The Internet and Beyond: Banking in the Next Millennium

A White Paper for BellSouth

March 1, 1999

Prepared by Calvin D. Johnson

Spring, 1999

The world of banking and financial services is in the midst of dramatic change. Driven by deregulation, consolidation and information technology, the financial services industry is busy reshaping itself – moving away from traditional "brick-and-mortar" branches to focus on new delivery channels, improved customer service and 24-hour-a-day access to information and transactions.

Like most other industries today, the financial services field relies heavily on information technology. Like data itself, many financial products are ephemeral. You can’t touch, feel or see them. They are, in a sense, nothing more than bits and bytes – characters and numerals on a computer screen or piece of paper. It’s what these products represent – hopes, dreams, security and progress – that people yearn to acquire or achieve.

As the industry changes, financial institutions are experimenting with and embracing a wealth of new technologies. Through automated teller machines, Internet banking, extended-hour call centers and more, banks and other operations are educating their consumers on how advanced technology can lower costs while improving the level of customer service. "Bankers’ hours" used to be from 9 a.m. to 4 p.m. Monday through Friday. With the help of new technology, today’s consumers can check their account balances, apply for loans, get cash or conduct transactions 24 hours a day, seven days a week.

Brokerage firms and insurance companies aren’t about to be left out, either. With the aid of the Internet, consumers can now trade stocks, open an IRA, check on their retirement funds – even get a quote for automobile insurance – without having to call or visit their agent or broker’s office. And increasingly, these three once-divergent financial industry segments – banking, brokerage and insurance – are working together or merging with one another to sell a complete line of financial services and products.

There are two key trends to watch in financial services – and both relate in one way or another to advances in technology and telecommunications. First, today’s financial services industry is undergoing a significant consolidation, both in terms of corporations and products. Secondly, the industry is changing the way it delivers financial products and services to its customers.

This white paper will explore the drivers behind the changing realities of financial services, as the world moves beyond the Information Age into the Interactive Age.

Citicorp and Travelers Group. Bank of America and NationsBank. Wells Fargo and Norwest. Banc One and First Chicago … the list goes on and on. As the barriers to interstate banking and cross-industry consolidation fall, banks and other financial institutions are following the Darwinian rule: merge, be acquired or face an uncertain future on your own. Banks must change, adapt or face being "gobbled up." In a more competitive, deregulated business environment, only the fittest will survive.

As Acting Comptroller of the Currency, Julie Williams pointed out recently: "In 1922, there were more than 22,000 state and nationally-chartered commercial banks in operation compared to fewer than 9,000 today…The leading factor in this dramatic consolidation has been the increase in merger and acquisition activity. There have been almost 7,000 bank mergers since 1980 alone, and they have involved increasingly large institutions."

But the move toward consolidation is not just corporate in nature – financial products themselves are being merged, tweaked and reshaped. Old-fashioned checking, savings and Christmas Club accounts are old hat. Today’s financial institution offers a plethora of investment, lending and retirement vehicles: from fixed- and adjustable-rate mortgages to IRAs, Keoghs and (401)k plans. And plugged-in consumers want more than just a checking account – they want an "asset management account" that blends cash, money market, stocks and other investments into a single, integrated account.

The idea is to create a "financial supermarket" where consumers can select from a full range of financial services and products that are appropriate to their lifestyle: insurance, home, auto and business loans, checking and savings accounts, annuities and retirement programs, stocks and bonds, etc. The idea has certainly caught on with the nation’s banks, according to research by Mentis Corp., which noted in 1997 that:

But merging disparate companies, products and computer systems into a single, integrated approach is easier said than done – particularly while the company must continue to face growing competition and a host of other distractions. Technology costs – for systems integration, new product development and back-office integration – are likely to be high, along with the potential for unforeseen customer service problems.

"In addition," wrote the online publication, Forbes Digital Tool, "Traditional banks are expected to devote at least 50 percent of their IT budgets in 1999 to resolving Y2K issues – a factor that will certainly affect how quickly and smoothly the larger firms will handle systems consolidation and ramping up for the web."

The introduction of new organizations, products and services often leads to better ways of managing customer relationships. And that’s certainly true in the financial services industry. Faced with the high cost of building and operating a traditional "brick-and-mortar" branch, banks are turning to alternative delivery channels – and consumers are eagerly choosing these new channels, since they offer fast, efficient, anytime access.

"Large banks are championing the reformation of traditional branches," notes Mentis Corp.’s 1997 annual survey of financial institutions. "These banks are far more likely to be either decreasing branches or displacing them with non-traditional offices…Large banks are aggressively migrating transactions out of the branch (evidenced through reductions in teller workstations) and onto self-service devices."

Even though most transactions (51 percent) still take place at a branch bank, "(t)he number of transactions monthly via traditional branches continues to decline while transactions performed at branch alternatives on a monthly basis are ever increasing," adds a 1998 study by PSI Global of banking trends. Currently, more than 36 percent of all households conduct less than one-quarter of their banking transactions at a branch.

Instead, the use of automatic teller machines, in-store banks, the telephone, the mail and a personal computer are on the rise. Between 1994 and 1998, the monthly use of a "brick-and-mortar" branch declined from 87 percent to 78 percent, while the use of ATMs, the telephone, the mail and PCs showed gains. In-store branch use remained constant.

"The telephone banking user base has increased 10 percent since 1994," said PSI Global, "and currently measures 45 percent of all U.S. households. More significant, however, is the transaction growth that has occurred during this time. The average number of monthly transactions among users has increased by 55 percent over the past five years (from 3.8 in 1994 to 5.9 in 1998)." Most households make an average of 13 transactions a month.

Interestingly, while the overall number of consumers using PC banking remains relatively small (4 percent, up from 1 percent in 1994), the number of monthly, online transactions nearly equals that of ATMs (7.8 compared to 8). Meanwhile, the average number of branch transactions each month has fallen from 6.9 in 1994 to 5.8 in 1998, according to the survey.

Another respected bank survey firm, N.C.-based Mentis Corp., agreed. In its annual survey in 1997, Mentis noted that alternative delivery channels continue to expand among large banks, (more than $1 billion in deposits). "The percentages of big banks that currently support or plan these channels by the year 2000 are: 1) call centers – 89 percent, 96 percent; 2) ATMs – 95 percent, 100 percent; 3) PC-based banking programs – 33 percent, 90 percent; and 4) Internet – 6 percent, 87 percent," according to Mentis.

The reason for this shift is clear. While the cost of an in-branch transaction averages $1.50, the cost of most alternative delivery systems is substantially less. According to a study by Booz, Allen & Hamilton, an ATM transaction costs 55 cents; a point-of-sale (POS) debit costs 15 cents; a personal computer transaction costs 20 cents and an Internet transaction costs just 1 cent. Because of the cost of labor, a call center transaction that involves live attendants or customer service representatives costs $2, while a call center transaction that uses interactive voice response (IVR) technology costs only 35 cents.

Many, though not all, of these trends have been driven by the rapidly changing world of information and telecom technology over the past 10 years. Coupled with the greater cost-efficiencies of merged operations, advanced technologies make it possible to deliver new products and services faster and more economically to consumers than ever before. Here are some examples of the ever-changing role that advanced telecom technologies are playing in the financial services industry:

• Call center solutions/Interactive Voice Response (IVR).A hub of technology, today’s call center lets financial institutions handle a greater volume and variety of customer inquiries – usually at a lower cost per transaction than at a branch. Many institutions operate their call centers for extended hours and combine human attendants (customer service representatives) with a touchtone-based IVR system. Combined with an 800 number, a call center can handle inquiries from all across the country – even 24 hours a day if the institution chooses. According to Mentis, banks with more than $4 billion in assets expect the average percent of customers using their call center to double – from 24 in 1997 to 49 in 2000.

• Asynchronous Transfer Mode (the "other" ATM).Capable of moving data at rates of up to 622 Mbps, high-speed, high-bandwidth asynchronous transfer mode (ATM) is frequently used as the "backbone" for voice, video and data networks that link branch offices and headquarters. ATM is a packet-switch transport technology that serves as the platform for all broadband services, including frame relay, switched multi-megabit digital service (SMDS) and more.

• Frame relay networks. Frame relay is an economical, packet-switched digital technology that’s widely used for transmitting data at rates between 56kbps and 45 Mbps. Its "bursty" nature allows customers the flexibility to send bursts of data at peak transmission times. Frame relay technology is sometimes combined with ISDN (Integrated Services Digital Network) technology as a back-up.

• Internets, intranets and extranets.When it comes to grabbing the imagination of consumers, financial institutions are well aware of the potential that the Internet’s World Wide Web represents. Online banks, some without any brick-and-mortar operations tout their interest rates on certificates of deposit, while other institutions offer everything from access to checking and savings accounts to insurance over the Internet. But the same browser technology used to reach consumers via the WWW can also be used to inform employees (via an intranet) and/or trading partners (via an extranet).

Throughout the Southeast, the company that more banks and financial services companies turn to more than anyone else for their telecommunications services is BellSouth. With an experienced team of business specialists throughout its nine-state territory, BellSouth offers a wide range of advanced communications products and services – including high-speed voice and data services; sophisticated call center and branch office equipment; and the expertise to plan, install, maintain and manage an organizations’ entire voice-and-data communications network.

BellSouth’s product and service offerings run the gamut of advanced communications services, but several with particular interest to financial institutions are:

As the financial services industry continues to consolidate and evolve, there’s little doubt that information and telecommunications technologies will play a critical role in that change. Seeking ways to survive in a highly competitive field, banks, brokerages and insurance companies are turning to technology to deliver improved customer service, offer services "anywhere, anytime," and improve their margins – in essence, to continue to succeed.

To keep up with ever-changing state of technology, financial services companies are turning to experienced communications vendors like BellSouth. From managed network solutions and high-speed data communications to websites that let consumers access their account information 24-hours-a-day, BellSouth is helping banks and other financial institutions throughout the Southeast with powerful, advanced telecommunications solutions.