After fomenting revolution in the computer world, Bill Gates is now setting his sights on the banking industry.

Mr. Gates thinks his software juggernaut, Microsoft Corp., is well positioned to shake up how banks operate, much the way it has turned the personal computer market on its ear. A lofty ambition? Sure, but not one to scoff at. For Mr. Gates has a number of things working in his favor.

First, there's his stunning track record. Since he started Microsoft in 1975 with a boyhood pal, the company has become the world's largest software provider, with anticipated revenues of $3 billion this year. It now dominates the PC industry the way International Business Machines Corp. controlled the mainframe computer business in the 1960s.

Second, recent quantum-leap improvements in PC technology have forced bankers to rethink their dependence on mainframe systems for most computing chores. That creates an opening for upstarts like Microsoft.

By one measure, Microsoft already dominates the bank PC market: Of the 805,000 personal computers at banks, 88% run on Microsoft operating systems, according to an American Banker/Ernst & Young survey.

But the next battleground -- and the more crucial one -- is over the operating systems that will link PCs into networks, a process known as "client-server" computing. The goal: to enhance the power of low-cost PCs while reducing reliance on multimillion-dollar mainframes.

"Take this from a former big-iron bigot, there is absolutely a move to client-server" computing in banks, said George DiNardo a technology consultant at Coopers & Lybrand who was formerly Mellon Bank Corp.'s systems chief "And in this area, everybody's watching Microsoft."

But Microsoft is a long way from having a lock on this fledgling market. Over the next decade, it faces stiff competition from other software giants, like Novell Inc., Lotus Development Corp., and Oracle Corp., all of which are fighting for a share of the business. The American Banker will profile these firms in future installments of this series.

|A Big Market'

Microsoft decided to start targeting financial firms in 1991, after years of developing massmarket software that was sold through the broadest of distribution channels.

When asked recently why banking was chosen for Microsoft's first foray into industry-customized software, Mr. Gates replied in his trademark no-nonsense style: "It's a big market."

But then Microsoft's chief executive became more contemplative. "Actually, it's more complicated than that," he said. "Banking has a lot of unique requirements and specialized systems, more so than other industries. We wanted to make sure we were giving bankers the right tools."

Operating System Leader

Technologists say Microsoft's influence lies in its expertise in operating systems, the programs that control a computer's basic functions. MS-DOS, the Microsoft PC operating system that started the company on its meteoric rise, is now being supplanted by Windows, designed to be easier for PC users to understand because it relies on graphic symbols to initiate commands, rather than DOS' often bewildering codes.

Gains by Windows

Like DOS, Windows has become a major money-maker for Microsoft, and the operating system has seen swift adoption in the normally conservative banking industry. Nearly a quarter of a million PCs in financial institutions now run Windows. according to the American Bank/Ernst & Young survey.

There's anecdotal evidence regarding the growing presence of Windows in banks as well. At Chemical Banking Corp., executives recently set up an technology exhibition to show employees the bank's latest systems projects. About half of the demonstrations -- from branch systems to sophisticated workstations that control the bank's huge data centers -- used Windows.

"Windows really improves the productivity of the PC and it makes it easy to integrate applications," said Alfred S. Dominick Jr., executive vice president of retail banking at Boatmen's Bancshares in St. Louis.

Boatmen's is currently using a DOS-based branch automation system from Ampersand Corp., and Mr. Dominick said he is anxious" to install the software company's new Windows-based product.

Making Up

It's noteworthy that Microsoft's focus on banking followed its high-profile divorce from IBM in 1990, when Mr. Gates pulled back from his support of IBM's successor to DOS, called OS/2, in favor of Windows. Some bankers who had made significant investments in OS/2 were angered by Microsoft's turnaround.

"I think Bill Gates realized he owed the industry an explanation. and that we had to communicate an architecture so they could plan for the future," said Bill Anderson, head of Microsoft's industry marketing group, who was hired in 1991 to help patch things up with banks.

But it was more than just diplomacy. "We put a lot of our hard-core technical types to work on banking," Mr. Gates said.

The result was a number of enhancements to Windows designed to help integrate banking-specific hardware like passbook printers and cash dispensers, as well as providing better data communications so Windows workstations could be easily linked with banks' IBM systems.

|Market Power'

Microsoft officials say these moves helped make it easy for banking software developers to work with Windows. At the American Bankers Association annual technology conference in May, more than 100 software firms demonstrated Windows-based products, according to Michael Rawding, Microsoft's financial industry marketing manager.

But some bankers question that rationale. "I don't think Microsoft necessarily leads from a technology standpoint, but they're shrewd businesspeople," said Peter Purcell, senior vice president of application development at First of America Bank Corp., a $17 billion-asset institution based in Kalamazoo, Mich. "They lead through market power."

Mr. Purcell said he also thinks some one-upmanship in the OS/ 2-Windows rivalry is involved. He notes that when IBM last year canceled a high-profile project to create a commercial lending system based on OS/2, Microsoft quickly signed up two of project's third-party developers to move their software to Windows. "I think Gates wants to succeed when IBM has failed," he said.

The NT Factor

While it appears Microsoft has won the battle for the desktop, that addresses only part of the client-server equation. Many bankers are still undecided about what kind of operating systems to use on computer servers, the machines that will hold much of the critical data and process transactions for the PC "clients."

Microsoft hopes to tackle this market with Windows NT. which is expected to be delivered this month after five years of development at a cost of more than $150 million, by far the company's most ambitious project to date.

Windows NT has been called an "industrial strength" operating system, because it offers system and network management capabilities as well as data security features that previously existed only on software for mainframes or midrange systems.

Broad Applicability

The system also has the advantage of running on a wide range of hardware, including PCs using Intel Corp. microprocessors, Digital Equipment Corp. workstations equipped with its new Alpha chip, and even a mainframe-class machine from NCR Corp.

To provide all these capabilities, Windows NT contains 4 million lines of code and requires at least 12 megabytes of a computer's main memory to run, much more than DOS or the original Windows.

Microsoft officials said that while a few desktop PCs in banks may migrate to Windows NT, such as for trader workstations, most installations will be on the more powerful servers.

Many banks are feverishly testing NT, including Citicorp, Bankers Trust New York Corp., and Barclays Bank, although most bankers are loath to talk bout what they want to do with it for competitive reasons.

First of America is looking at client-server systems using Windows NT, OS/2. and the Unix operating system, Mr. Purcell said.

"I may be in the minority as to why we need NT," he said, adding that OS/2 may have a leg up when networking with IBM mainframes is involved. "You don't have to be a rocket scientist to figure out that no one talks to IBM better than IBM." But he was quick to add that Windows will succeed if banking software developers move to it. "If a great application comes along that runs only on NT, then I'll use it."

Need for Vendors

Microsoft officials say they are acutely aware of the need to sign up application software vendors. To meet that goal, Mr. Gates put his Windows NT product manager, Dwayne Walker, in charge of the company's third-party software organization last month.

"We could hire an army of people to write banking applications, but we'd prefer to find the experts already out there and work with them," Mr. Walker said.

He added that while the biggest banks, like Citicorp and Bankers Trust, which write their own applications, will get individualized treatment, Microsoft prefers to let its third-party developers provide most of the technical support for smaller banks.

"If we tried to support everybody ourselves, we'd end up like IBM with tremendous headcount, and nobody, including IBM, can afford to do that anymore."

Microsoft is actively courting banking systems vendors that have software running on midrange and mainframe systems to convert to Windows NT, and officials said they expect a number of major announcements in that area later this year.

Mr. Gates also revealed that his company is involved in talks with some financial institutions regarding the use of the Microsoft Money personal-finance program for home banking systems, although he declined to be more specific.

The company, based in Redmond, Wash., is also making improvements to its own PC application software, such as its popular Excel spreadsheet program, so banks can customize the software for specific banking tasks using what is known a object-oriented" programming.

This technique lets software developers break up programs into pieces that can be rearranged as the need arises, vastly reducing the time it takes to develop new systems.

While bankers appreciate all the whiz-bang technology that Microsoft is bringing to the table, they also seem equally thankful that the company is trying to apply a sense of order to the increasingly chaotic world of computing. "It all boils down to this: How many promised lands are we being led to?" Mr. Purcell said.

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