Banks used to be the epitome of solid, imperturbable wealth, secure behind their marble walls. But they have faced crisis after crisis post-war, challenge after challenge. Now they face the heaviest threat of all. Traditional banking cannot resist the onrushing impact of electronic commerce. A simple proof: the cost of an ordinary banking transaction in a branch is 100 times that on the Web.
Anybody who questions the readiness of customers to conduct financial business on the Internet need only look at the powerful advance of online trading in investments. Led by Charles Schwab, upstarts have attracted huge traffic. Other dealings are certain to follow in these fast-moving footsteps. Investment is one area where established banks have hopefully strived to compensate for lost business elsewhere. But they will find no escape from the e-challenge anywhere.
Here, as in most markets, the Internet is a 'disruptive technology'. The phrase was used by Clayton M.Christensen in his book The Innovator's Dilemma, which asked why so many successful companies - even those few that had met the challenges head-on - had been undermined by upstarts using new technologies. Mast leaders simply ignored the threat, not out of stupidity, but for sound economic reasons. Usually newcomers tackled small or non-existent markets, offered lower functionality, earned lower prices and smaller profit margins - and had no appeal to the leaders' existing, lucrative customers.
The classic example is IBM and the PC. Even though it reacted with enormous success to the small fry led by Apple, the giant treated little machines as subordinate to its vastly more expensive, profitable and powerful mainframe computers. Its mainframes-first strategy allowed Microsoft, Intel, Compaq, etc. to steal leadership first in PCs and then in computery at large. As the Millennium appears, the first few dedicated online banks seem even more insignificant than the PC minnows once did. But the newcomers pose an IBM-style dilemma for established banks.
Many are now setting up their own Internet banking operations, with various degrees of intensity. None has taken the enormous plunge of scrapping all existing branches, systems and processes and moving entirely into e-banking. Their strategies are partial, with traditional banking coming first and foremost. Enter the IBM-style dilemma. Do they run Internet banking as an incidental add-on, just one of the channels available to customers? Or do they promote Internet banking heavily as a rival business, perhaps under a different brand, that will cannibalise, but not replace, the existing bank?
Christensen's evidence from other industries is overwhelming. Unless threatened companies embrace new technology whole-heartedly, and pursue it outside the mainstream business, with a full mandate to attack the latter, they will not win the war. Even the great IBM fell from 80% of PC sales to single figures because the mainstream business dominated its thinking. But banks have even greater reason than IBM to embrace the new technology - because the old technology is causing so many problems, anyway.
Above all, their internal systems are uncoordinated and inadequate. Microsoft chairman Bill Gates confronted this issue at a bank roundtable in Canada. As he explained in Business @ the Speed of Thought, banks have incompatible databases. They cannot build a complete picture of their relationship with any one client. He offered a simple solution: 'build a great interface for customers to see data over the Internet, then use the same interface to view data internally'. That way, banks 'can replace all the different ways of viewing data'. They can move on to 'upgrade the back-end database to new technology'.
As Gates said, the new interface 'becomes the bank, both inside and out'. It will be a new kind of bank, however. That's the stumbling block. People in the old bank like to follow the old ways. So you get the anomaly (a true story) of the bank which invested millions in a superb front-end, interactive Website for customers, but which still requires 13 back-end people to process manually a single transaction originated over the Web. Electronic banking is not evolutionary, but revolutionary - and revolutionary bankers have usually been a contradiction in terms.
The commercial promise of e-banking, however, has already generated some radical responses. As in Christensen's examples, though, these mostly come from outside the traditional competitors. Significantly, converted building societies (which have much less conventional banking business to defend) are well to the fore. Among insurance companies, the Prudential has pioneered, too. Early on, it shifted the emphasis of Egg, its spectacular new venture in direct banking, from telephone service to the Web.
Even before the first all-electronic banks, with names like eBank and BankNet, had become a significant presence, Halifax, the biggest ex-building society, decided to compete head-on. Its independent Internet operation, codenamed Greenfield, will seek to combine innovative technology with user-friendly online service to customers. It's easy to see the attraction for the latter: a service that lets them view recent transactions and account balances, see and activate standing order details, pay bills, set up direct debits and transfer funds internally through a single Website.
The attractions to the banks are also obvious. They can achieve true customer focus; get rapid development and roll-out (which are imperative nowadays) of new products; and repeat the customer impact of the few role models, like Wells Fargo. The California-based bank boasts that 'our most active banking store is invisible'. It is adding 1,000 online customers daily to a Website that handled a doubled total of 22 million banking sessions last year. Nothing else in banking offers such dynamic growth.
There's no doubt that Europe will share the dynamism. According to Bluesky International Marketing, which surveyed 863 Internet retail bank sites in Europe and twice as many in the US, over half the Europeans had 'intermediate and advanced' cyberbanks. This compared with under 15 percent of US banks. But there are great variations within Europe. France and Spain had six times as many advanced cyberbanks as the UK, even though they had half the number of users. Almost all bank sites in Holland were classed as advanced.
You could see this as an unexploited opportunity for British banks, or as a grave threat. Four years ago - an eon in Internet time - Forrester Research Group published a report which forecast the death of Financial institutions which lacked an Internet strategy. Like the later Bluesky report, Forrester's work emphasised the need for positive and quick action. By now all banks must have heard the warning. But hearing and reacting are two very different things. A defined strategy and quick implementation are both essential.
However, another survey, by Ernst & Young, looked at 100 leading banks in two dozen countries and found an amazing contrast. The banks expected to start the Millennium spending as much on establishing online presence as they currently spend on branch networks . Yet almost all these banks - 96% - did not expect online transactions to add a penny to their revenues. Moreover, only a third of European banks, and just over a half of US ones, believed that Web-banking would help them to retain existing customers.
The conservatism of traditional banks is not reflected in the strategies of their outsider competitors - or supported by the latter's experience. Sun Bank is the UK banking arm of Sun Life of Canada. In the first six weeks of Website operation, Sun Bank took over £11 million in customer deposits. The company is hoping to generate over half its revenue through the Internet within five years. Sun Bank's strategy tightly integrates business needs with technology to gain both internal benefits (via upgraded knowledge management and information systems) and external advantages (through greatly improved customer knowledge and interactions).
Woolwich is another building society converted into a bank, which, like the Halifax, is moving rapidly and adventurously into the new digital world. Its Open Plan offers customers a personalised relationship that goes far beyond the banking norm. This customised 'any time, any place' service operates via the Internet, call centres and traditional branches. Open Plan delivers advice and planning, accessibility, and integrated financial services which range from investment advice to Internet banking.
These state-of-the-art users are approaching the Holy Grail of modern marketing - dealing with mass market customers (Woolwich has 4 million) as individuals, and doing so economically and swiftly. The overriding objectives are to attract new customers, retain existing ones, and motivate them to give more and more of their financial business to the company. That hinges on being truly innovative and forward-looking; in other words, getting there first. The latecomers, however large they are, could find that the richest opportunities have been seized by others.
The e-challenge is essentially the same as that faced by other industries. Few, however, have the characteristics that make banks so eminently suitable for Web transactions: and which must make the 'invisible banking store' dominant early in the New Millennium. Marble halls are out: digital technology - cheaper, faster, accessible from anywhere and at any time - is in, for keeps.
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