Here's our list of front-running technologies that are poised to alter the world of banking.
SINCE THE BEGINNING OF TIME, technology has shaped and reshaped the way people live and work. Prom the invention ot the wheel, to the first bow and arrow, the discovery of electricity and wireless communications, and the first computer, every technological development has brought with it new possibilities and challenges.
Banking is no exception. Technological innovations have changed the way bankers perform routine business practices and the way they interact with their customers on a day-to-day or even hour-to-hour basis. A scant 20 years ago, few people had heard of an automated teller machine; today you would be hard pressed to find a financial institution that doesn't offer the convenience of ATM banking, 24 hours a day, seven days a week. But as the convenience of 24-hour banking has become more prevalent, so, too, have the demands for new and better delivery channels. So it should come as no surprise that as 1998 draws to a close, many of the hottest new technologies in banking are tied to the Internet-that sprawling web of computers and communications lines first put together for scientists and academics and now accessible to just about anyone with a computer, a modem, and the desire to "go online."
Opportunities online
To gain a sense of what trends are important in banking today, Bank Director polled bankers, consultants, and service providers on the technologies they consider "hot." Among the top vote getters: electronic bill presentment/bill payment, consumer-oriented Internet banking, and the delivery of cash management and related products to small- and middle-market companies via the Internet.
"The idea of Internet-based services as an alternative to traditional delivery of banking services is the killer app," says Richard Poje, partner, Treasury Strategies, Inc., a cash management consulting firm based in Chicago.
Page Ogden, president and chief executive officer, Britton & Koontz First National Bank, Natchez, Miss., understands firsthand how to get the maximum benefit from the Internet. A $180 million asset bank, Britton & Koontz set itself up as the Internet service provider for Natchez, a city of 20,000 on the Mississippi Delta. As such, the bank provides general access to the Internet for the citizens of Natchez, as well as electronic banking services via the Internet to its retail customer base. In the five years since Britton & Koontz has been in the Internet business, the bank has grown its asset base by $40 million, or about 30%, in what Ogden describes as a "fairly flat economy."
"I look at the Internet as another channel for delivering services to customers; customers increasingly are going to expect to reach us through this channel," Ogden predicts. And even though he, like other Internet mavens, concedes there isn't much money to be made from delivering banking services over the Internet per se, he expects most banks will come to accept the necessity of supporting an Internet delivery channel-or risk losing business. "If you are a banker and you are not developing this channel, in a few years, it will be like [having] a bank without any drive-up windows or an ATM," he says.
Ogden isn't alone in holding this view, even in community banking circles. A survey late last year by Grant Thornton LLP, Chicago, found more than half of the nation's community bankers have included in their five-year plans the creation of some type of Internet presence-enabling consumers to review account information (58% of those polled), using the Internet to market banking services to new customers (57%), and letting customers conduct financial transactions via the Internet (51%).
Many banks also are looking seriously at the Internet as a vehicle for bill presentment and bill payment. Witness the announcement by Citibank this fall that it was buying an interest in the electronic bill presentment venture formed last year by Microsoft and First Data Corp. (The venture, originally dubbed MSFDC, has since been renamed TransPoint.) Don Russo, group vice president for global financial services consulting at Oracle Corp., New York, says Citibank's investment in TransPoint is indicative of a trend on the part of the largest banks to partner with outside firms that can help make Internet-based bill presentment/payment a reality.
"It's also an example of how this venture is committed to working with financial institutions," adds Chuck White, chief executive officer, Home Account Network, a Charleston, S.C. company that sells home banking and electronic commerce solutions to banks. A veteran of First Data who joined Home Account Network earlier this year, White is largely credited with developing the company's electronic bill presentment concept and with putting together the MSFDC venture.
Banks have been offering electronic bill payment services for years. But typically, the services have been electronic on the front end only: Consumers can initiate payment requests electronically, but the actual payments, more often than not, leave the banks in the form of checks with paper lists detailing those customers for whom payments are being sent. It's an expensive proposition for banks that must maintain electronic links to customers while supporting traditional paper payment processes. But if banks can get billers to provide them with electronic versions of the statements they mail consumers, creating electronic links between themselves and billers and extending those links to the consumer market, much of the cost can be eliminated, experts suggest.
White predicts that by 2000, the top 200 billers in the country (utilities, telephone companies, and credit card firms) will be connected to banks via the Internet. "Once the biller connection is established, it's just a matter of getting the consumers on board," he says.
And it's not just consumer bills and payments that can be exchanged between banks and corporations over the Internet. Increasingly, banks are looking to the Internet as a vehicle for delivering cash management services. A survey of top cash management banks conducted earlier this year by Ernst & Young found that 18% provide balance and transaction information to customers via the Internet, up from 5% in 1997; 65% expect to offer information reporting via the Internet by 1999, according to Larry Forman, the E-Y assistant director who conducted the study. And Forman says most of these banks plan to add other services to the Internet delivery list, including transaction initiation.
"You'll see more products being pushed to corporate customers, greater access, updating of software, and a lot of services like that on the Internet channel," predicts Bob Olson, chief administrative officer, Carreker-Antinori, Dallas, a consulting and software firm.
Susan Skerritt, partner, Treasury Strategies, echoes the predictions of many pundits, suggesting that Internet delivery will bust open the market for small business customers, who tend to look for banks that can deliver baskets of services such as credit, cash management, and investments. "The small business market represents incredible opportunities," she adds.
On the other end of the corporate spectrum, Chris Knebel, senior vice president, Advanced Information Resources (AIR), a Del Mar, Calif. software house specializing in wholesale banking applications, expects the Internet will prove useful in the loan syndication process; at first, perhaps, for exchanging documents that might otherwise incur courier fees but, ultimately, to market credit participation to investors. "It's the kind of savings and marketing benefit that, as soon as the technology is widely available, it will be substantially embraced," says Knebel.
Breakthroughs in marketing and operations
While the Internet may be garnering much attention, it is by no means the industry's sole technology focus.
Data warehousing and data mining continue to offer hot developments in banking, an industry with a seemingly insatiable appetite for customer information. Ditto for client/server computing and workflow management tools.
"There's an unbelievable amount of duplication that goes into horizontal work processes in most institutions," notes Knebel of AIR in explaining the appeal of workflow management. In commercial lending, for example, loan information might pass through as many as 15 different software systems supplied by as many vendors. Using sophisticated workflow management software, however, a bank can bridge the gaps between those systems and eliminate costs. "Where the big money is, in terms of cost savings, is in horizontal integration," explains Knebel.
There are also substantial gains to be had from using workflow technologies to integrate and share information throughout different areas of the bank. To get to that point, banks continue to invest in data warehousing and data mining technologies. "Getting their information stores organized with analytical engines is a critical first step for banks to do anything," explains Russo. "What are you going to do with new delivery channels if you don't have anything to tell customers?"
Historically, data warehousing and data mining have required huge investments in sophisticated mainframe-based database systems. As in many other areas of banking, however, client/server technology is chipping away at mainframe computing's hold on the core processing systems that feed data warehouses.
"Client/server is one of the hottest technologies out there," says Larry Angeli, vice president, M&I EastPoint, Bedford, N.H., a subsidiary of lM&I Data Services and service bureau to community banks.
First introduced to banking about 10 years ago as a technology platform supporting branch automation, client/server technology is now taking over many of the core processing functions that had been the province of mainframe legacy systems. The trend is particularly noteworthy in the community bank market, where an investment in a client/server computing architecture supporting a relational database can provide a doublebarreled shotgun approach of data warehousing functionality and faster core processing.
For example, Ogden of Britton & Koontz says his bank's new Windows-based client/server computing system performs end-of-day processing in less than an hour, compared to several hours in the bank's old legacy-based processing environment. And the system incorporates a relational database and expanded memory capabilities that make data warehousing a snap, Ogden notes. The bank's total investment in the system-hardware and software combinedamounted to between $300,000 and $400,000, Ogden estimates.
It may seem a hefty price for a small bank, but Angeli says prices for client/server computing are coming down, while performance leapfrogs. "Client/server price performance is continuing at an increasing rate," he notes, suggesting that a $300,000 investment in a client/server system today delivers three times as much firepower as it did just two years ago.
"Our systems are getting bigger, better, and stronger every year because of client/server," says Angeli. Products that once took his company 30 days or more to develop using mainframe computing technologies now can be developed in less than a week.
A relatively recent trend in client/server technology is what some technology gurus refer to as the "thin client, fat server" configuration. Where thin client/fat server seems to have its greatest appeal is in the world of Internet banking, but experts say it has applications inside the bank as well. "With a thick client, all the complexity is sitting locally on your PC," notes Russo of Oracle, "so if something goes wrong, there's a big problem." Storing the bulk of information on a fat server also supports greater employee mobility, he suggests.
In the world of Internet banking, fat servers make the delivery of products and services a much easier proposition. Some third-party providers of Internet banking services, for example, are using fat servers in place of online, real-time connections to client banks' legacy systems to access historical account information in the customer interaction process.
Susan French, vice president for electronic business banking in the San Francisco offices of American Management Systems, believes the combination of fat servers and thin clients will make it much more affordable for banks to serve small- and middle-market businesses that don't have the staff time or computing power to maintain vast storehouses of banking and financial information on location. Imagine the savings to a bank that, in lieu of sending out CD-ROMs containing software upgrades for 35,000 online customers, used a fat server and the Internet as a vehicle to deliver software upgrades, French offers. "This technology is going to create new markets and new opportunities for small businesses and for the middle market," she predicts.
Everything old Is new again
Rounding out the industry's list of hot technology trends are several items that have resided in the tool chest for some time but are now enjoying newfound attention. Among them: electronic imaging, sophisticated communications technologies (like those that support call center operations and information sharing), and credit scoring systems.
"The industry is getting far more sophisticated in its use of credit scoring," says Diogo Teixeira, president of the Tower Group, Newton, Mass. Rather than simply scoring information to accept or reject a credit applicant, new scoring technologies are being applied by banks to the entire customer relationship, explains Teixeira. He concludes it's not far-fetched to expect banks soon will be able to use these technologies to score every transaction in a credit relationship.
The underlying technologies that are making credit scoring more sophisticated include neural networks and sophisticated decision support systems that take into account a broad array of information about customers and potential customers, not just their use of credit.
French believes the adoption of more sophisticated credit scoring techniques will become paramount as, increasingly, banks begin having more arm's-length relationships with customers.
Imaging is one of those technologies that has been available to banks for years but is only just now enjoying "hot" technology status. Experts say that's because a lot of the investments banks have made over the years in individual imaging applications (for example, document imaging for loan processing, image statements for demand deposit accounts [DDA], and imagebased research and adjustments) now can be leveraged to create more bang for the buck. Also, the cost of archiving images has dropped, which contributes to the business case. Just a few years ago, it might have cost a bank as much as $30 to store images of 1,000 cleared checks on an optical storage jukebox, whereas today it costs almost half that amount, or about $17, according to Mike Palermo, senior solutions consultant with Storage Technology Inc., a Louisville, Colo. company.
The great appeal of imaging, explains Olson, is removing costly paper-handling routines, like those associated with check clearing and processing. "A lot of it comes down to asking the question: `How do I utilize imaging to drive down expenses?"' he says.
Archiving is one way banks are achieving that goal. Take the example of Comerica Bank, Detroit. A $36 billion institution that processes an average 2 million checks a day, Comerica earlier this year shut off all of the microfilm machines that used to snap pictures of checks as they ran through the sorting equipment. Now, it captures electronic images of checks as they enter its processing shop; the images then are stored in a tape silo (about the size of two office cubicles) that Comerica estimates will house up to 300 terabytes of information, or about seven years of accumulated check images, front and back. The new configuration, among other things, offers corporate customers the ability to dial into the bank's archive and view images even before the items are posted to their accounts.
"Archiving is kicking item imaging into gear," says David Medeiros, group director, Tower Group.
When you get right down to it, though, the one overriding factor driving most technology trends in banking today involves faster and cheaper communications technologies.
"Communications will drive everything we do in the future," says John Collins, chief executive officer, Intercept Group, a Norcross, Ga., outsourcing firm.
"Banks need to push more bits of information through the pipe, faster," explains French. As a result, they're focusing more technology dollars on things like high bandwidth communications lines, high-speed routers, and smart modems.
Imaging is a classic example of how these technologies can work to a bank's advantage. Transporting images of checks to client sites requires substantial bandwidth and the ability to move information quickly to end users. "What's the point of capturing an image and leaving it in a database if you can't get it out to the line where it's needed?" asks Rod Scott, global financial industry marketing director, Cisco Systems, San Jose, Calif.
"If a bank fails to address its communications technology needs, it will hurt them everyplace else," Collins says. "Communications technologies make everything else work."
Take call centers. Here, sophisticated communications technologies are a prerequisite for getting the right information into the hands of sales agents, when they need it.
Call centers are also big users of workflow management and automated decisioning technologies, notes Kawika Daguio, payment system technology policy consultant for the American Bankers Association. The idea is to provide a consistent look and feel for the institution, no matter how a customer chooses to interact with the bank, Daguio explains. For that, you need to be able to move information quickly and easily from bank systems to call centers, or wherever the information is needed.
Weaving it all together
In the end, what it all comes down to is an emphasis on integration of banking technologies. Paul Danola, senior vice president, Fiserv, Brookfield, Wisc., says that's where his company is focusing much of its attention. "To really make these things effective, you have to start the integration process," says Danola. The idea is to be able to share information across all technology applications that touch customersthe Internet, call centers, branches, ATMs. It's not an easy process. "You're dealing with technologies where the applications often have their roots in different places." But it's a necessary process, nonetheless. "The intention is to make the encounter with the customer a knowledgeable one," says Danola.
And that, explains Robert Hall, chairman and chief executive officer, Action Systems, Dallas, is the essence of using technology in banking. "A big part of the challenge that banks are experiencing today stems from the fact that they have bought a lot of the pieces for customer relationship management, but they haven't figured out how to deploy and use them at the point of customer contact," says Hall.
Technology alone is no panacea, Hall suggests. It's merely an enabler. And from the looks of it, banking today is rife with technology enablers. "It's important to remember that information and technology are merely commodities," notes Hall. "What will create differentiation among banks is the ability to use and apply these things at the point of customer contact."
