Sept. 11, 2000

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Banks Face Big IT Demands

Banks must be good at B-to-B and B-to-C service and remain true to tradition

By Jennifer Maselli

More on banking industry:

Industry Charts: Banking (PDF file) sidebar: PNC Financial Services Group Inc. Banking On B-To-B (8/21/00) InternetWeek Financial Services Bank On BITS (8/21/00) InternetWeek Banks Wield Peer Pressure (6/26/00)

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hat's it like to manage business-to-consumer and business-to-business online projects while simultaneously responding to high demand for your company's traditional services and new sources of competition, all at a breakneck pace, day after day? Just ask any business or technology manager involved in IT planning at a major bank, where a variety of high-priority initiatives constantly compete for time, talent, money, and other resources.

While companies in some industries can focus on either B-to-C or B-to-B commerce, banks have had to get good at both. The number of financial institutions that provide online services has jumped from about 50 five years ago to 10,000, according to Online Banking Report. And banks have made that transition amid high demand for their traditional services and at the same time that deregulation has made it easier for new players to enter their market.

"Financial-services companies have come a long way when it comes to the Internet," says Dushyant Shahrawat, an analyst with the Tower Group. For years, financial firms were inwardly focused when it came to IT, insisting on internal development projects for competitive reasons. "The Internet has forced them to move much faster," Shahrawat says. "They have outsourced noncritical elements and are now focusing their attention on strategic issues like how to deploy applications over the Web more quickly and what's the best partnering strategy for Internet initiatives."

J.P. Morgan & Co., for example, has outsourced maintenance and support of some of its systems to the Pinnacle Alliance, a group that includes Andersen Consulting, Cap Gemini, and Computer Sciences. At the same time, J.P. Morgan is an E-commerce leader, Shahrawat says, as shown by its incubator strategy.

Where are other banks putting their IT efforts? Many are involved in online initiatives aimed at improving customer satisfaction and attracting new customers. They're also trying some new things. State Street Bank & Trust Co., for example, has created an exchange auction site for bond trading. And Wachovia Corp. is considering a retail exchange that would let its customers buy office supplies in bulk at negotiated rates. The approaches range from spinning off new companies and partnering with competitors to revamping IT departments around new Internet-oriented business plans.

State Street's B-to-B efforts include a global trading portal, called Global Link, that's intended to give investment managers access to all the services they might need, including access to data, research, analysis, and fund advice. The 3-year-old site was enhanced this year with instant messaging to support foreign exchange trading; investment managers and foreign-exchange traders can now negotiate trades and execute transactions online.

In a nod to customer convenience, State Street makes it possible for investment traders to perform foreign-exchange transactions not only with State Street but with other banks. State Street will work with investment managers who want to conduct trades through multiple institutions by creating links to those banks. "We understand that the nature of this industry is to deal with more than one financial institution," CIO John Fiore says. "By providing one platform for managers to perform these functions, we're making our customers' jobs easier."

Bank of New York Co. has also created online trading capabilities for investment managers. The company's homegrown online system, called Inform, gives business clients tools such as online equity trading, depository receipts information, portfolio status reports, and securities information.

Most of Bank of New York's business clients choose to perform these functions over a virtual private network, which means occasional service interruptions caused by upgrades and maintenance. During the past year, Bank of New York tried to minimize those problems. "We took every component of the online trading system and installed an automated failover solution, load-balancing across multiple data centers, and load sharing between multiple Internet service providers so that we are now up and running 24-by-7," says Richard Pace, the bank's chief technologist and an executive VP.

In addition, Bank of New York improved online security with the use of smart cards. Approximately 3,500 business users connect to Inform securely via the smart-card technology. The project involved the installation of software modules that validate a one-time password before providing access to back-end servers. Smart-card readers were distributed to business clients that wanted to use the system.

Bank of New York has also been working to expand its online foreign exchange trading services. In July, it unveiled a partnership with AVR Technologies Ltd., an E-business software company. The two created MarketMarque Inc., a jointly owned company that offers a multibank version of Bank of New York's iFX Manager, an online foreign exchange trade order-management and execution platform. MarketMarque lets Bank of New York and other financial institutions participate as dealers in the iFX Manager Network. The advantages for investment managers are a simplified way to communicate and conduct online foreign exchange transactions with more then one financial institution.

J.P. Morgan has also used a spin-off strategy in several of its online initiatives. Earlier this year, the company launched LabMorgan, an incubator program for cultivating business ideas--and one that has already shown results. Arcordia, an independent derivatives management and settlement company, was launched by J.P. Morgan and EDS to provide transaction management and settlement services via the Internet for derivative products. The venture offers customers round-the-clock access to derivative trades, as well as derivative settlement and management services. Another new company, Cygnifi, offers market and credit-risk applications and portfolio stress-testing services to investment managers.

J.P. Morgan is also partnering with competitors to better serve customers. Earlier this year, it launched Securities.Hub, a portal for institutional investors, in conjunction with Goldman Sachs, Lehman Brothers, Merrill Lynch, Morgan Stanley Dean Witter, and Salomon Smith Barney. "Buy-side customers don't want to log on to multiple sites, so a lot of these dealers are creating community dealer Web sites like a Securities.Hub," Shahrawat says. A second portal, Market Axess, was launched as an independent company in January by Bear Stearns, Chase, and J.P. Morgan. It allows traders to price and trade corporate, high-yield, emerging-market, and municipal bonds, among others.

Mike Reilly, J.P. Morgan's chief technology officer, says spin-offs can increase the potential for raising capital through public offerings and by creating new channels for reaching customers. In addition, it's a way "to allow our IT workers to take part in these exciting initiatives," Reilly says. While it's true that IT workers who leave to work for one of Morgan's startups also leave a hole in the IT department, Reilly says it's worth it. "It's better then losing them to a new E-commerce company, and we still benefit because Morgan owns a stake in all of our spin-offs." Morgan has about 4,500 IT personnel, including contract workers and consultants. Reilly says the promise of working for a spin-off has helped Morgan attract and retain IT talent. "It's much easier to recruit now than it was a year and a half ago," he says.

Meanwhile, other banks focus their online efforts on consumers. Wachovia, in Winston-Salem, N.C., recently created an online banking system that will let home users see up-to-the-minute balances. "We used to have a batch system that would update account balances every night, but now we have straight-through processing so customers can see their new balance immediately," says CIO Frank Robb. In order to do so, Wachovia switched its home-banking platform from Unix to Windows NT because Microsoft was willing to help provide the necessary technology, Robb says. Another reason for the move: The number of software vendors developing on NT has reached critical mass, Robb says. To help with the migration, Wachovia brought in consulting firm Corillian Inc.

Many financial institutions have been working to give business and consumer clients online access to their accounts. State Street's In-Sight application, for example, lets customers access general-ledger and cash balances online.

Summit Bancorp. has created new online features for its 1.2 million home users. The Princeton, N.J., bank lets customers pay bills online, apply for loans, and manage their mortgages. Other value-added services include estate and tax-planning services. And it provides 25 online calculators for tabulating everything from debt and elder-care costs to taxes, IRAs, and estate planning. Those and other services are in high demand among consumers, says a spokesman for the American Banking Association.

"Everyone is scrambling to offer bill presentment and payment online," the spokesman says. "It's a real boon for the industry. Consumers are looking to sign up with banks that can offer them convenience, and this is a major way to do it."

In order to win business in the new economy, it's clear banks are partnering with technology companies as well as their own competitors. In doing so, they'll reach more customers in innovative ways.

Gone are the days when large financial institutions hid their technology for fear competitors would gain a market advantage. In a new economy, banks recognize new competitors such as technology companies and marketplaces, and they're moving fast to create innovative revenue sources.

Illustration by Jeffrey Fisher
Photo of Robb by Jerry Wolford

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