Outsourcing is not the only answer
Its success, and the eagerness of smaller rivals, have spurred the traditional banks into defending themselves by launching their own internet services. But the new-fangled system is not for everybody and in many ways online banking cannot replace in-branch person-to-person services. The IBM Institute for Business Value's finance specialist, Cormac Petit, explains the importance of people in the banking sector.
Błażej Karwowski: To what extent will the internet take over the person-to-person services in banks?
Cormac Petit: What you see, when you look at internet banking, is that it is on the rise all over Europe, all over the world. When you
look at it a little bit more closely, there is definitely an age profile. It's mostly younger people, peaking at the moment at about
30-40 years old.
But what you also see is that people are using the internet as the medium for shopping around, not for actually buying products. The
banks and insurers would like to sell more on the internet, because it's a cheap channel for them to use. But people are not yet
buying, they are visiting the sites, they are gathering information.
So it is just a research tool?
Yes, in most cases. When you ask people, "why don't you use the internet to buy products more?" then you hear things like "well, the
security is a problem," "I actually would like to discuss and sign the contract with somebody face to face," or "I need to talk to
somebody."
We have one bank in Poland which offers a full scope of products via the internet, not just the basics. Do you expect this number to
grow?
Yes, I do. What you're seeing now is that there is a development of all the different channels; ATM for instance is obviously the one
being used more and more, and telephone is being used more and more. Particularly younger people are starting to get in a mode, or into
a culture of banking anywhere, anytime. And I don't actually have to go to a bank to do my transactions. As people are getting used to
doing that, those people, now young, will start to get older, and that's what's really driving it. You will definitely see more of that
happening.
Often, the reason people go to a branch is: "It's the only way I can deposit money."
But you have ATM deposits right now ...
Yes, but curiously it's not that widespread and they seem for some reason not to be used an awful lot. This will change in five to 10
years.
But person-to-person services will still remain?
At the moment simple products are sold on the internet and, indeed, you have to simplify a product to make it easy to buy online. More
complex products require more advice. The investments that banks are doing at the moment, the relationship sales are growing at about
15 percent a year, internet use growth is about nine percent, and branches are still at five percent. Branches are still growing, and
what in fact we've seen in quite a lot of countries, particularly in Western Europe, is that five, maybe 10 years ago there was a big
drive to reduce the number of branches, everybody taught they are so terribly expensive. So a lot of them were reduced but now they're
starting to come back again. The banks still need to have branches.
Should banks sell non-core businesses and specialize?
There are obviously still a number of big, general banks that will try to be all-purpose. Where I come from, Holland, ABN Amro has been
trying that for many years. But they are having difficulty maintaining that and they are finding a need to focus a little bit more.
We think the only way of gaining a competitive advantage is by focusing more on doing the things that you're good at doing, and
building those strengths up.
At the same time, we did a survey of CEOs across the industry, and two things came up. One was "we had all these years of cost cutting
and now there is time to grow," but [the second was] "we have to keep cost cutting." There is no room for fat to grow back into the
organization again. Cut, cut, cut.
Will outsourcing have its limits and at what point should companies call a halt to it?
What I am certainly saying is, you shouldn't outsource everything.
I was dealing with a bank in Holland not so long ago. They wanted to outsource some of their core banking systems and, in this
instance, I actually advised them not to.
This was one of those curious situations when I was asked by our [IBM's] outsourcing sales people to come and help them with some
pre-work and actually went against my colleagues by advising the bank not to outsource anything at the moment, but concentrate on
getting their own house in order.
[In that case] outsourcing would mean accepting an imposed management system, which would not match with what they wanted to do.
Outsourcing is not the answer to everything.
What about open platforms in banks, selling third-party insurance or other finance products?
That's the American model. The American banks tend to be selling much more products from third parties. European banks sell
bankassurance, mostly from within their own group. But it's definitely happening.
Where it starts in Europe and started in America, was with the discount brokers on the internet. They started to offer a limited set of
mutual funds and then extended to a variety of different providers. It will happen that way in Europe soon.
When do you expect to see this?
It's not a technical issue, it's a political issue. Technically it's easy. It's more of a question of when the banks here in Europe
will be prepared to do that.
Interview
by Błażej Karwowski
Błażej Karwowski: To what extent will the internet take over the person-to-person services in banks?
Cormac Petit: What you see, when you look at internet banking, is that it is on the rise all over Europe, all over the world. When you
look at it a little bit more closely, there is definitely an age profile. It's mostly younger people, peaking at the moment at about
30-40 years old.
But what you also see is that people are using the internet as the medium for shopping around, not for actually buying products. The
banks and insurers would like to sell more on the internet, because it's a cheap channel for them to use. But people are not yet
buying, they are visiting the sites, they are gathering information.
So it is just a research tool?
Yes, in most cases. When you ask people, "why don't you use the internet to buy products more?" then you hear things like "well, the
security is a problem," "I actually would like to discuss and sign the contract with somebody face to face," or "I need to talk to
somebody."
We have one bank in Poland which offers a full scope of products via the internet, not just the basics. Do you expect this number to
grow?
Yes, I do. What you're seeing now is that there is a development of all the different channels; ATM for instance is obviously the one
being used more and more, and telephone is being used more and more. Particularly younger people are starting to get in a mode, or into
a culture of banking anywhere, anytime. And I don't actually have to go to a bank to do my transactions. As people are getting used to
doing that, those people, now young, will start to get older, and that's what's really driving it. You will definitely see more of that
happening.
Often, the reason people go to a branch is: "It's the only way I can deposit money."
But you have ATM deposits right now ...
Yes, but curiously it's not that widespread and they seem for some reason not to be used an awful lot. This will change in five to 10
years.
But person-to-person services will still remain?
At the moment simple products are sold on the internet and, indeed, you have to simplify a product to make it easy to buy online. More
complex products require more advice. The investments that banks are doing at the moment, the relationship sales are growing at about
15 percent a year, internet use growth is about nine percent, and branches are still at five percent. Branches are still growing, and
what in fact we've seen in quite a lot of countries, particularly in Western Europe, is that five, maybe 10 years ago there was a big
drive to reduce the number of branches, everybody taught they are so terribly expensive. So a lot of them were reduced but now they're
starting to come back again. The banks still need to have branches.
Should banks sell non-core businesses and specialize?
There are obviously still a number of big, general banks that will try to be all-purpose. Where I come from, Holland, ABN Amro has been
trying that for many years. But they are having difficulty maintaining that and they are finding a need to focus a little bit more.
We think the only way of gaining a competitive advantage is by focusing more on doing the things that you're good at doing, and
building those strengths up.
At the same time, we did a survey of CEOs across the industry, and two things came up. One was "we had all these years of cost cutting
and now there is time to grow," but [the second was] "we have to keep cost cutting." There is no room for fat to grow back into the
organization again. Cut, cut, cut.
Will outsourcing have its limits and at what point should companies call a halt to it?
What I am certainly saying is, you shouldn't outsource everything.
I was dealing with a bank in Holland not so long ago. They wanted to outsource some of their core banking systems and, in this
instance, I actually advised them not to.
This was one of those curious situations when I was asked by our [IBM's] outsourcing sales people to come and help them with some
pre-work and actually went against my colleagues by advising the bank not to outsource anything at the moment, but concentrate on
getting their own house in order.
[In that case] outsourcing would mean accepting an imposed management system, which would not match with what they wanted to do.
Outsourcing is not the answer to everything.
What about open platforms in banks, selling third-party insurance or other finance products?
That's the American model. The American banks tend to be selling much more products from third parties. European banks sell
bankassurance, mostly from within their own group. But it's definitely happening.
Where it starts in Europe and started in America, was with the discount brokers on the internet. They started to offer a limited set of
mutual funds and then extended to a variety of different providers. It will happen that way in Europe soon.
When do you expect to see this?
It's not a technical issue, it's a political issue. Technically it's easy. It's more of a question of when the banks here in Europe
will be prepared to do that.
Interview
by Błażej Karwowski
