Q&A: How Technology Has Transformed Banking — and Is Doing It Again

ANAHEIM, Calif., Dec. 12, 2001 — Pinstripes may be as popular as mouse ears this week here in the home of Disneyland. Bankers by the thousands are gathered here December 12-14 for the Bank Administration Institute Retail Delivery Conference. It’s their industry’s largest conference devoted to retail banking — the bread-and-butter business of taking deposits and making consumer and small-business loans. Microsoft has a significant presence at the conference, because software is helping transform how bankers do business. To attract and retain customers, for example, bankers today are less likely to use free toasters than they are the latest customer relationship management (CRM) software.

To learn more about technology in our financial lives, PressPass talked recently with Warren Lewis, a former banker and credit-union industry executive and currently Microsoft’s worldwide industry manager for banking.

PressPass: What are the most significant consumer trends in banking today?

Lewis: The driving trend is the self-reliant consumer. Bank customers today are more confident in relying on their own judgment about financial matters. They are more comfortable choosing or changing their bank or other service provider. They’re looking for the best deal, the most value, what we call “best-of-breed solutions.” As a result, consumers are creating a more competitive environment for financial institutions, be they banks, insurance companies or securities firms. Consumers are comparing features and benefits, forcing providers to cut fees and improve service.

PressPass: Banking was once more of a trust relationship, built on things like a banks size and solidity, confidence in its managers and familiarity with the staff in a neighborhood branch. Today, would you say its more like other consumer relationships, like choosing where to buy a new TV? Is there no more consumer loyalty in banking?

Lewis: The trust relationship is still very strong, but there’s less loyalty, partly because consumers are more confident and therefore more ready to take their business elsewhere. Banks share some of the responsibility for diminished loyalty, because the industry worked hard to drive the consumer out of the lobby. Banks looked at their operating expenses and concluded that teller transactions cost too much. Technology seemed to offer cost-cutting alternatives: ATMs, call centers and now the Internet. Banks invested heavily in technology, and in encouraging customers to use it. There is nothing inherently wrong with that, but the unintended consequence is being felt in the form of diminished loyalty.

PressPass: Has that paid off?

Lewis: For consumers, yes. ATMs and the Internet make bank services available anytime and almost anywhere, enabling customers to have more frequent as well as more convenient contact with their bank. Both banks and their customers are more productive as a result. And Microsoft .NET Enterprise Servers provide an excellent platform for e-banking with software from our partner, Corillian, Inc.

But major savings from alternative delivery systems turned out to be a false dream. Even now, 92 percent of customers visited a bank branch at least once in the last 60 days. Branches and human tellers are still necessary.

And while banks have been investing in new delivery channels, their core systems have been getting old. They’re inefficient, and very labor intensive to integrate and maintain. The operating cost of banks information technology is higher on average than for almost any other industry. So banks need to look at the next generation of core systems to try to drive down their costs. They still must curb their costs because their core business is under attack as never before, in part because of technology.

PressPass: Why is that?

Lewis: Personal relationships were the glue that kept customers loyal. As more banking takes place with little or no human interaction, service becomes a commodity. Competition ratchets up with lower fees, free checking and the like. And new competitors arise.

PressPass: Is price — lower fees and higher interest on deposits — the only basis for competition, then?

Lewis: No. This is still a service business. The way for banks to differentiate themselves is to get closer to their customers. And even though technology thus far has tended to weaken that relationship, technology is the key to reinforcing it once again.

PressPass: How so?

Lewis: As banks have added alternative delivery channels, they’ve created disparate systems that don’t talk to one another. As a result they find it really difficult to get a 360-degree view of their customer. A customer with questions about her checking account and her home loan, for example, cannot make just one phone call and get the answers in one place. The customer finds that offensive. The key to a more positive and loyal relationship with the customer is creating a 360-degree view of that relationship and reflecting it in interactions with the customer through any delivery channel — in the branch or over any device. Bank personnel need quick access to the full range of customer data, and the customers do too, so they can do their own financial analysis and planning.

PressPass: How does Microsoft fit in?

Lewis: First of all, we offer banks a way to get to a 360-degree view without throwing out existing systems and antiquated infrastructure. They’ve made huge investments over the years in their existing technology. As they look to reduce their operating costs, no one can afford to junk everything and start over, especially not in the current economy. And they cant say “time out” while they go fix their aging information systems that are held together with bailing wire and duct tape. They have to continue in competition with securities firms and insurance companies that are moving into banking with new, integrated, real-time systems.

Microsoft’s .NET Framework and line of .NET Enterprise Servers are founded on the principal of integration. We can come in with our partners, the leading software vendors and systems integrators, and help banks integrate their existing environment, and where advisable, replace their legacy systems incrementally, add functions quickly and do it all very cost effectively. In short, we provide the business agility banks need to stay competitive.

PressPass: What about strengthening customer relationships?

Lewis: The 360-degree view of the customer that I was talking about is achievable today with best-of-breed software for customer relationship management from Microsoft partners such as Corillian, Fincentric, Getronics, WebTone and Onyx. And Microsoft itself is developing new ways for banks to get closer to their customers, like our new browser-enabled Money Explorer product, which allows financial institutions to offer customers a completely customizable financial management solution, integrating several of Microsoft’s award-winning financial tools from Microsoft Money software and the MSN Money Web site.

PressPass: What does Microsoft .NET mean for banking?

Lewis: Part of Microsoft’s .NET vision is that many business functions now performed in-house will eventually be outsourced to services that live on the Web. I compare it to signing up for voicemail service from the phone company instead of owning your own answering machine. By moving some services outside the firewall into a lower-cost environment on the Internet, banks can continue reaping the benefits of the latest technology without massive new capital outlays every few years. Small institutions will be better able to achieve technological parity with larger competitors.

Another part of .NET is Microsoft’s commitment to open standards for data exchange over the Internet based on XML. In financial services, XML-based standards support a wide range of financial activities including consumer banking, bill payment and presentment. We have been very active in the standards arena over the years, and in fact helped found the two most popular standards in use today OFX (Open Financial Exchange) and IFX. Because Microsoft technology integrates with XML, we offer a framework for financial institutions to plan a tested, lower-risk migration from old systems to new. For instance, we are developing adaptors for our Microsoft BizTalk Server that help map these standards to legacy systems and lower the bar of integration.

Perhaps the most exciting part of .NET is the concept of Web services the ability to deliver the functionality of software as a service, using XML and the Internet. This concept drives our vision of “Anywhere, Anyplace, Any Device” access to information. It also creates opportunities for banks to leverage their own intellectual property. Many financial institutions have invested literally billions of dollars over the years building software for internal use. The only way to monetize that asset outside of the competitive advantage it conferred was to create an independent software company and sell to other banks. .NET provides new opportunities. If a bank has a particular strength say mortgage processing it can turn that application into a web service and allow others assess to it for a fee. Many of our customers are seriously looking at these opportunities for new revenue.

In the past, converting to new mission-critical systems has involved huge financial risks. Careers have been ruined. Microsoft’s approach is different, more flexible. Our enterprise platforms integrate with legacy systems, scale up as needed, work with the largest array of applications, and pave the way for future Web services.

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