Press & Events

Beyond Banking: Financial Services And
The Internet

Financial services firms are going online to improve customer service; train employees, agents, and customers; and safeguard customer assets—while keeping a close eye on ROI.
By Fred Sandsmark

Article Summary:

September 2002 - iQ Magazine - Financial-services firms approach all technology initiatives on a return-on-investment basis. Because of the variety of products they provide and the sales channels they use, Internet initiatives must improve efficiency, reduce costs, or simplify processes in order to be valuable. Financial institutions are empowering their customers to go online to handle many of the transactions traditionally conducted via telephone calls or office visits. The Internet also helps with end-to-end processing, so electronic transactions don’t require manual processes behind the scenes. Online training and Web casting are replacing many in-person training and communication tasks. Customers who bank online cost financial institutions less per transaction, carry higher balances, and are less likely to move their accounts to other institutions. Financial companies are using online strategies to reduce communications costs while improving quality.

Financial-services companies occupy a central place and play a critical role in the inner workings of the global-business landscape. They touch every operation of every enterprise, large or small. The bottom line, to borrow a financial term, is that nearly every business transaction between two parties includes the participation of the financial-services industry.

Banks, brokerages, insurance companies, and many other types of companies all fall under the financial-services umbrella. It’s an industry that provides untold numbers of products, from basic checking accounts to complicated institutional custodial services.

The blueprint that maps out how the industry operates is constantly changing as the industry must comply with complicated, ever-changing government regulations that deal with privacy, security, communications, liquidity, and myriad other minute facets of its business.

The industry has embraced the Internet, both for customer-facing operations and back-office functions. Internet technologies are helping financial institutions provide products and services better, cheaper, more securely, and more efficiently than ever before. The financial-services industry has historically been a leader in adopting Internet technology, in many cases setting the standard for other industries.

“The Internet, rather than transforming financial services, was transformed by the financial-services industry into a useful marketing tool, a useful direct-sales tool, a useful account-management tool, a useful customer-communications tool, and more,” says Chris Musto, vice president of research at online financial-services consulting firm Gómez.

It’s difficult to draw any simple conclusions about an industry that employs 5.8 million people and has revenues of $2.2 trillion in the United States alone. (The United States Commerce Department figures are from 1997—the most recent year available.) But it’s safe to say that the financial-services industry is strongly motivated to increase revenues and decrease costs—good old-fashioned return on investment (ROI). That motivation extends to Internet initiatives as well.

“That’s just how bankers think,” says Musto. “They approach the Internet in terms of ‘Will this cut costs?’ And bankers will tell you that they believe it does.”

The influence of the Internet on financial services is particularly strong in several areas, including the following:

It has added channels through which the industry can offer products, and it has provided ways to manage those channels and improve customer care.

The complicated products and regulatory environment of communication in financial services has made e-learning important in many firms.

Data security, of course, is the foundation upon which every reputable financial-services firm builds its most important asset: the trust of its customers.

“Financial institutions are completely dependent on technology now,” says Tom Wolf, senior vice president of e-business for Royal Bank of Canada (RBC). “More and more is getting automated, and we’re struggling to make things more simple, rather than more complex. Nirvana is, essentially, simplicity in the way we interact with our customers, deal with internal support and fulfillment, and work in technology architectures. Hopefully we’ll get there, and it’ll be a lot more convenient for our customers.”

Customer Care
Looking Out for Number One: Customer care means integrating multiple channels and products.

Not so long ago, the term bankers’ hours was synonymous with short days and a schedule that, to put it politely, wasn’t customer-friendly. But financial institutions have changed their collective mind-set and made their services available around the clock through a variety of channels, such as automated teller machines (ATMs), telephone call centers, scaled-down branch offices in supermarkets, and Internet banking. Banker’s hours are now a historical footnote, like telephone dials and eight-track music cassettes.

Adding new customer-access channels isn’t a trivial task. Each channel represents more complexity and different systems that need to be managed and integrated like interlocking gears. These channels need to be synchronized to meet the customer’s needs: The information at the ATM must match what the customer gets over the phone, online, and in the branch.

Not only does adding new channels add complexity, but the new services they enable can compound the challenge. Take aggregation—the ability to view, on a single Web site, account information from a bank, brokerage, credit-card company, insurance agency, and other financial-service providers, perhaps from multiple companies. This service is appearing on financial institutions’ Web sites now. But it’s costly to do, because every account a customer accesses requires an electronic connection between two establishments, and those establishments are just as often competitors as they are partners.

And customers want more than to simply view account information. They want to move money between accounts, pay bills, sell stocks, and modify insurance policies from that central Web page. Providing this ability to customers creates “sticky” applications that bring customers back to a Web site repeatedly, so financial institutions like them because they build the customer relationships and improve customer retention. And these sites are attractive to the financial institution for another reason: every time a customer uses a Web site for a transaction or information request, rather than visiting a branch or picking up the phone, the financial institution saves money because an employee isn’t required to handle the task.

“Online customers are, in general, more profitable,” says RBC’s Tom Wolf. By moving customers to lower-cost channels, RBC saves $70 million annually.

“Just the simple act of offering online banking seems to have a positive effect on the revenue you get out of customers,” agrees Musto of Gómez. “There’s also an effect on customer retention. It appears that people who use online account-management interfaces tend to stay with you longer.”

One of RBC's key online strategies, according to Wolf, is the synchronization of its customer-relationship management (CRM) system between online and offline channels. The company has experienced 20% year-over-year growth in sales for the past four years, which it attributes directly to CRM. This customer focus also permits careful customer segmentation. All customer contact, regardless of channel, are collected and analyzed within a single database, allowing RBC to identify the most desirable, profitable customers.

“In the retail bank, we segment our customers and run the bank around customer segments,” he says. “We don’t run it around products, as banks generally do.” Some segments are, of course, more profitable than others, and RBC focuses on them. “When we’re providing products online, we want to make sure we’re servicing our profitable segments. But we also want to look at the other segments and think about how to make them profitable.”

Switzerland-based Credit Suisse Financial Services also practices aggressive, cross-channel CRM. “It was very important for us to be the first mover in developing the Internet as one of a number of integrated distribution channels,” says Hanspeter Kurzmeyer, the company’s CEO of e-Business. “Our investment in multichannel CRM obviously cost money, but we felt it was critical that we reach new customers and bring them closer to us.”

The investment is paying off: Credit Suisse has reduced its customer “churn” rate to less than 1% per year, compared with a European average of 3% to 5%. “And with that strengthened relationship comes new opportunities to increase ‘wallet share’ and up- and cross-selling,” says Kurzmeyer.

Brokerage Boom
The dot-com and stock-market boom of recent years had a dramatic effect on the Internet’s role in the retail brokerage business. Online brokerage transaction volumes, fueled in part by inexpensive online trading, peaked in late 2000 and have dropped 40% since, according to Gómez. Still, the number of online brokerage accounts continues to inch up from 1.5 million in 1997 to an all-time high of 19.7 million this year, despite consolidation in the discount brokerage industry. The biggest jump was between 1998 and 1999, when the number of accounts increased from 2.8 million to 12 million.

The immense stock-trading volumes of the boom enticed many traditional brokerage companies to flirt with offering their customers inexpensive online trading options. “But full-service brokers that did that didn’t understand their own business model,” says Musto. “They didn’t need to be offering $20 trades; that would be a sure sign that their brokers weren’t adding any value. Traditional brokers are getting by on relationships; they’re getting by on their value as financial professionals, not as order takers.”

Full-service brokerages are now adjusting their offerings to find the appropriate middle ground between the two extremes. Discount online brokers are likewise adjusting their offerings to provide more research, information, and service variety.

E*TRADE Financial, one of the first online brokerages, is moving into providing more banking services and now has the third-largest ATM network in the United States; and Charles Schwab & Co. has created a “Private Client” service specifically for clients with high net worth.

Insuring Service
Internet-based customer service has been a different challenge in the insurance industry because many insurance underwriters essentially have two sets of customers: agents who sell policies and the policyholders themselves. Managing the online channel has been complicated. And moving to direct online sales, although more profitable, cut out the trusted agent who’s best able to cross-sell and up-sell based on a policyholder’s specific circumstances.

“There are agents who are not so excited about the prospect of Internet self-service in insurance,” notes Musto. “A lot of insurers are trying to build out and upgrade what their agents have on their desktops; they think of the Internet as a business-to-business proposition, where the Internet interface is between the underwriter and the agent.”

The direct online channel is successful in some settings. Credit Suisse is using the Internet to tailor its insurance services to customers in various countries, including Spain, Portugal, and France. The site offers each customer a country-specific portfolio of products in his or her own language.

In the United States, direct Internet sales have been instrumental in opening the small-business market to insurers. “Businesses with fewer than 50 employees are less likely to be served by insurance agents,” explains Karen O’Brien, former research manager at research firm IDC. But Web sites that permit side-by-side comparison of policies from various underwriters have filled that gap. “Online insurance marketplaces facilitate the process of matching small businesses to carriers, increasing the appeal of the small-business market to insurance carriers.”

Data Security
Barring the Electronic Door: Data security is tight and intentionally low-key in the financial-services arena.

Security is the foundation upon which financial institutions build their businesses. But the very definition of security in the financial industry has changed. Twenty years ago it might have meant bigger locks, thicker walls, and heavier vault doors. Now, with the vast majority of financial transactions handled electronically, assembling the elements of security means redundant servers, encrypted communications, network safeguards, biometric physical security, and other precautions. What hasn’t changed is that the cornerstone of the financial industry is trust—not only that the bad guys will be kept out but that the bank will treat its customers and their privacy with all due respect. And if that trust is violated, either by crime or negligence, banks risk losing their customers.

In the Internet era, financial institutions find themselves in a sensitive position. To entice customers to use the lower-cost online channel, they need to assure them of airtight network security, but they also don’t want to call attention to their security measures. After all, the best way to bring the computer hackers to a bank’s electronic doors is to announce that it has the world’s greatest security. So bankers tend to be tight-lipped.

Although they may not speak publicly about security, they have spoken with dollars. Research firm IDC reports that financial-services organizations in North America—banks, insurance companies, and other institutions—spent a combined total of about $103 billion in 2001 on information technology, with the top priorities being disaster recovery, security solutions, and remote-access systems to ensure business continuity.

Three-Part Plans
Financial institutions tend to take a three-pronged approach to security: prevention, detection, and response. For prevention, the Web sites of financial institutions employ tested technologies such as secure socket layer connections, firewalls, encryption technologies, and virtual private networks to prevent break-ins. Companies are also considering biometric security—using unique human features such as fingerprints, retina scans, or voice patterns. Indeed, the Financial Services Technology Consortium, an industry group, has already sponsored several independent tests of biometric solutions. Prevention can also entail simulated attacks on a computer network—a sort of network fire drill—to test detection capabilities. Detection is done through constant monitoring, sometimes by third-party security firms. To respond to security problems, industry groups, companies, and even entire countries are establishing incident-response teams that evaluate network security incidents and respond to them in a coordinated fashion.

One thing that complicates network security in financial settings is that an institution can’t exist in a vacuum. It might have several automatic teller machine (ATM) networks, proprietary legacy networks and systems, an Internet Protocol (IP) network between branches and offices, fiber-optic links to a remote data center, a Web site—plus the systems that link them together. Any of these is a potential point of security exposure. Inadequate security policies, fragile systems, and human-resource challenges (most losses still come from insiders) also pose risks.

“Banks are simultaneously having to take advantage of a network of networks, which are to a great extent external to them, while integrating with networks they already have in-house or that they share with other banks,” explains Musto. Every link in that chain provides another exposure to security risks that the institution has to manage.

Wolf says that established financial firms have some network security advantages when it comes to these linkages. “We have very mature disciplines and processes in areas of security and risk management that we go through,” he says. “When we deal with third parties that may be Internet start-ups, we really make sure that they have airtight security procedures and that we’re not putting our customers at risk.”

Government And Consumer Needs
Government regulations provide some security guidance, especially as it relates to protecting customers’ personal information. In the United States, the Financial Services Modernization Act of 1999 (more commonly known as Gramm-Leach-Bliley after its three principal sponsors) made it possible for banks, brokerages, and insurance companies to coexist as single companies, but it also required financial-services firms to develop policies to prevent fraudulent access to confidential financial information and to disclose those policies to its customers.

But to consumer-rights groups, privacy is also a matter of how the institution treats customer data internally, and some analysts think that institutions should do a better job of informing their customers of their practices.

“Today’s bank sites do little to assuage consumers’ fears about how firms use their data online, with few firms giving clear and consistent access to privacy policies throughout the site,” says Charlotte Hamilton, analyst with Forrester Research, speaking specifically about Web sites of Europe’s 20 largest banks. “Banks must make their users feel comfortable inputting personal and private data, to move customers up the confidence curve.”

One way that banks gain their customers’ trust is to provide them with services that are unique and worthwhile. “People are willing to give information about themselves for value in return,” Wolf says. “If they see the value, they do it. It’s our job to make sure that there aren’t security holes.”

The security equation is even more complicated in the insurance industry, which is regulated at the state level in the United States. Not only do a variety of privacy and security regulations apply but insurance companies online “have to be cautious about the fact that anyone in the country might view their insurance offering,” says Musto. “They have to be conscious of how they present themselves to people in various states from a single Web site.” Various Internet customization and localization strategies can be used, but insurers often have to ask a new visitor to their Web sites for a postal code to determine their location, and even that tiny obstacle can put off potential customers.

Most financial-services companies accept the fact that privacy and security regulations are a necessary part of doing business, but executives say that the same rules meant to protect customers can also stymie innovation.

E-learning
Knowledge Is Power: E-learning technologies serve employees and customers while simplifying operations.

As in many industries, financial-services companies know the value of clear communication. But in many cases, clear communication is more than just good business, it’s the law.

“In the financial-services industry, Securities and Exchange Commission [SEC] and National Association of Securities Dealers [NASD] regulations govern a lot of the communications that take place between parties,” explains Paul Ritter, program manager in Internet Business Strategies for consulting firm the Yankee Group. These rules can be encoded into an Internet communication. For example, a customer can be required to view legally required privacy notices or disclosures before proceeding into a transaction.

For that reason, and many others, financial-services companies have moved to the Internet to provide employee and customer education and information-delivery services because the technology helps to keep the information timely, consistent, and convenient. A company can ensure that every employee takes exactly the same security training, for example, by administering the class through the corporate intranet.

Many brokerage firms have evolved their traditional Monday morning staff meetings for economic reports, corporate news, and other pertinent information from costly voice-only presentations to Internet-based teleconferences. “In a lot of cases, they’ve replaced what can be very expensive ‘squawk box’–type phone calls, where they have open, leased [telephone] lines,” says Ritter. “If they’re able to transition some of that to IP networks, where it’s done over the Web, it can significantly reduce costs.”

And some institutions are finding that IP telephony—routing voice telephone calls over the corporate data network—benefits their everyday communications. AMCORE Financial, a diversified financial-services firm with about 65 branch locations in Illinois, Wisconsin, and Iowa, is converging its voice and data traffic to reduce costs.

Newer Faster Cheaper
Throughout the financial-services industry, Ritter has found that Web casts are also replacing training and communication that has in the past been done via live satellite transmission, videotape distribution, CD-ROM, and hard-copy documentation sent through the mail. In these circumstances, the Web casts aren’t just cost-effective; they’re also much more useful for the participants. Satellite transmission can cost as much as $200 per person, compared with $5 per person for Web casts, according to Ritter, but beyond cost, the “perceived utility” of Web cast information is much higher (92 on a 100 scale) than for satellite broadcast (68). Of all the communications modes Ritter studied, Web casting was by far the most effective for the learner. It is also better for the company offering the Web cast because it includes the ability to control who views the presentation and to track, measure, and report on the audience size.

The insurance industry presents an interesting dichotomy for developers of e-learning technology, according to Ritter. “Insurance companies have all these independent agents spread out all over the country,” he points out. “That’s a widely geographically dispersed workforce, which is one of the characteristics that makes streaming [video] and Web casts much more viable alternatives. These companies are prime candidates for adoption of streaming-media technology.”

But that dispersed nature is also a challenge, because the level of equipment, technical savvy, and Internet connection speeds vary greatly from agent to agent. Ritter sees insurance as a prime market for video streaming products that adjust themselves automatically to each user’s situation and enable the industry to reach its agent workforce more cost-effectively.

In spite of these limitations, insurance companies are providing education and training to their agents electronically. Prudential Financial, for example, is moving training programs for its 17,000 agents and field-support staff in the United States into “blended learning programs” that combine instructor-led and Web-based training. Currently, 95% of Prudential’s training practices are instructor-led. That number is expected to drop dramatically when the company fully implements its new solution. Prudential expects to save $3.7 million over three years with e-learning.

RBC offers its employees online education through its Personal Learning Network (PLN). “We’ve been doing self-learning for more than ten years,” says RBC’s Wolf, “and we’re now moving it to the Internet. PLN has been successful, especially in the retail bank, where we’ve saved money by reducing class time.”

RBC ties the PLN to its human-resources department’s information systems because much of the training for employees is competency-based, meaning an employee must achieve a level of competency in certain subject areas to earn pay raises and promotions. The PLN lets each student develop an individual learning map that is tailored to the employee’s current job, professional interests, and desired career path. RBC develops PLN coursework in-house, but its Internet-based courses can also link to information and resources outside the company. More than 42,000 employees have access to PLN, and prospective employees are invited to take a demonstration course on the RBC Web site.

Customer Education
Online education in the financial-services industry isn’t limited to employees. Many online brokerages, including Charles Schwab and Datek Online Financial Services in the United States and Clic Trade in France, have long offered financial education to their customers via their Web sites. In April 2002, the Securities Industry Association (SIA), an industry group representing more than 600 securities firms, launched SIA Investor, a comprehensive financial education site. The site offers expertise from SIA member firms and other organizations, including the University of Pennsylvania’s Wharton School and the Federal Reserve Bank of Philadelphia. In addition to a dictionary of financial terms, it offers a sequential course covering five core financial topics: investing goals, investing essentials, choosing investments, managing your portfolio, and how markets work. The interactive courses are free of charge, require no registration, and include no sales pitches.

“Its purpose is solely to educate investors by providing answers to real-life financial questions that people have when building and managing their investments,” says SIA President Marc E. Lackritz. SIA member firms can incorporate SIA Investor coursework within their own Web sites or link to it in a separate page.

Although learning programs such as SIA Investor provide a structured environment for learners, investor education can also have an element of fun, as is the case with the WellsTrade Investment Challenge. This online investing game, sponsored by Wells Fargo Investments, the investment affiliate of Wells Fargo & Company, simulates the experience of playing the stock market. Participants manage a fantasy $100,000 account for a four-week period, buying and selling investments and experiencing market reactions as they would if the investments were real. Participants that outperform the S&P Index are entered in a random drawing for prizes. Several other Web sites, including discount broker E*TRADE and portal Yahoo, offer similar games.

IT Governance
“Financial-services firms are huge customers of information technology,” says Musto of Gómez. “It’s amazing the extent to which financial-services firms depend on being able to store large amounts of data, and then transport elements of that data to an arbitrary location very quickly,” such as to a customer-service representative’s screen, an ATM, or a customer’s Web browser.

With IT playing such a central role in large, complex financial-services companies, decisions on spending and governance need to be made at the highest levels. Often, a group of technology and business leaders sets the priorities for the entire company, identifying strategy and basic blueprints for systems.

“A number of banks have e-commerce councils, which are made up of business-unit owners and IT heads deciding on what projects to prioritize,” Musto explains. Sometimes these councils focus on infrastructure concerns, such as network connections, networking hardware, and servers, which are used and paid for by multiple lines of business.

There’s often a person whose specialty is Internet-technology management. “In financial-services companies, there’s usually somebody whose job is to coordinate Internet initiatives around the company,” Musto says. “Because what companies don’t want to do is build the same thing twice if they can just build it once.”

Melissa Dragon, senior analyst at IDC, says the ROI focus of financial institutions is valuable in times of tightening IT budgets. “Some financial-services institutions will decrease IT budgets, shift investment priorities, or postpone spending for future quarters,” she predicts. “Companies need to be selective by approving projects that can ensure cost reductions and prioritizing IT projects that have sound value propositions with measurable returns.”

RBC treats the IT function as a central corporate responsibility and aligns its operations with the company’s lines of business. The company's CIO is the vice chairman of the company and each line of business also has a representative overseeing IT operations. Wolf heads up an e-business operating committee, and the company also has a technology policy committee.

“The key message is that we’re aligned with the business and that IT expenses and projects are very transparent to the lines of business,” Wolf says. That transparency allows RBC to calculate accurate ROI for IT initiatives. “The lines of business really know the value they’re getting back for their investments.”