Who Will Capture Value in On-Line Financial Services?
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Should banks and software companies collaborate, or fight it out? Both players have options to redefine relationships between themselves and customers Trend toward non-exclusive arrangements and standards Two very different sorts of competitor are jockeying for dominance in the rapidly evolving market for on-line personal financial services. Banks and other incumbents bring to this arena their customers, brands, and starting position as trusted providers of financial products and services. Meanwhile, software companies offering personal financial management (PFM) programs, bring their own customer base, a bias toward designing products that delight users, and experience of competing in another volatile arena. The leading examples of these PFM programs are Intuit's Quicken and Microsoft's Money. Broadly, both these types of players share the same objectives: acquiring customers, providing them with new financial information, services, and products, and doing so in a way that is difficult for competitors to replicate [ILLUSTRATION FOR EXHIBIT OMITTED]. The participants in this game are caught up in the classic web structure that characterizes many high-tech industries during their early uncertain phase of development.(*) Players are jostling to shape an inchoate industry structure to their own advantage, while at the same time cooperating and even allying with many of their ostensible competitors. With on-line consumer revenues currently small, and direct profits probably negligible for at least the next few years, players should be looking less at near-term revenues and profitability than at long-term control of industry structure. Those that succeed in creating dominant on-line services and access channels should survive and prosper in the more efficient financial services sector that is certain to emerge from today's upheavals. The stakes are huge, especially for banks. Revenues from software and upgrades aside, key portions of the $84 billion US payments business are in play.(**) Evolving customer relationships will determine whether a slice of this traditional financial services pie will be swallowed up by new competitors. Though the ultimate economics of the industry are impossible to predict, it is likely that much of the value created by the coming wave of computer banking will be passed on to consumers in the form of lower prices and new value-added information and services. A classic web As the recent history of on-line financial services illustrates, the behavior of participants in a web appears irrational and chaotic at first sight. First, banks try to develop proprietary home banking packages; then they rush to team up with Quicken; now they want to deliver financial services over the Internet. As is typical, different players in the web have contrasting strategic perspectives and capabilities, so that winning the game means something different to each. To take a few examples: * Service strategy. Intuit's on-line financial service strategy is founder Scott Cook's main concern (and primary source of personal wealth). For Microsoft's Bill Gates, personal financial service strategy ranks as one of a handful of top priorities, though not the highest. In most banks, however, third- or fourth-level managers with only functional responsibility are leading strategy development and implementation in this arena. This is not to say that software companies enjoy an inherent advantage over banks, but that the way each type of competitor marshals its resources and thinks about problems is going to be different, and a key determinant of how industry structure will develop. * Technical flexibility. The culture of software companies embraces short cycle times, quick upgrades, and product cannibalization. By contrast, a bank's approach to applications development often involves creating large crossfunctional teams for long-term projects to develop new software linked to cumbersome legacy systems. …