As I read the December 8 issue of BusinessWeek on my 20+ hour journey home last week from the United States, I came across an interesting article that discussed a new youth-oriented banking product called Virtual Wallet‘ that was launched by PNC Financial Services (PNC).

Virtual Wallet offers three accounts in a single banking package and is completely online.

Unlike other bank accounts with online features, however, Virtual Wallet is unique in that it was designed from the ground up to appeal to the needs of young account holders.

From drag-and-drop account transfers to a calendar system that makes it easier for Virtual Wallet customers to view balances, visualize cash flow and monitor bills, Virtual Wallet is not your parents’ clunky‘ online banking system.

As BusinessWeek details, PNC never intended it to be. In 2007, it hired Palo Alto design firm IDEO and asked it to help the company develop a product that was tailored specifically for 18-34 year-olds.

PNC found that the online banking platforms offered by most major banks were not cutting it for this target audience and that this target audience needed a lot of help managing its money.

From this, Virtual Wallet was born.

The most interesting part of this story in my opinion is the fact that, on the substance side, Virtual Wallet doesn’t seem to be that competitive. Checking accounts earn 0.1% interest (compared to a national average of 1.25%), savings accounts earn 3% interest (not bad but certainly not the highest rate available either) and deposits are limited to less than $25,000.

As an admitted miser who tries to save at every turn and who likes to ensure that his money is being put to work to the fullest extent possible, such an offer seems utterly uncompelling.

Yet thanks to its focus on market research and its wisdom in selecting a solid outside firm to help it achieve its goals, PNC seems to be proving that Virtual Wallet has been designed and packaged well.

PNC reports that it has signed up 20,000 Virtual Wallet customers and is signing up 130 new ones each day. 65% of them are new PNC customers. 70% of them are in the target demographic. PNC believes Virtual Wallet will break even in two years – one year less than a new physical PNC branch would take to reach break even.

I think there’s a lot to be learned from the PNC case study‘:

  • Knowing who your target audience is and building your product around their needs is crucial to success. Despite the fact that, substance-wise, Virtual Wallet seems lacking, PNC knew what was really most important to its target audience. One 24 year-old BusinessWeek spoke to was “sold on…getting balances by text message.
  • You can’t assume that you know what your target demographic really wants. Although I’m more a fan of substance than style, style and packaging does count for a lot. Although I’d personally never use Virtual Wallet because the interest rates and deposit limits are lacking, Virtual Wallet does prove that sometimes the assumptions we make about what will attract customers are wrong.

    The research conducted by IDEO led to the creation of a product that is clearly attracting customers despite the initial assumptions I personally would have made.

  • Turning to outside help is often a good thing. A lot of companies think that new products can (or should) almost always be developed internally. In PNC’s case, it instead found that a consultancy like IDEO could help it fill in the gaps and didn’t hesitate to bring them on.
  • You can’t forget marketing. Virtual Wallet is hardly the mythical we didn’t spend $1 on marketing‘ viral success story – PNC is advertising Virtual Wallet on popular television shows and websites that reach its target demographic.

It will be interesting to watch over time how Virtual Wallet fares and whether other banks take PNC’s lead and develop more specialized offerings for demographic groups that may typically be underserved or less appealing.

In theory, building up a base of young customers makes a lot of sense – at some point many of these customers will graduate to more sophisticated banking products that generate more substantial fees.

Regardless of the long-term success PNC achieves with Virtual Wallet, I think the overall lesson for the banking industry is that there is a lot of room to innovate when it comes to online banking products. While I don’t think that Web 2.0 widgets aren’t the trick, user-centered product design like that exhibited by PNC and IDEO is capable of creating user experiences that can help drive new customer acquisition.