In the UK alone, 51% of the 1.7 million small to medium-sized enterprises (SMEs) are expected to bank direct, or online, by 2010, according to reports. This is unsurprising given the growing influence of the internet on everyday lives and the increasing take-up of online personal banking services.
It has not always been the case. The first online personal banking services, such as Prudential’s Egg and the Co-Operative Bank’s Smile, both suffered minor technical glitches that received as much publicity as their (largely successful) launches, and the public’s concern about the security of their financial information featured in almost every news story on internet banking.
Online comfort
Such teething troubles were soon overcome, however, and many retail banking customers are now comfortable users of online services. But the commercial banking space and the services offered to SMEs have not always been as successful. The late 1990s saw a number of banks attempt to break into the business-to-business market, offering services such as procurement alongside their basic banking offering. But these initiatives failed to gain traction.
Now that SMEs are adopting online banking platforms in greater numbers, there is still a feeling that the platforms are often somewhat below par and have a lower priority to the full-scale corporate banking packages available to large organisations, whose treasury systems resemble in-house banks, and the high-profile internet banking services offered to retail consumers. Caught between these two much larger markets, SMEs have often found that their needs are going unmet.
Left behind
“It is an environment where the banks are a necessary evil for the SMEs,” says Martha Bennett, research director, financial services at UK-based research firm Datamonitor. The banks are keen to accept the revenue that comes from the many SMEs in the market, the problem is they have long been unsure of how exactly to deal with SMEs, she adds. “The SMEs do not command the revenues that the large corporations bring in and who are serviced by banks’ corporate banking departments. Instead many banks have operated their commercial banking services as an extension of the retail banking segment, leaving the SMEs in a sort of no-man’s land.”
Crudely adapting a personal banking service for SMEs is clearly not acceptable, says Ms Bennett, and banks must think more about the specific needs of SMEs. She points to a number of differences between the banking needs of the two customer types, such as SMEs’ need for higher security and their greater reliance on cash.
Ms Bennett concedes that some UK banks have made efforts to upgrade their online commercial banking platforms. HSBC, for example, has its Business Internet Banking (BIB) platform to deal specifically with SMEs, and Mervyn Northam, head of e-commerce for commercial banking, says that it has a number of features designed to reflect this. “For example, it recognises that there is a need for more than one person to access an account, allowing up to 200 secondary users for each business account,” he says. “There is also a greater focus on security, an audit function that can track transactions made as recently as one minute ago and an ability to process BACS payments.”
Modifications made
The service was originally launched six years ago, since when a number of modifications have been made, says Mr Northam. One has been the switch from digital certificates to single password tokens. “The digital certificates needed software to be downloaded, and while they were great from a security perspective, customers were not keen on the idea of downloading software.”
Another key change has been a reporting function for company credit cards. “More than 50% of our BIB customers use an HSBC credit card and, over a year ago, we launched an online service for this so that customers can see their balance and their transactions, and change the limits for certain users.”
The bank has enabled higher value payments to be made through the online platform, upgrading the service to include Chaps and Swift payments as well as BACS and bill payments. Another addition is the ability for companies to renew modest and unsecured overdrafts.
The addition of automated overdraft approvals has highlighted how complicated the process of migrating branch-based services to the online world can be, says Mr Northam. “It depends on how many steps a member of staff would have to go through to look up the customer’s details; check whether the system will allow it; create a limit; calculate the interest; work out the additional fees; and issue an acceptance letter. All of this has to be automated online.”
Enabling Swift payments to be made online also involves complications concerning exceptions and failed payments and ensuring that cut-off times are not missed. Mr Northam says that HSBC has tried to make its platform “idiot-proof” where possible, with a number to be inputted with every Swift payment and server checking that will send an alert if a detail is wrong in the payment instruction. But complications aside, it is customer demand rather than technical complexity that will dictate to what extent banking services will migrate to web-based delivery channels.
“Almost anything that does not require handling of cash or cheques can be done online,” says Mr Northam.
“There are lots of things we could build now if we wanted to – but does the customer want this and is there enough of this happening to make it worthwhile?”
For example, the amendment of a standing order involves an estimation of whether customers want to do this online and how many times it would be done at a call centre or branch. If it is 100 times a day, it is not worth it, but if it is 20,000 times a day, the bank can be assured that migrating this function online will be financially viable. “We prioritise the things that we know customers want to do and then we base it on volume,” says Mr Northam.
Reducing paper
As well as reducing the need to have branch-based or call-centre-based staff, banks are also looking to cut back on paper. Issuing paper account statements to businesses is a considerable cost to banks and there has been a concerted effort to migrate customers to electronic statements. But the issue also reflects the difficulty banks have in migrating their customers away from traditional and costly banking habits.
For SMEs in particular there are also administrative requirements to consider – for example, many accountants, auditors, tax inspectors and commercial lending officers at banks with whom they deal will only accept original, paper-based statements, not a printout.
One banking service unlikely to make it onto the typical online commercial banking platform in the immediate future is anything to do with handling cash, an aspect of the average SME’s processes that is not considered enough by the banks, says Datamonitor’s Ms Bennett. For example, in the UK, Barclays has been the only major bank to seriously explore the technology behind contactless payments (as seen in Oyster cards used for public transport in London), even though the project found the cost of the supporting infrastructure far too prohibitive for the average SME, she says.
The US market has generally been at the forefront of online banking, due to the high use of the internet by the public, so it is of little surprise that US banks are making the most headway in the migration of the traditional, branch-based commercial banking services to the online world.
Wells Fargo offers business banking clients an online portal called the Commercial Electronic Office, which in addition to online treasury management functions also has a ‘desktop deposit’ that enables SMEs to use cheque imaging software to scan and transmit cheques to the bank.
“We have a wide network of branches for our commercial customers but our current focus is on extending our services so that there is no need for our customers to go to a branch unless they want to,” says Michelle Young, senior vice-president at Wells Fargo. “While information reporting and data exchange are very much suited to the online world and other more people-based services, such as cash, are more suited to the branch, we are currently looking at delivering everything through the internet. In fact, I am racking my brains to think of a service that we do not offer electronically.”
She refers to the desktop deposit as possibly one of the last frontiers of branch-based banking and explains that the bank’s next area of attention will be on translating all of these banking services for the mobile environment, such as cell phones, hand-held PDAs and Blackberries.
Despite Wells Fargo’s talk of final frontiers, Ms Young also adds that the physical and relationship-based banking will not be eradicated or made extinct and feels it need not be a case of customers choosing one or the other as their sole delivery channel. It is a sentiment shared by Mr Northam at HSBC. “Companies will still need to deal with cash, need advice on complex products and learn how to finance more effectively and I cannot see that going away in the short term. But everything else can be done online and in three to five years, I think all transactional aspects will be available online,” he says.
Technology overhaul
Aside from migrating services and customers away from the costly environment of the branch to the convenience of online platforms, banks are also considering an overhaul of their core technology. Many of the internet banking platforms were originally designed and developed more than a decade ago, generally through a basic internet package that many consider lacks the flexibility needed for the current world.
In the decade since, core banking technology has advanced considerably with more component-based or service-oriented architecture replacing the monolithic mainframes of yesteryear, enabling banks to develop specific applications with ease and relative speed, key benefits for banks looking to migrate branch-based services to their online platforms.
“A number of banks are looking at renewing their core systems but many will decide they cannot afford to rip out the legacy mainframe that has served them well for so long,” says Ms Bennett. “But what many banks will do is isolate this mainframe and introduce a banking backbone, typically based on service-oriented architecture, to untangle the front and back offices and negate the need to maintain all of the separate point-to-point connections – a particularly onerous task for many online banking platforms that were originally hardwired into legacy systems when they were first developed back in the 1990s.”
Dramatic benefits
There are banks that are seeing the benefit of core systems renewal and sometimes these benefits are quite dramatic, she says. For example, new products can be released within days rather than months. But the renewal itself is not an overnight task and there is a direct correlation between the size of the bank and age of the existing technology and the resulting level of difficulty in completing the renewal.
This is not to say that core banking systems renewal is restricted to smaller banking institutions. HSBC is in the middle of overhauling its online business banking platform. “The current system is not as flexible and is expensive to maintain. It is being rebuilt with new hardware and software,” says Mr Northam.
Twelve years ago, when HSBC developed the original platform, 80% of it was based on a third-party system with 20% of in-house customisation. “This time it will be more the other way round, with 80% of it developed internally to give us a much more bespoke system that will allow us to release new products much quicker,” he says.
Customers hope that, more importantly, a renewal of core banking systems should make it easier for a bank’s many different departments to communicate with each other, share data more efficiently and, finally, rescue the SME banking service from the no-man’s land between corporate and retail banking to an online destination of its own.
