How will the Microsoft-First Data Corp. venture affect banks' electronic bill presentment plans?

Banking is vital to a healthy economy; banks are not." This is the arresting opener from a recent study on the future of retail banking by Professor Ravi Kalakota, of Georgia State University. As an indefatigable bull market irresistibly lures consumers to move their money out of banks and into mutual funds and other forms of investing, banks are desperately trying to stay the hemorrhaging by increasing the number of transaction fees and upping ATM charges.

The proliferation of transaction fees, even a fee for putting your money into the bank, has slowed the use of ATMs and made consumers look elsewhere. Of the $22 trillion available of U.S. household funds, banks now have only 13 percent, while in 1976 they had 25 percent. "Do you know of any industry that went from 70 percent down to 30 percent and survived?" asks former Citibank chairman Walter Wriston.

For millions of consumers, banks are merely a place to deposit checks so as to use a credit card and access cash via an ATM, and there are technologies that could do that without passing through a bank for a fraction of the cost.

Right now, non-profit credit unions let you deposit money without a fee and even let you retrieve it from an ATM without a fee. This is why the banks are fighting them in the Supreme Court, even though credit unions have only 6 percent of the market.

The banks argue that credit unions do not pay taxes and have taken advantage of recent deregulation to vertically expand beyond the walls of the company or organization that spawned them. But banks have taken advantage of deregulation to compete in the investment market and have not done so well because bankers never learned how to sell.

Banks are anxiously looking to electronic banking as a way to automate banking and keep the consumer out of the branch. Chase Manhattan Bank offers "self-service banking," for example, whereby the consumer does all his banking electronically, avoiding most fees. Banks predict that, by the year 2005, a third of all retail services will be delivered electronically, and Chase officials contend that 10 percent of retail banking is already done that way.

Of the 44 million retirees, how many can type, let alone use a PC? But they do go to the supermarket, which is where many retrieve their money from an ATM and perhaps where, in the near future, they will do all their banking.

Recently, the U.S. Treasury announced that by 2000, all 66 million social security and veterans benefit checks would be sent electronically to the recipients' bank accounts, but 11 million Treasury clients do not have banking accounts. Treasury has asked banks and credit unions to offer a minimum fee account plan for these 1l million recipients.

But Treasury could deliver this money electronically to a government repository that would make it available on ATMs with a minimum fee paid to a company like EDS for installing and maintaining the ATMs. If credit unions can undercut retail banking fees, and EDS can deliver ATM cash at half the cost, the government can bypass banks to deposit directly into ATMs, thereby making banks unnecessary.

The future of retail banking lies in the most price-competitive solution to providing basic banking, i.e., depositing your paycheck or social security check in some electronic clearing house and getting it back in the most convenient way, like an ATM in your supermarket.

Nothing in this simple equation requires Chase or Citibank. n

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