Frank Mercardante thinks he remembers the exact moment technology became a critical element in banking. “In 1980, the cap came off interest rates,” says Mercardante, the president and CEO of Southwest Community Bank. “Ever since then, this industry has become more competitive every year. So we have to have more tools to bring customers in, and that includes a full range of technical services. If you don’t have those, customers are not going to come over to you.”

That may be why so many customers view banks as a commodity, adds Steve Borg, senior vice president and consumer products marketing director for California Bank & Trust. “The way people look at it now, a bank is a bank is a bank. So it comes down to the services you provide.”

To provide these services and stay ahead of the competition, banks must now put considerable planning, manpower and resources into creating a technological infrastructure both for internal and external use. Before a bank can offer its customer any fancy, whiz-bang electronic services, it first must be on the cutting edge of broadband internally.

Banking On Infrastructure
Most banks today (including all those contacted for this article), have Intranets or multiple T-1 lines that give them 1.5 megabits per second of speed. The world of finance always has moved quickly, but as other industries embrace technology, banks have an even greater need to stay ahead of their clients, particularly when it comes to communication.
“E-mail is a critical means of communicating between business partners, especially when time is of the essence,” says Steve Rice. He is market president of U.S. Bank in San Diego, which recently acquired Bank of Commerce, Peninsula Bank and Scripps Bank and is being acquired itself by First Star Bank, making it the nation’s eighth largest bank with $160 billion in assets. “I’d say 95 percent of businesses we deal with now have an e-mail address on their business cards.”

Whether it’s internal e-mail or communicating with other businesses and clients, the faster an employee can access the Internet to communicate or conduct research, the quicker the pace of business. That’s especially attractive in a world where financial files can be large and need to be transferred electronically.

For instance, 60-year-old North Island Financial Credit Union offers forms and rates to its broker partners online. “Having broadband speeds up our transactions,” said Geri Dillingham, executive vice president of retail delivery and corporate planning. “It also allows us to have a high level of security with firewalls.”

Security is another critical factor in transferring files over the Internet as they often contain confidential financial information.

“It’s important to have that 128-bit secure socket layer (SSL),” says Dru Shipper, the Internet banking manager for California Bank & Trust, which uses a T-1 line.

Once a bank lays in a solid technological structure, then it can offer cutting-edge electronic services for its customers. And that’s where the investment in high speed data capabilities really pays off.

Banking On Customer Demand
Five years ago, some banks began offering customers the opportunity to check a few items using an analog dial-up modem service. Few in the industry could have predicted how quickly this kind of service would catch on.
Today, banks that offer online services estimate that 10 percent to 20 percent of their customers are taking advantage of the option. For a national bank the size of Bank of America, that means 3 million customers, says Linda Mueller, spokesperson for the bank.

Yet a recent study by the Tower Group found that of 10,000 FDIC-insured banks nationwide, more than 7,500 have not developed a Web site. Those kinds of statistics have caused The Credit Union Alliance of San Diego to challenge its 23 members to get online.

“We feel that stepping to the forefront of the banking technology movement is essential to success in this industry,” says Robin Lentz, president of the CUA and chief executive of Cabrillo Credit Union.

That’s a view held by most financial institutions. As people become more comfortable with computers and security issues, they are demanding that more of their cash management needs be met online.

“If they don’t offer online banking, the customer will move to a bank that does,” says Dillingham. “I think that people want to monitor their finances more regularly than before. With more people investing in the stock market than 10 years ago, it’s heightened their observation of their financial resources.”

Most banks offer a range of services, including bill payment, balance reports, transfers between accounts, viewing current financial history, downloading credit applications and setting up regular payment schedules. A new technology now being offered by some banks is captured check images, which allows customers to actually see the back and front of a canceled check on the day it clears, a service that can be printed for proof of payment or to check for fraud. Customers can even download financial programs like Quicken and Microsoft Money with some banks.

Special services are available for business owners. For instance, Bank of America offers a small business center online that allows businesses to place personnel files and payroll information online and even has tips for improving sales. “These significantly reduce time on back office stuff,” says Mueller.

Clients who conduct international business can have a letter of credit supplied easily, points out Borg of California Bank & Trust. And with the new legislation passed that allows digital signatures, many financial documents are more easily executed online.

But mostly, customers like the ease and convenience of 7/24 access. Overworked small business owners can check on their financial picture at 3 a.m., while someone in the military can transfer funds from one account to another while stationed in a foreign country. Gone, or at least reduced, are the days of time wasted driving to a branch and standing in line during the bank’s limited hours.

“These services are a real-time saver for the customer,” says Dillingham. “Technology has really spoiled the customer.”

Yet technological stumbling blocks remain. When banks first began offering online services, many required customers to dial up on a modem and download programs to make the service work.

“It also had a lot of restrictions,” explains Shipper. “Many only worked with PC platforms, and not on a Mac. You could also only dial up from the continental United States.”

This may explain the problems that faced the industry in the first few years of electronic banking. According to a 1999 Cyber Dialogue survey of the 3.2 million customers who tried online banking, almost 3.1 million stopped using it within a year. That’s a problem because not only does electronic banking attract customers, but it is also a strong factor in retaining them.

“It gets down to the bottom line,” says Mueller. “It costs a lot more to attract a new customer than to retain one. If we’re losing customers out the back door, we’re not pulling ahead. Services like these have higher retention rates, what we call a ‘stickiness factor.’ That’s because it’s a relationship building product.”

In the last year or two, banks have been turning to various third-party service providers to create Web-based browser systems that allow the consumer to access the bank through the Internet. Many require an access number or PIN for security purposes. As a result, online banking has become easier and more comfortable for the consumer, who has embraced these systems enthusiastically.

Another reason banks want online services to succeed is because it reduces costs. “That’s because people aren’t coming into branches as much, so there is less cost in terms of brick and mortar and personnel,” says Borg. “Those savings can be passed onto the consumer, making us more competitive.”

Some banks are even adding lightning-fast loan approval and tax filing online. As technology continues to move forward, the number of services available is sure to multiply as well. For instance, Bank of America has a pilot program in California with wireless Palm 7s. “Customers can access their accounts and transfer funds, but they can’t do any transactions,” says Mueller. “But I’m sure that will come.”

Another area that’s ripe for growth is insurance, says Mercardante. “With the Financial Institutions Modernization Act passed at the end of 1999, banks can offer securities and insurance,” he explains. “I think that’s where we’ll see our greatest growth online. It makes more sense for a client to shop for auto insurance on the Internet.”

But whatever services banks decide to offer internal and external customers, it’s crucial they continue to keep ahead of the technology curve. “We need to anticipate how to use this technology in the future, because it’s not just a switch we can flick,” says Mueller. “We have to build the infrastructure and have the people and technology in place. If we don’t, the customer won’t have a good experience and they won’t try it again.”

In the end, attracting and retaining customers isn’t just about technology. Even though banks already exist exclusively on the Internet, most people still prefer a financial institution that comes with a personal touch.

“When there’s a problem, people want to know there’s a person they can talk to and not get lost in voice mail hell,” says Borg. “People still want that relationship that comes from a branch office. That’s why it’s important to provide the best of both worlds — technology and customer service.”