Banks spent nearly $9 billion on telecommunications technology in 1997. With a string of mergers shrinking the number of providers, banks may be facing more cost pressure.
Within the last eight months SBC Communications Inc. announced plans to acquire Ameritech Corp. and Worldcom Inc. did the same with MCI Communications Corp. And last year SBC bought Pacific Telesis Group and Bell Atlantic bought Nynex.
The telecom mergers "are not unlike the firestorm sweeping through the banking industry," said Don Van Doren, president of Vanguard Communications of Morris Plains, N.J. "We're clearly moving toward an oligopoly," he stated.
The number of regional Bell operating companies is on its way to four from an original seven, and pressure is on big phone companies like AT&T Corp. and GTE Corp. to get even bigger.
It seems like an unintended result of the Telecommunications Act of 1996, designed to deregulate the $200 billion industry and induce local- market competition among regional Bells, long-distance carriers, and cable operators.
Should banks expect higher telecommunications costs as a result? Already banks spend $3.8 billion-about half of their $7.7 billion operating budgets-on external expenses such as long distance and local line services, private leased line services, network management outsourcing and professional services, according to Mentis Corp., Durham, N.C.
They invest nearly $1 billion more on new telecommunications systems, hardware, and software.
Telecom investments are increasingly important to banks as they upgrade their networks to take full advantage of Internet and intranet technologies, self-service channels, and multimedia applications.
"The optimists say mergers could open up the market to competitive access providers, which is of benefit to banks because they provide faster access," said Mr. Van Doren. "The pessimist's view is that competition in putting together monopolies doesn't help too much. A concern would be that it delays the implementation of aggressive, competitive capabilities by the regional Bell operating companies."
He would prefer to see the regional Bells "stick to their knitting" and concentrate on providing better Internet access and network services at the local level. He said innovation is driven not by offering a cheaper service, but by introducing new kinds of products and services.
James Moore, president of Mentis, said it would be good news if banks ended up with fewer vendor relationships to manage. "Service will transcend state boundaries and require the telcos to provide a ubiquitous level of service," he said.
In the most recent deal, for example, SBC would emerge as the largest local telephone company in the United States, surpassing Bell Atlantic Corp.
The resulting "more seamless network will ensure good integration of switches and network components to reconcile billing and get a common cost accounting," said Mr. Moore. He added that it will also increase pressure on virtual private networks and long distance companies to provide competitive rates.
In the long term, however, "it has the potential to move toward a monopolistic situation," he warned. "Whoever gets left out will have the competitive disadvantage of not being able to play to the large national banks. It can drive the competition out and prices up."
Allan Tumolillo, chief operating officer of Probe Research Inc. in Cedar Knolls, N.J., said mergers as a rule undermine competition and in turn stifle innovation.
MFS Communications of Omaha, which ran high-speed fiber-optic lines directly into downtown office buildings, was acquired by WorldCom two years ago. Meanwhile, AT&T acquired Teleport Communications Group, a provider of local communications services, last January.
"The service from the telcos is not as flashy as from MFS and others," said Mr. Tumolillo.
Tumolillo called the future "increasingly bleak" now that the number of regional Bell companies has declined. "Who will provide independent network services to banks?"