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The battle of the banks

The domestic banking industry has arrived at a major crossroads. Legislation is loosening, technology is improving, and the strategic value of controlling a customer's assets is increasing.

Opportunity, opportunity, this is your big opportunity.
--Elvis Costello

Over the past few weeks, the U.S. Senate has been diligently working on a bank reform bill referred to by Phil Gramm as the "most important banking bill in 60 years." This may even be an understatement. The domestic banking industry has arrived at a major crossroads. Legislation is loosening, technology is improving, and the strategic value of controlling a customer's assets is increasing. This rare moment in time smells of both opportunity and risk for the major players in the financial market. It also opens the door for nimble new players who recognize the uniqueness of the situation and have the courage to take advantage of it.

Glass-Stegall, the depression-era banking act that limited banks from other financial businesses, is all but dead. Other banking laws that restricted multistate banking also are fading away. Good riddance. While most industrialized nations have only a handful of banks, America wallows in thousands. The reasons for this are purely bureaucratic, as financial services are truly scale businesses. In other words, larger banks with more diversified asset bases should have lower costs, which should allow them to offer loans at lower prices. Moreover, by integrating financial services, consumers should be introduced to a complete financial services solution that includes banking, security trading, insurance, and much more.

Coinciding with this reduction in legislation is the rise of the Internet--an amazing facilitator of integrated low-cost financial services. What better way to offer customers a low-cost, yet feature-rich bundle of financial services? Online, the insurance counter is one click from the trading desk, which is one click from the bill-payment facility. And if one financial service entity has access to all these features, they can offer the customer a dramatically simpler and more efficient experience. The Internet also lowers geographic barriers to entry, removing the need for local presence. All customers on the Web are free game, regardless of their zip code. All of a sudden, thousands of banks are competing for your account, not just one or two.

As if the stakes weren't high enough already, new entrants are probable, as an Internet banking business likely will be an important strategic asset. First, realize that the financial service industry is fundamentally a bit-based business. Moving money from account to account requires no human touch and has no physical dependence. Almost every interaction with a financial service entity can and will be executed through an electronic medium. Properly executed, online banking may be the most strategic Internet business of all. Look at the market cap leaders on the Internet today--one began as an access company, one as an auction house, one as a bookseller, and one as a search engine. While all of these companies have certainly shown themselves to be in positions of strength and have used these positions to move into other services, wouldn't the company with electronic control of all of your financial assets be best positioned of all?

Perhaps you are wondering what the perfect integrated financial services offering looks like. It is a unique combination of (1) breadth of product, (2) unbelievable customer service, and (3) unique innovation. The ultimate offering will have one-click access to all financial services, including, but not limited to: checking, loans and mortgages, bill pay, securities trading, insurance, money market and mutual funds, wire transfers, ACH, direct deposit, credit card issuance, and so on. The company that delivers this service will be a customer service aficionado. No more 9 to 5, no more banking holidays. This is a no-nonsense, 24/7/365, "consider it done" type of operation. Can you say that about your current bank?

Perhaps the most important key to success will be innovation. The online leaders of today (Yahoo, Amazon, eBay) don't use much off-the-shelf software because you can't lead the industry if you wait for someone else to build the road. Moreover, the resulting feature is no longer differentiating if everyone has access to it. Consumer banks typically have chosen to buy vs. build when it comes to interesting new features. This may be a losing strategy over the next several years. The ultimate financial offering likely will include an online equivalent of Quicken, as well as one-touch tax filing. Also, the No. 1 online bank will offer one-touch purchasing over a multitude of e-commerce sites with the payment cleared over ACH as a direct debit from your interest-bearing checking account (i.e. no credit card needed). Want financing? That's one touch away as well. While Intuit may help you with taxes, you will be hard pressed to purchase the latter feature off the shelf.

Let us now walk through the likely candidates to lead this new banking world.

Traditional banks
There are many reasons that large traditional banks are the likely winner in this battle royal, but there are just as many reasons why they may stumble. They currently have the largest account base, control of the ATM networks, and a strong understanding of the legislative environment. What they lack, however, is flexibility, innovation, aggressiveness, and a true service mentality. Large brick-and-mortar infrastructures are costly. Also, most larger banks buy rather than build their Internet technology, which guarantees they cannot lead the market and reduces the chance of future innovation as they become increasingly dependent on outside technology resources. In addition, traditional banks are not nearly as aggressive as online trading companies and are certainly not as aggressive as Internet-based players such as Amazon.com or Nextcard. If you recognize this as a once-in-a-lifetime opportunity, you have to be willing to bet the farm. Some companies will.

Perhaps the biggest hurdle to big banks' success will be an ostrich-like attitude with respect to customer service. I use online bill pay with one of the most innovative banks in America. I recently encountered a situation in which the bank declared the payment "paid," but the recipient declared the payment "past due." When the online support person offered no solution other than to work with the payee, I asked the representative whether they would mind if I conferenced in the support rep from the payee. The support rep paused, stuttered, and then hung up the phone. At traditional banks, phones shut down at 5 p.m., you have to pay to see a historic check, wire fees cost $25 (these will be free online), and access to past records typically take two weeks to execute. If a deposit and a check are negotiated on the same day, you can bet the check will be processed first, resulting in a lack-of-funds situation. Banks seem to search for opportunities to charge incremental fees rather than finding ways to please the customer. This attitude will not win on the Web.