The Internet is flashy. Quicken and Microsoft Money are cool. But the real workhorse of remote banking is the call center. Outside of branch visits, customers are more likely to contact their banks by telephone than by any other means, including automated teller machines. The enormous popularity of telephone banking has amounted to a quiet revolution. By next year, 28% of all customer-initiated contacts with banks will be over the phone, up from just 17% two years ago, estimates the Tower Group, Wellesley, Mass. The consulting firm also expects that share to reach 32% by the turn of the century. "We see the phone still being the leading remote delivery channel for the foreseeable future," said Patrick Swanick, executive vice president of KeyCorp in Cleveland. The impact of telephone banking is being felt across the industry. With their ascendancy, plus the increasingly widespread deployment of ATMs, banks at long last may be able to jettison much of their costly, labor- intensive brick and mortar. And, more than just a cost-cutting ploy, call centers are now regarded as potentially lucrative profit centers in their own right. Banks are also racing to emulate other companies that have shown how to do more with less - nonbank financial services firms and catalogue retailers with sophisticated phone operations but few stores. Bank spending on call center technology, much of it geared toward generating sales, is growing at 15% a year. But this rosy picture is not without thorns. The vast majority of bank calls are still for balance information, and bankers say they need to do a better job of educating customers about other services available over the phone. The increasing telephone volumes have generally not resulted in lower costs elsewhere. And relatively few banks are using their telephone centers for outbound sales calls, which could be the source of the much- hoped-for new revenues. KeyCorp's call center is as good a place as any to see where the industry has been and is going. Now handling about 3 million incoming calls a month, the company's network of four service locations has been growing at an annual rate of 20% to 30% in recent years. Some 79% of customer inquiries are resolved with the automated voice-response system, a rate that is among the highest in the industry. Mr. Swanick said the growth has been fueled primarily by convenience. Customers know they can contact their bank at any time from wherever there is a telephone, which means just about anywhere. Customers are also drawn to the growing array of information and transactions that can be conducted by the phone. "We have added functionality to these phone centers so you can basically do all your banking over the phone, with the exception of getting cash," said Mr. Swanick. The volume of business handled by the $65 billion-asset bank's four centers is equivalent to that of 130 branches. "To put it another way, we'd have to put another 130 branches out there to replace the business that we generate over the phone," said Mr. Swanick. The efficiency of KeyCorp's telephone banking operation is aided by information technology that is more advanced than the systems in the bank's branches. "The customer service representative in the call center has a full profile of the customer's account relationship with the bank, even if those accounts are situated on various systems within the company," said Mr. Swanick. The ability to pull together information on multiple accounts onto a single computer screen is seen by experts as a major step in improving efficiency, quality of customer service, and sales opportunities. But many banks still lack such "middleware" technology, which allows banks to bridge their various computer systems and data bases, noted Francisco Sauza, a senior consultant with Speer & Associates in Atlanta. "It's a great tool but not inexpensive," said Mr. Sauza. "For middleware, you are talking about spending between $1 million and $2 million to buy software." "Only recently have banks been able to bring this together for an integrated snapshot of the customer relationship," said Ashish Bahl of Andersen Consulting. "It's a bit of a complicated issue, and that's why banks are reasonably struggling with it." "The complexity is not the technology," said Mike Perreault, manager of product development research at Early, Cloud & Co., an International Business Machines Corp. subsidiary that provides call center systems, including middleware. "Institutions have so much information that they don't know (all) the information they have." Bankers also want to use information technology to track customer profitability. That, along with insights on which delivery channels customers use and how often, is essential to creating a rational pricing system for ATMs, telephone banking, and even branch visits. To discourage low-balance or low-profit customers from using call centers too much, KeyCorp may follow the lead of major retail banks like Wells Fargo & Co. and BankAmerica Corp., by charging for excessive calling. But banks want to make sure they can still waive fees for their best customers. (See related story on page 6A.) Some 30% of big banks have begun to differentiate service levels based on the value of the customer relationship, according to a First Manhattan Consulting Group survey. Another 54% regard that strategy as critical or important but have yet to implement it. U.S. Bancorp of Portland, Ore., is among the institutions that want to create service-level tiers based on customer behavior and profitability. Robert D. Sznewajs, vice chairman, said systems to do that will be in place in 1997. "We can give them a higher level of service because we can allow their calls to go into the queue differently than others," said Mr. Sznewajs. "And based on the relationship, we could conceivably charge them after a certain volume of calls for talking to a live operator, assuming they could get the same information through the voice-response unit." The $31.5 billion-asset company has been very effective in using its call center to market consumer loans. In the past two years, the proportion of applications taken over the phone has jumped from a quarter to two-thirds. The bank is able to give customers a thumbs-up or thumbs-down within 30 minutes. Loans are among the most popular retail banking products sold over the phone. About three-quarters of institutions with call centers now offer the service, according to a recent Ernst & Young study. Despite the range of services available, the vast majority of calls (81%) are balance inquiries. Here, banks look enviously at the well-developed telephone operations of nonbanks like Fidelity Investments, Merrill Lynch, and American Express. "They grew their business off the phone to begin with," said Don Owen, a BankAmerica Corp. senior vice president. "Most of those companies are much further down the path than banks." Charles Schwab & Co., for example, handles 3.8 million active accounts with just 4,000 brokers. Its automated system allows customers to enter trade orders by phone. The company has 235 branch offices compared to, say, KeyCorp's 1,300. And it has a lot of little bells and whistles: Schwab customers on hold hear updated financial news while bank customers typically get Muzak. Part of the problem for banks, said Patrick M. Blanchard, general manager and senior vice president at Wachovia Corp.'s call center, is that not enough customers have been educated about the range of products and services available by phone. "One of our biggest challenges is to make sure the customers are aware that we are here and of what we can do for them," he said. "Some customers perceive the phone center as just an alternate place to do transactions. We want them to know we are for sales and service." One way to boost profitability is to use call centers for outbound marketing. Tom Scott, president and chief executive of National Commerce Bancorp.'s data processing subsidiary, said telemarketing is the next planned phase in its call center strategy. The Memphis-based bank's telephone service has been outsourced to Alltel Information Services. (See related story on page 10A.) The popularity of telephone banking raises other questions. Some industry experts worry that if traditional banking becomes too remote or impersonal it could lose the advantages it still enjoys over nonbank rivals. Among them are their visible presence through extensive branch networks, and customers' perception, shown in studies, that bankers are more trustworthy than their cold-calling counterparts in brokerage firms or insurance agencies.

Could encouraging customers to stay away from branches actually reduce opportunities to sell products to customers? "The branch's greatest role is in account setup," said Mr. Bahl. A lot of people haven't figured it out: If we don't have branches and we have all these direct channels, how are we going to get these customers signed up?" KeyCorp's Mr. Swanick said, "There is a concern, but we think we have it pretty well in hand. "We know now that 40% of our retail customers have already figured out how to deal with us via the phone and the ATM, and not visit us face to face," he said. "They are 'visiting' the branch now more than they ever did physically through the branch network." The importance of telephone banking to KeyCorp can also be seen in the recent appointment of Mr. Swanick to head a newly formed electronic commerce unit that will manage the call center, PC and Internet banking, and ATMs. "We need to be able to cater to the invisible customer, the customer we never see," he said.

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