Vertical Market Opportunities in Retail Banking and Securities
The delivery of retail banking services moved to the forefront this year with the explosive growth of the Internet, the emergence of in-store branch banks, and the appearance of the direct bank. The emergence of in-store branch banks is a mainstream branch strategy. The direct bank delivers a consistent set of products and services to customers who directly access the bank through a variety of channels, such as the PC, the Internet, or the telephone. In particular, the Internet has not only continued to sustain its exponential growth, but bank usage of the Internet evolved from mainly electronic billboards or brochures last year to transaction-capable systems. First Union, Chase, and Wells Fargo lead a virtual “who’s who” of top banks making forays into Internet-based, online banking. Internet-only banks, such as the Atlanta Internet Bank, are also appearing. Also banks are considering using Internet technologies in the form of intranets within their corporate boundaries to speed the delivery of information through the bank.
Electronic commerce, whether Internet-based or not, is also making great strides. The implications of these gains are significant for banks that need to define and establish their role in electronic commerce. With the Secure Electronic Transaction (SET) protocol developed by Visa and MasterCard for the purposes of sending financial information over a public network securely, electronic commerce appears poised to take off. Vendors are flocking to support the SET standard. Also Check Free (that purchased Intuit’s transaction processing unit) and IBM (that joined with 15 leading banks to create the Integrion electronic transaction network) are ramping up networks to enable browser-based financial transactions. Both are aggressively recruiting subscribing banks.
Bank interest in electronic commerce continues to be fueled by fear of disintermediation. With Intuit, the marketer of the popular Quicken home financial application, selling its transaction processing unit to Check Free and Microsoft adopting a cooperative approach with the banking industry and backing away from its initial competitive strategy, the immediate threats have subsided. Yet, it is still not clear whether the banking industry will continue to play the same central financial transaction role in the electronic marketplace that it has played in the conventional marketplace. Diverse players spanning the regional Bell operating companies (RBOCs) to the cable TV networks to software companies are jockeying for a role in the emerging electronic market segment.
In the short run, banks appear in good shape to compete. Commercial banks reported net income of $13.2 billion in the third quarter of 1996, their third-highest quarterly total ever, according to the most recent data released by the FDIC. For the first nine months of 1996, commercial banks earned $38.6 billion during the period. At this pace, the industry will likely surpass $50 billion in annual earnings for the first time. The average return on assets (ROA) at commercial banks, a basic yardstick of industry performance, was 1.19 percent. That is identical to the ROA recorded by the industry during the first nine months of last year. Almost three out of every four banks reported ROAs above 1 percent for the third quarter. Total assets increased by $61.4 billion during the three-month period. Asset-quality indicators remained favorable, as noncurrent loans and net losses on loans to commercial borrowers declined. However, there are growing signs that consumer credit problems are on the rise. Consolidation continues to sweep the industry as the largest banks get bigger and the total number of banks gradually declines.
Among securities companies, the death-defying bull market continues to boost the securities industry’s profits, expected to reach $11.5 billion for 1996, up 34 percent from 1993’s record breaking $8.6 billion. New York Stock Exchange member companies are employing more workers (262,460) in positions dealing with the public than ever before in their history. And, employment industrywide has grown 4 percent annually over this decade. Factors promoting these good times include new stock issues and 866 record-setting offerings through December 20, 1996. This number represents a 20 percent rise over 1993 and a “high” for the decade. A flurry of merger and acquisition activity, with an estimated value of $500 billion, reflects a 40 percent rise in one year and triple that of 1993. U.S. companies are also profiting from underwriting about $70 billion in stock issues for foreign companies, 63 percent more than the recording breaking 1993 activity. Mutual fund assets also climbed to $3.54 trillion, stimulating trading which reached a daily average of 410 million shares on the NY Stock Exchange and 22 million on the American; representing hikes of 18 and 9 percent respectively. The NASDAQ Stock Market averaged daily shares of 542 million shares, up 35 percent from 1995. What happens when the widely expected market correction finally comes is anybody’s guess.
However, both banks and securities companies face a challenge from interactive World Wide Web services, such as Online Bank and Broker (OB&B), that offer banking services and securities transactions. Some major companies have taken aggressive action to defend, claim, or reclaim their share of the voluminous retail market, such as the merger of Dean Witter and Morgan Stanley. (Lehman Brothers Holdings was expected to follow soon.) Fidelity Investments has formed an alliance with Salomon Brothers, allowing each party to offer its partner’s specialty to its customer base.
The institutional company’ forays into retail territory precipitate, by months, the introduction of an electronic system, called OptiMark. The server-based system is the baby of Instinet’s Bill Lupien and touted to allow large block transactions to occur without impacting the securities’ market price. With asset allocation a mainstay of today’s money management strategy, black box anonymity is sure to be tempting—provided it delivers on its promise. OptiMark’s founders say all orders will pass through the same brokers for recording on the appropriate exchange, but Wall Street is wary of losing order executions.
Internet accessibility has emerged as a cost of survival in the financial services industry. Smith Barney, Paine Webber, Prudential Securities, and Merrill Lynch have added to their Web presence, offering account access, research reports, or bill payment services. Investment houses, Goldman Sachs and Bankers Trust, embarked on intranets last year, with Goldman using its intranet experience to plan Internet delivery of research to its clients. Internet pioneer E*Trade has already upgraded from text-based screens to point-and-click capabilities. Consulting firm Ibbotson Associates provides research on its Web site.
Similarly, the powerful mutual fund industry is not to be left behind. Vanguard Group clients will access their account data from its Web site. Another example is the well-publicized electronic-access demand issued by Fidelity, which wanted to connect to its brokerage companies’ in-house computer networks (intranets). The objective of establishing such a connection centered on expediting retrieval of copies of earnings models. These models are used to estimate earnings of the companies tracked by Fidelity. Although a dedicated line rather than an Internet connection was proposed for the interactive connection, Internet browsers will probably be used to facilitate the query functions. Little wonder The New York Times has added Internet to its classified job categories. Wall Street want ads bulge with calls for Internet systems analysts, designers, project managers, Web site coordinators, Web programmers, and Webmasters. Similarly, the market is growing for security engineers, advanced products (such as digitally generated passwords for passing through firewalls), and programs for perfecting a unique Internet presence, as well as better data control.
Another key issue for both banking and securities is the impact of Year 2000 fixes. The financial services is one of the industries identified as being most susceptible to Year 2000 problems with so much of its information being date-sensitive. Dataquest studies have repeatedly found high levels of interest in the Year 2000 issues in the financial services industry. Regulators have ordered the industry to bring their systems into Year 2000 compliance. Estimates of the cost of doing this worldwide run into the hundreds of billions of dollars. Although much of the work will be turned over to outsourcing companies and contractors of various sorts, Year 2000 fixes, at the least, will distract IT management and will likely divert money and resources that otherwise would be directed toward new IT initiatives.
IT providers will maintain full agendas in meeting demands for real-time information, online service, rapid data accessibility, and download capability, among numerous other examples. Dataquest estimates for industry market size identify U.S. retail and commercial financial services, including real estate, markets, as representing 16 percent of the total U.S. IT market size of $264 billion in 1997. Table 1-1 presents a closer look at key business trends influencing retail banking and securities industry segments with their impact on technology trends.