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 NEWSIn financial services, the currency is change By Eugene Grygo June 15, 2001 1:01 pm PT  IF EVER AN industry were ripe for a New Economy jolt, it would be financial services.
E-commerce has spread so quickly in financial services because the real currency of the industry is information, observers say. "Everybody now is in the information business. Everybody. Even banks," declares Peter Stern, CTO of Datek Online Brokerage Services, the 5-year-old Iselin, N.J.-based provider of online trading transactions and real-time information for the consumer-oriented individual investor market. "The fact is that banks don't realize that they're information providers. A lot of financial services firms are purely information providers. That's the thing that's changed a lot over the last five years." Inefficiencies exposed Although finance has realized new roles and great possibilities with online services, e-commerce has also brought into focus the inefficiencies of existing financial businesses and created new opportunities -- most of them related to the bureaucracies that are part and parcel of the industry. This is particularly acute in securities trading. Datek Online Brokerage Services, a 5-year-old Iselin, N.J.-based provider of online trading transactions and real-time information for the individual investor market, for instance, was created so that investors could bypass brokers. "In our case, you talk to a Web site and we provide [transaction] services for you in some way, shape, or form completely with computers," Datek CTO Peter Stern says. This avoids incurring a lot of overhead costs, but it also denies investors access to a lot of expensive research that other firms provide. Competitive strategies Because the Internet has changed the dynamics of the industry from price points to products and services, customers armed with the latest information "can more easily switch providers," says Larry Tabb, an analyst at Tower Group, a Needham, Mass.-based research and analysis firm focusing on financial services. The hotly competitive environment "almost leads to a downward spiral -- a price or service war," Tabb says. "We've seen both things happen." One firm that has avoided the spiral is Merrill Lynch, according to Tabb and other industry observers. Merrill Lynch launched a multilayered approach to e-commerce in late 1999. "They say, 'We will work with you in a number of different ways,' " Tabb says. Merrill offers Internet discount channels such as Merrill Lynch Direct as well as its traditional brokerage service, but at varying rates. The more hand-holding and research customers need, the more they'll pay. Merrill Lynch's approach is about delivering services over the Internet to "people who have a continuum of needs," Tabb says. John McKinley Jr., executive vice president and CTO of New York-based Merrill Lynch, acknowledges the leveling power of the Internet and the infrastructure changes that accompany an e-business strategy. "Now you've got better information in the hands of customers ... I think it forces you to bring your A-game to the field every day," McKinley says. The increasingly important A-game requires a lot of behind-the-scenes work to realign IT infrastructures in favor of the customers. "It means a continuous emphasis on our e-initiatives ... with the mantra of becoming the easiest company to do business with," McKinley says, adding that being easy to work with also entails a never-ending quest for quality. Decentralized model Ameet Patel, CTO of the New York-based group serving the merged empires of J.P. Morgan and Chase (now called J.P. Morgan Chase & Co.), is overseeing a federated, decentralized approach to e-commerce . The model is one that resonates throughout the industry: set up a unit to focus on e-business and let e-business permeate the other business divisions. The New York-based Chase Manhattan Bank, now a subsidiary of J.P. Morgan Chase & Co., has been venturing into a variety of business-to-business and consumer e-business efforts. These include delving into b-to-b procurement and creating a Chase Global Capital Markets Trading and Research Web site as well as developing Chase Workspace for treasury managers; I-Vault, an imaging archive service for business customers; electronic bill payment and presentment services; and several ASP (application service provider) hosting options. To stay at the top of the game in today's competitive market, Patel sees his role as one of building "complete partnerships," that take into account the lines of business. "Business individuals, technology individuals, and the individuals in the LabMorgan organization triage work on respective projects that will drive Web enablement," he says. E-business efforts are under way in other parts of the J.P. Morgan Chase & Co. empire such as its private equity unit, J.P. Morgan Partners. With the help of Syncata, J.P. Morgan Partners is streamlining its portfolio review process by moving it to the Web. Using a Web-based application and extranet access, the private equity group can quickly hone in on "the acquisition and analysis for business-critical information in a way that enables us to collaborate," says Edward O'Connor, CIO of J.P. Morgan Partners. "Collaboration is at the core of our business. All of our investments are done on a very consensual basis. The information exchange is ... arguably the most important part of our business because we're relying on the common wisdom of all of our investment professionals. In that light, this solution revolutionizes a private equity investment business process." The human touch At this point, it's clear that those who will succeed will have mastered the balance of hands-on and hands-off contact with customers online. As one who has straddled the New and Old Economies, Subi Katragadda, CTO of 401Kexchange.com, oversees a West Palm Beach, Fla.-based b-to-b exchange for information and transactions. Katragadda says that the disintermediation so widely predicted and feared hasn't come to pass, and that it shouldn't. "You really don't try to disintermediate somebody who adds a lot of value to the process," Katragadda says. A case in point is the 401K market itself. Financial advisors for these retirement plans are the largest client base for 401Kexchange, "and we feel they bring valuable input into the shopping process for the plan sponsor," Katragadda says. "We want to make it easier for the financial advisor to get the information for the plan sponsor." The key is finding "a high-tech, high-touch approach," he says, that also streamlines the inefficient processes of financial services. Financial services firms are likely to become more aggressive in their outreach to customers, especially consumers. Perhaps a harbinger of things to come is Etrade and its Target stores initiative. Etrade is partnering with Target retail stores, which includes Mervyn's and Marshal Fields, to set up Internet Etrade terminals in 20 stores as part of a pilot project. Financial firms are also likely to dabble in electronic bill presentment and payment for consumer and b-to-b efforts. Liquidity, too, will be the determining factor in an area pregnant with possibilities for financial services online b-to-b marketplaces, according to analysts. Financial services firms "are assembling an ever-growing array of products and services to address what they perceive are their target customers' needs," say analysts John Hagerty and Randy Weston in a recent report for AMR Research in Boston. Among the innovations are payment services, risk management offerings, credit ratings information, and special "smart cards" expressly for b-to-b procurement. A pioneer in this area is Bank of America, which, with the help of EDS, is offering to act as an underwriter of sorts for b-to-b supply chains. As business sectors clarify and automate their complex supply chains, the money needed to grease the virtual wheels of the New Economy has been lagging behind. The combined efforts of EDS and Bank of America as well as the participation of Ariba and Commerce One are intended to free up the much-needed capital. "We are a big proponent that the people who have the most to gain [from b-to-b] are going to be the financial services players," says Tower's Tabb. But financial services firms, as they have from the start, need to see that they will be rewarded for their efforts. The future holds promise for other innovations, but Tower Group's Tabb has reservations about financial services moving into b-to-b that also can be applied to the industry generally. "It's going to be a chicken-and-egg scenario," he says. "Financial services won't go unless there's liquidity."  Hear from the players What lasting impact has the Internet had on financial services?
Financial services
Source: Tower Group, Standard & Poors SPONSORED WHITE PAPERS 
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