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William Davis is getting fidgety.

He's waited years for BankBoston, which offers Web-based banking for consumer accounts, to roll out the same services for its commercial clients. Davis, assistant treasurer of Avid Technology, a maker of digital and audio content tools, has already built his own workday around Web access, and he's convinced that access to Internet-based financial services will become increasingly important to how his company does business in the next millennium.

A long-time customer of BankBoston, Davis isn't yet ready to switch to a rival over the issue of Web access. But he's definitely looking at his watch and tapping his foot. "The nature of my position is to make sure our financial relationships are operating as efficiently as possible," he says. "When there are new technological means to make our relationship more efficient, I want them as soon as possible."

Customers like Davis are among the main forces pressuring banks to make Web-based services a priority not just for millions of individual customers but for commercial accounts as well. It's no secret that, over the last 30 years, banks have lost control of the financial world, missing growth opportunities in markets such as stock trading, mortgage lending and insurance. Now the Web offers banks a shot at regaining ground with both individual and commercial customers by providing services online-if they can provide them well enough and in time.

Banks enter the e-commerce race with one huge advantage: long-time experience handling electronic transactions. But in an increasingly crowded field of competitors, it's still far from a clear shot to victory. As Esther Dyson notes in Release 2.1: A Design for Living in the Digital Age (Broadway Books, 1998), "Banks have the opportunity to play a vital role in the digital age, or lose it all to newcomers."

Brokerages like E-Trade Group and Charles Schwab are locking in Wall Street-minded customers; in fact, discount brokerages will control more than 50 per cent of all online personal finance activity by 2002, according to predictions by New York City-based Jupiter Communications. Meanwhile, independent online-only banks like Net.Bank of Atlanta and CompuBank of Houston have won approval from federal regulators for real-time online banking (E-Trade acquired another Internet-only bank, Telebank, earlier this year). Online lenders such as LendingTree.com and E-Loan siphon off more potential business. Credit card giants have jumped into the fray as well: Earlier this year, American Express launched its virtual Membership bank, while Chicago-based Bank One started up separately branded WingspanBank.com. Finally, banks increasingly face new competitive threats from a particularly unlikely source: software companies.

What's driving all that growth? Demand. More than 24 million US households will bank online by 2004, up from 7 million in 1998, according to an August 1999 report from GartnerGroup's Dataquest research division. Some banks pull more than 60 per cent of their profits from corporate financial services, in which banks offer customers minute-to-minute access to information about payments cleared, account balances and interest, trades, disbursements and transfers, among other services. So it's reasonable to assume demand on the business side will grow as well.

But while a few major financial institutions, such as The Chase Manhattan and Citicorp's Citibank, both based in New York City, are moving ahead with sophisticated Web-based efforts, banks in general still trail other industries in letting individual customers manage their accounts online. And financial institutions have been even slower to offer significant online services to their commercial customers, with many corporate-finance products still in beta even among the leading banks.

That gap showed up in a recent survey by Ernst & Young's Boston-based financial consulting group and Mainspring Communications, an e-commerce consultancy based in Cambridge, Mass. The survey, conducted in 1998, found that most financial institutions didn't yet have a pricing strategy for e-commerce, and many hadn't yet integrated e-commerce into other delivery channels. The four top e-commerce innovators named in the study included just one bank, San Francisco-based Wells Fargo, which has nearly 990,000 online customers, mostly through its Wellsfargo.com Web site. The other three Web business leaders represent a perfect triumvirate of the forces vying for control of Web dollars-e-tailer Amazon.com, online broker Charles Schwab and software giant Microsoft.

Those findings don't surprise Richard Erario, vice president of electronic commerce for Chase Manhattan Bank. Erario, who has been working to develop software for business-to-business e-commerce functions, knows his financial institution faces competition not just from other venerable financial giants but also from impertinent newcomers with names like CyberCash and Intuit. "With a lot of these solutions we're developing, our competitors are major software companies," Erario concedes. "That's definitely where we're headed."

Under Pressure

Since World War II, banks have watched their market share shrink dramatically, eaten away by nonbank players in the insurance, stock brokerage and independent mortgage loan business. In 1950, banks controlled 75 per cent of financial transactions, but these days that figure has fallen to 25 per cent, notes Richard Crone, a vice president and general manager with CyberCash and a former director of KPMG Peat Marwick's Centre for Electronic Banking.

It's not that banks aren't eager to build business online. While Internet spending still represents a tiny fraction of the $150.9 billion worldwide financial services IT budget, the volume of dollars earmarked for Web development is growing, according to a study by Newton, Mass.-based Meridien Research. In 1997, the combined financial services industry (including banks, securities firms and insurance companies) spent $550 million on Internet-based corporate financial services. By 2001, Meridien projects that number to nearly double, to $926 million.

Banks bother because customers want desktop access to their accounts, both personal and commercial. But banks themselves stand to save a bundle as well. A Web-based transaction costs pennies to process, whereas phone or ATM transactions cost upward of 50 cents and more than $1 for a visit to a human teller. At the same time, there's evidence-on the consumer side anyway-that many people have returned to banking in person, by phone or at ATMs, according to a survey released in August 1999 by Cyber Dialogue, a New York City-based marketing company, and consultancy Booz-Allen & Hamilton. Half of the 1,000 Internet users surveyed say they quit using online banking services after finding the process too complicated or customer service response too poor. The Cyber Dialogue study concludes that financial institutions need to act quickly to leverage their main assets: electronic transaction experience and existing customer databases. Specifically, the report recommends that banks invest in high-transaction technology, robust e-mail and telephone help services, and top-quality navigation tools such as search functions and site maps.

Meanwhile, banks continue to develop new services, primarily for individual customers. Mellon Bank of Pittsburgh, for example, has developed a portal site that allows customers to review their accounts, pay and present bills, and access mutual funds and news, sports and lifestyle information, says President and CIO Allan Woods. Even small community banks now earn the loyalty of individual customers who live so far away that they may never have heard of the institution before the advent of the Internet. Salem Five Cents Savings Bank, an early and enthusiastic adopter of online banking, now gets fully 10 per cent of its consumer business over the Web, serving 6,000 customers in all 50 states and 12 other countries.

But while Internet budgets are climbing, many banks have been too busy with other challenges to roll out industrial-strength corporate services, which require much more back-end programming and systems integration than consumer services. Dozens of US commercial banks have been merged or acquired over the past 10 years, leaving the new, bigger corporations with an awkward mix of new technologies and legacy systems.

Take BankBoston, an institution created when one Boston-based financial giant, Bank of Boston, acquired rival BayBank in July 1996-and which now itself faces acquisition by Boston-based Fleet Financial Group Analysts have said that the success of the latest merger, worth $16 billion, depends largely on the new entity's ability to restructure itself to support e-commerce. And Fleet CEO Terrence Murray has said his top goal includes figuring out how to continue to offer traditional banking services and earn profits online from those customers who grow up expecting to do business online. (Last fall, BankBoston had about 350,000 online customers, compared with Fleet's 200,000). But, as at nearly every other financial institution, online expansion remains a lower priority than Y2K preparations-and with allaying customer fears before and after the clocks strike midnight on Dec. 31.

Even before the latest ownership change, BankBoston had some catching up to do on the online corporate financial services side. While the bank's retail customers can initiate payments through a browser, its business customers still access the bank's mainframes through aging PC-based clients. To bring its commercial financial services to the Internet, BankBoston must first consolidate five different PC products, each with its own distinct functions and interface. Some of its PC-based products were developed in-house and others acquired as part of the earlier merger; one package still relies on DOS, while the other four run on Windows.

Cultural Challenges

Before they can bring many complex financial services online, banks often must figure out how to pull their stratified organisations together. Many still operate as a string of carefully shielded fiefdoms, using individual departments setting up software and systems to handle core functions that may or may not interact with other functional areas. For instance, account inquiry or automated clearinghouse (ACH) transfers may be processed on one system, stock trades on another and international transactions on a third. These systems usually run on separate mainframes and must be accessed by bank staffers through widely varying interfaces. Sometimes information may be stored in completely incompatible database formats, notes Meridien Research Director Octavio Marenzi. "For example, if a bank wants to present trade, ACH and cash management services, each may have a separate password [right now]," he notes. "Depending on how things are structured, they might have to make all sorts of changes if they want to offer a single interface."

Finally, banks need to develop entirely new ways of approaching their business, says Diana Brown, vice president and general manager of the Financial Markets Business unit at Scient , a San Francisco-based company that specialises in helping banks and other corporate clients develop e-commerce strategies (see "Hired Guns,"). "For the first time, banks have to integrate strategies across all lines of business," integrating around customers, not their own lines of business or locations, Brown says. "It forces them to think about [questions such as], 'What functions are we putting on which channel? How do we cross-sell? What do we want customers to do on their own? And where do we want to provide value-added services?'" Playing Catch-Up Analysts say offering a full range of Web-based services to commercial customers as well as to individual ones is critical for financial institutions that want to survive in the 21st century. And bankers know it. "This has to happen-there is no choice," says Susan Rugnetta, BankBoston's managing director in the finance department. "Our customers want ease of use, and with Web-based technology, it's going to be much easier to present a single window to all the information the client needs."

Through Internet-based corporate financial services, banks should have access to an additional 40 million to 50 million small- to medium-size customers capable of quadrupling the industry's cash-management revenues to $80 billion by 2004, projects Palo Alto, Calif.-based research firm Killen & Associates.

Aware of this potential, First Union budgeted $70 million through next year for cash-management product development, most of which will go to Internet products, according to Randall York, senior product developer with the information reporting team for the bank's Global Cash Management area. The Charlotte, N.C.-based bank's first products are targeted to small businesses, which are "much more likely to use the Internet as their primary source," York says. "Their needs are [less complex than those of] large businesses."

When banks do provide their corporate customers with Web access, they often get enthusiastic response. When $2.1 billion Vermont National Bank kicked off its corporate Web product, for example, 50 of the bank's 225 commercial customers signed up within the first day it became available, says John Revilla, vice president of operations for the Brattleboro-based company. The high turnout came even though the bank initially offered only ACH transfers and a handful of other payment capabilities. Its DOS product, which has been available for more than a decade, offers customers checking account and loan information as well as direct deposit service, debiting and crediting, vendor payments and tax payments.

Like consumers, commercial customers aren't nearly as afraid of the Web as they used to be, Revilla says. "I think there's more of an understanding among customers of how encryption works, and that we have adequate security," he says. "There's actually less security risk with the Web, firewalls and encryption than with a modem on the desk connected to a network."

Slow Motion

Even with the Web hitting full maturity, many banks don't expect to roll out corporate financial services within the next year. Some clients still use decades-old "green screen" terminals connected to bank mainframes and are happy with the solution they've got, thank you very much. Others think they're doing fine with their trusty PCs. "I think you may find that proprietary networks linger for a long time," says Philip Bligh, founder and CEO of Chicago-based consulting and systems integration company Inforte, whose customers include Citibank and Harris Bank. "Banks can start to roll out an architecture they want everyone to migrate to, but taking away proprietary networks is a big change for customers-they have to change technology on their side."

Some banks remain nervous about their inability to control the whole customer experience. That's why First Union is phasing in its Web product a bit at a time. First Union's product allows customers to make wire and ACH transfers, monitor the status of payments, keep an eye on interest accrued and owed, and more-but the bank must gradually wean its customers off old technology at the same time. Like many of its competitors, the bank still supports old technologies even with its new Web-based services. First Union has offered both PC-based and dumb terminal access to cash-management information for several years. To access First Union's Web product, Web InVision, corporate cash-management customers come in through the bank's home page and log in with a password combination. First Union's customers can initiate domestic wire transfers and automated clearinghouse transfers and book transfers, make stop-payment orders and pull down reports online.

Ultimately, banks that don't ratchet up their Web-based corporate financial services can expect flak from both individual and corporate customers. While the majority are plugging away at bringing the standard PC apps used by commercial customers onto the Web one at a time, they aren't feverishly worried about turning out a fully functional integrated product, says George Kivel, Mainspring's managing director. "Most banks have committed to doing something on the Internet, but I don't think any of them consider it a strategic initiative," he says. "If large numbers of customers were going to another bank because it offered Internet cash management, banks would provide it. But they aren't, and so the adoption rate is slow."

When it comes right down to it, Web-based products aren't worth the sweat needed to implement them unless they do something the PC-based clients can't do or at least offer all of the functions the PC products offer, says Meridien Research's Marenzi. "If you're simply going to take an existing PC-based application and offer someone a reduced subset of that functionality via a browser, that doesn't offer a competitive advantage, really," Marenzi says. "It's just not terribly important."

Setting the Standard

E-banks aren't all on the same page yet -but they're working on it WHEN SOME FUTURE BUSINESS SCHOOL TEXTBOOK CHRONICLES the history of online banking, the chapter on 1999 could well be titled "The Year Before the Revolution."

Currently, only about 6 per cent of US banks and credit unions offer online services, according to the American Bankers Association, a New York City-based trade group. But the industry clearly expects that percentage to soar as both corporate and individual customers demand capability to manage their accounts, make investments and handle bills online.

More than 7,200 US banks and credit unions will invest in online banking applications this year, up from just 1,200 who did so in 1998, according to research by International Data Corporation, a sister company to CIO Communications. Analysts project even faster growth beginning next year, once banks (and everyone else) can redirect resources long assigned to Y2K preparedness.

Banking, a highly competitive industry whose major players tend to keep their technology initiatives top secret, now collaborate in at least one key area: setting e-banking technology standards. Heading those efforts is the Banking Industry Technology Secretariat (BITS), formed in 1996 as the IT arm of The Financial Services Roundtable, a Washington, D.C.-based trade group. BITS, whose board of directors includes the chairmen and CEOs of the nation's 14 largest banks, launched its flashy new Financial Services Security Laboratory in Reston, Va., earlier this year. (For information on the lab, visit www.bitsinfo.org.) Researchers at the lab test security-related products, including browsers, transaction software and firewalls. Using standards set by IT executives at member banks, researchers evaluate how well products meet specific security attributes such as authentication, integrity, privacy and authorization. Products passing lab scrutiny qualify for the BITS Tested Mark, a Good Housekeeping-like stamp of approval that appears on the BITS Web site.

Industry leaders say such objective third-party testing will help banks save time and money while implementing the most up-to-date e-commerce security solutions. That, in turn, should stimulate widespread demand for online banking services. As KeyCorp Chairman and CEO Robert W. Gillespie, who heads the roundtable's board of directors, puts it: "Security is the key to consumer confidence."

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