Half a decade ago, when many bankers were reeling from failures in home banking services, a few hardy souls in the Pacific Northwest decided to place their bets on a new wave in personal computing. Deep within U.S. Bancorp in Portland, Ore., Linda Parker seized on the PC as a key "access technology" for the future. But rather than trying to go it alone, as was the tendency among major banks, U.S. Bancorp teamed with Microsoft Corp., which had been looking for new outlets for its newly created Money personal finance software. Microsoft's support eased the path both technologically and financially. "The systems development cost is very low, and that would be true for any bank as a result of partnering with a technology company," said Ms. Parker, now senior vice president and manager of emerging delivery services. "If you're going to have a first base coach, (Microsoft) would be your choice," said Phoebe Simpson, an analyst with Jupiter Communications Co., a New York-based research firm. And so was born one of the most pivotal and influential and at times controversial inter-industry partnerships in financial services. But now the bank and the software company are going it one better. U.S. Bancorp is using Microsoft's Internet development tools, code-named "Blackbird," to build a completely network-based bank branch. The project, unveiled at the Bank Administration Institute's Retail Delivery Conference in December, caught the attention of industry onlookers and marked an important next step in electronic banking services. It goes beyond simply using software as a pipeline to basic ATM-like services. Instead, it aspires to make a full-service branch available in the home through the PC including the option of a live teller through two-way, full-motion video giving customers access to everything "except maybe safe deposit boxes," Ms. Parker joked. Customers would enter the on-line bank through an Internet browser. They then would be able to apply for and check various accounts (not just basic savings and checking), download cash and make deposits. In this model, Microsoft executives have said, the personal finance software would serve as no more than a "filing cabinet" for financial information. "The vision is that the customer would be able to do everything on-line that they can now do in a branch," Ms. Parker said. "And that's much broader than what traditionally has been delivered over an automated teller machine or telephone. The PC has much greater capabilities." Indeed, banking over the Internet itself seems to be where the industry is heading. And some are already there. Cardinal Bancshares of Lexington, Ky., set up an entirely "virtual" bank on the Net, Security First Network Bank. In conjunction with its system developer, Five Paces Software Inc., the bank plans to license its security technology to other banks, including investors Wachovia Corp. and Huntington Bancshares Inc. More than 100 financial institutions have already established some sort of beachhead on the Internet's vast World Wide Web. But few Web sites offer more than stale marketing pitches or much in the way of interactivity. More comprehensive offerings like those promised through Security First and U.S. Bank of Oregon could make home banking appeal to more of a mass market, not just the computer-owning sophisticates who use personal finance software like Money and its market-leading rival, Intuit Inc.'s Quicken. "There is a segment of people who like to track things they keep track of their expenses, they make budgets, they monitor their bank balances very closely those are the people using Money and Quicken software," Ms. Parker said. "We believe there's another, larger segment of customers who don't want to track things that closely, but they still have a need to be organized. The virtual branch is a way to do on-line banking, but they don't have to use personal finance software." Richard Comandich, another senior vice president at U.S. Bank in the electronic access area, put it simply: "This is going to dwarf the use of personal finance software." And that's saying a lot, given U.S. Bank's success so far with software- based home banking. More than 7,500 U.S. Bank customers do some amount of banking on-line most through Money, which the bank has been promoting for two years. (Its Quicken service has been available only for a few months.) In a poll of close to 20% of those customers, released in early January, 85% said the service met their expectations, 88% preferred it to more conventional means, and 95% would recommend it to friends. Not too shabby for a service that many banks are still working the kinks out of. Matt Cone, product manager for Microsoft Money, said many banks "still view this as a pilot, whereas U.S. Bank sees this as mainstream." Indeed, U.S. Bank was one of the original three banks with First Chicago Corp. and Michigan National Corp. to test a Money-based banking service three years ago. Last year, U.S. Bank was also the first to announce its intention to offer similar access through Quicken. U.S. Bank is Microsoft's "most visible," if not its closest, banking partner, according to Mr. Cone. Even when bankers cried foul about Microsoft's potential to take electronic customer relationships away from retail banks, U.S. Bank remained one of its staunchest supporters. At the Retail Delivery Conference in Atlanta, Ms. Parker even took the stage with Microsoft chairman Bill Gates, during his keynote speech, to demonstrate the companies' PC system and on-line bank prototype. As Ms. Parker and another Microsoft executive walked the audience through the developments, their presentation underlined the close ties between the bank and the software company. To some industry observers, U.S. Bank and Microsoft may be too close for comfort. "It seems they've thrown themselves full-force at Microsoft's plans," said Ms. Simpson of Jupiter Communications. She said the bank's glowing testimonials hold little water if Microsoft provides their only on-line outlet. "They really need to be wary of not being seen as a Microsoft puppet," she added. Nonetheless, the relationship has provided Microsoft an eager and credible partner, willing to ride the wave of electronic financial services even when it was at low tide. Meanwhile, U.S. Bank has broadened its customer base by establishing the kind of pioneering reputation that plays well in the Northwest, which is also Microsoft's home. Ms. Parker said the bank has spent as much if not more on marketing home banking as it has on the systems to run it. But the road to the virtual branch of the future will be neither smooth nor uncrowded. While many observers were intrigued by the jointly developed virtual branch, at least one analyst was "underwhelmed." Other than spotlighting Microsoft's Blackbird tools before their public release, David Weisman, an analyst with Cambridge, Mass. Research said, Forrester said, "There was nothing new there." With Sun Microsystems Inc.'s Java programming language already sweeping the nascent market for Internet building and being used by a number of banks it may be tough even for Microsoft to craft something truly new and different. Others cautioned that U.S. Bank will have to step a little more lively if it hopes to stay ahead of the competition from other banks. The bank also needs to carry its marketing successes over to profits. "Traditionally (U.S. Bank) has been a leader in retail banking technology," said Tom Brown, a senior analyst with Donaldson, Lufkin, Jenrette, "but that has yet to translate into superior results in retail banking." To the bank's credit, the on-line branch development was only two months along at the time of the conference, according to Ms. Parker. And U.S. Bank executives have become painfully aware of the many "hairy issues" they need to contend with on individual and industry levels, Mr. Comandich said, from regulatory constraints to security costs, systems integration, and fee-setting. "You need to look at incentive pricing," he said. "If banks just build other channels, and customers still use the same old channels and only adjust to the new ones incrementally, then banks are just adding to their costs." U.S. Bank seems to have been beaten to that punch by Citicorp, which had set the tone for incentive pricing by dropping many service fees to its home banking customers. But just like the Internet itself, the business of on-line banking has a long way to go. In sharing the burden, U.S. Bank seems to have made a name for itself, as well as a viable service for its customers, without making costly mistakes. Whether it can sustain its leading-edge position *remains to be seen. Butit would not be a safe bet to count out the bank that was there beforeothers were ready to *start it up.
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