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SUMMARY PRAFACE
/ e-business, e-trade By Ahmet Hamamcıoğlu/Editor We started for Banka
ve Para Teknolojileri Dergisi (Banking and Money Technologies) 18 months ago
and reached to 9th issue now in your hand. We’re trying to be a
source issue for finance sector regarding technological developments,
transformations and researches. Meanwhile, another
issue of us in which e-business and e-trade to be studied is “e-ticaret”
will be published in September as bi-monthly issue alternating with “Banka ve
Para”. So, this means we’ll issue a periodical in each month that we also
plan them to be seen on Internet, up to this year-end. Researches suggest
that Internet users in Turkey increased %55-60 in the first five months of 2000.
It increased to 1,000,000 as of July from 450.000 as of end 1999. It’s
predicted that this figure will be 3 million users at the end of 2000. It’s accepted that
e-business and e-trade are the innovations to put their mark on all markets in
near future. They are growing up as a new way for both consumers and firms
because they have some advantages as rapid adaptation to transformations, areas
without borders, and minimum operation costs. E-trade that can be
defined as the trade of product and service via the networks, against its short
past, is being focus of interest because of its much more increasing capacity
and brilliant expectations. Mainly, e-trade has
two branches as B2B and B2C. According to Gartner, the capacity of B2B will
reach to $7.29 billion globally by 2004, as it is $145 billion for 1999. Today, banks are
diversifying their delivery channels. Customer relations are not confined with
brunch networks, call centers and postage. They benefit from a range of e-business
channels included Internet, mobile phones, interactive TV sets, and service
demands by electronic controllers mounted on electrical furniture. Banks in our
country, as it’s being happening always, are undertaking the key role of
developing e-business and e-trade. Hope to see you in
every month…. E-BROKERAGE
By John R.
Engen-Freelance Writer/Minneapolis
Wells Fargo & Co.'s Web site is applauded as one of the industry's
best, but what really excites senior vice president Shelley Freeman is the icon
in the lower left corner of the screen. Clicking on this icon transports the customer into a
world of $29.95 per-transaction stock trades and a full menu of price quotes,
news and information that could soon rival the offerings of E*Trade Group or
Charles Schwab & Co. "Customers want one place where they can manage
their entire financial picture as seamlessly as possible," asserts Freeman,
who manages Internet investment services at Wells. "If we can put it all
together in an integrated way, that's customer nirvana." Such is the dream of
many bankers. As Wells demonstrates, Internet technology does make possible an
integrated offering. Limitations on sharing information between banking and
brokerage units force institutions to erect costly technical and organizational
firewalls. That hinders effective cross-selling between the two units. Perhaps even more
daunting, banks are latecomers to the e-brokerage party. Nonbank companies such
as Schwab, E*Trade and Fidelity Investments are already dominant in the market
and continue to improve their technology and products at a blistering pace. But
for banks that are up to the challenge, the rewards of mastering e-brokerage can
be substantial. Such capabilities can pay off in stronger customer relationships,
particularly among the more affluent segments. If banks don't capture
that business, their nonbank competitors certainly will – by offering bank
products. To compete in e-brokerage, banks must beef up their systems to handle
the higher volumes generated by Internet trading. They must integrate banking
and brokerage offerings in ways that simplify things for the customer, and also
improve their marketing efforts. And to pull this off, banks will need to
develop entrepreneurial cultures that foster rapid innovation. A shift in strategic
orientation will also be required, and this perhaps is the hardest part. Many
institutions tend to regard e-brokerage as an add-on service, so they delegate
decision-making to product managers who are narrowly focused on the performance
of their own units. Banking's rush to e-brokerage
is part of a long-running campaign to offset the flow of deposits into
alternative investments. By contrast, the level of equity, bond and mutual fund
holdings has soared. "Today's customers have a definite equity mindset when
it comes to savings," says Michael Bastian, CEO and president of Action
Direct, the brokerage unit of Toronto-based Royal Bank of Canada. "If banks
want a greater share of wallet, they need a brokerage offering that is
sufficiently attractive to encourage customers to consolidate their financial
accounts with them." To accommodate this
growing market, most of the nation's large banks – and more and more small
ones – are hustling to form an e-brokerage operation. The strategies vary.
Some have leveraged recent brokerage acquisitions. Others have chosen to partner
with ostensible enemies. None of these U.S. banks has yet to make a dent in the
market share tables. Banks, then, have their work cut out for them if they ever
hope to break into the upper tiers of a business where costly technical skills
and branding initiatives define the winners. At the same time, they are forced
to fight a two-front war against nonbank competitors who are muscling into their
markets. The good news in all this is that banks still enjoy some competitive
advantages, such as their far-flung branch networks. Surveys consistently find
that online customers prefer a physical access point to complement the virtual
delivery channel. Consumers also place far more trust in banks than other
financial services providers and view transactional accounts as the foundation
of their financial lives. The sheer increase in
Web traffic overall should boost customer contacts at bank sites. But getting
those customers to consolidate their banking and brokerage accounts with a
single institution requires a seamless online experience. William Veeneman, a
senior vice president and manager of online services for U.S. Bancorp,
Minneapolis, envisions an offering that enables customers to log-on once, at
their bank site, and manage their entire financial lives from there. Such an
offering would include balance statements of both brokerage and banking accounts,
total net worth statements, easy transfers between bank and brokerage accounts,
and financial calculators that download existing customer information. The reality is that
established online trading firms possess a three- to five-year head start in
terms of building a branded e-brokerage presence on the Web. These nonbanks have
also made more progress in solving the technological problems involved with
online trading. Finally, their corporate cultures are better suited to the
brokerage world, which moves at a much faster speed than traditional banking.
It's likely that nonbanks will do a better job at marketing banking products on
the Web than banks will do at selling brokerage, investment or insurance
products. For one thing,
brokerage firms don't have to worry about some of the privacy and legal issues
that bedevil banks. For example, federally-insured depository institutions must
post lengthy disclosure statements about what is and is not guaranteed by the
FDIC. To avoid running afoul
of the various restrictions on sharing customer information and tying banking
and brokerage operations, banks have had to construct costly technical and
organizational firewalls between the two sides of the house. Bank-owned e-brokerages,
for instance, must have separate management teams. The units must also pay fair
market prices for any service provided by the parent company. Such restrictions,
while ostensibly customer-friendly, limit the ability of banks to offer the kind
of seamless service they envision. What good is a
financial services supermarket if you can't use loss-leader pricing in one
category to entice customers to buy products in another area? Eager to avoid
regulatory and legal tripwires, most banks are reluctant to allow customers to
view their banking and brokerage accounts via a single logon. Pulling together
customer data in a manner that respects legal requirements and customer privacy
sensitivities is considered by most bankers to be their toughest hurdle in e-brokerage.
Another operational
hurdle is managing the extra demand on already-overtaxed systems. Separate
customer service operations, manned by licensed securities experts, must be
built and maintained for e-brokerage. And while a typical Internet banking
customer might visit a site once a week to make a payment or check balances,
many online investors log-on hourly to get quotes, research, news and other
information. If the system goes down for even a few hours during a market sell-off,
a bank could be sued. FleetBoston, for
example, reportedly spent tens of millions of dollars linking Internet banking
customers to its Quick & Reilly e-brokerage site. The combined offering,
which was launched in November, boasts a single logon (one of the few that does)
and enables customers to view both their banking and brokerage balances on the
same page. With time, however, e-brokerage
operations could prove rewarding for at least a few banks. Perhaps a dozen of
the top 100 banks will successfully adapt their organizations and product
offerings to the online world, predicts Marenzi, who adds, "It's a massive
opportunity for banks to finally get into a business that has been stealing
their best customers for years." Another law of nature
is that big companies can't get excited about small opportunities. It's not that
their managers are bad. It's just that for a $40 billion company, for example,
achieving 10% growth requires that it find $4 billion of new business next year.
This causes managers of large organizations to either dismiss or overly
pressurize innovations, most of which appeal only to small markets at the outset.
CULTURE CLASH
By Julie
Monahan-Freelance Writer/Seattle
When Bank One Corp. executives plunked down $7 billion to buy First USA
Inc. in January 1997, they justified the stupendous price in terms of the growth
the credit card unit would provide. Mesmerized by expectations of earnings
acceleration exceeding 20% per year, they agreed to pay a purchase premium that
is awesome by the standards of traditional bank deals: 570% of book value and 20
times trailing 12-month earnings. Less than three years
later, a shocking reversal of fortunes at First USA provoked a major stock sell-off
and prompted the resignation of John B. McCoy, Bank One's chairman and chief
executive officer. McCoy, who lifted Bank One from less than $25 billion of
assets to more than $250 billion in the span of a single decade, apparently met
his undoing when First USA went off on its own and took extra risks in the
pursuit of growth. This unfortunate
episode shows that acquirers face a critical challenge when they buy dissimilar
companies in pursuit of growth. On the one hand, it is incumbent upon purchasers
to preserve the entrepreneurial cultures that make entities such as First USA
valuable in the first place. On the other hand, it is also imperative that
managers quickly develop the business comprehension and controls needed to
manage risk. It's quite a balancing act, but one that simply must be pulled off
if cross-sector deals are to work. All of these concerns,
however, must be balanced against the need for tight financial and managerial
controls over the acquired business, whether or not that involves the target's
existing top managers. The first step in dealing with this challenge is
recognizing its many dimensions – dissimilar performance metrics, incompatible
information systems, unfamiliar risk issues and alien cultures. There's a lot to
deal with, and it takes a substantial ongoing commitment. Dealmakers also must
be careful in framing expectations. When companies pay huge acquisition premiums,
they essentially are saying they can operate the targets significantly better
than the units' own managers. The last decade saw a
plethora of deals in which diversification-hungry banks bought specialty finance
firms, credit card companies, mutual fund complexes and especially brokerage/investment
banking firms. The benefits surfaced in earnings reports last year. Robust
trading, investment banking and venture capital revenues helped conglomerates
such as Citigroup, Chase Manhattan Corp. and FleetBoston Financial Corp.
overcome sluggish growth in traditional deposit and lending businesses. It's
difficult enough to merge two banks; bringing a bank and a nonbank together
increases the danger of merger misfires. Although the Bank One/First USA
reversal has dominated the headlines recently, it is not an isolated incident.
Although the circumstances of individual deals remain murky to outside observers
and can vary greatly, it does appear that some merger difficulties are traceable
to the chief executive officer. While it is true that
some executives of assimilated companies will temporarily tolerate disrespectful
treatment in exchange for extra financial rewards, it is not true that entire
teams of critical employees will tolerate flagrant disrespect indefinitely. In
other instances, CEOs can be far more interested in striking deals than in
following through on them. Then there are the CEOs who appear to lack an
adequate understanding of what they are getting into. Not all of the powerful
expertise built up during a banking career may be applicable in other sectors of
financial services. Also, a specific target may have budding problems of which
the acquiring CEO is unaware. It's risky enough to bull one's way into a
bank-on-bank acquisition, where the risk dynamics are better known. Such
aggressiveness can entail even more risk in unfamiliar types of deals. A top priority is
communicating with acquired employees early and often. Managers need to explain
the mission of the combined company and attempt to clarify, as soon as possible,
the role of these employees. PNC Advisors, for example, took immediate steps to
dispel employee uncertainty after acquiring Hilliard Lyons, an investment
banking firm in Louisville, Ky. The private banking arm of Pittsburgh-based PNC
Bank Corp. published a periodic newsletter that kept employees on both sides of
the transaction informed of how the integration was proceeding. It also posted
information on the two corporate intranets. Compensation plays a
key role in retaining top talent in any merger deal, but particularly in those
involving companies whose employees are accustomed to Wall Street-like salaries
and bonuses. The importance of
ensuring smooth relationships with acquired employees is linked to the need for
continued revenue generation, during and after the merger. That's particularly
critical in a cross-sector merger, since acquirers can expect less in terms of
expense reduction or economy-of-scale opportunities than in a bank-on-bank deal.
Customers tend not to
wait patiently for management to shift its attention back to their needs, and
competitors can be expected to pounce on opportunities. The acquiring
organization must move quickly, therefore, if it is to capitalize on the
expertise of acquired employees and regain momentum. Acquirers usually
discover that some of an acquiree's "best practices" can be applied to
their own operations. After purchasing Equitable Securities, SunTrust moved its
own debt capital group under that unit's umbrella, using the new name SunTrust
Equitable Securities. The bank also built on its securities franchise by adding
investment banking and trading services and expanding the division's sales force.
PNC followed a similar course when it transferred its Pittsburgh-based
securities servicing and clearance operations to Hilliard Lyons' Louisville
location. Since then, PNC has doubled the number of customers using its
brokerage services. But out-of-sight should not translate into out-of-mind. Granting acquired
employees a high degree of autonomy entails some risk, as demonstrated in the
Bank One/First USA situation. For that reason, M&A experts advocate that
acquirers lay out a clear system of controls. This can involve the target's
existing management if the acquirer has confidence in that management. But the
key requirements are that acquired employees understand exactly who is in charge
and that the acquirer has an accurate view of what's going on with its new
property.
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