Study: Online Models That Bolster Existing Sales Channels Will Succeed.

Companies that use a "reintermediation" online model--one that supports existing sales channels such as agents--to distribute financial-services products are more likely to achieve near-term success than companies that approach distribution by "disintermediating" their existing sales channels--that is, bypassing existing sales channels with an online sales effort--or by Web-enabling traditional bricks-and-mortar institutions, according to a report from investment bankers Stephens Inc., Little Rock, Ark.

The report, Web-Enabling e-Financial Services, concludes that businesses that shorten the sales process by helping agents get multiple quotes for customers will succeed this year, although the other approaches will begin to gain favor in 2001. Insurance agents with their person-to-person relationships are still ingrained in the system, but the other approaches use the true efficiencies of the Internet, said Stephens research associate Barry L. McCarver, who wrote the report with Nikolai D. Fisken, a vice president.

By taking distributors to the Web, reintermediation companies improve their product depth, sales productivity and servicing, the report said. Long-term, however, the problem with this model is that the Internet might displace these distribution channels. "Agents for some products, such as automobile insurance, will be phased out faster than agents who sell products like health insurance," McCarver said.

While the efficiency and cost sayings of the disintermediation model are apparent, fundamentals such as the cost to acquire customers and low barriers to entry have caused problems. "If a bank offers a [certificate of deposit] with a particularly good interest rate online, customers may flock to it, but as soon as that CD expires, they're likely to go somewhere else;" McCarver said. High interest rates or low insurance premiums may work for a few quarters, but that strategy will not result in the type of long-term customers to whom companies can sell additional products, the report said.

Affinity marketing is a better strategy for companies that want to link customers directly with financial institutions. Examples include selling to members of a certain profession, ethnic group or shopping club, McCarver said. The researchers estimated that affinity marketing can cut the cost of acquiring a customer by more than 50%.

The key factor in predicting the success of a disintermediary is the lifetime value of a customer relative to the cost to acquire the same customer, the report said. Other important factors are a Web site's "stickiness" (how often customers revisit) and ability to compare well with all Internet sites, not just those of financial-services companies.

People will begin to buy insurance products online after they learn to do their banking and buy other financial products online, McCarver said. "If you buy an insurance product only once a year, you're not likely to learn to use the Internet to do it," he said.

Rating Online Sales Models
A look at the effectiveness of online
distribution models in four market
subsegments, including the models'
rankings and number of companies that
use the models in each sector.
                   Consumer
                   Financial        Insurance        Banking
                              # of             # of           # of
                    Rank *    Cos.   Rank *    Cos.  Rank *   Cos.
Reintermediation       7       4        6       7      --      --
Web-Enabler            6       89       5       47      8      76
Disintermediation      4       44       4       22      6      45
                   Securities
                   Brokerage
                               # of
                     Rank *    Cos.
Reintermediation       --       --
Web-Enabler            9        19
Disintermediation      9       117
(*)Rank indicates relative Internet
development. A 10 is the top ranking
and indicates a highly developed
subsegment.
Source: Stephens Inc.