Showing papers in "ABA Banking Journal in 2000"

Internet Banking-An Update from the Frontlines

Abstract: Back in the spring of '99 when I asked community bankers to tell me about their plans for full-service Internet banking, the typical responses were, "Not until next year--and only after we're done with Y2K," or "My customers aren't demanding it." What a difference a few months make. Now, at the turn of the millennium, those folks are singing a very different tune. Around the country, increasing numbers of community banks have made implementing a competitive Internet banking strategy one of their top priorities for 2000. To get a sense of market activity, we asked 1,000 banks who already had websites to complete our Five Minute CEO Survey on their Internet banking efforts. Their responses provide valuable insights for community bankers trying to move up the Internet banking learning curve. Collectively, the responses offer insight about how far the banking industry has come in its pursuit of e-customers today and where it is going in the very near future. Seven real-time observations As any banker who has been involved with this revolutionary new financial services delivery channel will tell you, the following are becoming self-evident when it comes to Internet banking: 1 No bank wants to be left behind when it comes to the e-banking revolution. Being a fast second may have worked in the past, but with developments now moving at "the speed of the Internet" falling too far behind may make it effectively impossible, or at least very difficult, to catch up with your competitors. 2 Most banks with websites are already providing or implementing full service Internet banking to their customers, or have it as a high priority strategic objective for 2000. These banks fully understand that Internet banking is the cornerstone of an effective customer relationship management strategy. 3 Bank customers are becoming increasingly more interested in having Internet access to their bank. As a CEO of a $200 million in assets bank told me, "Potential new customers are asking us two questions: First, "What are your Saturday banking hours," and second, "Do you offer Internet banking?" For all bankers, the major question is just how long will current customers be willing to wait for Internet banking before they move their business to a competitor. 4 Community banks are adopting Internet banking in a phased progression, from the establishment of an initial billboard style website, to offering enhanced content on that site, and ultimately to offering full service Internet banking, including balance inquiries, bill payment, account opening, loan applications, etc. 5 The initial compelling force behind implementing Internet banking has been defensive. Most CEOs said they moved forward simply out of a desire to hold on to their current customers. The objective of attracting new customers was a secondary concern. Banks were basically setting up websites because their competitors were doing the same. Now they are focusing on the opportunities the Internet provides to reach customers and to avoid the limitation associated with a traditional bricks and mortar strategy. In short, instead of looking over their shoulders, many bankers are looking down the road at new opportunities. 6 Capitalizing on Internet banking is a journey, not a walk around the block. The basics include developing a marketing strategy for driving traffic to the site, increasing actual utilization of services over the Internet, offering a broad array of e-commerce services, and ultimately establishing a web based loyalty management program. 7 The economics of Internet banking are not yet fully understood. The economics of losing a good, profitable customer are. Building barriers to customers exiting The single most important driving force behind the increasing momentum of banks implementing full service Internet banking is to create powerful barriers to customers exiting. …

Community Banks Go Online

Abstract: Simpler and more affordable technology brings Internet banking to smaller institutions For a closer look at the future of community banking, take an online look at the World Wide Web. Internet banking is the trend of tomorrow for financial institutions large and small. However, while the mega, multi-state banks are already enjoying the productive fruits of e-business, banks in smaller towns and communities are only now rapidly logging on to the benefits of online commerce. A new generation of convenient and more affordable technology has put online banking within the reach of even the smallest community bank. These new solutions include dynamic remote web software systems, Internet host interfaces, and highly-specialized online banking support services. By understanding the trends and technologies that are driving the move toward Internet banking, community banks can position themselves to take full advantage of this crucial development. Online trends The Internet revolution is coming to a community bank near you. The use of personal computers continues to grow, with more than half of U.S. consumers having access to a home computer. Industry statistics show that by mid 1998, almost 80 million consumers in the United States and Canada had Internet access. By the year 2002, some 320 million people around the world are expected to use the Internet on a regular basis, and many say that growth will continue as users in smaller communities and developing nations acquire Internet-capable technologies. Internet banking itself has been a long time coming. The first PC banking systems were developed in the 1980s, and Microsoft launched the first home banking network in 1994. By 1996, some one million U.S. households banked via the Internet, a number that grew to more than 4.2 million by the end of 1997. Industry observers predict that online banking will continue to grow, with projections showing some 28 million U.S. households will bank online by 2001. Those are significant numbers, and they are changing the way banks deliver products and services. For community banks that want to stay ahead of local competition and major interstate banks, the question is not if they will offer online services, but when. Community challenges While community banks can certainly derive significant advantages from Internet banking, e-commerce also poses unique challenges for the smaller institution. Depending on their location and demographics, local banks may need to work a bit harder to sell online banking services to their customers. Rural banks in particular, when compared to banks in metropolitan regions, may serve customers who are less technical and who have not invested as heavily in Internet-ready technology. Some older customers may be less receptive to the newness of Internet banking. However, as consumers in smaller communities catch up to their big city counterparts in terms of PC usage and Internet access, community banks with online capabilities will come out ahead. By their very nature, smaller banks often do not have and cannot afford the technical infrastructure maintained by their larger competitors. Few local banks, for example, have the resources to build or maintain their own web-enabled data center. For this reason, most community banks rely on external specialists for technical design and expertise and may lease their infrastructure from independent suppliers. The same limitations often apply to the personnel needed to design and troubleshoot e-banking systems. Some community banks, like small businesses in many other industries, simply cannot afford to hire their own information technology staffs. Some now turn to independent consultants and buy both hardware and software on a pay-as-you-go basis. Banks should realize that no immediate cost savings will be gained by implementing Internet banking because they are adding a delivery channel to their existing cost structure. …

E-Business Models Stress Putting the Customer First

Abstract: If you think the first rule of e-business is to make money, you probably won't fare well in the virtual realm. That's the consensus, anyway, of a recent crop of books and seminars on e-commerce and business models that succeed there. Think of the customer first, and you're half way to being the goose that lays golden eggs. Want to keep those eggs coming? Then understand that we're past the blue-sky phase of the Internet's business cycle, and in a steadier chapter where smart, soberly conceived models can shine, says Matthias Hartmann, managing principal and practice leader, IBM financial services, Frankfurt, Germany. Hartmann is responsible for providing systems related to e-banking, IT-strategy, and clearing and settlement. At a recent technology conference hosted by Trema Group, in Cannes, France, he spoke about emerging business models in the digital economy. Among other points, Hartmann noted that banks will have to partner with specialized service providers to triumph in their internet ventures. Hartmann also offered examples of early Internet winners. Autobytel, he says, is a full-service model (one that offers market-making functions as well as information for comparison shopping) that aligns itself around the "life event" of a customer--in this case, the purchase of a car. "Contact arrangers," third parties that link buyers to sellers and take a fee, operate under a different, yet apparantly viable, model. Each offers banks some best-practice notion that they might take to the table--or their boardrooms--but they will also need their own sharp ideas to win Internet-based earnings. Creating value for the customer Although much of Hartmann's talk involved dissecting the business models of the few, the lucky, and the branded, he also discussed (like others cited in this article) the customer, who firmly occupies center stage in the digital economy. Being for the customer involves more than slick sloganeering, says Hartmann and others. It refers instead to customer centricity, one cornerstone of the digital economy. "The early optimism has faded, and now we're looking for models that underscore distinct value creation," he explained. Virtual hesitations, stumbles, and adjustments ought not be confused with short-lived fads, however, because, by most accounts, e-commerce is here to stay. (In fact, it is rapidly becoming synonymous with commerce itself.) Forrester Research, for example, estimates that 400 million consumers are expected to be online by 2001, up from 100 million in 1999, while Jupiter Communications postulates that eight million households are conducting Internet banking right now. By now, when e-commerce hype is at an all time high, and tech stocks have soared, and tanked, and trended upward again, bankers have learned at least the fundamentals about the burgeoning virtual marketplace. And given bank's traditional roles in the payment system and in lending, there are some obvious places to begin shaping their e-commerce strategies. But Mary Pat McCarthy, co-author of Digital Transformation, The essentials of e-Business Leadership, McGraw Hill, says that in her role as vice chair of Information, Communications, and Entertainment at KPMG LLP, she gets numerous requests for "more clarity" in matters related to the Internet. And so, she wrote a kind of primer on developing an e-commerce strategy that discusses the need for vision and the need to embrace imprecision to win on the Net. "Management needs to understand that the Internet is typically disruptive--yet if they wait for perfection [in their business model] they'll lose." Making the suggestion that banks spin off particularly disruptive models into separate companies, McCarthy also touches on the importance of the six "c's" --commerce, content, culture, cost, collaboration, and community when planning an Internet venture. "There is a live interaction between these elements; you can't manage any one of them out of context with the rest," McCarthy explains, adding: "You can't think linearly about the Net. …

Forget "Cost Cutting" Think Low-Cost Revenue Growth

Abstract: The price of overzealous cost cuffing is too high. Banks now look at their efficiency ratio in the context of their overall business Some call it an obsession. Others say it's a crusade. Semantics aside, one thing is clear: Banks have focused on efficiency with a religious-like fervor during the past decade. Under the gun to rethink standard ways of doing business while beating the previous quarter's financials, banks have launched a variety of initiatives aimed at "eliminating redundancies" and "streamlining operations." In the name of efficiency, banks have merged, purged, displaced, and re-engineered "non-essential" business lines, locations, and people. By some evaluative measures, the efforts have yielded results. For example, in ABA Banking Journal's June 2000 Top 100 ranking of bank holding companies with assets over $1 billion, the median efficiency ratio for the group was 56.91%, reflecting an improvement from 58.64% the previous year. While the efficiency ratio, generally defined as non-interest expense minus other real estate owned, divided by revenues, can be an effective performance measurement tool, it isn't a singular one. Moreover, as some analysts and consultants stress, efficiency cannot be defined strictly in terms of expense reduction. Indeed many banks have learned the hard way that they cannot cut their way to long-term profits and that viable revenue-growth issues must be addressed. But understanding this challenge -- and effectively managing it--are two different things. Comparatively, experts say it's a lot like maintaining a healthy lifestyle. Intellectually, people know that fitness is achieved by a striking a balance between good nutrition and regular exercise. It's not an "either-or" proposition. However, some try to give the illusion of good health by crash-dieting in the short term instead of maintaining a consistent health regimen. The same is true of some banks. They became acquisitive--in pursuit of longer-term revenue growth--then slashed expenses aggressively to make their quarterly financials look good. But they later found that they couldn't effectively grow revenues from that base. Cut within context While no one is advocating inefficiency, analysts and consultants stress that banks' efficiency strategies must go beyond the easy route of slashing headcount, branches, and product offerings. Efficiency isn't a silo and must be put into the perspective of broader corporate initiatives. "The challenge moving forward--and it's one that is becoming extremely difficult--is the ability to grow revenues more inexpensively," says Christopher Kelley, a bank stock analyst at Morgan Keegan & Co. in Memphis. "If you cut too much to the detriment of service, it may take a long time to bring customers back, and in some cases you may never get them back." Joseph Duwan, a Keefe, Bruyette & Woods analyst in New York, agrees. "I think that there is a growing recognition among bank CEOs that when you look at efficiency, you also have to look at the company's overall business mix as well as customer service," Duwan says. "There has to be an understanding and a balance of priorities." Experts say that a comprehension of viable business strategies for the future must also come into play. For example, bank managements that are actively engaged in merging and digesting acquisitions may find themselves wasting an inordinate amount of time re-engineering business models that aren't particularly opportunistic--or profitable--moving forward. Bankers must be able to assess various business activities--both traditional and nontraditional--on the merits of their long-term potential. "While it's great for banks to strive for an improved efficiency ratio, they should also be looking at ways for investing in their future--in technology and customer relationship management," says Alex Sheshunoff, president of Sheshunoff Management Services in Austin, Tex. …

Is XML the Next Big Thing

Abstract: Bank applications are emerging XML is a set of simple rules for converting the meaning of a document written in any software into a globally standardized format that any other software can understand. The current buzz in IT departments about the language is that it will soon rival the current web workhorse, HTML (Hypertext Markup Language) for use in e-commerce, and eventually devour it. Both languages enable people to send messages over the Internet. The essential difference is that HTML lets a sender's browser tell a receiver's web server how to display the format of a message, while XML lets a sender tell a receiver how to handle the content of a message. This seemingly esoteric difference is precisely what's needed at this juncture in the Internet revolution, XML buffs say. The new language will enable banks to create knowledge systems and to exchange financial information with customers and such third-party service providers as stockbrokers, mortgage and insurance companies, and mutual funds. A simplified example can illustrate the differences between XML and HTML. Both use "tags" (stylistic definitions set off in pointed brackets, [less than]thus[greater than]). Imagine you are a firm's web server and you get this HTML message: [less than]H1[greater than] blab, blah, blah [less than]/H1[greater than] You know that H1 means that you should print "bla bla bla" in the size and style of your firm's first-level header. You don't know or care what the words mean. Now imagine you are the same server equipped to handle this XML message: [less than]amount[greater than] 125.75 [less than]/amount[greater than] If this message comes in the context of, say, a billpay transaction, it's likely you are also set up to take $125.75 out of a customer's checking account (similarly defined) and send it somewhere (similarly defined), and so on. You can program your system to do this without calling up a separate routine at each step of the billpay transaction. That saves a lot of processing time. XML isn't the actual language that defines meanings; it's a meta language of rules for creating specialized vocabularies for any number of generic (usually industry-wide) applications, called schemas. Banks are late-adopters of XML, but some interesting applications are beginning to emerge. Wells Fargo leads One of the first banks to use XML in a major application was e-banking pioneer Wells Fargo. Early last year, the bank's Institutional Trust & Brokerage unit decided to upgrade its intranet knowledge base to make it more useful for some 1,800 users in the group. …

Disintermediation: A Positive Force for Banks

Abstract: Portals won't become banks, and banks won't become portals, but the Internet will create new winners among both banks and nonbanks The basic role of a bank has always been as an intermediary Thus, disintermediation has always been viewed as a threat The "dis-" prefix seems to connote a loss of function, a loss of meaning, and a loss of role Who needs an intermediary, people think, when technology allows the product or service to bypass a step that was once required? The truth is more complicated--but not really scary Financial services improve under disintermediation Customers are better served, the flow of funds is made more efficient, and the industry's work processes are naturally made more productive Certain institutions that lack strategic insight may do worse, but for every loser, there are likely to be two, or even three, new winners One of the proofs of this point is banking industry return on assets, which since 1993 has been higher than any time this century If disintermediation hurts, then we want more of it Of course, this has been a truly boom economy, illustrating a timeless fact: Banks do well when the economy does well and poorly when recession hits The influence of technology, no matter how much or how new, does not, and will not, affect the industry's bottom line The industry adopts technology quickly enough so that cost savings are equally distributed Benefits pass to the customer in the form of "better, faster, cheaper" products and services Increased costs, for example from IT investment needs, work the same way Profits, in aggregate, are just market returns Commercial banks make loans and take insured deposits This class of financial institution is losing share of household deposits For example, between 1989 and 1998 transaction accounts and CDs dropped from 293% to 157% Household asset growth was in stocks (15% to 227%), mutual funds (53% to 125%), and retirement accounts (215% to 275%) (See Exhibit 1) Insured commercial banks' assets have grown during the same period from $33 trillion to about $54 billion, although the share coming from core deposits shrank from 53% to 47% from 1996 to 2000 Banks are gradually changing their profile under the influence of disintermediation Total real operating costs and number of employees are roughly stagnant Because of balance sheet growth, therefore, efficiency ratios for banks over $100 million during that same nine-year period, dropped from 65% to 58% This description of financial evolution is more realistic than the revolution and impending doom preached by many end-of-worlders Banking is mature and restricted, although evolving, while financial services is growing in new areas engendered by technology It is unlikely that technology will destroy the basic banking functions of balance sheet risk intermediator and locus of final settlement for all payments Protected, quasi-governmental institutions will always be needed here Other company types would not want, and could not succeed, at penetration Those who believe Microsoft (or Yahoo) wants to become a bank don't understand what a bank is Failure of banks to monopolize new business functions, such as bill payment or presentment, are predictable because the technology lends itself to different industry structures But this is not a threat to the core, historic, banking identity There is nothing wrong with a future where commercial banks, narrowly defined, play a diminished but still critical role, surrounded by nonbanks The railroad industry of 1910 offers a metaphor Not viewing themselves as generalized transportation companies, railroads lost out to the new trucking firms who took much of the freight away But society and industry didn't care Free flows of capital went into the new industry and the customers were taken care of Even the railroad stockholders didn't care Mostly institutions, the soaring value of truck stocks offset the declining value of railroad stocks …

One-Click Check Presentment

Abstract: THE FED AND THE PAYMENT SYSTEM: PART II Montana banks lead the way in the Fed's EPIC electronic check presentment pilot which combines imaging with Internet delivery Malta, Mont., lies about 45 miles below the Canadian border in the northeastern part of the state, where major roads are few, the population sparse, and nature itself can be a formidable opponent. "We're remotely located," says Corliss Nelson, cashier of First State Bank of Malta, with a bit of understatement. Yet, First State and a group of other Montana banks are at the very center of state-of-the-art developments in payment systems. Backers of electronic check presentment as part of the solution to the payment system's glut of paper watch Montana very closely, for Federal Reserve efforts there may someday spread, in some variation, throughout the system. With about 200 depository institutions, most of them small, spread over a geographic area as long as the distance between Philadelphia and Chicago, Montana made an attractive proving ground for the Federal Reserve System's EPIC project. EPIC, which stands for Electronic Presentment Internet Checking, is a technology pilot proposed and spearheaded by the staff of the Helena, Mont., branch of the Federal Reserve Bank of Minneapolis. The goal of the "Montana Pilot," as EPIC is more commonly referred to in Fed circles, is to set up a completely electronic check payments process throughout the state in voluntary collaboration with the state's financial institutions. The technique of choice is electronic check presentment, accompanied by check imaging provided by the Fed, and internet availability of check images and related records. Building greater acceptability of electronic check presentment has turned into a major goal of the Fed's Payments System Development Committee (ABA BJ, Sept. 2000, p. 42). In early September the committee issued a list of steps to take to build that acceptance. (See page 62.) Electronic check presentment consists of substituting MICR line data for the check itself, so that the actual check need not travel beyond the point where that data is captured. This eliminates much or all of the physical transfer of checks, while still permitting consumers and businesses to make payments using the familiar paper checks they have been using for more than a century. The potential payoffs include increased efficiency, reduced fraud, improved accuracy, and reduced costs. This is electronic check presentment as defined by the Fed, and as practiced in Helena; some private sector electronic check presentment efforts still include the actual check somewhere in the flow. A phased approach The Montana pilot is a testing of legal concepts as well as technological ones. A key issue is ensuring the acceptability of an official replica of a check in lieu of the actual check. The Fed's Helena branch and participating depository institutions are engaged in the program under bilateral agreements that supersede certain laws and rules that would otherwise apply to checking transactions. This temporary legal underpinning would have to be made permanent, in some fashion, before much of what is going on in Montana could be applied beyond the state. The Montana pilot consists of three phases, with participating institutions already engaged in the first two, with the third still under development: * Phase one -- Beginning in June 1999, the Helena Fed began to image capture and archive all checks that pass through it, with the branch now processing an average of 750,000 checks daily, according to Sam Gane, branch manager. At the imaging stage, both MICR line information as well as the front and back of every check are captured. Participating depositories, in their role as paying banks, receive electronic presentment files, rather than checks, and process these as if they had received checks. …

Online Banking Yet to Deliver

Abstract: WHO COULD FORGET ALL those mid-'90s warnings by industry analysts and rainmakers that clicks would overtake bricks--causing branch banking to wither on the vine? Yet, online banking has yet to reach mass appeal--and may never be more than a tool for niche groups, a new report on ebanking confirms. Issued by eMarketer, Inc., New York City, the report compiled data about online banking from several industry sources, including Grant Thornton, Tower Group, Cyber Dialogue, Forrester Research, and others. The company also added some of its own statistical analysis. It recounts the wildly varying estimates of projected growth for online banking, and sticks to a more conservative number of 15.9 million users by 2003. What drove all the hype? A willingness to listen to e-commerce analysts a little to whole-heartedly, asserts Paul Mulligan, eMarketer's director of financial services, and the report's author. "Quite frankly, it was a little shocking to me that senior executives with a lot of financial services experience put their faith in the thinking of an analyst community with the average age of 26," says Mulligan. "Also, it was a mistake to have 'spinoff' Internet ventures, with strategies and information set apart from the rest of the bank," Mulligan believes. "If anything, all that channel separation hurt banks. They should be consolidating [customer] information from all their channels." Despite the Internet's underwhelming performance thus far, the majority of community banks, especially those with assets greater than $100 million, intend to launch sites, perceiving it as a defensive move. This may be because, as the report notes, "if you hear [something] enough, it must be true." And certainly, banks of all sizes have heard enough about virtual banking's threat to at least begin to hedge their bets. By 2003 then, 86% of all banks, savings institutions, and credit unions (totaling 21,166 as of June 30, 1999) will likely offer transactional sites, analysts project. To that end, 18.1% of U.S. banks have spent $12.3 billion in strategic IT spending. Ernst & Young indicates that 58% of the banks it surveyed said that investment in the Internet/PCs would be a strategic priority. Customers "turned off" The report portrays an industry grappling with the presence of new technologies and services--including bill payment and presentment--but typically not making an easy transition to the cyber world. Tower Group reported that only 5% of the 24,000 banks nationwide that accept retail deposits have websites with any significant transactional capabilities, though many have plans to do so later this year and into next year. Meanwhile, the customer churn rate--the degree to which customers change or abandon their online banking service--was estimated by Cyber Dialogue to be as high as 50%. …

AGGREGATORS-Aka "Screenscrapers"

Abstract: Alliance-prone e-commerce has hit corporate America, but not everybody is pleased with its effects. One type of inadvertent collaboration between companies -- that resulting from aggregation -- has many bankers frowning amid the race to win "eyeballs" on the Net. This is because, early on, nonbanks took the lead in aggregating -- loosely defined as extracting data from disparate websites and presenting it to consumers in one place. It's also because the "collaboration" in question has been mostly fractious so far. If portal players like Yahoo, or other nonbank aggregators like Yodlee, Sunnyvale, Calif., have been able to create sites more compelling than those offered by their banking counterparts, the argument goes, then many banks stand to lose in more ways than one. Matt Cone, chief marketing officer at Corillian, Beaverton, Ore., a web developer and aggregator, thinks that banks are coming around to the concept: "Banks are quickly passing the 'dread' phase to that of accepting aggregation as an inevitability," he says. "I think most banks are very interested in the aggregation concept." At first glance the practice seems innocuous enough, but it has already stirred controversy. At a time when FleetBoston Financial Corp., was launching such a site (www.NetFriday.com) to compete head-on with nonbank aggregators, First Union Bank, Charlotte, N.C., opted to protect itself against intrusion. In December, the bank filed suit against Secure Services, Inc., providers of the Paytrust.com e-bill service. First Union contended that the aggregator threatened the bank's security and violated the bank's customer privacy policy in its effort to give customers a one-stop billpay service. Subsequently, the bank withdrew the suit and hammered out guidelines for future work with Secure Services and other aggregators. But the bank remains concerned about aggregation's potential privacy and liability risks -- more specifically, those associated with the practice of "screenscraping" which is one approach to the process. Aggregation, as First Union argued, poses potential security threats, as it gives banks no way of knowing that a customer-authorized code has been keyed in by an agent, rather than the customer. Entry into the bank website by such third-party agents could unwittingly wreck havoc on carefully crafted systems. Also, if an aggregator has trouble with a customer's data, the bank may be liable, as early case law has yet to set a firm precedent. Gayle Wellborn, director of customer advocacy for First Union's E-channels division, says that the process of extracting data from bank sites to "slot it in" elsewhere creates these and other concerns for the bank. "Because of the way the sites link [as a result of aggregation], the consumer believes we tacitly approve of the arrangement, when that may not be the case. They also tend to think that the aggregator will handle their data with the same caution that a bank does, and that's also not necessarily true." To stand on firmer ground, First Union asks aggregators to sign a contract with the bank, provide end-to-end audit trails at both the system and transaction level, provide customers with full disclosures, not initiate transactions for First Union customers, and agree to adhere to privacy standards and protect consumer log-in and authentication information. First Union is also in talks with industry associations (although Wellborn declined to comment on specifics) to introduce a common set of aggregation practice guidelines. "We're interested in doing this ourselves," says Wellborn. "The idea is that it needs to be done correctly." Even now, with certain bank-friendly aggregators stepping into the space, questions about its safety and legalty remain. Octavio Marenzi, president and CEO of Celent Communications, Cambridge, Mass., just completed a report on aggregation and says that First Union was right to be concerned. …

Why Dedicated Retention Efforts Often Fail

Abstract: In debunking six retention myths, the author offers a better way to build a true customer relationship, in which both parties find value Bank customer retention is up a bit. Or down a bit. Maybe it's holding steady. The answer changes with the study of the month. The different conclusions fail to disguise the larger point. A whole industry (mutual funds) and legions of companies (Schwab, et al) owe their success largely to the wallet share they lifted from banks, in broad daylight, right when the banks were mounting guard against that very assault. If this is retention, what would defection look like? Of all the customer initiatives in any bank, retention is one of the most prominent. It is backed up with retention rallies, defection tracking, cross-sell campaigns, and personal interventions. Retention, indeed, is make-or-break because regardless of the business, channel, or product, a mere handful of customers account for most of the profits. Lose a few, and you can spend a whole year's worth of your front-line sales and service capacity lust getting back to the starting line. We believe defection occurred--is occurring--because banks, like many other companies, treat retention as an event--and as a separate strategy to be implemented and moved on from. Mistaking retention for loyalty, and seeking to shore up loyalty, they subscribe to some enticing myths about retention. MYTH #1 High-profile retention programs seriously alter loyalty patterns. Announcing a major retention program does work well as a clarion call. It gets everyone focused on the fact that value is slipping away. It drives efforts to seek out certain customers and identify deliberate means of making sure they stay kept. That's a good thing. But it unwittingly masks a bad thing. The energy expended in those proactive retention efforts belies the fact that they account for a tiny fraction of the customer's experience. A retention tactic may be sound, but if it is not part and parcel of the entire customer experience--if it is just one more transaction for the customer, why would loyalty go up? Airlines now single out their very best customers for an on-board visit from a solicitous representative. "Is there anything we can take care of on your arrival in London?" Clearly a proactive retention technique and appreciated, I'm sure. But if you consider the rest of the service experience during the flight, plus all the phone calls and waiting lines before the flight, how many other unmanaged interactions actually define that customer's defection or loyalty? Heroic retention forgets that the customer's experience consists mainly of customer-initiated dealings across all channels where retention is not the main thought in anyone's mind. Retention happens all the time, whenever and wherever the customer shows up, not just when the trumpet blows. MYTH #2 Focusing on the most-likely-to-leave should be the first line of defense against defection. When management tells the front-line, "Here are your best customers who look ready to walk--no matter what, hang on to them," they are saying, "Spend your energy on those who now require a lot of it." Since it takes skill, insight, and often high-level authority to reverse the course of a wavering customer, that means assigning the best resources to these at-risk customers. Good retention is the lob of the whole customer contact apparatus. Making retention the job of the person with the likely-to-leave list is like making surgeons responsible for a hale and hearty populace. After all, when beeping monitors send the whole medical team racing to the patient in intensive care, the objective is not wellness but resuscitation--and very costly at that stage. Likewise, when a customer gets a flurry of solicitous calls about a plunge in account balances, it is a little late to talk about building loyalty. …

Banking's Top Performers

Abstract: Banks get little respect from the market, but the best of the big banks posted impressive returns on equity, despite shrinking net interest margins The stage was set for outstanding performance across the banking industry in 1999, and the industry didn't disappoint. The booming economy, soaring stock market, high levels of consumer confidence, low unemployment, and quiet inflation combined to benefit the financial services industry, and most banking companies recorded sharp increases in profits in 1999. All was not sunshine, however. Because of upward movement of interest rates, investors essentially ignored the extraordinary financial performance of banks last year. While the Dow Jones Industrial Average and the S&P 500 increased 25% and 20% respectively, the American Banker Stock Index of 225 banks fell almost 10% during the year. In addition, competition in financial services continued to intensify, and the industry's net interest margins fell to new lows. On balance, as the accompanying tables clearly show, banks overcame the effects of the negatives and racked up a very strong year. Part I of the eighth annual ABA Banking Journal Performance Rankings takes a look at large banks and bank holding companies to gain some insight into the factors contributing to their financial performance over the past year. Part II of the rankings, which will appear next month, will highlight top performing community banks and investigate the trends that have led to their success. Selection criteria This year's study focused on publicly held banks and bank holding companies with over $1 billion in assets as of Dec. 31, 1999. A total of 228 institutions qualified under that criterion. Institutions were ranked by return on average equity for 1999. In instances where the reported ROE was the same for two or more institutions, 1999 return on average assets was used as a secondary ranking criterion. The 100 institutions with the highest ROE were selected as the industry's top performers. Nonpublic banking institutions were not included in the analysis. A large number of these institutions with more than $1 billion in assets are limited purpose subsidiaries of larger institutions--for example, the credit card captive of a department store chain. Data was obtained from Sheshunoff Information Services as of December 1999 and from Securities and Exchange Commission filings. Movers and shakers Although asset size did not correlate to a high ROE, the industry assets represented by the top 100 performers saw a huge jump in 1999 with the addition of Citigroup, Wells Fargo, J.P. Morgan, and Bank of America. These four institutions accounted for assets of over $1.8 trillion dollars. Smaller institutions were also amply represented in the group, as demonstrated by another notable newcomer: Peoples Bancshares (Mass.), which leapt into the number six spot with an ROE of 24.82% and assets just over the billion-dollar cutoff. Several of last year's top performers failed to make the grade this time around. Fleet, AmSouth, and Zions experienced large declines in net income due to merger-related charges. UnionBanCal fell from the rankings due to an $85 million restructuring charge in the third quarter. Eight of the 30 institutions to drop from the rankings this year were acquired in 1999. The biggest movers on the up side were Silicon Valley Bancshares, up from 95th in last year's rankings to 15th this year, and National City Corp., up 66 places to a rank of 11. In the other direction, Summit Bancorp fell from 40th to 86th, due to nonrecurring charges for business line realignment and an increase in its loan loss provision, and CVB Financial Corp. dropped from 26th place to the 55th spot due to merger costs. Raising the bar Last year, the industry's ROE surged forward, with significant increases for many institutions. The median 1999 ROE of the 228 publicly traded institutions eligible for ranking was 14. …

Trash-Talk-And Treasure-In Consumer Complaints

Abstract: On the Internet, where the message can instantly be "everywhere," what's said can count The Internet represents both an accelerator of customer expectations and a ready accomodator of complaints when expectations aren't matched. Recall the 1976 movie "Network," which left a marker in America's cultural memory by portraying the rebellion of a washed-up TV anchorman. Driven to the breaking point, he steps onto his live news set and bellows: "I'm mad as hell, and I'm not going to take it anymore!" The lament strikes a chord in his audience. Millions of viewers simultaneously rise from their recliners, open their windows, lean their heads out into a rainy night, and howl a chorus: "We're mad as hell, and we're not going to take it anymore!" This event never actually occurred on broadcast television, but with the Internet it can happen, and does, everyday. Of course, fielding complaints has always afforded banks an opportunity. Using them, banks can give their customers better product choice, more convenience, and more value than ever before, and most banking customers are satisfied. Nevertheless, there is a rising level of customer complaints. These include a new strain of them made publicly, for all to see, on the Internet. Yet some banks are striking gold by beginning to mine complaints as high-value market knowledge. Before turning to why and how they are doing so, let's take a quick visit to the World Wide Web's world of complaint-sharing, where thousands of people are mad as hell, and doing something about it. Complaints--on steroids Complaints flow to the bank through every point where it touches customers. They also flow to the media, to watchdog consumer groups, to members of Congress, and to regulators. Last summer, the Comptroller decided that the complaints it receives are covered by the requirements of the Freedom of Information Act, and began releasing information that led to adverse press coverage for several companies. But it's the complaints posted publicly on the Internet that are changing the very nature of the complaint process. The Net enables people to find like-minded souls and join with them in a united community, mutually reinforcing each other in an upwardly spiraling anger at a company. It also makes it possible for people--for instance, customers, regulators, and lawyers--to find people with complaints from whom to get information or team up for action. Bankers who have not spent time on Internet complaint sites could benefit immensely from investing an hour or two "listening" to these voices. Many of them are unpleasant. (At risk of offending readers, a good place to start is to search for the name of any large financial company, followed by "sucks.com." Many bankers who failed to buy up these Internet domain names must today grit their teeth as their precious brand names are dragged into the slime. One such site features a cartoon figure that walks repeatedly across the top of the web page and urinates. Another company-specific site is devoted to customers united by rage at a large bank. It is not easy to find this one by searching for the company's name, but somehow hundreds of infuriated customers have found it anyway. I happened across it and found myself in the virtual-world equivalent of an angry mob, united in outrage at this bank. In addition to cataloging numerous gripes, this site offered visitors a wide range of helpful resources. It made the statement that the bank regulatory agency could "shut down" the bank if enough people complained, and gave addresses and links to the regulators' complaint sites. It offered a link to Ralph Nader's website in case anyone wanted him to know what was going on at this bank. It suggested the names of reporters and their publications who might be interested in running news stories about the bank's terrible treatment of customers. …

And They Said It Couldn't Be Done

Abstract: Critics who say bankers can't sell haven't gone near First Tennessee or Compass Bank If they had, they just might be customers now Here's how the banks do it Traditionally, banks beginning the road to sales put a great deal of stock in the cross-sell ratio Selling more and more products to a single customer just seems to have a built-in efficiency and profitability about it But to a small group of banks that have been at this game for a while, simple crosssell ratios not only don't cut it for analysis, but overreliance on them may actually cut into profits That's because crossselling may simply lead to placing unused accounts, cards, and such in unprofitable customers' hands First Tennessee National Corp, Memphis, $175 billion in assets, is a leader among this group Longtime banking analyst Tom Brown, now managing Second Curve Capital, a New York-based financial services hedge fund, lauds the company's commitment to "revenue per household" At First Tennessee, this approach has spread beyond the retail area, where the sales push so often begins Commercial lenders, for instance, speak in terms of "revenue per relationship" Sales is a broad concern at First Tennessee, but for the sake of illustration of its approach, consider the place it has been running the longest--First Tennessee's retail function The foundation of the sales culture consists of four elements, according to Paul Harless, First Tennessee executive vice-president for marketing and strategy These are: acquisition -- bringing customers to the company; retention -- keeping them with the company; crossselling -- building profitable, multi-faceted relationships with them; and, finally, drawing all or most of their relationships to the company, thereby building dominant "share of wallet" All officers, from branch managers on up to the company's chairman, must look to their record against targets for acquisition, retention, and share of wallet for at least an element of the incentive-based portion of their compensation Not all things to all people Harless says First Tennessee first began to take sales talk to heart in the late 1980s At the time, he says, the bank had an average cross-sell ratio of 12 products per household Management decided early on that household profitability would drive the overall effort Over the next few years, the company began building the infrastructure that a full-blown sales program requires: a sales manager; a sales incentive program, support staff; and centralized customer databases that drew on information stored in diverse parts of the organization Today, the average cross-sell ratio is 41 products per household, but that number, by itself, doesn't do much for First Tennessee Harless explains that, many evolutions later, the company's database, tracking, and analytical systems give management a sharp view of what a given household really means to it Beyond products sold, there is the question of usage, the cost of supporting that usage, revenue, and what else the relationship could encompass First Tennessee's systems can answer such questions about the retail customer And this is how the apparently profitable customers are separated from the truly profitable: Customers are evaluated on the basis of "net revenue" on each First Tennessee product they use "We add up the revenue we actually earn from a particular product relationship," says Harless, "not what the customer pays To be of long-term interest to First Tennessee, a customer has to demonstrate either "high profit or high potential," says Harless Customers are placed in tiers A highly profitable customer is one who represents net revenue of at least $3,500 per year, he says, while a tier 2 customer would represent $1,500 to $3,499 of net revenue Down in tier 5, the bottom of the range, are customers who represent less than $100 of net revenues for a year, says Harless …

Change Your Branches to "Physical Portals"

Abstract: Want to know where branch banking is going? Wherever you happen to be. Pervasive computing, the Internet, and the costliness of physical branch transactions have been leading the industry on an unrelenting march toward the goal of providing convenience and access. And banks that balk at virtualizing their branches to provide a new kind of private banking for the masses may find themselves, well[ldots]nowhere. Over the span of a decade, forces of change have bubbled to create two threats to traditional banking: 1. an exponentially larger competitive playing field, and 2. a more empowered consumer. In terms of personal empowerment, a study by Summit Bancorp found that nearly 50% of its customers weren't banking at traditional branches any longer, and were relying instead on telephones, ATMs, and computers to conduct transactions. Responding to the same trend, numerous roll-outs of wireless banking projects have sprouted around the globe, many in Europe and Asia. They permit banking, stock trading, and bill payment via mobile phones, personal digital assistants, and pagers. Industry analysts estimate that by 2003 there will be more than a billion wireless communications subscribers worldwide, but relatively few banks are preparing for the onslaught. (See "Wireless Banking, the next untethered step, April, 2000, p. 50.) Remarkably, the industry is still grappling with the change that's essential to help convert those threats to opportunities. Inertia generated by 50 years of traditional branch structure and related management systems has kept most banks from optimizing new technological channels, and customers in search of more personalized service and convenience. Hypothesize this [ldots] The path branch banking is likely to take can be determined by a set of simple hypotheses. Here's the first: The emergence of the virtual market is driving a change in the business structure of the physical market. Studies by Jupiter Communications, Forrester Research, and our own IBM Consulting Group predict convulsive growth over the next several years in every segment of the Internet retail financial services industry. By 2003, online investing is expected to reach a level of nearly $1.3 trillion. Volumes in online mortgage origination are estimated to hit $375 billion by 2004, and online credit card and loan activity is projected to surpass $60 billion in the next four years. In addition, Jupiter projects that by 2003, 28% of all U.S. banking households will have online, web-based checking accounts. Internet bill presentment will boost the percentage of consumers who pay bills online from 48% in 1998 to 70% in 2003, and the number of consumers who research loan rates and apply for credit online is expected to more than double in the same period. If the sheer numbers alone aren't compelling enough, banks have two other reasons to care about this fundamental shift. First and foremost, it's where their profitable customers are going. Forrester has found that over 50% of affluent customers are conducting financial activities online (see chart, next page). And according to PSI Global, the financial services profit potential for these customers ranges from $3,000 to $6,000 apiece per year. Bankers for years have tried to figure out a way to capture these customers. The web is allowing banks to effectively market to them. At least one top-ten bank confirmed that its online banking customers are the most profitable (except private banking), and generate 2.6 times the revenue of like demographic offline customers. Although older, retired customers do tend to maintain higher balances, they exist in the form of CDs, a product with very low spreads. As time passes the online banking demographics will normalize. Already, for example, approximately 15% to 20% of seniors are online. Bankers should also care because the cost advantage of becoming an Internet-based banker can be enormous. …

What to Do with the "Losers"

Abstract: Better read this before you cut off any unprofitable customers, you could end up as the loser Bankers often will say, "I'd be happy to send certain customers to my competitor, they just cost me money," or words to that effect. Sounds reasonable. Particularly when applied to the customer who keeps $165 in a savings account and comes into the branch every day to check his interest, and won't use the ATM. Or the convenience credit card user who does no other business with the bank. Every bank has such customers, people who for one reason or another cost more than they produce in revenue. Nobody would disagree that absent some other compelling reason a bank should try to do something about these situations. This is a key part of what marketing and profitability systems are meant to address. But in practice, the success of such systems depends on how well a bank understands customer behavior and its own costs. "Customers use products and services in the way that the bank allows them to be used," observes Jerry Weiner, chairman and CEO of IPS/Sendero, Norcross, Ga., a unit of Fiserv that provides relationship software and advice. "So if a customer isn't profitable, it's the bank's fault, not the customer's," says Weiner. In addition, the method of determining who's profitable and who's not may be flawed. "I'm not sure that the numbers being used by many banks to determine which customers are profitable and which aren't fully contemplate the true step-fixed-cost nature of providing financial services," says Weiner. "It is critical that banks better understand both the pricing and cost issues if they are going to improve the overall share of wallet that they garner from their most desirable customers. Weiner explains that most financial institution costs are neither purely fixed nor purely variable. A given resource investment can handle a finite number of transactions. More than that requires another investment to handle the next incremental transaction--a series of steps, in other words. Don't just remove them If banks simply opt to dump unprofitable customers, they may be throwing out the baby with the bathwater. "It costs ten times as much to acquire a customer as it does to keep one and it is much more efficient to increase a current customer's profitability than to go out and buy a list of profitable customers," says Jeffrey Brown, executive vice-president of marketing for Webster Bank, Waterbury, Conn. "You find that there is not a direct correlation between demographics and customer profitability, and the same is true with unprofitability. You have to come at it from a different angle and think about it differently." Getting rid of unprofitable customers will cost banks more in the long run and affect the institution's reputation, others agree. If a bank executive decides to stop doing business with unprofitable customers, they will expend more cost, according to Robert Hall, the Dallas-based chief strategy officer for Xchange, a CRM software and consulting firm. (Xchange acquired Hall's previous company, Customer Analytics, this past spring.) "If you remove unprofitable customers, a lot of the fixed costs for supporting those customers, such as back office systems and facilities, don't go away," says Hall. "So, simply because a customer is unprofitable does not mean that getting rid of that customer somehow restores profitability. Some of those least profitable customers' mom or dad or brother or sister or husband are very profitable and so you begin to hurt your brand if you 'de-market' them in a mass way," says Hall. He suggests banks spend their resources on trying to make these customers more profitable by either selling them more, pricing them differently, or delivering less to them rather than just getting rid of them. "The Bank of Hawaii has to be extremely careful about discarding customers because population growth is flat in the 515t state," says Lori McCarney, executive vice-president and director of marketing for the Honolulu-based bank. …

New Wave of E-Money Options Hits the Web

Abstract: E-commerce and newfangled computer gear are coaxing old-fashioned cash into futuristic form. Take the case of e-mail money. Representing encrypted value that is first paid for in the real world (by credit card or cash), and later presented for online purchases, it is arguably more of an electronic instruction to pay than true "electronic money." But it is nevertheless a significant development. Until recently, the ability to make secure nonrepudiatable non-credit card payments efficiently has been missing from the e-commerce mix. Early 'Net users downloaded their music, or picked up Furbies, books, flowers, and clothing by giving a merchant credit card information (or by mailing a personal check), or they didn't transact. But inventive providers are offering an expanded palette of options. New York City-based Internet-Cash Corp., is a newer e-mail money provider, as are the slightly more established ecount.com, Conshohocken, Pa., eMoneyMail, (Bank One's venture), ecash technologies, Inc., Bothell, Wash. (which sells its technology to banks), PayPal, a free service from Palo Alto-based X.com, and Billpoint, San Jose, Calif. (an eBay company which is partnering with Wells Fargo bank to offer payment services for the auction site). Providers vary in approach, and in the "sweet spot" they target (e.g., auctions, person-to-person payments, or business-to-consumer transactions), yet all offer a payment that to some degree mimics cash. In doing so "e-cash" takes on some of paper money's key attributes, including durability, anonymity, and divisibility. Unlike earlier payment technologies of this ilk--notably the Digicash and Cybercash services of the mid '90s--"e-mail money," generically speaking, is more elegant. It requires no software downloads or especially elaborate activation schemes. The newer services vary in their features, differing in everything from how they encrypt and activate value, to the type and extent of information they collect to process the payment, to how or whether fees are charged. "It's definitely a new and evolving payment form that can cause confusion due to its similarity [in some cases] to debit and credit forms," notes Ken Kerr, senior analyst at Gartner Group. "E-cash ventures are typically secured with an ACH deposit, though some vendors accept credit card deposits too," he explains. "The vendor/host doesn't pay any interest on the deposit and really, they make their money on float," Kerr adds. (They do pay a credit card processing transaction fee, however.) Matt Gillin, president and CEO of ecount.com offers his "take" on the form: "To be successful, this payment type will have to be 'device agnostic,' working with wireless technologies as well as it does with e-mail. It will need to leverage the existing payment infrastructure, either ACH or credit; and the digital cash will need to be easily converted from the virtual to physical worlds. I don't think people will want a lot of restrictions about where and how the 'money' can be used," Gillin adds. "Remember this is supposed to function like cash." Gillin's company includes former employees of American Express, MBNA America, and Andersen Consulting among its staff. Though originally conceived as a consultant in Internet payments, ecount.com saw an opportunity to create a new form based on patterns of commerce on the Net--and seized it. Called the "personal account," this payment system uses a patented technology that, in essence, issues a virtual 16-digit MasterCard debit card as soon as funds are deposited (by the account holder or by someone sending funds on their behalf). Unlike the services of some competitors, ecount.com's "money" isn't limited to online transactions, but can be taken out of an ATM as cash. It's also "personal," in that the features of the account will vary somewhat, depending on the account holder's patterns of use. Though comparatively new (product introduced about 15 months ago) the form is getting traction fast, says Gillin, and some indirect indicators point to a sizable growth potential. …

At 25, Bankers' Bank Concept Meets Needs Old and New

Abstract: Questions and answers about a very adaptable source of help for banks Back in December 1975, the Independent State Bank of Minnesota opened. The debut of a bank wouldn't ordinarily be special enough to warrant a lookback, but this was a bank with a difference--indeed, such a difference that it took an act of the Minnesota legislature to birth it. Independent State wasn't a community bank. It was founded as a bank for community banks, that is, a "bankers' bank," the first of what are now 18 such institutions nationwide, representing a total of more than $3 billion in assets. Bankers' banks, historically identified with the independent bankers movement but now considered wider in appeal, provide correspondent banking services to, and are owned by, community banks. Bankers' banks are not linked with the government. Several factors had led to the formation of these specialized institutions, but the main ones were dissatisfaction with the service offered by correspondents and fear of competition from same. Today the Minnesota institution is known as United Bankers' Bank and it has expanded its marketing activities into four additional states (Iowa, Mont., N.D., and S.D.) under Bill Rosacker, president and CEO. And the idea has spread elsewhere. "A bankers' bank is the only noncompeting provider of service," says Ronald L. Slater, president and CEO of Bankers' Bank of Wisconsin, which serves Wisconsin and Iowa. "We're limited to doing business with banks, bank holding companies, bankers, and directors. Both by charter and bylaw we don't compete at all for retail service." Not all banks that could avail themselves of bankers' bank service do so. In some cases this is because of entrenched ideas of who a bankers' bank is for. The remainder of the article presents answers to questions bankers might have about bankers' banks. It is a distillation of information from bankers' bank execs, community bankers, and the web. Q. I've been under the impression that bankers' banks were really only for smaller community banks. A. This varies. Some bankers' bank chiefs acknowledge that their customers sometimes "graduate." "You do, sometimes, outgrow your provider," says Rosacker. However, others maintain that community banking is a philosophy, not a matter only of size, and that they can lust as easily serve larger community banks. Down south, for instance, the Independent Bankers' Bank of Florida serves customers as large as $1 billion in assets, according to James McKillop III, president. He expects this to continue because banks of all sixes are increasingly looking to outsource functions to save on costs. Q. Why should I even think about getting involved with a bankers' bank if I've managed without one up until now? A. One New England community banker we spoke with has watched her bank's correspondent business move from one big provider to another over the last decade or so, as various big banks dropped that kind of business or merged. She is now thinking of shifting at least some of her bank's business to the three-year-old Bankers' Bank, Northeast, the youngest of the 18, based in Glastonbury, Conn. "I would never, ever, put all of my eggs in one basket, and no one entity can provide everything," this banker says. "But I do think the bankers' bank is here to stay, because it adds an alternative and a layer of protection for community banks." Q. I already joined the Federal Home Loan Bank in this area. Why do I have to consider adding another provider to the list? Besides, aren't bankers' banks competitors with the home loan bank system? A. Back when Federal Home Loan Banks were first allowed to admit commercial bank members, some of them made an aggressive grab for correspondent banking business and that caused a fair deal of bad blood, some of which hasn't been forgotten. Even today, some of the home loan banks still provide certain correspondent banking services. …

Will E-Commerce Reverse Card Fraud Trend?

Abstract: Overall statistics show continued progress, but the web unquestionably is a fertile field. Merchants, for now, are the ones on the hook Listen to card processors and you get a rosy story of how credit-card fraud is continuing its decade-long decline down to losses of less than a penny for every $10 in purchases. Listen to anecdotal horror stories, spiked with a skittish public attitude toward Internet security, plus informal surveys, and you feel like calling off the whole e-commerce revolution. The ambiguity arises from these facts: 1. the card associations don't break out statistics on credit-card fraud when a card is not present (referred to in shorthand as "CNP"). This includes mail-order and Internet transactions. 2. A typical Internet fraud begins with an old-fashioned theft of a physical credit card or a card number, and thus isn't basically a breach of Internet security. 3. Sophisticated risk-management measures may be mainly responsible for the downward trend of losses and may be able to lower Internet fraud losses to acceptable levels. The official statistics on card fraud are indeed impressive. Visa U.S.A. announced an "all-time low" in fraud losses for 1999: six cents for every $100 in transactions (0.06%), compared with 0.07% in 1998 and 0.18% in 1992. "It's actually never been safer to use your Visa card," beamed Carl F. Pascarella, president and CEO of Visa U.S.A. Not only are cards safer to use, but beginning this month, consumers won't be liable for any losses from fraudulent use of credit or debit cards over the Visa system. This supersedes the rarely enforced industry standard under which cardholders could be liable up to $50 if the fraud hadn't been reported within two days. Significantly, that immunity extends to GNP (including Internet) transactions. As this article went to press, Mastercard waived a cardholder's liability for unauthorized credit card use , "if you promptly report your card missing, in most circumstances." In its report on 1998 results, Mastercard enthused that it was continuing "a decade of success in fighting fraud." Its fraud losses in that year rose 5.2% to 0.081%, still less than half the global peak of 0.18% in 1992. The ABA's 1998 Bank Card Industry Survey (covering 1997) reported fraud losses sustained by three classes of banks: Group I-less than $50 million in card outstandings or less than 50,000 card accounts with balances; Group II-$50-759 million and thousands of cards; and Group III-$750 million or greater in both categories. For the smaller banks of Group I, fraud losses declined 38% from 1996-'97, to about $31,000 per bank. Losses by the average Group II bank dropped 43%, to about $600,000. For Group III, the corresponding figures were 58% and $8.5 million. Each case of fraud cost the smallest banks $1,720, compared with $895 and $1,069 for Group II and III banks. The ABA report commented that the high per-case cost for smaller banks was "presumably due to a lack of technology and processes to quickly identify suspected fraudulent account activity." For the seventh consecutive year, loss or theft of cards was the biggest single source of fraud loss for all groups, in terms of both number of cases and dollar losses. Counterfeit cards caused the second-highest dollar losses--26% of all losses by Group I banks and 10% and 12% for Groups II and III. Much fewer incidents and lower losses were attributed to fraudulent applications, intercepting cards in the mail, mail or telephone transactions, account takeovers, and others. (ABA will release a new card report later this spring. Preliminary figures indicate a further decline in fraud losses.) Anatomy of Internet fraud Has the Internet made the fraud artist's life easier than it was when he operated in a "card-present" regime? Yes, is the consensus answer from insiders. Because by definition the card is never present in an Internet transaction, the criminal's Job One is to get a valid account number. …

How Can Banks Avoid "Channel Discrimination"?

Abstract: Wherever the banking industry goes, fair-lending challenges follow. Lenders are constantly innovating product, policy, price-setting, risk evaluation, marketing, service, and distribution systems and virtually every new approach sets off a new chain of concerns about potential direct or indirect credit discrimination. Of all the many budding controversies, the one that may need the most careful thought is what we might term "channel fairness," or as the regulators call it, "steering discrimination." New channels, new challenges Banks are delivering their products through a wide variety of channels-- branches; nonbank offices of specialized lending subsidiaries; telephone lending; partnerships with brokers and dealers; affinity marketing relationships and co-branding. And, increasingly and importantly, they deliver services over the Internet. The explosion in new delivery systems intersects with the trend already underway, even within the traditional bank, to treat customers differently based on factors like potential profitability or customer preferences. Customers may get different terms, different add-on options, different pricing, different levels of personal service--even different treatment from the collections staff if payments are late. They also may well be subject to different underwriting criteria or depth of scrutiny when creditworthiness is evaluated. This differentiation process is being made easier and more cost-effective every day thanks to new data management tools. It promises huge benefits to consumers, in the form of products that are bettered tailored, more convenient, and comparatively cheaper. Further, prices should be fairer because they should reflect customers' individual risk profiles and the costs of the way they use the bank's services. However, these changes will produce winners and losers. When the losers are minorities and women, and the subject is credit, fair-lending controversy will ignite. In one area, it is already starting to flame. Example of a "steering" dilemma Imagine three people with identical credit profiles, all wanting a mortgage. One applies in a branch. The second one sees a television ad for that same bank's affiliated sub-prime finance company and calls its toll-free number. The third one logs onto his computer and applies online. All three are dealing with the very same bank and they all have the same creditworthiness. Will they be treated the same? And should they? The answer to the first question is usually "no." They will probably be shown different product sets. They will very likely be evaluated against different underwriting criteria, at least between the subprime customer and the other two. And they will likely receive different pricing, with the subprime loan the highest, and possibly the Internet loan lower than even the traditional option. Now, suppose the customer who approached the subprime channel is a minority. Assuming he or she was treated in a manner consistent with all other applicants to the subprime lender, is it acceptable, from a fair lending standpoint, that this customer received a worse deal than did his counterparts? As usual, fair lending law, regulation, and public policy do not give a clear answer to this. But there is a growing body of enforcement thinking that the answer to this question should be "no." Signs of this are abundant, including in the current interagency fair lending examination procedures. Those guidelines identify three general and six specific types of discrimination, one of which is "disparate treatment by steering." The agencies direct examiners to check whether applicants are referred to the best product available, and to suspect discrimination if not. The procedures state that one indicator is when "[a] lender has most of its branches in predominantly white neighborhoods. The lender's subprime mortgage subsidiary has branches, which are located primarily in predominantly minority neighborhoods. …

Managing E-Mail and Webchat-It's Becoming Every Bank's Virtual Point of Pain

Abstract: Whether you're a dot-com de nova or an established big bank with a transactional website, you've likely felt the same pain when it comes to customer service. The pain comes from volumes of customer e-mail that's snaking its way into your organization daily, even hourly, with a serpent's single-minded intent. Like a sinewy reptile that wants only to strike its target, your customers' e-mail steadily arrive with the sole purpose of getting an answer. Of course, any bank worth its URL wants to get feedback from its customers or to address a problem with an account. The challenge: how to manage--identify, prioritize, route, respond to, or escalate when needed--the sheer volume of communication slithering into your e-mail queue. For institutions the size of Citibank, Bank of America, or Wells Fargo, managing rising volumes of e-mail or communications coming from newer webchat (e.g., written communications or voice signal carried over the Internet from websites) channels is already the norm, says Tom Lynn, executive vice-president of Quad Co., a consulting firm in Ann Arbor, Mich. For the last year or more, he estimates, about 25 to 30 of the largest 50 U.S. banks have piloted or rolled out off-the-shelf or internally developed systems designed to route and present e-mail to agents analogous to the way that interactive voice response (IVR) units manage incoming phone calls. "In the United Kingdom, we work with one large institution that handles all of its customer service issues out of a call center in Dublin," Lynn says. "Managing web chat and e-mail along with phone calls is routine practice there today." But before the routine set in, there was, well, pain. And banks that are just coming online with transactional websites might learn from the trials of early adopters. Typically, banks evolve by first handling e-mail as a distinct channel from voice traffic. They might hire a few agents dedicated to "picking off" e-mail questions -- one by one, in no particular order. To track e-mails and action taken on them, these agents might rely upon a spread-sheet. To track how quickly, in general, the e-mail is being answered they might rely upon memory. This approach might let a bank get by--for a while. And also, it can work well for addressing routine or frequently asked questions (FAQs), because canned responses can essentially be written once, and repeatedly issued. But soon enough, a manual approach begins to cause almost as many policy and compliance problems as it solves. Or it simply isn't fast enough to keep pace. That's bad news for a bank. But, if you'll permit us one more use of our analogy, a boa constrictor can be tamed into something as harmless as a garden snake if handled. E-care, or virtual customer care systems, for example, purport to do their part by automating much of the process of responding to customer inquiry. Well-trained customer service reps can handle the rest of the non-routine stuff by working as either as 1. universal agents that handle all forms of in-bound communication (e.g., voice, voice over Internet, or webehat, email, etc.), in queue, or 2. agents that specialize in phone calls or electronic communications. Many banks are taking the first step by considering their options. In a recent study on call centers by the ABA, for example, 12% of the 454 respondents indicated that, e-mail automation response software either had been purchased or was soon to be on their shopping list. Before bankers sign on the dotted line for new software, however, they need to keep in mind all of the now-conventional wisdom about call centers. This includes: 1. the desktop equipment of agents should be integrated with all the back office silos of data in order to present both management and agents with the most complete view of the customer; 2. agents should make use of all relevant customer data (both historical and transaction-based) in real-time to assist them on a call, preferably with some sort of screen pop technology; 3. …

Making Privacy a Brand Issue at Bank One

Abstract: If you think "chief petty officer" when you see the initials "C.P.O.," read on Any banker who has given even a cursory look in the direction of privacy legislation and regulations knows that the red tape has already grown waist deep. What some might have taken for an annoying legislative trifle shows all the signs of eclipsing the Community Reinvestment Act and fair-lending laws in regulatory ballast. Yet Bank One Corp.'s privacy coordinator, Julia Johnson, doesn't have a staff of privacy experts to assist her. In fact, she doesn't even have an assistant for this work. And, the surprising thing is, Johnson wants things this way. Where should privacy "live"? Johnson's official title at Bank One these days is Director of Information Policy and Privacy. "I think you'll start seeing the initials 'C.P.O."'--for Chief Privacy Officer--"around banks a lot," she says. Why not just "privacy officer"? Johnson believes that, as the existing and new federal laws on privacy are structured, privacy responsibilities reside--and should reside--in many parts of a banking organization. Johnson spent many years in the compliance fraternity and is especially known for her CRA work. As a consequence, she knows, too well, the tendency for line bankers to ship stuff involving fine print down to the compliance department, in hopes of never seeing the issue again. "Privacy is a basket where multiple issues reside," Johnson explains. "For example, the Fair Credit Reporting Act is in effect in all banks. Just because it is part of the larger privacy issue doesn't mean it should move. It has long been, and should stay in, Compliance." However, not all privacy issues should stop there, Johnson adds. Further, because privacy issues will increasingly need a coordinating point, there is the need for a "chief" position, if only to resolve present and potential conflicts among the various laws. "In many organizations," says Johnson, "the CEO will also be the CPO." Already, discrepancies have been noted between the privacy provisions of the Gramm-Leach-Bliley Act and its implementing regulations and the strictures of the Fair Credit Reporting Act, as amended. The danger of designating anyone solely as a "privacy officer," Johnson believes, is that doing so would have a way of letting all the other parts of a banking organization feel that they had been let off the hook. It would simply create an alternative home, versus Compliance, where bankers could let privacy issues fall by default. And Johnson believes keeping your bank out of privacy difficulties with regulators and the courts will require a better effort. And that, she allows, is why she decided not to have a privacy staff under her. If she did, people might think Johnson was where the privacy buck should be stopping. And she sees her role more along the lines of a missionary's. "My job is to be the one who maintains an enterprise-wide perspective of the data flows within our company," Johnson explains. Making privacy count To most bankers, privacy the concept is a central issue, a core part of what being a banker, a trusted financier, is all about. Privacy the regulation, as revamped by Gramm-Leach-Bliley, is a bit of a dead rat in the desk drawer to many bankers. Estimates of the cost of compliance mount almost as fast as the paper devoted to explicating the subject. Worry over the new laws and regulations has even reached the executive suite in many banks. Johnson thinks such negative thinking has got to be turned around. "Privacy is really a customer service issue, a cultural issue," she insists, "not just a compliance issue." Johnson believes the attitude shift must come because she sees the current federal "opt-out" stance as a limited window of opportunity. Even now, congressional forces and the Clinton Administration are pushing for tougher laws than Gramm-Leach-Bliley. …

Financial Portals Are Hot, but for Whom?

Abstract: Banks have the trust and some of the content, but Yahoo et al are not waiting on ceremony Suddenly--even by Internet time--the long sought one-stop financial portal has arrived. E-banking watchers are predicting that by the end of this year, most big banks and some smaller ones will be sporting websites where customers can come to handle all of their financial affairs. What's been missing until now is the ability to aggregate information and perform transactions that involve a customer's accounts at rival institutions. Rich payoffs await the bank that can field a full-service financial portal. Its customers will likely visit the site more often, stay longer, and use more services. An early-adopting bank has the chance to become its best customers' primary bank, where all financial information is consolidated into always-available net worth statements. For high-net worth customers, basic banking will likely evolve into online versions of what is now being called wealth management. The dark cloud in this rosy scene is the fact that big, capable nonbanks have jumped into it first. Yahoo, Alta Vista, America Online and other hugely popular general-purpose portals are offering bill paying and account aggregation--plus news, sports, stock market quotes, weather, travel services, e-mail, and other drawing cards with proven power to keep websurfers coming back to their sites en route to other destinations. Survey after survey finds that consumers would rather handle their financial affairs at their banks, leading to the well-worn conclusion that this business is the banks' to lose. Will banking websites, then, morph into general-purpose portals? Not likely. But who knows which way the ball will bounce? Of course, it's the customers who will decide, and re-decide, as new conveniences and benefits arise. Some observers of the changing scene think that the whole portal business will be restructured from the present general-purpose sites to a small number of generic portals. Likely candidates: shopping, financial services, sports, and entertainment. Today, about 1,000 banks offer even the basics of online services; few of these banks are ready to take on the technical and financial challenges of offering aggregated accounts. Thus it's likely that this new level of services won't be available to customers of almost 90% of all banks. And the appeal of aggregation services will likely be limited (at first, anyway) to high-net-worth individuals who are comfortable with computers and who have a preference for self-service. That shrinks the potential demand for aggregation to less than 10% of all online households. If that seems small, it's not negligible: that small customer segment likely contributes 70%-80% of all bank profits. Yet another twist in the calculus of aggregation services is that it's unlikely that consumers will want to aggregate all of their accounts at all of the providers' websites. Take a consumer who has accounts with two banks, a brokerage, and a mutual fund. She would gain no benefit--but much inconvenience--from giving out all four of her customer account numbers and passwords to all of the different providers and getting the same aggregated information from all four of them. More likely, she will choose one primary service provider to aggregate all her financial accounts. Scraping the technology bottom The technology of account aggregation isn't rocket science. Indeed, the method that started the current buzz goes by the distinctly low-tech name of "screen scraping." The main attraction of screen scraping is that it enables an aggregator to go to any financial site and, with the account owner's prior consent--but not the financial service provider's--make the bank's web server think that the customers themselves are making a routine request for their account balance or whatever. The main drawback of this method is that it scrapes messages written in HTML, which describes the format (type size, paragraph spacing, etc. …

Website Advertising -- Compliance Considerations

Abstract: Bank web sites range from the relatively simple--those that merely provide information--to the very complex--those that enable the bank to conduct transactions with customers through the Internet. But whether simple or complex, virtually all bank web sites include advertising. And, since web sites are a new thing for many banks, now is a good time to review the law affecting advertising of bank products. As most bankers know, the Truth-in-Savings Act regulates most deposit product advertising and the Truth-in-Lending Act regulates most lending product advertisements. What some bankers might forget, however, is that bank product advertisements are subject to other compliance considerations as well. This paper will review several other, less-prominent rules and guidelines: the FDIC official advertising statement, an Interagency Statement dealing with advertising of nondeposit products, the ECOA prohibition against advertisements that discourage applications, and the federal agencies' Fair Housing Act advertising requirements. The paper closes with some suggestions on how to check your web site for compliance. FDIC official advertising statement The FDIC requires that insured banks include the "official advertising statement" in all of their advertisements (but with many exceptions as described below) [12 CFR 328.3(a)]. The official advertising statement reads "Member of the Federal Deposit Insurance Corporation" [12 CFR 328.3(b)]. The regulation permits certain minor variations of the statement, such as using the "FDIC" abbreviation or including the institution's name in the statement [12 CFR 328.3(b)]. You can also use the FDIC symbol as the official advertising statement [12 CFR 328.3(b)]. The "symbol" is the portion of the official FDIC "sign" that includes the letters and the FDIC's seal [12 CFR 328.1(a)]. The official advertising statement can be written in a language other than English so long as the translation has prior written approval from the agency [12 CFR 328.3(e)]. The FDIC regulation has a lengthy list of exceptions. Some are for documents that are not really advertisements, such as statements of condition, bank supplies, etc. Others are for advertisements of bank products that are not deposit accounts, such as loans or loan services or a safekeeping box business or services. Still others are for advertisements in which it is not practical to include the statement, such as TV or radio ads of less than 30 seconds or promotional items like pens or key chains. See 12 CFR 328.3(c) for the complete list. Advertising nondeposit products In February of 1994, the federal banking agencies (other than the NCUA) issued an "Interagency Statement on Retail Sales of Nondeposit Investment Products." A central theme of this statement is that institutions must make clear to their customers that any nondeposit products the institutions are selling or are involved in selling are not FDIC insured, are not guaranteed by the institutions, and are subject to investment risks, including possible loss of the principal amount invested. The statement says that all advertisements of nondeposit products should include those three messages. Furthermore, if an advertisement contains information about both insured deposits and uninsured products, it must clearly segregate the information about the nondeposit investment products from the information about deposits. In 1995, the agencies interpreted the statement to allow a logotype disclosure in certain visual media, such as television broadcasts, ATM screens, billboards, signs, posters, and in written advertisements and promotional materials (e.g., brochures). The interpretation did not mention web sites, but they might fit within the "written advertisements" category. The logotype disclosure should include the phrases "Not FDIC-Insured," "No Bank Guarantee," and "May Lose Value." The logo-format disclosures must be boxed, set in boldface type, and displayed in a conspicuous manner. …

Looking Back and Looking Forward

Abstract: One of the important things to understand about agriculture, and, consequently, about ag banking, says Steve Lindholm, is that it's never just about one year. One really good year won't make a farmer, of course, and one really bad year, by itself, won't break most farmers, the banker continues. For most of the customers of Lindholm's Farmers & Merchants State Bank, 1999 goes down as kind of a breakeven, Lindholm says as examiners from the Minnesota Department of Commerce, who arrived after Thanksgiving, work on the bank's regularly scheduled exam in a room nearby. Though prices were low, for most, the strong yields in the Clarkfield area helped keep things positive. A few of Lindholm's customers slipped while a few actually gained some ground, he explains, but most, using marketing strategies based on some combination of government grain programs and the cash or futures markets, managed to cover their costs of production. Family living expenses were not covered by the typical Clarkfield farm's output, Lindholm notes, but the late-fall arrival of long-awaited federal aid helped with that. "Most covered themselves," says Lindholm, "but they didn't make anything extra. People are sober, but not depressed. They're feeling good they had such high yields. There's an element of disappointment that, in the face of such yields, the opportunity to get ahead wasn't there." Lindholm pauses a moment, and then adds, "this creates uncertainty for future years." Unfortunately, that's not the only factor causing uncertainty. Good one way, worrisome another Sometimes Mother Nature seems to have a perverse sense of humor. As detailed in the previous installment of Ag Pulse, harvest time saw dry weather. That's great when you have to bring in mature crops, because there are fewer days lost to bad weather, there is less weather damage, and there's even the added bonus of not having to spend as much time and money drying corn. But there's also a downside when such conditions go too long, as they have this year in Clarkfield: Sub-soil moisture drops. In fact, says Lindholm, "our subsoil moisture is almost nil." People with a passing familiarity with Minnesota might figure that Clarkfield would regain its moisture after the winter's snow melts, but that's not the case. Lindholm explains that the ground typically freezes before the snows come to this part of the state. And when the snow melts, the ground typically isn't thawed sufficiently for much of the melt to be absorbed. And farmers in southwestern Minnesota, such as in Clarkfield, are dryland farmers. Drive through in summer and there's nary a pivot in sight. As a result, Lindholm concludes, locals would have liked to have had some rain, so that some moisture would have been "banked" for spring before the ground froze. They are worried that the possibility of a dry spring, on top of the dry fall, could spell trouble. It's happened before, he notes. The area has a drought roughly one year in ten and this can cut the average local yield by as much as half. "Considering that farmers are barely covering costs in a bumper crop year, many are asking themselves what will happen if they don't have a good crop" says Lindholm. The season ahead Given the results of the 1999 crop year for Clarkfield, most of the bank's customers have managed to stay off the trouble list. "Only about 5% to 10% of our portfolio is in the highly supervised category right now," says Lindholm. Though it's just the beginning of winter, some customers have already been in to talk about 2000 operating loans and plans for the new season. …

Must Banks Give Away Their Small Business Franchise

Abstract: Almost every working day, 26 million small business owners visit their bank. Usually this is to make deposits, withdrawals or to check balances. But in the course of this banking relationship, businesses also use a myriad of other financial services. And unlike the banking relationship of major corporations, the banking relationships of small business owners mirror their personal banking relationship. Often this results in an emotional as well as a financial bond. For small businesses, their bank is their core financial channel. In essence, the bank "owns" the small business segment. This is especially true for smaller banks--the community and middle-tier institutions--because of their proximity to their small business customers. But the smaller bank's traditional small business franchise has been under heavy siege by non-bank competitors, such as American Express Small Business Services, and a relationship can only be "owned" as long as it fully satisfies the needs of both parties. Competition can erode small business relationships Non-banks covet many traditional banking services offered by banks to their small-business customers. Aggressive efforts are also being made to solicit loans, an area that contributes substantially to revenues. Larger banks are soliciting small businesses for loans and other services using direct marketing, sometimes built around credit cards and direct solicitations, and are now aggressively using Web channels for that solicitation. Small wonder that smaller banks often feel they are being attacked from all sides. There is a statistical correlation between the number of financial services used by a customer and account retention. The odds of retention are increased exponentially with each additional service. Therefore, selling additional services to small business customers is not only desirable but also essential to continued growth and profitability. The question then becomes, "If larger institutions and nonbanks are trying to pirate my small-business customer, how am I going to protect my franchise, much less increase it?" The answer is to use all the resources readily available and to be open to new and innovative ways of serving your customer, like the World Wide Web. Different results require different actions The strongest tool available to smaller banks is proximity to customers. Good customer relations are labor intensive. When the playing field is level in terms of services offered and competitive pricing, personal contact will win over direct marketing every time. It is only when competitors offer superior products, prices or convenience, that banks lose their grip on the small business relations. There was a time when large bank and nonbank institutions possessed resources not available to smaller banks that gave them a competitive edge. Unlike earlier times, however, today's smaller banks have access to Internet-based technology and technology-delivered services that can level the playing field and provide a competitive advantage. By using a "click and mortar" strategy, smaller banks can offer their small business customers the best of both worlds: 24/7 access to banking information and services, combined with the comfort and convenience of "real bankers" they know and trust. There is no shortage of technology vendors offering Internet solutions, but not all solutions are created equal. Adding an Internet banking dimension for small businesses must serve to cement the bank/customer relationship, not create a distance. This means having the ability to customize Web service offerings to fit the unique needs and interests of customers, and to make Internet business banking practically transparent from a bank's traditional brick and mortar service. The best sites serve as a portal for small business financial managers, combining core banking transactions with essential business services--and can be blended to deliver customized news, account information and transactions, access to SBA loans and financing, merchant card services, the ability to file and pay taxes, and virtually any financial transaction normally needed by a small business. …

The Truth about Margin Debt

Abstract: The recent explosion in margin debt has garnered a great deal of attention as many investors are wondering about the potential impacts of this surge on the equity market. Some fear that rising margin debt could negatively affect overall market performance, while others are concerned about the implications for market volatility. And with Alan Greenspan so concerned about the "wealth effect," many investors are wondering why the Fed Chairman doesn't just raise the margin requirement instead of aggressively pushing up short-term interest rates. In 1999, margin borrowing soared by 62.1%, marking the largest yearly increase since the 75% gain logged in 1983. To some, this rise is indicative of an evolving speculative bubble in the market and a sign of trouble ahead. Historically, however, we find that rising margin debt levels tend to be associated with firmer equity market performance. In each of the past four decades, margin debt levels have exhibited a positive correlation with the performance of both the Dow Jones Industrial Average and the S&P 500. In fact, our results found that U.S. equity markets generally outperformed averages during years that were associated with oversized gains in margin debt. During the ten years in our survey of the fastest margin debt growth, the Dow Jones Industrials averaged a gain of 21%, compared to an average annual rise of just 8.8% from 1957 to present. Furthermore, market performance tends to slip as margin borrowing decelerates. Specifically, the average gain for the Dow equaled just 3.3% in the year following such above-trend gains. Some investors would argue, however, that a greater concern is the potential for an increased level of volatility. Contrary to conventional wisdom, however, we find that big jumps in margin borrowing are not generally associated with increased volatility. Our results produced roughly a -25% correlation between margin debt growth and stock market volatility. Moreover, this negative correlation increased to close to -30% as lag structures of one to six months were introduced. Next, we wanted to examine the implications of a move in the Federal Reserve's margin requirement for equities. As the Fed has moved to raise interest rates partly in an effort to dampen stock market gains, many investors have openly questioned why Fed Chairman Greenspan has not used margin requirements to quell market exuberance instead of penalizing investors and non-investors alike by raising short-term rates. …

Mellon's Tech Strategy and Idea Lab

Abstract: Janey A. Place is executive vice-president of e-commerce strategy for Mellon Financial. She is responsible for Mellon's eCommerce strategy, customer information management, and is co-CEO of MellonLab. Prior to her time at Mellon, Ms. Place's extensive tech career included being executive vice-president of Strategic Technology at Bank of America, and, Wells Fargo's senior vice-president in charge of Internet strategy. Your background includes having been a professor at the University of California. What from that experience do you bring to your current job? I taught systems and communications theory. This put me in a good position to develop a skill that I think many broadly-trained academics have, which is "pattern recognition." We're the types who are able to connect the dots and identify trends because we're not too specialized. This is helpful in a world where new technology and business models are converging very quickly. In my corporate experience, I've been fortunate enough to both manage many different projects at once in an overseer's role and, alternatively, drill down much more deeply in the management of fewer projects. That's also given depth to my perspective. It seems that banks, and other corporations, have to reinvent themselves on a much quicker timeline. Or at least, that's the talk. Yes, in the business world, we're coming up with new models and blasting through the not-so-new ones faster than ever. This is to address the challenge of finding new ways of bundling value and functionality for the customer, who is in control of the interaction these days. So you believe in the customer-centric model? Absolutely. This isn't just a fad. It's a new way of thinking about delivering services and value to customers. For example, in my work at Mellon, we've read research that shows that over 50% of consumers do some kind of online research before they make a car purchase. Much fewer buy online, but I think those numbers are changing fast. Consumers are interested in this way of doing business because they can be at the center of everything, getting what they need in a single place. The Internet delivers price transparency, virtual test driving, etc. Companies are having to fall in line with this vision, and change distribution. Tell me about your work at Mellon. First, we've created an enterprise-wide approach to e-commerce, which puts us among the vanguard. I started here a year and a half ago. I was hired to report directly to the CEO, Martin McGuinn, and to help organize an e-commerce strategy that would span the entire company and represent each line of business. After some consideration, we decided to first roll out a new unifying architecture - we're on Unix and use IBM's Websphere. It was somewhat of a risky move at first, in that we might have been able to come to market more quickly by developing the internet as a separate channel and come up with a series of point solutions for the various lines of business. …