Bank CIOs convinced that "huge savings" and "improved operational efficiencies" were terms that wouldn't be found in the same sentence have learned to rethink their IT strategy, thanks to the advent of voice-over Internet protocol. Banks have found that VoIP, which is being rapidly adopted by mid-sized and small banks, is akin to replacing their tin-can telephones with powerful new models that promise to dramatically change the way they do business in the next decade. Think Jetsons, not Flintstones.
Instead of circuit-switched networks, sound waves of voice calls can be digitized and divided into data packets before being routed over a data network. The upside is profound: huge telecommunications savings, increased bandwidth for movement of larger pieces of data, more flexibility for mobile workforces, more security for disaster-recovery and business-continuity backup systems, more CRM capabilities, and more options for in-house training with video and other applications.
Susan Cournoyer, a principal analyst at Gartner Inc., predicts VoIP will be "inevitable by 2008 in 70 percent of businesses." The largest adopters have been education, with about 35 percent of the total market, and health care, with about 16 percent. Financial services represents less than 16 percent, says Ronald Gruia, program leader for enterprise communications solutions for analyst Frost & Sullivan in Toronto. Sellers of Internet-telephony gear include Cisco Systems, Avaya Inc. and Mitel Networks.
So far, the fastest adopters in the financial industry are small and mid-sized banks, Cournoyer says. "Small to mid-sized banks know that in order to compete with the large banks, they need to focus on the customer experience," she says. "The large banks are more focused on analytics and know more in a data-oriented case what their customers want. Mid-sized banks are focused on tangible contact points with their customers, like the branches and contact centers."
Banks have been cautious for a reason, says Jason Boutwell, senior account executive at Mitel, who notes that the technology had to overcome a nasty reputation for unreliability, which it has accomplished. "There's a lot more at stake for a bank than your local dental office or a network of retailers," he says. "When you're in a financial services company, the only differentiator you have is the relationship with your customers. If you have something that prevents that, you are at risk of losing that."
Although the technology has been in its infancy for several years, it is now heading for full-blown adoption in financial services, with claims that it can shave up to 50 percent off banks' telecommunications bills, says Nick Lippis, president of Lippis Enterprises, a telecommunications consulting firm. "We're finally at a point where the technology is mature enough that we can quantify its benefits. You can point now to different companies that have done this and are showing the way."
Anthony S. Kleckner, director and practice leader for financial service at Avaya, says it's only a matter of time before the entire industry is run on VoIP. "A year ago it was, 'Should I go to VoIP?' he says. "This year, the question is: 'How would I do it?' But seeing is believing. Few wanted to be pioneers."
One of those pioneers is SouthTrust Bank, the Birmingham, AL-based regional with more than $53 billion in assets that has 12,000 employees and more than 700 branches across Alabama, Florida, Georgia, Mississippi, North Carolina, South Carolina, Tennessee and Texas. Wachovia agreed to acquire SouthTrust last month in a $14.3 billion deal. SouthTrust is saving more than $5 million annually in telecommunications expenses and other costs, thanks to a recently completed replacement of its patchwork time-division multiplexing phone system with VoIP from Cisco Systems. The crossover-believed to be one the largest to date in the U.S.-was no easy task, says Stan Adams, SouthTrust's group vp of network services. But by the end of 2003, nearly 10,000 VoIP phones were on-line; only about 10 branches still need to be transferred, he says.
Cost reductions include savings of 20 percent annually in local and frame-relay circuits; 51.3 percent in moves, adds, and changes; 93.9 percent in conference call charges; and 38.4 percent in long-distance charges. In addition, the bank expects that it will reduce overall voice and data systems maintenance costs by about 15.4 percent. These savings-on seven million voice calls monthly-are expected to continue, even if the anticipated merger of SouthTrust and Wachovia passes all regulatory hurdles and is consummated by the end of 2004, as expected.
The bank, which had been weighing whether to do an enormous replacement of its existing voice and data networks, tiptoed into the VoIP pond, however, by creating three pilot projects in 2000. "Early on, we found bugs in the system, but we worked them out," Adams says. "We ended up changing our design from what we wanted, but we actually found ways to make it more efficient." Those pilots were key in convincing management the project was worthwhile, says Adams, who pressed for the switch to Cisco for "many, many months" before getting his way. He has no regrets. "We saw Check 21 and check imaging and other applications we would need coming down the road," he says. "We knew we needed a higher bandwidth." The toughest snag, he says, was changing phone carriers, after BellSouth "dragged their feet as much as possible" on whether it would support the bank's new VoIP system. So the bank found a carrier that would: AT&T.
The bank realized a huge benefit it hadn't even anticipated: better business-continuity planning. "Disaster recovery is the biggest benefit we didn't realize we'd get," says Adams, who notes the bank has already begun building a secondary headquarters in Atlanta. "If we lost our central processing center in Birmingham, we can send everything to Atlanta. We won't ever be without voice mail or voice communications." All data circuits can route to different locations so that if any building is damaged or destroyed, data integrity and connectivity isn't compromised.
Peter Simonsen, vp of information services at Arizona State Savings & Credit Union, won't say how much the credit union is saving annually since it began installing its VoIP system from Cisco in its 20 branches in 2001, but he does say the credit union predicts a return on investment after only 16 to 18 months past the completion date. So far, the biggest savings are in the long-distance bill, which now averages $3,500 monthly for the entire credit union. Before implementation, a single branch's bill could top $11,000.
With 330 employees and $880 million in assets, AZSTCU was hyper-sensitive about providing better customer service in a competitive environment. The firm juggled 11 phone systems for voice and myriad 56K lines for data, all of which was handled by a service bureau. Every time the CU added a new member, its service bureau added a fee. Moreover, some employees lacked voice mail and often had to interrupt calls with members to answer other incoming phone calls -and take messages by hand.
The new system has been a true makeover for the credit union, which now offers full Internet banking. It also has increased productivity by 15 to 20 percent at its call center, which handles 30,000 calls per month; has reduced the average member's call to 90 seconds; and has cut turnover dramatically by motivating staff with updated equipment that help them do their jobs better.
"I inherited an antique store, from a technology perspective," says Simonsen, who says AZSTCU's VoIP operation was the first end-to-end system installed in the U.S. "We had so many versions of [Microsoft] Office that you couldn't send attachments to people because you didn't know who had which version. ...But [VoIP] met and exceeded all our business expectations. I would never go back to the separate data/voice networks."
The technology's biggest surprise, says Simonsen, was the efficiency of on-line training for staff through the network's video capabilities, saving AZSTCU travel expense and employee time. The savings also trickled down to the IT division: Though a credit union this size should have an IT staff of 40 to 50 people, AZSTCU's staff includes only nine, he says.
But VoIP does have a downside, though it's minimal. Users and analysts report complications in connecting disparate legacy networks and problems with emergency dialing, since the 911 operator cannot trace the exact location of the caller.
And security remains a huge concern, though compromising data lines isn't something banks want to discuss. "You need strong controls and you have to keep better track of the operations-the changes and modifications-of the network," says Lippis. He predicts banks will probably divert some of their enormous savings from VoIP to keeping their data lines secure. "The security piece is an arms race," he observes. "It requires ongoing and continual planning and an implementation cycle that companies have to get into. You have firewalls, encryption, intrusion detection and prevention systems. ...The bottom line is the industry is moving to implement defenses at different parts of the network. Maybe adding voice on top will hasten the pace in terms of security technology. And that's a good thing."
Many banks are going to have to deal sooner or later with overburdened voice lines, so it's only a matter of time, say analysts. "Voice is a canary in the coal mine," quips Rick Moran, vp of product technology for Cisco Systems. "It's a very narrow bandwidth application, but it's sensitive to delay. ...VoIP can often improve the performance of other applications and network."
But any technology that allows banks to take affordable risks and try out other business options is likely to be embraced. And one of the key features of VoIP is flexibility, says Mitel's Boutwell, who points to an unidentified bank in Brookings, SD, that is using the technology to open a one-person office out of someone's home in rural Cando to determine whether there would be enough customer interest to open a real bank branch there. "This technology is giving them the ability to test the water in rural markets," he says.
How quickly VoIP is adopted in the banking world will be dependent on business acumen-and how fast banks can revise their budgets to make VoIP a priority. "It's not necessarily one killer app, but a killer environment, where many incremental benefits add up to a better customer service experience," points out Cournoyer. Oh yeah, and don't forget those cheap phone calls.
