Citigroup Strikes Out

In 1997, Citigroup, the parent company of Citibank, launched e-Citi, a Web bank that was designed to compete with Citibank itself and other parts of the $230 billion company. Citigroup put a lot of resources into the venture. Within 3 years the Web bank had 1600 employees and 100 different Web sites. Between 1998 and 2000, Citigroup spent $1.1 billion on the effort. It was a gigantic failure. By March of 2000, when Citigroup called it to a halt, the venture had only 30,000 accounts, compared to the 146 million accounts in Citibank.

What went wrong? For one thing, e-Citi was set up as an independent venture. Customers could not use Citibank branches. This was a fundamental mistake. People using a Web bank have a large number of questions to start with:

• How do I deposit money?

• What ATMs can I use?

• Whom do I talk to when I have a problem or need a loan?

• Whom can I relate to?

Since, on top of all that, there was no institution to identify with, it is amazing that Citigroup was able to find 30,000 people who were willing to open accounts.

No Web bank has ever made a profit, and none ever will. What can be profitable is for an existing bank with lots of branches to persuade some of its customers to use the Web for some of their transactions. Web transactions cost about one penny each. Branch visits cost at least $2. The cost savings to the bank can be very substantial. But customers will use the Web only if they have confidence in the institution and if there is someone whom they can go to see when they need help.

After Citibank folded the e-Citi operation, the company formed an Internet Operating Group to see which Citibank services could be profitably shifted to the Web. The company created an online-payments business called C2It that let customers email money to one another for a 1 percent fee. Individual Citibank units were encouraged to shift functions to the Web. Eighteen months later, Citigroup was serving 10 million customers online with a variety of services. Looking forward, Citigroup expects to cut $1 billion off its annual costs through using the Web.