Preparing For The E-Future

In the financial services industry, as in other e-commerce arenas, Internet initiatives are being launched at a frenetic pace. More than 40 percent of financial services firms said they were investing in 10 or more Internet projects, according TO a recent poll by Ernst & Young LLP and Mainspring.

And none too soon, say industry experts such as Jupiter Communications, NFO Interactive and International Data Corporation (IDC), who predict that two-thirds of American households will be online by 2003. By that time, says IDC, there will be more than 15,000 U.S. institutions offering online financial services to nearly 40 million customers.

Although some researchers dispute these projections, IDC's forecasts are bolstered by another trend: the growth of the "information appliance" market. IDC estimates that sales of information appliances -- which include Internet gaming consoles, nets, "smart" handheld devices, Web terminals, e-mail terminals and screen phones -- will reach nearly $18 billion by 2004 as users demand access to Web-based services in more locations and situations, without the complexities and expense of PC ownership.

As banking consumers gain greater Internet access, the demand for increased functionality from financial Web sites will only increase. The result will be a new kind of online banking, one that embraces information-sharing, transactions, payments, cross-selling, and integration of value-added products and services. However, for financial institutions to move successfully toward increased functionality, they must answer a number of difficult questions.

Build or buy?

Many financial institutions have successfully established a Web presence by developing in-house resources. However, as online customers have grown more sophisticated about interactive capabilities, they are placing more demands upon institutions' systems. As a result, many financial providers are facing substantial upgrades to satisfy online consumers and stay abreast of the competition. It is at that point in the evolution of their Web sites that many bankers are forced to consider: Is it better for us to build a new Internet infrastructure ourselves, or should we outsource it?

The answer to this question can be determined only when bankers ask and answer a number of related questions, such as:

• What products and services do we want to offer?
• Do we have the expertise to create a competitive offering?
• How much will it cost to maintain an in-house Internet banking division?
• How long will it take to acquire the necessary infrastructure and integrate it into existing systems?
• Is the return on investment worth the potential risks? 
• Can we provide 24/7 technical support for our customers?
• Will we be able to commit adequate resources to research and development?
• What are our volume, service and technological limits?

As financial institutions take a closer look at these issues, many are concluding that outsourcing makes good economic sense. By working with a reputable third-party provider, financial institutions can reduce time-to-market and deployment costs by eliminating the need to develop in-house software, purchase new equipment, and provide end-to-end support. However, selecting an outsourcing partner presents its own challenges.

Choosing a technology partner

The first step toward ensuring the success of any new partnership is to conduct a thorough "due diligence." For a technology partner, the due diligence must look at much more than financial statements and impressive product demonstrations. The financial institution's evaluators also must consider the areas of technical risk and opportunity. In addition, the due diligence team should consider such items as the marketing, educational and service culture of the vendor. 

To ferret out the right partner to help your institution reach its goals, start by asking potential providers these questions about technology, business practices, products and services, customer service, sales and marketing, and security and privacy.

Technology

• Do you have a scalable system? How much transaction volume can you handle? Have you done load testing to confirm it? 
• How much downtime have your clients experienced in the past year?
• What is your experience in integrating your software with back-end systems such as ours? How long will it take? What will it cost? Is your software compatible with popular personal finance programs such as Quicken and Money?
• What levels of technical support do you offer?

Business practices

• What costs are associated with your services? Are volume discounts available?
• How long does it take to implement a new program? What is your history when it comes to meeting deadlines?
• Do you offer modular programs that can cost-effectively meet changing needs?
• What is your disaster recovery plan?

Products and services

• Do you offer a full range of transactional capabilities for deposit accounts, bill-payment, cash management, loan automation, investment services, insurance, etc.? 
• What kind of transaction history will be available?
• What new products or services are in development? What are the anticipated launch dates? 
• Do you offer value-added content or revenue-sharing opportunities?

Sales and marketing

• What kind of marketing and sales materials are available?
• Do you have a proven program for increasing market penetration?
• Can you provide case studies?
• Can you provide sales training and education for our staff?

Security and privacy

• What type of security measures do you have in place?
• Has your security system been audited by regulatory authorities?
• Have you had any security breaches? How were they handled? What was the outcome?
• How does your company protect customer data? Who has access to it? How will it be used?

Once you have narrowed the field of Internet banking software providers, contact references. Ask current clients: How responsive are they? Do they meet deadlines? Do they deliver what they promise? How well did they integrate their program with your legacy system? Has the program met your expectations? Do they cooperate with other vendors with whom you have relationships?

Linking up with an Internet banking partner is a long-term commitment. It's critical that you devote adequate time to ensure you have the right company on your side. 

One final caveat: Don't let price become the primary driver in the selection process. If you do, you may live to rue that decision. Rather, look for quality and technological prowess. Remember, you're staking your institution's reputation on the company that delivers Internet banking to your customers.