DELIVERING E-BANKING SERVICE: AN EMERGING INTERNET BUSINESS MODEL AND A CASE STUDY

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1 DELIVERING E-BANKING SERVICE: AN EMERGING INTERNET BUSINESS MODEL AND A CASE STUDY by Andreas C. Soteriou and Stavros A. Zenios Working Paper HERMES Center of Excellence on Computational Finance & Economics University of Cyprus P.O. Box 20537, 1678 Nicosia, CYPRUS

2 HERMES Center of Excellence on Computational Finance & Economics The HERMES Center on Computational Finance and Economics at the University of Cyprus has been selected by the European Commission as a European Center of Excellence in The Center faculty, graduate students, and visitors pursue a broad research agenda that focuses on optimal financial decision making from both the supply side (financial institutions) and the demand side (households and institutional investors). Emphasis is placed on the challenges created for both sides by the globalization and innovations of the financial markets, especially for the economies of pre-accession States as they move towards harmonization with European Union. The work of the Center is divided in five major areas. The first deals with enterprise wide risk management and the development of both innovative methodologies and decision support tools. The second deals with the saving and borrowing behavior of households and their portfolio choices. The third deals with empirical studies of capital markets and the information they reveal for the prediction of bankruptcy events and the management of credit risk. The fourth deals with real options, their valuation, and their use in coping with an uncertain world. The fifth deals with issues surrounding the performance of financial institutions in delivering quality services. Data-driven theoretical modeling, empirical analysis, and the use of computations are the cornerstones of the disciplinary approaches of the Center's activity, that brings together researchers from finance, economics, accounting, management sciences, mathematics and computer science. Research is basic, yet relevant to this important sector of economic activity. The Center fosters a community of scholars, practitioners, and graduate students whose interests support the mission of the Center. Close collaboration with industry ensures that the Center s research remains not only cutting-edge in pursuit of academic excellence, but is also relevant to financial institutions, in their quest for competitive excellence. If you would like to know more about the Center or join in its activities please let us know of your interest and visit our Web site at Stavros A. Zenios Director

3 Delivering e-banking services: An emerging internet business model and a case study Andreas C. Soteriou Stavros A. Zenios February 24, 2003 Working Paper HERMES Center of Excellence on Computational Finance & Economics School of Economics and Management University of Cyprus Nicosia, CYPRUS University of Cyprus, Nicosia, Cyprus. University of Cyprus, Nicosia, Cyprus, and The Financial Institutions Center, The Wharton School, Philadelphia, USA. 1

4 1 Introduction The increasing presence of the Internet in everyone s life is changing the way business is done. The financial services industry is no exception. As of March 2000, 27.5 million individuals were cyberbanking up from nine million a year before. The euphoria witnessed towards the end of last decade surrounding the use of the internet in service provision, was based primarily on the notion of infinite scalability, that is the ability to serve increasing numbers of customers at low incremental costs. This notion justified high valuations of internet firms from venture capitalists. e-banking 1 within the information-based environment of financial services made infinite scalability appear even more promising compared to other types of e-commerce. The often unrealistically optimistic projections regarding internet use, however, led to the dot.com shakeout that came with the dawn of the new millennium. In the US, at year end 2000 only 19% of the US commercial banks and savings institutions offered e-banking services, a number that shrank even further in According to a recent projection by the office of the Comptroller of the Currency, it is likely that almost half of all financial institutions have no plans to offer e-banking, ever. As the dust settles from the dot.com crush, however, a number of success survivor stories make it clear that e-banking is here to stay. What is needed are new business models that suit the new business environment. The potential is there. The internet has become a part of everyday life with tens of millions online every day engaging in various internet activities, 50% of which include e-commerce. (See a special issue of American Scientist, 2001, and of Communications of the ACM, 2001, for trends and statistics.) According to a recent study by TowerGroup, there are about 16 million e- banking accounts in the US, 35% of which belong to eight banks, the top three being Bank of America, Wells Fargo and Wachovia (after acquisition by First Union). E*Trade Bank perhaps the most successful and profitable e-bank today has close to half a million online accounts, $7.7 billion in deposits, and $13 billion in assets. One of its primary assets, unique for an e-bank, includes a large ATM network of 10,000 stations, acquired through the acquisition of Card Capture Services. Only a few weeks after the terrorist attacks of September 11, 2001, Bank of America (BofA), proceeded aggressively with major e-banking programs. It launched an account aggregation program, where a user can, with a single sign-on, have no-fee access to all his or her BofA accounts as well as those at other institutions. The service, 1 The term e-banking for the purposes of this article encompasses all those banking services provided over the internet either by traditional brick-and-mortar banks or by e-banks (virtual or direct banks). 2

5 called My Bank of America, was rolled out nationwide in On-line banking is rapidly adopted in Europe (with more than 20 million internet users logged onto finance and personal banking sites in May 2001 alone) with the trailblazer being Scandinavia where almost 60% of the online population in Sweden were visiting finance sites in May 2001 (Carter, 2001). Over the last few years a number of internet business models have appeared in the literature, addressing various aspects of e-commerce. With very few exceptions, these do not target the idiosyncrasies of e-banking. This chapter builds upon the previous literature and presents an internet business model that focuses on e-banking and can provide the foundation for successful e-banking strategies. More specifically, we first review some of the changes of the world of financial services in the internet era that are relevant for the proliferation of e-banking services. We examine both supply and demand forces that shape the drive for internet-based financial services, paying particular attention to Italy the country on which we later on base our case study. Based on the above, we next present a general business model specific to e-banking. Finally, we present as a case study a system for personal financial planning which has been deployed by some Italian banks and analyze some of its components from the point of view of the general business model. 2 The changing landscape of demand for financial services The decline of the welfare state has created an increasing level of awareness by individuals that the well-being current and future of themselves and their families is more in their own hands and less in the hands of the state. This development has created a breed of consumers that demand anytimeanywhere delivery of quality financial services. At the same time we have witnessed an increased sophistication of the consumers in terms of the financial products they buy and the channels of service delivery they use. These trends are universal among developed economies, from the advanced and traditionally liberal economies of North America, to the increasingly deregulated economies of the European Union and pre-accession States, and the post-communist countries. The numbers are telling: In the 1980 s almost 40% of the U.S. consumer financial assets were in Bank deposits. By 1996 bank deposits accounted for less than 20% of consumers financial assets with mutual funds and insur- 2 The My Bank of America service is available to customers whose primary accounts are located outside the states of Washington, Oregon, or Idaho. 3

6 Household total % of household s assets Mutual funds Asset Management Life and general insurance Table 1: Traded financial assets by Italian households during in billions of ITL. (Source: ISVAP, the board of regulators for Italian insurers.) Others Life insurance Shares Mutual Funds Bonds Liquid assets Figure 1: The evolution of Italian household portfolios. ance/pension funds absorbing the difference (Harker and Zenios, 2000, ch. 1). Similar trends are observed in Italy. The traded financial assets of Italian households more than doubled in the 5-year period from 1997, and the bulk of the increase was absorbed by mutual funds and asset management; see Table 1. The increase in traded financial assets comes with increased diversification of the Italian household portfolio, similar to the one witnessed in the U.S. a decade earlier. Figure 1 shows a strong growth of mutual funds and equity shares at the expense of liquid assets and bonds. Today one third of the total revenues of the Italian banking industry is originated by asset management services. These statistics reveal the outcome of a changing behavior on the part of 4

7 consumers. What are the changing characteristics of the consumers, however, that bring about this new pattern of investment? The annual Household Savings Outlook (2001) provides important insights. First, the traditional distinction between delegation of asset management to a pension fund Board or an insurance firm directors by the majority of consumers, and autonomy in the management of assets by wealthy investors, no longer appears to be valid. Both attitudes are present in the behaviorial patterns of private savers. Second, the trend in behaviorial profiles is towards higher levels of autonomy, and there is an increased propensity towards innovative instruments as manifested in the data of Figure 1. The group of Italian households classified as innovators grew steadily from 6.7% in 1991 to 22.6% by Each percentage point increase added a further 200,000 households to this category. Today this segment numbers 4.3 million Italian households. Households in this category adopt a very professional approach to questions of finance. They are able or at least they feel so to manage their financial affairs, and they rely on integrated channels for doing so, using on-line information and conducting business by phone. Third, an analysis of the influence of quantitative variables on the savings habits of households shows that awareness of financial indicators, and in particular the performance of managed asset returns, is influencing household behavior. Investors in older age groups are more aware of such indicators than the younger generations. The survey also reveals that the trend towards increased diversification of assets under management will continue unabated during the next three years. The investors favorites are insurance and portfolio management. However, the survey was conducted just prior to the stalling of the world-wide bull markets so the projection of a continued favor towards portfolio management can be questioned. The changes in attitudes towards innovative products came with a change in attitudes towards delivery channels. Data from a survey of households in the U.S. (Kennickel and Kwast, 1997) show that modern consumers also demand access to more than one delivery channel. While a personal visit to a bank branch remains the predominant way of doing business, a significant percentage of U.S. households use alternative channels such as phone, electronic transfer, ATM, PC-banking etc; see Figure 2. Italian households follow this trend, although with a delay of some years. In 2000 only 16% of households could recognize on-line brands. Today this number has grown to 56%. Brand recognition has been followed by use of the new channels as illustrated in Figure 3. 5

8 Figure 2: Percentage of U.S. households using alternative delivery channels. (Data from Kennickell and Kwast, 1997.) Market 100% (17 million) On line/telephone Istitutions awareness75% (12.8 million) Use of the Internet/ telephone for financial purpose 12% (2 million) Use of the Internet for financial purpose 7%(1.2 million) Figure 3: The use of new channels on line and telephone by Italian households. (Data from Household Savings Outlook, March 2001, a joint publication of Prometeia Calcolo and Eurisko.) 6

9 3 The changing landscape of supply of financial services Painting the changing landscape of the supply of financial services is a daunting task, better left to collections of works by scholars and practitioners such as those found in Harker and Zenios (2000). We focus here on key changes that are relevant to the provision of asset allocation support to individuals through the World Wide Web. Technology and the internet are gaining a growing role in the world of finance and investing. It is impossible to enumerate all those companies operating on the internet offering research, advise, brokerage operations and other important financial data, just one click away. Browsing the web can lead anyone, anytime, to security prices, company and market news, retirement plan consultants. Web sites are designed in a way that even financial novices are able to make decisions on which mutual fund to purchase, whether it is convenient to surrender their life insurance, or place an order to sell or buy a given stock. The web-investor is afforded the autonomy of deciding what is important and what is not, much as the institutional investor has been doing for years. The value added by the internet consists of spreading financial information, besides offering the possibility to interact immediately on the basis of the news just downloaded. The market for direct distribution of financial products through the web is, however, a niche market. It is relatively modest in terms of the actual shares traded through the web compared to traditional channels. For instance, it is estimated that in Italy only 500,000 investors out of 12 million potential users rely on the web for trading. This is consistent with another significant change on the supply side of financial services: the changeover from product sales, pure and simple, to the active management of customers financial planning expectations and needs. In this respect the internet has considerable potential as a facilitator. It is one more channel to be used in the management of existing relationships established with customers through the traditional channels of banks, agencies and advisors. Financial institutions endeavor to provide multi-channel support, keeping up with the trends in Figure 2. The shift towards multichannel distribution is due to both pull and push forces. The pull is coming from the changing demands of consumers and especially the younger generations. The push is coming from the suppliers of financial services who find in the web a rich medium that allows them to reach a wider client base. For a given fixed cost an inverse relation exists between the richness of a channel and its reach to clients. In providing 7

10 Reach Web-based channels Traditional channels Rich Figure 4: Rich communication channels and the reach of clients for a given fixed cost. financial services the web considerably reduces costs since no logistics are involved in the delivery of financial products. The frontier of reach vs rich is pushed out; see Figure 4. The web is not used only to reach customers, it is also a valuable tool for the support of financial advisors. These are the internal clients of a financial service provider. Web-based services support the financial advisors so they can better serve their clients. This leads not only to customer loyalty towards the advisor, but also creates disincentives for advisors in switching firms (Roth and Jackson 1995). In addition, web-based services provide an alternative channel of communication between the firm and the customer, so that the customer-firm relationship is not under a monopoly control by the network of financial advisors. The last points should not be underestimated. Indeed, they are key considerations in the adoption of any system. The advisors are one of the most valuable assets for a financial service provider. The firm needs to serve them well, but also to loosen their tight grip on the clients. Broker Stephen Sawtelle made front-page news in The Wall Street Journal Europe (August 29, 2001) when he left Wadell & Reed and a clash followed for control of his 2,800 clients. Mr Sawtelle was eventually allowed to keep 2,600 of his clients, while 8

11 an arbitration panel ruled that the firm must pay $27.6 million in damages to its ex-broker. Mr Sawtelle s departure could not have be avoided even if Wadell & Reed had supported him by a web-based system he was fired for personality conflicts. However, the 2,800 clients would have been more autonomous in managing their assets directly, and the ensuing battle for their control would have been less disruptive. 4 An Emerging e-banking Model The basic elements of customer experience found in traditional e-commerce are illustrated in Figure 5. They include the following: i) Navigation, or the ability to access and move around the site, ii) Information, that is providing enough information (depth and breadth) to help customers make a purchase decision, iii) Support, i.e. providing customer support regarding various aspects of the product or service and be able to answer questions promptly, and iv) Logistics, that is, handling, packaging, and delivering the physical goods or service to the customer and arranging for payment. An orchestrated execution of all four elements is expected to have a positive impact on customer loyalty and, in turn, on long term growth and profitability (Heskett et al., 1997). Each of the aforementioned elements can also affect each other. For example, if no adequate attention is paid on making the site easy to use (navigation), the result maybe an increase of the number of customers acquiring customer support. Information handling can greatly reduce both customer support and logistics costs. In turn, well executed logistics may further result in reduced customer support costs. Interestingly enough, even today most companies choose to build their competitive priorities around the first two elements: navigation and information. Unfortunately for them, these are also the easiest to imitate, thus eliminating the potential for building a lasting competitive advantage. An e-banking model that builds on the traditional e-commerce dimensions is outlined in Figure 2. Navigation is still an important element in e-banking. An abundance of articles in the popular literature suggest elements to keep in mind when designing a web site (Wen et al., 2001). Customer oriented cyberscape design and various issues of e-quality pertaining to the tangible aspects of the site are the focus of many on-going research efforts, mostly from the marketing area (i.e. Parasuraman and Grewal, 2000). Also important in e-banking is the interrelated dimension of information handling. Customizing, for example, the complex financial services requires continuously updated, relevant and complete information available to the right customers. The potential to truly create and manage a customized 9

12 Navigation Information Loyalty Support Logistics Figure 5: A traditional e-commerce framework. Navigation Support Trust Information Intermediation Loyalty Figure 6: An e-banking framework. 10

13 experience in the customer interface is further discussed by Wind (2001), who presents the concept of customerization in e-banking services. The concept of customerization moves beyond simply recognizing customers and setting up web pages with account information. Customerization creates a true customized experience that integrates a number of elements including, but not limited to, personalized messages and custom-made or bundled products (Bakos and Brynjolfsson, 1999) with the customers lives. The wealth of information available through electronic transactions also creates a different type of strategic advantage. With e-transactions one can track down, among others, the data flow, amount, and source of transactions, which can in turn create a body of knowledge regarding customers and their needs. Most banks utilize such information today to further segment their customers, identify needs and build customer loyalty. Only last year, Fidelity Investments identified and directly contacted 250,000 serial-callers prompting them to use their web site and/or their automated system. Quite often such information is used to identify the revenue-generating customers. At First Bank in Baltimore, for example, moneymakers are given the option to click on a web icon to chat with a customer service representative. The rest of the customers do not even know about the existence of cush an option. Although many believe that a successful site will result in minimal customer support requests, this has not been the experience of many successful internet firms (i.e. Everdream.com, Amazon.com, LandsEnd.com etc.), which have recognized the importance of customer support within e-service. As a result, such firms place increasing attention on their support function. According to a 2001 study by Gomez Inc., 84% of e-banking customers actively use and pursue customer support. Given the increasingly complex financial environment customer support which in the case of financial services also includes financial advising becomes crucial and can provide a major source of competitive advantage. The application we present in the following Section, is an internet based system adopted by italian banks, providing support for personal financial planning. This system also analyzes the risk of the portfolio in terms that are intuitive for a layperson and monitors its performance in achieving the target goals. As such, it provides additional support towards customer advising. Given the primary absence of a tangible product in financial services, logistics is no longer a key element of the framework. It is well accepted that the dimension of logistics can be a major source of competitive advantage. Amazon, for example, the leading e-commerce in sales with nearly $3 billion of sales a year already, turns over its inventory held in centralized warehouses much faster than bricks-and-mortar retailers do. In e-banking, however, the dimension of logistics is replaced with financial intermediation 11

14 and the management of risk (see also Zenios and Holmer, 1995). Logistics in financial services is not so much about the physical transfer of products, as is the transfer of risks. The integration with traditional and/or existing models for financial intermediation provides an additional challenge in e-banking, although little literature exists on the topic. Saatcioglou et al. (2001) present an interesting approach for developing proprietary indices that focus on individual customer needs and using the internet to provide customers with proprietary financial instruments on these instruments. These include a tool for selecting customized optimal portfolios and a bundle trading mechanism (see also Fan et al., 1998) to help establish and rebalance portfolios as needed. The most important perhaps element in the customer experience in e- banking, is trust, which is gained by an orchestrated delivery of all the aforementioned elements of the framework. Surprisingly, despite all the advertised and promising features of e-banking being convenient 24 hours x 7 days a week, reliable and at least as secure with traditional banking, consumer demand is still not there. In a recent study on e-banking from Gomez Inc. perceived security was still among the primary reasons for disusers. Electronic money transactions can be undermined by latent frauds and illegal access to private information. Issues of data confidentiality and privacy become crucial, especially in a risk-dominated cyberspace where transactions are conducted at a distance with limited contact with the service provider and uncertain knowledge of the outcome (Reicheld and Schefter, 2000). Trust is, of course, a more general concept relating to the ability of the firm to deliver its promise (Berry, 1995). Thus, a well executed experience involving all the elements of navigation, information, support and financial advising and efficient financial intermediation, will result to higher levels of trust, as perceived by the customer. The interrelationships among loyalty and trust have been well explored within the marketing and services management literatures (i.e. Berry, 1995; Berry and Parasuraman, 1991) and are now becoming the focus of numerous studies within the management information systems (i.e. Ba and Pavlou, 2002) and e-commerce literatures (Urban et al., 2000). Trust in turn leads to higher levels of customer loyalty. Trust is thought to be the cornerstone for successful and lasting relationships, as it determines the customers future behavior and loyalty towards the business (Berry and Parasuraman, 1991). Reicheld and Schefter (2000) also report that e-customers are less price sensitive as originally thought and more sensitive to trust. Consider for example, the Vanguard Group, the fastest growing mutual fund company over the past decade, with more than $ 500 billion in assets currently under management, having spent more than $ 100 million into the development of its website. It is not uncommon to see certain high flier funds flagged, bearing 12

15 a word of caution from the CEO Jack Brennan, warning that recent returns may not be sustainable in the future. This is in contrast with most competitors who aggressively promote the returns of such hot funds. Despite the difficulty of accessing its site (need specialized sophisticated encryption technology software and a password that will only be mailed) Vanguard has gone overboard not to jeopardize the trust among the customer base on which they focus. The primary antecedent of trust is customer loyalty, which has well been discussed in the literature as a driver of long term profitability and growth (Reicheld, 1996; Heskett et al., 1997). Today, the exploration of the construct in e-banking, including its drivers and antecedents, and its various sub-dimensions (i.e. attitudinal and behavioral loyalty) is at best in its infancy. Despite, however, the dearth of relevant literature specific to e-banking, e-loyalty is considered by both academics and practitioners as the most important driver of long term growth and profitability (Reichheld and Schefter, 2000). 5 The design of a web-based personal asset allocation system In the Section we present a brief description of a web based personal financial system and discuss some of its elements as they relate to the e-banking model presented in the previous Section. The system was designed by Consiglio et al. (2002) and has been adopted by several Italian institutions. We also briefly discuss some key characteristics of a successful business plan for the implementation of the system. Individuals have a variety of financial goals for which they must plan. A house, a car or other tangibles must be purchased, children education financed, retirement planned, and health care and other insurance covered. All of these requirements face the typical family, but they appear with varying intensity at different stages of one s life-cycle. The young parents are concerned mostly about children education, newlyweds for purchasing a home, and middle-age business executives for their retirement. Some personal asset allocation systems (e.g., the HOME Account Advisor TM, see Maranas et al.,1997) advocate an integrative approach to financial planning taking into account all of the above targets. Others (e.g., FinancialEngines.com of Sharpe) focus on a single problem, namely that of retirement planning. The system of Personal Financial Tools (PFT) we discuss provides support for each one of the goals facing a typical family by segmenting the 13

16 family s planning problem into distinct sub-goals. The user specifies the financial planning problem by indicating the time horizon of the project, the target goal, and the current asset availability. This information is sufficient in calculating the target return that the individual expects. The system of PFT will then assist the user in structuring an asset allocation consistent with this target return and the appetite towards risk revealed by answering an on-line questionnaire. For each user-specified goal PFT provides three interactive modules: Personal asset allocation: This determines the strategic asset allocation decisions. Users are asked to specify their targets, their planning horizon, and the availability of funds. The users must also reveal their attitude towards risk. A scenario optimization model (see Consiglio et al., 2002; Consiglio et al., 2001) specifies an asset allocation plan that meets the target using the available endowment, and which is consistent with the user s risk profile. Personal rating: This provides a data warehouse of financial indicators and ratings of mutual funds to assist users in tactical asset location. The Personal Rating tool provides a menu of mutual funds offered for sale by the institution, that are consistent with the broad asset categories in the client s strategic plan. The menu comes with ratings of the funds and other information relating to their past performance. The multitude of mutual funds available to investors makes the tool invaluable in assisting users. (For instance, the Investment Funds brochure of UBS offers more than 270 funds.) Personal risk analyzer: This measures the portfolio risk and monitors the portfolio performance in achieving the target goals. These three tools form part of an integrated interactive system that allows users to carry out game-of-life simulations, addressing both strategic and tactical issues. The personal risk analyzer provides a control module to ensure that the developed strategy and its execution will meet the targets. 5.1 The integrated decision support system The system is designed as a combination of an off-line module that runs the optimization, and an online module for product customization. The off-line module exploits the fact that large population segments are homogeneous, so that one could optimize for a range of planning horizons, financial targets, and risk preferences. Customization of a plan for an individual is then extrapolated from the pool of optimized plans. 14

17 !"#$% & ' ( )*' &+,-,. $ /0 * & Figure 7: The off-line system: The optimization model is run every month for several combinations of risk profiles, horizons, and target portfolio growth rates. (Source: Consiglio et al., 2002.) The scenario optimization model is run off-line and the results are stored in a solution database, see Figure 7. The online system (Figure 8) interacts with the user and, for a given risk profile, horizon and final goal, interpolates the optimal portfolio from the available solutions in the database. The online system is interfaced through a set of web pages. The user s inquiry is first analyzed by an expert system that maps the risk profile to the proper risk aversion parameter, and the minimum growth rate is calculated. These data are passed on to the interpolation module that consults the offline system through the database of solutions, and determines the strategic asset allocation which is closer to the user requirement. The broad asset allocation is then mapped to a set of mutual funds which can be purchased by the investor. A fund chooser takes care of this task by showing to the user a set of mutual funds, offered for sale by the institution, from the broad asset classes selected by the optimizer. A database of available funds is maintained by each institution providing the online service, and it reflects the institution s product portfolio. 15

18 !"#!$%&'()*)+(,-% ; 7<= /. /0 6 / 78 9 : Figure 8: The online system: The user interacts through the web pages and the specific enquiry is mapped on to the solution database and matched with specific products from the fund database. (Source: Consiglio et al., 2002.) 5.2 Business plan for the deployment of the system The development of the appropriate engine and the conceptualization of the web-based service was a significant step in building the system. However, its eventual success was critically dependent on the business plan. We attribute the successful adoption to two key characteristics of the business plan: 1. Concentrate the development to an Application Service Provider. Prometeia Calcolo 3 stuff, working closely with client institutions and the team of academic consultants, designed a turn-key system relying on the off-line optimization model, with custom-made on-line system to support the idiosyncratic needs of each institution. The off-line system constitutes the generic engine box and it is identical for all applications. The input data and the user interface were customized. Input data concern primarily the types of products offered for sale, and this is already part of the business strategy of the institution. Similarly, some institutions may have views on market trends 3 Prometeia Calcolo S.r.l. is a limited liability company established in 1981 to carry out economic research and analysis, and provides consulting services to major industrial companies, insurance companies and banks, as well as government agencies in Italy. 16

19 and may wish to convey those to their clients in the specification of scenarios. More often than not, however, they rely on market expectations from other sources. The information required on the part of the consumer is also custom-made for each application, driven by the market segment at which the business is aiming. Similarly the requirement for the user-interface hinge upon the core business of the sellers and is well-understood by their marketing departments. No particular expertise was expected on the part of the client institutions either in financial engineering or in web-based services. However, the clients performance specifications were adhered too. Much as a new car buyer can be satisfied with a particular automobile without knowledge of the complex electronic controls running the engine under the hood, so the clients of Prometeia were satisfied with the services provided by the web-based system and the Personal Financial Tools, without being aware of the advanced technology behind the user-interface. 2. Adopt a b2b4c view of the web-based system: Business-to-Businessfor-Consumers. In the provision of financial services there are two types of business involved. The product originators, such as investment Banks, and the distributors, such as retail banks, financial advisors and brokers. The system developed enhanced the integrations of the process from product origination to distribution to the consumer. Distributors have direct access to several product originators if they so choose, and they can even use the system to originate their own products. A product originator can also reach financial advisors of multiple distributors. Not only b2b4c integrates better the existing service chain originatordistributor-consumer but also creates alternative processes at no extra cost (e.g., originator-consumer, distributor-multiple originators). These alternative processes may cater to different market segments. It is still too early in the use of the system to determine whether if any of these new processes become dominant. In our business plan we took the view that the developed system is one more channel of delivery of services to be added to existing channels. This is consistent with the behavior of consumers who rely on more than one delivery channels as highlighted in Figure 2. Both distributors and originators could achieve the same results with traditional delivery channels, but the rich web-based channel enhances their reach; recall Figure 4. Perhaps this enhancement is better understood in observing that product originators can 17

20 now reach directly the consumer without the need for an elaborate network of sales intermediaries. The system resulting from the combination of technology and business plans adds value at two levels. At a basic level it supports the provision of personal asset allocation advise to consumers. At an advanced level it supports the complex needs of financial advisors in serving their clients, designing customized portfolios, and dealing with the product originators. Depending on the business plan of each client institution the system would add value at either one, or at both levels. Four banks are now using the system and have benefited from its adoption. The benefits vary, depending on each bank s niche market. For instance, advertises itself as Europe s leading online broker. It was created in 1995 as a direct banking subsidiary of Commerzbank AG to offer clients a complete range of direct brokerage services. Within five years in the business, ComDirect became one of Europe s leading online brokers with the most heavily frequented financial website and over 631,000 clients (over 595,000 of them direct brokerage clients; data as of June 30th, 2001). ComDirect takes pride in offering a whole range of professional information and analysis tools to help clients in their direct trading. Clients order via the Internet on the basis of solid information provided either by ComDirect or by other information providers. In the first trimester of 2000 more than 8 million orders were placed through 60 million visits to the company s site. ComDirect offers services trough.com subsidiaries operating in Germany, France, the UK, Austria and Italy each specializing to some extend to the conditions of the local market and complying with local regulations. The personal financial tools were first deployed by the Italian subsidiary of the company, and are supporting a client base of 10,000 during the first year if its operation. A second user is a subsidiary of one of the oldest and largest banks in Italy going back to the Italian renaissance in the 1400 s. The subsidiary has a network of 1,500 financial advisors that support tens of thousands of clients in planning their personal investments. This Bank uses the web-based system at the basic level, adding one more channel of delivery of services to their clients. The Bank also uses the system for advanced support to the financial advisors enhancing their access to product originators. The use of the system for both basic and advanced support poses a challenge in ensuring that consistency is preserved between the recommendations of the advisors and the recommendations of the system. In part this issue is resolved by careful design of the web-based system specifications, so that its recommendations are consistent with the general recommendations offered by the advisors. The Bank management also encourages the use of the system by 18

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