Banking on Technology

Banks and brokerages like Fidelity, Schwab, Citibank and Wells Fargo have used technology to better connect with consumers in an increasingly cutthroat marketplace.

It was 1970, and Steve Schutze was in charge of a project to install the first two automated teller machines at the National Bank of Detroit. This was pioneering stuff, even though these stand-alone cash dispensers of 30 years ago were nothing like the real-time, round-the-clock networked machines of today.

"One challenge was getting them to dispense currency correctly and not jam," says Schutze, now director of e-strategies at the American Bankers Association.

Today, of course, networked ATMs with full-graphics screens, multiple currency capabilities and account management features represent "the bank" for 70% of the U.S. population.

Rather than simply cutting costs, the ATM revolution -- combined with other self-service channels in financial services such as interactive voice response systems in the 1980s and Internet trading and banking in the 1990s -- gave consumers unforeseen flexibility. Other aggressive technology deployments -- such as online transaction-processing systems in the mid-'80s on the banking side and multitasking Unix workstations and servers on the brokerage side -- established the industry as an early leader in the use of IT for competitive advantage.

The financial marketplace has grown only more cutthroat through the years. The intense competition has forced financial institutions to continue to invest heavily in IT as they seek to maintain an edge.

"In today's world, financial services and technology are inseparable," says Steve Elterich, president of Fidelity eBusiness in Boston.

According to a recent report by Forrester Research Inc. in Cambridge, Mass., the financial services industry spends more than 8% of its revenue on technology, among the highest of all industries.

In the early 1970s, banks made huge investments in back-office mainframes and check-processing machines to slash the costs of laborious banking processes. By the 1980s, 20- to 30-ft.-long machines were processing 1,000 checks per minute, driving costs for large banks down to 5 cents per check.

Bank tellers in the early '70s served customers using machines that were more like calculators than computers. But in the mid-'70s, banks such as Wells Fargo Bank began installing sophisticated teller terminal systems that sped up processes like checking account balances.

At the same time, banks were also quick to jump on the minicomputer bandwagon, using packaged applications to perform duties such as processing loans, deposits, customer data and financial information. "For the first time, small banks were able to buy turnkey systems and do their own processing, rather than relying on service bureaus," says Art Gillis, a Dallas-based consultant who has been working in the computer industry since 1958.

In the early '80s, banks networked ATMs to their central systems, making it possible to give customers real-time balance information and eventually creating a national network. In the mid-'80s, banking customers were introduced to the concept of phone systems that responded to voice and touch-tone prompts. Other industries looked on as banks (along with airlines) deployed online transaction processing systems that enabled fast transactions, split-second decision-making and optimal use of time.

Meanwhile, brokerages such as Fidelity and Charles Schwab & Co. were opening up sophisticated phone centers in the mid-'80s, providing customers with automated access to account balances, as well as touch-tone trading in the late '80s and voice recognition in the late '90s.

Investment firms such as Solomon Smith Barney will be remembered as the pioneers that brought Unix into commercial environments. Because of the multitasking capabilities of Unix workstations, as well as the power of relatively inexpensive large Unix servers, the investment industry flocked to Unix, effectively opening the rest of the world to its possibilities.

Banks were more open to PCs. "In the early '80s, IBM sent free PCs to all the CIOs at the major banks," says Schutze. "They all said, 'What would I use it for?' IBM forgot they didn't want PCs; they wanted something to do with those PCs."

Over time, PCs found their way into the branches. "A lot of banks were deploying PCs when they were 280s running DOS for customer service processes, like filling out forms," Schutze says.

John Reed, onetime chairman and CEO of Citibank (now part of Citigroup Inc.), was converting his bank's entire culture into one that used technology to differentiate itself, eventually turning consumer banking into a profit center rather than "the back yard of banking," says Robert Landry, an analyst at TowerGroup in Needham, Mass. "To be successful at Citibank, even on the business side, you had to have an understanding of how technology would help the business."

The Internet Age

The early '90s were defined by massive bank mergers, as well as the convergence of the banking, investment and insurance worlds. Technology projects in some cases were waylaid as IT groups struggled to integrate multiple back-office systems.

Despite those challenges, however, in 1995 Wells Fargo emerged as a Web pioneer, offering Internet access to customers, enabling them to check account balances and transaction histories, and later to transfer funds, pay bills and apply for loans. Along with New York-based Citibank and other large banks, San Francisco-based Wells Fargo is still one to watch when it comes to Web innovations.

Also in 1995, Schwab launched its Web site, and a year later, it began offering Internet trading.

"At one point in 1999, firms were adding 3,000 to 4,000 accounts per month," says Dan Burke, an analyst at Gomez Inc., a consultancy in Waltham, Mass. "Suddenly, it wasn't only the veteran discount players but upstarts like ETrade and Ameritrade coming on with sound technology at an extreme cost reduction."

Mistakes were made, of course, mainly to the tune of how to integrate the Web with the business. Citibank, for example, learned through its launch of Citi f/i that customers didn't want a stand-alone online bank but one that was blended with the bank's other online and off-line services.

San Francisco-based Schwab had a similar experience. "To begin with, we treated [the Web] as something separate," says Geoff Penney, CIO at Schwab. "If customers used E-Schwab, they paid a lower commission but didn't get the same level of services. We went 18 months before we integrated it back into the firm."

In today's uncertain economy, financial firms must continue to use technology to hone their competitive edge.

For brokerages, the challenge is to step into more of an advisory role. They will do this, Burke says, by refining their Web sites - increasing the sophistication of their financial planning tools, making Web research easier to use, simplifying alert setup and ensuring that investment selection tools get applicable results.

Brokerage systems and Web sites will also become more account- and portfolio-oriented, Burke says. For instance, an adviser might get an alert when a client's portfolio allocation differs from the model that's been set up.

Similarly, banks also need to get into "help" mode, Landry says. "The No. 1 capability of the Internet is distribution of information," he says. "Banks can use it to play a big role in educating consumers as to how securities, banking products and insurance will help meet their lifestyle objectives."

The Internet, in the form of Web services, will have an even more revolutionary impact as a platform for building systems within banks and between banks and their partners, Landry says. "If a bank needs, for instance, a bond calculation, it can use Web services to find a program that can do that, as opposed to a programmer buying a piece of software, integrating it and supporting it for a long period of time," he says.

Corporations such as Citigroup and Wells Fargo will likely continue to lead with innovative Web capabilities, such as account aggregation.

Many observers, particularly in the brokerage arena, see wireless finally becoming an important channel for accessing accounts and carrying out transactions. "We're convinced wireless will be important," Penney says. "Will it be in the next five years? Who knows? Our objective is to know what we can do most effectively through wireless by experiencing it, not reading about it."

"Wireless has fallen out of favor in terms of being a trend, but that's because the right combination of technologies has not come together yet to make it user-friendly enough," says Elterich.

As innovations such as these continue, it's difficult to conjure up the days when IT was behind the scenes doing batch-processing functions. "I'm not sure the financial services industry was always a pioneer in the true sense of using new technology," Schutze says. "What it did was take technologies and integrate and deploy them differently. And that's where banks have done a tremendous job."

Brandel is a freelance writer in Newton, Mass. Contact her at

Copyright © 2002 IDG Communications, Inc.

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