A Vision for Japanese Banking in the Networked Economy -- Taking Technology Out of the Back Office and into the Board Room
by Michael Cannon Brookes

If you ask the President of any Japanese bank what are the three things that keep him awake at night, the bank's information technology (IT) needs are unlikely to be among them. Instead, the list of headaches will probably include how to respond to deregulation, how to meet non-traditional competition, and how to enhance revenue and keep costs down. Solutions can be found to all of these fundamental challenges, however, by reassessing the bank's IT strategy. With the advent of e-business and the networked economy, the task facing banks all over the world, and particularly banks in Japan, is how to transform IT from a back office cost center into a driver of the business.

As industries go, the financial services sector is the biggest IT user of all. So helping banks to use IT to transform their business also requires a change of mindset among the technology companies that serve them. If banks need to do a better job of making IT serve their business, technology companies like IBM need to start making their offerings more relevant to the business needs of bankers.

The need for technology companies and their banking customers to work together has never been more pressing. The combination of powerful software and widening Internet and intranet networks is revolutionizing the way all industries, businesses, institutions and individuals buy and sell goods and services, pay their bills, and do their banking. The networked economy is creating a new infrastructure for conducting business.

Deregulation measures, such as Japan's Big Bang, are opening up international financial markets to non-traditional competition. Therefore, businesses possessing their own global networks and customer lists, such as telephone companies and web browser operators, are seeking to leverage their strengths to offer financial services to customers and compete head on with traditional financial institutions.

Banking customers are becoming more demanding and more willing to switch their loyalty. Round-the-clock, convenient service by phone or over a PC may count for more today than a traditional banking brand image of trust and security. Enhancing distribution, improving customer service and identifying alternative customer channels now rank alongside the ever-present business objectives of decreasing cost to income ratio, reducing fundamental costs and diversifying revenue streams.

Despite the limits placed on them by the recession, Japan's banks are now addressing the need to provide new services to keep pace with potential competition. Following the introduction of 24-hour ATM services by foreign competitors such as Citibank, ATMs are now open longer. Banks are also venturing into new distribution channels to create better customer service, improve customer loyalty and strengthen the marketing of financial products. Fuji Bank recently introduced automated consultation and contract machines (ACMs) that allow customers to carry out complex transactions including opening new accounts and making loan applications. The terminals offer innovative video-conferencing facilities for face-to-face consultation with service staff.

Banks who can employ IT effectively and creatively will open new markets and drive profitable new products. Fuji has already experienced an increase in new account openings from customers who find it more convenient to use ATMs than to go to a bank during opening hours. New channels can also help to keep costs under control. Fuji Bank is pursuing a new low cost banking model using unattended branches that offer a full range of services at a fraction of the cost of traditional branches and for longer hours.

However, these new services will only build customer loyalty and drive new business if they are backed by strong customer data. Traditionally, banking has been organized by separate product areas. In the era of the networked economy, however, banking will be driven not by a bank's products and services, but by customer data. Bank's hold huge stores of information about who their customers are, what services they use and what services they may need. Banks must turn this data into active information that can drive the business, and for that, IT has to move to the center of the business.

Some of Japan's city banks have begun using a variety of customer relationship management software, such as IBM's Customer Discover and Intelligent Miner applications, to sift through customer data and draw out key information that can help improve service. By segmenting their customers more accurately, banks are finding that positive responses to direct mail campaigns have risen dramatically. Likewise, when a customer rings a call center, service staff can call up the customer's data so they know exactly who the customer is, and can process the inquiry faster.

To make this leap, however, a bank needs hardware, software and systems to put the data to work. Most of all, it needs a strategic vision of how the networked financial institution operates in the networked world, and a coordinated strategy and framework for deploying IT. Likewise, technology firms now need to match their offerings to the overall strategic needs of the banking industry.

The inextricable link between banking strategy and IT needs to be understood by both banks and their IT suppliers. From the president or CEO down to the line-business managers, every banker needs to be aware of how technology can create the networked bank. At least a third of their staff are in future going to have to come from the technology side. There are clear signs that this process is already underway. The President of Bank of Tokyo Mitsubishi is a former CIO, and five out of nine of Japan's city banks now have professional bankers running the IT departments.

In turn, IT companies need people who understand banking and can credibly go to the CEO and put the capabilities of technology into banking language. IBM now holds seminars to teach our technical staff about banking, and we are hiring more staff and consultants with banking backgrounds. We foresee that in the future about a third of IBM's banking experts will have a financial rather than a technology industry background.

IT outsourcing for banking customers is one area where both IT providers and bankers are finding the right balance. In March 1998, Daiwa Bank signed an agreement with IBM Japan to outsource its IT resources and functions. In March this year IBM Japan signed another contract with Mitsubishi Trust and Banking. Partnerships of this sort, of which we can expect to see more, will enable bankers and IT experts to concentrate resources on areas where each has a respective advantage.

However, IT companies and their banking clients will need to work closely together to identify a strategic and long-term vision for how a bank can benefit from IT outsourcing. As a technology company, IBM has always been committed to using the power of technology to bring tangible benefit and competitive advantage to our banking customers. In the past, hardware and software sales drove the relationship, however, now we are working with our banking customers to establish a vision of how their business can adapt to the needs and demands of the networked economy, and identify how the application of technology can provide the answers. To do that successfully we need to understand their business, and they need to understand ours. As all industries are transformed by the advent of e-business, the most successful partnerships between banking customers and IT suppliers will be between those who have the right balance between technology skills and industry skills.

Michael Brookes is general manager for banking finance & securities industries at IBM Asia Pacific.

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