Will Internet banking ever take off in Asia? Although much of the region is wired, obstacles remain. Customers are concerned about security; the banking products available so far tend to be unexciting; and in the wake of Asia's recent economic crisis, many smaller banks have been preoccupied with the more urgent issue of survival. But some evidence suggests that on-line banking will succeed if the basic features, especially bill payment, are handled correctly.

Meanwhile, human tellers and automated teller machines continue to be the banking channels of choice, and only a tiny minority has recourse to Internet banking. Among middle- and high-income people questioned in a McKinsey survey, only 2.6 percent reported banking over the Internet last year.¹ In India, Indonesia, and Thailand, the figure was as low as 1 percent; in Singapore and South Korea, it ranged from 5 to 6 percent.

Overall, Internet banking accounted for fewer than 0.1 percent of these customers' banking transactions—a figure unchanged from 1999. (By contrast, telephone transactions have doubled since then, to 0.6 percent.) The Internet is used more often for opening new accounts, but again the numbers are small: fewer than 0.3 percent of respondents used it for that purpose, except in China and the Philippines, where the figures climbed to 0.7 and 1.0 percent, respectively.

Bankers can't blame limited access to the Internet for the slow uptake: 42 percent of respondents said that they had access to computers and 7 percent to the Internet. The chief problem in Asia and throughout emerging markets is security, which more than half of the respondents reported as their main reason for declining to open on-line banking or investment accounts. Respondents also said that they preferred to have personal contact with their banks.

Access to high-quality products is an issue as well. Most banks in Asia are only beginning to offer Internet banking services, and many of the services are basic compared with those available in other parts of the world. Citibank, which has marketed a range of Internet banking products in the United States for years, didn't add bill payment to its Hong Kong service until last year—and even then, for only 11 companies. HSBC, the leading bank in Hong Kong, introduced Internet banking last summer.

Nonetheless, Internet banking appears to have a future in Asia. When we analyzed the responses to the McKinsey survey, we uncovered the following three segments:

1. Lead users: In the group we studied, 38 percent of the respondents said that they intended to open an on-line account in the near future. These lead users undertake one-third more transactions a month than do other users and tend to employ all banking channels more often.
2. Followers: The responses of an additional 20 percent suggested that they would eventually open an on-line account, especially if their primary institution offered it and there were no bank charges.
3. Rejecters: Only 42 percent showed little interest in or an aversion to Internet banking. These respondents also had a preference for consolidation and simplicity—that is, for owning fewer banking products and dealing with fewer financial institutions.

Conducting complex activities—for instance, trading securities or applying for insurance, credit cards, and loans—over the Internet appealed to no more than 13 percent of the lead users and the followers. One-third of the lead users and the followers preferred to undertake basic functions, such as ascertaining account balances and transferring money between accounts, over the Internet (exhibit). Some of these basics are hard to supply, however. Bill payment, for example, was the most popular feature, cited by 40 percent of respondents, but the service is difficult for banks to provide because it requires a high level of security and involves arranging transactions with a variety of players.

Future increases in the rate of on-line penetration will depend on whether banks catch up with the consumers' requirements. Given the latent demand, institutions that do so will probably find Internet banking well worth their while.