Far from decreasing competition, consolidation in the banking industry has spawned a fierce fight for customers. As corporate clients evaluate incumbent and prospective banking partners, they should take a hard look at the Internet capabilities of banks, because that is fast becoming a critical point of differentiation.
So argues Frank Schlier, a group vice president at research and consulting firm Gartner and the author of a recent report that predicts tumult in the banking and financial services sector. In his view, the convergence that deregulation makes possible has a strong technological underpinning. Banks and other financial institutions no longer compete for deposits and other customer assets on a regional basis, but rather nationally and even globally, thanks to the power of ATM networks, sophisticated customer databases, and other forms of technology. That means that even as the number of banks declines — Schlier says that by 2007 there may be as few as 5,000 — the survivors will all contend with one another, rather than with a handful of regional rivals.
"CFOs have to look beyond local relationships," he says, "and beyond a bank's balance sheet and income statement. It's a bank's embrace of technology that will determine whether it survives."
Banks have had some notable Internet failures: In June, Bank One Corp. folded Wingspan.com, its Internet-only bank, back into its other online operation, bankone.com, which had nearly three times as many customer accounts as the highly publicized Wingspan. But analysts say that such failures are merely growing pains and that banks can be counted on to leverage the Internet in profound ways. "Banks initially saw a danger in being disintermediated by online competitors," says Robert Patten, an analyst at UBS Warburg LLC, "but now that the Internet companies have plunged, it's clear that banks have the market capitalization, the scale, and the customer base, and they can afford to slow down a little and get it right."
Indeed, Bank One hardly seemed dissuaded by the failure of Wingspan. In July it hired James Ditmore, former chief information officer at online brokerage firm Ameritrade Holding Corp., as its new chief technology officer. Also in July, CEO James Dimon told analysts that the bank may be on the hunt for additional acquisitions by the end of this year, once it consolidates several deposit and loan systems, a form of streamlining that many banks must master as they struggle to absorb acquisitions. Ditmore is expected to focus on those infrastructure issues along with more purely Web-based initiatives.
Patten believes that as of now banks are slightly ahead of their customers as far as Internet capabilities go, but their lead may be shrinking. A survey conducted by software firm Magnet Communications found that the use of online banking by business customers will more than quadruple by 2005. Among the top three functions sought by customers, only lockbox has substantial use today; bill payment and loans have yet to be rolled out to any significant degree.
Banks will not only continue to develop these capabilities in-house, says IDC director of online financial services research Ian Rubin, but also overcome their traditional reluctance to partner with other firms so they can offer services more quickly and at less risk. "This technology changes so quickly," he says, "that banks now see the value in licensing it from third parties. An ATM may last a decade, but Internet technology is probably obsolete in 18 months."
Some banks see electronic services as lucrative ancillary businesses and are assembling portfolios of companies that can help them become market leaders in various niches. Zions Bancorporation, for example, recently added iComXpress to its list of acquisitions, part of its plan to become a market leader in digital signature and workflow technology. Harris Simmons, the company's president and CEO, says that in the wake of the "E-sign" law passed last year, "there is now the potential for banks to provide services that facilitate commerce." He believes that his company's technology will play to a host of corporate needs, from expense-report processing to 401(k) plan enrollment. "Traditional banking services will remain a core part of what we do for a long time," he says, "but we are also positioned to handle everything from paperless online lending to the storage of digital documents."
How quickly corporate customers will rush to embrace those new services remains to be seen. Ray Graber, a senior analyst at research firm TowerGroup, says that financial executives are moving slowly in this arena, sensing that a wrong move could be disastrous. At the same time, he says, banks haven't helped themselves by crafting sophisticated offerings for large companies while giving less attention to smaller firms that might well embrace Web services if those services were more closely tailored to their needs.