Wells Fargo and Company:
Leading the Banking Industry into the 21st Century*
"On-line banking on the Internet is the Holy Grail of the Banking industry…Internet banking does two things we have always wanted to do – it satisfies our customers' needs and it reduces our costs….it is the key to electronic commerce, which could be the most important event in commercial history." These were the words uttered by Dudley Nigg, Wells Fargo's executive vice-president of direct distribution, as he sat in his office in downtown San Francisco where mammoths such as Wells Fargo and archrival Bank of America have dominated the banking industry for over a century. (See exhibit 1, 2, and 3 for a summary of Wells Fargo Financial History.)
In early 1997, recognizing that the future of the electronic commerce "upon us," the Chairman of Wells Fargo, Paul Hazen, decided to form a think-tank to strategize how the company could take advantage of its position as a leader and innovator of the banking industry in order to solidify its position in electronic commerce. On May 21, 1997, Hazen initiated the formation of a new 'Office of the Chairman', organized around 3 major customer segments and central staff groups that support them. The objective was to bring creativity and vision to new innovations. As part of this new venture, a separate business unit dedicated to online financial services was set up, to be headed by Dudley Nigg. Given the great possibilities of the Internet, Dudley and his staff recognized many opportunities for the company, and the industry as a whole:
Wells was the first bank to recognize some of these possibilities when it went online in 1989 and was first to begin offering Internet services in May 1995. Since then, a slew of competitors, old and new, have made competition in this industry even more fierce. Wells has thus far been the leader in innovation creativity and speed to market. SmartMoney magazine named Wells Fargo "Best Online Bank" in 1996. And, in 1996, the Wells Fargo Internet site was also awarded "Best Overall Site by a U.S. Financial Institution" by the Online Banking Association. Yahoo!, the Web site locator, gave the bank's home page a four-star rating (its highest).
However, Dudley and his team also realized a downside to online banking and the new era of electronic commerce. The ease and affordability with which any bank could gain an Internet presence and access to a significantly larger market meant that large banks would not necessarily enjoy the advantages that they had in the past over smaller banks – lower operating costs, marketing advantages, larger distribution channels. Would 'bigger is better' continue to characterize an industry where electronic commerce was seemingly the future of financial transacting? In addition, because of falling regulatory barriers and the ease of reaching massive markets of consumers by merely setting up a server and making small investments in software, virtually anybody could become a competitor in the industry. Who would the new competitors be and how will Wells Fargo fight them off?
Banks were facing increasing risk that they would be competing at a disadvantage with non-banks in the not-too-distant future. These potential competitors included those organizations traditionally not involved in the banking industry, such as computer and technology firms and cable and other media companies that had a technological edge and the proper vision of electronic money to lead the future of commerce. At worst, banks risked being bypassed or left behind, at the least, banks were faced with having to play catch up to the VISAs and Microsofts of the world, who would certainly be more formidable competitors than the Digicash, Cybercash and Mondexes of the world (small niche players who had not posed a serious competitive threat). In a now infamous article, Microsoft CEO Bill Gates was quoted in a June, 1994 interview in Newsweek as saying: "Banks are dinosaurs . . . we can bypass them."
While the future seemingly held great risk and uncertainty for the banking industry as it had traditionally been known, it still had some advantages going into the electronic commerce wars of the 21st century. Of all online financial services providers, banks had an unparalleled information base and Wells, for one, intended to use this to get the right offers quickly to the right customers. In addition, banks had an intangible asset that would be very hard for competitors to break down, one that they have been building since the early 1800's - customer relationships.
Dudley and his staff therefore faced great challenges as well as great opportunities afforded by the growth and seemingly unlimited potential of the Internet. Now that customers were successfully being served in the banking sense on the Web, the "next step is to offer them a broader array of products." How would this company, so tradition-rich as an innovation leader with a reputation for superior customer service, maintain its leadership position in the industry? How would it ward off the attacks of so many competitors, large and small, from a barrage of industries, who could, at the same relatively low cost, offer the same mix of products and services just as efficiently and cheaply as Wells Fargo had for so many years?
Wells Fargo opened in 1852 as a banking and express firm, providing a wide variety of services to pioneers, including the operation of stagecoach lines, the transportation and safekeeping of gold and the delivery of the U.S. mail. Nothing is more evocative of the Old West than a stagecoach. In the heyday of overland staging, the 1850s and 60s, Wells Fargo boasted a line of 1,500 horses and 150 Concord coaches. Stagecoaching was not the sole province of Wells Fargo, nor was it Wells Fargo's only business enterprise. Nevertheless, Wells Fargo was the largest express company at that time, and stagecoaching was the backbone of the early express companies. Over one hundred years ago, its stages traveled across thousands of miles of desert, prairie, and mountain roads to deliver mail and cash.
In 1859, Wells Fargo brought the army something really worth fighting for - their paychecks. Wells Fargo agent A.W. 'Buck' Buchanan was a hero to the army in 1859. For troops stationed in Southern California, it just wouldn't have been payday without him. Buchanan's job was to pack up the $30,000 payroll, board a steamship in San Francisco, and accompany the payroll to the various military posts. This garnered great visibility and popularity for the bank.
The company's California banking business was separated from the express business in 1905. As a wartime measure in 1918, the U.S. Government nationalized the country's express companies into a single federal entity.
The Wells Fargo stagecoach became and has since continued to be a symbol of reliable service across the American West. During the Gold Rush, Wells Fargo provided regular communications, (including the first electronic transaction, by telegraph, in 1864), delivered vital goods, converted unprocessed gold into U.S. gold coins and provided checks and bank drafts. The company earned a reputation for creating services and products that would satisfy all customers, old and new. Moreover, it became a company 'the people could trust', spending large sums of money to apprehend thieves who stole from customers, stagecoaches, and bank outlets. For over 145 years the company had taken pride in coming through for its customers.
Through the 1900s, Wells Fargo had continued to offer new and innovative products to its customers, providing a full range of banking services to small business, commercial, agribusiness and real estate customers, in addition to its traditional banking services. To expand all of these services and reach previously untapped markets, the bank took on a series of acquisitions and alliances through the 1980s and into the early 90s. (See exhibit 4.) One of the most significant was a cooperative agreement reached with The Hong Kong and Shanghai Banking Corp. Ltd. in April, 1989. The two parties agreed to establish a jointly owned trade bank called Wells Fargo HSBC Trade Bank. The new bank, which opened in October 1995, was based in California and provided customers of both companies with trade finance and international banking services. It was a nationally chartered, FDIC bank that was solely devoted to international trade finance for middle-market businesses.
Soon after the opening of Wells Fargo HSBC, on April 1, 1996, Wells Fargo completed its acquisition (merger) of First Interstate Bancorp (First Interstate). This was done in order to expand the innovative product and service base offered to customers and to take advantage of the lower costs that could be achieved by the consolidated operations. In addition, it would allow Wells Fargo to gain a presence an initial presence in the Southwest. First Interstate was one of the original banks to establish its own web site in 1994. Many in the banking industry, in order to gain insight as to how companies take advantage of merger-related synergies in online banking, watched closely as this merger took shape. The Internet program of the merged bank became the model for other superregionals to follow. The merger brought Wells Fargo an additional base of approximately 50,000 online banking customers. Even before either Wells Fargo or First Interstate presented their first Internet sites, the two met to plan integration of their two Web sites.
As of 1997, Wells Fargo employed approximately 33,200 full-time employees and was the tenth largest bank holding company in the United States. The parent company was Wells Fargo and Company and its principal subsidiary was Wells Fargo Bank, N.A. Wells Fargo could be divided into six distinct lines of business – The Retail Distribution Group, The Business Banking Group, The Investment Group, The Real Estate Group, The Wholesale Products Group, and The Consumer Lending Group. (See exhibits 5 and 6 for a contribution breakout of each division and for a company structure matrix.)
Wells Fargo's overall objective in 1996 was to "have the most functionality available to the most customers possible." The bank had continued to provide personal, responsive service by connecting its customers to essential financial services 24 hours a day - by ATM, phone, personal computer or through a growing network of traditional and supermarket branches. The company was known for its efficiency, and it passed the rewards along to its customers in the form of innovative products and services. It operated one of the largest and busiest consumer banking businesses in the United States, serving as banker to more than 10 million households in the 10 Western states. The bank provided a retail network of more than 1,900 staffed service outlets, 4,300 round-the-clock Wells Fargo Express ATMs, a 24 hour telephone banking service, and a popular online banking service.
Wells Fargo was also one of the nation's leading managers and administrators of mutual fund and trust assets. In addition to managing more than $19 billion in mutual funds, the bank maintained personal and institutional trust assets of approximately $300 billion.
In June 1996, Wells Fargo added two other services to meet the needs of its customers. First, it added bill payment capabilities to its Internet site. This service was induced by consumers who demanded to use the Internet to pay bills. The cost of this service was $5 per month. The bill payments could then be downloaded into a personal financial software package like Microsoft's Money or Intuit's Quicken. Wells Fargo also implemented a system where customers could apply for money market mutual fund accounts through the Internet.
In February 1997, ComputerWorld magazine listed Wells Fargo along with four other banks (Bank of America Corp., Barnett Banks, Inc., First Union Corp., and KeyCorp.) in its Premier 100 list for their innovative Internet applications and Web sites. According to Computer World Magazine, Wells Fargo's efforts in online banking proved that it "has an understanding of what it takes to attract customers to its site." (ComputerWorld magazine) Wells Fargo was known along with Bank of America for its innovative work in building online branches on the Web.
The Regulatory Environment
In recent years, some of the long-standing government regulations in the banking environment began to fall. In 1994, the Riegle–Neal Interstate Banking and Branching Efficiency Act was passed. This act allowed banks to transact in interstate branching. The Riegle-Neal act led to an era of widespread branch banking, changing the landscape and structure of the banking industry throughout the United States. Immediately upon the passage of this act, banks began to consolidate in order to take advantage of the almost limitless opportunities. Widespread branching networks, as well as regional networks supported by affiliated bank relationships, evolved across the country.
In addition to the passage of the Riegle–Neal Interstate Banking and Branching Efficiency Act, another breakthrough legislation change was the loosening of Section 20 of the Glass-Steagall Act. Section 20, originally created after the stock market crash of 1929, prohibited the affiliation of Federal Reserve member banks and investment firms engaged in dealing or underwriting securities. Beginning in 1987, the Federal Reserve slowly began to remove the regulation. As of 1997, banks were allowed to derive 25% of their revenues from securities underwriting.
Impact of Technology
Traditionally, banks had been early adopters of technology due to the large number of routine transactions that they processed. In addition to their own internal banking systems, most banks also maintained links to credit card processing systems, ATM systems, interbank check clearance systems and a number of links to their customers. During the late 1980s and the early 1990s information technology and telecommunications technology began to converge. This convergence enabled banks to centralize services and take advantage of new delivery channels such as telephone banking and the Internet. Wells Fargo's experience in Texas provided good example of the opportunities that technology produced.
In 1997, the Texas Legislature allowed banks to offer home equity loans for the first time. Previously, this product had been allowed in other states but not in Texas, one of the nation's most populous states. Wells Fargo wanted to take advantage of the change in legislation. They decided the most efficient way to capture the home equity lending market was to sell this product over the phone. This enabled Wells Fargo to avoid the problem of performing training for all applicable branch personnel on the new product. Wells Fargo set up a phone center in Pueblo, Colorado to take these calls. Phone center personnel were bilingual. When a call came into the call center, the agent receiving the call recorded all the customer's information in a computer system whose processing center was in Bozeman, Montana. Since the sales prices of homes in Texas were not made available to the public, Wells Fargo's system used the Texas Tax Assessor Database to determine the value of the house. Other credit checks were performed and the system ensured that the new loan plus existing loans on the house did not total more than 80% of the value of the house (another Texas regulation). With these checks performed, the system produced a preliminary approval. This whole process took place in 20 seconds and the customer was informed during his or her phone call. Contracts for the loan were issued from Wells Fargo's existing fulfillment center in Cincinnati and the loans were disbursed in Texas. Martin VanDerSchouw, Assistant Vice President of Strategic Analysis, proudly stated that building the infrastructure for this opportunity took only 57 days. Initial data available at the time that the case was written indicated that Wells Fargo had captured more than 50% of the total market.
Financial Services Trends
The Financial Services Industry under went a number of fundamental changes during the 1990's. Major changes included:
The deregulation that swept the financial services industry significantly changed the environment in which banks operate. The relaxation of interstate banking regulations opened the door for mergers and acquisitions not previously possible. Many banks dreamed of serving customers from coast to coast. The cost of building new branches, recruiting new personnel and winning new customers made mergers a much more attractive method of expanding their retail and commercial banking operations than classical expansion. Since 1994 a number of major mergers and acquisitions occurred. In the Midwest, Chicago's largest bank, First Chicago Corporation merged with the National Bank of Detroit to form First Chicago NBD. In a year's time, NationsBank, the result of a number of previous mergers, acquired Boatmen's Bank, a large northeastern bank and Barnett Bank, a large Florida Bank. Indicative of the frenzy in the industry, Core States Bank in Cleveland made an offer to buy Mellon Bank of Pittsburgh. A few days after Mellon Bank turned down the Core States offer, First Union of Charlotte stepped in and bought Core States in the largest banking transaction in U.S. history. Wells Fargo was also part of this trend; they acquired First Interstate bank in 1994, a move which helped expand their presence in the Southwestern United States.
The trend towards consolidation was not limited to retail and commercial banking. Relaxation of Glass-Steagall's Section 20 enabled banks to enter the investment banking sector. Large highly capitalized banks began to acquire investment banks in a rush to provide 'one-stop' banking services to their large corporate clients. A number of Wells Fargo's closest competitors were involved in this activity. Cross-street rival Bank of America acquired Robertsen Stephens. NationsBank acquired San Francisco based Montgomery Securities and First Union bought Wheat Securities. At the end of 1997, Wells Fargo had not made any investment banking acquisitions and remained a retail and commercial bank.
Increasing customer sophistication and new electronic banking channels enabled customers to perform more transactions without interacting with banking personnel. In retail markets this was consistent with the bank's strategy. A 1996 Dove Associates survey found that the average branch transaction cost over $1.10. The same transaction done by phone cost approximately $0.40 and the cost dropped to $0.03 if the transaction was done over the Internet. In order to encourage retail customers to use these less expensive channels, banks followed a number of different strategies. First Chicago NBD was the first to start charging customers to use tellers instead of ATMs. Bank of America experimented with using greeters to guide banking customers to ATMs for simple transactions. Citibank launched people-less branches that contained only ATMs and banking kiosks. Kiosks were modified automated tellers with phones that could be used to connect the customer directly with a bank representative. In 1995, the first all-Internet bank, Security First National Bank, opened for business.
This trend was also extended to the securities business. Charles Schwab, the country's largest discount broker, allowed customers to perform a variety of equity and mutual fund trades through the telephone or the Internet. New all-Internet discount brokers also emerged to vie for customer's business, including E-Trade and Sure Trade.
From the banks' perspective, the products that most retail customers used were commodity products. Simple deposit and loan products such as checking accounts, savings accounts, certificates of deposit, personal loans and most mortgage loans were all standardized. Regardless of whether the customer used an electronic channel or a teller, all transactions for deposit accounts were processed electronically. Loan accounts required a credit scoring process to assess the risk of the applicant, but by 1997 even most of this process was performed using information systems. The marginal cost of a transaction within the bank was extremely low. Banks relied on customer information systems to consolidate the various products that a customer owned into a single statement. The challenge for banks was to make the customer feel that the products he or she was using were customized to their needs, while processing these products as commodities. Wealthy individuals and corporations usually received more customized service from banks through their private banking or small business divisions.
The rapid growth in ATMs, telephone banking and online banking enabled customers to use banking services anytime and anywhere. This recognition was first exploited by Wells Fargo, who began aggressively marketing "7/24 Banking" (7 days a week, 24 hours a day) in the late 1980s ("Branch Banking is Not a Dinosaur," McKinsey Quarterly, 1996, Number 1). The availability of banking services and products to customers around the globe meant that banks had access to a larger customer base than ever before. It also meant they faced more competitors than ever before. Citibank, with over 3,400 offices in 97 countries was the most global of the U.S. banks. Citibank served both commercial and retail customers around the world. Bank of America also had a growing international presence, with operations in 38 countries. The IMF bail-out of several Asian countries in 1997 and the European Monetary Union schedule for 1999 were both expected to further encourage the liberalization of financial services.
Wells Fargo's Strategy
Wells Fargo CEO, Paul Hazen, called delivery of anytime, anywhere service a "must-do" priority for Wells Fargo. Hazen's strategy for Wells Fargo included a focus on customer service and cost control. To accomplish these two seemingly conflicting goals, Hazen relied on Wells Fargo's ability to create innovative delivery channels that were more convenient for the customer and less expensive for the bank.
"The trick is to show customers the broad range of choice and pricing they have for interacting with the bank. In some cases, they'll choose the personalized services we offer, in our Investment Group, for example. In others they may benefit from alternative, lower-cost channels such as telephone, ATM or Online Banking."
The announcement of the separate Online Financial Services Business Group as part of Wells Fargo's reorganization for the 21st century demonstrated the key role that innovative delivery channels to played in accomplishing Wells Fargo's strategy. Executive Vice President of the Online Financial Services Group Dudley Nigg said, "The bank will do everything we can over the next 4 or 5 years to make all transactions electronic." By moving transactions into the lower cost electronic channels, the bank expected dramatic cost savings. In 1993 before the merger, Wells Fargo and First Interstate had a total of 1200 brick and mortar branches. By 1996 the combined bank had reduced this number closer to 400. Industry critics speculated that electronic delivery channels would further distance the branch from the customer. The cost savings also impacted stakeholder relations and caused bad publicity. John Mcquinn, a San Francisco-based lawyer who represented a number of ex-Wells Fargo Branch Managers affected by branch closings, said "Bank of America and Wells are very good at selling services, and not so good at delivering them."
The strategy had other detractors as well. In his book The Bankers, famed industry observer Martin Mayer noted that the interesting thing about the Wells Fargo strategy was its rejection of growth as a strategy. Mayer contended that Wells Fargo's profit increases were expected to come from cutting the costs of existing business. Mayer quoted Wells Fargo President William Zuendt, who said "As our assets shrink, our labor base shrinks and our costs shrink, we will simply be running at higher octane". Mayer compared Wells Fargo to a smaller bank, saying that the smaller bank was using technology to make standard transactions cheaper for the customer while working to sell them more customized services. In contrast, Mayer said that Wells Fargo was using technology to standardize its service offering in the hope of selling these products to customers for more than they cost.
Employees & Organization
The bank liked to initiate employees into the 'Wells Fargo Way.' The 'Way' had five main components:
Wells Fargo management felt that these principles were central to growing the bank in the future. Martin VanDerSchouw expressed that Wells Fargo's ability to innovate was a result of their corporate culture. He emphasized that each business unit was run as if it were a separate organization, which spurred entrepreneurship and innovation. VanDerSchouw said, "Most innovation comes out of the business unit and initially the hurdles to develop these ideas are fairly low; however, when a group does roll-out an idea, there is some fairly strong review that focuses on shareholder value." .VanDerSchouw did note that Wells Fargo's location in San Francisco was both an advantage and a disadvantage. Although there were a lot of technically skilled programmers and engineers in the area, the recent economic growth had intensified competition for resources.
When asked his opinion on Wells Fargo's leadership in banking innovation, VanDerSchouw said:
"I personally believe Wells Fargo is a leader in the industry because we take a very different approach to the industry. I look at us as a technology company who happens to be in financial services. Our core goal is to provide shareholder value by providing consistent, solid customer experience on-time, every time. It helps us to have this approach a great deal because of our proximity to the Silicon Valley where a great deal of innovation occurs. Finally, we are not traditional bankers. We dress business casual and probably have a lot fewer MBAs and a lot more PhDs and other degrees than most other financial organizations. To put it bluntly, we just look at the world differently."
Wells Fargo's Current Innovations
Wells Fargo had several innovations in progress in 1997, including Mondex, Online Banking and WebTV, Business Centers, and Virtual Stores.
In 1996 Wells Fargo, Chase Manhattan, AT&T, Dean Witter Discover, First Chicago NBD, Mastercard and Michigan National Bank announced the formation of Mondex USA. Mondex's goal was to roll out an electronic-cash card to consumers nationwide by mid-1998. Mondex was one of a number of competitors trying to create a standard for these 'smart cards'. The cards resembled a credit card, but included a computer chip. The chip could be loaded with cash at 'cashless ATMs' and then used at merchants whose card scanners would debit the electronic cash from the chip when purchases were made. These 'cash purses' were expected to become extremely popular with customers and merchants. Similar to credit cards, customers would not have to worry about holding cash; however, Smart cards had the added advantage that because the cash was essentially electronic, it could be exchange anonymously. In addition, the Mondex technology allowed the card carrier to transfer money to other card carriers to pay small personal debts. This feature was unique to the Mondex technology and was expected to give it the lead over other smart card technologies. Wells Fargo also considered Mondex to be 'a natural for small Internet transactions' because it was an electronic form of cash.
Online Banking and Web TV
Wells Fargo had been a leader in electronic banking since its entry into PC-Based Home Banking in 1989. It began offering Internet services in 1995. Since then, Wells Fargo had been recognized as a top provider in Web services. As of 1996, 11% of Wells Fargo's customers accounted for 70% of its revenue. The bank believed Internet customers were part of this 11%. Internet banking customers tended to be younger and more educated. As such they represented the customers of the future which many banks were competing to attract.
By mid-1997, Wells Fargo's Web site recorded 450,000 visits per week and customers conducted 12,000 banking sessions per day. This meant that Internet customers were visiting the site an average of once every ten days. This segment was expected to double every 6 months.
The goal of the Wells Fargo Online Financial Services Business Group was to continue to expand the number of products and services offered over the Internet. By the middle of 1997, customers could access and move money between checking, savings, market-rate, money market, credit card accounts, equity line and other lines of credit. They could apply for credit and other new accounts and buy traveler's checks and foreign currency. In addition, they could download account balances and history into Quicken, Microsoft Money and other spreadsheet software.
The growth of the Internet as an entertainment medium and the convergence of technology and communications had let to the creation of WebTV. The idea behind WebTV was that households could access all the entertainment services they required through their television. This included regular television and cable, movies on demand and Internet services. WebTV was also expected to appeal to people who did not currently have computers in their homes. To access WebTV, customers would need to buy a set-top box that would be hooked up to their TVs. These set-top boxes were predicted to cost between $200 and $600 a price significantly lower than the cheapest desktop computers available at the time. In addition WebTV sites were designed to be more user friendly and not require knowledge of existing Web browsers, DNS (Web site) addresses or file transfer protocols.
WebTV had both proponents and detractors. Proponents felt that the lower cost and ease of use would open the Internet up to a wide range of customers who had never used the Web before. Critics argued that the people who were interested in the Internet already had access through their computers. They also argued that without a full keyboard and other capabilities, WebTV would be very limited in its applications. There was probably some truth to both arguments. Nonetheless, WebTV was expected to have more than 250,000 users by the end of 1997. American Banker magazine cited initiatives by Wells Fargo and a handful of other banks to redesign their Internet sites for WebTV.
In 1997, Wells Fargo introduced Business Centers. These centers catered to small businesses through a mixture of personnel and electronic services. The centers included special business ATMs that could accept bagged deposits (deposits of currency and coin taken from the cash registers of merchants) in a secured area, 24 hours a day. The Business Center also contained kiosks with direct phone connections to Wells Fargo's National Business Banking Center. Wells Fargo planned to open 50 Business Centers by the end of 1997.
In 1997 Wells Fargo, Microsoft, Digital Equipment Corporation (DEC) and VeriFone signed a unique partnership to sell electronic commerce solutions to small and medium sized businesses that wished to sell goods over the Internet. The solution included the design of online catalogs and electronic storefronts for Wells Fargo business customers. The bank provided Internet credit card clearing service using the VeriFone merchant software. All transactions were processed through the customers' Wells Fargo bank account. The partnership used the Wells Fargo's sales force since this sales team had established relationships with retailers. Michelle Banaugh, Vice President of Marketing for Wells Fargo's Electronic Payment Solutions Group, said, "We're selling to our own customers who want to expand their position on the Internet. This is also a great way for us to generate new sales with retailers".
A small retailer would pay about $48,000 for an Internet server and start-up services. A medium to large size merchant would pay anywhere from $60,000 to $140,000. Merchants were expected to gain from additional sales and savings from avoiding hard copy catalog costs. The solution was expected to take 30 days to install and test. Industry observers were impressed. Bill Burnham, senior analyst for Piper Jaffray, said in Financial Net News, "Wells is really grabbing the bull by the horns and making transactions happen. They're acquiring the whole transaction, getting the profits, while providing extra banking services."
Online Banking Safety Concerns
Although it online transactions were just as safe as those completed by mail, telephone, or in person, consumers were concerned about security, a fear that could limit the success of Internet banking. Many consumers feared that they would be vulnerable to Internet fraud if they decided to use the Internet as a means to banking. Furthermore, in a recent survey, Intuit, the home PC software producer best known for its popular Quicken software package, found that the number one fear of consumers who considered using the Internet for banking was 'cyber fraud'.
There are three tiers on which online security needs to be maintained: (See Exhibit 7)
Security between the customer's PC and the Internet server was handled through a security protocol called Secure Sockets Layer (SSL). SSL was a security feature standardized by Netscape, the popular browser manufacturer. The main function of SSL was to provide data encryption. Additionally, SSL provided a security handshake used to introduce the connection between the customer's PC and the Internet client/server. Information between the Internet banking server and the banking customer database was provided by internal banking controls. The separation of the Internet banking server and the banking customer database in itself provided an additional security feature. Finally, a unique account number/password combination provided a third layer of protection that guarded against direct logon to the customer's account.
Netscape was in the process of adding advanced security options to their current browser, Netscape Navigator. Additionally, the University of Southern California was developing software that would allow banks and their customers to send electronically encrypted checks over the Internet. Finally, in order to ease consumer fears about Internet transactions, many credit card companies, such as Visa and Master Card, began to advertise the fact that protection against fraud was guaranteed regardless of the mode by which the fraud took place.
Wells Fargo faced a number of traditional and non-traditional competitors in delivering innovative financial products and services. Martin VanDerSchouw noted that "Actually our main competitors to delivery innovation in the financial arena are not banks….only a very few banks are able to compete currently in this arena."
Bank of America
Bank of America, also headquartered in San Francisco, had been a direct competitor of Wells Fargo for over a century. In 1994, they chose to include in their line of products a Web site that enabled customers to perform a variety of both personal and business banking functions. The Web site included access to over 2,200 HTML pages of information. Among the services provided were listings of bank-owned properties for sale, listings of ATM branches and locations in 11 states, lending services for automobile dealers, and merchant services for business banking. Home banking was available to users with access to Netscape Secure, America Online, or Managing Your Money. Customers also had the option of "building" their own banks through setting up a personal Web page. The user would enter in his or her interests, and the bank would automatically send and update information to the user's Web page. In providing this service, Bank of America was able to acquire crucial demographic information about the online banking customers through the personal profiles that they had created in order to set up their Web pages. By June 1997, Bank of America's web site received 150,000 "hits" per day.
Bank of America's Internet vision was best summarized by Jeff Hershberger, spokesman for the interactive banking division:
(Bank of America's goal is) "…to provide the entire array of our services and offer a virtual bank branch in cyberspace…We want to offer customers multiple options to meeting their needs…Our customers will be able to build their own banks."
Citibank had developed online banking in 1984 with its Direct Access program. Their Internet banking service was unveiled in 1997. Direct Access 6.1, as the new service was known, offered basic banking services as well as the ability to buy and sell securities and mutual funds, a service previously prohibited by Section 20 of the Glass-Steagall Act. Citibank offered this service in response to requests by customers, 92% of whom reportedly used the Internet. Direct Access allowed Citibank to circumvent ownership regulations in countries such as Brazil and India in order to expand their customer base.
Citibank hired The Mining Company to build its Web site into a medium by which customers could access not only information about Citibank's services but also information around any area of interest. The agreement prohibited The Mining Company from collaborating with any other financial institutions during its 2 ˝ year relationship with Citibank. Additionally, Citibank recruited Josh Grotstein away from Prodigy to head its Internet development.
Security First Network Bank (SFNB)
Security First Network Bank, opened in October 1995, was the first bank to exist entirely on the Internet and amassed more than $40 million in assets in less than two years. It spun off a subsidiary, Five Paces Software, that developed the software enabling SFNB to offer basic online banking services. The software was licensed to other financial institutions. Regional banks such as Huntington Bancshares of Columbus, Ohio and National Bank of Commerce of Memphis signed contracts with Five Paces to build their Web pages. By the middle of 1997, Five Paces was working with more than 30 financial institution clients. Five Paces could develop a fully-secured Web page for as little as $25,000, an option that appealed to many smaller banks who were more price-sensitive but wanted to follow the larger banks' lead in establishing a presence on the Internet. In cyberspace, the local banks' smaller asset base and smaller traditional branch network was less of an issue.
Formed in September 1996, Integrion was a consortium led by IBM and fifteen of the nation's largest banks. These banks served 60 million households (60% of total American households) and held more than $1 trillion in assets. In many ways, Integrion resembled the system of regional ATM networks in the US. Member banks included the following:
|ABN AMROMichigan National|
|Banc One||First Bank System||NationsBank|
|Bank of America||First Chicago NBD||PNC Bank|
|Barnett Banks||Key Corp.||Comerica|
|Fleet Financial Group||Mellon Bank||Washington Mutual|
The consortium was founded to address the threat of software companies such as Microsoft and Intuit who already offered online banking software to financial institutions. Intuit, in particular, posed a threat because of its ability to leverage its wide name recognition as the creator of Quicken and TurboTax. Some 63% of the banks that offered online banking in 1996 offered basic home banking services that could be accessed through personal financial management (PFM) packages such as Quicken. The Integrion member banks feared that software companies would eventually come between banks and their customers and also that these software companies, rather than the financial institutions themselves, would be responsible for setting the standards for online banking. According to Hugh L. McColl, Jr., the chairman of NationsBank,
"The banking industry is responding to the challenge laid down to us by the technology industry…Had this system been built by one of our nonbank competitors, we ultimately would be reduced to commodity providers, and our own brands would disappear."
In order to gain widespread acceptance for the new standard, IBM pledged to keep the network open (i.e. to maintain an open standard) to allow other banks to join if they so chose. In addition, IBM pledged to publish software standards so that other companies would be able to develop products based on those standards. Furthermore, Integrion hoped to prevent the development of competing standards by creating a link to Open Financial Exchange (OFX), a specification under development by Microsoft, Intuit, and CheckFree.
Rather than create branded software that linked users to the Internet or to the banks' Web servers that would have to be customized to fit each financial institution, Integrion's purpose was to focus on the "middleware" that would aid banks in handling electronic transactions. The processing of these transactions would be handled by IBM and other vendors, while banks would pay a per transaction fee. Customers would be able to conduct transactions using both the bank's World Wide Web page and their choice of personal financial management software. Integrion's program would then link the consumers to the banks' networks that in turn would conduct these transactions.
The alliance appeared to be a mutually beneficial. With Internet security an increasingly important issue as electronic commerce began to soar, Integrion promoted itself as more secure than the Internet because of its use of the IBM Global Network (IGN). Plans included offering a private access network for those who wanted one. By pairing with many of the country's largest banks, IBM stood to earn a fortune leasing IGN lines and selling systems integration and consulting services. In IBM, the banks found access to the IBM Global Network, the world's largest intranet. And since financial institutions were IBM's largest group of customers, both IBM and the member banks shared a common interest in fending off the threat of Microsoft and Intuit.
Integrion unveiled its main product, the Gold Standard, in March 1994. The Gold Standard was a messaging system that linked a bank's network internally and also to other networks such as the Internet. The open-messaging system allowed customers to communicate with banks and vendors via dialup and Internet.
Integrion purchased Visa Interactive, Visa's online banking subsidiary, in 1997. The agreement allowed Visa to maintain the rights to ePay, its bill payment system, but the rights to used ePay were transferred to Integrion, who made it the "preferred" engine.
Citicorp and First Union Corporation each purchased an interest in Integrion in September, 1997.
Open Financial Exchange (OFX)
Open Financial Exchange was a joint project that Microsoft, Intuit and CheckFree announced in January 1997. It enabled users of personal finance software to download account data and pay bills via the Internet.
Although the industry raised concerns concerning the compatibility of Integrion's and OFX's standards, both parties claimed that the fear of dual standards was exaggerated, since each group concentrated on a different channel of Internet banking. OFX perceived its strength as addressing communications between a user's desktop PC and a bank's Web server. Integrion's focus was on the messaging between the bank's Web server and its accounting systems. Chris Stevens, an electronic commerce analyst at the Aberdeen Group, argued that the two products were complementary and could peacefully coexist:
"The majority of banks are still using mainframes and database systems that require IBM services and support…By adopting compatible standards, IBM, Microsoft, and Intuit can focus on their core businesses."
Strengths of OFX included access to the vast majority of PFM software users (Quicken and Money) and CheckFree's dominance in payments processing services. CheckFree's share of the payments processing market was further increased by its purchase of Intuit Services Corporation, a subsidiary of Intuit, for $228 million in 1996. By joining forces, Intuit could shed its subsidiary and focus on its bank relations, and CheckFree increased its share of the payments processing to 85 percent.
Jack Henry and Associates
Another atypical competitor in the online banking industry was Jack Henry and Associates (JHA). JHA was an integrated service provider of information solutions to banks and financial institutions. One of their primary service offerings was the development online banking systems for small financial institutions. According to NETBanker, 10 out of 46 banks defined as "true Internet banks" had online banking services provided by JHA. Most of these banks had assets under $300 million. As of 1997, JHA had 1260 customers around the world.
(See Exhibit 8 for other, non-traditional competitors.)
The Challenges Ahead
Sitting in his office, Dudley Nigg contemplated the challenges ahead for his division and the bank as a whole. He firmly believed in the bank's strategy of offering products and services to customers anytime and anywhere. He also knew the Internet would be one of the most effective ways of doing this, but he saw the downside as well.
The widespread use of the Internet was attracting competitors big and small. Many incentives were driving banks toward the Internet, such as potentially lower transaction costs and more profitable customers. The rise of online and Internet banking created a new arena through which not only banks, but other nontraditional competitors could enter to compete against Wells Fargo's Internet banking solutions. (See Exhibit 9 for an example of http://www.wellsfargo.com/.) For instance, banks such as Citibank and Bank of America offered their own Internet banking sites. Other firms, such as Intuit and Meca, teamed up with Microsoft, in order to develop a competing standard to the one developed by IBM and its Integrion consortium of banks. For the first time ever, Wells Fargo's competitors also included smaller, regional banks, who were now able to set up Internet banking sites for as little as $25,000.
In addition to the new competitors, Nigg worried about the speed of innovation. New products and services developed for electronic channels had typically been easy to imitate. Wells Fargo had, thus far, stayed ahead of the competition, but with so many new online competitors he knew this would become more and more difficult.
The Internet also posed the problem of further separating
the bank from its customer. Customer relationships with the bank became strictly
transactional in nature when online banking was used. For so many years, Wells
Fargo had counted on personal relationships with its customers for competitive
advantage; did the Internet make these relationships less meaningful and
therefore more transitory? Nigg considered Mayer's criticism of the
Wells Fargo strategy and the implications of producing standardized commodity-like products. His challenge was to reverse this argument and find a way to use the Internet to build relationships.
In addition to these challenges, Nigg faced the complexity of managing the myriad of partnerships that Wells Fargo had entered to address the electronic banking environment. He wondered about the long-term implications of these alliances for the bank.
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