THE BANKING INDUSTRY AND E-COMMERCE
INDUSTRY BACKGROUND – BRIEF HISTORY
For 50 years, into the early 1980’s, the banking industry was stable due to regulatory
guidelines and constraints intended to ensure competitive and operating stability. Regulations drove
product, pricing, place, and promotion decisions. Several deregulatory moves made by the federal
government in the 1980s reduced artificial constraints on competition and diminished the distinctions
among various financial institutions in the United States. Two major changes were the Depository
Institutions Deregulation and Monetary Control Act (1980) and the Depository Institutions Act (1982),
which allowed savings and loan associations to engage in often-risky commercial loans and real
estate investments, and to receive checking deposits. By 1984, banks had federal support in buying
discount brokerage firms, and commercial banks were beginning to acquire failed savings banks. In
1985 interstate banking was declared constitutional thereby allowing the formation of powerful
national banks. The number of commercial banks in the U.S. started to decline—from more than
14,500 in 1985 to 10,000 by 19951.
Further deregulation occurred in 1999, when Congress overhauled the entire U.S. financial
system. Among other actions, the legislation repealed the Glass-Steagall Act, thus allowing banks to
enter the insurance and securities businesses. Through the 1990’s, industry consolidation, rapid
development of new technologies, and new competition from non-bank competitors changed the
underlying business economics and created a stressful environment for all competitors.
At various points in retail banking history, new distribution channels have been introduced
resulting in lower marginal costs per transaction than the previous channels. The wide distribution of
automated teller machines (ATMs) by the mid-1980s gave customers 24-hour access to cash and
account information. Telephone and cable television banking entered the mainstream soon after
ATMs, similarly allowing customers to move money between accounts and check balances without
having to visit a branch. Although telephone banking added convenience for consumers, the cost of
providing this service continued to rise steeply. Some customers called multiple times daily to check
their account balances. Their drawbacks made banks during the 1980’s and early 1990’s turn their
interest personal computer banking since it offered both visual verification lacking from telephone and
1
Day, George S. “Strategies for Surviving a Shakeout,” Harvard Business Review, Mar/Apr 1997.
a two-way communication lacking from Television2. Banking via a personal computer (also referred to
as PC banking) required specialty proprietary software for a customer to log directly into a bank’s
systems3. In PC banking, products such Intuit’s Quicken enabled customers to connect to their
checking account.
The disadvantages of the closed systems above were overcome by the
emergence of the Internet and the World Wide Web. Unlike personal computer banking, Internet
banking does not require proprietary software or access to private networks. By 2000, most PC
banking systems were replaced by Internet banking, where customers accessed their accounts
through the bank’s Web page. Error! Bookmark not defined.On-line banking through the Internet
and banking through automated phone systems now allows for electronic payment of bills, money
transfers, and loan applications without entering a bank branch 4.
CURRENT ENVIRONMENT – MARKET SIZE, MARKET GROWTH AND TRENDS
Compared with the banking systems of most developed countries, the US industry is highly
fragmented. Thousands of smaller players such as credit unions, regional banks, and community
banks as well try to compete on an equal footing with industry leaders in terms of pricing and service.
Merger activity, which propelled both revenue growth and efficiency improvements in recent
years, slowed to a crawl in the first nine months of 2002. As their stock prices declined, banks had
less currency for mergers and acquisitions (M&A). Instead, banks were forced to focus on credit
quality, internal revenue growth, and cost-cutting.
In what may mark a retrenchment from
diversification strategies, some bank managers have implemented spin-offs or divestures designed to
rationalize operations. For example, in the second quarter of 2002, Citigroup spun off its Travelers
property-casualty insurance unit. In 2001, Bank of America corp. shut down or sold several
businesses, exiting auto leasing and sub-prime mortgages altogether. In mid-2002, FleetBoston
Financial shut down its Robertson Stephenes investment banking unit, after failing to find a buyer for
it5.
Giannkoudi, Sofia., “Internet Banking: The Digital Voyage of Banking and Money in Cyberspace,”
Information & Communication Technology Law, Vol. 8. #3, 1999
3
Frei, Frances X. and Hanna Rodriguez-Farrar, “FleetBoston Financial: Online Banking”, Harvard Business
School Case Studies, November 13, 2000 and revision May 13, 2002.
4
The Columbia Electronic Encyclopedia Copyright © 1994, 2000, Columbia University Press. Licensed from
Columbia University Press. http://www.infoplease.com/ce6/bus/Z0856839.html
5
Biggar, Stephen, “Banking”, Standard & Poors Industry surveys Nov. 2002 (7)
2
Although bank industry M & A activity will probably remain sluggish for now, over the longer
term it is expected that the industries consolidation trend will resume. Primary targets for
consolidation will be small-cap and mid-cap banks which lack the large bank’s marketing and
technology budgets, product sets, and advantages of scale. Much of this consolidation will allow
banks to take advantage of scale opportunities and to earn healthy shareholder returns from larger
portfolios. The primary factor favoring further consolidation is competition, which has intensified
pressure on banks to expand market share, improve efficiency, and offer a broader range of financial
products5. Consolidation can help banks to fend off competition from other banks and from nonbank
providers of financial services as well. Banks contend that they become financially stronger following
a merger because they can reduce the acquired bank’s noninterest (operating) costs. Other benefits
of consolidation include expanded delivery networks, geographic and product diversification, and
fewer competitors in a given market. It is further argued that consolidation brings lower banking costs,
broader products, and greater convenience.
To satisfy both fiscal and quality requirements, technological improvements have helped
banks control expenses while providing better service. Electronic banking through telephones,
automated teller machines, and online banking improve customer service by offering 24-hour banking
capabilities conveniently. Meanwhile, the costs of completing such transactions remain well below the
more labor-intensive operations at bank branches.
Retail banking, because it seeks to attract
individual consumers, remains a service oriented business. Today’s banks are increasingly investing
in new technology to make banking more pleasant and convenient for customers.
The most noticeable trends in banking in the last decade include merger and acquisition
activity, consolidation, strong growth oriented and an increase in efficiency coupled with a reduction in
operating costs. Following are some of the factors that have driven banks to merge or consolidate
with other banks:

Greater efficiency: Banks often operate more cost-effectively by increasing their size.

Leveraging technology: It's easier to offer new, expensive technologies if you can
spread the cost over a larger customer base.

Changing laws: Barriers to interstate and branch banking have been toppled by recent
federal legislation, particularly the Financial Modernization Bill of 1999.

Diversification: Banks can control risks by diversifying their operations across
geographic regions.

Management – With some notable exceptions, financial firms are better managed than in
the past. As a result, managers have shed peripheral businesses and cut costs in order
to improve returns to shareholders. The same motivation is behind the latest rash of
mergers and acquisitions. In theory at least, each deal allows enough cost-cutting and
streamlining to outweigh its cost.
Although still in an embryonic stage it is estimated that Internet banking will develop at an
accelerating pace, making its monitoring and control extremely difficult. Furthermore, it is feared that
Internet banking will inherit the idiomorphic characteristics of the internet, as a seemingly anarchical
and borderless space where activities fall beyond the sphere of national regulation and sovereignty.
The concerns above are magnified by the ability of participants in Internet banking to issue and
circulate electronic money--a completely new, digitized form of monetary value--in cyberspace6. The
Internet is also driving two important forms of consolidation, one relating to financial services, the
second to electronic communications.

Brokerage, insurance and banking services are converging on the Internet. -- The
Internet banking company is the best way for the community bank to compete in the future,
with a very well-developed package of products, quality, and good reliable service. A
community bank might partner with a brokerage house for investment services and an
insurance company to offer personal risk management.
The Internet can make smaller
banks attractive by giving them the opportunity to offer more products at a lower cost than
has been the case traditionally.” (B16A, Feb, 2000)

Multiple Channels: On one hand, there is a trend toward tying together different electronic
communication formats—phone, television and Internet. On the other hand, there are more
alternative delivery channels than ever before, complicating the process of integration.
(B16B, Feb, 2000)
Multi-retail concept – A number of banks now have branches inside supermarkets, providing
convenience to customers who need to bank and buy groceries during the same trip. Wells Fargo
6
http://search.epnet.com/direct.asp?an=2555048&db=aph
pioneered a multi-retail concept by having Kinko’s and Starbucks located in or adjacent to certain
branches. Bank customers can buy a decaf latte, get copies made and do their banking with relative
ease.” (B10A, Mar, 2001) Initially, the mentality of the banking industry was to keep everything inhouse. Indeed, the increasing tendency of banks – and other financial institutions – to partner with
outside organizations marks a change in the industry that many be seen as positive.
CURRENT E-COMMERCE ENVIRONMENT
The advent of the Internet and the popularity of personal computers presented both an opportunity
and a challenge for the banking industry.
For years, financial institutions have used powerful
computer networks to automate millions of daily transactions; today, often the only paper record is the
customer's receipt at the point of sale. Now that its customers are connected to the Internet via
personal computers, banks envision similar economic advantages by adapting those same internal
electronic processes to home use.
Banks view online banking as a powerful "value added" tool to attract and retain new
customers while helping to eliminate costly paper handling and teller interactions in an increasingly
competitive banking environment.
Today, most large national banks, many regional banks and even smaller banks and credit
unions offer some form of online banking, variously known as PC banking, home banking, electronic
banking or Internet banking. Those that do are sometimes referred to as "brick-to-click" banks, both to
distinguish them from brick-and-mortar banks that have yet to offer online banking, as well as from
online or "virtual" banks that have no physical branches or tellers whatsoever. The challenge for the
banking industry has been to design this new service channel in such a way that its customers will
readily learn to use and trust it. After all, banks have spent generations earning our trust; they aren't
about to risk that on a Web site that is frustrating, confusing or less than secure.
Most of the large banks now offer fully secure, fully functional online banking for free or for a
small fee. Some smaller banks offer limited access or functionality; for instance, you may be able to
view your account balance and history but not initiate transactions online. As more banks succeed
online and more customers use their sites, fully functional online banking likely will become as
commonplace as automated teller machines.
Advantages of online banking

Convenience: Unlike your corner bank, online banking sites never close; they're available 24
hours a day, seven days a week, and they're only a mouse click away.

Ubiquity: If you're out of state or even out of the country when a money problem arises, you
can log on instantly to your online bank and take care of business, 24/7.

Transaction speed: Online bank sites generally execute and confirm transactions at or
quicker than ATM processing speeds.

Efficiency: You can access and manage all of your bank accounts, including IRAs, CDs, even
securities, from one secure site.

Effectiveness: Many online banking sites now offer sophisticated tools, including account
aggregation, stock quotes, rate alerts and portfolio managing programs to help you manage
all of your assets more effectively. Most are also compatible with money managing programs
such as Quicken and Microsoft Money.
CURRENT E-COMMERCE ENVIRONMENT – KEY TECHNOLOGIES
1. Public Key Infrastructures and Digital Certificates and Privacy - The benefits of implementing
a comprehensive and managed PKI solution have yielded tangible returns for internet banking. The
applications range from extending personalized banking services to reducing the turnaround time for
application forms. Organizations like the Bank of Nova Scotia, J.P. Morgan, and U.S. Electric Utilities
are using PKI technology for a secure and cost-effective means of communicating with customers.
Moreover, smart signature cards, is designed for the use in PKI. It offers security and confidentiality
for different types of Internet transactions.
2. Digital coin-based money and electronic wallet - Due to the increasing importance of
electronic commerce via the Internet the importance of digital money increases. Representing "real"
money in an electronic world means that properties and functionalities like anonymity, authenticity, as
well as availability of pico-payments are considered. Like "real" money, digital coins have an inherent
value.) More than 100 banks are supporting electronic wallet technology and its users can have
money deducted from their accounts automatically while the security of the transactions is
guaranteed.
3. Image Technology - Digital technology will not only offer integration of this traditional
payment form with alternative delivery systems, but it will also enable more efficient processing of
checks. By definition, imaging is digitizing information for storage and retrieval. Digital check images
can be stored in the same way as digital data, (i.e.: written to magnetic disk, optical platters, or to
tape). Check imaging is not new, but technological advances in microprocessor speed, storage,
telecommunications, data compression algorithms, and artificial intelligence pattern recognition have
assisted in making check imaging more practical and possibly profitable.
4. Microsoft SQL Server 6.5 - SQL Server provides Bank the scalable database to meet the
needs of its rapidly growing customer base. For instance, Corillian applications deployed at Bank of
Stockton include the Consumer Banking Module, Bill Payment Module, and the OFX Publishing
Server.
5. Mobile E-banking - Offering even more convenience is mobile e-banking using the
Wireless Application Protocol (WAP), although there are many complaints about the slow
transmission of data. But with the introduction of Global Packet Radio Services (GPRS) and 3G
phones in the future, speed will no longer be an issue.
6. Corporate cash management and wholesale lockbox functions - The Internet's
profound effect on the conduct of business has equally profound implications for banks and other
financial
institutions. Corporate cash management and wholesale lockbox functions are in the
process of being transformed as the connectivity and collaborative potential of the Internet are
exploited through electronic invoicing, online dispute resolution, and online payment products.
7. “Web-enabled ATM” - This new kind of ATM is known as a “Web-enabled ATM”. IDC
(Web-enabled ATMS: Implications for online Banking And Multichannel Delivery, 2001) provides a
useful definition: A machine that operates on Web technologies, using Web-based software, servers
and network protocols to communicate to the ATM network and the bank’s host systems and
databases. It does not mean a machine that allows users to randomly “surf the Web”; consumers
would not have general access to the Internet, but transactions and content would be delivered to the
machine via Web technologies.
Of course, there are other technologies used in internet banking. As we all know, the new
technologies used in banking are increasing very rapidly, so here we only demonstrate several of
them.
(1)
CURRENT E-COMMERCE ENVIRONMENT – MARKET SIZE AND GROWTH
Banking sector will be a leading player in electronic commerce. In 1999 nearly 60% of e-commerce
was concentrated in the financial services sector, and with the expected 10-fold increase of the ecommerce by 2004, the share of the finance will even increase. In the USA online banking is growing
at an annual rate of 60% and the number of online accounts might attain 15 million by 2003
(UNCTAD 1999). Almost twice the percentage of U.S. consumers are paying bills and transferring
funds online, compared with two years ago. Recently, the nonprofit Pew Internet and American Life
Project (a
nonprofit initiative that conducts survey research on the Internet’s growth and
societal impact) say 32% of consumers--37 million people--are banking online, compared with 17%
in March 2000.
Banks have established an Internet presence with various objectives. Most of them are using
the Internet as a new distribution channel. Financial services with the use of Internet may be offered
in an equivalent quantity with lower costs to more potential customers. There may be contacts from
each corner of the world at any time of day or night. This means that banks may enlarge their market
without opening new branches. American banks are using the Web to reach opportunities in three
different categories: to market information, to delver banking products and services, and to improve
customer relationship (Diniz, 1998).
The cost of the average payment transaction on the Internet is minimum. Several studies
found the transaction cost through mobile phone is estimated 16 cents, a PC bank using the banks'
own software is 26 cents, a telephone bank is 54 cents, a bank branch $1.27, an ATM 27 cents, and
on the Internet it costs merely 13 cents. (ITU, 1999). As a result, the use of the Internet for
commercial transactions started to gain momentum in 1995. Since then, millions of commercial web
sites have emerged. 3,286 banks around the world have already established their web sites. Some
banks are there because their competitors have been.
CURRENT E-COMMERCE ENVIRONMENT – TRENDS
The following trends have been identified by industry experts:
1. Digital check imaging coupled with Internet delivery - “Given the exceptional cost
savings that can be gleaned from removing the paper in check processing, most of the top 25 banks
will experiment—to varying degrees—with imaging. Within the next two years, a few will launch
check truncation pilots. (B7C, Jan, 2003)
2. Electronic storage of voluminous loan packages and other documents, such as data
processing reports, item processing reports, bank statements, customer correspondence, etc.
– “One of the bottlenecks in imaging is indexing, but systems are getting smarter all the time.”
Improvements to the indexing component are needed to index according to a bar code applied to
each document that contains the account number, type of document and an array of additional
information. (B2H Apr, 2002)
3. IT outsourcing for large financial institutions – “this trend officially sprung late last year
[2002], when in fairly quick succession ABN, AMRO, Bank of America, Deutsche Bank and JP
Morgan Chase signed multi-billion dollar IT outsourcing arrangements with either EDS or IBM. Smalland medium-sized banks have been outsourcing various back office functions for years to cut cost
and streamline processes, a recent example being the Unisys/Washington Mutual check image
arrangement. Now that four of the largest banks in the world see the wisdom in large-scale IT
outsourcing, it’s probably only a matter of time-and increasing competitive pressure-before other top
20 banks follow.” (B3A, Feb, 2003)
4. Banks will further harness Internet-enabled technologies to improve customer
offerings and service.
5. Banks will pay more attention to privacy and identity theft concerns – “Banks are
becoming more proactive in assuaging consumer concerns regarding Internet banking privacy and
the broader issue of ID theft. Banks are increasingly recognizing that privacy concerns have impeded
Internet banking adoption by the mainstream. Privacy concerns in turn fuel lack of confidence across
all electronic channels and new payment systems. Thus, banks have a long-run stake in mitigating
privacy breaches.” (B7B, Jan, 2003)
6. Banks will continue to improve their customer knowledge – “While CRM has often
failed to deliver on its promises, banks recognize that its promise is worth pursuing further. To that
endeavor, retail banks are building a customer service infrastructure that is able to utilize CRM data
effectively and are evaluating their front-end branch automation software based on customer
management goals. “ (B7E, Jan, 2003)
7.Corporate cash management will become fully browser-based – “Great strides have
been made in browser-based cash management over the past year, bringing it up to par with the
features and functionalities of Windows-based solutions. As a result, banks will phase out Windows
and DOS solutions by the end of 2003.
The migration to a browser-based system will yield
substantial benefits in the areas of cost savings and ease of use.” (B7F, Jan, 2003)
8. Banks will extend their reach in business’s financial supply chain – “Banks will
increase their promotion of electronic payments to businesses by integrating well-established
payment systems (purchasing cards, ACH, and wire transfer) with accounts payable/receivable and
ERP systems.
They will strive to provide value-added by adding rich remittance data to the
payment.” (B7G, Jan, 2003)
9. An emerging XML standard called XBRL, or eXtensible Business Reporting
Language, promises to simplify the mechanics of working with financial statements.
The
beneficiaries of XBRL aren’t limited to analysts or public companies. Virtually all of the participants in
the financial information supply chain will find it worthwhile to take advantage of the enhanced data.
No industry will benefit more from XBRL than banking. A bank plays in numerous places around that
supply chain. To wit, banks have controllers, tax analysts, investor relations personnel, loan officers,
credit analysts, and regulatory and compliance officers. Furthermore, converged financial institutions
have brokerage, investment banking and research capabilities under the same roof. Literally, it hits
them in about 20 different ways.” (B8B, Mar, 2002)
MARKET PARTICIPANTS
THE IMPACT OF E-COMMERCE ON FIRM RELATIONSHIPS WITH CUSTOMERS
E-commerce technology has been used by banks to attract, retain and deepen customer relationships and
has been cited by banks as a factor contributing to success with their customers (Bank of America Annual
Report, 32). E-commerce technology has changed customers’ expectations and needs. Banks have
continued to implement new channels of convenience for its customers. Online banking is an important
component in giving customers the flexibility to do banking in a fast and easy way, whenever it’s most
convenient. Customers are provided real-time data access to most account types, transaction history, and
fund transfers. Loan applications can now be filled out online with preliminary approval almost
instantaneous. Customers can download their account information into personal financial software
programs such as Quicken or Microsoft Money. Not only does online banking present a channel of
convenience for the customer, it also serves to reduce the costs incurred by the bank in serving the
customers’ demanding and evolving behavior (Frei, 3). Forecasts for 2003 predicted that 29 percent of
United States households would be banking online (qtd. in Frei, 4).
Banks recognize the importance of building online capabilities that offers their customers a
relationship-centric, personalized Web experience tailored to all their needs and encompassing all the
services the bank delivers to them (Frei, 8).
THE IMPACT OF E-COMMERCE ON FIRM RELATIONSHIPS WITH SUPPLIERS
In attempting to meet the challenges of a rapidly evolving competitive and technological marketplace,
banking industry members are feeling the pressures to form tighter and tighter relationships with their
suppliers who have expertise in necessary support areas. More and more, banking members are looking
to suppliers to provide more integral parts of their business and to keep up with technology changes since
they are unable to do this cost-effectively in-house (B13A, May, 1995). Banks such as JP Morgan Chase,
American Express and CIBC are even signing deals to outsource their entire IT infrastructure—the data
centers, mainframes, networks. When banks hand over their legacy applications (mission-critical
applications such as banking and brokerage) to their outsourcing partners, they are entrusting them with
the lifeblood of their organizations (B4H, Feb, 2003). This requires the relationships with suppliers to be
very closely supervised and monitored.
BUSINESS MODELS FOR REVENUE
Revenue in Retail Banking, Customer accounts generate three types of revenue:
1. Investment income from deposit balances – Every customer deposit generated
investment income. This revenue component was represented by net-interest margin, the
difference between the rate a bank paid on a deposit account and the rate at which it was
able to invest that deposit through, for example, commercial and mortgage lending.
2. Fee income – An increasingly important source of revenue in light of recent declines in netinterest margins, fees were variously assessed for checking accounts, late payment, and
overdrafts.
3. Loan interest and base lending rates – Loans were the dominant asset in banks’ portfolios
and loan interest their primary revenue source.1
The most important advantage of electronic banking is the lower costs associated with processing
electronic transactions as compared to paper check or in-person branch transactions. The extreme
ease with which customers can access accounts over the Net also makes it possible to reduce the
number of traditional and very expensive “brick-and-mortar” branches.
The potential cost savings for Internet banking are dramatic. An American Bankers
Association study (http://www.aba.com) placed the cost of handling a paper check transaction at
between $0.42 and $2.00. Although Internet banking is so new that the recovery of development and
start-up investments skews transaction costs, the cost could ultimately rival the reported $0.15 to
$0.50 cost of an ATM transaction.
In addition to cost savings, Internet banking will open opportunities for increased revenue for
banks. The tradition in the Net banking world is different. Most banks charge or plan to charge fees
for Internet services including bill payment services. Affiliated brokers already charge fees for Internet
securities trading. As new services appear on the Net, you can anticipate that most banks will use the
opportunity to charge their customers new fees.
Therefore, from 121 banks all over the USA those were already running a Web site. Among
these, about 20% are banks with assets greater than $10billion, more than 30% are somewhere in
between $500million and $10billion and almost half of them (47%) with assets lower than $500
million.
Some bank web sites offer some plain information with no interactivity. We can see bigger
banks doing better than smaller ones on the information delivery field at higher levels of interactivity.
On the transaction field, we see banks creating opportunities to develop an alternative channel to
deliver products. Again, at the basic and intermediary levels, we notice bigger banks doing better.
There are more and more banks offering transaction services at the advanced level because of the
development of technologies and intensity of competition.
BUSINESS MODELS FOR CONTENT
Web banking models are being adopted in United States. We see American banks using the
functionality of the Web on three different levels:
- Level I - as an information vehicle, since very often banks work as information providers;
- Level II - as a channel for conducting transactions, in the same way as in branch offices or
ATMs;
- Level III - as a tool to improve customer relationship.
Level I, which is basically having a web presence for advertising purposes. Banks use the
Web as an information delivery tool. At the basic interactivity level, like an electronic brochure, it
provides institutional and promotional information, ways for contact the bank and special offer
announcements. Examples for the intermediary level of interactivity are search engines, report
downloads, recruitment forms and hot links to other sites. At the advanced interactivity level, Web
sites use customizing resources, besides some subscription option, advertisement or discussion
groups. This model’s revenue is still dependent on traditional offline bank services.
Level II, that is, the prospecting level. The Web is a vehicle for the most common transactions
that one could expect to have with a bank. In the lowest level of interactivity, we see applications for
opening accounts and requesting products and services. Included here are card requests and
investment and credit applications. At the intermediary interactivity level, a client can have access for
information on accounts through balance and statement. Other options are fund transfer and bill
payments. Notice that in the intermediary level the client has to have some access to the bank
database. As advanced level of interactivity we consider banks that are working primarily via Web,
the non-branch banks. We also have in these very same level banks that are promoting the use of
some e-cash as a way to develop transactions through the Web.
Level III. Banks use the Web to improve relationship with customers. At the basic interactivity
level, e-mail and forms are the ways a client has to make suggestions and complains. At the
intermediary interactivity level, advising tools (as calculators, for example) are offered as a support to
make financial decisions. The advanced level of interactivity is related with possibilities the Web
brings in gathering information to product and service development. More advanced technologies,
such as videoconference, are also considered in this level. This high level model is a combination
website of banking, investment, insurance, consulting and brokerage. The revenues are from all kinds
of channels, like transaction fee, consulting fee, interest fee, etc. The Multi-Purpose Bank are
:WellsFargo, Citibank, Chase.
PARTNERSHIPS
Before 2000, many banks were individually attempting to excel at all facets of their e-business. This
strategy failed because the pressure for broader functionality and richer content was stretching the
technology resources of banks.
ineffective.
The banks’ limited resources were becoming fragmented and
For example, Citibank invested millions of dollars and tried to specialize in such e-
business areas as software development, systems development and front-end services. With this
approach, they were struggling to keep up with client needs because clients and software technology
were constantly changing. By 2000, banking strategies began to focus on alliances and utilizing
partner strengths (McCauley, 2002)
TYPES OF FIRMS TO SEEK AS PARTNERS
Banking industry members began to partner with companies that had complementary technology or
infrastructure or access to markets.
Complementary technology - sourcing for a particular line of business or a particular application
functionality, such as

Processing services – MasterCard, Visa or Interactive Transaction Partners

Online banking software –

Account aggregation company –

Electronic Bill Payment and Presentment (EBPP) – A partner would provide a consolidation
of bills or a “switching” function for its participating institutions, enabling them to access
consumer bills and initiate payments to those bills. (Frie, 11)

Credit card issuing – players like Total Systems Services [TSYS] and First Data

Mortgage servicing – players like Alltel and Fiserv

Automated teller machine servicing – Diebold

Small business services – Banks are forming alliances to offer emerging businesses
resources for growth. An example is Ebank.com, an Atlanta thrift that operates a banking
Web site for small businesses, who plans to begin offering payroll, human resources, and
benefits administration services on-line this month through a recently signed agreement with
Automated Data Processing. (B11A, Jan, 2000)
Complementary infrastructure - Banks such as JP Morgan Chase, American Express and
CIBC are outsourcing their entire IT infrastructure—the data centers, mainframes, networks,
distributed computing, data and voice networks. The contracts are structured in a way that allows
banks to outsource commodity services in order to lower costs. IBM’s view is that computing power
is a utility, much like electricity and water.
The underlying assumption is that a bank can buy
computing power more cheaply than it can manufacture itself. (B4G, Feb, 2003)
Access to market - Banks are searching for alliances that will help them to expand their reach to
customers. Several examples of this are (1) placing bank branches inside supermarkets provides
convenience to customers who need to bank and buy grocers during the same trip; and (2) employing
a multi-retail concept where products and services that complement the bank’s strategy are used,
such as having Kinko’s and Starbucks located in or adjacent to certain branches. In today’s 24/7
world, virtually anything that saves time will be well received and greatly appreciated. (B10B, Mar,
2001).
BENEFITS PROVIDED BY PARTNERSHIPS
Many benefits result from these strategic alliances. These benefits and some specific examples are:
Frees up bank resources for customer service - Forming these partnerships frees up
bank resources for the one function that nearly everyone agrees should stay in the hands of bankers:
Customer service. Banks must do a superb job of customer service. (B13H, May, 1995)
Able to complete the banks’ technology evolution at a faster rate and a lower cost Turning to partners can help to shorten the time necessary to get a service up and running. Even
banks that could build a service themselves versus acquiring the service find that a key difference is
time to market – the difference in the time it takes to introduce the service to the market if you build it
in-house versus the time it takes when you use a partner.” (B13D, May, 1995) In addition, existing
services or processes can be given to a partner to find efficiencies. The partner firm will take it over,
consolidate it, improve the speed and pass on the savings to the bank. (B4O, Feb, 2003)
Shift the risk of changing economic conditions onto the vendors – An example of this is
banks that provide brokerage services. As securities trading volumes increase, banks are choosing
to outsource this activity rather than buying additional capacity to handle the additional volume. That
way they will not be left with excess capacity if securities trading volumes go down. (B4I, Feb, 2003)
Reduces the banks’ exposure to variable costs – “It goes beyond cost containment.
While they will get some cost improvements in the beginning, [the longer-term benefits] will be on
having costs aligned with the business. So they can allow the lines of business to understand how
costs scale up and down as the business expands and contracts. (B4J, Feb, 2003)
Access to greater purchasing power – “EDS also brings to the table purchasing power that
BofA, huge as it is, doesn’t posses. By combining our existing purchasing power with theirs, we got
better rates for commodity products such as carrier services, long distance rates and equipment.
(B4N, Feb, 2003)
THE LIKELIHOOD OF CRAFTING SUCH ALLIANCES
Because many benefits exist from these alliances and partnerships, banks will be likely to form such
alliances. Banks are recognizing that their core competencies lie outside of network and technology
services and that the marketplace does it better than them anyway. (B4O, Feb, 2003). However,
several obstacles exist in forming these alliances and partnerships:
Lengthy negotiating process – These is a long negotiating period involved in forming these
alliances. Most of these things take seven or eight months minimum. In some cases, it can be
single-sourced but usually there’s three or four providers competing. There’s a process put in place,
sometimes run by a bank, sometimes by a third party. (B4Q, Feb, 2003)
Difficult to relinquish control of legacy systems to others – These mission-critical
applications are the lifeblood of the bank and much consideration and care need to be involved
before they are handed over to others.
Control and security of data – These items are important when choosing a partner. (B13J,
May, 1995)
Branding and co-branding issues – This concerns whose brand the customer will associate
the service with—the bank or the partner. To many financial institutions, this is a critical issue.
(B13K, May, 1995).
SUPPLY CHAIN AND COLLABORATIVE COMMERCE
In an effort to supply their customers with great service and resources, banks will continue to extend
their reach in business’s financial supply chains. Banks will increase their promotion of electronic
payments to businesses by integrating well-established payment systems (purchasing cards, ACH,
and wire transfer) with accounts payable/receivable and ERP systems. They will strive to provide
value-added by adding rich remittance data to the payment.” (B7G, Jan, 2003)
COMPETITIVE ADVANTAGE – HOW IT IS CREATED IN THIS INDUSTRY
OUTSOURCING: Banks mainly outsourced this E-Commerce service at the onset of ECommerce. However, the biggest competition now for outsource companies that provide online
banking applications comes from in-house development efforts. But because the in-house option is
expensive, skilled programmers are in short supply, and it is not the bank’s core business,
outsourcing appears the more attractive option. Because the key to success for online banking lies in
the ability to offer real-time data to their customers, this effort may be cheaper in the long run if it
came from the inside.
TRAINING: The industry must strive to take an increased role in educating those developing
and implementing new technologies. The banking industry is reputed to be traditionally regulatory.
Standard setting processes are unlikely to keep pace with developments in information technologies.
Banks therefore need to actively participate in research to avoid delaying the availability of new
technologies to consumers.
CONSOLIDATED SERVICE: The banks that come out ahead are those that ensure as far as
possible that online and automated services complement and enhance availability of direct human
service rather than substitute it. This is particularly important for the older consumers, as well as
those with disabilities. Lately, banks have closed several brick and mortar branches, leaving open
selected drive-through and satellite branches. These options, while less costly, must not take the
place of face time that technology-resistant consumers prefer.
INITIATIVE: Initially, banks focused on their traditional areas of expertise, offering electronicbased payments initiation and information reporting capabilities. Today, banks are expanding their
involvement, partnering with their customers, including government clients, to help them keep pace
with the e-commerce revolution as new technology and applications continue to emerge. For
example, a company or government entity can now outsource its entire payables process by
transmitting an electronic file of all payments directly from their accounts payable system to a bank.
The bank then executes the payments as authorized, creating electronic payments (ACH credits or
wire transfers), as well as paper-based checks. This integrated payables solution enables the
customer to conduct business electronically with all their suppliers, even those still requiring payment
via check.
VARIETY/DIFFERENTIATION: Financial institutions have been quick to offer a variety of
Web-based services, including payments initiation and information reporting. Customers also can
provide payment instructions, check issue information and other data over the Internet using secure
file transfer methods. Electronic Bill Presentment and Payment (EBPP) is another innovative ecommerce solution banks have added to their suite of services. With EBPP, any billing entity can
benefit from the opportunity to lower billing costs, improve customer care, accelerate cash flow and
deliver meaningful information to their customers.
CREATIVITY: With the advent of the digital marketplace, banks are discovering even more
creative ways to provide services for their customers. For instance, some bank Web sites offer
marketplaces that enable smaller businesses or government entities to purchase a variety of goods
and services and achieve savings that wouldn't have been possible as a single buyer.
CUSTOMIZATION
Customization deserves special mention in the need and awareness of competitive advantage. As a
source of value-addition to the customer, now more than ever, in the Internet age, unparalleled
opportunities exist to customize through customer communication, product or service design and
pricing.
Customization has certainly been reborn… in years past, if you needed a pair of shoes, you
went to the shoemaker and they were cut to fit. Communication was one-to-one and very
personalized. While mass production saved greatly on cost efficiencies, it cut back on this
personalized service. Technology and the Internet offer a chance to reestablish these networks with
the customers, and banks have taken great advantage of this. There are two sides of this coin: while
consumers enjoy these benefits, banking institutions must liaise production and pricing to enable
them reap profitable benefits. In these omnipresent communication cycles, only the fit survive. Some
elements will ensure success in the banking environment:

TRAFFIC: Banks need to direct traffic to their sites, and especially sell this service to a skeptical
public. If no one visits the site, there is no chance that a web presence will make money. Sites
must offer a sufficient variety of attractive offerings to draw customers in and keep them visiting.
At onset, customization is difficult because the service provider does not know much about the
customer.

CONVERSION: This is the conversion of regular visitors into paying customers. Customization
then ensures that information is personalized and fitted to this customer.

LOYALTY: This is the transformation of the one-time customer into a loyal customer who
continuously revisits the site for services and or products. Repeat business is critical on the ECommerce scene. Loyal customers require less marketing and set-up costs, they are less
sensitive to price, etc. Customization certainly enhances loyalty.

REVENUE: A loyal customer becomes a source of increased revenue. This means a bank would
have to reduce a customer’s purchases from the competition. Customization can achieve this
and more.

PRODUCT MARGIN: The retailer must sell products and services with high margins.
Differentiation means some products are more profitable than others. Banks therefore must
monitor profit margins from each customer, and promote the more profitable products. Websites
must point customers to these products, and make them attractive.
THE ROLE OF E-COMMERCE IN CREATING COMPETITIVE ADVANTAGE
Security is paramount in this business – to the banks as well as to the bank's customers. Many firms
established early that 128-bit cryptography was the minimum level of security required. The more
digits in the key, the harder it is for an attacker to decrypt someone else's information. With keys of
128 bits, it has been estimated that it would take a supercomputer thousands of years to decrypt a
single message.
Initially, banks promoted their core capabilities, being products, channels and advice, through
the Internet. Then they entered internet commerce markets as providers / distributors of their own
products and services. The trend toward electronic delivery of products and services is occurring
dramatically in the financial service industry, where the shift is partly a result of consumer demand,
but also of a ruthlessly competitive environment. More recently, due to advances in Internet security
and the advent of relevant protocols, banks discovered that they can play again their primary role as
financial intermediaries and facilitators of complete commercial transactions via electronic networks
and especially via the Internet. Financial service organizations are implementing multiple styles of
electronic financial services.
Like any other business type, the banking industry encompasses various technology-based business
activities that categorize roles of various participants, thereby affecting competitive advantage:
TECHNOLOGY PROVIDERS: Technology infrastructure is an integral part of E-Commerce.
Telecommunication organizations, Internet Service Providers, Web hosting services organizations,
Web development software houses and IT integrators are technology providers who have flourished
by the presence of E-Commerce and whom banks must liaise with effectively.
CONTENT PROVIDERS: The richness of the medium’s content has been a critical success
factor in attracting a sharply growing number of website visitors. Content providers are the source of
the raw material that flows through the medium and upon which banks offer added value and service
such as a corporate profile, product and pricing information, rates, some application forms etc.
CONTEXT PROVIDERS: This type of Internet commerce business generates new
intermediaries who accommodate context in a manner that adds value to its content components.
Generally, context providers are e-marketplace owners. The content scope of an e-marketplace may
extend vertically or horizontally, addressing the interests of an industry sector, a user community, a
special purpose or it may aggregate material from various general or related areas. Some banks host
e-mall concepts where they put forward their brand names as guarantees for online shopping trust.
ENABLERS: These are value adders that enable E-Commerce transactions, such as
payment service providers and clearing houses. Banks are increasingly building payment
infrastructure with various security mechanisms (SSL, SET etc.) because there is tremendous
potential for profit as more and more payments are made through the Internet. The challenge for
banks is to offer a payments back-bone system that will be open enough to support multiple payment
instruments (credit cards, debit cards, direct debit to accounts, e-checks, digital money etc.) and
scalable enough to allow for a stable service regardless of the workload, time of day, season etc.
Certification authorities (eg. www.visa.com, www.verisign.com) enable secure transactions by
managing the distribution and circulation of digital certificates. Banks are qualified to play the role of a
certification authority first to their customers and then as a service to the larger public. Security and
trust infrastructures are obviously within the scope of banking in its broader sense.
Different banks use different E-Commerce technologies to play different roles:
E-Brokerage: Activities or firms that offer an interface to the end-user/customer for access to
various products/services, e.g. an agent that presents a variety of products (e.g. loans), rates them,
makes suggestions and facilitates purchasing (e.g. www.e-loan.com), or trading (e.g. www.etrade.com).
Information Brokerage: A special type for e-brokerage is information brokerage. Web sites
that give access to databases of special interest topics are information brokers. Some bank sites act
as information brokers because they provide access to rates, indices, economic information and
reports pertaining to the whole sector in which they operate in, rather than giving information
pertaining to their own organization only.
E-Service Providers: These business activities are not carried out in brick-and-mortar
premises, but are realized in a mostly or completely virtual world. At the very extreme, they are purely
virtual organizations, such as www.ingdirect.com. Virtual banks have lower labor and premise costs,
and are therefore able to center on offering a better service to its clientele.
WHICH PLAYERS WILL DOMINATE?
To formulate an action plan, an organization needs to have a strategy based on the following key
factors that can be supported by the roles of Internet intermediaries and all banking institutions as a
whole.
AGGREGATION: Provide a forum for transaction of multiple products from multiple sellers
through ongoing recruitment of clients and ongoing search for new potential markets/products.
Bundling multiple services/products into a single priced package allows for side-by-side product
comparison.
ACCESS: Available 24 hours a day, 7 days a week, 365 days a year. Should prohibit
movement of unwanted information (junk and unsolicited mail), and curtail information overload.
These players will provide secure channels to transact business, extend business from local to global
markets and promote the use of new, user-friendly technology with guaranteed uptime and
authenticated business users.
FACILITATION: players will provide a dictionary of terms for merchandise/services to
facilitate information exchange between themselves and the end-user. They will collect information on
buyer preferences, track market information and transaction data. They will provide the forum that
enables the end-user to avoid having to sift through large quantities of information to determine
important decision factors.
COSTS: Reducing costs requires the coordination of all players. Successful players will avoid
"deadweight" costs (lost costs due to unsuccessful searching) and instead provide for economies of
scale by investing in technology.
TRUST: Prevents opportunistic behavior & unfair trade practices. Buffers and mediates
interests of all involved parties. Assurances are set against transaction failures. Business activity is
enhanced by reputation and commerce regulation. Encryption and validation rules and procedures
put in place.
VALUE-ADDED: Introduces and identifies uniqueness of services & products. This enhances
product-line differentiation, informs buyers about availability, provides detailed product specifications
and makes available a forum for advertising and marketing new or existing products.
Here are some real-life examples of players in this field: those who have learnt to do more with less -less money, less people, and less power: Outlook: Wells Fargo's Internet group no longer reports
directly to the CEO and has been rolled into the retail bank’s jurisdiction. Bank of America's ECommerce group now leaves online strategy to the lines of business and focuses instead on the user
experience and growing adoption of online access and EBPP. KeyBank did not disband its online
group: it consolidated all delivery channels into a single organization - reporting to the executive who
ran the online group. P2P: P2P payments have not caught on beyond the auction space, and Bank
One and Chase abandoned their efforts to extend it beyond auctions. EBPP: At the onset of EBPP, it
was predicted (by Forrester Research) that Chase, Wachovia, and Wells Fargo would abandon
Spectrum EBP and sign on with CheckFree. They didn't have the chance however, for Spectrum died
first. Metavante picked up the baton but did not have any significant eBill volume through it. Wells
Fargo and Wachovia opted to build or license their own payment warehouses to get faster settlement
times, lower costs, and access to more eBills.
ETHICAL, SOCIAL AND POLICAL ISSUES (Patrick)
The electronic commerce industry is plagued with many ethical, social and political issues
that have some implications in online banking. Consideration of the ethics of e-commerce has tended
to focus on areas relating to the fragility of information collected and held electronically and
transferred via computer-mediated communication. The issues include privacy of information about
individuals, accuracy of the information, ownership of the information and intellectual property, and
the security or accessibility of information held 7. Banks are increasingly recognizing that privacy
concerns have impeded Internet banking adoption by the mainstream. Privacy concerns in turn fuel
lack of confidence across all electronic channels and new payment systems. Thus, banks have a
long-run stake in mitigating privacy breaches.” (B7B, Jan, 2003)
Ethical Challenges. Information privacy includes both the claim that certain information
should not be collected at all by governments of business firms, and the claim of individuals to control
the use of whatever information that is collected about them 8. The issue of information privacy and
the sometimes contradictory effects it may have has divided opinions and created two rival camps:
those that support anonymity as the base for financial privacy and protection from being monitored
and those who fight anonymity, considering it to be the main source of various forms of crime
flourishing in cyberspace9. Banks objective for secure online transactions include:

Restrictions on accessing customer information through authentication

Confidentiality of customer information and

Integrity of the information provided
However, even though banks have adopted measures that attempt to achieve the
aforementioned objectives, the security risks that banks face requires them to track and verify that
proper exchanges occur by ensuring that only authenticated parties participate 10. While it is essential
to provide customers with the best dependable and personalized services, banks are continually
trying to balance issues of public safety with online transactions anonymity. To illustrate the
challenges that banks continue to face in regards to privacy, just weeks after September 11 th 2001
Turbin, E., Lee J., King, D., and Chung, H. M., (International ed.), “Electronic Commerce; A Managerial
Perspective”, Prentice Hall, London, 2000. (8)
8
Laudon, K., Traver, C., “E-commerce: Business, Technology, Society,” Addison Wesley, 2001 (3)
9
http://www.student.kuleuven.ac.be/~m9300141/anonymity/bgll.pdf
10
Harris, L., Spence, L., “The Ethics of Ebanking”, Journal of Electronic Commerce Research, Vol. 3, No. 2,
2002 (3)
7
terrorist attacks on World Trade Center, the US Congress passed the “USA Patriot Act”. In this Act,
banks responsibilities include: identifying and verifying customers seeking to open a new account
(authentication and non-repudiation); Checking new account applicant against various government
lists of suspected terrorists; Reporting suspicious account activity; and Complying with requests from
federal investigative agencies for financial records. Additionally, the Act exempts investigators and
financial institutions from liability for sharing your financial records 11. Some of the requirements of the
Act have been in practice for a long time by financial institutions such as banks. However new
challenges have risen that will force banks to share confidential customer information to investigators
who later can compare with lists of suspected terrorists. Other concerns relating to privacy become
apparent as e-commerce evolve. The difficulty is that online banks have been counting on the ability
to use detailed customer information for targeted marketing offers while the evolution of e-commerce
depends on intra-industry alliances and the sharing of data 12.
Social Challenges – In any transaction, trust plays a key role. Face to face transactions allow for
the assessment of trust on the basis of physically observed information. This is not normally part of
an electronic exchange. Trust may also be based on previous experience on successful transactions
with predictable outcomes. This is not yet established in electronic commerce. Where there is no
personal experience, the transactional partner might rely on reputation 10. While the Internet does
indeed lower the barriers to entry, its anonymity and the vast range of choices has widened the gap
for face-to-face transactions and consequently increased the importance of brand name13.
On a different perspective, the displacement of job opportunities away from face-to-face and
back office services roles to information systems professionals is a common feature of the ecommerce revolution7. By offering web-based services banks may cut out its intermediary and
advisory role, therefore reducing its work force to cut costs. Job losses are the means by which banks
may cut cost and this may have social implications for those in the firing line. In addition prospective
electronic commerce projects in this business area stand little chance of internal acceptance. Projects
that are likely to result in job losses within the bank through automation of paper-based tasks also
11
http://www.bankrate.com/brm/news/bank/20020823c.asp?keyword=&authorid=17&firstn=Jay&middlen=&last
n=MacDonald “New law declares open season on bank records”, accessed 3/28/03. (6)
12
Simpson, John., “The Impact of the Internet in Banking: observations and Evidence from developed and
Emerging Markets”, Telematics and Informatics, 19, 2002, Pp 315-330
13
Giannkoudi, Sofia., “Internet Banking: The Digital Voyage of Banking and Money in Cyberspace,”
Information & Communication Technology Law, Vol. 8. #3, 1999 (8)
require support from sufficiently powerful factions if they are to go ahead, and tend to result in
considerable tensions between areas of the bank reliant on traditional processing and the electronic
commerce development teams10.
HOW THE BANKING INDUSTRY IS ADDRESSING THESE CHALLENGES
Nearly a quarter of online banking customers that stopped conducting their banking online
identified increased security and privacy concerns as their primary reason for stopping to use online
banking. Most large retail banks have made significant changes such as rolling out valuable
functionality, integrating products and services and continuing to enhance the usability of their
Internet offerings such as;
Prominently display security message on login screens. Research from Gomez.com suggests
that 63% of online banks post a security message on the login screen; however the prominence of
these messages varies greatly. Leading firms utilize a lock or similar icon to denote security close to
the login screen and provide clear links to the security policy. Banks may alleviate security concerns
by prominently displaying a lock and directly linking to security information 14. In addition to prominent
disclosure on the homepage, firms should consider placing clear links to the privacy policy and
disclosures at other key locations within the site.
Reinforce security once customers are logged in. Campbell-Holt (2003) suggests that banks must
continue to reinforce security practices within the online account management area. Beyond clear
links to a security policy, additional effective options include presenting the date and time of last login,
allowing customers to mask or unmask account numbers and providing clear disclosure of whether or
not the customer is logged in.
Allow customers to define their usernames. Many firms utilize either the social security or debit
card number to identify which accounts are linked to the customer. In turn, this number has become
the default "username" at many banks. While the Social Security Number in particular is likely to be
easy to remember for customers, the result is that customers are required to utilize a highly sensitive
piece of information every time they wish to access online banking. In most instances, the information
is not masked as the customer enters it, further increasing customers' sensitivity. Allowing customers
to define their own username eliminates the requirement that customers utilize their SSN, account
number or ATM number to access online banking. A customer-selected username contains the
additional benefit of increasing the likelihood that this information will be remembered, resulting in
less frustration from lockouts. Finally, the ability to change the username after enrollment allows
security-sensitive customers to periodically change both their usernames and passwords 14.
Inform customers how information will be utilized. Requests for sensitive personal information
including SSN, employment history and relationship with other financial institutions are the norm in
online account applications. Yet most financial institutions do a poor job of disclosing why they need
specific information and how it will be used. Prudential alleviates customers’ concerns by disclosing
how it will use the data and why it would be beneficial to the customer to provide this information.
Chase provides another strong example on its online checking account application, informing
customers that their e-mail addresses will be used "to send updates on your application. The firm
then provides an additional check box for customers who are interested in receiving marketing
messages from Chase via e-mail.
Allow customers to control preferences. The example from Chase above illustrates a final area of
opportunity for financial institutions: allowing customers to control marketing preferences online. In
most cases, customers are limited to specifying their e-mail preferences (often only when they initially
enter the information) and still must utilize other channels to control their phone and mail preferences.
Chase informs customers how e-mail addresses will be used. U.S. law requires that banks inform
customers how their information will be used and allows them to remove themselves from marketing
lists. By placing privacy information online and in the customer’s path, and allowing customers to
modify preferences online, banks are better serving customer’s needs and potentially reducing their
operational costs. Privacy and security concerns remain the primary reason why offline bankers don’t
bank online. Paying attention to these concerns can influence more and more customers to transact
via the lower cost online channel, enabling the Internet to live up to its lofty business goal of reducing
costs and increasing loyalty15.
Frei, Frances X. and Dennis Campbell. “Economics of Retail Banking” Harvard Business School, April 2,
2002.
1
Moriah Campbell-Holt, 2003, “Best Practices: Security Provisions that Boost Customer Confidence”,
www.Gomez.com (7)
14
Moriah Campbell-Holt, 2003, “Best Practices: Helping Customers Feel even more Secure that their
Confidential Information stays that way”, www.gomez.com (7)
15