DESPITE A FOCUS IN recent years on retail banking and the profitability of consumer services, many banks continue to invest in technology to better manage and service commercial accounts.

Results of the 1994 American Banker/Tower Group/Andersen Consulting survey of 150 of the top bank holding companies in the United States illustrate that technology, a critical component in wholesale banking, is being used to provide value-added services to corporate clients, supporting the industry's efforts to rely less on credit relationships with commercial customers and shift revenues more toward steady fee income.

Fee Income Rules Wholesale banking objectives

19941 Grow fee income2 Grow by acquisition3 Improve

product/relationship profitability4 Enhance/introduce new products5 Cross-sell existing customers

1997(*)1 Grow fee income2 Improve

product/relationship profitability3 Enhance/introduce new products4 Grow by acquisition5 Cross-sell existing customers

* Projection

Source: American Banker/Tower Croup/Andersen Consulting

The survey notes that over the next several years banks will be focusing on improving the profitability of products and client relationships, and on leveraging existing customer bases through cross-selling.

While the goals are clear, the methods used to attain them seem to be working at cross-purposes, say industry analysts who characterize today's wholesale banking environment as a study in contrasts.

On one hand, says John Shain, president of the Exton, Pa., consulting firm Littlewood, Shain & Co., banks want to sell products and services on a relationship basis: by packaging an array of services in such areas as investment management and credit.

On the other, customers want to buy services like volume transactions and cash management on a commodity basis, at the lowest price.

This constant conflict in the market between buyers and sellers causes a potential for a lot of price erosion, he said.

"There tends to be an over-supply of players chasing a smaller amount of borrowers and users of bank services, and there's not a lot of new business being created," he said.

Hal McIntyre, managing partner of the Summit Group, sees similar conflicting forces at work in securities processing, where commoditization, resulting in cheap, assemblyline services, is competing with customized processing.

These opposing forces are being reconciled through technology. While banks are focusing their efforts on a variety of wholesale areas, including cash management, investment management, and customer profitability, a common thread running through all efforts is an interest in providing more efficient delivery of services by "getting closer to customers," said Mr. Shain. Banks are automating wholesale processes and serving as "electronic gateways" for information.

One example is First Union Corp. in Charlotte, N.C.

Judge W. Fowler, director of systems development at the $72.1 billion-asset institution, said technologies that seem to be of the most interest to commercial customers are networks or communications facilities allowing them to perform certain banking functions on personal computers within their own offices, saving them trips to the bank.

For example, some commercial customers may want to review all presented checks on a daily basis, to check them against the general ledger, thereby circumventing fraud. Currently available systems offer such a capability.

"Our experience has been that distributing functions to customers is very profitable," said Mr. Fowler.

The bank is investing in electronic data interchange, the computer-to-computer transmission of invoices and other documents in standardized formats. The bank plans to develop facilities that will allow a broad range of electronic products and services to be accessible to customers.

Today, most banks use the technology mainly for bill payment, he said, leaving its full potential largely unexploited.

Full-blown EDI, he said, allows you to do a lot more, and focus on specific industries, such as hospitals. For example, insurance claims can be routed electronically between companies, banks, and insurance companies to expedite processing. The same concept could be applied to the routing and acknowledgement of payments and purchase orders.

Mr. Fowler said First Union is committed to building a very large, scalable solution that will meet its data interchange needs for the next 10 years. "We believe we will come to market with a comprehensive, substantive use of EDI within the next one to two years," he said.

In a similar vein, Chase Manhattan Corp. is working to seamlessly share information globally, and make it readily accessible to service customers better, said officials. The bank is aggressively implementing Lotus Notes, a type of software allowing many personal computer users to access and share the same data.

Today, 8,200 Chase employees use the system, said Steven Wolinsky, a senior vice president in the corporate finance operations area. Combined with the global data and voice network, the staff has seamless connectivity around the world, he said.

The $112 billion-asset New York bank also uses a desktop-to-desktop video conferencing and data capture system in its trading and risk management areas, which automates information flow between traders and other Chase units.

PC-based cash management systems, commercial versions of home banking, also give customers an electronic window into bank data. Chase provides clients with a Windows-based cash management system, allowing them to initiate transactions, access information from the bank's computer, and manipulate it locally. Similar systems have been employed by many other large banks.

To increase fee income while providing customers with information, Chicago-based Continental Bank Corp. focuses on investment management. The company, with approximately $22 billion of assets, is scheduled to merge with BankAmerica Corp. later this year. It uses a portfolio manager workstation to provide investment managers with access to real-time quotes, valuation and modeling tools, and other data.

To Dan Cardell, vice president and manager of investment at Continental, the challenge for wholesale banks is competing with nonbanks, which have resources to spend on the latest technology.

First Union's Mr. Fowler agrees that if banks don't provide the service, commercial customers can find plenty of competitors who will.

"In 1980, banks had 60% of the credit market and nonbanks had 40%. Today, nonbanks have 68% and banks have 32%," he said. "Over the last 12 years, the use of credit by commercial customers has grown substantially, but the banking industry's servicing of credit has decreased."

Mr. Fowler believes that, in the next five to ten years, large bank holding companies will either choose to get out of the commercial credit business and become retail oriented, or they will compete with nonbanks head to head. To do this, he said, banks will need to broaden credit line offerings to match those of such competitors as General Electric Capital Corp. and Fidelity Investments, which provide equity offerings, loan syndications, derivatives processing, and other products banks have not historically offered.

But Mr. Fowler sees one big advantage for banks such as First Union.

"One thing separating us from Merrill Lynch or J.P. Morgan is that we have 1,400 branches and we know our customers," he said. "We have products enabling us to compete with nonbanks, and our credibility is higher with customers than Wall Street."

Mr. Cardell agreed that a bank's customer base is a competitive asset. Continental has access to 2,000 corporations around the country by virtue of lending and cash management relationships. Banks must learn to cross-sell to these existing clients to effectively compete against nonbanks, he said.

One way Continental is attempting to cross-sell its customer base is by turning the traditional lender into a relationship manager. Lenders are employed as a first point of contact, and direct customers to product specialists in such areas as investment management, corporate trust, and foreign exchange.

Mr. Cardell said that banks are increasingly moving toward such relationship management and advisory roles.

First Union's Mr. Fowler envisions commercial customers using a single gateway for additional functions, such as modeling, cash flow analysis, and to access research information on an industry or marketplace.

"Whole new product lines will materialize as more connections are made to the commercial enterprise," he said.

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