Being tops in retail banking used to be about having the best products. Now it is about delivering them in the best ways-or at least experimenting with alternatives.

Links with Internet sites such as and 1-800-Flowers are indicative of how bankers are exploring new ideas in retail marketing and distribution.

The idea may seem simple, but the sheer number of possible pathways to the electronic consumer is mind-boggling. From automated teller machines, to branches, telephones, and the Internet, the proliferation of channels complicates all efforts to provide consistent service, sell more products, determine customers' profitability, and develop pricing strategies.

The challenges-and opportunities-of channel proliferation are causing banks to focus less on the manufacturing of products and more on the distribution.

"Investment dollars are coming forward to the front end of the distribution chain," said Peter J. Carroll, managing director of Oliver, Wyman & Co. "The back end is the commodity, and the front end is where the value is."

"We have emphasized a four-channel approach," said Patrick J. Swanick, vice chairman of KeyCorp, which has given this challenge considerable strategic thought. The channels are the Internet, the call center, branches, and ATMs.

The aim for KeyCorp-as for all retail banks-is to lead customers down the least costly and most profitable route.

To ensure that electronic banking registers just as highly in consumers' minds as do branch-based services, KeyCorp last fall launched an extensive advertising campaign. Print ads in Cleveland, Denver, and Seattle, as well as on-line advertising, tout the ability to gain instant access to up-to- date information, no matter what channel is used.

KeyCorp also emphasizes consultative selling to educate new-account openers about electronic banking options. Customers receive messages about electronic delivery on-line, in statements, and through the call center in a "Did you know ... ?" style, Mr. Swanick said.

As a result "the percentage of branch transactions has dramatically decreased over the past several years," he said. At the same time, customers have developed trust in the new delivery channels, as they have come to expect consistent and updated levels of account information and service.

Hoping to give customers another reason to try its electronic service, KeyCorp has put a link on its Web site to the on-line bookseller Customers are steered toward books related to, say, small business or tax preparation, which have been reviewed by KeyCorp officers.

"We're taking advantage of our trusted adviser status," Mr. Swanick said.

Providing recommended reading lists could be a prelude to even broader forays by banks into new, nontraditional marketing territory.

Linda A. Weber, senior consultant at American Management Systems Inc., sees banks becoming the primary providers of all of a consumer's financial information, including mutual funds, insurance, and stock holdings.

Software agents, accessible through a bank's Web site, could "research" a number of financial sites and relay changes of importance to the bank's Web site, which the consumer presumably would come to rely on as a financial reference point.

"Agents are one way to differentiate on the distribution side," Ms. Weber said.

Increasingly, she said, banks will weigh whether to be distributors or producers of products, and "only the behemoths will do both."

Manufacturers "ultimately will have commodity products," where low cost is key, she said. Distributors, meanwhile, would be able to set prices according to quality and relationships.

"A lot of small banks will survive because they will be high-quality, high-touch distributors of products in a community-oriented way," Ms. Weber said.

Rick Sellers, a partner at Arthur Andersen, said big banks will rely more on outsourcers to help them deal with the issues being raised by having so many channels.

"Banks are building, building, building channels, but they're not decreasing their costs," he said.

The "new kids on the block"-the few, mostly young banks that use the Internet as their primary channel-have a distinct advantage over those bogged down by legacy systems, he said.

Some banks will embark on new beginnings, he predicted, by developing Internet- and telephone-based versions of themselves and outsourcing 60% to 75% of the back-end systems.

"They literally will start over and go into competition against themselves," a tactic he called "much easier" than the "extremely difficult" process of integrating new channels into existing back-office systems.

Such banks would pursue growth in the new direct bank, "eventually folding the old bank" into the system built from scratch to handle multiple electronic channels, he said.

But most banks would not take such a radical approach, seeking instead to become better at managing multiple channels.

"Channel management" has emerged as a new buzzword, in part to find the benefits yet to be realized from Internet strategies. They have not resulted in the low costs that were anticipated, according to research by Oliver Wyman.

At 87% of 50 major U.S. and European banks that Oliver Wyman surveyed, costs actually increased when new channels were added. The 13% of banks that reduced costs were able to lower them by an average of just 3%.

Costs increased because the expectation that customers would exclusively use the lower-cost channels didn't materialize. And because transactions were easier to perform, their total number increased by an average of 25%, also raising costs.

Mr. Carroll recommends that banks price products and services in such a way that customers are encouraged to move to lower-cost channels or end up paying the freight if they use expensive ones.

Such strategies have resulted in a proliferation of accounts with low fees and modest balance requirements, as long as all interactions are electronic. At the same time, however, many banks have slapped monthly fees on low-cost Internet accounts.

"The pricing structure of bank products across all channels is chock- full of false incentives," Mr. Carroll said.

Les Dinkin, formerly of Oliver Wyman and managing principal of NBW Consulting in Stamford, Conn., recommends banks combine the development of rudimentary accounts with more refined research that takes into account customer preferences in fees, access methods, and balance requirements.

"It's some art and some science combined," he said. The guiding principle is that "the channel is an integral component of product design. In many ways, the channel is the bank."

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