Transaction automation opportunities belong on the short list of issues bank chief executives make their concerns.
In two previous articles in American Banker, I stated that bankers should be cautious about adopting radically new technologies and that they need to revamp those CEO short lists to reflect changes in the marketplace.
Historically, bank executives divided transaction services into two categories.
In one group were activities viewed as "natural" to the banking business - costs of doing business so to speak. They included deposit handling, check clearing, coin and currency, and the like.
The second group was seen as profit-generating services (though they often were not profitable when carefully analyzed). Over the years a variety of services passed through this group - payroll services, correspondent processing, account reconciliation, and merchant processing.
I believe it is fair to say that top bank executives never had these businesses on their short lists and did not hesitate to exit many of them when the chance arose to outsource or sell them. They were considered peripheral to banks' central role: gathering deposits and deploying them as earning assets.
With respect to transaction processing, the economic model that suggested leaving this business was built on two assumptions. First, it was generally felt that these services required powerful mainframe computer systems that were costly to operate and maintain. Second, because of the systems infrastructure required, it was believed that economies of scale drive the business. After all, how many First Datas can there be?
But since the late 1970s, the technology world has been transformed by unbelievable miniaturization.
Suddenly, highly segmented enabling technology exists to extend services to markets, and in ways that simply were not possible a few years ago.
High-technology companies like Intel Corp. and Motorola are building chip factories at a tremendous rate. And it is feasible not only to make more chips but also to continue building capacity and complexity into the chips themselves. (Andrew S. Grove, chief executive officer of Intel, says chip speed will double every 18 months at least into the first 10 years of the next century.)
My point is that these developments give substance to the claim that a whole new era of transaction automation business is emerging.
The use of the plastic card as a platform for service delivery via a chip is a perfect transition into this exciting new world of services. Services already well along in adoption include cash replacement ("stored value" in industry jargon), health information, government benefits, telephoning, merchant loyalty programs, and electronic commerce via the Internet.
Because a huge mainframe infrastructure is not needed to offer some of these services, and because banks are a natural source for some, bank CEOs have the chance to be leading players here and enjoy the rewards.
One other issue makes it vital that the executive team put this topic on the short list.
One school of thought contends that the real threat posed to banks by the Internet is the ability it gives technology providers like the regional Bell operating companies, cable companies, and Microsoft to seize control of customer contacts.
One way to protect against this is to move toward a chip card-based platform, particularly for high-profit customers, most of whom are card users today. The relationship then remains with the bank, and the chip card becomes the "door opener" to the Internet and other services.
There is, without a doubt, a great deal at stake for banks in all of this. The possibility of added fee-based businesses and the potential to protect customer relationships while extending those added services are among the stakes.
I acknowledge that this is not for every bank, but I fail to see how any executive team can avoid incorporating this analysis into its short list of concerns.
What sort of time scale is involved? In markets outside the United States the rapid adoption of everything from stored-value systems to countrywide use of chip cards for carrying national health service information is occurring.
Within the United States, 1996-97 will be a period of pilots and other types of test. By 1999, major card companies will be aggressively placing chip cards, and the rollout phase will begin.
This means that each bank has less than two years to determine the position it wants to take in this emerging business. There are three possible approaches:
*Participate in a "branded" solution - offered by a card association or national provider in selected countries. This would offer the comfort of being backed by a global capability, but it also makes customization for an individual bank's needs more difficult.
*Take the lead as a system operator for a particular region. Some observers believe that certain services (possibly including stored value) will be primarily regional phenomenons, that is, most people will use the cards close to home. If that is so, being the local provider can potentially be valuable and profitable.
*Invest in a number of pilots during 1996-97 to learn consumer reactions, costs, product potential, revenue possibilities, and ways to tie in with other business lines.
As usual with strategic issues, no one answer is right. Each executive team must evaluate the opportunities and threats within the context of its own plan and market.
I am confident, though, that this is one of those areas on which equities markets will benchmark banks - not judging what a bank chooses to do but whether it is making a choice. In other words, has this area gone on the short list?
Mr. Lewin is a senior account executive in Verifone Inc.'s Rolling Meadows, Ill., office.
