IN THE PAST TWO years, Americans have been inundated with the wonders the socalled information highway supposedly will bring to their doorsteps. From interactive media and video communications to telebanking, the message promises technology that will permit consumers to conduct their everyday affairs without ever leaving home.
Even though this is logistitally, technologically, and economically miles away from reality, questions about how this technology will affect the banking industry am already being addressed.
As banking examines its position along the information highway, there are many opportunities for expanding customer products and services. At the same time, banking's role may be substantially transformed. Banks will feel the effects of an information highway in several key areas.
First and foremost, competition from nonbanks will be even greater. The information highway opens up the opportunity for mutual fund companies, insurance companies, and other financial services firms to enter the financial marketplace at a competitive level never before faced by banks. And they will be able to do so from any location, without boundaries such as state legislation and other restrictions like those that have kept banking operations tightly concentrated within geographical borders.
Few industries are as stringently regulated as banking. In order to deliver
services to customers, banks are mandated by law to have a physical presence in those markets. Banks have invested heavily in infrastructure such as branches, back office operations, and delivery functions. It seems unfair that banks must compete so aggressively with institutions that are not as regulated or restricted.
But banks have a secret weapon to counter these attacks - information! Institutions that have the ability to access and analyze customer information will be in an excellent position to deliver products and services tailored to specific customer needs. This puts a premium on a "total" customer relationship, which involves services that address all of a customer's needs.
Developing and electronically delivering personalized and custom products is an emerging technology, but one m which banks can excel. This is a promising strategy that banks must aggressively pursue if they are to meet the challenges of an increasingly crowded marketplace.
The information highway will have many entry points, depending on customer needs and requirements. Services such as electronic data interchange, automated teller machine networks, point of sale, debit card, and automated clearing house have all made inroads.
Pay-by-phone represents one of the first attempts at home banking, but efforts at delivering services electronically have been largely disjointed. Unless future technological advances produce a medium capable of transmitting the vast amount of information necessary, these electronic services will continue to be delivered ad-hoc via ATM, clearing house, and faxbased conduits.
Some banks provide loans by phone, 24 hours a day. This requires having personnel available to transcribe information into a system that can be reviewed and approved by a loan officer at a later time. This type of service has enjoyed limited success in the marketplace, but adds another product delivery vehicle to bricks and mortar.
Even with extended banking hours and supermarket branches, banks are still inconvenient for some customers. Customers have countered this inconvenience by accessing their accounts via ATM networks to withdraw cash, transfer funds, and obtain balance information. System limitations have, however, limited customers' transaction capabilities. Even as some companies are attempting to expand ATM services, concern is mounting over the possibility of long lines and security problems for a machine designed primarily for obtaining cash.
Activities such as corporate lending and trust services will continue to require traditional, physical sites, and really don't lend themselves entirely to remote electronic access.
In order to provide fully electronic services, banks will need to be interactive. However, this technology remains undeliverable for the foreseeable future, as the amount of information necessary for both voice and video communication cannot be carried by existing networks. Pilot projects are currently under way, such as one in Orlando where homes are wired for services on demand.
Banks must exercise judgment and caution when investing in new technologies. Entry costs in equipment, software, and hardware will be steep.
In the beginning, interactive telebanking may prove affordable only for the largest financial institutions followed by large service bureaus. Community banks will not be far behind, because they will be able to tie into service bureaus and networks.
One of the early products will be image processing, now in test sites in several cities throughout North America. An individual sitting at home in front of the television set will be able to review his or her entire banking activities including images of checks paid on his account, copies of loans, mortgage and insurance documents, and transactions.
Vehicle and home loans will be expedited. There are systems today that are capable of automatically requesting a credit report, performing credit scoring, and giving preliminary approval for specified loan amounts. Preapproval on installment and mortgage loans will be a reality within the near future.
In the same context why not sell or purchase stocks, bonds, and annuities and automatically debit the purchase price from an account? Virtually any transaction that can be performed at the bank - except cash transactions - could be done from home. There is no physical or technical information that would preclude someone in an easy chair from opening a new account, handling loan transactions, or making any kind of payment.
Electronic banking will be the major impetus in eliminating checks. Electronic funds transfer will eventually replace personal checks as the preferred source for transactions. Check volumes continue to decline on an annual basis. Just as point of sale increases in image and popularity level at the retail level, financial transaction services in our homes will eventually move consumers toward a true electronic environment.
Customers will be able to order services by voice, and institutions will be able to identify customer voice patterns. If this sounds like futuristic, spaceage predictions, just look at the new TV commercials being run by American Telephone & Telegraph Co.
Security is an issue on the information highway. How will banks be able to determine if the individuals they are dealing with electronically are indeed the individuals they claim to be? With so much information available about customers, and so many electronic transactions being conducted, how will consumer confidence in electronic banking be affected? How do banks ensure that security is properly established and maintained in controlling assets?
In the past, the banking industry has constructed elaborate controls and operational security measures for wire and other electronic funds transfers. So far, little has been done in the way of legislation or operations to address these security concerns.
Privacy and security eventually will be satisfactorily addressed, but this will limit the amount of marketing information that can be accumulated on individuals conducting transactions. The banker will be faced with providing customer security, while also trying to build a marketing data base that identifies opportunities for cross-selling products.
The possibilities and potential the information highway holds for the banking industry are truly staggering. It's easy to envision a world where a personal computer connected to a television set enables a user to open a new account with a bank, preview service charges and marketing information, prequalify for a mortgage or car loans, and conduct banking transactions without leaving home.
However, this will require vision, judgment, and more than a few years of technological advancements. But it's not too early to begin determining where you want to fit along the information highway.