Magazine article American Banker

Banks' Budget Planning Methods Are Not Ready for Internet Time

Magazine article American Banker

Banks' Budget Planning Methods Are Not Ready for Internet Time

Article excerpt

As quickly as the Internet is changing the rules of business for banks, it is also wreaking havoc on traditional processes for yearend budgeting and forcing many banks to rethink how they plan their funding for technology projects.

"Corporate budgeting methods were designed for predictable, slow-moving business conditions," said Frank E. Gillett, an analyst at Forrester Research in Cambridge, Mass., in a brief. "Rapidly evolving Internet technologies are accelerating the proliferation of new business models."

Such standard processes as return-on-investment analyses do not jibe with the pressures banks face to make investments quickly, experts say. That the Internet is the fastest-growing area of technology spending only makes the problem worse. Electronic commerce commands 10% of bank technology budgets globally, making it as heavy a budget drain as maintenance of physical branches, according to Ernst & Young's annual survey of technology spending in financial services. Internet spending is expected to rise to 14% of the budget by 2001, versus just 3% in 1997.

Banks are responding by forming dedicated Internet development groups and in some cases exploring venture capital funds to feed their Internet initiatives. At the very least, they are isolating their Web project planning from their more traditional technology expenditures.

"Clearly, you have to look at the Internet differently from other technology investments," said John J. Beale, executive vice president and chief information officer of $6.7 billion-asset City National Bank in Los Angeles.

City National, which last week unveiled a newly branded set of electronic services, has had to "factor in the speed of the Internet and the fact that there is no single-bullet business model" in justifying its Internet expenditures, Mr. Beale said.

In September the bank created an e-technology group focused solely on Internet product development. Part of its mandate is "building that new business model," which would blend requirements of the Internet world with traditional models, Mr. Beale said.

One problem with Internet investments is that they present a mixed bag in size, cost, and complexity. Some projects simply introduce electronic access methods, while others aim to transform or create a business.

Using traditional return-on-investment analyses, "banks would never fund any" Internet projects, said Jaime P. Punishill, a Forrester analyst.

Projects aimed at providing Web access require a long time to show a return, since consumers are still in the early-adopter stage, Mr. Punishill said.

And with efforts designed to create a new way of doing business, the analyst continued, "you can't build an ROI case. Even Priceline and don't know what the new business models are."

Some banks have succeeded in at least separating the two types of Internet endeavors by creating divisions dedicated to the more transformational ones.

Citigroup, for example, created e-Citi, which built the company's Internet-only bank, Citi f/I, and is behind several other Internet businesses at Citigroup. Deciding which businesses are to be part of e-Citi is a source of continual discussion, said Edward D. Horowitz, chief executive of e-Citi and a senior executive of Citigroup.

Mr. Horowitz said Citi follows this criterion: If a business was around before the Internet and can lower its costs by using the Web, it is not included in e-Citi; one that could not exist if not for the Internet is included.

Chase Manhattan Bank had the same philosophy in mind when it launched Chase. …

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