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 (see Exhibit 1). 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.¹ 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.² 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.
• Operations. Banks know that their customers’ trust is rooted in reliable operations. Not even the biggest and best software companies have ever delivered services in the high-volume transaction environment characteristic of banks. Nor do recent financial services entrants truly understand how quickly errors can destroy trust and drive customers away.

Their contrasting cultures have made negotiations between traditional providers and software houses particularly fraught

The skills and strengths of both sides are needed to create viable consumer services. But their contrasting cultures have made negotiations between traditional providers and software houses particularly fraught. Their relationship is at once that of allies and adversaries. In a web, players must ally in order to create value, but compete in order to divide it up. As long as both parties are moving rapidly to create value, the division of the spoils remains an open question. In the end, it will be determined by the way in which competition is defined and conducted.

A year after a failed buyout, Microsoft and Intuit are competing with one another for the right to mediate the relationship between financial institutions and their customers, albeit in different ways. CEOs of financial institutions are openly questioning whether Intuit and Microsoft are facilitators of customer relationships or competitors. These players feel they need each other to meet the emerging needs of consumers for on-line banking services. At the same time, each is concerned that the other will walk away with most of the potential value.

What’s the game?

Many observers would define this evolving arena as software companies pitted against individual financial institutions. Intuit and Microsoft add financial institution partners one at a time, and have not so far set any limits on the type or number of partners they may ultimately acquire. Similarly, most financial institutions think in bilateral terms about their arrangements with new industry participants.

But there may be other, more subtle ways to define roles. A software house that proclaims a limit on the nature and number of partners with which it will proceed, at least for a fixed period, could attract many wavering institutions. It must, however, be prepared to deliver on the implications of such a move in terms of customer service, enrollment, and fulfillment. Alternatively, or additionally, a software company that clearly defines its aspirations without threatening incumbents may be able to move share in its direction, particularly if it can employ these institutions as its distribution agents.

Players can redefine roles and rules in a way that will influence the structure of the industry

Most banks regard the closed nature of Intuit’s bill payment system as a real threat, for instance, because it separates bill payment, with its proven customer retention value, from the demand deposit account relationship. Microsoft’s recent announcements of an alternative bill payment arrangement with Visa and specifications for Open Financial Connectivity, both of which create new options for incumbents, illustrate how a player can redefine roles and rules in a way that will influence the structure of the industry.

Shifting the balance

There are many ways that financial service providers can tilt the economics of these relationships in their favor

Yet there are many ways that bankers and other financial service providers can tilt the economics of these relationships in their favor. They should remember that a widening gap between the information that financial institutions actually provide to their customers and the information that might be delivered was what created the market opportunity for PFM software in the first place. Closing this gap, particularly through other channels, might be one approach for incumbents seeking to regain advantage.

Value-added paper statements and the replication by incumbents of core Intuit bill payment capability over the Internet represent two means of weakening Intuit’s channel advantage and unique information role. Other possibilities exist, but the overall objective for incumbents remains the same: creating new value-added information offerings for customers in order to prevent a third party from controlling and extracting high tolls on the only channel for useful information.

At the moment, most financial institutions see just two PFM software providers, Intuit and Microsoft, and wonder what Bank of America and NationsBank are doing with their proprietary competing product, MECA. The nature and number of substitutes for the "big two" will be important determinants of power and surplus allocation in this new business. Accordingly, which platforms individual institutions choose to develop or support will influence not only their own relative bargaining power, but also, taken together, the outcome for all participants.

Charles Schwab recently entered into an agreement to be one of Intuit’s on-line partners. While its Street Smart software provides many value-added features, there are gaps between it and the integrating functionality of Quicken. But Street Smart’s existence, and Schwab’s willingness to enhance its functionality, will make for a much more balanced negotiation than Schwab would otherwise enjoy.

All these methods of influencing industry structure assume the individual firm as agent. In practice, however, it could be that delivering on the high standards of reliability, consistency, and confidentiality that customers expect of financial intermediaries will require incumbents to employ existing industry associations or form new ones. The current lack of robustness, scale, and standards in electronic bill payment, for example, cries out for an industry standard. While the Visa/Microsoft deal represents one approach to the problem, the National Automated Clearing House Association (NACHA) and associations that maintain cross-bank networks of ATMs, such as Cirrus and Star, could play keys role in enhancing the functionality of this core on-line service, and perhaps redress the balance in negotiations between incumbent institutions and the providers of PFM software.