Telecoms And Banks Tie The Knot

They're rushing to make online banking a reality

There's nothing that boosts a company's share price these days like the mention of anything approaching a dot-com strategy. It works particularly well for some of the oldest institutions around--European banks. After Spain's Banco Bilbao Vizcaya Argentaria (BBVA) announced an e-commerce partnership with local telecom giant Telefonica on Feb. 11, investors pushed its share price up some 10%. Germany's Commerzbank shares rose 4% when it said it would hook up with Deutsche Telekom to provide online financial services. And shortly after Deutsche Bank unveiled its plan to develop a pan-European e-commerce bank with mobile telephone provider Mannesmann, its stock went up 5%.

A year ago, very few banks figured they would ever rush into the arms of telecom companies. Financial institutions reckoned they would get a lock on cyberbanking by setting up their own operations. And they assumed they would be the first choice to finance most e-commerce transactions because of the dominant role they play in Europe's existing payment systems.

Wrong. The early success of Internet entrants, such as Prudential Assurance Co.'s Egg or Dublin's first-e, showed the banks pretty quickly that customer loyalty can no longer be taken for granted. Now, supermarket chains, utilities, and even auto manufacturers may move into Internet finance. And, of course, telecom companies, too.

As if that weren't bad enough, e-commerce is developing in a way that erodes the banks' dual role in providing and processing money. Telecom companies could easily take control of the processing. Many banks have also realized that they need to provide the most advanced Internet delivery channels--using mobile phones--if they are to keep existing customers and win new ones. The best way to do so is to team up with phone companies. Otherwise, "traditional banking establishments are clearly at risk," says Robert Dedman, managing director of Teleconsul Europe, a British consulting firm in Winchester.

TROJAN HORSES? The links with telecom firms aren't just defensive. Some ambitious banks think they can take a bigger slice of the burgeoning e-commerce market by working with the phone companies rather than against them. "The pioneers of the New Economy will reap huge rewards, and we intend to be one of them," says BBVA's co-chairman, Emilio Ybarra. "That's what drives our deal with Telefonica."

But bank executives such as Ybarra could be disappointed. No one knows if consumers will rush to do their banking on their cell phones--especially since mobile calls still cost more than ones made over fixed lines. Besides, joint ventures are often difficult because corporate cultures clash. Worse still, it may not be long before the telecom providers decide that they can make more money by ditching the banks and taking over completely. "The telecom companies control the portals and therefore the interface with the customer," says Dedman. "These deals could turn out to be like Trojan horses, a means for the telephone companies to steal a march on the banks."

That doesn't seem to worry the big banks. Over the past month, at least five have unveiled plans to link up with various telecom providers (table). Many others are poised to follow--including France's Banque Nationale de Paris and Italy's UniCredito Italiano, which analysts say are negotiating deals with France Telecom and Telecom Italia respectively. None of the companies would comment. "There's a growing realization in Europe that the banks and phone companies that will do best out of e-commerce will be the ones working together," says Robin Arnfield, a mobile telephony specialist with Lafferty Group, a London financial publishing and research group. "This is the beginning of a powerful new trend."

BRAND RECOGNITION. For the telecom companies, these alliances are probably the easiest, and certainly the quickest, way to provide financial services. It would be difficult for telephone companies to offer online banking on their own. Apart from the regulatory hurdles they face, they lack both banking expertise and the brand recognition to snare clients.

Consider three recent deals. Telefonica and BBVA will jointly provide online financial and payment systems, as well as business-to-business and business-to-consumer services to customers throughout Spain and Latin America. To cement the relationship, the phone operator will buy a stake of up to 3% in BBVA, while the bank will increase its stake in Telefonica from about 8% to 10%. Telefonica Chairman Juan Villalonga will become deputy chairman of the bank, and BBVA co-chairman Francisco Gonzalez will become deputy chairman at the telecom provider. "The Telefonica deal pushes BBVA right to the front of Internet banking and e-business," says Inigo Lecubarri, who follows Spanish banking for Salomon Smith Barney in London.

Comdirect, the online broking subsidiary of Commerzbank, hopes that its deal with Deutsche Telekom's Internet operation T-Online International will generate 100,000 new customers--a one-third increase over the 305,000 it has now--within the next three months. And many of them could be outside Germany, thereby helping comdirect transform itself into a pan-European institution. T-online already has 320,000 customers in France following its February purchase of Club Internet, the country's second-largest Internet service provider, from conglomerate Lagardere Groupe. "The deal with T-online opens up a completely new dimension in marketing for us," says Norbert Kasbeck, a member of Commerzbank's management board. "It gives us a big new distribution channel."

MOBILE MOMENTUM. And Deutsche Bank isn't just hooking up with Mannesmann. It also plans to shell out up to $1 billion this year on some 200 other Internet initiatives. These include agreements with German business software group SAP, Internet service provider AOL Europe, and Silicon Valley information and financial-services startup eTime Capital. "The digital economy is fundamentally shifting power to the customer and transforming the way we go to market," says Hermann-Josef Lamberti, a managing board member of Deutsche Bank. "We're acting now with an unparalleled sense of urgency to put Deutsche Bank in a leadership role."

The convergence of telecom and banking also heralds a major shift in the Internet economy, say e-commerce analysts. In particular, these deals could spur the development of Europe's fledgling mobile e-commerce market. The number of Internet-enabled cellular phones will overtake the number of laptop PCs in Europe sometime next year, according to Durlacher Corp., a London investment bank specializing in technology and media.

The new generation of phones present fewer security problems, too. Subhajit Gupta, a telecom analyst at Standard & Poor's in London, describes them as "effectively credit cards with antennas." Given that, the potential for mobile e-commerce in Europe is enormous. Business volumes will top $23 billion by the end of 2003, predict Durlacher analysts. The institutions that handle the payments for all that business should do pretty well.

It all seems to make sense. And investors obviously like the idea. But potential conflicts of interest--which could arise once the portals are more firmly established--may mean some of these deals will unravel. Still, financiers and telecom specialists agree on one thing: The banks and phone companies that have linked up know that in the Internet economy, it's smart to grab market share first.

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