Banks have beaten back the challenges presented by a new wave of Internet financial services companies and can give themselves a collective pat on the back, said UBS Warburg in a report issued Monday summarizing a conference it held in March.
Despite a scare in the late 1990s that traditional banks would lose market share to new entrants offering financial services over the Internet, the incumbents remain firmly in control and are leveraging the Internet to their own advantage, UBS Warburg said.
Banks succeeded because of the collapse of the capital markets, the limited growth of new technology competitors, and because customers did not flock to the new entrants, said Eric E. Wasserstrom, an analyst at UBS Warburg, in an interview. It also helped that banks worked feverishly to integrate the Internet across their business lines, he said.
"Even though some Internet companies have failed, some of the models they have presented have catalyzed evolution in terms of how traditional financial institutions look at the Internet," said Mr. Wasserstrom, an editor of the report.
As recently as one year ago, the 50 largest Internet companies had a larger combined market capitalization than the top 50 U.S. banks at well over $1 trillion. Today, Internet trailblazer Yahoo's market cap of approximately $10 billion places it below companies such as BOK Financial Corp. in Tulsa, Okla.
The change has helped banks regain confidence about their role. In its report, UBS Warburg gave results of an interactive poll of the several hundred conference attendees. It found that 64% said they believe that incumbent banks would be the primary winners in delivering financial services via the Internet. Only 22% said that nonbank financial companies would be the winners, while 9% picked portals and only 2% chose nonfinancial, new-economy companies.
Brian Moynihan, the executive vice president of the eCatalyst group at FleetBoston and a presenter at the conference, blamed the stock market run-up for forcing banks to Internet-enable their enterprises in the late 1990s, often in an unfocused and makeshift manner. With the collapse of stock prices in the technology sector, banks can now focus on the economics and the value of the Internet without looking over their shoulders at new players hungry for market share, he said.
Denis O'Leary, the co-head of LabMorgan at J.P. Morgan Chase, said his company has taken a pragmatic view of the Internet: Industry changes will inevitably work their way through the system, but they will do so gradually. Hammering home his point that traditional banks still rule the roost, Mr. O'Leary took aim at E-Trade Bank, the E-Trade Group subsidiary, by deriding an E-Trade commercial that had been screened for the audience earlier.
In the commercial spot, a monkey on horseback wearing an E-Trade T-shirt surveys the ruins of the dot-com landscape and watches mournfully as the famous spokesman/sock puppet of the now-defunct Pets.com is flung to the ground.
"We don't have to shoot puppets out of cannons to get attention," Mr. O'Leary said.
Janey Place, executive vice president of eCommerce at Mellon Financial Corp. in Pittsburgh, said her bank took a conservative and controlled approach in its adoption of the Internet, resisting the temptation to invest in numerous technology partners.
"We resisted the 'Do something! Do anything!' approach and therefore did the company no harm," she said.
Instead, Mellon took the time to build a single technology platform. Although more complex and risky, the enterprise-wide strategy is aimed at reducing implementation times and costs while streamlining customer experience, she said.
Mellon's take-it-slow strategy seems to fit with the expectations for the Internet held by those at the conference.
Forty-one percent said that in three years, the Internet will generate an earnings improvement of 5% for banks. Thirty percent said they believed that no improvement will result from the Internet, while 20% said it could effect an earnings improvement of more than 10%. Nine percent of attendees thought that banks would take a 5% hit to earnings due to their Internet initiatives.