On The Cutting Edge
In the late 1980s, Fidelity Investments could do no wrong. The Boston mutual- fund giant's reputation for good returns and stellar customer service went happily hand in hand with its fame as a quick adapter of new technologies. The firm took a big lead as it implemented voice-recognition technology and daily valuations of 401(k) plan accounts, becoming the nation's largest provider of such plans.
But Fidelity's bent for being on technology's cutting edge has also led to blunders. One mistake was Fidelity's attempt to build Windows-based software for its retail-brokerage customers to use in making investments online. The project ended up taking three years longer to get in gear than arch-rival Charles Schwab & Co.'s system. Schwab's PC-based products blew Fidelity away. When Fidelity began the software-development effort, says CIO Albert Aiello, "we knew Schwab was coming out with something, and we wanted to jump right over them. We tried to do too much." Aiello won't disclose how much was spent on the project, but only 40,000 Fidelity brokerage clients--out of 1.6 million--use it today.
While Fidelity stumbled, Schwab expanded its lead, signing up several hundred thousand customers to its proprietary software. Last May, Schwab widened the gap by launching Internet-based equity trading, and in July, it added fund and option trading. The discount broker continues to lead with an all-electronic account offering called e.Schwab. Today, 24% of all trades executed by the San Francisco giant are done through its PC software. Fidelity plans to launch Internet trading by the end of the year.
As the showdown between Fidelity and Schwab makes clear, technology has become crucial to success in financial services. And it's not enough to simply invest in technology. Companies must be careful to select technologies that will serve customers while keeping them ahead of the competition. "The train has left the station, and it's picking up speed," says Dudley M. Nigg, executive vice-president for direct distribution at Wells Fargo Bank. "If we're going to stay competitive, we'll have to stay competitive technologically."
Unfortunately for big financial-services providers, whether they serve consumers or corporations, size doesn't necessarily bring advantage in this world. "Technology is a great leveler," explains Gartner Group Inc. consultant Ira Morrow. "It's a commodity. You can buy it." Indeed, a swarm of low-cost imitators have become much more serious competition than ever before, stocking data warehouses with information purchased from outside sources and using affordable software to analyze that information to competitive advantage. Old-line companies may have plenty of data, but those data are often, as one consultant terms it, "in jail"--trapped in old systems that are not uniform and must be broken down before a new, usable system can be built--a project that can easily cost tens of millions of dollars.
Despite the cost and uncertain payoff, financial companies large and small are betting big. Banks alone will spend $19 billion on technology this year--$5.4 billion of that on improving customer service and business processes, according to Ernst & Young and the American Bankers Assn. And despite the risks and competition, few question the wisdom of such hefty investments. "Technology is the production equipment of financial services," says Philip J. Lawrence, a partner at Ernst & Young. "The trick is execution."
Some of the best executors are using technology to improve customer service. Close to half of all bank transactions are currently done outside the branch, and that percentage is expected to rise. So as geographical convenience ceases to matter and customers grow comfortable with PC banking and banking by phone, banks have found they must work hard to be the brand of choice. Competing for their customers is a slew of nonbanks eager to provide a high level of service to gain a bigger slice of the pie.
Merrill Lynch & Co. is in the midst of a two-year, $800 million project that the brokerage hopes will help establish it as America's leading money manager. Merrill is setting up a system that provides its 13,000 domestic brokers with a file on all of the business a client does with the firm, plus recommended action and customer profitability. "We're making a big bet that in spite of the Internet, the individual still needs an adviser to sort through all the information out there," says Howard P. Sorgen, chief of technology for Merrill's private-client business.
Merrill's online service, launched in September, is designed to further bind the customer to the firm. Accessed via the Internet, the system offers clients a menu of services--including online account balances, an E-mail connection to their broker, and bulletins of news and investments to consider, augmenting the sales staff's telephone pitch.
PROFIT FLAG. State Street Boston Corp. offers a similarly high level of communication to its institutional customers. James J. Darr, the bank's executive vice-president, explains that technology has been the key to State Street's strong growth in pension-fund servicing and 401(k) asset administration. The bank has 2,000 customers linked to its systems, providing daily balance and holdings updates. Operating in 30 countries around the world, the bank has increased assets under administration from $200 million a decade ago to $2.6 billion today. Chase Manhattan Corp. is investing $500 million a year--close to one-third its total tech budget--in technology-intensive processing businesses, including cash management for corporations. That kind of investment is necessary to keep customers, who are increasingly demanding faster transaction execution and information, says Richard J. Matteis, Chase's head of global services. The rewards are worth it: These businesses deliver a lucrative return on equity of 35%.
A company's high-margin customers should benefit from such plans. Credit-card dynamo Advanta Corp. gets 60,000 calls a day and has technology that flags which customer is calling. "If I'm a very profitable customer, I may get answered in half a second by a human," says Chief Information Officer John Roblin.
Once you know your customer that well, the next step is to sell that customer more services. USAA Life Insurance Co. has done an exceptional job of this, using heavy telephone and systems investment to double the number of products their average customer holds, to 4.5. The insurer will spend $270 million this year on technology, augmenting already detailed customer-information systems. As a direct writer of policies, USAA does all of its business through the mail or by phone, so its marketing efforts rely heavily on analyzing computer files. Mutual-fund powerhouse Fidelity Investments' "cross retail station," four years in development, will soon provide phone reps with information on what Fidelity products a caller is most likely to buy.
Credit-card company Capital One Financial Corp. has grown into one of the largest in the field by using information technology to customize its product. For example, a credit card shared by a parent and child tied to the parent's credit line would be offered the summer before the child's freshman year. Capital One offers 3,000 different cards, with a variety of interest rates, fee structures, and special features, and plans to expand beyond credit cards into auto and home-equity lending.
SELF HELP. Some companies offer technology that enables customers to modify products to their specifications. Fund giant Vanguard, which resisted cutting-edge technology in the mid-1980s, has come full circle. Early signs are that demand is especially strong for such futuristic gizmos as two-way PC video and software that allows, say, a retirement-plan participant and a Vanguard rep to make changes and try out different possibilities simultaneously. Some 90% of the people in a test run preferred this to face-to-face contact.
A similar focus on customer participation can be seen at leading securities firms and banks. Goldman, Sachs & Co. has moved away from proprietary links to customers and instead offers clients access to a series of sophisticated derivative "calculators" over the Internet. These help customers better understand the models the firm uses to create derivative products and lets them experiment with different prices, expiration dates, and even the underlying securities the instrument is derived from.
Bankers Trust Co. offers clients "scenario analysis," which provides all market data in real time to update corporate or institutional clients' risk position to the last transaction done. This allows customers to adjust their risk exposure, something that changes constantly in derivatives. (The bank has been sued by clients for losses from derivatives trading, and it settled a lawsuit last May with Procter & Gamble Co.)
Often, customers want firms to customize services, but the return to the company is just not there. G. Kelly Martin, Merrill Lynch's Chief Operating Officer for corporate and institutional client groups, warns that many of the clients pushing him hardest for total connection are smaller, aggressive firms, such as hedge funds, which, while profitable, are not Merrill's bread and butter. "We can't build an Internet strategy on them," says Martin. "We need to ask our top 500 to 1,000 issuers [of debt] what they want."
Understanding what customers want is easiest when those customers work at the company. At J.P. Morgan & Co., top traders are taken out of their seats to spend weeks helping customize software to perfect trade execution. Citicorp Chief Information Officer Colin Crook stokes executive interest by taking top brass on field trips, recently touring Microsoft Corp. with the bank's chairman, John S. Reed.
Of course, not all financial companies are plowing big bucks into technology. "There are some companies that are rapidly building the ark today. Some are studying the plans, and others have heard the forecast for rain and don't believe it," says Thomas K. Brown, a banking analyst at Donaldson, Lufkin & Jenrette Securities Corp. Despite the high cost of tech investment and the risk of failure, there's little doubt that the technological leaders will thrive while the doubters drown.