Banking Services: Harness Technology And Come Up With a Winning Business Strategy Which Continues to Serve Public Interests - Statistical Data Included

Business America, Jan, 1998 by John R. Shuman

Electronic commerce, which includes payment mechanisms, presents the greatest challenge to and opportunity for the commercial banking industry. It is a challenge in that banks' basic function as a facilitator of payments for commerce is subject to new competition by technology firms. These firms have developed software to run over communication networks capable of performing payment functions. It is an opportunity in that the commercial banking industry is poised to solidify its premier role as a payment processor for the economy, introducing savings and new services to its customers.

Banks, in partnership with technology firms, are developing a secure infrastructure to support legitimate electronic commerce. Such infrastructure development is essential if banks are to maintain their core role as payment processors for the global economy. Electronic commerce is clearly the way money will move and financial institutions are working to be the vehicle.

Electronic commerce is especially attractive to banks and other organizations that deal with mountains of paper. According to the Federal Reserve, more than 63 billion consumer and commercial paper checks were written in 1996. Assuming there were 1.5 additional back-office transactions per check, a total of more than 157 billion non-cash, paper-based transactions took place in 1996. A one percent shift among these 157 billion transactions from paper-based to electronic commerce, assuming revenue of 20 cents per transaction, equates to an opportunity of more than $314 million a year in revenue for transaction services providers. A 33 percent shift equates to a $10.4 billion industry.

Banks are now engaged in a race to build a bank-centric electronic payments infrastructure. In the future of payments and the future of electronic commerce, the standards and the operating systems are really the de facto strategies. Which ones the industry adopts has implications for what technologies it will use and who the players will be. Banks are in the forefront of defining what the business requirements are for banking in order to not cede control of this process to technology firms.

Survival in the virtual world means that banks must focus on transferring their "value" to customers from the physical world to an electronic playing field. The challenge is one of structuring profitable business models, not trying to reinvent the institution as a technology company. Electronic commerce is just one area in which banks can command a leading role by identifying the right technology partners. In a business where product is increasingly commoditized, fostering added value is what will differentiate banks from their competitors, and that is all customers care about.

For instance, faced with high and rising costs and battered by the lower-cost alternatives of home banking via PC, telephone-based banking, supermarket banking, and automated kiosks, the conventional bank finds itself at an economic and cultural crossroad. The character of the bank and the roles that bank personnel play are being reinterpreted in a dozen ways to make them leaner and more technologically adept.

U.S. banks are now offering telephone and PC-based banking and an extensive ATM network. Banks' Internet offering to facilitate electronic commerce and interactive banking, allows customers to monitor checking, savings, and credit card account activity and balances; transfer funds, including paying third-party bills; review their credit line status; and send electronic mail to customer service. On the securities side, banks are now gearing up to provide customers with all the tools they need online to make informed investing decisions, such as real-time quotes; company news and research; and stock, corporate bond, treasuries, options, and mutual funds trading, among many others. Other technologies, such as smart cards, are just appearing on banks' radar.

The transformation of the financial landscape has not escaped the attention of global leaders. G-7 heads of state called for a cooperative study to investigate the implications of recent technological advances that make possible the creation of sophisticated methods for making retail electronic payments. A working party produced a report that developed a broader understanding of the policy issues facing governments as a result of electronic money and identified any issues that could benefit from additional cooperation. The working party focused on three broad policy areas: consumer issues, law enforcement issues, and supervisory issues.

The report concluded that, though electronic money products are still at a relatively early stage in their development, the potential exists for stored-value cards and their network equivalents to provide important efficiency benefits by reducing cash handling costs and improving speed and convenience for consumers in making small-value payments.

On consumer issues, overall, the working party's review of current consumer protection laws yielded two main observations: 1) most countries rely on existing laws and regulations in addressing risks such as loss, fraud, insolvency, and piracy concerns rather than enacting comprehensive new measures aimed at electronic money; and, (2) government policies on consumer protection and electronic money are still evolving.