Strategy, Technology, and the Fight for the Wheel

The end of summer is upon us again, faithful Gonzo groupies. The kids are back in school… vacation’s over… our credit card balances are at new highs… the end of the heat wave is somewhere out there… your department’s annual budgets are completely blown… so what’s missing? Right… it’s time to start the annual strategic planning process!

Today’s tome addresses factoring technology into the planning process. The classic version of strategic planning starts with the premise that strategy drives technology. First the vision, then the goals, then that tactics, then the systems needs and priorities.

But (at the risk of being a contrarian) this really isn’t always true, particularly in that part of the banking world that deals with Internet delivery and payment systems. In fact, the technology has driven strategic planning much more than we want it to. Consider these examples:

• Strategy really didn’t lead to the Internet and its many implications for delivery and consumer buying habits (maybe Al Gore had a strategy). Rather, banks had to react to what the Internet did to them and adjust for it. Few strategic plans mentioned the Internet until there was a “we need to do something about this” realization.
• Most of the infrastructure and technology surrounding debit was demanded or funded by banks after it was determined that customers needed an alternative to writing checks for purchases and using ATMs. The bank also needed a pretty good new source of fee income. (Al Gore wasn’t surprised here either – I think he invented debit cards, too.)
• None of the strategic plans you wrote last year said that your merchant customer relationships would be greatly enhanced with a machine that converts checks into electronic transactions, alleviating the need to make deposits through the branch. But you will have to plan how to react to it.

These examples illustrate how technology came on the scene and caused banks to change the way they deliver services.

Here’s my point. What drove (and is driving) significant change in electronic delivery and payment systems has been a combination of two things:

• The maturing of the technology (much of it designed and funded outside of banking); and
• Consumer acceptance/usage based on the age-old, pragmatic criteria that they either made things easier or cost less.

It is important to recognize that while banks have effectively pursued these opportunities or mitigated these threats, they were responding reactively and not in accordance with a proactive strategy.

Most banks need a component of their strategic planning process that looks at external factors that will influence the bank in the next year and will require special focus. Here are five trends I would suggest examining and factoring into planning/budgeting:

1. ATM usage is leveling, since debit cards have finally taken their toll. Driving this growth is the cash-back debit transaction (it’s easier than a trip to the ATM). A recent study conducted by Pulse concluded that as many as 17 percent of debit transactions involved cash back.
   • What might this do to your 2004 ATM switch revenue?
   • Is it time to trim the stand-alone ATM fleet?
   
   
2. The percentage of PIN-based debit card transactions vs. signature-based is growing, driven by merchants (it’s cheaper). Recent estimates in Card Management Magazine indicated that PIN-based transactions account for slightly more than 40 percent of all debit, but merchant pushing of pin-based could increase that significantly.
   
   In a recent American Banker article, Bank of America Corp., one of the nation’s largest issuers of Visa debit cards, estimated that a significant move to debit settlements could reduce its net income by as much as $200 million, or 1.7 percent, in 2004.
   • Will the potential fee revenue increase caused by the growing number of debit transactions be offset by lower per-transaction fees?
   • What does that do to the 2004 fee income line?
   • Who’s accountable for driving usage?
   • Will customers support the debit transaction fees many large banks are contemplating?
   
   
3. Check-to-ACH conversion is getting steam, driven by Wal-Mart, which is piloting the technology in 300 stores and lockbox operations (it’s cheaper). An article in American Banker stated that virtually every large lockbox function is transitioning to or looking at converting checks to ACH, and that the per-item transaction cost reduction could be 15 percent to 30 percent.
   • What impact will this have on NSF volumes? NSF fees? Float? Account analysis fees?
   • What is the pace of implementation in your markets?
   • Who in your bank is charged with understanding and tracking this?
   
   
4. Check 21 cometh. The ability to present images instead of physical items for payment may represent one of the hairiest, bodacious opportunities to save money that we’ll see for quite a while. Early industry studies indicate that reduced handling charges could be as much as $2 billion to $4 billion annually. And let’s get something straight. Forget strategy. Stuff planning. Bag committees. There is absolutely nothing bankers like better in this world, nothing that puts a bigger gleam in their eyes than the good old-fashioned act of saving money. Well, maybe concocting incredibly complex commercial loan deals come close, but just barely.
   • How and when should your bank prepare its imaging and other systems to take advantage of Check 21?
   • Who is the bank Check 21 expert?
   • Is that person beating the snot out of your IP, imaging, and other vendors to make sure they will help you be ready to take advantage?
   
   
5. Internet-based loan applications continue to grow (they’re easier, they’re cheaper, and your customers can shop anonymously). In the consumer area, credit unions have been the leaders in exploiting the trend. We know of several at which more than 50 percent of their applications are Internet-based.
   • How will this trend affect relationship banking and cross-sell plans?
   • Will there be an impact to add-on insurance sales and related fee income?
   • How should loan employee productivity and cost per loan change?

Even if the trends I discussed will not directly impact your bank, there is technology out there, some being funded by out-of-industry competitors who want to pick your pocket. And customer behavior always exploits what is easier and cheaper, even if it’s not good for you. So, in between the continental breakfast and the group exercises, talk about these things.

Technology may not always drive strategy, but it sure is the back-seat driver barking out instructions and telling you to speed up.
-tr