Financial Firms Face E-Business Challenge

Banker's hours. Once, it was a term that meant light duty: Fewer hours and a long lunch. Now, the banking and financial service industries are adjusting their clocks to Internet time, and bankers do not have time to sleep, never mind take a lunch break.

Stepping On Toes: The first Internet-only bank, WingspanBank.com, offers checking, insurance and trading. Traditional banks such as Chase Manhattan, First Union and Wells forge an alliance Research shows 28 million households may do some banking online by 2003. Projected spending for banking sector should leap 22 percent to $122 billion from 1999 to 2001.

As the pace of change quickens and the lines begin to blur between the major players in the marketplace, a growing challenge for banks, as well as brokerage firms, insurance companies and other financial service providers, is how to quickly and efficiently align their IT strategy with their business strategy. In many cases, they are turning to enterprise partners for guidance in developing and implementing these solutions.

It is not an easy task, especially for banks, which, as analysts and industry watchers said, have long been burdened by trying to be all things to all people. And despite all the hype, retail bank customers are not flocking online to conduct business. In February, a GartnerGroup Inc. survey of 11,000 consumers found that, for bill-paying, consumers preferred their brick-and-mortar banks over Internet portals by an 8-to-1 margin.

Yet market analyst firm Jupiter Communications predicts that 28 million households will do some of their banking online by 2003. So, even if consumers are wary now, enterprise financial companies need an E-business strategy so they do not end up eating their competitors' dust.

"The challenge that financial services companies face is understanding what their corporate strategy will be in this rapidly evolving marketplace. That's challenge No. 1," said Brian Barker, executive vice president of the Financial Services Group at Computer Sciences Corp., El Segundo, Calif., whose customers include Deutsche Bank, Royal and Sun Alliance and J.P. Morgan.

Tread carefully: that is the advice to companies from professional service firm Ernst & Young LLP. In its annual special report on technology in the financial service industry late last year, the New York-based firm stated that, for all companies but the largest and greatest risk-takers, "active waiting" should be the watchword regarding E-commerce. Yet, for the past few months, the accent has been far more on the "active" and much less on the "waiting."

Just this summer, three financial powerhouses,Chase Manhattan, First Union and Wells Fargo,teamed up to form an online consumer billing company.

Also this summer, Bank One launched its Internet-only bank, WingspanBank.com, offering checking, insurance and online trading.

In its bid to become what it calls a "digital financial media company," E*Trade, the second-largest online brokerage firm behind Schwab, has recently added a retail bank piece, Telebanc, to the long and growing list of financial services it offers. The firm already offers loans through E-Loans, investment banking and research through E*Offering, and credit cards through First USA.

The tidy word for all this activity is "convergence." John Myer, president of EDS Corp.'s Diversified Financial Services Group, describes it a bit differently.

"Everybody's getting into everybody else's market," he said.

It all adds up to a huge business opportunity for firms providing IT products, services and consulting. The activity is dizzying. EDS, CSC and other enterprise solution providers are right in the middle, managing E-business initiatives and integration engagements.

Plano, Texas-based EDS earned $3.2 billion, approximately 18 percent of its total 1998 revenue, from its 4,500 financial service clients. These include the National Association of Securities Dealers, which is the Nasdaq's parent organization; banks such as First Union and Mellon; and lender GMAC.

For CSC, the financial service industry represents its largest commercial sector, providing more than 20 percent of its annual revenue of $7.7 billion last year, Barker said. And it is getting larger. "This industry segment is experiencing explosive growth," he said.

Explosive indeed. Research firm Dataquest, San Jose, Calif., predicts significant increases in spending in all sectors of the industry. The firm forecasts a 32 percent jump in worldwide spending on IT in the securities sector between 1999 and 2001, to $87 billion from $66- billion. During the same period, insurance will increase 25 percent, to $95 billion from $76 billion, and banking will jump 20 percent, to $147 billion from $122 billion.

Of all vertical markets, the banking and the financial service industries spend the most on IT, as a percentage of annual revenue, according to InformationWeek (a CMP Media Inc. publication), which found that, on average, companies in the financial service industry spend 7 percent of their annual budgets on IT, while banks spend 6 percent.

E-business implementations represented a hefty chunk of those dollars, InformationWeek found. Banks and financial service firms spent 11 percent and 6 percent of their 1998 IT budgets, respectively, on these projects.

"One thing we're getting a great demand for is setting up virtual financial institutions," said Myer. Calling these initiatives "almost a bank-in-a-box," Myer said these efforts are focused on helping banks maintain a competitive advantage in a rapidly changing business environment.

The strategy for most of the biggest banks, such as Citibank, Chase Manhattan, Bank of America and Wells Fargo, has not been to build separate entities, but rather to expand their operations into the virtual world. WingspanBank.com, the Internet-only operation by Bank One, is an anomaly in the banking world.

But anomaly or not, the move is a prime example of the altered competitive landscape that banks must now navigate. "Bricks and mortar really is not the competitive advantage it was before," Myer said. In fact, the competitive advantage of the E-banks is not being burdened by a real-world establishment, he said.

Traditionally, financial service firms have been early adopters of IT solutions. What has happened more recently is a shift in the focus of spending.

Spending used to be more on basic transaction and back-office operations processing, such as check imaging and check and loan processing, said Dataquest analyst Matthew Chivers. Now, financial service firms are spending IT dollars to develop more sophisticated views of their customers and build more customer information into their product offerings.

"In general, the evolution we're seeing is really from spending on the back office to spending on the mid to front office," Chivers said. The front-end systems are becoming increasingly important as retail banks, for example, try to cross-sell insurance and brokerage products to their customers, a function that is being enabled by more front-office technologies, Chivers said.