Andrew Grove, chief executive officer of Intel Corp., wrote in a recent book about moments he called "inflection points" when technological changes undermine existing strategies, making businesses shaky and requiring them to change course.

Banks may be facing such a point today in retail delivery.

Banks spend about half of their noninterest expense - about $75 billion - on retail delivery systems and channels. If these costs are undermined or rendered unnecessary by advanced technology, will not this create a moment of inflection?

Advances in computers and software are creating new applications to produce, service, and deliver retail bank products. Some specific examples are Internet banking, personal financial management software, and consumer E-mail.

There are now at least eight retail banking channels: branches, call centers, mail, automated teller machines, indirect terminals (chiefly for loans), the Internet, remote home banking, and sales kiosks. Each channel exists primarily to capture data about transactions and-or communicate with the consumer.

With four of the five largest-volume channels - branches, call centers, U.S. mail, and indirect - virtually all data entry is done by bank employees. With the newest three, consumers do the data entry.

This fundamental change has major implications for banks' cost base, their user functions, and their industry's structure.

Retail banks process about 100 billion transactions annually, including checks. More than 90% of these transactions begin life with a piece of paper or phone call that requires some type of data entry.

In the long run, if 50% of these transactions could be initiated through electronic channels not owned by banks, an enormous amount of the current cost base could be rooted out.

Of course, new types of cost will be incurred by banks, and therein lies the inflection point. In the transition from one type of cost to another, will some banks lose and some gain? Andy Grove thinks it highly likely.

Why are new costs needed?

New consumer interfaces will be needed since today's interfaces were not designed for consumers. New transaction types will be created. Many transactions will be able to spend their entire lives in electronic form if the requisite completely electronic workflows are created. Some consumers will have electronic data bases or filing systems of their own, which will then need to communicate with the banks' data bases. In short, banks face a new wave of investment for the software and processes to support electronic channels.

We predict about 12 million U.S. households will use home remote banking by 2000. About half of this usage will be via Internet access and half via private networks. But customers will not use this channel exclusively.

People will continue to use multiple channels. Probably less than 5% of today's retail banking transactions will have been diverted to this new channel, and we estimate that 65% of the transactions in the channel will be incremental or new transactions, for example, bill payment instructions.

Previous experience bears out the contention that new channels don't divert as much as they stimulate. People withdraw cash more often from ATMs than they did from tellers. Voice-response units stimulate frequent balance inquiry calls from nervous customers.

The conclusion is that costs will increase in the new home electronic channels long before they decrease in the existing channels.

Can banks charge to reflect channel costs? I believe history would argue against it. With the current exception of (foreign) ATM fees, banks traditionally have not charged for automated channel usage.

Transaction fees never have proven wholly popular. Consumers generally expect that interest rate spreads will cover all costs.

What banks can do, however, is tailor products and pricing much closer to the behavioral profile of narrowly defined customer segments, specifically including channel preferences and usage.

So for example, an Internet banking deposit product might require direct deposit or have other features-restrictions to shape a behavioral pattern that fits the channel's cost structure.

Most banks will be focusing on deposit products. Lending via home channels will be done by banks and nonbanks alike, probably connected to "loan finder" sites that use search engines to locate products the consumer wants. Funds also will be distributed electronically, and we estimate that as many as 40% of all consumer contacts with top U.S. mutual fund firms will occur via PC by 2001.

The dial-up approach will coexist with Internet access. Usage selection and channels will be driven by the consumer. Computer savvy consumers who enjoy financial planning will continue to use personal financial management software to keep household budget and expenditure data; calculate their net worth; prepare tax filings; and interact with deposit, loan, insurance, and investment accounts.

But many people may not wish to carry out these activities. Simpler- to-use PC software that performs simple banking transactions is likely to appear on the market and appeal to the mass market. Web access through a browser is going to be adopted by others.

The barrier to private networks is the difficulty of getting the attention of the consumer, distributing the software, and training the users. The Internet approach should gain share because we believe everybody will eventually have browser software. Since browsers are easy to use, the private network barriers can be circumvented.

How will consumers divide their dual-channel home remote banking usage? Statements and other financial data might be downloaded to the consumer's personal financial management software. That is where they will keep their permanent electronic financial records. Consolidation from the average U.S. household's 6.2 financial providers will occur here.

Meanwhile, balance data or bill payment instructions would be accessible through the Web. The same consumer will be doing both, so banks must provide access to the same account data both ways.

There is a need in the market for a function that provides financial planning and consolidation, making it unnecessary for consumers to do it themselves.

Certain consumers don't have the time, yet may be willing to pay for such a service. Security First Network Bank is planning to offer such a service, called Virtual Financial Management Suite.

Banks will be building Internet capabilities over the next five to 10 years. Web access by banks is now emerging from an experimental phase into one of focused marketing, where accounts will be captured on the Web. During the next two to three years, we believe a window of opportunity will open during which as many as two million to three million customers will shift their accounts.

And by about the year 1999, we believe most retail banks will offer home remote banking so that potential differentiability will decline. Once Internet banking becomes a commodity, offered by all, we suspect most consumers will stay with their existing provider.

Electronic mail is a new technology that offers tremendous scope for changes in the retail delivery arena.

Most banks are not fully invested in this capability and have previously thought of it as an internal service. Yet Internet-based electronic mail is the obvious communications medium of choice for users of home remote banking.

Electronic mail is quick and offers the capability of being preaddressed by the user to an appropriate person or department. Specific data can be incorporated and references made to problems or issues in the data.

Yet banks are going to have to invest in new back-office electronic mail processing software and revised business procedures. E-mail is different from U.S. mail or phone calls. It tends to cover different questions. It may demand responses in minutes or hours and, in some cases, immediately.

Electronic mail is an unformatted, text-based message for which banks currently have no high-volume logging, tracking, or auditing capabilities. Too many bankers today do not even know how to answer an electonic mail message.

At Security First National Bank, E-mail already conveys more than 50% of all customer inquiries. About 30% of Security First's electronic mail concerns "how do I?" questions relating to software, raising the issue of whether banks can effectively answer questions about browsers.

Perhaps they need to screen out such calls, reroute them to browser vendors, or have three-way conference calls. Other E-mail includes messages like "I forgot my password," which require entirely new procedures, policies, and fast-response standards.

Security First was seeing two to four customer inquiries per account per month in the summer - far more than experienced, on average, for conventional banking channels.

Electronic mail is evolving in powerful ways. For example, a new Netscape feature allows "push content capability," meaning that complete Web pages can be delivered to an E-mail address.

Banks would no longer have to wait for consumers to find their Web sites. Uses could include delivering financial news, account balances, statements, or transaction reports, results of inquiries, or even new product news.

The branch channel is banks' most expensive and exists primarily to process paper checks and paper currency.

Both could ultimately be displaced through the advanced technologies of microchip cards and readers, which could be linked to remote home banking.

For example, Verifone's Personal ATM product is aimed at this idea. This technology could be even more of an inflection point, potentially threatening the entire retail branch structure - someday.

There's no doubt banks must go through this transition to a new, home-based, electronic channel. But how fast will change occur?

Internet technology is moving extremely quickly, but consumer behavior changes much more slowly. Use of existing channels, such as ATMs, took decades to build up. Also, how to make money from this new channel? How to prevent investing in incremental transactions or in unneeded infrastructure?

These critical questions occur in every inflection point, and even Andy Grove admits that the decision to change strategy is never easy.

But the important thing is to get started thinking.

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