Many prognosticators believe that all a bank must do is introduce an aggressive entry on the Internet and the holy grail of banking in the future will be theirs for the taking. However, our experience with many of the world's leading financial services organizations indicates a more sobering reality.

While consumer migration to a more electronic world of banking is a likely eventuality, there is uncertainty on how long it will take - and on which attributes will make the journey as smooth as possible. The key to a successful transition might lie in how successful a bank is today, and how much capital-both financial and psychological-it has invested in the current paradigm. Ironically, the more successful a retail bank is today, the more difficult it might be for it to dominate virtualized banking ten years from now.

History has taught us that the change agents during major shifts in commerce are usually not the dominant players. Why? Because they believe they have too much at stake in the current economic structure and therefore only dabble in new arenas to minimize their risk. That leaves room for the interlopers, such as Microsoft, Intuit, Charles Schwab, and American Express, who have far less invested in the current paradigm-and more to gain from the new order. This dynamic may be exacerbated by today's capital markets players, many of whom adversely view any provocative electronic commerce action and respond by punishing a bank's stock price. As a result, the banks could find themselves in a Catch-22.

If history repeats itself and banks lose the lead to market-savvy nonbanks, traditional banks might have a hard time catching up, especially given the capital base of the likely competition. And while the lack of geographic boundaries in electronic commerce might appear to provide unlimited room for players, it's likely that only a few successful companies will survive. As a result, many banks-especially larger mass- market players-might have no chair to sit on once the music stops.

So how does a bank avoid this scenario? The solution embraces several guiding principles that banks can adopt to successfully and cost effectively navigate through the obstacles of electronic migration:

n Get support from the top -up front. Many banks pursue their electronic commerce initiatives in a piecemeal fashion; this approach often reflects the fragmented support for electronic migration. Electronic commerce initiatives will be successful only if they have the direct support of a CEO who has a clear vision and focus of what the future holds in electronic commerce.

n Offer sufficient delivery options. It's naive to assume that consumers will gladly leap directly from the teller window (the most expensive delivery channel) to the laptop PC (the least expensive). Therefore, a full gamut of interim steps-multitask ATMs, cash back at point-of-sale (POS) networks, call centers, and PC/home banking-is necessary to satisfy customers while keeping the bank's delivery costs as low as possible.

n Closely monitor customer behavior. The attributes and pricing of new delivery channels are still being tested, so the specific migration path consumers will adopt is still unknown. As incentives are applied and alternative delivery channels are expanded, it will be critical to monitor consumer behavior closely. This means committing the resources to develop superior technology systems that can gather and manage information on individual transaction behavior as well as on buyer values, including the critical price points for customers.

n Understand the economics of migration. A comprehensive knowledge of transaction marginal costs, retention rates for closed branches, price sensitivity to migration incentives and scale curves for teller and platform activity will be critical to banks that wish to compete with their nonbank competitors. A keen understanding of the still-formulating economics of electronic commerce will also help.

n Create and align the right incentives for both consumers and line employees. Like a new golf swing, migration will not feel natural for either bank provider or consumer. Constructing the specialized incentives for specific groups of high-value customers will help banks avoid investing too much on segments who will either migrate slowly or be unwilling to pay for the expensive traditional delivery channels.

n Start electronic commerce initiatives immediately. Companies should not overstrategize their electronic commerce options; instead, they need to jump in and get their hands dirty, build upon their experiences and learn from them. And one thing is clear: given the rapidly changing business landscape, no one can afford the traditional sequential model of change. In today's marketplace, the strategy, process reengineering, implementation, and workforce training phases need to happen concurrently. This is a big challenge indeed. Incrementally encouraging consumers to migrate to alternative delivery channels may keep the noise of complaints down and, with it, the bank's visibility. However, it runs the risk of increasing delivery costs because of increased multiple channel usage-a difficult trend to reverse. It also runs the risk of selling off physical real estate no longer needed. Being the last bank to sell that corner branch with the marble facade is not a good position to be in. Moreover, since banks typically pay 25%-plus premiums versus what other retailers pay for space, the downside to a late branch exit could be very high. This all suggests cutting deeper or earlier than external environmental signs would suggest.

Applying these guidelines will be no easy task, and it's one reason why few banks will have the courage (and shareholder support) to adopt them. To succeed, a bank will need a tenacious CEO who has the earnings base to avoid looking over his shoulder. Finally, banks will need to leverage external catalysts-insightful consumer behavioral data, analytical tools, and change agents-to facilitate the transition. This is not the time to pinch pennies. The new nonbank competitors are counting on the banks to take exactly that approach.

James S. Greene is a partner in Andersen Consulting's Financial Services Industry practice.

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