Virtual financial services does appear to be the buzz phrase of the moment. Management consultants, never slow to recognise a selling opportunity when they see one, have latched onto the concept with a vengeance, and this summer saw the launch of a series of reports into banking in the future.
At first glance, the future looks a hostile place. “Virtualisation is the removal of constraints of time, place and form, and is made possible by the convergence of computing, telecommunications and visual media … Virtualisation is happening in many areas of commerce, but it is particularly evident in the financial services industry with its proliferation of virtual products and services.” This, from Andersen Consulting, did appear to point to an unfriendly future of cyber-age superhighway banking, of virtual reality headsets and techno-toys.
The words come from an Andersens booklet produced to help the firm sell its Virtual Financial Services Model. This is a “sophisticated new tool” that “helps clients explore a number of plausible futures, determine a sensible strategic direction, and define the specific actions they need to take.” Rather implausibly, according to the sales pitch, it will help companies “migrate to their preferred position” and without it, firms run the risk of squandering money by investing in the wrong initiatives.
Rival Price Waterhouse’s report into the same subject contains some equally impressive jargon, but PW is missing a trick – it is selling its research work, but doesn’t appear to have a “sophisticated new tool” to sell alongside it.
It is easy to poke fun at consultants and the crazy jargon they use to sell their expertise. Their customers are so bombarded with conflicting forecasts and products that it is not surprising they fall for the sales pitch and put their future strategies in the hands of something as ridiculous as a virtual financial services model.
To be fair, the Price Waterhouse report and a Financial Times article about the same subject are pretty sensible documents which outline the recent changes in the banking and financial services industry and attempt to do some crystal ball gazing.
Perhaps most disappointing is the discovery that, despite the futuristic label, virtual banking is little more than consultant-speak for telephone and computer banking. But this is hardly news and yet another report into telephone banking is not nearly as eye-catching as one into “the challenge of virtual banking in the new millennium”, which is Price Waterhouse’s title.
With the exception of Midland Bank and TSB, banks were slow to understand the benefits of telephone banking. Yet, according to research by Datamonitor, there are 125,000 new telephone bank users in the UK every month. The firm estimates 30% of the UK population will be using telephone banking by the year 2000.
An Ernst & Young speaker at a recent conference in London explained the problem well. He said banks’ reaction to the prospect of change and to the concept of virtual banking can be easily predicted. Their first reaction, as it was with telephone banking, is denial. “It is too way out, it can never replace traditional branch banking, our customers will not be interested.” Next comes gradual acceptance of a new concept through a pilot scheme and the fear created by the realisation that competitors might be stealing a march by being first into the market. After the amazing and unexpected success of the pilot, the new service is integrated into the product range and is quickly accepted. From then on it is all part of business as usual, with more than one bank attempting to claim that it was first to recognise the benefits and offer the best service.
According to the FT, “the user interface for virtual financial services will become increasingly virtual”. Technology is becoming faster, more reliable and more powerful. It costs less to run a virtual bank – because in theory you do not need bank branches. Throughout retail banking there are already pilot schemes in place for home banking via PC, banking by Internet and interactive television to delivering banking services using cable TV. Banks – notably Barclays – are also investigating ways of offering customers simple banking products, such as agreeing a loan via cashpoint machines.
Banks are allying themselves with technology companies – they can no longer afford to go it alone – as Price Waterhouse points out, NatWest’s interactive television trial is driven not by NatWest, but by BT and the Cambridge Consortium. It is being offered as part of a wider service than simply banking.
Denigrating virtual banking as merely telephone and computer banking is perhaps a little unreasonable. The possible rewards brought about by the combination of telephone and computer banking are great indeed for the banks and also for their customers. But technology is developing at a faster rate than the willingness of people to use it.
Price Waterhouse ends its report with a checklist of ten “key questions” for bank chief executives and the following wise words: “In separating the winners from the losers, effective leadership will be the decisive factor.”
Banks customers have become familiar with technology such as payment cards, cashpoints and, increasingly, telephone banking. They must continue to stay on top of technological developments. Financial services technology is developing at an ever-increasing pace. Then they have to weed out technologies that are unlikely to be of interest or use to their customers. That done, they must work out when customers will be ready to use developing new technologies, which customer segments will make best use of them and whether this will be profitable business. Banks must not rush customers into using a technology they are not ready for.
While all this is going on, banks are evolving and must work out what to do with their branches, retrain staff, become more customer friendly and manage the necessary change in banking culture. And as they go through the process of reinventing themselves, they are also facing more competition than at any time in the past, never quite sure where the next competitive threat will come from. Banks and their management consultant advisers realise the future does not hold room for all the existing players – consolidation in the industry is a fact of life. In order to be among the survivors, banks face a massive juggling act over the coming years.
Patricia Tehan is banking correspondent of The Times.