William H. Gates 3d says he has turned over a new leaf in his dealings with banks-though he is puzzled about what the old leaf was.

The chairman of Microsoft Corp., fresh from his grilling in front of the Senate Judiciary Committee and preparing for a speaking appearance today at the National Automated Clearing House Association's Payments '98 conference in Seattle, said last week that "our relationships with banks have never been stronger."

In an interview with American Banker, conducted by e-mail, Mr. Gates said Microsoft has solidified those relationships by keeping lines of communication open and allowing the actions of controversial initiatives like MSFDC, the joint bill-payment processing venture with First Data Corp., to prove that Microsoft's motives are not ulterior.

He said the signing of four major test banks for MSFDC "indicates we've adapted what we've originally proposed to really meet banks' needs."

Aware that his words and actions have at times irritated his banking constituency, Mr. Gates said, "Bankers are trying to figure out how to best take advantage of technology at the same time that there are so many other concerns facing banks.

"It always surprises me how much this leads to a concern about what Microsoft is doing. I think it is important to point out that software continues to be the best opportunity for Microsoft. I want to make sure that banks are comfortable working with us and using our software."

He contended that "banks will always be necessary because they are the trusted custodians of people's financial assets."

To be sure, bankers worry about a widening range of competitors and increasingly raise concerns about Microsoft. In a talk last week to an Online Banking Association meeting near San Francisco, Citicorp executive vice president Edward Horowitz warned of Microsoft's power even as his company uses Microsoft as a system supplier and participates on the MSFDC advisory committee.

The cooperation-competition nexus is something that Mr. Gates said "banks are already very familiar with. ... A bank might partner with Norwest to originate mortgages while competing with Norwest in credit cards. Or a bank might offer DDA transaction services to a brokerage firm while actually competing for trust accounts or mutual fund sales.

"Banks jointly own the ATM networks with their competitors. So, I think banks are actually more familiar with complex arrangements between partners and competitors than most industries."

He went on: "Microsoft's role with respect to banks is to build core technologies. Everything else we do in financial services is designed to help banks make the transition to on-line services. A substantial and growing number of banks are using Windows NT on the desktop and server and using their own branded version of Microsoft Money for customers. Our joint venture with (First Data) is partnering with four major banks. We're working with IBM to merge (the home-banking interchange standards) OFX and Gold. We can't do any of these things alone, and that's why we're working with more than 100 independent software vendors who make financial industry products. In fact, we partner more than we compete."

He said as Microsoft has "talked more and more to the senior people at many banks about it's business and our long-term intentions, I'm glad to say they have become more comfortable working with us."

Following are other excerpts from the exchange with Mr. Gates:

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In your thinking about banks, are they "different" from the rest of financial services, or is it all one big thing now?

GATES: Every industry seems to have its great convergence theory, whether it's digital PCs and digital communications, or financial services. When you look at financial services and the ongoing regulatory and competitive changes, it is clear that different kinds of institutions- brokerages, banks, and others-will compete for consumer relationships and will increasingly offer overlapping services. (Although) there is a blurring, it is never total.

Banks come to this competition with special competencies and established positions. Banks have the leadership position in payment systems and in consumer lending via credit cards and mortgages. Also, the very largest banks are bigger than the largest investment banks and brokerages in some dimensions. You have to believe that as financial services change significantly, top banks will come through these transitions with leading roles.

Do you have any words of wisdom or advice for the traditional part of the banking industry? Is it better or worse prepared for the future than a few years ago?

GATES: People worry about the Web and technology somehow disintermediating banks from their customers but I don't think that will happen. The technology will be transparent and allow banks to actually get closer to customers-certainly closer than ATMs and voice mail systems get them today. The Web is a great opportunity for banks to offer more services that can be tailored to individual customers. And banks that will be successful five, 10, or 15 years from now will be those that are investing in infrastructure today to prepare for computer-savvy customers.

It is well known how focused you are on the business of Microsoft, on creating great software and channels for it. Can you characterize how much of that thinking and energy is financial and/or electronic commerce- related?

GATES: A lot of the work Microsoft is doing can potentially help banks position themselves for e-commerce. As on-line usage goes up rapidly and bandwidth problems are resolved, that presents customers with the opportunity to have a new, more intimate kind of relationship with their bank.

As they develop these new products and services, banks will require a digital nervous system, which is a term I use to describe how a corporation-like a body-deals with information in an efficient way, and especially how it reacts to unplanned events. We feel it's very important that banks are able to construct a sensitive digital nervous system-and, using different terms, that's exactly what they've told us they need.

I also believe that the Internet will be more and more important as a way consumers and businesses conduct their day to day business. It will be more and more natural to book your travel or compare new cars or buy books on the Web, or do your banking on-line. Electronic commerce relies on being able to pay-and banks are going to continue being the key payment relationship for most consumers. Consumers want their money in a safe place, not on their PC's hard disk.

Banks are where people's paychecks go and that's why banks need to have every service accessible from any area using a simple, user-friendly interface. The work Wells Fargo has done with one of our partners, Diebold, to make bill-paying available via ATMs is a good example of this. Nonbanks are also making innovative use of technology. A favorite of mine is the Irish Post Office, which has built 1,000 PC-based kiosks at which people can pay bills, apply for a passport, obtain various licenses, get pension benefits-and even buy stamps!

Certainly you are not as obsessed about burrowing your way into banking as some bankers seem to think you were. Then again, your vision of a digital wallet was quite resonant. Are you still hot on that idea? Do your friends in the banking trade "get it"?

GATES: I can't say this enough times: We don't want to be a bank. We want to give banks more choices.

A decade from now, many bank customers will have used computers all their lives. If you ask college students, I bet that almost all of them would want to use the Web for a variety of activities, including their banking. These kids are the closest to living what I call the Web lifestyle. They'll use electronic mail, pay bills on-line, file taxes electronically, check the Web for sports, news, weather, investing tips, movie listings, gifts, even order pizza-it will be totally taken for granted, like the telephone, fax machine or TV today.

And those are customers who will want to manage their money on-line. They'll want to know that if their checking account balance is high, their bank will proactively suggest a better investment. They'll want their bank to help them analyze their portfolio and let them make decisions instantly. They are very desirable customers, and they will flock to banks that offer these options.

The digital wallet is a good example of a compelling banking experience that software can provide. The digital wallet is currently part of Internet Explorer 4.0. The wallet allows users to encrypt their credit card number and personal information once, then order, say, a book from Barnes & Noble just by clicking on a button.

Like IE4.0, the wallet can be bank-branded-another way for banks to maintain their strong identities on-line. The wallet provides an easy user interface to hide the complexities of encryption and digital certificates that make payments safer. It is not a bank, just a tool for banks. The bank has an account relationship with customers based on holding their deposits or letting them borrow to make purchases.

The wallet, like the browser, is a piece of software. Consumers understand the difference.

When Scott Cook was starting Intuit, banking/finance was very much on his mind. I don't know if he ever said it this way, but he clearly regarded financial services as a "killer app." Where do you stand on this? Should we even be talking "killer apps"?

GATES: E-mail is the first killer app for the connected world. It's not "sexy," but it's fundamental. The same can be said of on-line banking. There'll be other breakthroughs in hardware and software. For example, 10 years from now attendees at a Retail Delivery Conference will probably be carrying around tablet-sized PCs that can take dictation, recognize handwriting and provide verbal meeting reminders.

Will that be a killer app for bankers? I don't know. More likely there will be a series of good, innovative products that will steadily make life easier over time.

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