Like all good parties, the fun and excitement around the Internet economy has turned into a bit of a hangover. Suddenly, the banking industry finds it must deal with the realities of how the new technologies can help them compete in a dramatically changing environment. Banks are having to deal with shrinking margins, increasing competition, legislative changes and very old core-processing technology. On top of that, banks must figure out how to meet demand for Internet-based access and products. As a result, financial institutions must rethink the ways they do business.

While the bloom has definitely worn off the Internet, a quiet boom is occurring beneath the bust. While stock prices have tumbled for Internet pure-plays (the dot-coms), the use of the Internet continues to grow. Most studies show increased usage in all categories of the Internet, including the number of users and the number of people conducting financial transactions on line.

Additionally, the TowerGroup recently reported that total information technology spending for the financial services industry is expected to exceed $75 billion in 2001, and that it will be the top area of spending for the financial services sector.

Debates are raging about the true benefits of the Internet channel for financial institutions. Some of the issues include whether the Internet helps reduce costs, retain and grow deposits and improve service. Other issues include whether the Internet helps banks expand into brokerage and insurance, and even whether banks should sponsor shopping networks.

Many of these technology applications fit well into a bank's strategic direction as it tries to navigate today's challenging waters. While each financial institution is unique and should be evaluated in the context of the markets and constituents it serves, the following steps may assist in determining which Internet strategies are best for a particular financial institution:

Internet strategy should follow business strategy. The first step in a technology decision is to be clear on what the bank's business strategy is. Key strategic points include what products and services the bank will offer, the markets it will serve, what its core competencies will be, what the value proposition will be for the markets they serve, and where growth will come from. A bank should view the Internet as an enabling tool to help meet the overall goals of the institution, not the other way around.

Internet strategy should reinforce brand. A bank's Internet strategy and technology platform should reinforce the bank's brand. Most bank brand affinities are centered on service, relationships, value and community. The bank should reinforce its brand and value proposition through all distribution channels including the teller, ATM, voice, and the Internet in a consistent way.

The Internet is a great tool because of its flexibility and the relative low cost of extending the brand and operating efficiency of the institution. As the bank evaluates Internet-based banking, bill payment, cash management, insurance, brokerage, B2B shopping, payroll services, 401k planning, B2C shopping, as well as the many other possibilities, it should evaluate the issues in the context of whether they reinforce the overall brand, the value proposition and the strategy.

Internet strategy should ensure consistent service. Banks should decide how they want to service their customers, and with which products and services. Once decided, they should ensure that a full multi-channel strategy is possible with their existing technology infrastructure. The customer should be able to access and be served consistently through all distribution channels. All information should be accurate, consistent and highly integrated among all distribution points, including the Internet.

Internet strategy should provide better service and allow you to sell more. One of the tremendous strengths of Internet technologies is the ability to provide timely, relevant and filtered information about your customers' history and needs. This can be used to service customers better and to offer products and services that meet the needs of their customers. Any technology product or application suite that is purchased should make this easy and motivate the bank to promote greater usage through incremental revenue streams. Many banks enter into cost-based usage contracts with no new revenue streams, ultimately exacerbating a big problem: lower margin rates.

Internet strategy should include an integrated approach to a complete enabling platform. Many institutions are sold on the concept that an Internet application alone will solve their need to provide better customer service more profitably. However, the limiting factor here is the architecture of many of the platforms that tie into the Internet package. If the core transaction system is inflexible, legacy based and batch, it will severely limit the timeliness and the completeness of the information available. As a result, the institution may be making decisions about how to service customers better or pricing decisions with out-of-date or incomplete information. While the Internet channel is important, it is equally important to ensure that a complete enabling platform is in place to allow the institution to fully realize their investment.

Internet strategy should result in profitability. It seems strange that I would need to mention profitability for a business that operates in a capitalist system. Nevertheless, while there are often investment cycles that must be factored into any Internet technology decision, I'm often struck by how little analysis is done to justify the return on investment for Internet-related purchases. There are several models among vendors today which allow a fixed cost to the additional Internet channel which when combined with new non-interest revenue sources from additional products — such as insurance, brokerage, payroll services, B2B buying — provide the appropriate incentive and return on the technology investment.

LOUIS HERNANDEZ JR. is the chairman and CEO of Open Solutions Inc., which sells e-commerce, Internet banking and core processing software to community banks. The company is based in Glastonbury, CT.


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