As banks begin to make major investments in their retail branch technology, a race is shaping up between the two biggest vendors of desktop software.

Despite the dominance that Microsoft Corp. and its Windows operating system long have exercised in the consumer market, International Business Machines Corp. has quietly established a sizable niche with its OS/2 operating system in the retail operations of many of the nation's largest institutions.

About 42% of banks with more than $1 billion in deposits use OS/2 at the server, and 22% use OS/2 at the desktop, according to Mentis Corp., a bank research firm based in Raleigh, N.C.

Only 6% of banks with more than $1 billion in deposits use Microsoft's competing operating system, Windows NT, at the server; 3% use it on the desktop.

NationsBank Corp., Bank of Boston Corp., First Interstate Bancorp, and Huntington Bancshares Inc. are among the institutions using OS/2 to run their branch automation systems.

But in the next two years, IBM is likely to face its stiffest challenge yet in the battle over the branch, since Windows NT seems to be gathering momentum.

Recently, a handful of bank companies, including Citicorp, ABN Amro, and Seafirst Corp., have said they are installing Windows NT in their branches.

In August, Microsoft was expected to release Windows 95, a desktop operating system designed to address some of the complaints users have had about its enterprise computing scheme.

One complaint has been that Windows NT, which is designed to run on a server, requires too much memory to be used at the desktop. Windows 95 is supposed to solve that.

However, observers say it will take the software company a good 12 months to iron out all the bugs and that most banks are likely to hold off on purchases during that period. "To date, we haven't had a choice" other than OS/2, said Rick Sellers, president of Huntington Service Co., the automation arm of Huntington Bancshares.

Huntington installed an OS/2-based retail automation system five years ago - three years before Windows NT was introduced.

Since then, "Windows NT doesn't answer all the questions," Mr. Sellers said this summer. "Microsoft will answer the questions with Windows 95 - but that's not even here yet."

Banks have chosen OS/2 in part because it had the capability, much earlier than the Windows products, to handle multiple tasks simultaneously.

OS/2 was more powerful and efficient on the server than Windows NT's predecessors, and on the desktop, it allowed a branch employee to move from one application to another, from a customer profile to a letter to an interactive training program, without losing his or her place.

"Banks have voted for OS/2 in the first round," said Robert Landry, a consultant at the Tower Group, Wellesley, Mass. "If Microsoft stubs its toe a little bit, OS/2 can get big enough to survive," he said.

But IBM faces serious obstacles.

Because OS/2 has not really caught on with the consumer, few software companies have written programs for the operating system. As Microsoft offers more robust products aimed at corporate networks, that limitation could come back to haunt IBM, experts said.

ABN Amro, the North American unit of the Netherlands bank company, said it recently decided in favor of a Windows NT-based branch system over an OS/2-based system because of the availability of software not related specifically to the branch.

"Either product would have completely satisfied our retail branch requirements," said Betty Vivant, vice president and director of technology planning at ABN Amro North America.

What swung the decision in favor of a Windows NT-based product from Olivetti North America, Spokane, Wash., was that "we knew for sure there would be other Windows NT components we would install - such as systems management and back-office software," Ms. Vivant said. "We weren't 100% sure there were other OS/2 applications we would install."

Some banks may eventually find it easier to tie their branch systems with other systems across the corporation using Windows NT rather than OS/2.

"When we started branch automation three years ago, Windows NT was not a viable option," said Lee Richards, manager of distributed systems at First Interstate Bank. "We did look at it, but it was risky."

First Interstate adopted an OS/2-based retail branch system. However, the rest of the bank is adopting Windows NT as a standard.

In a year or two, "we will look at the branch environment again," Mr. Richards said. "It may be that NT fulfills our requirements."

Windows NT has made substantial headway in winning over the vendors of branch automation software. Most vendors that develop and market branch automation systems - including Olivetti; Alltel Information Services, Little Rock, Ark.; EDS Ampersand, Plano, Tex.; AT&T, Dayton, Ohio; and Unisys Corp., Blue Bell, Pa. - plan to support Windows NT, according to Microsoft.

However, Argo Data Resource Corp., Dallas, one of the first vendors to develop a retail branch system for OS/2, has not committed itself to support Windows NT.

Argo currently has the largest share of the branch automation market, with about 20%, according to the Tower Group.

And yet another of IBM's past advantages may soon melt away. IBM always has had superior connectivity to host systems, said Richard Kearnes, advanced technology manager at Olivetti, which markets branch systems based on Unix and on Windows NT but not on OS/2.

However, he said, Microsoft is rapidly building up its connectivity product offerings. With all the hoopla surrounding the launching of Windows 95 in August, OS/2 can seem like an operating system under siege. A recent report in The New York Times quoted IBM's chief executive, Louis Gerstner, as saying it was "too late" for IBM to go after the desktop market.

Some bankers and vendors contacted for this story cited that report as indicating that IBM might not continue to support OS/2 at the desktop.

"OS/2 is a very robust environment, but you have to wonder: Is it still going to be a product next year?" one banker said.

IBM strenuously denied that Mr. Gerstner was suggesting the company would stop supporting OS/2. "We can't back off from OS/2," said Bob Berini, marketing executive for retail delivery systems for the Charlotte, N.C.- based banking, finance, and securities industry group at IBM.

"In the banking industry alone, in terms of customers and projects well underway, we have a deep commitment," he said. "We can't do anything but go forward and further."

A very few banks, such as Wells Fargo & Co., San Francisco, have opted for branch computers based on the third major operating system, Unix.

And while more banks are installing Unix systems, some observers said the operating system is not generating the same excitement as OS/2 or Windows NT.

In part that is because Unix is perceived as more difficult to write applications for than the other two and in part because bankers favor putting workstations, rather than the terminals used in Unix systems, into their branches.

"Most investments in Unix are protections of existing systems (rather) than real forward-looking decisions," said Richard Stone, director of marketing for standard platforms at Olivetti, which markets a Unix-based branch system.

Seafirst has installed Unix in its branches for teller automation but plans to adopt Windows NT or Windows 95 at the platform. The bank is using Olivetti's Pinnacle Plus, a Unix system, because it enables tellers to perform transactions quickly with its "tight interplay between the terminal and server," said Ken Viafore, senior vice president and manager of information systems at Seafirst.

However, at the platform, the bank wants employees to be able to move from task to task. Seafirst considered OS/2 but decided against it.

"Ours is a long-term strategic decision," said Mr. Viafore. "You have to look at the marketplace, the competitiveness of the vendors, their commitment to their product."

The two companies have different approaches. IBM is marketing its systems expertise and its experience in client/server networks. "IBM can pull a total solution together that goes beyond the operating system," said Mr. Berini, the IBM marketer. "We have practical experience in client/server implementations."

Also, he noted, IBM is conducting a pilot with several financial institutions involving object-oriented programming, in which objects are reusable software coding that can be mixed and matched to create applications.

IBM recently acquired a company, Footprint, with expertise in object- oriented programming. "Right at this moment we are ahead in the game, ahead in the use of objects, the depth with which we're doing this," Mr. Berini said.

IBM will integrate the Lotus Notes workgroup software with branch systems, he said, for example, to let groups of employees have access to loan documents.

Microsoft, meanwhile, stresses its dominance of the software market at large.

"Our strategy is, we offer a single set of platforms that can provide retail branch, home banking, and telephone banking so you can build an application suite" across those delivery channels, said Peter Knook, general manager of industry sales and marketing at Microsoft.

Windows NT also has a Department of Defense-certified security algorithm built into the operating system.

Mr. Knook conceded that sales to the biggest accounts currently are slow, but he pointed to the recent decision by Citicorp to adopt Windows NT across the bank.

Ms. Brokaw is a freelance writer based in San Francisco.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.