Balancing the budget

Asset managers eat away at banks' market share by spending more on acquiring customers than on building infrastructure

Banks' collective hold on market share is slipping, according to the sixth annual Special Report on Technology in Banking and Financial Services, recently released by consulting company Ernst & Young.

Approximately $22 million in U.S. household assets are at stake, contends the Ernst & Young report, which adds that asset management firms are successfully battling for these funds.

"In 1976, banks held 25% of U.S. invested assets; today their share has dwindled by nearly half, to just 13%," the publication states. "During this same 20-year period, assets held by asset managers have ballooned from 38% to 66%, at the expense of banks and other traditional institutions. No ambiguity there: Banks are losing ground."

The report reveals that banks, along with insurance companies and brokerage firms, are battling with discount brokers and mutual fund companies to maintain their once-secure place in the market.

So what is the competition doing right?

According to Ernst & Young, while banks are keenly focused on building products, mutual fund companies and other asset management firms favor expenditures aimed at customer acquisition and distribution. The report noted that last year, banks earmarked 19% of their discretionary technology expenditures for new products while asset managers budgeted 13%. Meanwhile, asset managers targeted 41% of their budgets to acquire new customers, as compared to 31% for banks.

The strategy of the asset managers, the publication indicates, has led to nonbanks snatching up consumers who previously never would have considered doing business with these less-traditional firms.

The report notes that a large part of asset managers' expenditures is funneled into technological innovations that focus on more-convenient delivery methods-Internet transactions, for example-largely because asset managers "view physical presence as an adjunct to virtual delivery channels." Banks, on the other hand, have different priorities: "While 79% of survey respondents indicated plans to redesign branches, their commitment to the past is deep and tangible, including brick-and-mortar structures, legacy mainframe systems and a culture that is conservative and risk-averse."

Charles D. Petersen, national director of Ernst & Young's financial services consulting group, commented on this difference:

"Financial services firms are racing to implement their visions. ' Banks are laden with large physical infrastructures and face important decisions about how they compete in the new landscape, while asset managers, who have less infrastructure, are moving swiftly to target the consumer.

"While the contest is not over, it is clear that firms need to take decisive steps or risk not having a place in the evolving value network, where firms collaborate with other institutions to offer services."

Illustrating the increasing competitive furor, the Ernst & Young report-for the first time-names nonbanking institutions among the top financial services technology innovators. Most frequently cited as leaders in this category were Citibank, Fidelity, Charles Schwab and Wells Fargo.

But although banks are lagging in technological development, the publication relates that many of them recognize the need to adopt new technology-and soon. Ninety-five percent of the Ernst & Young survey respondents plan to use the Internet for information dissemination, and 87% want to be able to offer Internet transactions by 1999. Thirty-six percent of respondents believe "the most important technology investment in 1999" will be Internet and personal computer banking.

A majority of financial institutions also plan to adopt one-touch processing-the single entry of transactions typically applied to ATMs, call centers, securities processing, loan applications and bill payments-as the new back-office operating model. Survey data show a 34% increase in ATM transactions and a fourfold increase in home banking transactions before the turn of the century.

Already, the combination of technology and product decision support has made tremendous strides, the publication states. Data warehousing, a technology used to capture information about customers and their transactions, is moving to the front office, where it is actively used by 60% of survey respondents in their product management and risk assessment decisions.

"Melding knowledge about all aspects of customers and their financial transactions into the decision process is indispensable in offering products and services today," said Phil Lawrence, partner in Financial Services Consulting Practice, a division of Ernst & Young.

"Forward-looking companies," Lawrence continued, "are recognizing that the integration of customer information into the decision-making process is an imperative in this [competitive] environment."

Ernst & Young cautions banks, however, in their race to acquire the latest technology:

"Unless information technology is effectively applied, it will remain simply a large-cost item and will not fulfill its potential as a competitive advantage."

The report encourages banks to "make clear choices about what [market] segments they will serve," "position the company according to its core competencies," "develop an explicit operating model" and "quickly take action in the marketplace."

In other findings about technology expenditures, the publication relates that spending to correct the Year 2000 problem will peak this year, while 68% of all respondents will still be working toward solutions into 1999.

A fourth of the respondents plan to defer a mission-critical project to fund Year 2000 initiatives.