The 'Net threat to Banking: Convergence of Services Force Banking Industry to Think About the Box

Retail banking has experienced a major shift in customer habits and expectations with the advent of the ATM network. There's little question that the machines are a boon to the banking industry and its customers who expect the convenience of anywhere, anytime accessibility. Up to now, the basic functions of an ATM network have been managed well through banks' existing, legacy-based technology systems. But the Internet and other factors have changed this landscape drastically, and new threats to retail banking's established ATM customer base have emerged. Of these, the one that constitutes the biggest threat are retail outlets, like convenience stores, that are not traditionally tied to financial services, but are now heavily coupled to an expanding, non-traditional customer base.

24 x 7 access to funds and other banking needs is a convenience that most people agree they can't live without. The downside to providing this constant access however, has been the general erosion of banks' hard-won relationship with their customers; if customers have fewer reasons to visit a bank, then how does the bank know what its customers want? Until recently it hasn't, and retail banks have been content to sit back and manage their relationships over the ATM network in order to drive down costs. Meanwhile, and right under the nose of the retail banking crowd, these alternative service providers have exploited new technology to offer broader and even more convenient alternatives to traditional ATM banking.

The pressure from non-traditional providers is major. Convenience operations are in a position to capture new customers while in pursuit of their daily activities with innovative, technology-based amenities that differentiate themselves from traditional financial services providers. Banks have been slow to adapt new technology because of the difficulty involved with integrating it with their legacy systems, now they're forced to defend their customer base against these technologically superior upstarts. The challenge, then, is for banks to extend their service offerings and develop additional revenue streams, while delivering enhanced products on a uniform, always available platform that leverages their existing technology investments.

Put mildly, this is difficult in an economic environment that has strangled spending budgets and decimated IT staffs. The monolithic, proprietary back-end systems in which banks invested early on are rarely (and without considerable difficulty) able to integrate the thousands of new payment processing applications, customer relationship management systems and so forth that now exist, and the pressure to extend these services is crucial to the industry's survival.

The future of retail banking depends on the convergence of four major categories of revenue opportunities onto a single, always available, industry standard platform: pre-pay services; new markets; new revenue channels; and the previously described expansion of services through the ATM network.

Pre-pay services in the telecommunications, utilities, gambling and micro-payments industries are on the rise. It's a trend being fueled by convenience stores that, aside from being nearly everywhere, offer the ability to pre-pay via enhanced ATMs for certain services such as debit cards and phone minutes, while in the same trip catering to the everyday needs of busy customers; the theory being that one-stop-shopping is preferable to having to make an additional trip to a bank branch!

New markets have been created through the convergence of services provided by Internet-ready ATM kiosks inside physical retail outlets. The melding of these physical and virtual worlds into a unified environment has created unlimited transactional possibilities--all of which have to be tracked, executed, reconciled and reported to the players involved: banks, retailers, the kiosk owner and anyone else involved in establishing and maintaining that point of sale.

Advancements in payment technologies have also been a generator of additional revenue. Innovations like chip cards, also referred to as "smart cards," carry a tiny processor imbedded in the plastic itself. These processors keep users' credit or bank account histories available for chip-card enabled commerce platforms to access. Still another option is virtual money, which includes online pre-paid credits that offer the convenience of not having to reenter credit card data every time someone makes a purchase.

The standard ATM kiosks that people are used to using are evolving to accommodate the demand for additional services. Generally, consumers hate to go out of their way for something as simple as cashing a check, so there's movement in the banking industry to make sure that not being able to do that isn't one of the reasons customers leave a bank. Check cashing, along with wire transfers, stamp purchases, ticket reservations, bill payments, gift cards and other amenities are all services that are just now becoming available on these machines. However, the ability to execute transactions generated by these additional revenue generators hasn't kept pace with the speed at which these new services are being offered. In order to do this, banks are turning to electronic funds transfer (EFT) platforms based on continuously available industry standard operating platforms.

EFT platforms manage the hundreds of thousands of daily transactions created by the channels above. They act as a sort of traffic cop for bank databases linked to the Internet and track and manage the money consumers spend. On a simplistic level, EFT software works like a directional switch: once a transaction is executed, the money needed to complete the sale has to be debited from the consumer's account and forwarded to the party that is owed the money. A portion of the funds might also be deducted from the retailer and paid to third parties that helped facilitate the sale; the EFT software that regulates these transactions has to then reconcile that additional transfer. And most importantly: the EFT platform always has to be available. Multiply this process exponentially and you'll understand why the availability of this platform is considered mission critical.

Microsoft's Windows 2000 Advanced Server operating system is a common denominator for most of the world's computing systems, but it hasn't been synonymous with mission critical computing until recently. The advent of fault-tolerant computer servers designed with industry standard components like Intel processors, has made Microsoft's very accepted but not-so-trusted operating systems more palatable for the kind of heavy-lifting required of EFT systems. Fault-tolerant servers are designed not just to recover from a component breakdown, but to actually compute through one, as though nothing ever happened. The need for this capability is self-explanatory in the financial services world, as even one dropped transaction could have dire consequences. Not surprisingly, this same fault-tolerant server technology is used to run computer aided emergency dispatch systems around the world, ensuring every life-or-death phone call reaches a dispatcher.

Undeniably, the most damaging effect of system unreliability in financial services is the loss of customer confidence should they experience an ATM system failure. Since retail banks are already feeling the pressure from within their own industry, they can't afford to anger or inconvenience their existing client base any further. Even if failures were transparent to the customer, the cost of dropping transactions is too high in terms of tracking profit and loss. By combining scaleable EFT software programs onto a common operating platform and ensuring its availability, banks can offer innovative and forward-thinking revenue generating services around the clock with technology that seamlessly integrates into their existing infrastructure.

The latter point solves a thorny issue for banks: how to enable the new services they need with both an established legacy environment and an advanced EFT platform, while at the same time protecting their previous technology investments. Advanced EFT platforms are designed with hardened technology based on open standards and industry proven software. This architecture ensures a seamless fit into existing systems; for pennies on the dollar (compared to their legacy investments), banks can offer additional services that are generated from the EFT platform and are designed to compete in a rapidly evolving industry. At the same time, the investment in the legacy systems remains protected because the EFT platform can embrace the incumbent technology. At such time as the banks' operations people are comfortable, more emphasis can be placed on the updated system--the bridge from one technology to the other can be crossed whenever the bank is ready.

An evolution, not a revolution is the answer for banks looking to add and expand services to their customer base. They can protect their existing technology investment and make money by adding an always available, Internet-ready EFT switching platform based on industry standard components to their legacy environment. It's a small investment with a huge return. Through added technological capabilities, retail banks can maximize their revenue potential and protect their hard won customer relationships. Without them, banks will only watch as their customers leave for providers with more to offer.