There is no shortage of industry experts, polls, and surveys touting the importance of technology in banking. But equity analysts have been relatively quiet on the issue. Apart from cost-cutting initiatives, questions about technology applications and investments don't neatly fit into spreadsheet analyses or traditional research reports.

That appears to be changing. CS First Boston Corp., for example, recently released a report, entitled "Separating the Winners from the Losers in the Banking Industry," in which technology is the separating factor.

First Boston's Thomas H. Hanley, one of the most respected banking analysts in the country, now calls technology "the most critical variable in banking over the balance of this decade."

The new report, Mr. Hanley said, was written to draw attention to an issue he said has been neglected by the analytical community.

"We are not spending enough time on it," he said. "I would say that in our future company reports - in fact we've been doing it more in the last couple of years - you'll see much more coverage on this."

In a recent interview, Mr. Hanley and his colleague Phillip J. Carter talked about their growing interest in the application of banking technology.

Q.: In the research report you say - and it's one of the few times I've heard it from people such as yourselves - that there is a causal link between technology investments and performance over time.

CARTER: I think a lot of people are really behind the eight ball. You've seen the industry go through some pretty tough times in the 1980s in terms of real estate losses. There's been a wave of these over time. And certain banks have had the willingness and the ability to invest heavily in technology. And certain others have been forced to put it aside.

There are a lot of people who like to say that technology is going to be important. But then you kind of get behind it, and a lot of people really don't understand all the incredible shifts that are going on - whether it's supermarket banking, closing down big numbers of branches, Glass-Steagall reform, or interstate branching.

HANLEY: We wanted to heighten the issue - and if we've done nothing more than that, I think that we will be successful. . . . You sit down with the chairmen and presidents of many of these banks, they can speak to this topic much better now than they have ever been able to do during the past. It's interesting that at the management level they seem to be focusing a lot more effort on it.

Q.: How did you pick the banks you cited in the report as being among those with the best technology strategies?

HANLEY: It was us bringing up the issues with them. And not based on the last quarter or last year but rather watching it unfold over the last several years. Also, getting it reinforced by outside polls - customers polls, Information Week polls, whatever.

The one bank that spent basically through thick and thin has been (John) Reed's bank (Citicorp). The other bank that we sense in recent years is J.P. Morgan. I think that their systems are top notch.

We find that a lot of banks talk about technology but whether they are actually applying it right - who the heck knows?

If it were up to the banks, everybody would tell you that "Everything is fine, we're state-of-the-art." Or at worst they would say, 'Well, give us another year and we'll be up to speed.' I've never found anybody yet who said "We're down on it."

The same thing about the good ones. They are a little bit shy because they are so good they think it's a competitive secret.

CARTER: There are really two ways that you can win. You can kind of be at the forefront of technology, (although) you don't want to be too far out in front of people. You can have invested prudently and technologically be very sound. And that gives you a major advantage.

Or you can have a customer base that is strong enough or unique enough that over time you can leverage technology to maximize your profitability. And that's important in looking at the consolidation issue.

HANLEY: This whole field has obvious implications in terms of nationwide banking, obvious implications in terms of the Glass-Steagall Act. It cuts across a broad spectrum of bank stock worth.

On the acquiree standpoint, these banks . . . are concerned already about their 1996 budgets. Not in terms of technology, but the total profit budgets.

In the larger sense they are asking, Can we compete long term? Instead of saying it that last way, they tend to focus more in terms of technology. I can't tell you how many times that issue has come up.

Most people think these banks are going to sell out because of a shortfall in terms of revenue, or something like that. To the extent that this becomes more and more important - as banks expand not just geographically but functionally as well - it's going to put a greater burden on these smaller take-out banks.

We really think around Labor Day - as banks start their first early cuts of their 1996 budgets - you're going to see a marked acceleration in terms of M&A activity. And one of many reasons is going to be technology. It's a huge barrier to entry. And in banking, we don't have a lot of barriers to entry. It's a commodity business.

(But) the ones who haven't done it, you can't just sit back and conclude they are losers. They could partner up with somebody and do beautifully. So there is (what's) going to be the job of the analyst. It's not black or white. There's going to be an awful lot of gray here.

Q.: And from the acquirer standpoint?

HANLEY: The general notion is the reason they acquire is just to take out costs. That's true, of course. But in a larger sense, one of the things they need going forward - if they are going to compete with all these other industries - is scale. You get the scale via acquiring.

If you've got the scale and the technology, then you've really got something going for you.

CARTER: It starts off with the cost advantage you get from the scale. If you can ever figure out how to leverage the revenue side of the equation as well, that's where the real winners are going to be.

If you look at a Norwest, and why they are so successful, the banks that they buy are usually pretty plain-vanilla banks. But . . . they've got one of the best consumer finance companies in the country, one of the best mortgage banks in the country, they've got a good credit card operation - all of these products and services that previously these smaller banks haven't been able to leverage. All of a sudden, you get people who are marketing oriented, who are talking about stores, talking about different products, and they can flow them through that. And they can make a lot more money off of your customers.

Q.: Are alternative delivery channels - home banking, kiosks, whatever - going to happen as fast as some in the industry believe?

CARTER: On the consumer front it is more prevalent than even we realized. Ed Miller at Chemical said that two thirds of their consumer transactions are now handled outside the branch network, which is an amazing number. A huge number are handled by telephone, and almost 85% of the calls coming in via telephone from customers are handled automatically with no personal contact on the end.

HANLEY: At the last analysts' meeting, (vice chairman) Lew Coleman from (BankAmerica) got up there - a lot of analysts had left the room - and he said "We're going to close down half of our branches over the next five years." Then he got into his theme about supermarket branches . . . and his plans for 800 of them.

If he had made that statement five years ago or 10 years ago, it would have been viewed as absolutely radical. Now it's viewed as being very significant but not radical.

What the senior executives at the top of the these banks are planning in terms of technology over the next five years is going to be fascinating.

Q.: Do the technologists at banks have more clout than they did a few years ago?

HANLEY: I don't think so. We're going through a slash and burn period at banks. The expense ratios - you've got to bring them down to blah, blah, blah. But these people are going to have their day in the sun. But quite frankly, I don't think that they are there yet.

Q.: What business lines are going to offer the greatest opportunity going forward?

HANLEY: Some of the fields the banks are going to get into we may not have given it enough thought yet. Some of the actual areas that are most profitable may not exist right now.

Q.: Such as?

HANLEY: I think before everything is said and finished, the banks will become major factors in terms of life insurance. That's an industry that has a fairly mediocre return on equity. But picture the banks applying bank capitalization ratios to that industry, technology, and also eliminating the middleman. You don't need him.

I think banks will adapt quicker than the insurance companies.

Q.: Insurance companies haven't invested in technology as much as banks have, have they?

HANLEY: No. If you go to Hartford and walk through some of the insurance companies, it's row after row - you can walk 10 minutes on a floor - piles and piles of these files. Nothing is on computer. They haven't changed. Every time I'm up there it never ceases to amaze me.

CARTER: They have done a better job over time of selling. They are much more sales oriented. That's their strength.

Q.: What is technology's role in this new sales culture that banks are working to develop now as well?

CARTER: I'd say it plays out in a couple respects. People talk about the businesses of banking being very commoditized, where pricing is extremely thin. You look at a lot of the national consumer businesses, such as credit cards and mortgage banking, where the spreads are increasingly thin. There, the leverage technologically is in processing larger amounts. There are economies of scale in these businesses that are critical.

Then you go into the branch. And you go into the delivery of products and services. That's where you get into cross-selling, where Norwest does well. In looking at the customer base they look at profitability by customer, by product, and really leveraging the customer base they've got to market more effectively.

And then . . . the whole risk management area. People are much more globally oriented. Systems have to be so much more sophisticated nowadays to stay on top of that. Everything that you gain on the pricing side of the equation can be given right back unless you are effectively managing the credit side of the equation. It kind of plays in different ways.

HANLEY: The whole back office in terms of derivatives - operational risk problems - is far greater in our view than any other problem.

If you get Johnny-come-latelys into business without the right operational strength you could send a problem around the world. The real risk lies outside the U.S. - Johnny-come-latelys, foreign banks that have been attracted by very high ROEs.

Q.: You talked a little bit about restructurings. Is it really possible for banks to undertake aggressive cost-cutting exercises and at the same time sustainably increase revenue?

HANLEY: Anybody can cut costs. It does not mean that overall productivity is going to be enhanced at all. It will be enhanced over the short run but not necessarily over the long run.

In banking there is a lot of monkey see, monkey do. And it's all relatively short term. The analytical time frame is also too short term. And you're not looking at the intermediate term - the next three to five years. That's one of the reasons that we wrote this report.

We have to be very, very leery of banks that are doing something extremely short term that might not be in the best interest of shareholders long term.

CARTER: Look at one of the banks we profiled, Wachovia. The better- managed guys, you don't see them taking out 10%, 20%, slash and burn. They do it little by little, do it the right way, streamline it over time. Wachovia has been remarkable. It's the whole culture. They don't blow up and grow huge in operations at certain times and then slash them right back.

The better-managed banks are more consistent over time. You don't see the huge restructurings. You see streamlining. Information is going to be critical in this, too. If you can measure profitability by customer, by business segment, you can be a be a lot more nimble in targeting your niches.

Q.: Since technology is a new area you are focusing on, how do you determine who has the right strategy?

HANLEY: How do we know we are doing it right? We don't. You get a little bit of history going in this field, and you put in your time, the chances of making a big boo-boo have been reduced. But you can always make one because you are dealing with something new.

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