While banks wrestle with a host of electronic banking issues, nonbanks may "eat their lunch" in the business, says an author of a recent Salomon Brothers study.
"Although some players, such as Microsoft, deny any interest in the banking business as such, they have targeted becoming the gateway for transactions - including financial ones," says the report, "On-Demand Banking: Power to the People."
"This has the potential for stealing revenues that banks are currently generating from their transaction-processing businesses," the report says.
Nonbanks are "going to eat their lunch," said Diane Glossman, a senior Salomon banking analyst who co-authored the report. "Nonbanks will find a way to suck out the profitability."
The entry into financial services by outsiders like Microsoft Corp., AT&T Corp., and International Business Machines Corp. has spurred unparalleled interest in new electronic services among banks.
But the involvement of such companies puts banks in a Catch-22 situation, the report says: Partnering with huge technology companies means risking the loss of bank identity, but not partnering can mean that a bank will fall behind technologically.
Banks' historical strength - their branch networks - often work against them in developing electronic banking, the study notes.
But moving away from a branch-based infrastructure is not easy when "a number of companies are so engrossed in internecine battles between the managers of the existing branch networks and new alternatives," the Salomon report says.
The main reason for nonbank superiority in many electronic services is that nonbank financial service companies - such as Fidelity, Schwab, and Countrywide Credit - "are not hamstrung by what bankers like to call the branch paradox," the report says.
It also says banks need to make better use of their stores of customer information. This information should be organized better and made available through a wider range of delivery mechanisms.
The ultimate goal is to get a better understanding of customer habits and needs.
"If you don't have the information to tell you what customer buying preferences are, how do you know what to do?" said Ms. Glossman.
For example, the report states that although Chemical Banking Corp. and Citicorp have developed their data bases and applied them to selling, they "are well behind consumer nondurables companies in milking valuable information from this mass of data."
Indeed, experts said many banks lagged behind their nonbank competitors in making use of customer information.
The cost of the so-called data warehouse technology that provides many customer information applications with data may have discouraged some banks.
According to IBM estimates in the Salomon study, a data warehouse for a typical $5 billion asset bank would cost about $2.5 million. A similar system for a bank with $15 billion in assets would cost $7 million to $10 million.
The report cites a recent study by Killen Associates, estimating that the entire global market for electronic financial services was $329 billion last year. It is expected to climb 14% a year through 2000.
