Anyone still wondering whether the financial lives of consumers will be aggregated on-line—that is, brought together and managed in one place—hasn’t looked at the numbers. Publicly available data suggest that US households could save an average of $530 a year if they managed their saving and borrowing more skillfully. Purchasing financial services from the most competitive provider would save a further $950. And paying bills when they are due—neither unnecessarily early nor late—would save $180 (Exhibit 1).

The McKinsey study that supplied these figures painted a picture of consumers holding fat checking-account balances that earned no interest at all while racking up sizable credit card debts at hair-raising interest rates. Ordinary savings and certificate-of-deposit accounts are still popular, even though they earn far less than government bond funds having little risk and comparable liquidity. The average consumer’s cash flow, brimming with overdue receivables and nonfinanceable payables that are settled too quickly, is truly abysmal.

Of course, consumers were able to integrate their finances before the coming of the Internet. But since doing so typically involved paying a financial adviser to manage many different accounts and accruing transaction costs each time money was moved among them, the cost was prohibitive for all but the wealthiest. Now aggregation not only is within the reach of ordinary people but also comes with something extra: the promise of full aggregation of information from all accounts as well as direct personal control over them.

A matter of time

If average households can save almost $1,700 a year—and more affluent households can save much more—by aggregating consumer financial services, it is only a matter of time before this actually happens. But it won’t be overnight. Most people adopt new technologies late, and most households have never made any special effort to get the financial products they want from a single company, even when they could do so: on average, they use 3.6 institutions for deposits, loans, and investments.

To be fair, no company ever offered consumers a genuinely easy and cheap mechanism for personally aggregating all of their money matters. Similarly, no single aggregator exists today to help consumers capture the full benefits of better cash management and product selection. However, a small but rapidly growing number of customers now get at least some of the benefits from the on-line players. VerticalOne and Yodlee, for example, provide customers with a single statement summarizing their balances in bank accounts, investment portfolios, and credit card accounts. (At least one new service, CashEdge, is developing a cross-institutional transaction capability.) Paytrust and TransPoint can help users receive their bills from a limited number of merchants electronically and pay those bills using their bank accounts. Finally, a number of product "supermarkets," such as E-Loan and Charles Schwab’s OneSource, facilitate comparison shopping in specific areas by posting financial products from different providers side by side. Combining these services—along with the ability to move balances easily from one product, account, or institution to another—would allow most consumers to capture the benefits of aggregation.

Will additional business models of this sort emerge? Which models will be dominant? What is the time frame? Nobody knows. What is obvious, however, is that the speed with which companies try to exploit the possibilities of aggregation will depend fundamentally on two things: the rate at which individual financial products and services go on-line and the extent to which they do so.

When you buy a car or a home, you meet agents and dealers who have an incentive to guide you away from on-line channels

Certain financial services, such as those of brokerage houses, are rapidly going on-line; others, such as auto finance, may take much longer. Indeed, it isn’t clear that all financial services will actually go on-line: when you buy an automobile or a home, you come into contact with agents and dealers who have an incentive to guide you away from on-line channels and back to traditional ones. And sometimes the channels themselves don’t work terribly well: one on-line mortgage company recently announced that it was exiting the business-to-consumer mortgage market because, apparently, the infrequency, size, and certain other aspects of home purchases prevented it from constructing a workable on-line business model.

Two cycles

The essays that follow look, from a number of different vantage points, at the likely on-line evolution of a variety of consumer finance products and services. Each industry in personal financial services differs from the others. Nevertheless, taken together, at least two phenomena characterize all of them.

First, it would seem that the less tangible a financial product or service may be, and the more often it is purchased or utilized, the faster the companies offering it will go on-line. Thus, brokerage is moving on-line quickly, mortgages much more slowly. The second phenomenon—as in most serious discussions of the evolution of business on the World Wide Web—is the contest between established players and the Internet-savvy newcomers that aim to take their business away.

The attacker-incumbent game for the whole dot-com universe has passed through at least two cycles since the number of Web users reached critical mass. In the first cycle, the game seemed to belong to the dot-coms, which came in quickly, claimed the on-line space, and generated breathtaking market capitalizations grand enough to let some of them buy their old-economy competitors. When the incumbents did finally get around to moving onto the Web, Wall Street not only failed to award them similar price-to-earnings multiples—even, on an implied basis, for the Internet-based parts of their business—but also penalized them for the cost of building the very businesses they were urged to create. If you weren’t an Internet pure play, it seemed back then, you weren’t in the game.

But things have changed at least once since then. The majority of the pure-play attackers, including the financial ones, are now trading below their offering prices. Some are beginning to run out of money. And in response to interest rate increases by the US Federal Reserve Board, borrowing has gone down, causing lending-oriented businesses—most immediately, mortgage businesses—to suffer. As a result, many analysts and investors have concluded that bricks-and-mortar companies will ultimately rule the Web by leveraging their existing assets, such as brands, customer relationships, marketing capabilities, and physical presence.

The tendency of these same analysts and investors to alter their long-term predictions with each upward or downward movement of the stock market naturally induces caution about their pronouncements. In addition, the substantial differences among the various businesses that make up personal financial services—collectively representing 15 percent of the gross domestic product of the United States and other developed countries—suggest that it would be unwise to make blanket pronouncements. Perhaps in some areas, the offerings of the attackers will be more attractive to consumers; in others, incumbents may have the advantage. Perhaps the winners will be hybrids: incumbents or attackers that have borrowed cannily from their competitors’ models. And perhaps good business management will prove more powerful than channel choices. For these reasons, this special section takes a category-by-category approach.

Misunderstood incumbents

Although the incumbents had trouble beating back the attackers in the early going, the latter may continue to have a harder time than many observers originally expected. In the first cycle, it was said that lumbering, unfocused legacy organizations were short on Web savvy and too burdened by the market’s expectations to risk getting into no-revenue, high-cost on-line businesses. Actually, quite other considerations slowed down the efforts of incumbents to match the newcomers, even if the long-run business case for doing so was strong.

Established companies naturally hesitate to offer a new, lower-cost channel, product, or service if much of the business it brings in is actually drawn from other parts of the company. This fear of "cannibalization" explains why supermarkets publish coupons in the newspaper rather than cut their shelf prices. Why offer lower prices to people who will buy at higher ones? Related to this hazard is the problem of channel conflict. This occurs when, for example, an insurance company’s brokers start steering their clients to a competing carrier because the first company has started selling products on-line and they fear losing their clients to this do-it-yourself channel.

Incumbents feared that the Web would jeopardize their traditional distribution mechanisms as well as their easiest source of profits

Understandably, established companies wondered whether embracing a new, ultra-low-cost, ultra-efficient way of helping their customers manage finances was going to put their traditional distribution mechanisms—and their easiest and most reliable source of profits—at risk. Many of these companies have been similarly unwilling to give their support to aggregators, because they fear that their role in managing customer information and the overall customer relationship will be undermined.

Yet in the long term, such steps might be a requirement for staying in business. Ten years from now, few customers will leave $20,000 or $30,000 sitting in checking or low-rate savings accounts or revolve big credit card balances at 18.7 percent—and pay their bills late half the time. Banks that don’t encourage such customers to use their money more efficiently will lose them to banks or other institutions that do.

At present, incumbents are squarely facing the fundamental challenges the Internet poses for them: first, how to migrate their current customers to on-line channels quickly while also getting new customers to supply the profits they will be giving up; and, second, how to cover the hundreds of millions of dollars they will be spending to go on-line.

Now that incumbents have come to understand that, like it or not, they must play this new game because desirable customers have already begun to leave them, attackers may be surprised by the fierceness of the challenge established companies—at least the best of them—will pose. The $950 a year in above-minimum fees that aggregation on the Web will give back to consumers will put a great deal of pressure on second-rate providers.

Every company in the distribution chain will have to struggle to add unique value to the final product or see margins evaporate. Yet the survivors will preside over a more expansive, more information-rich space than the one in which they currently operate.

In this section, the Quarterly takes a look at six areas of consumer finance: brokerage services, credit cards, insurance, mortgages, and on- and off-line banking. The next article discusses what it will take to succeed in on-line investing now that the early hand has been played out. It is followed by analyses of businesses in ascending order of tangibility, from the small piece of plastic you carry in your wallet to the bricks and mortar you come home to every night. The section closes with an examination of why consumer banking itself may never go more than halfway on-line.

As a coda, we note that not only PCs but also mobile telephones and even, perhaps, interactive TVs will be an important part of the consumer financial experience of the future.