Enhancing the Branch

By Karen Epper Hoffman

As more investment dollars flow to the branches, bankers are looking at key software upgrades.

As financial institutions have reaffirmed the branch's central role in serving customers, they've seen the need for software improvements, particularly for applications that analyze customer behavior, create staffing models and facilitate sales. Annual branch software investments by U.S. banks will reach $47 million by 2005, TowerGroup Inc. estimates, up 57% from $30 million this year.

After years of neglect, "The branch has become the new battleground for customers," says Mark Greene, general manager for International Business Machines Corp.'s global banking unit, based in White Plains, NY. But there's a danger in fighting this battle with outdated weapons, hence the push to upgrade software in the branches.

Among the new technologies being considered is so-called "forecasting software," which banks can use to gauge customer traffic and specialized service needs at each branch. This helps with staffing decisions and even branch design. Another growing category of software supports performance measurement, which helps track the effectiveness of employees and marketing campaigns.

A more fundamental change involves the migration to Internet-based software for basic branch operations. Many banks, for example, are looking at using Java and its more enterprise compatible counterpart, J2EE, for their branch applications. Meanwhile, antiquated OS/2 operating system software is being weeded out of thousands of branch platforms in favor of Windows-based systems.

Such progressive activities mark a reversal from the late '90s, when branches did not receive their fair share of bank technology investment. Web-based initiatives soaked up multi-million dollar budgets, while efficiency campaigns inspired institutions to spend millions more on automated teller machines and even wireless access, all designed to limit the need for human contact.

In the aftermath of the dot-com crash, it became clear that branches are still the best channel for serving current customers and reaching out to new ones. Driven by the need to replace outdated or discontinued systems and integrate the branch network and their retail channels as a whole, banks are finally focusing their interests — and their IT budgets — on updating the branch.

The Price of Progress

Though the rationale is clear, the branch upgrade commitment is not one to be taken lightly. "Because of the physical nature of the branch network, it's a very expensive proposition to upgrade that channel," says Jerry Silva, an analyst for Needham, Mass.-based TowerGroup. Canadian Imperial Bank of Commerce, for example, spent $260 million overhauling its 1,150 branches: $180 million for basic infrastructure and another $80 million for applications over three years.

Linda Dentay, the vice president and chief information officer for retail branch technology, says CIBC's plan to revamp its branches began in the fall of 1999 when the Toronto-based bank decided "to re-engineer its customer experience." Realizing that customers would always want branch service, CIBC executives knew they needed to replace some of the basic branch hardware, which was a decade old in some cases.

At the same time, CIBC planned to go beyond basic upgrades to create a new infrastructure. A big part of that new infrastructure was a switch from IBM's OS/2 operating system to Microsoft Corp.'s Windows system. This is a common occurrence in the industry, since OS/2 will be phased out in coming years, although IBM has been coy about exactly when it will terminate support. The prospect of this termination, however, has sent bankers looking at alternatives, such as Microsoft products, or open source OS Linux.

National City Corp. of Cleveland, Ohio is also moving off OS/2 as part of a broad, $122 million, two-year branch renewal program. The project was initially conceived about five years ago when the bank first became aware that OS/2 was on the way out. This "Customer Connections" project spans the bank's retail network, teller platform, and series six investment and contact center, as well as consumer and small business lending, according to executive vice president Bob Healey.

As part of the transition away from OS/2, National City, like many of its peers, found itself wrestling with related issues, including a teller system that dated back to the 1970s, a branch banking system first installed in the mid-'80s, and the fact that "most of those systems are not fully integrated," Healey says.

As they get deeper into their branch re-engineering projects, banks are looking at some new tools, such as forecasting software. National City incorporated one of these packages last year as part of its upgrade plans, according to Healey. Such software helps to allocate branch staff more effectively around peak times by anticipating the types of transactions customers will request. Columbus, Ohio-based Huntington Bancshares Inc. has implemented similar scheduling software, which senior vice president of operations Connie Wanner credits with improving customer service.

Another key upgrade involves performance measurement, according to Anjalee Davis, an analyst for Boston-based Celent Communications. As banks invest more heavily in branches and re-orient their retail strategies to sales and service, it becomes more important to ascertain the effectiveness of each employee and each marketing campaign. In particular, analyzing how customers move through the branch — what they notice or ignore, how much time they spend at specific activities — can be important in helping design, staff and organize the offices.

Internet Branching

Meanwhile, many banks are turning to technologies that originated on the Internet. According to consultant Davis, many institutions are considering the use of Java and its more enterprise-compatible counterpart, J2EE, for their branch applications. Until recently, these technologies have been more closely associated with Web development.

Java and J2EE will help cut costs by allowing institutions to re-use code across different channels and more easily update applications, says Drew Lamparello, product marketing manager for branch solutions for S1 Corp., an Atlanta-based vendor that develops products and services for both branches and the Internet.

Colin Piper, the president of North American operations, Ireland-based Eontec, one of the companies that offer J2EE platforms for multiple bank channels, cites J2EE's ability to be "re-usable" across various processes and channels. Piper explains that by using a single code base, a bank can make a basic function — like paying a bill or setting up a direct debit — look very much the same at the branch as at the ATM or call center. This helps banks to more easily "mesh" their channel operations.

Furthermore, banks are attracted to the idea that by adopting such open, broad-based components, rather than the more proprietary technologies of the past, they'll avoid "being locked into a particular vendor," says Greene of IBM. While performance and scalability issues may have kept banks from using the earliest forms of Java for mission-critical applications at the branch years ago, proponents like Piper say the technology is now ready for prime time.

Financial institutions such as the Bank of Ireland and CIBC would seem to agree. Both have been rolling out Eontec's J2EE platforms. CIBC's Dentay says the technology allows for the easier integration of technology across channels and gives the bank the ability to separate out the business logic — the functions that direct the steps that need to be taken to carry out a particular task, regardless of the specific channel. In addition, Java code has allowed the bank to create a simpler user interface for tellers.

It's not surprising that as the branch becomes a new focus for tech dollars, more banking vendors are beginning to target that market as well. Traditional branch system vendors, such as Dallas, Tex.-based ARGO Data Resource Corp. and Atlanta, Ga.-based Harland Financial Solutions, a unit of John H. Harland Co., are expanding their repertoire in order to provide broader, better-integrated service to upgrade-intensive banks.

Meanwhile, newer entrants, such as S1 and Atlanta-based WebTone Technologies Inc., have entered the bustling branch services market by acquiring established, long-time branch vendors such as Software Dynamics Inc., formerly of West Hills, Calif., and Broadway & Seymour Inc., formerly of Charlotte, N.C.

These developments enlarge the spectrum of available upgrades, and they also change the way banks work with particular vendors. According to TowerGroup's Silva, more and more banks are opting for a "big bang" approach — pairing up with a single vendor that can help them upgrade their systems in various ways across multiple channels. "Banks used to just look for best-of-breed," Silva says. "Now, the smart ones care about choosing vendors that can serve across many channels."

Such requirements speak not only to a reorientation of priorities, but also to a new set of management challenges for financial institutions. Painful lessons were learned during the dot-com era about the hazards of rushing into projects without clear business objectives. That wisdom now must be carried into the new branch software initiatives, in that the best installations will be those that most strongly support high-value business activities.

Ms. Hoffman is a freelance writer based in Poulsbo, Wash.

Copyright © 2003 by Banking Strategies, published by BAI.

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