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Communications of the ACM

Bundling E-Banking Services

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Since the 1996 Telecommunication Deregulation Act, telecommunication companies such as local, long-distance phone companies, Internet providers, cable companies, and entertainment companies have been battling to be the one-stop-shop for infotainment (information entertainment). To that end, many companies are joining forces with others to round out their offerings, as evidenced by mergers between MCI WorldCom and Sprint, SBC and Ameritech, AT&T and TCI, and Time Warner.

At the same time, AT&T is breaking up again and has made public statements that one-stop-shopping is not for everyone. There are some local companies such as (see and many others belonging to (see buying services from the telecommunication companies and offering to medium- and small-size companies services such as local and/or long-distance phone, Internet connectivity, cable service, or wireless telecommunication. is a business space site acting like a portal mentioned in [6.] Usually Competitive Local Exchange Carrier (CLEC) companies, through a Web interface, offer these services in bundles. Such Web sites allow users to examine their usage patterns and choose the optimal bundle that fits their company profile.

A similar phenomenon is occurring in the banking industry. Banks and brokerage houses are merging services, such as Firstar and U.S. Bancorp, and FleetBoston and Summit Bank, with Fleet selling both banking and brokerage services through its Quick & Reilly brokerage unit. Another firm, Microcell Telecommunication Inc. has teamed up with Royal Bank of Canada to offer wireless transactional banking services such as bill payments, balances, last transactions, transfers, exchange rates, and prime rates, using Fido's smart-card technology. Citibank, a unit of Citigroup Inc. will enter Israel's retail banking market in the second quarter of 2001. Citibank, which has been offering corporate clients commercial and investment-banking services with sister company Salomon Smith Barney, is planning to buy a local bank in Israel to better serve customers. Schwab is another company joining those offering bankerage (banking and brokerage) services as one-stop-shopping. offers many services listed on their Web site [5] in bundles, reflecting alliances between Schwab and its partners.

The economics literature studies bundles of two items under pure and mixed strategy, focusing on either offering only the bundle or both the bundle and the items together. Optimal bundle pricing is covered in [7], wherein the problem is formulated as a disjunctive programming situation with any costs and a customer can choose only one bundle and the bundle prices are in additive form.

In [3, 4] the authors analyze further bundling or unbundling in the case of information goods. With low production, distribution, and marginal costs bundling can make sense. The authors argue that some customers have high while the others have low valuation of two different items, so it makes sense to charge a moderate price for the bundle containing the two items, simplifying the buying decision while still enjoying the positive consumer surplus. For example, a $59 subscription to the Wall Street Journal's Interactive Edition includes many features not found in the paper edition, such as interactive services, stock tracking services, Barrons, and Smart Money. This is an example of a bundle with all features for one price. Another example is Microsoft Office, which sells for less than the price of a spreadsheet package of a couple of years ago.

It is stated in [3] and [4] that it is better to maximize the number of items in a bundle to maximize the profit for information goods with very low marginal cost. This is with respect to selling the items separately. The authors discuss the conditions under which long-term subscriptions for information goods become feasible. When the product can be inexpensively provided over time, it may be profitable to sell a long-term subscription instead of selling individual uses for short periods of time, since the user might have high valuations of the goods at some times, and low valuation of the same goods at other times. Using arguments similar to bundling, it can be shown that a single subscription fee giving long-term access to the goods might increase profits.

With the law of large numbers it is better to bundle as many items as possible, although this is not true for physical goods with significant marginal costs. Such "predictive value bundling" often leads to large-scale bundling. On the other hand, when there are differences between the consumer groups with different valuations then just simple bundling does not work anymore. In this case you need to prepare different bundles to satisfy the need of the different segments.

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New Technologies Favor Alliances and Bundling

Similar to many CLEC firms, banks may implement a Web-based billing system allowing customers to have access to data about their usage patterns. They can analyze their spending patterns and choose the appropriate one or change to another pattern in response to changing business conditions and dynamic business requirements. Banks need lead customers, customers, competitors, and partners. In [8] the authors describe high IQ companies, which are responsive to customers, competitors, and partners; they are agile companies that can react quickly to changing conditions. The high IQ refers to the organizational IQ, which, unlike an individual's IQ, can be changed. The technology is there to make it happen. "Lead customers" are those who adopt the new services first and once firms satisfy lead customers it becomes easier to satisfy other customers. The organizational IQ depends on external information awareness, effective decision architecture, internal knowledge dissemination, organizational focus, and business networks.

There are two forces working together. On the one hand, the customers look at the data and then choose a bundle for themselves. On the other hand the banks can store the data in data warehouses and do data mining to extract patterns important to the banks. They can create intelligence from voluminous data to be used in defining long-term strategy for the banks.

Information is power and creates strategic advantage. With electronic transactions one can track down the data flow, amount, source, destination, in an extended enterprise consisting of customers, partners, and competitors connected by a network. The network generates positive externality that grows with each new member. The more users belong to the network the better, because users can learn from each others' money flow patterns. Your competitor wants to belong to your network because they are also going to get benefit too. The real winner is the one who uses the information to create strategic advantage, turning knowledge and information into dollar and cents. Banks will be in the information and knowledge business or they will be out of business.

The best example is the SABRE system handling American Airlines' reservation system, which is connected to all other airlines' reservation systems. Doing such consulting for other airlines allows American Airlines to gain the largest market share. Schwab also offers all mutual funds from different companies as a one-stop-shop companyit tracks who is buying which fund, which helps it to create new products similar to most popular funds.

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Creation of Bundles and Challenges with Bundling

Another advantage of bundling is to support new applications more effectively. The correct pricing might help to determine the demand and supply. Most probably the consumers will be heterogeneous in valuation of services and time. An example of bundle pricing applied to music downloaded from the Internet is explained in [2]. Positive externality is to have people belonging to the same network, which increases the transactions among members.

Profits most probably will depend on the degree of competition, the pricing scheme of the competition, other services offered, and the security level reached. It may not depend on the form of pricing used. Hence the bundle pricing scheme is not another scheme to increase profits but to help e-banks become more efficient and lead to correct and timely investment for additional capacity.

The first issue is that bundles should not cannibalize other bundles. This issue is more complicated when there is correlation between items leading to harder to determine transaction prices. Bundled transactions should give extra utility to consumers. Readers are referred to [3] and [4] for more comprehensive analysis of bundling, where the authors study bundling and unbundling strategies. They mention "...bundling strategies for more than two items is a notoriously difficult problem."

E*Trade offers many feature bundles. Citigroup bundles checking account, brokerage, investment banking, and insurance products. One Citigroup site named offers small-business customers payroll, retirement accounts, office supply shopping, accounting services, and a variety of other services.

Several companies offer electronic payment bundles: Paymybills charges $8.95 per month for up to 25 payments plus 50 cents per transaction above that. charges the same for individual users and has a different bundle for the small business edition for $19.95 plus 75 cents per transaction, including a dedicated account manager. charges $3.50 for up to five transactions, $8.95 for 30 transactions, $29.95 for unlimited transactions. Web-based bill collection companies include Killen Associates, Seals, DocuCorp, Network Computing, PayPal, and ZDNet. Benefits of these companies include reducing the cost of invoicing, increasing productivity, and reinforcing loyalty.

More details on optimal heuristic pricing of number and significant bundling are given in [1]. In [3] the authors discuss the case when the number of items in a bundle increases fixed pricing becomes more attractive under monopolistic conditions. In bundling, value pricing can be used with prioritization of the services offering Quality of Service (QOS) guarantees. The congested resources such as a Web server can be more efficient serving customers with varying valuations matched with different levels of priorities. This depends on the competition and the demand curve. Under competition and with customer segments with different valuations, various multi-item bundling may be what the consumer is looking for. The e-bank could release the statistics collected from the consumer helping them to enhance their next bundle. Generally, e-banks should offer as many bundles as possible and let the consumer decide on the bundles.

In the optimization problem to decide on prices there can be constraints that the consumer surplus is positive becoming the binding constraints for the solution. There could be other criteria each bank is interested in, changing the solution for the bundles. From the experience of electronic bill payment bundles of tens looks attractive. This would depend on the niche each bank is trying to create. Banks must decide whether to outsource these services or perform these functions in-house.

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The future of the banking industry with regard to e-commerce is uncertain, which has some banking officials concerned yet expectant. As of March 2000, 27.5 million individuals were cyberbankingup from nine million a year prior. E-banking is progressing, with the enhancements of e-bills, e-commerce, and e-business. Some predict Microsoft, IBM, and even airline companies as possible competitors. Banks or financial institutions may merge with brokerage firms to form click-and-brick banks. Many possibilities for new services exist, but these services must initially be subsidized until the critical mass is achieved, and consumers become accustomed to the convenience. Then flexible, adjustable bundles can be offered for consumers to decide upon. Usage patterns may be shared with customers, with the bank acting as an information manager, helping customers choose optimal bundles.

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1. Altinkemer, K. Bundling and Pricing of Information Goods. Purdue University Krannert Graduate School of Management (1999).

2. Altinkemer, K. and S. Bandyopadhyay. The effect of the Internet on the music industry. Journal of Organizational Computing and Electronic Commerce 10, 3 (May 2000), 209224.

3. Bakos, Y. and Brynjolfsson, E. Bundling information goods: Pricing, profits and efficiency. Management Science 45, 12 (Dec. 1999), 16131630.

4. Bakos, Y. and Brynjolfsson, E. Bundling and competition on the Internet. Marketing Science 19, 1 (Jan. 2000), 6382.

5. Dewan S., and Mendelson, H. (1999) University of Washington and Stanford University.

6. Dewan R., Freimer, M., and Seidmann, A. Portal Kombat: The battle between Web pages to become the point of entry to the World Wide Web. In Proceedings of the Hawaii International Conference on System Sciences (1999) Maui, Hawaii.

7. Hanson, W., and Martin, R.K. Optimal bundle pricing. Management Science 36, 2 (1990), 155174.

8. Mendelson H. and Ziegler, J. Survival of the Smartest. Wiley, NY, 1999.

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Kemal Altinkemer ( is Associate Professor of Management in the Krannert Graduate School of Management at Purdue University in West Lafayette, IN.

©2001 ACM  0002-0782/01/0600  $5.00

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