentiate on more than price could also be heading for exinction.