Make Way For E-Commerce

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Make Way For E-Commerce
Branch offices are the likely first casualties of banking's high-tech revolution

By Joseph C. Panettieri
Issue date: Sept. 18, 1995

rom electronic commerce to branch office automation, the business of banking is undergoing a technology revolution. The big challenge for chief information officers: Design and deploy a technology infrastructure that can attract new customers, speed data retrieval, reduce costly paper trails, and extend financial networks into millions of homes--where personal banking will mesh with the PC, and perhaps even the TV.

"Whether you call it virtual banking or electronic commerce, our business is changing," says Robert King, senior VP of information systems at First Tennessee National Corp. in Memphis. Adds Craig Goldman, CIO at Chase Manhattan Bank N.A. in New York: "We're all pushing to get our customers interested in dealing with a bank without walls."

As a result, technology spending at U.S. banks is expected to jump more than 20%, from $16.35 billion in 1994 to $19.8 billion in 1997, according to a recent survey of senior banking executives by Ernst & Young and the American Bankers Association.

The new technology will let customers bank from home or the road, and reduce the need for costly branch offices, which banks are shedding fast. According to a recent report by accounting firm Deloitte Touche Tohmatsu International in New York, retail banks will likely close half their branches during this decade in an effort to stay competitive. "People who bank in branch offices are typically high-transaction, low account-balance customers," notes Robert DeNunzio, a principal at EDS' strategic technology consulting division in New York.

Taking advantage of the trend toward electronic commerce are online service providers America Online, CompuServe, and Prodigy, and software companies such as Microsoft and Intuit, which are helping banks move branch customers online. While most banks didn't sign online deals until this year, some bank CIOs identified the electronic commerce opportunity much earlier. Barnett Banks Inc. in Jacksonville, Fla., has offered home banking via Prodigy for more than two years. "We're continuously evaluating the application of new technology," says Barnett CIO Jonathan Palmer. Barnett and other banks ar e hedging their bets by offering electronic account access by phone, and exploring interactive TV and electronic commerce on the Net. "Clearly, there's no other technology that has the potential to affect financial services the way the Internet does," says David Taylor, executive VP of the Bank Administration Institute.

But for the Internet to be a viable means for electronic commerce, it must be better secured from threats such as hacker attacks. A universal Net security standard has yet to be deployed, but banks are hopeful that such a standard will arrive soon, thanks to encryption developers at major universities, Visa , Microsoft , Netscape Communications , and other technology providers.

ATMs Cut Costs
Until the Internet is made more secure, banks are tapping an old standby--the automated teller machine--to further reduce costs. Analysts say ATM transactions cost about one-quarter of teller transactions, so banks are trying almost every option--including charging up to $3 a visit for teller service--to push customers to ATMs.

That's not to say ATMs will completely replace branch office employees. On the contrary, several banking giants are tackling massive branch-office automation projects. Bank of Boston Corp., for example, is deploying networking gear from Bay Networks Inc. and the IBM OS/2 Warp operating system in dozens of branches so managers can help customers evaluate investment offerings.

While Microsoft's Windows 3.1 outsells OS/2 10-to-1 in the general market, OS/2 has proven to be popular with banks because of its ability to connect to mainframes and its extensive crash-protection features. IBM says OS/2 is used on workstations or servers at 30 of the 50 largest U.S. banks. "OS/2's penetration in banking is significant," says Barnett's Palmer. "We've had it on our server for four years and are considering it for our desktops. "

Among the most recent users of OS/2 is First Union Corp. in Minneapolis, which recently began installing Warp Connect--a desktop version of OS/2 with built-in networking connectivity. Warp Connect is slated to run newly developed account maintenance applications at First Union. Still, savvy CIOs know that it isn't wise to standardize on both OS/2 and the Microsoft Office applications suite, because Microsoft will phase out its current 16-bit Office in favor of a 32-bit version this fall, and OS/2 won't be able to run the 32-bit version.

The clearest option for banks running Office on OS/2 is either switching to Microsoft Windows NT, or swapping Office for Lotus Development's SmartSuite, which runs natively on OS/2. So far, only a handful of banks, including Bankers Trust New York Corp., use the two-year-old NT. But that may change. "The NT environment is becoming popular in banks because it has open interfaces and an attractive price point," says Craig Lashmet, a partner at accounting firm Grant Tho rnton LLP in Chicago.

Windows NT Server and NT Workstation are taking center stage at Citicorp N.A. in New York, where the No. 1 technology challenge is global integration. "Most other banks go with OS/2, but it's our judgment that NT is a very progressive operating system for running retail branch systems," says Colin Crook, head of corporate technology and communications at Citicorp.

While OS/2 and NT battle for department servers and workstations, Unix is still the preferred operating system for off-loading mainframe applications onto client-server systems. How does a bank decide which applications to move off big iron? "If it's got to be bulletproof and relates to large transactions, that's a job for the mainframe," says Chase's Goldman. "If the application requires friendly interfaces and end-user access to information, that's for client-server."

Riding The Wave
Chase, which last month announced its intention to merge with Chemical Banking Corp., is riding the client-server wave wi th imaging and workflow applications, including Lotus Notes. "The long-term goal is to process loans and other transactions using imaging and workflow software," says Goldman.

Another large imaging software user is Barnett, which processes five million checks per night in its Jacksonville imaging facility. Barnett is prepared to deploy imaging technology at other locations because its corporate network uses frame relay and two high-speed switching technologies--synchronous optical network and asynchronous transfer mode.

Ironically, such massive networks can sometimes slow business processes at banks, making it extremely difficult to retrieve data in a timely fashion. "Most every bank is striving for an answer to slice-and-dice information on the fly," notes EDS' DeNunzio.

For many banks, that means embarking on data warehousing and software modeling projects that can speed information location and retrieval. At First Tennessee, the answer was Microsoft's Visual Basic development tool and A ccess database. Using the two products, First Tennessee developed an executive information system that allows bank officials to grab revenue and other financial variables off a mainframe and present them graphically on a PC. "It's a great system for forecasts," says senior VP King.

Unfortunately, the tool won't help King and other IS execs forecast where IT will take banking next. Most banks likely will continue their march toward electronic commerce, occasionally stopping to build a data warehouse or automate strategic branch offices, while replacing others that prove too costly with more ATMs.

The ultimate destination is a secure Internet. Savvy CIOs are already preparing for that day.

(To view the Banking chart in PDF format click here)

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