Until the 1980s, banks and other financial institutions competed in an arena confined by regulations. The environment was fairly placid, with few demands for new services from customers. Companies waged a quiet battle for customer loyalty using interest rates, loan packaging, and geographic coverage as their weapons.

If you're a financial marketer, you don't have to be told that those days are long gone.

Thanks to deregulation and rapid innovation in electronic payment systems, banks and others have been plunged into a changing world in which customers can go almost anywhere for what they need, and every week someone is introducing something new service to take your customer away.

Companies in this environment are waging total war to maintain the loyalty of existing customers and to attract new ones. At the same time, technological advances have created challenges in other departments.

For example, the large back-end systems that have run the core of banks' business for years were never built to handle rapid change. New, more flexible client/server systems are now available, but questions arise as to how to take advantage of the benefits of new technology while protecting large investments in legacy mainframes.

The lure of electronic commerce - with its promise of on-line access to sizable markets without having to add staff or build new branches - is another example of how technology is changing the way financial institutions do business. In fact, staffing levels and the number of branch banks are both declining significantly as more customers do business remotely.

Exploiting the opportunities has become a game with very high stakes. The sheer volume of electronic payments is huge. More than $1 trillion in payments is currently transacted over the major global bank card networks each year. And the market is growing substantially.

In January 1997, 13% of payment transactions in the United States were electronic. By 2000, that could reach 20%, according to the American Bankers Association.

In addition to pure volume, the different types of electronic transactions are growing. Smart cards, another aspect of electronic payment, are becoming a major market opportunity. In addition to being used as an extension of the credit-card payment model, smart cards are employed in such applications as identification, transit, health insurance, and government benefits.

Chain Store Age magazine predicts that more than 3.5 billion smart cards will be in use by 2000, including 300 million in China.

This doesn't even include the explosive growth potential for Internet commerce. In 1996, $2.6 billion was transacted over the Internet. By 2001, International Data Corp. says, that number will increase to $220 billion.

This outlook poses two questions to banks and processors or acquirers of electronic transactions: What will be the effect of this growth? And how can they succeed in this new market?

The first effect will be at the merchant countertop. The growth of debit and smart card technology will change merchant payments considerably. Smart card technology will create new ways to maintain customer loyalty.

The use of multiple payment methods will require upgrades to countertop terminals so they can accept all. New types of electronic payment devices will be introduced, not based on payment terminals as we know them today but on such devices as smart phones, personal computers, Personal ATMs, and WebTVs.

Perhaps the biggest effect will occur in the less visible realm of back- end systems. Processing a high volume of electronic payments in many different forms requires rapid, low-cost, low-disruption strategies within the acquiring financial institutions. And that will require a new architecture for back-end systems.

Many banks today are finding the client/server offers the best solution for making the transition from today's mainframes to a more open and flexible environment. This computer architecture links the power of a host to remote clients and runs on industry-standard platforms such as Unix. Applications running on these systems can be changed rapidly, adding new programs as the market requires.

The systems can also be configured to any size as a business grows. Executives at merchant-acquiring companies that have moved to client/server systems say the systems perform better and more cheaply than mainframes.

One such example, Verifone's integrated payment system, takes advantage of the capabilities to accommodate legacy information and manage valued- added services like loyalty programs, stored-value payments, and multiple devices such as cell phones and WebTV.

The characteristics of the deregulated financial services market - incessant change, intense competition, rapid growth - require quick adjustments, and in the banking context, constant innovation and the ability to manage a wide variety of payment methods.

Banks and financial institutions that can keep their costs down and still be able to react quickly will succeed. Client/server is a start.

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