The recent conference Online Financial Services - Shaping the Future - held by FT Conferences and The Banker, included varying perspectives from financial institutions on how the online revolution will affect the financial sector.
E*Trade, one of the leading electronic brokers in the industry, is making headway into the global marketplace by keeping a consistent overall strategy.
Judy Balint, president of E*Trade, believes that in order to succeed in the Internet age one must focus on consumers. But this is not to say that E*Trade's strategy is to be all things to all people, it is the right customers that one wants to have as opposed to pleasing all customers.
Her presentation at the recent FT Conferences and The Banker event focused on three primary and important issues: Globalisation, power of consumers and the supporting IT global infrastructure that underpins a company's success. She believes that the ubiquity of the Internet, among other things, fosters globalisation and as e-commerce regulations, such as the digital signature bill, become comprehensive enough to be passed - true globalisation will exist.
Currently, online application for a financial service account is hindered by the need to have a "real" signature on the application. This is the case in Italy, where one needs to be in the branch to open an account. This will change soon when more and more organisations come online, en masse. Already, global and national certificate authorities exist to allocate root digital certificates to banks and it is only a matter of time when digital signatures become the norm rather than the exception to the rule. Ms Balint emphasised E*Trade's position as a global player and said that an e-company equals a global company by default and adds that online cross-border trading will be ever more in demand.
E*Trade is very much a brand without borders. Many in the financial services industry are trying to differentiate themselves by focusing on the consumer. While this is not a new concept, the application of new technology to accommodate consumer needs is. While others are looking at multi-channel access to encapsulate a full view of their consumers, E*Trade's is solely based on the Internet medium.
Four groups of consumers are derived from E*Trade's existing base: dabblers, who are new to investment; strivers who have higher net worth; builders, individuals who make up to 24 trades a day and who are looking to invest more; and power traders, individuals who are heavy traders and make approximately 35 trades a day. As consumers are becoming more sophisticated, E*Trade is taking notice and expanding sophisticated product offerings to address the needs of their consumers in each of the group's bases.
The other pillar of success centres on the supporting technology which E*Trade has deployed. It takes technology very seriously, says Ms Balint and, to this end, need to facilitate the increasing rush of consumers for their service - currently at 1.6 million in the US alone. It is no surprise that E*Trade's sophisticated network includes a large ATM backbone which allows for high bandwidth.
Its partnership with Digital Island allows for high-speed connection to the Internet and reduces net congestion and lag time. Consumers connect to their ISP (Internet service provider) and as soon as the connection is made, it is automatically routed to the ATM network. E*Trade's focus on customer satisfaction is backed up by the fact that it runs its network at 25 per cent capacity and the rest on contingencies; an extraordinary price that it is paying for consistency of service.
This coupled with its strategy of buying back equity from partnerships means more control over providing the right mix of strategy for the right type of consumers.
Security First Network Bank
Unlike E*Trade, the first Internet bank, Security First Network Bank (SFNB), is looking at another strategy proposition. David Noble, CEO of SFNB, a subsidiary of Royal Bank of Canada, believes that online financial services mediums will go through a period of high convergence.
By this he means rather than only focusing on the Internet to do business, his organisation will look into a "click and mortar" strategy to add value to consumers. Many banks are in support of this multi-channel access strategy; the premise is that customers during uncertain times will want a branch or other mediums that are more personal.
This is fine if the strategy of the organisation, including primary factors such as marketing, sales and distribution channels and secondary factors such as human resources and technology, is consistent and supports the value proposition an organisation intends to pursue - different consumers. Its strategy, Mr Noble stresses, is that an Internet bank is not just an add-on to an existing physical bank.
There is a fundamental change in processes, organisational culture and attitude towards how one should view an Internet bank, partly because a large investment is needed upfront for a long-term gain in the future. He says to run an Internet bank represents a huge cultural shift and his advice is that one cannot assume a net present value (NPV) now but in a few years' time the "end game" or the NPV will be realised. SFNB's approach is sitting in between the traditional bank and the "Internet attackers" in the hope of offering the complete set of services of a direct retail bank - one which has everything that is lacking from some traditional providers such as low cost/high interest products and from Internet attackers such as multi-channel access and personalised service.
It aims to do this by partnering with the best of breed IT vendors such as S1, TS, M&D, CheckFree and Visa. A prime example of the synergy gained from partnerships is SFNB's joint venture with Primestreet, the Internet portal. The use of CRM technology (inclusive of data warehouse) implemented in the front-end and filtering through to the back-end means that a broader view of the customer is achieved because their audit (or rather click) trail provides information on possible related products that can be cross-sold to consumers when they are perusing the portal site and making regular transactions.
The challenge for SFNB is that by being an Internet bank means that there is a surcharge for access to other organisation's ATMs but currently it cannot absorb these charges because it is offering 6 per cent on its chequing account.
Chase Manhattan Bank
There was a sense of change, which came from Susan Webb, senior vice president of Chase Manhattan, with this new era of the Internet.
In her presentation, she mentioned that banks needed to think differently from how they have in the past. Banks are not known for their great understanding of the "customer experience" because they really did not have to care about it in the past. Now, according to Ms Webb, banks need to think differently and she points to the idea that one needs to build an overall client view. This is achieved by consolidating the back-office in order for information to be shared among disparate systems. She said only 7 per cent of websites are linked to the back-office.
The technological change that is occurring is great, with new technology or enhancements in current technology becoming more available. As a result, Chase Manhattan is also partnering with leading IT vendors to help with these efforts and is evident via the "collaborate to compete" theme. According to Ms Webb, collaboration with partners is analogous to deploying speedboats; by partnering, products can be launched and brought to market a lot faster than otherwise if they were to deploy everything themselves.
To this end, Chase also outsources some of its IT systems. Ms Webb continued on the client view and collaboration theme and suggested that consortiums such as Identrus are necessary for future security issues and that personalised services is key to success. Chase's strategy centres on "testing the waters" and it does not believe that a single channel or technology is the deciding factor. Much like SFNB, it is looking into multi-channel access and this was emphasised by Ms Webb making the statement that they are planting "many acorns" today for potential future growth.
Perhaps the biggest challenge facing Chase is that it is competing with start-up companies not judged by a P/E ratio.
MeritaNordbanken
The presentation given by Kalevi Kontenin, executive vice president of MeritaNordbanken, started with two main issues that have changed the face of banking: deregulation and technological change. While the full impact of the former is yet to be seen, the latter is much clearer as portrayed in today's networked environment. Mr Kontenin says network banking raises questions and worries.
He asked whether customers accept self-service banking, whether this will lead to disintermediation and whether banks will eventually shrink to "items in somebody's else's menu"? Or whether there will be only a few global "video game" banks in the fashion of Microsoft or IBM? There are answers, however. He said that the experience gained so far varies between countries but, even admitting cultural differences, there is little doubt that the bank customer behaviour ultimately will be rather consistent worldwide.
He said customers will accept self-service and there should not be worries over transaction intermediation as long as it does not lead to "relationship intermediation". Commenting on the economics of e-commerce, Mr Kontinen says that success in any business is equivalent with return on investment. In e-commerce, it depends on the income stream because even reasonable investments and expenses are substantial. Success in selling an investment for the perceived value of future income streams only passes the responsibility for success on higher level to the fortunate buyer.
The point was made that since income consists of volume and margin, and since margins are hard to obtain given that competitors are a mouse click away, e-commerce success is determined by volume. And that this is best achieved by focusing on the global market. One may, however, try to compete with something other than products. Most customers need some degree of integration of their financial positions and transactions and many would welcome a service that also provides this on the Internet. Portals obviously act as an Internet integrator.
Mr Kontinen says: "Success of e-commerce may thus also come to banking from lower volumes with higher product margins or additional income streams from value-adding integration services. The basis of this are the customer relationships instead of products, which as well can be somebody else's". Part of MeritaNordbanken's strategy is to be a leader in "network banking".
The underlying assumptions are that this form of banking will be the dominating one in the future and that the franchise of a customer relationship bank can then be extended towards trustee functions and services.