Bankers have it tough these days. The competition is nimble and hungry, driven by the incessant expansion of Internet connectivity, both in the United States and abroad, and eager to tap a financial services customer universe that is far less technophobic than only a few years ago.
Those customers not only have come to realize that the Net won't bite you; more and more of them apparently have decided that the convenience of handling financial chores online is worth the risk of sending their banking information through cyberspace.
Research published earlier this year by Red Herring, working with marketing firm Ipsos-Reid, found that more than 28 million American adults (or about one in five who have bank accounts) now do at least some of their banking online.
And it was only one year ago, the researchers report, that a strong majority of Americans voiced serious concerns about the security of Internet banking. Today, however, the number who feel that Internet banking is secure matches the number who don't.
While the slow-but-sure customer uptake in Internet banking bodes well for institutions that get it right, precisely the same trend is attracting all those new competitors to financial services. Gartner, the Stamford, CT-based research and consulting firm, notes in a recent report titled Financial Services: Plan for Change, Change for Profit that industry consolidation hasn't softened the competitiveness of the business.
In 1985, says the report's author, Frank Schlier, fewer than three institutions competed for the average banking customer's business. By 2007, though, every bank (practically, if not literally, worldwide) will be able to compete for each customer and relationship.
In this special edition of Bank Technology News, we survey the landscape of online financial services in the United States. You'll find most of the major players here and plenty of small institutions to boot. Those that are missing chose not to share their information with us.
While we conducted this research to provide our readers with a handy reference on individual institutions, the picture it presents in the aggregate is interesting as well.
For example, the huge investments of the money-center banks in their online offerings yield few surprises when tallying up users. But, look closely and you'll discover that a number of smaller institutions clearly are doing something right when it comes to Internet banking, whether through customer education efforts or simply online product and service offerings that are strong enough to attract otherwise hesitant customers to the keyboard.
Jim Springer, senior vice president for the regional bank Internet group at J.P. Morgan Chase & Co., says the online banking market has undergone a fundamental shift during the past year. Those institutions that sought to differentiate their Net banking functionality by giving it a separate identity are now bringing it back into their core businesses.
At Morgan Chase, Springer says, we have always viewed the online business as supporting our core business. The New York-based giant now has 1.1 million customers signed up for online banking. We continue to view it as very important, but also as only one channel among several that our customers can use. We never expected our customers to use it exclusively.
Gartner's Schlier agrees that successful banks in the 21st century will be strong players in both the physical and virtual worlds. For the smaller institutions, however, the virtual world may be the more level playing field.
That's something we work on around here a lot, Schlier says. How are companies going to make money in this industry in the future?
For small banks, he says, survival will depend on giving the big guys a run for their money; and the Internet is the track on which that race will be run.
The large institutions have economies of scale, Schlier says. To compete with them, you're going to have to have economies of access...bringing the online customer all the products and services that the big guys do.
This past spring, online banking vendor Brokat Technologies Inc. observed in a white paper that most financial institutions rushed to the Net to keep up with their industry peers. Early solutions, the sponsored paper declares, were set up to establish an Internet presence quickly and tended to be tactical in nature. In the early 21st century, a challenging economic environment notwithstanding, new evaluations (of online banking) are emphasizing more strategic issues.
Naturally, the widespread rush to the Net made a commodity of the online channel. Internet banking is no longer a competitive advantage, say the consultants of Newton, MA-based Meridien Research, but rather a competitive necessity.
Meridien predicts that the number of regularly active Internet banking users worldwide will grow from the firm's estimate of 23 million today to about 32 million by 2003. Successful banks, a recent report from Meridien suggests, see online banking as just another channel-though an increasingly crucial one.
Springer says Morgan Chase believes that guaranteeing customers' security and privacy remains extremely important as banks pursue their businesses online. It has always been one of our chief concerns, he says, and that's why a lot of people around here are focused on privacy. This strategic imperative plays out not only in the areas of customer attraction and retention, Springer adds, but also because you don't want to solicit customers for products in which they're not interested.
He believes the processing and infrastructure pieces-making sure that (your Internet banking offering) is scaleable and available-is still most important.
And will a slowing economy bring a halt to banks' capital investments in the area of online banking?
No way, says Springer. Ditto Schlier.
We're certainly spending as much as we always have, if not more, the Chase Morgan executive says. If anything, I think (the economic environment) has added focus. It's not going to take away from creativity. Delivering the right product to the right customer, and doing so profitably, is going to require continuing innovation.
For his part, Schlier believes some banks have taken this as a time to slow down, but not the best performers.
There's another set of bankers out there who are saying that this downturn is going to end someday and we want to be ready to come roaring out of it when it does, says the consultant, whose career has focused on banking for about 30 years.
The Information Age has put the consumer in the driver's seat, Schlier adds. Banks that expect to survive will give their customers what they want through every channel, recognizing that the Net enables them to compete for wallet share on the other side of the ocean, not just the other side of the state.
You must have a wide range of ways for your customers to reach you, he says, because, every day, the consumer is becoming more and more in control of the terms of competition.
The growing power of customers to take their business elsewhere will also help reshape banks' current offerings, says Schlier, citing online bill presentment and payment as a ready example.
One of the biggest problems I see with bill payment is that the customer has to do something, he says. You're asking people to go out and do the coordination necessary between their power company and their bank. Why can't I set all that up at the time I set up my checking account?
Although Internet banking is among the most visible applications of technology within the financial services industry, Schlier believes IT has only just begun to prove its strategic importance to banking.
With most of the world's money stored as bits in digital computers, he writes in Gartner's recent report, no industry is affected more by IT than the financial services industry...Contrary to conventional wisdom, the information explosion made possible by technology is still in its formative years. The rate and volume of information bombardment will continue to accelerate.
Today, he says, bankers continue to put technology to work primarily on the operational front. In the future, Schlier believes, the strength of IT will be focused on strategic processes.
Once the application of technology to the automation of bank operations reaches its zenith, banks' human resources will be focused almost exclusively on customer-facing activities. Inevitably, the online arena contributes to greater and greater degrees of commoditization among financial service offerings, the consultant says. Consequently, knowledge will be the key differentiator.
Although some experts, such as author Tom Peters, think technology will erase the need for intermediaries altogether, Gartner analysts believe IT will affect banks-intermediaries by definition-somewhat differently than other industries, says Schlier.
We think financial services firms are going to survive by becoming buyers' agents, instead of sellers' agents, he says. Banks are going to have to change from an 'I can give you the best products' approach to an 'I can bring you the best products' form of organization.
Companies like Charles Schwab already have shown the power of the Internet to attract customers, Schlier says, in large part by offering other companies' products and services as a sales agent.
Banks' natural resistance to such a strategy is breaking down, of necessity, Schlier says, and the cracks are nowhere more visible than in cyberspace.
