A New Millennium of Opportunities and Challenges

by Jim West, corporate director of marketing alliances, Fiserv

Financial services were designed to serve the needs of people as they pursue their dreams and achieve their expectations. As the new millennium begins, financial service organizations are encountering new challenges and finding new opportunities to serve customers.

Evolution of modern financials

To understand modern financials, we need to look at where they originated. In America’s pioneer days, financial institutions opened with hopes of building vital new communities and to facilitate commerce. Those hopes were dashed with the Great Depression. Trust in our financial system needed to be restored, so the government stepped in. The Great Depression spawned regulations that, until very recently, separated banks, insurance companies, and brokerage services firms in the United States.

Shortly after the post-Depression era, the word “rural” equated to, in many people’s minds, “poor.” Young people moved from the country to the city for better pay, health services, and financial opportunities. At that same time, huge advances were made in transportation. Railroads, airlines, automobiles, and trucks were moving people and commerce faster and further than ever before. As poverty crept into cities they began to lose their appeal. Some families fled to the suburbs looking for, and often finding, better pay, health services, and educational opportunities for their children just outside the urban centers once sought after by their parents. This movement saw the creation of new suburban communities. For the next generation, technology was used to leverage energy and to make it easier to move more things faster and with less effort.

The contemporary generation may be the new millennium’s catalyst of change. Continuing in their forefathers’ pioneer spirit, they have a philosophy of seeking opportunity versus embracing protection. Today, the wealthy typically do not worry about FDIC insurance and young adults are losing faith in the government’s promise of Social Security. Almost everyone understands the need to maximize investments. Both urban and rural dwellers can hold down sophisticated jobs on a remote basis that were once only available in larger cities. Home office workers are returning to their original communities and are enjoying quality employment, medical benefits, education, and enriched lifestyles. The modern-day offspring of our pioneers may be returning home in pursuit of their parents’ dream of a more comfortable lifestyle.

Financial institutions have changed significantly to meet the needs of our pioneering generations. Institutions are repositioning themselves to accept new visions because they are in the people business, and people change.

Changing landscape

Money follows the laws of nature, that is, the path of least resistance. Household assets are moving from insurance policies and bank accounts to the accounts of asset managers. In fact, the number of households investing is projected to grow at a rate of 400% to 600% over a four-year period ending in 2003.

Any flow, whether it is water, air, electricity, traffic, or product delivery, will intuitively seek the most efficient conduit for each given situation. Americans are equipped with wireless communication in the form of cell phones, pagers, and personal digital assistants and with wired communications to telephones, computers, and Internet services. The electronic path between digital product manufacturers and consumers has fewer layers than traditional paper-based product paths for solid products and is becoming the path of least resistance as unnecessary paper layers are removed.

Financial institutions have manufactured digital products for years, although they are traditionally manifested as solid products on paper. Banks, insurance companies, and brokerages have stored digital products on computer hard drives for more than a quarter-century. Those products have traveled through telephone lines to tellers, agents, and brokers for as long as we can remember. Digital networks can carry digital products just as trains, trucks, and airplanes can carry solid products. Financial institutions manufacture digital products, which are riding on an ever-increasing number of digital highways between manufacturer and consumer.

Paper has less influence on product manifestation each day. Americans’ lifestyles are changing as they learn to shift their most valuable resource—time—by using technological advances such as e-mail and voice mail. For example, online users received more than 7 trillion e-mail messages in 2000. Americans are moving more rapidly and are constantly looking for easier routes to travel. Because they are willing to take more financial risks than their parents, members of today’s generation are using tools their parents could never have imagined.

As products blend and product delivery channels to people change, financial institutions continue to redesign their products and improve these channels.

Industry response

Financial institutions have become more customer-centric. They are far different from pioneer and post-Depression-era ancestors, when the community accepted banker’s hours. Community banks, for example, are experiencing positive returns on their investment in customer relationship management (CRM) projects, which in turn helps them understand and advise their customers.

Larger institutions don’t always have the same positive experience. This might be due to the ease with which smaller institutions can inspire their entire, and relatively smaller, employee base to move in one direction with an institutionwide undertaking. More than 60% of U.S. households have expressed an interest in account aggregation, a great source for CRM data, and they want their financial institutions to offer it. Many insurance companies are installing call centers and Internet sites that eliminate layers between the manufacturer, or insurance company, and the customer, or policyholder, which increases delivery speed and decreases cost for both sides of the manufacturer/customer equation. For this same reason, small commercial insurance agencies also are racing toward Internet distribution. Brokerage has provided a stellar model for Internet success. Brokerage firms have taken advantage of Internet services by providing their product directly to the consumer, probably due to the customers’ need to follow price fluctuations on a frequent basis. Internet-based brokerage has reduced the cost of a trade to a fraction of what it was a few years ago.

Customers require a variety of channels to access products, including physical locations that can handle documents and provide meeting space. For example, they may feel comfortable sending $20 via the Internet, or issuing a sell order on securities, but may not want to close a mortgage transaction without a physical meeting. Cost and convenience are always balanced in the consumer’s mind. They will shop at a convenience store and pay more when they are in a hurry, and they will shop in a supermarket to pay less when they have the time. Whether for food or finance, customers require multiple channels to buy their products.

While certain activities can occur only at a physical location, an Internet branch is worth more than most traditionalists think. How much value can be placed on an Internet service channel? E*Trade paid $1.8 billion for Telebanc, which had no branches, and is now able to provide brokerage service, lending, bill payment, and other banking services online, making it a digital supermarket of financial services. E*Trade offers vacation travel awards to attract investors, as a digital premium of sorts. E*Trade is not alone in this belief. America’s largest banks are spending $150 million to $400 million per year on developing Internet services. That equates to roughly 1% of their noninterest expense base. Allstate, a large insurance company and bank, plans to spend $1 billion on its Web development in 2001.

The physical financial institution also has changed significantly. Many of today’s institutions are located in multistory, atrium-style shopping malls, which are now the Main Street of urban, contemporary America. Some of us know our bank, brokerage firm, or insurance agent as a call center, a voice simulator computer program over the telephone, or a Web page. Actually, many consumers are beginning to experience these products behind a single storefront, as either one institution or a market-driven partnership of blended portfolio products. Whatever the case, institutions bear witness to the fact that the delivery vehicles used by Americans are rapidly changing. Documents, and the signatures on them, are going digital. Institutions, and the laws governing them, are adjusting to accept new customer contact/product delivery channels.

Digital future

Future financial transactions certainly will come from mobile telephones, and also will come from cars passing through tollgates, toys as they receive download upgrades, automated teller machines, washing machines, microwave ovens downloading recipes, pay toilets, and supermarket carts recording purchases as items are placed in them. In Norway, Nokia cell phones transmit point-of-sale purchase authorizations to vending machines, allowing them to dispense their merchandise to the cell phone’s holder, who usually is standing in front of the machine, running the payment transaction from the phone. The payment may come from a credit card, a bank account, or stored-value chip in the phone. The consumer is using digital money to pay for a physical product without a second thought toward the incredible significance of recent technology changes that enabled the event to take place.

Machines talking to machines will make up the majority of future Internet transactions. The Internet itself will not be in the forefront of Americans’ thoughts, since it will be taken completely for granted, much like electricity is today. Employees, whether in the office, on the road, or operating from home, will be connected by wireless workstations small enough to be hung from their belts. Think of what will happen when customers in a store have instant access to price comparisons through wireless devices that can quickly locate competing stores, their prices, and the best route to them. Digital signatures will allow contracts to be signed remotely with higher probability of authenticity than today’s blue ink signature. These changes result in an increased focus on e-commerce, which is predicted to consume 14% of financial institutions’ information technology budgets by 2002.

An international construction project is taking place for a remote space station. When it is completed in 2005, the pressurized living and working space aboard will be more than 46,000 cubic feet, roughly equivalent to the passenger cabin volume of two 747 jetliners with a mass of nearly 1 million pounds. The station provides living space for astronauts, an occasional rich tourist, and scientists. The first crew began their three-month stay on the station in October 2000, and has since been permanently staffed. Certainly, transactions through any financial institution, signed off by customers working and living above the earth on this remote space station, will be handled routinely by 2005. Pioneers, lodging on the international space station in Earth’s orbit, will need to attend to their finances. Only the unnoticed distance between the institutions on Earth and the customers in orbit will be unusual.

© Board Member Inc. All Rights Reserved