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Sleeping With the Enemy

For banks, technology is a weapon that can cut both ways when competing with nonbanks.

According to Charles Manning, CIO of Woodforest National Bank (The Woodlands, Texas; $1.8 billion in assets), it is the manner in which the technology is used by nonbanks that is so different from the way traditional banks operate. "It's not newer technology—it's just delivered in a different way," he comments. "PayPal uses the ACH network—ACH isn't new, it's just the manner in which it's deployed that's new. The delivery channel is very innovative."

Sharper Focus

But can nonbanks' technology be compared fairly with their traditional counterparts' IT? After all, in most cases, nonbanks typically provide no more than a handful of products and services. Banks, on the other hand, offer a huge array of financial services, so of course their IT situation is trickier.

"For nonbanks, it's easier for them to understand their [IT systems] because they have a narrower strategy," Manning continues. "They just focus on their particular niche."

Metavante's Shannon says many nonbanks "have a philosophy of efficiency and simplicity." He points to ING Direct, the virtual bank run by the global securities and insurance organization, as a good example of this mode of operation. "They don't offer many products, but they're very competitive pricewise," Shannon says. "In the back office, [ING] is very careful about the technology partners it picks, too."

Again, says TowerGroup's Khirallah, it comes back to the enterprise's distribution system. "A nonbank can use its distribution system to provide a limited number of financial services," she explains. "They have a distribution system and a trusted brand, and people are doing business with them anyway." That also applies to large retailers.

But an established retail distribution system can provide an opportunity for banks, too—if they are willing to adapt the way they operate. In-store branches, where a bank branch is located in a retail store, not only save banks money on construction, they also can help build a bank's market share. Woodforest National Bank is among the financial institutions that are pursuing this strategy.

Although it is a regional Texas bank, Woodforest has expanded its branch network to 191 locations and stretched its reach to North Carolina because of arrangements with Wal-Mart and other retail stores. The bank currently has plans to open a branch in Super Wal-Marts in Virginia toward the end of the year, relates Woodforest's Manning, who notes that the deal benefits both the bank and the retailer. "It's the one-stop-shop concept," he relates. "It's a way for Wal-Mart to satisfy its customer base." Wal-Mart officials declined to comment for this article.

A ready-made audience and distribution system can go a long way in any financial services venture. UPS Capital knew the potential that awaited it in financial services since it had millions of customers already. Domestically, UPS has 1.8 million business customers, according to the firm's Bradshaw. Seventy-five percent are small and midsize businesses—UPS Capital's "sweet spot," he says, adding that currently, around 5,000 of these clients use the shipper's financial services solutions.

Bradshaw emphasizes that there is much more to entering financial services than simply buying technology systems. Referring to the acquisition of First International Bank in 2001 by UPS, he says, "That's part of the reason we purchased the bank—they had the [industry] knowledge and the technology platform already." The Connecticut bank specialized in lending to small and midsize businesses. "We also have a major company behind us—UPS—which has a heavy technology spin to help us operate," Bradshaw adds.

Capco's Dener says nonbanks approach financial services wisely—they examine the needs of the market and introduce products accordingly. "I don't think financial services companies have to be all things to all people," he remarks. "It's a prudent strategy to roll out functions in a structured way according to your customers' needs."

TowerGroup's Khirallah agrees. "When nonbanks get into financial services, they don't offer every product," she says. "They favor a limited, straightforward product set."

So, can banks compete against this efficient approach? Sure they can, according to SAP's McAllister. The evolution toward streamlined operations is well under way at savvy banks, which recognize that they have too many disparate systems, he relates. As a result, "They are trying to lower costs by rationalizing their vendors," he says. "Banks are running leaner shops today [and] they're selling services they didn't before. They're matching their services and looking at their infrastructure to see how they can run leaner."

According to Metavante's Shannon, the vendor's bank clients increasingly are seeking ways to compete through better IT efficiency. "We're getting a lot of work today from banks that are looking for best practices to focus on their core competencies of selling to their customers," he says. "They have to map their business strategy with IT efficiency. Banks have to know their core strategies and spend time gathering a sense of the competitive landscape more so today than in the past."

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