Banking has entered a new era, with cyberspace as its frontier.
At first the Internet was perceived as an end-of-the-century gold rush that heralded the irrelevance of the Old Economy rules. However, the shutdown of a large number of dot-com companies since April 2000 suggests that the Internet has not quite changed the fundamental laws of business success.
Even when companies are driven by great ideas, profits matter at the end of the day.
Let us examine the fundamental principles for developing a consistent strategy in an increasingly online world.
We must remember that the ultimate goal of an Internet banking strategy is to integrate the Internet and its applications with the existing back-office processing and systems in a real-time, direct-access computing and wireless environment.
First and foremost, the budgeting of Internet strategy dollars must be based on the corporation's strategic focus and on broader corporate initiatives. Money must be invested in areas where a true competitive edge can be achieved, without aping the strategies of megabanks.
To boost productivity and enhance a lean banking strategy, banks must reinvent the back-office systems and processes, like account openings, by integrating Internet applications into them. Our research shows that the typical cost for integrating technology into the back office is up to 2% of assets, or 12% to 16% of noninterest expenses.
The best way to minimize system glitches and ensure timely technology enhancements is to forge partnerships with the bank's core system vendors and to outsource applications to quality, cost-effective service providers.
Another key element for executing well and earning consistent profits is to develop and nurture a cadre of dedicated, well-trained, highly skilled employees who are excellent technology users.
Though Web banking initially should be a defensive move rather than one for immediate profits, we will learn from customers how to squeeze out costs while improving services, as well as how to maintain staff at current levels even with increases in volume.
E-banking is a great equalizer - another important plus for midsize banks. It reduces the advantages of large banks - scale, brand, technology, geographic reach, etc. - and it helps smaller banks broaden their markets and retain the best customers.
Operating effectiveness can be truly enhanced when the Internet is coupled with a well-planned and designed intranet system that provides a 360-degree view of each customer's behavior and ample opportunities to cross-sell other services. The intranet will also help a bank track customer sales and assess the performance of its contact people.
Another crucial strategy for retaining existing customers and attracting new ones is to guarantee that their privacy will not be breached and that they will not be held liable for fraudulent claims.
In the long run, to survive in the New Economy, institutions must also do the traditional things well, like managing growth, risk, customer service, and fulfillment infrastructure, and attracting the right talent.
Above all, let us not forget that a bank is still a trusted third party, unlike high-tech firms and nonfinancial companies. The challenge, then, is to capitalize on this special status.
The future belongs to banks that are smart, nimble, and entrepreneurial. These banks will offer customers something truly wonderful and unique. They will not depend on weak or uninformed customers for their profits, nor will they capitalize on local monopolies or price discriminations.
Internet banking applications are continually evolving. Among the current commercial applications: access to account information; transaction execution; cash management; electronic bill payments to anybody, anywhere; credit scoring for small-business loans of up to $250,000; letters of credit; trade finance; international wire transfers; foreign exchange; payroll services; and direct deposit.
E-procurement for the bank and its customers could cut costs as much as 20%. Examples of other emerging applications include interbank funds transfers, e-mail bill payment, and customized e-mail alerts about pending loan payments and deposit levels that drop below certain minimums.
Current retail applications include access to account information, transaction execution, electronic bill payment, stop payments, third-party financial advisory services, automated home mortgage financing, e-mail alerts, and interbank transfers.
Loan applications and payments have proven to be more Web-adaptable than other business-to-consumer retail services, since they do not require the usual order fulfillment infrastructure, such as storage, inventory control, and returned goods. And soon any retail transaction that can be executed in a branch, except getting cash, will be available online.
When evaluating an Internet banking strategy, an institution must analyze the pros and cons of its focus, product offerings, marketing, customer service, and back-office processes. The Internet should be approached with the goal of learning rather than an expectation of immediate profit. The strategy must be broad-based, but it must be carried out incrementally and reflect the creativity and genius of management.
The initial online support staff should include operations center and fulfillment representatives, a Web site coordinator, a business-savvy Web site writer, and a marketing manager. More employees should be hired as volume rises.
High marketing costs are required to attract and retain customers. These costs, plus high deposit and preferred loan rates, lead to thin margins. It is important to recoup these costs by cross-selling other services online, because the transaction costs are lower: 4 cents versus $1.44 for tellers.
Because of the declining margins in an increasingly online environment, operating efficiencies and expense control are absolute musts.
Customers typically prefer a concrete place to resolve problems. Charles Schwab's experience shows that 70% of its customers open new accounts at a branch, though 80% of their transactions are done electronically.
We must also make high-tech more high-touch. John Naisbitt suggests that we embrace only those technologies that preserve our humanness, and reject those that intrude on it. He further states that we must know when to plug in and when to unplug, since the Internet will not teach us the value of human contact.
As discussed earlier, a focused business plan is essential, and it must include the decision to serve either a vertical market, which focuses on a single or a related group of services for a niche audience, or a horizontal market, which offers full services akin to a full-service bank.
Commodity bank services can be easily Web-enabled. Those that are not should be modified to include personalized services, as in commercial lending.
Above all, successful Internet banks will always do what is right for the customer, online or offline.
Mr. Thamara is the principal of FSIC Associates, a bank consulting and research firm in North Andover, Mass., and the author of "Banker's Guide to New Growth Opportunities."
