NOT YET OUT OF THEIR expansion phase, most larger financial institutions say they are already shifting their retail focus to making the most of what they have by streamlining their distribution channels.

Although the ongoing cycle of mergers and acquisitions has not shown signs of stopping -- or even slowing down -- in the near future, many big banking companies are pruning their expanded businesses and plotting ways to reach out to their growing customer base.

According to the 1994 American Banker/Tower Group/Andersen Consulting survey of banking technology, banking executives consider dealing with these consolidation issues -- standardizing products, making use of new retail channels, cross-selling, and growing fee income -- paramount. Technology is the tool they expect to use to get them where they want to be.

Using Technology to Generate Revenue Retail banking objectives

19941 Standardize product/service offerings2 Grow by acquisition3 Reengineer the back office4 Grow fee income5 Cross-sell existing customers

* Projection

1997*1 Cross-sell existing customers2 Reengineer the distribution system3 Grow by acquisition4 Reengineer the back office5 Create new distribution channels

Source: American Banker/Tower Group/Andersen Consulting

To meet that goal, bankers have continued to place more emphasis on increasingly popular PC-based systems and advanced retail delivery systems. Although technology spending on the retail side grew at a compounded rate of only 6.8% over the past year to $7.8 billion, retail bankers claim that they are indeed putting their money where their mouths are in redefining their business.

"The winners in providing consumer finance services will be those who succeed in delivering value-added products that are tailored to the individual customer," according to Edward E. Furash, chairman of Furash & Co., a Washington-based consulting group. "The banks of the future will have to run multiple distribution systems."

For Marshall & Ilsley Corp., the acquisition of $4.3 billionasset Valley Bancorp and a number of smaller commercial banks provided fresh distribution channels. These acquisitions also underscored a need to build a "sales culture" into the technology of the retail business to highlight cross-selling and fee income opportunities, said Joe Delgadillo, president and chief executive of M&I Data Services Inc., the $12 billion-asset holding company's automation unit.

"We're rolling out branch automation to create a stronger set of storefronts to distribute new products and promote brand equity throughout the whole company," Mr. Delgadillo said.

Since 1989, the Milwaukee company has gradually been building a PC-based system to simplify administrative tasks, cut down on paperwork, and generate more fee income through cross-selling and customer services.

M&I is relying "less and less on the mainframe," Mr. Delgadillo said, using it more as a warehouse of information while shifting the bulk of the retail transactions to the clientserver operation. And with 53 banks and 237 branch sites to consolidate, executives at the holding company have decided -- as have many of their counterparts at other banks -- that client-server functionality works better than the hostbased system for connecting diverse retail sites.

Responses from American Banker's survey of 150 of the top U.S. banks confirm this trend. By the year 2021, mainframe applications will probably make up less than 25% of the industry total, according to the survey.

Pittsburgh's Integra Financial Corp. is a perfect example. The $13.5 billion-asset bank holding company, which was formed five years ago by merging two holding companies and seven banks, is in the midst of a huge client-server initiative.

In the $10 million project -- started about a year and a half ago -- Integra will roll out a PC-based system to all of its 260 branches. Using terminals from AT&T Global Information Solutions (formerly NCR Corp.) and software from Argo Data Resources Corp., the new branch automation system is expected to aid the sales staff to more effectively sell bank products and cut down on paperwork, according to Bill Burt, a senior vice president at the bank.

Integra has already rolled out its new system to about onethird of its branches, Mr. Burt added.

Aside from automating and improving the sales process and eliminating excess paperwork, the holding company is developing what it sees as a standard operating system that will ease the way in future initiatives.

As the technology survey indicated, cross-selling to existing customers and reengineering the distribution channels will only continue to become more of a priority in the future for retail bankers.

"The challenge the banks have for tomorrow is how do you constantly provide for customers as their needs change," Mr. Burt said.

Perhaps even more important than drawing together the traditional retail system has been the development of alternative distribution channels.

Through the Valley Bank acquisition, M&I has gained entry into the arena of grocery store branches.

"We don't see the traditional branch going away entirely," Mr. Delgadillo said. "We just think this will augment their abilities."

Integra has also set up branches in supermarkets, as well as airports. Automated teller machines, telephone banking, and home banking have also received more attention, Mr. Burt said, and plans are already under way to expand those services.

Although many banks have resisted plunging into cuttingedge technology too quickly -- fearing that older customers would not be accepting of it -- times seem to be changing.

"The whole approach to retail banking is undergoing a transformation," said Thomas G. Ash, president and chief executive officer of Sun Trust Service Corp., the automation unit of Sun Trust Banks Inc., Atlanta. "The demographics show an emerging market of younger customers who are more comfortable with technology."

Also easing the way is the growing cost effectiveness of platform automation and highend technology in general, Mr. Ash said. As customer acceptance rises and expenses fall, "the traditional branch may not be as important," he added.

"The future for distribution is not based in brick and mortar," said Fritz Elmendorf, vice president for communications at the Consumer Bankers Association.

Banks are using technology to help fit the diverse pieces of their business together, he said, and that need will only increase -- as will acquisitions -- with the passage of interstate branching legislation.

But big banks already have huge investments tied into their existing systems, and the survey indicates that they are reluctant to change too quickly. Last year, banks spent more than three times as much on maintenance than on new development -- 66% compared to 19% -- within their retail banking technology budget.

"Despite the health of the banking industry and strong earnings, most banks worry severely about the affordability of technology," Mr. Furash said. "The track record for delivering technology is very poor -- rarely on time or within budget."

Most banks have not yet moved to the "information warehouse concept" -- using mainframes to hold their data, and building a PC-based system around them -- although they note the trend, he said. Integrating legacy systems with branch automation platforms has been the biggest hurdle toward building better retail technology operations, he added.

Although they can can see the handwriting on the wall, most banks are still walking the tightrope between overextending themselves and losing their competitive edge.

"Banks are looking at technology in an incremental fashion," Mr. Furash said. "This is an era of enormous experimentation where, unfortunately, most banks are followers rather than leaders."

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