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SYNOPSIS | Technology
for online banking used to be pitched
first to larger banks and then trickled
down to small institutions. But recent
advances in inter- and intra-bank payments,
as well as other online innovations,
are available to small as well as large
institutions. The one remaining liability:
Smaller institutions thinking small.
Only a few years ago,
Web-based technology tended to get pitched
mainly to bigger banks. It took several
years for products to trickle down market
to community banks and credit unions.
Today’s electronic payments technology
is making that trip down-market a lot
faster, however, and that makes the price
of small thinking — especially
in the form of procrastination on deployment
decisions — more costly.
This is particularly
noticeable with online banking and bill
payment. While we’re well on our
way to making on-line banking a critical-mass
application (more than 2,000 financial
institutions offer services to more than
30% of households), the basic functionality
of enabling customers just to check their
balances online is being rapidly eclipsed
by intra- and inter-bank transfers, streamlined
bill payment services, account self-services
and integrated funds management. It’s
not a fluke — this is clearly how
most of us will be doing our banking
in the future.
Smaller financial
institutions that missed the initial
wave of online banking adoption and saw
their hold on customers and deposits
suffer can now play catch-up. Several
viable, experienced providers are available
to lend these smaller institutions a
digital “lifeline” to get
back into the online game. And, the good
news: These services don’t have
to be free; today’s online banking
consumers are actually willing to pay
for the additional value now being offered
through standard online banking and bill
payment platforms.
To take a personal
example, I can now transfer funds electronically
from my personal account at a New York-based
bank to my aging father’s account
with a San Francisco bank in one to two
business days. That compares with mailing
a check to my father’s bank, which
takes between eight and 11 days to complete
the round-trip transaction. And the electronic
transaction costs me only $3, which I’m
delighted to pay because I can effectively
conduct my banking business at the last
minute. Other institutions charge up
to $8.95 for the same service, and nobody
seems to be squawking!
The conversion of
the inter-bank payment business model
is happening even faster in check processing.
With Accounts Receivable Conversion (ARC),
the Automated Clearing House (ACH) system
has demonstrated that there’s no
point processing consumers’ paper
checks beyond the lockbox. The operations
and risk-management formula for doing
ARC is well understood by now, and many
companies can help the smaller banks
set up the service.
Check 21 operations,
likewise, may look daunting on paper,
but announcements from a growing number
of providers suggest that smaller institutions
can effectively outsource their sorting,
fraud-checking, least-cost-routing and
payments transmission wherever and whenever
desired. Compare that with the uncertain
costs and return on investment of making
image investments internally at this
stage and the conclusion is inescapable:
Why not enter the fray?
Conventional wisdom
used to hold that smaller institutions
were at a disadvantage because of their
size and relative inability to invest
in and deploy service innovations. Today,
the small institution’s only size
disadvantage is thinking small.
Questions
or comments about this article? Post
them at the Banking
Strategies blog.
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