In many ways, the Internet is their natural home: just about everyone who is (or is about to be) on-line has a bank, a broker, a credit card, or a mortgage, and for a long time the business has been a matter of numbers flickering between one computer file and another. The Internet, of course, has also fostered new offers, such as electronic comparison shopping and data aggregation.

This combination of service and innovation is bearing fruit. Quicken’s Web site closed approximately $3.5 billion in loans from March 1999 to March 2000, and many major banks count their on-line customers in the millions. Indeed, some economic commentators have suggested that the volume of on-line trading helped power the long bull market in the United States.

But the plunging values recently suffered by the stocks of on-line brokerages suggest that it is hard to make the economics work. Too many firms doing business on-line appear to assume that the customers they are spending large sums to acquire will have the same characteristics, and display the same on-line behavior, as the earliest users of Internet-based personal financial services. In fact, people in the second wave don’t trade as heavily as those in the first, nor have they moved significant amounts of money into their on-line accounts.

How do we know? McKinsey recently completed a comprehensive on-line market research study about consumer preferences for on-line financial services, including banking, brokerage, credit cards, mortgages, auto loans, and insurance. The Firm surveyed more than a thousand on-line consumers as well as an off-line group to correct for sampling bias.

Our research tells us that as yet the whole industry has relatively little to show for its considerable efforts to acquire on-line customers. In the United States, we believe, the on-line channel is generating only 1 to 2 percent of total revenues.

Does this mean that building on-line financial services should stop? Not at all. So rapidly are consumers becoming comfortable with the Internet that, in 2002, 10 percent of revenues from personal financial services will be generated on-line. Fully 42 percent of the revenue in these businesses will involve the Internet in some way if you include on-line search activity that culminates in off-line execution.

As rosy as this vision seems, it will not come to pass if businesses treat all on-line consumers identically. Broadly speaking, the people in the first wave—about 40 percent of the total on-line population—have been using the Internet for some time and are younger and more affluent than others on-line. They manage their own money and shop around. So far, they have moved just 5 percent of their financial assets on-line. The meager penetration rate of a segment with such demographics and a strong affinity for the medium spells enormous opportunity for financial-services firms.

The people in the second wave have needs different from those in the first wave and must therefore be served differently. The second-wave group represents another 40 percent of the on-line population. These people are generally less affluent but are less likely to shop around and more influenced by brands. They are also the reason personal financial services aren’t going on-line more quickly: they like the physical interaction that bricks and mortar make possible and that the pure on-line players cannot provide.

There is also a third group, comprising 20 percent of the on-line population, whose members say they are simply not interested in moving their financial services on-line right now, even though many of them are active Web users. Even without their participation, the prize is substantial: the first group alone generates $60 billion to $70 billion in personal-financial-services revenue, the second about $55 billion.

A sum as large as $125 billion is plenty to fight over. How should companies fight? We don’t believe in one-size-fits-all advice, so each essay in this collection deals with a different industry segment.

How on-line financial services deal with the fundamental fact of fast-rising customer acquisition costs will make or break those services. Only firms that can match their offers to the customer—and thus don’t waste money by chasing undefined or unpromising segments—will be richly rewarded.