Will Banking Go Virtual?

Inc. magazine's finance editor points out some of the pitfalls that go with electronic banking.
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Electronic banking can help small businesses manage their funds and maximize interest earnings. But there's a rub

Every afternoon Allen Systems Group Inc.'s chief financial officer, Frederick Roberts, sits down with the software company's Miami bank. He's spent the morning pooling treasury information from the company's network of 11 international banks as well as its domestic banker, working in concert with financial staffers to reconcile figures and update projections. After wrapping up his daily planning session with CEO Art Allen, Roberts is ready to go over a series of highly detailed account transactions with the bank, transactions aimed at maximizing the company's cash flow and credit line. All in a day's work? Yes. But there's a high-tech twist. Miami is 100 miles away from the $20-million international computer company's headquarters, in Naples, Fla., and Roberts is doing all that treasury management on his personal computer.

Welcome to the wide world of on-line banking, where the future is now. PC-to-PC account management not only is here to stay, it's driving the U.S. banking industry -- with most banks launching new technology-based products and services faster than the Girl Scouts sell cookies. And it's rapidly changing the way U.S. businesses do their banking, if only because banks themselves are convinced that technology is the key to their competitive edge.

What do all those technological innovations mean for the owners of small businesses? It's too early to know for sure, but what's clear is that they'll have to start making some basic decisions soon about which products and services it makes sense to try. Some small companies have already begun sampling technology-based services; others will undoubtedly sign on as more options become available at the regional and community-based banks that handle their business. And given that bankers are marketing those high-tech products and services like there's no tomorrow, more and more entrepreneurs are going to have to get up to speed on the technology whether they want to or not.

If you've heard all the hype but still aren't clear about what high-tech banking means, here's an overview. The biggest game in town is electronic cash management -- the ability to access account information directly, without a visit to a real or an automatic teller. The banks that are most technologically advanced allow their customers to dial in via computer; others can give customers account-balance updates at specified daily intervals, by either fax or secure voice mail.

How does electronic banking benefit a business? The basic pitch goes something like this: With up-to-the-minute information at their fingertips, business owners can make more timely decisions about how to manage their funds. On-line banking lets them move cash between accounts to pay bills while they still earn as much interest as possible on their cash reserves. With PC-to-PC banking, cash-management decisions are transmitted from business to bank by computer, the way Roberts transmits his decisions to Allen Systems' domestic bank. These days companies can also use their computers to control automatic payroll plans, so they don't have to phone or fax salary-payment instructions to their bank. And they can use computers to authorize tax payments and international-currency maneuvers.

Banking-industry experts project that within two to three years, computerized banking could begin to make traditional business banking ancient history. "On a day-to-day basis almost all your financial transactions would take place electronically, including invoicing your customers, receiving their payments, and authorizing your own payments to suppliers and tax authorities," speculates Raymond S. Sczudlo, a partner and banking specialist in the Washington, D.C., office of the law firm Weil, Gotshal & Manges. "The only reason you'd need a bank is to actually carry out the transfer and hold funds."

Large corporations already conduct many financial transactions electronically, or they will soon. As of next January, for example, the IRS will require all businesses that paid more than $50,000 in payroll taxes during 1995 to convert to an electronic filing system. But these days it's possible for any business owner with a 486-or-faster PC, a modem, and sufficient time and energy to comparison shop among a growing range of electronic-banking options. To hear the bankers tell it, the business world stands to gain significant advantages by going digital: up-to-the-minute account information, easier access to that information, the ability to make financial decisions quicker, fewer transaction errors, and, ultimately, lower banking costs.

At the moment, however, the reality isn't quite that rosy if you're a small-business owner. Although bankers talk a good game, especially when they're selling new and sometimes pricey products, they haven't done much in the way of figuring out how to get the business community -- especially smaller companies -- from here to there. While the new technology promises to make cash management quicker and more cost-effective, so far it does little to address the small-business community's thorniest financial problem: its lack of access to capital.

Some bankers are candid about the uncertainty in their industry. "It's still too early for us to tell how much the new technology is going to help our smaller business customers," says Barbara Davis Blum, chairwoman, president, and CEO of Adams National Bank, based in Washington, D.C. "People talk a lot about PC-to-PC banking, but so far only a small number of our customers are doing it." She pauses and then adds, "Small businesses are just not that technologically oriented. Our small-business customers are not out there clamoring for state-of-the-art services and products. But there's a really strong feeling here that we have to stay ahead of the curve because that's where the competition is."

Blum is quick to note that the bank's outreach is already under way. Last spring Adams National began a push to develop technology-driven services specifically geared to save small and midsize companies time and money. The bank is experimenting with a program that sends loan officers, laptops in hand, to visit prospective business borrowers. The goal is twofold: to save business owners from having to visit a branch office when they're applying for a new loan or an upgrade, and to speed the bank's decision-making process on loan requests of up to $100,000. Adams National also launched a Web site in July 1996 so that customers can access its credit applications on-line if they need loans and are comparison shopping between banks.

There are good, practical reasons for smaller companies to explore the possibilities of Internet banking. First and foremost that's where a lot of the action's going to be. International management and technology consulting firm Booz, Allen & Hamilton Inc. recently reported that 20% of the 285 North American banks it surveyed already operate Web sites and that 69% plan to offer a range of banking services (including account-balance inquiries and on-line bill payment) over the Internet within the next three years. The attractions of cyberspace for bankers are obvious: more than two-thirds of the banks with Web sites spent less than $25,000 to set them up -- compared with the typical $1.5 million to $2 million it costs to set up a traditional branch office. Plus most of those Web sites cost less than $25,000 a year to maintain, compared with the $350,000 to $500,000 a year it costs to operate a branch office.

It makes sense for a midsize bank like Adams National to be adapting high-tech resources to the interests of its small-business customers. Some major banks are also now reaching out to smaller businesses. Bank Leumi Trust Company of New York already offers a wide range of state-of-the-art products and services to its large- and middle-market corporate clients. The bank is hoping to woo smaller companies with a custom-designed software system known as Leumi Access, a package of banking modules. The basic module gives customers on-line access to a complete list of their previous day's banking transactions. It also allows them to stop payment on outstanding checks, print custom statements, and transmit account inquiries to their banker. Other modules let them transfer funds and control cash flow. Customers with international business activities can even use their PCs to create and send letters of credit and to authorize international collections. "We want our customers to never, ever need to walk into a branch office of a bank again unless they want to," notes Thomas L. Hoffman, Bank Leumi's first vice-president and head of custom business services. "If they've got a PC, they should be able to process their payroll, reconcile their account, and switch excess funds between investments without ever leaving their offices or even calling a banker."

That's certainly the way things work at Allen Systems these days. But Art Allen cautions that companies should have a firm understanding of their own cash-management needs before turning to a bank for high-tech solutions. Allen spent a month talking to members of his financial staff before he initiated discussions about the company's treasury-management system with its domestic bank, Miami's Northern Trust Bank of Florida, N.A. It took another two months of consultations before Northern Trust came up with the technology and provided the customized software that allow Allen Systems to carry out its array of daily transactions from a Pentium-based PC. On a typical morning, Frederick Roberts and his staff pore over faxes that detail balance figures from the company's international accounts in Europe and the Far East (at present most foreign banks don't have the menu of on-line services that major U.S. banks have introduced). By 2 p.m. they've compiled a daily treasury report. Allen and Roberts then put their heads together and decide how best to move funds between domestic and international accounts to lower the company's expenditures and enhance its cash flow.

"There are so few small companies out there that even know about the possibility of doing all this," says Allen, "that it's hard not to view this as our competitive edge. After all, boosting operating cash through more effective cash management reduces our company's need to go out and borrow those funds instead."

Most smaller companies, of course, don't have multiple international accounts or a 15-person financial staff to crunch numbers. So it's not surprising that many small-business owners are just testing the waters when it comes to high-tech banking. "PC-to-PC banking sounds good in theory, but I'm not exactly banging my fist on the table to get it," admits Brian Sullivan, president of $9-million Sullivan & Company, an international executive-search firm in New York City. Sullivan uses only two computer-based services -- automatic payroll and a "sweep" account that invests excess funds in an interest-bearing account at the end of each business day -- and those services are better described as mid-tech than high-tech. "Three or four years ago, we needed to operate two different accounts and then go to the bank at the end of each business day and write a check in order to invest our excess funds," recalls Sullivan. "But I threatened to switch banks if we couldn't get an automatic-sweep account to make that process easier." His company still collects and deposits client reimbursements the old-fashioned way: receiving checks and having someone walk them to the bank. "It isn't too much of an imposition because there always seems to be somebody who has to go to the bank," Sullivan says.

One bank trying to overcome the hesitation to switch to electronic banking is Wells Fargo Bank in San Francisco. The bank is aggressively targeting smaller businesses for its new service, which at a monthly cost of $5 (and a one-time charge of $14.95 for the software) allows even a one-person company to manage multiple accounts in real time from a PC. The service, called Business Gateway, lets users customize "alarms" to warn of low account balances and also includes economic reports from Wells Fargo's senior economist. Lynn Frydryk, owner of J&L Peaberry Coffee + Tea, a 30-employee roasting plant based in Oakland, Calif., was a test user of the system. Frydryk insists that managing her four accounts electronically already has had an impact on her bottom line. Particularly useful, she says, is being able to get up-to-the-minute account totals in the evening, when coffee prices on international commodities markets can take a sudden, unexpected dip. "We keep traders' hours, not bankers' hours," she says. "We need to know how much cash is on hand so we can decide if we can afford to buy a shipment right away."

It may be a while before Business Gateway and competing services have a large impact on the small-business market. For now, Marshall Rafal, president of OLI Systems Inc., an aqueous and environmental software manufacturer in Morris Plains, N.J., is another small-business person who is taking modest steps into electronic banking. "We just started depositing the paychecks of all 15 staffers electronically. And we receive electronic payments from our international clients, which gets us our money faster, although I've noticed that they deduct a charge to cover the cost of making payments to us that way. The truth is we probably could improve cash flow by knocking five or so days off our collection time if our domestic customers would be willing to pay us electronically. But so far no one is doing that."

Rafal may not have to wait much longer for that day to arrive, at least according to Sczudlo, of Weil, Gotshal & Manges. "Two or three years from now I expect you'll see smaller businesses doing much more of their day-to-day transactions with suppliers and customers electronically," he predicts. Word is that the next big push in banking technology will be the development of enhanced security safeguards to encourage electronic payments and phase out paper invoices. That could turn out to be a net plus for small businesses strapped for cash or hindered by the customary lag time while "the check is in the mail."

But here's the reality bite, the hitch with high-tech banking: so far it promises small businesses no better prospects for securing credit. Marshall Rafal puts it well: "All I really care about is my credit line. If that's adequate, I don't care if everything else about my banking relationship is archaic." Art Allen agrees: "All too often banks sell you all kinds of supposedly user-friendly products and services and then give you grief every day of your life about your credit line."

There isn't much in the way of good news on that front. Yes, the tech wave is changing banking on the credit side. But many of those changes will probably make it tougher, not easier, for small businesses to qualify for loans. Why? Because many banks are taking steps to automate their credit-granting programs so that customers can either phone in or electronically transmit loan requests without having to meet with a loan officer. Computers, programmed to verify the accuracy of the information on a loan application, will then decide yea or nay on the loan. The process will be quick, but it will leave many entrepreneurs without the chance to inspire a loan officer with the passion and other intangibles that might sway a dicey loan decision. "If a business owner happens to fit the computerized profile of the bank's ideal borrower, he or she will find it easier to get money," says Sczudlo. "If not, it will be much more difficult because there's no person involved and no room for subjective factors."

It's too soon to know whether the pilot program introduced by Adams National Bank -- loan officers' making "house calls" to prospective business borrowers and processing credit applications on laptops -- will prove to be an enlightened solution to that chronic problem. Certainly the program takes advantage of the best of both human and technological worlds. Meanwhile, there is almost universal agreement that no whiz-bang menu of computerized banking services can take the place of a banker for a cash-starved, growth-obsessed small business. Barbara Grogan, chief executive of $10-million Western Industrial Contractors Inc., an industrial construction company in Denver, is a big fan of banking improvements that allow her to manage interstate payrolls and multiple bank accounts by fax -- "making financial decisions in 20 minutes that once might have taken two months." But she values her relationship with her banker, which dates back to 1982, much more. "Once a year I sit down with my banker, my attorney, and representatives of my bonding company and my insurance company for a 'state-of-the-state' analysis of our company. What computer could match their advice and long-term understanding of my business?

* * *

Jill Andresky Fraser (incfraser@aol.com) is the finance editor of Inc.


TAPPING ALL THE WAY TO THE BANK?

Bank assets in millions Less than $300 $300-$999 $1,000-$4,999 $5,000 or more

PC-based on-line services

Currently offer 20.0% 30.4% 52.9% 83.3%
Plan to offer within 2 years 80.0% 69.6% 47.1% 16.7%

Phone banking by audio response

Currently offer 13.7% 39.6% 74.1% 76.5%
Plan to offer within 2 years 9.9% 35.4% 18.5% 5.9%

Source: 1995 National Retail Operations & Automation Survey Report, American Bankers Association, Washington, D.C.

Last updated: Sep 15, 1996




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