A new fear is settling into the on-line banking community, a threat that may be more dangerous even than the demons that bankers currently most love to hate at Microsoft Corp.

It is the fear of commoditization, and it reared its head repeatedly during Online '97, the American Banker's third annual cyberspace banking conference in Phoenix last week.

Commoditization, the sameness that reduces competition to a lowest common denominator usually based on price, is, in a sense, old news for bankers. Their most basic consumer products are commodities.

But now it is dawning on them that the Internet and other alternative ways of reaching customers, despite the wonders of the technology and the promise of "anytime, anywhere" convenience, could push commoditization to a further, undesirable extreme.

Can banking companies break free of their heritage and make product differentiation work in their favor? Can they find the equivalent in cyberspace to the street corner locations that conferred competitive advantage in a previous era?

It didn't look good when Matthew Josefowicz, who works in marketing and business development for FarSight Financial Services in Cambridge, Mass., showed a picture of America Online's on-screen Banking Center.

A few big banks had prime positions, and under them were the words "more banks." Click on that spot, and a window appeared with dozens listed alphabetically, offering the uninviting prospect of scrolling through to see all the names.

"Is this the most effective means of building your brand identity?" Mr. Josefowicz asked.

FarSight, which has access to some of the most sophisticated investment management technology as a member of the D.E. Shaw Group, wouldn't be in business if it didn't see some hope. It is one of a growing number of companies offering to help institutions make their Web presences felt with a broad set of financial products and related information.

"The good news is people want all of these Web-based services from banks," Mr. Josefowicz said. "You don't want to stick to DDAs and savings accounts."

"It is empowering for customers to find their own information on-line versus getting it over the phone," he added. "People feel like you are giving them value when you give it to them and they search" for the equities and investment products they want to purchase.

More encouraging words came from Alex Stein, who formerly worked at FarSight and is now a principal in Gomez Advisors, a Boston-based consulting firm that focuses especially on the securities industry's move to the Internet.

While banks were struggling to move computer-based, interactive services into the mainstream, mutual fund and brokerage companies passed them by. By some estimates, Web trading accounts, most of them operated by discount brokers, are approaching three million, twice the number of Internet banking users.

Mr. Stein praised the likes of Charles Schwab & Co. and E-Trade Group for their technological and marketing genius. (Another speaker, analyst James Marks of CS First Boston, pointed out that E-Trade's marketing and sales expenditure is 2.6 times its technology budget. "Marketing is really the key," he said.)

But Mr. Stein said there are limits to how far specialized nonbank companies can go in consolidating their customer financial relationships, and this can work to banks' advantage.

Discount pricing prevails on the Web, and "deep discounters will be vulnerable to attack from brand names," Mr. Stein said. "Their budgets are razor-thin. They have a narrow product set." The service has commodity, or loss-leader, characteristics, meaning profits have to come from add-ons that banks will be better equipped to provide.

"You will be more profitable than the niche players," Mr. Stein told the bankers in his session. "The wave that is coming will be for the one-stop shop. You have the most frequent interaction with the customer today, the best share of mind, and that is a foundation for habit-forming behavior.

"If (Microsoft chairman) Bill Gates was right and the Internet is Jurassic Park, then the banks are well positioned to be T-Rex. The challenge to you is big, but it is one you can address."

Lessons in how to cope with creeping commoditization might come from the technology industry.

Catherine Allen has been repeating this theme since, as a Citibank vice president, she organized and headed the multi-industry Smart Card Forum, many of whose members were bankers. That was before she became chief executive officer of the Bankers Roundtable's Banking Industry Secretariat, which is trying to keep the industry in the payment-system driver's seat.

She has a favorite quote from former Lotus Development Corp. CEO Jim Manzi about how "market cycles (that) used to be five to 10 years in the making now come and go in 12 to 18 months"-and that time length may have become obsolete in the few years since he said those words.

At the American Banker conference, Ms. Allen urged an audience of about 500 to "think differently about how to use information.

"Learn from the nonbanks and new players who look at it from a different viewpoint," she said. "Think like a software company."

John Kao, author of a book titled "Jamming: The Art and Discipline of Business Creativity," hears answers in jazz.

Mr. Kao, CEO of a New York consulting firm called Idea Factory, is an expert in unleashing the creative instincts that bureaucracies tend to stifle. He showed two short films to get his business audience into a "different space" and illustrate the distinctions between sheet music and improvisation-between the rigidity of plans and structures and the fluidity and creativity that add up to invention and innovation.

Jazz musicians are at their most creative when they "clear the mind, clear the place, and clear the beliefs," and corporations must do the same, Mr. Kao said.

"Innovation increasingly tends toward a commodity," he. "The key skill is continuous innovation-to stay a step or two ahead of commoditization."

Mr. Kao is reachable by electronic mail at kao jamming.com.

First Union Corp. is one banking company with a huge appetite for experimenting. It is offering several types of home banking services, participated in the Visa Cash smart card trial during the Atlanta Olympics last year, and tested Cybercash Inc.'s Cybercoin system for micropayments on the Internet.

The bank's six-month Cybercoin trial ended last spring after "hundreds of downloads and hundreds of transactions, not thousands," said Parker Foley, vice president of electronic commerce at First Union National Bank. "The Web was not yet ready" for this type of virtual cash "and we decided not to take it to the next level."

But trial and error and learning are what the anti-commoditization movement is all about. Mr. Foley said the notion of virtual wallets like those being attached to Web browsers remains intriguing, and keeps First Union working closely with Cybercash to explore the possibilities.

He described the coming clash between banks and nonbanks as a "shootout at the disintermediation ranch. All providers are equal-as long as they carry a gun and don't turn their backs."

Given the nature of Internet-based innovation and entrepreneurship, "we're lucky disintermediation hasn't been worse so far," Mr. Foley said. "If everybody will be delivering a commodity, you have to deliver it to your customer first and then enhance it with value-adds."

Mr. Foley's North Carolina neighbor Chuck Hieronymi, senior vice president of NationsBank Corp., said, "We all have access to the same technology and strategic thinking-but not the same ability to execute."

Mr. Hieronymi gave a more sober assessment of banking by personal computer than might have been heard a few years ago. NationsBank is one of the most successful in the business, having distributed 400,000 copies of its version of Meca Software LLC's Managing Your Money program. Its 1.5 million on-line "touch points" a month are "real, and it does move the dial," the banker said.

"But it doesn't happen overnight" and doesn't obviate the basics of having to maintain thousands of branches and automated teller machines and an extensive call-center capability.

Mr. Hieronymi also said collaborations like those NationsBank has as part-owner of Integrion Financial Network and Meca Software are essential because "we can't do it all ourselves."

Asked to confess his bank's biggest mistake in this area, Mr. Hieronymi said it underestimated the initial popularity and the cost of delivery, and at the early stages fell short in "bandwidth" and customer service.

His co-panelist, Citibank vice president of PC banking Guillermo Francisco, made an admission reminiscent of Bill Gates-that Citi "underestimated the power of the Internet and how fast it would grow over the past three years."

Citibank is apparently making up for lost time. Gary Meshell, director of Price Waterhouse LLP's electronic financial services group, said he has seen the future Web site and gave it a rave review. It is expected to go live within weeks.

Microsoft Corp. may not have been the center of attention that it would have been at conferences in years past.

MSFDC, its joint venture with First Data Corp. in the bill payment and presentment business, was certainly a concern to a group of Banking Industry Technology Secretariat members considering a proposed, bank- controlled alternative. But that was behind closed doors elsewhere in the Pointe Hilton resort.

Ms. Allen of BITS expressed no hostility. She said MSFDC had a "galvanizing" effect on bankers, and pointed out that "skepticism is still alive about how banks could work together cooperatively."

Cordiality reigned when Matt Cone of Microsoft and David Fortney of Integrion Financial Network discussed progress they are making-largely at BITS' behest-to converge their competing home banking standards, OFX and Gold.

When he took the podium last Tuesday morning, Microsoft vice president Lewis Levin had the morning headlines in mind when he said, "I will endeavor to be as un-newsworthy as I am capable of being."

The day before, the U.S. Justice Department said it would ask the courts to impose a $1 million a day fine on the Redmond, Wash., software company for violating terms of earlier agreements about its dealings with computer manufacturers.

Mr. Levin proceeded diplomatically, portraying Microsoft as "first and foremost a technology supplier" with no designs on controlling banks' customer relationships or on subsuming their brand identities.

He, too, weighed in on commoditization, saying on-line "open finance" gives customers more power and freedom of choice than ever in managing their money and assets. But leaving the technology aside, "this is nothing new or different. It is the reality that prevails today," Mr. Levin said.

On the positive side, "the technology lets you deploy unique capabilities ... a repertoire of services you choose to offer, under your control."

Several speakers said the brokerage industry's successes-some companies are actually making money through electronic channels-are a hopeful sign to bankers still wondering if there is a payoff.

Daniel Schley, chairman and CEO of Home Financial Network Inc., a Westport, Conn., software company, said he does not have patience for the old defeatism among bankers. He said "we don't believe" market researchers' predictions that on-line banking will be limited to 10% or 12% of the 100 million U.S. households within three to five years.

"Profitability is a realistic expectation," he said. "Home banking can be profitable, but it needs out-of-the-box thinking."

Mr. Schley appeared with one of his customers, Dawn Harpin of Webster Bank in Waterbury, Conn., to illustrate the potential. Within six months of introducing a service based on the HomeATM software, $6 billion-asset Webster signed up 4% of its households, double the original projection. Activation of the service by those who asked for it far exceeded expectations, attrition rates and customer support costs were well below.

Jack Rodgers, president of American Finance and Investment Co., said he has a competitive advantage in offering mortgages only via telephone and the Internet, and working with the software company Brightware Inc. on automating customer service. His company's average origination costs have gone from $2,300 to $800.

But one community banker felt left out of the party.

Bill Turner, senior vice president of $100 million-asset Horizon Capital Bank of Webster, Tex., expressed disappointment about one vendor's preferring to "look at bigger banks than mine."

Still, he was optimistic his bank would be able to keep pace with its bigger rivals, even if executing an Internet strategy costs a little more than he would like to spend.

"If you follow the leader, you can't get too far off base," Mr. Turner said. "I know we won't be able to stay on the leading edge, but certainly we can stay on the same playing field."

James Marks, the CS First Boston analyst, led his presentation with two words: "Be cautious."

He said some banks have rushed on to the World Wide Web "without asking why they need to be there." He said assessments of companies with Internet- based should be based in part on how well they have "thought through the process."

"On-line delivery completes the commoditization of financial products," Mr. Marks said, and the concern carries over to standardization.

On the OFX-Gold controversy, he said, "Pick your poison. Banks' basic product is information. Open systems may be good from a technology standpoint, but not necessarily from a business standpoint. Think through these problems before embracing these enthusiastically."

Like Mr. Stein of Gomez Advisors, Mr. Marks said the one-stop supermarket concept "is the on-line winner" for building deep and profitable customer relationships. But he warned, "don't underestimate the difficulty of modifying consumer financial behavior."

He said there have been only five major financial service breakthroughs in 50 years-credit cards, mutual funds, money market funds, ATMs, and asset management accounts like Merrill Lynch's CMA. None gained widespread acceptance overnight and credit cards, for one, caused banks great pain in the form of losses before reaching critical mass.

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