Banking technology in an age of transformation

The banking industry is an ancient one. Banking in the sense of charging for safekeeping is said to have originated in Mesopotamia between 3000 BC and 2000 BC. Babylonian banking arose in the temples, which provided places to store valuables.

The first recorded merchant banker, Pythius, was operating throughout western Asia Minor and Greece, lending and charging interest around 600 BC. From 1095 to 1270 AD, banking in western Europe experienced resurgence as a result of the need to transfer large sums of money to finance the Crusades. The military and religious order of the Knights Templar is recorded as having stored valuables, lent money and arranged international fund transfers.

Most banks after that time dealt mainly in coin and bullion, with much of their business based on money changing, supplying foreign and domestic coin of the correct value, and accepting deposits for safekeeping.

On the face of it, the business of banking has not changed much, but modern technology is certainly changing the way banks conduct their ancient business. However, at the same time, the financial services industry is in a state of transformation as it encounters the virtual world, and technology, particularly e-commerce, is driving that transformation.

Banks and other financial services firms are increasingly dealing in the exchange of information rather than cash. The bulk of what is earned as salaries, for example, is never converted to hard currency, but exists as digital information stored in networks. Many processes are now automated, with foreign exchange trading, cheque authorisation and others not needing any human intervention. Along with the transformation to a cashless world has come new technology such as the Internet and mobile devices. Banks see these as boons, since banks and financial services providers are now able to offer multiple channels to their clients, but these innovations do not come without their challenges. The survival of financial services players depends on how they manage those technological challenges.

The advent of the Internet and mobile communications was heralded as the end of banks, but not of banking, particularly as the Internet enables self-service and empowers the client. However, the financial services industry has embraced the new technology much more enthusiastically than many early observers imagined. Absa`s much-publicised free Internet connection is just one example of this.

"Not so long ago it was fashionable to say that banking will survive but banks may not," says eBucks.com CEO Michael Jordaan. However, he says, banks are not encumbered by the need to physically fulfil. "We sell intangible products and services. These intangible services have the most distributive value on the Internet. We can give customers immediate gratification, one of the Holy Grails of customer service - not just on the Internet."

Herman Singh, Standard Bank`s online business director, says trust is the essence of banking, which is why security and authentication are so important. "The vast majority of what you earn never turns into cash," he says. This is becoming more so as a cashless society moves towards being a reality. "Far from undermining banks, we need banks more. When the bulk of your money is stored as bits of information, you want to be able to trust the institution storing that information. Banks have the experience and the brand. There also has to be a level of comfort with the device you are using, which is where encryption and security come in. As you go more virtual, banks play a more critical role."

Jordaan agrees: "We, as banks, are not liked but we have an existing relationship of credibility and trust with our customers and instead of being caught like rabbits in the headlights, banks are embracing the Internet. In SA, you can witness this by the active participation of three of the four main SA banks in the Internet community with eBucks, Bluebean and free ISP, not to speak of advanced Internet banking functionality. Banks have been and therefore will remain the 'grease` of the economy for a very long time."

When the bulk of your money is stored as bits of information, you want to be able to trust the institution storing that information.

Herman Singh, director: online business, Standard Bank

Singh says studies show that after e-mail and porn, financial services management is the most accessed area on the Internet. He also notes that even when a virtual currency is created, such as the case of Standard Bank`s Bluebean and FirstRand`s eBucks, Reserve Bank regulation means that the currency must be backed by cash. Small online players do not always have that cash.

Online commerce is not restricted to retail banking. Businesses are also moving heavily into the online environment to handle their financial services requirements. Corporate appetite for Web-based treasury transacting, for example, has grown significantly in SA. Online treasury service, NetTreasury Services has experienced month-on-month growth of up to 250% since the launch of its flagship forex product in January this year, says MD Linley Scorgie. The growth is being driven by corporates seeking to streamline their treasury operations through viewing a full spectrum of rates on a single, Internet-based, platform.

The fact that banks and financial services firms have embraced the Internet and e-commerce illustrates an understanding on the part of the industry for the need for multiple channels of access to financial management services on a 24-hour basis.

One of the most powerful impacts of technology in the financial services industry is in the field of automation, a process that, in effect, leaves many everyday decisions up to computers. This is especially evident in foreign exchange trading, where huge volumes of forex are traded without the need for human intervention. But it also takes place in many other financial services processes, such as cheque verification, credit card authorisation, fraud detection and so on.

Harry Wilson, GM of process management at Nedcor`s Technology & Operations arm, says this automation, which is enabled by building a number of rules into the relevant software, enables banks to handle huge volumes cheaply and efficiently. Even checking signatures on cheques is becoming less and less manual. Customer relationship systems are also automated to a large extent, Wilson adds. The systems monitor a clients` transactions and interaction with the banks and build up a knowledge database. Automation means banks can handle volumes of transactions which were previously impossible.

Automated application and transaction procession has also found a place in Internet and mobile banking. Clients are using these gateways to undertake various tasks, all with some form of automated decision-making process running in the background. But all of this does not herald the end of the teller.

With the universal adoption of the Internet, online or e-banking is rapidly becoming the favoured consumer interface - and the introduction of digital TV and WAP phones will further extend these options.

Mark Ehmke, MD, Staffware

Wilson says it is the goal of Nedbank and other banks to move deeply into the self-services arena, where banking clients do most of their financial management themselves. Self-service has been proven to generate more volumes, and smaller banks in particular, which need more volumes, are often more self-service oriented.

Increasingly, customers are demanding a wide selection of channels and expect to be able to access them 24-hours-a-day, all week. At the same time, they are demanding personalised services and products. An example of this customisable, around-the-clock access is Liberty Group and Standard Bank`s e-commerce and financial services portal, MyLife@bluebean.com, which offers fully personalised financial planning services ranging from online shopping to portfolio management.

Other channels include interactive television, PC banking, personal digital assistants, Web-based financial services, call centres, and even cellular phones. "In the late 1980s transactions over the counter dominated business rules," says Staffware MD Mark Ehmke. "The early 1990s saw the advent of telephone banking with the creation of financial services call centres. With the universal adoption of the Internet, online or e-banking is rapidly becoming the favoured consumer interface - and the introduction of digital TV and WAP phones will further extend these options.

The main factor for retail banking organisations moving from traditional over-the-counter-based transactions to providing services online is one driven by cost.

Mark Ehmke, MD, Staffware

"Looking more closely at the pattern that has emerged over the last 10 years, the main factor for retail banking organisations moving from traditional over-the-counter-based transactions to providing services online is one driven by cost," he adds. "The number of business processes and time taken to conduct banking in a branch is much more costly compared to banking over the phone or via the Internet. This move to 'faceless` transactions ties in with the larger retail banking players` strategy of wanting to drive down unit costs and head count in an effort to become more efficient and profitable as well as improving lead times and responsiveness to customers." He says that research has indicated that processing an Internet transaction costs a quarter of that of a phone transaction and a tenth of a branch transaction.

Wilson agrees that once customers move more into self-service and away from queuing in branches, banks` costs will decrease. However, observers offer the caveat that determining the right channel mix is crucial, since investing in channels is costly, and no organisation can, or even should, invest fully in every channel. Singh says costs are likely to be affected by how customers choose their channels.

Singh also points out that there are indications that having access to many channels has not decreased the number of people who visit their branches. "When ATMs were first installed we expected a move away from the branches. We found that instead of moving away from the branches, our clients used both channels, but they banked more. It was the same with the Internet. People are making more use of different channels. Developing many channels costs money, and we are going to have to be smarter about convincing them to move to a virtual environment."

When ATMs were first installed we expected a move away from the branches. We found that instead of moving away from the branches, our clients used both channels, but they banked more.

Herman Singh, director: online business, Standard Bank

Financial services firms have been keen to embrace mobile technology as channels. Mark Anderson, the business development manager for SA (financial sector) at mobile computing and wireless solutions company RangeGate, says the financial services sector in SA has a high cost-to-earnings ratio, which needs to be brought down. "The banking industry`s core business models have remained the same. E-commerce made a huge impact on the Internet, but imagine that anytime, anywhere. The ability to work faster and to service the client better is phenomenal."

He says migration to the mobile and wireless environment is not a costly affair, since mobile devices can be integrated with banks` legacy systems, eliminate paper and even screens.

The advent of multiple channels is unlikely to herald the end of the teller and the "brick and mortar" bank. Past behaviour patterns indicate that banking clients will still visit their branches, particularly when the transaction they wish to undertake is a complex one.

The financial services industry is in transition. Technology, particularly e-commerce, has led to an increase in the number of industry participants, many of which are not traditional financial services companies, but retailers, Internet portals and so on. Financial services being commoditised, and competition is fierce.

Singh says the next big thing in financial services is e-CRM, which is in agreement with a report by Ernst & Young. The report, based on a survey of e-commerce in the banking sector, says that, faced with increased competition, there are three basic choices open to financial services companies aiming to be profitable in the e-commerce era. "First, a few firms will differentiate themselves by earning consistently superior returns on investments," the report says. "Second, some companies will choose to participate in the auction market, competing on price, quality and reliability of commodity products.

Many firms will find that the most viable way of differentiating themselves in the face of commoditisation will be by successfully managing their relationships with customers.

Ernst & Young, 1999 Special Report, Technology in Financial Services

"Finally, many firms will find that the most viable way of differentiating themselves in the face of commoditisation will be by successfully managing their relationships with customers. Managing relationships in the era of e-commerce will require an alignment of people, processes and technologies." The survey`s respondents increased their CRM spending by 31% in 1999, a year in which overall technology spending increases flattened to 8%.

"As we enter the digital revolution, competitive advantage and superior customer service will continue to be the main business drivers in the retail banking sector," says Ehmke. Singh points out that customer service levels are better in the virtual environment, and that as more people migrate, their clients will be more satisfied with their service. The uptime in Standard Bank`s virtual space is between 98% and 99%, which means that service is available at any time.

Absa`s free Internet offering has received a great deal of press in recent months, with much comment on the business model as well as branding and CRM. "Absa`s decision to give away free ISP has had positive results for its brand," says Jordaan. "Secondly, it is very positive for the SA online market, especially if we consider that it has resulted in a net growth of customers." He adds that everyone in the market has gained, including the other banks. "We have significantly more eBucks bankers now than we had four months ago."

However, he adds that it is possible to make money out of giving free Internet away to customers only if you make that money back - ultimately out the very same customer base. Observers agree that Absa is on the right track as far as branding is concerned. The branding and customer base alone is held to be important in an age where CRM is forecast to be the next big issue.

As we enter the digital revolution, competitive advantage and superior customer service will continue to be the main business drivers in the retail banking sector.

Mark Ehmke, MD, Staffware

The financial services industry is not likely to find the transition to a virtual world easy. And it is likely to be some time before we see the average person walking down the road with a small electronic device on which he is doing his banking on a regular basis. What is more immediate is the fact that financial services sector players must overcome powerful challenges in the technological arena if they are to emerge victorious at the end.

One of the most crucial challenges for any financial services player is to find the right channel mix. As noted above, it is not possible for an organisation to invest fully in every channel. Banks and financial services providers will have to find a mix based on their own target customers` needs and demands. Attempts to invest in too many channels will prove costly and there is the danger that clients will experience information overload. What makes finding the right mix even more difficult is the fact that it is not possible to predict which channel technologies will survive.

Another challenge noted by most of the banks interviewed is the need to integrate their mainframes. Many banks still have information silos, which hampers the speedy processing of information and also affects customer relationships. Broadly speaking, banks have three levels of technology: the front-end device, networks, and the mainframe. The mainframe is where the least development and investment has taken place in recent years, but industry participants say this is changing.

The third challenge, which is especially relevant in SA, relates to telecommunications infrastructure. It has become almost compulsory to bash Telkom when talking about telecommunications infrastructure, but primitive land-line technology is not the only factor. Current cellular telephony simply cannot handle the volume of traffic at which financial services firms are aiming.

Another challenge banks are currently dealing with is the smart card revolution. Visa and Mastercard have mandated banks to have all their point-of-sale card readers chip-compliant by 2004, says Archie Kot, BOE`s head of acquiring. Banks are rolling out the equipment, which he says is a costly exercise and involves a great deal of capital expenditure.

BOE, which has only 12% of the market in SA, is spending R78 million just to replace the hardware. The challenge for banks is to recoup that expenditure, but he believes that in eliminating billions of rands in fraud alone, the technology will be valuable.

It is almost impossible, at this early stage of transition, to find consensus about what exactly is in store for the financial industry during the next five to 10 years. However, there is agreement on certain trends that are likely to emerge.

The supply of information will increase, particularly as new channels develop. But the resulting overload will lead to a demand by customers for companies to organise that information efficiently. Financial services firms are also likely to choose certain channels above others based on their own target market`s demands and needs.

Absa lacked the skills to gain insight of where to focus our e-initiatives. We needed to get our arms around exactly what the e-strategy was going to entail.

Bert Griessel, executive director, Absa Group

Commoditisation of financial services is also likely to increase as enabling technology becomes more mainstream. Unless regulatory intervention occurs, banks will have to find ways to cope with that, which is likely to propel CRM into the limelight.

One trend that is already developing is the establishment by financial services companies of independent e-commerce organisations to compete with their own traditional organisations. MyLife, Bluebean and eBucks are prime examples.

Alliances and partnerships with IT companies are also emerging trends likely to be a major factor of the future, since they allow financial services groups to focus on core competencies while their technology is improved and new markets are opened to them. One such example is an agreement between BOE and TradeRoot. TradeRoot, which specialises in bank and payment gateways, recently installed a switch in Cape Town`s Canal Walk shopping centre allowing merchants to connect directly, using an automated system, to BOE`s systems. "We got 90 merchants out of that, who would have been acquired by other banks," Kot says.

Absa`s recently announced alliance with Dimension Data is also part of a long-term IT vision. Absa Group executive director Bert Griessel says the strategy enables it to enter into select IT alliances that allow the banking group to remain flexible and concentrate on competencies. The group has also contracted KPMG Consulting to assist with its e-business strategy and consolidate its internal e-initiatives. "Absa lacked the skills to gain insight of where to focus our e-initiatives. We needed to get our arms around exactly what the e-strategy was going to entail."

The independent online broker is also likely to become a thing of the past as customers demand share trading as just one part of an integrated financial services offering. Many brokerages are already owned by the banks, and banks are beginning to move aggressively into the online share trading environment.

Technology hasn`t changed the face of banking so much that if you take a banker from the Wild West and put him in a modern bank it will be like putting him on the moon, which even his horse wouldn`t recognise.

Harry Wilson, GM of process management, Nedcor Technology & Operations

This article has offered only an introductory overview of some of the trends and challenges in financial services and banking technology, primarily in retail banking. Many issues have only briefly been touched on, and many others, such as trends and implications of smart card development, biometrics and innovations in electronic funds transfer technology, have not been discussed. There is certainly scope for in-depth analyses and case studies of every issue.

Banking has come a long way since the Knights Templar, but the main changes brought about by technology have not changed the core nature of banks` business. What it has changed is the efficiency and costs of doing that business. Says Nedcor`s Wilson: "Technology hasn`t changed the face of banking so much that if you take a banker from the Wild West and put him in a modern bank it will be like putting him on the moon, which even his horse wouldn`t recognise."

As Singh points out, the heart of banking is trust. The challenge is to use technology to maintain and even increase that trust. But the greater challenge is to ensure that such trust always translates into profit. Technology is only a tool to that end.