The strategic alliances that have been forming among telecommunications companies, cable providers, computer manufacturers, and consumer electronics providers may well be the catalysts that finally bring banking into the home. Home banking is not new.
However, in the past, banks' visits into customers' homes have been frustrating ones. The welcome was tepid, the stay a stressful one, and the result a disappointment for both host and guest.
The two steps forward, one step back experiment in home banking may now progress at a steadier and faster clip: Both supply and demand are propelling home banking. Consumers have less time on their hands and have become used to nonteller banking.
Retail Strategy in Question
Thus, they are likely to be more comfortable with and receptive to automated transactions. On the supply side, banks are experimenting with new distribution channels. The cost-driven reengineering at most large banks is calling into question the sacred cow of retail banking and the dominant role of the branch network.
Most important, other industries are stepping in to remove technological hurdles to home banking and eliminating the need for banks to develop proprietary technology as a prerequisite to entry.
Cable, telecommunications, computer, and electronics industries are converging in an effort to build the "electronic superhighway." The process is not a smooth one and has been marked by high-profile courtships and breakups, advances and retreats.
But while there is much uncertainty as to the eventual configuration and combinations in the new industry, there is no question that the industry itself will exist and grow. There will be increased distributor demand or in-home services to pump through new - and principally fixed-cost - pipelines into the American home.
Control May Be Lost
The good news is that home banking is certain to be an important service offered through the "superhighway." Banks will be able to leverage the technical capabilities of others in the development of the delivery platforms.
On the other hand, control over delivery and retail payment systems - long the exclusive domain of the banking system - will certainly be reduced and perhaps lost. Consumers will have far greater access to home banking, but bank as well as nonbank competitors will have far greater access to those consumers.
The multimedia alliances now being contemplated or formed to route the electronic super-highway into the home have important implications for the banking industry. The industry must examine the strategic impact of this development and determine how to access these alliances or create alternatives as banking moves into the home.
In the past, the growth of home banking systems in the U.S. was stifled by technological limitations on the supply side and by lukewarm demand. Customer preferences and technology do not remain constant, however, and are now moving in directions that suggest far greater acceptance of home banking.
The technological watershed resulting from the formation of interactive multimedia networks and alliances is well-timed, given changing customer preferences and the urgency of finding lower-cost alternatives to branch banking.
At the most basic level, the motivation to save time is driving consumer demand. The book "Overworked American" reports that the free time of working Americans has decreased by 40% in the past 20 years. Americans may soon view some form of home banking as a necessity rather than just an option.
Consumers are no longer tied to the teller. When ATMs were introduced, there was serious concern about the willingness of customers to accept the new technology. ATM transactions are growing at the rate of 12% a year - three times faster than inbranch transactions.
ATMs have acclimated bank customers to alternative delivery channels. By the year 2001, the percentage of people who prefer to bank with a teller is projected to decline from 50% in 1991 to just 30%.
A 1992 study conducted in New York City by Payment Systems Inc. found that 68% of the respondents would use screenphone banking services and 37% said that they use or would use telephone banking.
ATM and telephone transactions are significantly less expensive than teller transactions, and the potential for cost savings is a clear motivation for preserving with nonbranch delivery channels.
A 1992 study by our firm found that the cost of a teller transaction averages $1.07, a telephone transaction averages 35 cents, and an ATM transaction costs only 27 cents.
In evaluating alternative distribution channels, may banks have been stumped by two issues: "How can we get our customers out of our branches without reducing our overall customer service or loyalty levels" and "How can we ensure that any new distribution technologies replace, rather than add to, existing channel costs?"
There is growing awareness that home banking, considered in the context of an overarching distribution strategy, can transfer volume out of high-cost branches and enhance overall customer service levels.
These changes in supply and demand are coinciding with the dramatic and potentially paradigm-shifting changes taking place in the media and communications industries. The new networks are expected to carry interactive television/multimedia such as video games, data bases, home shopping, and movies-on-demand through cable and telephone lines.
For instance, AT&T and Compression Labs are developing the capability to deliver movies and other video services to the television via phone lines; BellSouth Telecommunications and U.S. Order allied to develop Scanfone, a dedicated computer, a modem, and a credit card magnetic stripe reader. Numerous other alliances have been contemplated or are in the works.
High-Cost Private Labels
As a result of these ventures, a platform is being created that will allow banks to pursue home banking without the high cost and low penetration rate of such proprietary systems as Chase's Spectrum, Citibank's Home Base, Chemical Bank's Pronto, and Banc One's Channel 2000 and Video Financial Services.
Utilizing this platform, however, requires that banks get over the "not invented here" syndrome that led many of them to invest in expensive proprietary systems in the first place.
Valuable lessons have been learned from previous home banking programs - from both the successes and the failures. This knowledge, coupled with evolution in technology, customers, and the banking environment portend greater success in the next wave of ventures:
* In many failed pilot programs, home banking services were confusing and did not provide real-time information. Current home banking pilots are far more user friendly; many are modeled after ATMs with data updated every few minutes.
* In the past, most banks attempted to fund all costs themselves and services were expensive to develop and support. Today, banks are sharing costs - some by offering home banking as an item on a larger network (e.g., Prodigy) or by collaborating with other banks to build a network that can be shared.
* The initial services handled only a fraction of a customer's potential requirements, never approximating the kind of full-service capabilities that would truly move the branch toward obsolescence. Current programs are far more comprehensive.
* The initial American systems required customers to purchase expensive and dedicated equipment and teach themselves to use unfamiliar technology. As recently as five years ago, most people were strangers to ATMs, personal computers, and self-service telephone systems.
As the absorption of technology increases and the cost decreases, the receptivity of new applications for the technology also increases. The new multimedia alliances will make even more people familiar with technology, as numerous services become available through telephone lines, cable lines, and modem.
These lessons are reflected in the pilots now being launched by a large number of banks. By 1994, one of every four U.S. banks will offer the most fundamental of home banking interfaces - the ability to access account information and transfer funds between accounts by phone.
A substantial number are testing more innovative approaches. Meridian Bank and State Bank of Fenton, Mich., for instance, are testing delivery via satellite television.
Home banking will succeed and will be as essential an offering as ATMs are today, but it cannot succeed as a stand-alone product requiring the bank to develop - and the customer to buy - equipment dedicated solely to this use.
Natural Delivery Systems
The alliances now being formed to bring a wide variety of multimedia services and enter-tainment to consumers are natural delivery channels for home banking. New systems will likely rely initially on multipurpose screen phones; PC-based systems will appeal to a specific market segment.
Over time, we expect a significant shift to intellignet television sets, given television's 98% household penetration and the technical innovations being driven by the multimedia alliances.
The alliances being formed to create the emerging multimedia industry represent potentially attractive partnering opportunities for banks. It is critical to recognize that many of the players in these alliances view commercial banking products and services as commodities.
Just as a grocery store has the right to choose which products occupy its valuable shelf space, so too will the emerging systems have the right to choose their purveyors of home banking.
With over 8,000 commercial banks in the United States offering basically undifferentiated products, it should not be a surprise that locking in a bank partner is not the first priority of these new alliances. As a result, the bargaining power will not initially be on the side of the banks as they seek to participate in the systems.
However, banks do have some cards to play. As interactive multimedia systems push into America's living rooms, the ability to micromarket will become increasingly critical. Some players in the banking industry (particularly credit card issuers) have refined the market segmentation and targeting skills that will be essential to the success of system offerings.
These attributes may create an opportunity for some banks to get in before the window of opportunity closes and to participate early in the evolution - and perhaps ownership - of the new electronic superhighway into consumers' living rooms.
Notwithstanding the allure of the latest and greatest technology, banks should recognize that two of the most heralded direct-banking examples - USAA (which focuses on a market niche composed of military officers and their dependents) and First Direct (a subsidiary of Midland Bank PLC) - are person-to-person-based systems.
The success of these two direct banking providers is attributable not to in-home technological linkages but rather to their understanding of the needs of targeted customers and their building of product, service, and distribution offerings around those needs.
Just a Telephone
For example, First Direct has no branches and no in-home technology, other than a basic telephone. It offers a complete line of banking products and services through person-to-person, telephone banking 24 hours a day, 365 days a year.
This service appeals to a time-strapped "yuppie" clientele that is uncomfortable with or unwilling to use higher-technology solutions in the home. USAA, which has developed state-of-the-art image processing and customer information file systems, also still relies heavily on a person-to-person, phone-based delivery system.
Using this combination of high-tech back-end and low-tech interface, USAA can provide appropriate products and services as well as continuity of service to U.S. military officers and their families as they move from one location to the next.
In both examples, the providers studied the needs of their target segments and build delivery systems to meet those needs.
These two success stories underscore the fact that a high-tech client interface is no substitute for good customer service. In fact, they suggest that as new providers begin to build and innovate distribution systems, the focus of the banking industry should shift from "Star Wars" technology to structuring and marketing bank-at-home offerings that best address the needs and behavior of specific customer segments.