-------------------------- N E W S R E L E A S E ---------------------------- Auburn University - University Relations (334) 844-9999 ------------------------------------------------------------------------------ 8/11/95 Bob Lowry (lowrygr@mail.auburn.edu) (Editors -- The following op-ed piece is offered for your consideration and possible use): HOME COMPUTERS MAY SOON BE CONSUMER'S BANKER AND BROKER By JAMES R. BARTH and R. DAN BRUMBAUGH JR. There are few press conferences whose importance exceeds their hype. Intuit Corp.'s recent announcement that 19 of the largest financial firms in the United States are joining it to enable their customers to conduct banking transactions on-line was one such press conference. The service will use Intuit's personal-finance software program, Quicken, and is scheduled to begin this fall. Another contestant in the race to provide on-line banking services is a small bank headquartered in Lexington, Ky. Cardinal Bank Shares, a $580 million holding company, has formed a subsidiary, Security First Network Bank, that will exist solely on-line. If all goes according to plan, it will be up and running at the end of the summer. The first on-line banking transaction will be a historic moment not unlike the first automobile sale or the first commercial airline flight. It will signal a commercially viable use of a new technology that may ultimately eliminate what until now we have considered the retail aspects of banking, stock brokerage and more. The implications are profound. The promise is electronic access to all financial transactions at substantially lower cost. There will be no traveling to the bank or broker, no paper checks to fill out, no stamps to lick, no statements in the mail and no bills piling up on the kitchen table. One's personal computer can, in essence, become an in-home bank branch, brokerage outlet and financial planner. As an example of the kind of cost savings that may result, consider that payment by check costs banks and customers about 79 cents compared with roughly 25 cents for electronic payment. Potential annual savings from just replacing checks amount to $30 billion. The immediate beneficiaries of Intuit's service will be small businesses, including home-based businesses that already have the computer capability to access the promised service. But home banking surely is next. In the past, home banking failed to ignite because households did not have the appropriate capabilities. This is no longer the case. Household surveys by the Electronic Industries Association show that 30 percent of households have personal computers and 10 percent have modems. The association also reports that factory sales of personal computers, add-ons and software have risen 85 percent since 1990 to more than $13 billion in 1994. This represents a substantial acceleration in the pace of sales. Households are rapidly increasing their capability to engage in home banking on-line. Other measures of consumer acceptance of electronic funds transfer show similar rates of increase over the same time period. The percentage of the private sector work force using direct deposits has nearly doubled since 1990. Total automated clearinghouse payments increased 63 percent. The dollar volume of ATM transactions rose 50 percent. The dollar volume of credit card transactions rose by 41 percent. To date, the increasing array of choices that consumers have in financial services has worked to the disadvantage of banks. Consumers have been obtaining financial services on better terms at competing financial institutions. Indeed, the extent to which consumers now bypass banks has dramatically changed the role of banks in the financial marketplace. In 1950, banks held 65 percent of the total assets of all U.S. financial firms. Today, their share has fallen to 34 percent. The lesson is clear: Consumers demand banking services, but not necessarily banks. The entry of banks into on-line home banking services is consistent with their efforts to fight back by providing a broader menu of products and services. These efforts to adapt to the rapidly changing marketplace have been limited by restrictive banking regulations that separate banking and securities activities. In recent years, some of these restrictions have been eased and some members of Congress have introduced legislation that grants greater securities and insurance powers to banks. The outcome of the legislation remains unclear, nonetheless, because insurance agents, securities brokers and banks of different sizes are battling to protect their turf. The Intuit announcement demonstrates how market forces and technological developments can leapfrog belated congressional efforts and interminable turf battles. With Intuit's software and with its union with American Express, Smith Barney and 17 large banks, consumers will be able to use one link for the first time to access traditional banking, credit- and charge-card services, brokerage services, financial planning and more. This combination of services means that from the consumer's point of view, functional separation of banking and securities brokerage services essentially may be eliminated. The effect on the banking and brokerage business and their employees is going to be profound. The retail sales forces of banks and brokerage houses may shrink substantially, as may the ranks of financial planners. The number of banks and brokerage buildings may also shrink. Consolidation among banks may increase substantially as the technology provides lower costs with large size and scope of activities. Nor is all of this just a domestic phenomenon. Banks have already been affected by the increasing demand for goods and services abroad. In 1965, the United States accounted for nearly 40 percent of the world's gross domestic product. Today, the corresponding figure has fallen to less than 25 percent. As a result, many U.S. firms are obtaining a larger portion of their revenues from abroad. With large, growing middle classes in other countries, this trend is likely to continue. To serve this growing global market, banks are expanding abroad. In some cases, U.S. banks abroad are granted greater securities and insurance powers than they are here at home. The rest of the world is now much more accessible to on-link banks. Intuit's financial software is designed for us on all leading computer operating systems, including Microsoft's Widows and Macintosh. This means that consumers will have global access to banking transactions on-line in the near future. It is rare these days that a much ballyhooed announcement is really underballyhooed. Intuit, its collaborators and its competitors in on-link banking will likely provide the world with a greater array of financial services at lower prices. Given the importance of financial intermediation in economic development, the economic and social benefits should be enormous. --------- (Barth is the Lowder Eminent Scholar in Finance in Auburn University's College of Business. Brumbaugh is a San Francisco economist, author and consultant.) # # # aug95:AU-banking CONTACT: Barth, 334/844-2469 (jbarth@business.auburn.edu)