Banks Engaging Partners to Share Technology Risk
During the go-go 1980s, many banks were willing to invest millions of dollars for big technology projects with uncertain, unproven benefits.
In the current economic climate, banks eyeing new technologies that might give them a competitive edge are looking for less costly ways to try them out.
The answer for some institutions is to join as partners with deep-pocket technology companies that are willing to take on more of the expense -- namely, development funding and marketing costs.
A case in point is the latest foray of Huntington Bancshares Inc. in home banking. The Columbus, Ohio, bank recently formed an alliance with American Telephone and Telegraph Co. to develop and market a home banking service that uses a computerized telephone called SmartPhone.
On the surface, the alliance seems extremely risky. The bank was burned in a previous attempt to market a home banking program based on microcomputers.
However, Frank Wobst, Huntington's chairman and chief executive, said his bank is protected. "The downside risk is minimal, and the upside potential is great," he said.
The Compuserve Fiasco
Mr. Wobst's view is tempered by his institution's previously unsuccessful attempt at selling home banking to consumers.
In the mid-1980s, Huntington was one of the first banks to work with the electronic information network Compuserve, owned by H&R Block, to build a personal computer-based home banking service. The service bombed with customers and was scrapped.
AT&T has already sunk tens of millions of dollars into developing the SmartPhone for home banking applications and will take on a significant chunk of the work to build Huntington a back-office operation to support the service, sources close to the project said.
Huntington will use the back office to support not only its own home banking service, but to process home banking transactions to other institutions that offer SmartPhone home banking programs.
The bank is using the SmartPhone project to launch a new retail business called Huntington Direct, which includes home banking, a 24-hour customer service line, and a customer information system that lets bankers have a single view of a customers' relationships with Huntington.
Huntington Stake Is Small
The company is keeping its own initial investment in the program at a minimum.
Though the bank says it will invest $10 million, sources familiar with the bank's plans say that it will initially invest only a few million dollars and will rely instead on the marketing, technical expertise, and financial muscle of the telecommunications giant.
AT&T is designing the automation platform for the operation and will supply the hardware and software to Huntington. The equipment is obviously not free, but no one doubts the bank got a good deal.
Bankers say they expect more of these alliances as banks, unable to foot the whole bill for new technology projects, look to computer companies for partnerships. Before the AT&T/Huntington alliance, banks that are installing check imaging systems from IBM and Unisys Corp. got big discounts to serve as the pilot sites.
And Continental Bank has a preliminary agreement with an International Business Machines Corp. subsidiary to take over its technology operation, including software development for its next-generation cash management system.
In the SmartPhone project with Huntington, AT&T hopes to have four to five million of these phones in homes by 1995. The company will market the phones through its retail stores. Huntington says its research shows that 10,000 of its customers will sign up in the first year.
More important, AT&T has been in discussions for the past several months with other banks that are interested in offering customers a SmartPhone-based home banking and bill payment service. Many bankers believe that an easy-to-use telephone will be a much more successful home banking device than personal computers.
"We're back now, with something that will work," said William Randle at Huntington. "And being ahead of the learning curve with this technology will be where we have an advantage."
The service might help Huntington build market share in cities where it has a weak branch presence, such as Cincinnati and Toledo. Rather than build new branches, Huntington wants to let customers bank by phone.
Because the advanced telephone may prove to be a more popular and easier-to-use-home banking device, the bank could shoot past its competition, such as Banc One, which has a PC-based home banking program. And if other banks use Huntington's back office, the bank could reap significant fee income.
But the program's success is far from assured. Its planned price - $20 to $25 a month plus a $100 sign-up fee - is far more expensive than existing PC-based home banking services. Many banks are leery of home banking. Some experts say AT&T's prediction of the number of phones in homes by 1995 are overly optimistic.
If the service bombs with customers, Huntington will not lose much. If, however, the service takes off and the SmartPhone and Huntington's back office become the backbone of a generation of successful home banking programs, Huntington stands to reap big benefits.