Technology is neither a panacea for what ails a bank in the marketplace, nor an assurance of continued dominance by market leaders that have aggressively invested in it. But the changing nature of competition requires banks and other financial institutions that want to gainfully compete in today's environment to strategically deploy information technology (IT)--and, more, technology-skilled people--in businesses across the enterprise.

While significant strides are being made in banks' back offices, front-end technologies have thrown bankers for a loop. In many cases, electronic distribution channels are merely being exploited to lower transaction costsoand that is even suspect as many banks have not been able to convince customers to select a mode of electronic interaction with the institution, thereby increasing the costs associated with multi-channel customers. This doesn't even begin to approach customer relationship management and profitability that, in theory, should be the focus of financial institutions. It always comes back to the people behind the business model.

This brings to mind a nagging question: To what extent does IT up productivity and profitability--and at what price? Price is the operative word; consultants can quantify what's being spent on technology, and, to a lesser extent, in what businesses the spending is occurring. But we have a difficult time qualifying the benefits--and downside--of technology expenditures in financial services businesses. This is the industry's greatest challenge.

Surveys focusing on technology investment in financial services indicate that the industry will spend around $60 billion or so in 1997 on IT, and that figure is projected to continue to rise in the next two years. Banks biggest areas of discretionary spending, according to Ernst & Young: support infrastructure; customer sales and service relationships; new product introductions; decision support; capital markets products and services; and risk management. And while that $60-plus billion is astounding, the number is, in and of itself, meaningless. Behind that number lurks obstacles, challenges and, yes, opportunities to cash in on.

A recent study from the University of Pennsylvania's Wharton School--"Examining the Contribution of Information Technology Toward Productivity and Profitability in U.S. Retail Banking"--offers keen insight into such issues as the profitability contributions of IT. The study's authors contend that "the easy availability of IT to all banks implies that IT investments do not provide any competitive advantage. In other words: Since there is no barrier to entry in terms of IT in the retail banking industry, a bank investing in IT does not stand to gain additional market share as a result of its investment."

Interestingly, the study demonstrates the importance of IT labor--the "process engineers"--in the overall productivity and profitability of U.S. retail banks.

The study is available free of charge from Wharton (

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