Bobby Mehta, vice president of Boston Consulting Group and co-leader of its financial services practice, led the team behind "The Information Superhighway and Retail Banking," a 1995 study commissioned and published in two volumes by the Bank Administration Institute. American Banker senior editor Jeffrey Kutler recently asked Mr. Mehta to reflect on that work and what it says about the future of the financial services industry.
You spent more than a year immersed in issues relating to the new interactive technologies and how banks are relating to them. What did you personally take away from that effort that you may not have fully appreciated before? I can much better articulate now how we tend to hype the near-term implications of technology and completely underestimate the longer-term significance of it. One of the most important lessons in both service delivery and new payment systems is that people who expect cataclysmic changes to occur over the next two or three years will probably be disappointed. But it is also very misleading for people to use this as a way to explain or rationalize why their longer-term future is secure. You sound like you are trying to be a voice of reason. Are people getting that message? The most sophisticated, those who have thought the most about this topic, get it. People who are having their awareness raised as a result of all the publicity and so on are more likely to have a knee-jerk reaction. My counsel to them is not to react that way. You need to react in a resolute way but figure out what you want to do. The world isn't going to collapse around you in the next two years. But you do need to get going. I am afraid that people who react in a knee-jerk way in one direction, when they suffer the first reverse, obstacle, or disappointment, will then say, "Well, we knew this was all hype, anyway," and then knee-jerk back in the direction of the status quo. The people who get it view this as an investment in the long term, not something that is going to do anything for them in the next six to eight quarters. Isn't there a disconnect between the people who, as you say, get it, and some of those executives at the higher levels who may not be of the same mind, or just more comfortable with the status quo? There are potentially two kinds of disconnects. In one, people at the middle levels become proselytizers for this new world. They are basically taking a dismissive attitude toward the old world. They are not helping themselves communicate to their senior managements. The disconnect can also be systemic at the mid-level where they are trying to raise awareness to hype something. The second example is people at the senior level being comfortable with the status quo and not with the risks attendant to moving in the new directions. There are a handful of institutions I have seen that are beginning to think about this in a more rational fashion. Is it possible that the proselytizers have to go a bit overboard in their communicating, just to get noticed? That may be, but inherent in that approach is a risk. You create a set of expectations that in the first instance may cause something to happen, but in the next instance may cause a knee-jerk reaction in the other direction. It's obviously a trade-off, and I'm not saying there is a right answer to this, but there can be backlash against the proselytizing attitude. For example, "Video on demand didn't work, why should we move ahead?," or "PC banking is for the birds if it didn't succeed in year one." To someone who has not seen your publications on the information highway, what would you say are the points most essential to grasp? There is a set of observations about developments outside the banking industry that are changing the way in which products and services, in the most general sense, will be distributed and sold, and customers served. Getting a grounding in that, which is what the first volume is all about, is an important foundation. If one buys the premise that fundamental change is occurring from a physical to a digital distribution system, then it is much easier to make the leap to understanding how that affects one's particular business. Building on that is the change in the competitive dynamics that the shift from the physical to digital distribution system creates. We have talked ad nauseam about the risks of disintermediation, entry of new competitors, radically new bundles of products, etc., which upset what has been a relatively stable banking paradigm for the last 50 years. Despite the advent of telephones, ATMs, and the like, the associated changes were all spawned by the banking industry. Now there is a set of technologies that nonbanks can use to circumvent the traditional barriers to entry that protected banks. Third would be how fundamentally important the payment system is not just in the context of banks' keeping control of it, but for all the players who have invested a lot of money and have a lot at stake in terms of the development of electronic commerce. Fourth, I would return to my earlier point that these are all indicators of fundamental change, and it is far too easy to overestimate what will happen in the near term and underestimate what will happen in the longer term. There has been something of an obsession with Microsoft and other such companies as potential competitors for financial services. Putting that aside for a moment, might the best of these supposed new entries represent a new commercial or organizational paradigm? What do they tell us about the underlying changes in the business world? What can bankers learn from the high-tech world about the way they will be operating in the future? I agree with the premise of your questions. This may sound a bit odd, but the high-tech companies simply work at a different tempo from the banking industry. You must be referring to their extremely short product cycles. That is just one example. Product cycles. Customer service. Their philosophy of inducing obsolescence. The belief in self-cannibalization do it to yourself before somebody else does it to you. There is a set of high-tech organizations that could end up being either partners or competitors with banks but that work at an entirely different tempo, that work on a completely different product cycle, respond to customers in much different ways. Banks can learn a tremendous amount from that. Another thing that banks can learn, which we alluded to in the strategic options section of our second volume, is from the way high-tech companies will say they are very good at a given point on the value chain. They focus on that activity, staking their claim and building their business. Banks will have to understand that issue. They will have to deconstruct and reconstruct their value chain. In the long run, I don't believe it is possible for all banks to be all things, which is a lesson from the high- tech world. And not just from the high-tech field but from retailing, banks can understand the implications of the shift from a spread- or margin-based business to a fee-based business that will accompany the shift from physical to digital distribution. A lot of bankers are uncomfortable about that. They know deep down that they don't "own the customer" and they haven't invested in building their brands in a way that will withstand the competition or allow them to be legitimate alliance partners with some of the brands that have grown up in the high-tech and retailing arenas. You have touched on one of the key cultural issues at work here, which is that banks have gotten rich and still are getting rich in the old-fashioned way. Right. There is great irony in the fact that in a year when the banking industry earned more money than ever before, there is a feeling of depression and fear, as opposed to saying, "We are dealing from a position of strength. What can and should we do?"