Joint Effort?

By Rob Luke

To keep bank-led technology alliances from foundering, members need to organize themselves more like profit-centered ventures and less like utilities.

When is a consortium not a consortium? Answer: when it involves the banking industry and is called a "joint venture" instead. Banks have had so many disappointments with technology development consortiums in recent years that new ones are usually called joint ventures. Whether the cosmetic change in these arrangements can be matched by any performance improvements remains to be seen.

Whatever label they use, banks unquestionably need to pool their efforts on certain major initiatives. It is simply impossible for even the largest organizations to invest in all technologies that experts deem critical for survival in the years ahead. Online banking, electronic bill payment, check imaging: major banks need to stake a position in all these areas. But nobody can shoulder the costs alone.

To solve the developmental problem, banks have been banding together in groups with progressive monikers such as Integrion, Spectrum, Identrus and Viewpointe. The usual pattern in these groups is that they are dominated by a few large players, who then link up with chosen technology vendors to develop a bank-owned and -branded solution to a selected technological issue.

Unfortunately, the result has often been political infighting between the members and an excruciatingly slow pace in getting products to market. Integrion Financial Network, formed in December 1996 to develop technical standards and infrastructure for home banking, finally collapsed under its own weight last year.

Newer ventures, such as Viewpointe Archive Services, are trying to adopt a more profit-oriented perspective, hence their positioning as joint ventures rather than consortiums. They're creating corporate-style governing structures featuring streamlined boards and business plans with timetables for reaching targets in membership growth and profitability. "When the venture is for-profit, the voices of all of the members must be heard," says Viewpointe project manager Robert Krug, who is also a vice president at Chase Manhattan Corp.

Another change from past consortiums involves the relationship with technology vendors. From the outset, Integrion tied its fortunes to a product developed by IBM Corp. Some members felt uncomfortable with that and experimented with other solutions. By contrast, Identrus, which was formed to develop online authentication solutions, allows members to build their own technology platforms, leaving to the consortium the job of linking those platforms. Future consortiums are likely to follow this trend of cooperating only on "behind-the-scenes" infrastructure and technical standards, leaving banks free to develop their own branded customer contact and service platforms with other vendors.

Time will tell whether these changes enhance the durability of the newer bank alliances. Spectrum and Identrus, two of the more recent ventures, are already being criticized in some quarters for slowness-to-market, just as Integrion was a few years previously. And debate continues regarding the proper governing structure for these consortiums. A small board dominated by a few banks creates suspicion among other alliance members; a larger board, however, tends to become unwieldy and bog down decision-making.

Finding the right balance between participation and efficiency is the critical issue going forward. And the stakes are high for member banks and the industry at large. If Spectrum and Identrus go the way of Integrion, the sponsoring banks lose all the energy and resources they devoted to these projects. Worse, a consortium's failure to solve critical standards and infrastructure problems leaves a clear path for nonbank technology companies to invade that part of the e-commerce world.

Some bankers thus argue that they simply have no choice but to back these consortiums. "The fact is that banks can't do it by themselves any more," says Donald MacLeod, executive vice president and head of First Union Corp.'s eVentures Group in Charlotte, N.C., and a Spectrum board member. "Such joint ventures work in other industries, so why not here?"

Checkered History

Integrion is usually held up as a model for what can go wrong with bank-led consortiums. It was founded four years ago by 17 member banks as an "industry utility" operating on an IBM Internet banking platform.

Over the next two years, Integrion was slow to deploy this platform, which industry sources attributed partially to its unwieldy governance — every member had a seat on the board — and partly to competition from more nimble competitors, most notably Microsoft Corp. As members defected and officers departed, the consortium finally dissolved in March 2000. The three members who had actually deployed Integrion's Internet banking platform soon abandoned it.

Although Integrion is the most prominent example of a flawed consortium, there have been others, such as Bankwire and EDIBanx. These two alliances were established in the mid-'90s to facilitate online wire transfers between banks and their corporate customers, and both proved short-lived. Mark Sievewright, president and chief executive of Needham, Mass.-based TowerGroup, attributes their failure to excessive capital demands on member banks.

Despite the checkered history, banks continue trying to make these alliances work. New technologies spawned by the online revolution are being introduced at a bewildering rate. But few of them can become commercially viable unless the players agree on technical standards and communication protocols. "Customers want e-commerce to work the same way every time," says Sievewright. "To achieve that in a multi-bank world, you've got to have commonality of standards and infrastructure, and that's what's driving the formation of these ventures."

To be sure, there are a few successful models out there to spur bankers on. The credit card is ubiquitous today because banks were able to cooperate in the Visa and MasterCard associations, which agreed on common platforms and systems back in the 1960s. The same is true for automated teller machines in the early 1980s. The fact that customers of any bank today enjoy universal acceptance of their credit and ATM cards stands as a monument to successful bank cooperation.

Hoping to achieve the same results in e-commerce, banks keep forming consortiums. Four new ones that emerged recently are Spectrum, Identrus, Viewpointe and FinancialSettlementMatrix.com. Spectrum and Identrus are quite large, with 18 and 30 members respectively. Viewpointe currently is backed by just three companies, Bank of America Corp., Chase Manhattan Corp. and IBM, but is hoping to enlist more banks among the 50 largest over the next few years. FSM is comprised of two banks, Wells Fargo & Co. and Citigroup Inc., who teamed up with three technology vendors to try to harmonize electronic transactions between business-to-business financial services Web sites.

Although each of these consortiums is focused on a different problem, they share the goal of creating a bank-led solution. Spectrum, for example, was founded in 1999 to present a bank-oriented alternative to CheckFree Corp.'s control of the electronic billing market. Although Atlanta-based CheckFree already dominates bill payment, Spectrum's lead institutions — Wells Fargo, Chase and First Union — are trying to give banks a strong role in the electronic presentment of bills.

The problem has been a lack of unity. Some of the largest banks, such as Bank of America and Citigroup, have declined to hop aboard the Spectrum bandwagon, although FleetBoston Financial Group recently announced it would join as both a user and an equity investor. Bank of America, meanwhile, recently became a major investor and participant in CheckFree.

Unwieldy Structures

Consortium members are required to agree on decisions aimed at benefiting the group as a whole rather than certain individual members, sometimes even to the point of agreeing on a single technology provider. But that runs counter to the competitive urge for technological advantage. The recent spate of big mergers has only exacerbated this competition by bringing some major institutions, for the first time, into a direct fight for market share in the same geographic regions.

George Barto, research director for Gartner in Stamford, Conn., draws an analogy to the United Nations. "Members should subordinate their own interests for the good of the group. But often individual members spot advantages for themselves and try to seize them at the expense of others."

Consortiums have attempted to address this problem by establishing governing structures that protect the interests of all members. But that creates additional problems. Integrion, for example, started out with 17 member banks plus IBM and Visa. Although not all members contributed the same amount of equity, each was given a seat on the board and an equal say in decision-making. But this, say analysts and bankers, created decision-making log jams as each member attempted to influence decisions based on its own needs, rather than what was best for the consortium as a whole. Integrion's failed restructuring in April 1999 marked an attempt to redress this.

Ventures with similar decision-making structures, such as Identrus, face the same challenge. "With larger, more bureaucratic institutions, slowness is an issue," says Kristin Kupres, chief operating officer of Identrus. "There can be problems building consensus, and that means decision-making can become a long, drawn-out process." Failure to bring products to market in a timely fashion then causes members to lose interest and explore competing solutions, as occurred with Integrion.

Already, both Identrus and Spectrum are facing criticism for not getting developments up and running quickly enough. Identrus, for example, was forced to delay its commercial launch from December 1999 to April 2000 because of problems reconciling the demands of its various members. Spectrum tried to avoid the Integrion-like unwieldiness by retaining day-to-day decision-making powers in the hands of its three founding members. Observers say the results have not been entirely satisfactory, however.

Smaller Boards

The overall trend among bank consortiums today seems to favor smaller boards. Ann Cairns, Citigroup's spokesperson for the FSM venture, which has just five directors representing the founding members, believes smaller boards promote more effective decision-making. She says the key to allaying the fears of non-voting members is to add independent directors who are not beholden to the dominant banks.

"Even banks that don't have a significant e-commerce presence right now understand the need to get involved and move quickly. Most will be pleased to be part of a group and won't be concerned about not being part of the wider decision-making process," contends Cairns, Citigroup's global head of e-Solutions.

The status of the CEO presents another tricky issue. The bankers who represent consortium members typically are preoccupied with full-time jobs, which restricts their ability to contribute to the organization. For that reason, these alliances need a strong leader who enjoys the full support of the member banks.

Integrion was managed initially by William M. Fenimore Jr., who joined the consortium as its founding CEO in late 1996 from Meridian Bancorp in Pennsylvania, where he had been the chief technology officer. Although Fenimore had a solid background in technology and payments processing, political infighting at Integrion is widely blamed for his decision to quit after less than three years at the helm. The organization then limped along for another six months under a succession of interim managers before expiring.

Spectrum has also grappled with leadership problems. For more than a year, the company was run by a management consultancy. Now it's guided by its chairman, Ronald Braco, also a senior vice president at Chase Manhattan Bank, while a search continues for a permanent CEO.

Determined to avoid that kind of problem, Viewpointe has decided that its management team, including the CEO, will be picked from its member banks and then devoted full-time to the joint venture. "The resources the member banks contribute to Viewpointe will be dedicated solely to Viewpointe," says Thomas J. McGuire, Chase's senior vice president of operating services.

Outside analysts cite other suggestions for improving the performance of consortiums. One is to keep the initial capital outlay small enough to bring in the maximum number of members, voting or otherwise. Another is to assign equal weighting to all board members regardless of size. That will encourage smaller banks to enter without fear of their interests being subsumed by the larger founding members, who often contribute the lion's share of initial capital. "You have to give Frankenstein the ability to challenge the scientist who created him," says James Van Dyke, a senior analyst at Jupiter Communications in San Francisco.

To avoid consensus-building problems, the consortium's founders must have a clear objective and governance framework. Member banks should clearly understand those rules and how they fit with their own guidelines. One weakness that has plagued past alliances is the lack of sanctions against members who take actions outside the venture, thus undermining it. "In theory, there should be some oversight of rule-stretching in these joint ventures," says Neal L. Petersen, director of banking law and regulation in the national regulatory advisory services group of KPMG LLP.

Petersen, who is based in Washington, D.C., also recommends that banks make sure the consortium's operating rules fit with their own internal compliance concerns, such as privacy policies, to avoid running afoul of regulators. He points to the recent anti-trust case brought by the Justice Department against Visa and MasterCard as an example of what can go wrong in this area.

As with all technology ventures these days, assembling all the right elements is no guarantee of success. "The interesting thing about the future of these ventures is that even though they might be operating with the right model, there's no assurance that any of them are going to turn out to be the next Visa," Van Dyke says. "They're all still in a very precarious position."

Mr. Luke is a freelance writer based in Carbondale, Ill.

Copyright © 2003 by Banking Strategies, published by BAI.

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