ITEM: In September 1994, the U.S. enacts the interstate banking and branching law, commonly called Riegle-Neal. The objective: to maintain essentially the same framework that has existed for nearly 100 years, but bring it up to date and eliminate redundant costs in the system so that banks can operate on a more level playing field with their new nonbank competitors.

ITEM: In October 1994, Microsoft Corp., the world's leading manufacturer of personal computer operating systems and software applications, announces that it will pay $1.5 billion, or about a 100% price premium for Intuit, developer of the popular Quicken personal finance software. Microsoft, with its DOS and Windows products, owns a channel for software suppliers reaching more than 60 million personal computers in the United States. The announced purchase of Intuit, combined with the planned Microsoft Network, provides the company with an immediate opportunity to expand the volume over its new electronic distribution channel.

ITEM: In January 1995, American Express Co. forms a joint venture with America Online Inc. to offer cardholders electronic financial services. Through the new service, ExpressNet, American Express cardholders will be able to not only research trips and make reservations on-line, pay bills, and access billing histories, but also to download data directly into PC financial management software such as Intuit's Quicken. ExpressNet allows American Express to expand financial relationships with its 35 million cardholders by reaching out to them electronically through America Online's rapidly expanding distribution channel.

These apparently discrete, unrelated events in fact foreshadow the most dramatic revolution in the history of the U.S. financial system. And this 180-degree transformation will bring both opportunities and threats for banks.

Before interstate banking, only nonbanks could use electronic channels to access customers anywhere, any time, at little incremental cost. Banks, meanwhile, have been forced to establish elaborate separate infrastructures in order to broaden their customer bases. No longer. When combined with the elimination of interstate barriers, electronic banking will become the great equalizer. It will place large banks and small banks, banks and nonbanks - including those not currently in the financial services industry - on the same playing field.

As an industry, banks have spent almost $100 million over the past decade trying to implement electronic banking - with universally frustrating results. But this pattern is about to change dramatically for four reasons:

* Explosive growth in ownership and use of personal computers.

* Increasing sophistication of PC software, making it more intuitive and simple to use.

* Rapid acceptance of electronic communication and transactions evidenced by the growth of electronic mail and subscriptions to on-line services such as America Online, CompuServe, and Prodigy.

* Normal progress in the market adoption of new technology.

Ten years ago, there were 20 million installed PCs in the United States, and about two million in the home. Today, there are 85 million installed PCs, of which more than one-third, or 35 million, are installed in homes. And in 1994, for the first time, dollar sales of personal computers eclipsed those of color televisions, the world's most ubiquitous consumer electronics product. On a global basis a new PC is installed and put into use every two seconds. And unlike the PCs of five years ago, most of today's new machines come equipped with a modem, CD-ROM, and a preinstalled personal finance package such as Quicken, Microsoft's Money, Computer Associates' Simply Money, or Block Financial's Managing Your Money.

The industry's early home banking products were primitive at best, frustrating many of their would-be customers. But so were the early word processing programs. Controlled by obscure keyboard commands that users had to either memorize or commit to elaborate "cheat sheets," word processing programs were neither easy nor fun to use. But they soon evolved with the help of color screens, graphical user interfaces, and instant help keys into simpler, more colorful, even entertaining tools to get the work or writing done. So it will be with electronic banking. The personal financial manager will provide the same boost to electronic banking that the graphical user interface did for the adoption and use of PCs.

The growth of electronic mail has also skyrocketed recently, illustrated best by the growth of Internet e-mail addresses, which now number as many as 35 million and are growing at a rate as high as one million per month. Electronic mail, unlike a fax, wastes no paper, uses no smelly chemicals, and best of all, information sent need not be transcribed for processing but can be integrated immediately with other information, or enhanced and returned to the sender, or instantly forwarded to multiple parties. More and more companies are now offering internal e-mail in conjunction with one of the on-line services or on the Internet itself.

With annual subscriber growth running in the 30% to $40% range, the on- line services are in the beginning stages of a meaningful growth cycle and are now reaching mainstream consumers. These consumers are growing comfortable with communicating on-line electronically, and are browsing for other services of interest, be they shopping, entertainment, or banking.

All new financial services technologies move through an adoption curve from prototype to widespread usage. Automated teller machines were prototyped in 1966. Banks didn't begin installing and using them until 1976, and it wasn't until 10 years later that meaningful demand for ATMs was generated, primarily through the baby boomers. By 1996, ATMs will be the delivery channel of choice for most routine banking transactions. The supply of ATMs has created the demand for, and even dependence on, the ATM as a distribution channel.

Electronic banking should be no different. The first home banking product was prototyped in 1975. Major banks started offering the service in 1985, but captured only a market of computer nerds. By 1996, many of the 50 million consumers with computers will be looking for an ATM-like service they can access from the comfort of their homes. And by 2006, it will become the delivery channel of choice for this market.

Electronic channels - the 85 million PCs, together with 140 million phone lines and 24 million cellular connections, plus the 192 million televisions in 100 million U.S. households - offer bank customers the opportunity to realize a level of added value that could never be obtained through the 200,000 outlets which comprise the existing proprietary, brick and mortar, paper-based and staff-based delivery system. The electronic infostructure allows bank customers to bank anywhere, at any time, and also to access and manipulate information in specific and meaningful ways.

Banks' traditional competitive advantage over nonbanks has been their proximity to customers through branches and proprietary access to the payment system. But location-based advantage is being superseded by access advantage: access to service, to information, and to interpretation.

A multichannel strategy must be pursued in order to maximize all three of these access points. Banks need to view themselves as destinations on the information superhighway, opening multiple avenues to their service, whether it be through the phone, PC, personal financial manager, or interactive television. Electronic access and Reigle-Neal challenge the bank to think not in local, parochial terms, but rather in national - even global - terms in providing their services.

Within the next five to 10 years, Riegle-Neal is likely to have consequences far different - and far greater - than its authors intended, its advocates hoped, or its critics feared. Physical branch network acquisitions made possible by Riegle-Neal could turn out to be a fatal distraction for banks trying to build a national delivery franchise. While money-center and regional banks pick and choose among their smaller brethren, and while independent bankers urge state lawmakers to "opt out" of interstate banking, they all ignore - at their peril - the much greater competitive threat posed by those firms now developing a national electronic infostructure and positioning themselves to be the "banks" of the 21st century.

Still, banks are in an excellent position to leverage their understanding of retail and wholesale distribution strategies by positioning themselves for electronic access. However, because access to electronic channels requires heavy dependence on nonbanks and outside service providers, banks must develop a cohesive electronic banking strategy in order to know which alternatives, third parties, and interweaving alliances will add the most value to their target market.

There are typically 10 steps needed to update a bank's overall distribution plan for new channels and develop a banking strategy:

* Hold a project planning meeting.

* Define the bank's current situation.

* Assess the competitive environment.

* Analyze emerging electronic delivery channels.

* Evaluate potential service providers and alliance partners.

* Profile the electronic consumer.

* Correlate channel, supplier, and customer segments.

* Prepare the proof of concept and business case.

* Share conclusions, gain consensus, and define strategy.

* Mobilize to implement.

Following these steps is key to understanding which channels will access the most profitable customer segments and what outside organizational dependencies are created through those channels.

One of my clients concluded after completing this process that pursuing electronic distribution channels was like "opening a new bank." This client correctly identified the real opportunity of electronic banking, the change to not only win bank market share from nonbanks but to also gain access to new markets and new customers with a suite of value-added, information- based products and services. Electronic channels combined with Riegle-Neal will provide banking without boundaries.

is a senior manger in KPMG Peat Marwick's financial services consulting practice in Los Angeles. Mr. Crone can be reached by electronic mail via the Internet at:

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