c



  
¬
 

    

 


"On-line banking on the Internet is the Holy Grail of the Banking industryxInternet banking
does two things we have always wanted to do x it satisfies our customers' needs and it reduces
our costsx.it is the key to electronic commerce, which could be the most important event in
commercial history." These were the words uttered by Dudley Nigg, Wells Fargo's executive
vice-president of direct distribution, as he sat in his office in downtown San Francisco where
mammoths such as Wells Fargo and archrival Bank of America have dominated the banking
industry for over a century. (See exhibit 1, 2, and 3 for a summary of Wells Fargo Financial
History.)

In early 1997, recognizing that the future of the electronic commerce "upon us," the Chairman of
Wells Fargo, Paul Hazen, decided to form a think-tank to strategize how the company could take
advantage of its position as a leader and innovator of the banking industry in order to solidify its
position in electronic commerce. On May 21, 1997, Hazen initiated the formation of a new
'Office of the Chairman', organized around 3 major customer segments and central staff groups
that support them. The objective was to bring creativity and vision to new innovations. As part of
this new venture, a separate business unit dedicated to online financial services was set up, to be
headed by Dudley Nigg. Given the great possibilities of the Internet, Dudley and his staff
recognized many opportunities for the company, and the industry as a whole:

a Wired customers, who are on average wealthier, younger and more educated, tend to be
much more profitable than unwired customers.
a The web is, by far, the most efficient channel for designing and distributing new
products, and also serves as a window to web-based electronic commerce.
a The potential for fraud and mis-selling is so severe that a great advantage is conferred, to
banks in particular, which are in a position to promote themselves as 'certifiers' of
electronic transactions, and 'trusted distributors' of their own and third party financial
services.
a With three levels of security x at the desktop, the network, and the bank server, the Net
will provide banks with far greater security than conventional check and card payments
systems.

Wells was the first bank to recognize some of these possibilities when it went online in 1989 and
was first to begin offering Internet services in May 1995. Since then, a slew of competitors, old
and new, have made competition in this industry even more fierce. Wells has thus far been the
leader in innovation creativity and speed to market. SmartMoney magazine named Wells Fargo
"Best Online Bank" in 1996. And, in 1996, the Wells Fargo Internet site was also awarded "Best
Overall Site by a U.S. Financial Institution" by the Online Banking Association. Yahoo!, the
Web site locator, gave the bank's home page a four-star rating (its highest).

However, Dudley and his team also realized a downside to online banking and the new era of
electronic commerce. The ease and affordability with which any bank could gain an Internet
presence and access to a significantly larger market meant that large banks would not necessarily
enjoy the advantages that they had in the past over smaller banks x lower operating costs,
marketing advantages, larger distribution channels. Would 'bigger is better' continue to
characterize an industry where electronic commerce was seemingly the future of financial
transacting? In addition, because of falling regulatory barriers and the ease of reaching massive
markets of consumers by merely setting up a server and making small investments in software,
virtually anybody could become a competitor in the industry. Who would the new competitors be
and how will Wells Fargo fight them off?

Banks were facing increasing risk that they would be competing at a disadvantage with non-
banks in the not-too-distant future. These potential competitors included those organizations
traditionally not involved in the banking industry, such as computer and technology firms and
cable and other media companies that had a technological edge and the proper vision of
electronic money to lead the future of commerce. At worst, banks risked being bypassed or left
behind, at the least, banks were faced with having to play catch up to the VISAs and Microsofts
of the world, who would certainly be more formidable competitors than the Digicash, Cybercash
and Mondexes of the world (small niche players who had not posed a serious competitive threat).
In a now infamous article, Microsoft CEO Bill Gates was quoted in a June, 1994 interview in
Newsweek as saying: "Banks are dinosaurs . . . we can bypass them."

While the future seemingly held great risk and uncertainty for the banking industry as it had
traditionally been known, it still had some advantages going into the electronic commerce wars
of the 21st century. Of all online financial services providers, banks had an unparalleled
information base and Wells, for one, intended to use this to get the right offers quickly to the
right customers. In addition, banks had an intangible asset that would be very hard for
competitors to break down, one that they have been building since the early 1800's - customer
relationships.

Dudley and his staff therefore faced great challenges as well as great opportunities afforded by
the growth and seemingly unlimited potential of the Internet. Now that customers were
successfully being served in the banking sense on the Web, the "next step is to offer them a
broader array of products." How would this company, so tradition-rich as an innovation leader
with a reputation for superior customer service, maintain its leadership position in the industry?
How would it ward off the attacks of so many competitors, large and small, from a barrage of
industries, who could, at the same relatively low cost, offer the same mix of products and
services just as efficiently and cheaply as Wells Fargo had for so many years?




Wells Fargo opened in 1852 as a banking and express firm, providing a wide variety of services
to pioneers, including the operation of stagecoach lines, the transportation and safekeeping of
gold and the delivery of the U.S. mail. Nothing is more evocative of the Old West than a
stagecoach. In the heyday of overland staging, the 1850s and 60s, Wells Fargo boasted a line of
1,500 horses and 150 Concord coaches. Stagecoaching was not the sole province of Wells Fargo,
nor was it Wells Fargo's only business enterprise. Nevertheless, Wells Fargo was the largest
express company at that time, and stagecoaching was the backbone of the early express
companies. Over one hundred years ago, its stages traveled across thousands of miles of desert,
prairie, and mountain roads to deliver mail and cash.

In 1859, Wells Fargo brought the army something really worth fighting for - their paychecks.
Wells Fargo agent A.W. 'Buck' Buchanan was a hero to the army in 1859. For troops stationed in
Southern California, it just wouldn't have been payday without him. Buchanan's job was to pack
up the $30,000 payroll, board a steamship in San Francisco, and accompany the payroll to the
various military posts. This garnered great visibility and popularity for the bank.

The company's California banking business was separated from the express business in 1905. As
a wartime measure in 1918, the U.S. Government nationalized the country's express companies
into a single federal entity.

The Wells Fargo stagecoach became and has since continued to be a symbol of reliable service
across the American West. During the Gold Rush, Wells Fargo provided regular
communications, (including the first electronic transaction, by telegraph, in 1864), delivered vital
goods, converted unprocessed gold into U.S. gold coins and provided checks and bank drafts.
The company earned a reputation for creating services and products that would satisfy all
customers, old and new. Moreover, it became a company 'the people could trust', spending large
sums of money to apprehend thieves who stole from customers, stagecoaches, and bank outlets.
For over 145 years the company had taken pride in coming through for its customers.

Through the 1900s, Wells Fargo had continued to offer new and innovative products to its
customers, providing a full range of banking services to small business, commercial,
agribusiness and real estate customers, in addition to its traditional banking services. To expand
all of these services and reach previously untapped markets, the bank took on a series of
acquisitions and alliances through the 1980s and into the early 90s. (See exhibit 4.) One of the
most significant was a cooperative agreement reached with The Hong Kong and Shanghai
Banking Corp. Ltd. in April, 1989. The two parties agreed to establish a jointly owned trade bank
called Wells Fargo HSBC Trade Bank. The new bank, which opened in October 1995, was based
in California and provided customers of both companies with trade finance and international
banking services. It was a nationally chartered, FDIC bank that was solely devoted to
international trade finance for middle-market businesses.

Soon after the opening of Wells Fargo HSBC, on April 1, 1996, Wells Fargo completed its
acquisition (merger) of First Interstate Bancorp (First Interstate). This was done in order to
expand the innovative product and service base offered to customers and to take advantage of the
lower costs that could be achieved by the consolidated operations. In addition, it would allow
Wells Fargo to gain a presence an initial presence in the Southwest. First Interstate was one of
the original banks to establish its own web site in 1994. Many in the banking industry, in order to
gain insight as to how companies take advantage of merger-related synergies in online banking,
watched closely as this merger took shape. The Internet program of the merged bank became the
model for other superregionals to follow. The merger brought Wells Fargo an additional base of
approximately 50,000 online banking customers. Even before either Wells Fargo or First
Interstate presented their first Internet sites, the two met to plan integration of their two Web
sites.

As of 1997, Wells Fargo employed approximately 33,200 full-time employees and was the tenth
largest bank holding company in the United States. The parent company was Wells Fargo and
Company and its principal subsidiary was Wells Fargo Bank, N.A. Wells Fargo could be divided
into six distinct lines of business x The Retail Distribution Group, The Business Banking Group,
The Investment Group, The Real Estate Group, The Wholesale Products Group, and The
Consumer Lending Group. (See exhibits 5 and 6 for a contribution breakout of each division and
for a company structure matrix.)

Wells Fargo's overall objective in 1996 was to "have the most functionality available to the most
customers possible." The bank had continued to provide personal, responsive service by
connecting its customers to essential financial services 24 hours a day - by ATM, phone,
personal computer or through a growing network of traditional and supermarket branches. The
company was known for its efficiency, and it passed the rewards along to its customers in the
form of innovative products and services. It operated one of the largest and busiest consumer
banking businesses in the United States, serving as banker to more than 10 million households in
the 10 Western states. The bank provided a retail network of more than 1,900 staffed service
outlets, 4,300 round-the-clock Wells Fargo Express ATMs, a 24 hour telephone banking service,
and a popular online banking service.

Wells Fargo was also one of the nation's leading managers and administrators of mutual fund and
trust assets. In addition to managing more than $19 billion in mutual funds, the bank maintained
personal and institutional trust assets of approximately $300 billion.

In June 1996, Wells Fargo added two other services to meet the needs of its customers. First, it
added bill payment capabilities to its Internet site. This service was induced by consumers who
demanded to use the Internet to pay bills. The cost of this service was $5 per month. The bill
payments could then be downloaded into a personal financial software package like Microsoft's
Money or Intuit's Quicken. Wells Fargo also implemented a system where customers could apply
for money market mutual fund accounts through the Internet.

In February 1997, ComputerWorld magazine listed Wells Fargo along with four other banks
(Bank of America Corp., Barnett Banks, Inc., First Union Corp., and KeyCorp.) in its Premier
100 list for their innovative Internet applications and Web sites. According to Computer World
Magazine, Wells Fargo's efforts in online banking proved that it "has an understanding of what it
takes to attract customers to its site." (ComputerWorld magazine) Wells Fargo was known along
with Bank of America for its innovative work in building online branches on the Web.

The Regula Env nmen

In recent years, some of the long-standing government regulations in the banking environment
began to fall. In 1994, the RieglexNeal Interstate Banking and Branching Efficiency Act was
passed. This act allowed banks to transact in interstate branching. The Riegle-Neal act led to an
era of widespread branch banking, changing the landscape and structure of the banking industry
throughout the United States. Immediately upon the passage of this act, banks began to
consolidate in order to take advantage of the almost limitless opportunities. Widespread
branching networks, as well as regional networks supported by affiliated bank relationships,
evolved across the country.

In addition to the passage of the RieglexNeal Interstate Banking and Branching Efficiency Act,
another breakthrough legislation change was the loosening of Section 20 of the Glass-Steagall
Act. Section 20, originally created after the stock market crash of 1929, prohibited the affiliation
of Federal Reserve member banks and investment firms engaged in dealing or underwriting
securities. Beginning in 1987, the Federal Reserve slowly began to remove the regulation. As of
1997, banks were allowed to derive 25% of their revenues from securities underwriting.

6mpac  Technlg

Traditionally, banks had been early adopters of technology due to the large number of routine
transactions that they processed. In addition to their own internal banking systems, most banks
also maintained links to credit card processing systems, ATM systems, interbank check clearance
systems and a number of links to their customers. During the late 1980s and the early 1990s
information technology and telecommunications technology began to converge. This
convergence enabled banks to centralize services and take advantage of new delivery channels
such as telephone banking and the Internet. Wells Fargo's experience in Texas provided good
example of the opportunities that technology produced.

In 1997, the Texas Legislature allowed banks to offer home equity loans for the first time.
Previously, this product had been allowed in other states but not in Texas, one of the nation's
most populous states. Wells Fargo wanted to take advantage of the change in legislation. They
decided the most efficient way to capture the home equity lending market was to sell this product
over the phone. This enabled Wells Fargo to avoid the problem of performing training for all
applicable branch personnel on the new product. Wells Fargo set up a phone center in Pueblo,
Colorado to take these calls. Phone center personnel were bilingual. When a call came into the
call center, the agent receiving the call recorded all the customer's information in a computer
system whose processing center was in Bozeman, Montana. Since the sales prices of homes in
Texas were not made available to the public, Wells Fargo's system used the Texas Tax Assessor
Database to determine the value of the house. Other credit checks were performed and the
system ensured that the new loan plus existing loans on the house did not total more than 80% of
the value of the house (another Texas regulation). With these checks performed, the system
produced a preliminary approval. This whole process took place in 20 seconds and the customer
was informed during his or her phone call. Contracts for the loan were issued from Wells Fargo's
existing fulfillment center in Cincinnati and the loans were disbursed in Texas. Martin
VanDerSchouw, Assistant Vice President of Strategic Analysis, proudly stated that building the
infrastructure for this opportunity took only 57 days. Initial data available at the time that the
case was written indicated that Wells Fargo had captured more than 50% of the total market.
| nanc al Sev ce
Tend

The Financial Services Industry under went a number of fundamental changes during the 1990's.
Major changes included:

a Consolidation
a Disintermediation
a Commoditization
a Globalization

›
 

The deregulation that swept the financial services industry significantly changed the environment
in which banks operate. The relaxation of interstate banking regulations opened the door for
mergers and acquisitions not previously possible. Many banks dreamed of serving customers
from coast to coast. The cost of building new branches, recruiting new personnel and winning
new customers made mergers a much more attractive method of expanding their retail and
commercial banking operations than classical expansion. Since 1994 a number of major mergers
and acquisitions occurred. In the Midwest, Chicago's largest bank, First Chicago Corporation
merged with the National Bank of Detroit to form First Chicago NBD. In a year's time,
NationsBank, the result of a number of previous mergers, acquired Boatmen's Bank, a large
northeastern bank and Barnett Bank, a large Florida Bank. Indicative of the frenzy in the
industry, Core States Bank in Cleveland made an offer to buy Mellon Bank of Pittsburgh. A few
days after Mellon Bank turned down the Core States offer, First Union of Charlotte stepped in
and bought Core States in the largest banking transaction in U.S. history. Wells Fargo was also
part of this trend; they acquired First Interstate bank in 1994, a move which helped expand their
presence in the Southwestern United States.

The trend towards consolidation was not limited to retail and commercial banking. Relaxation of
Glass-Steagall's Section 20 enabled banks to enter the investment banking sector. Large highly
capitalized banks began to acquire investment banks in a rush to provide 'one-stop' banking
services to their large corporate clients. A number of Wells Fargo's closest competitors were
involved in this activity. Cross-street rival Bank of America acquired Robertsen Stephens.
NationsBank acquired San Francisco based Montgomery Securities and First Union bought
Wheat Securities. At the end of 1997, Wells Fargo had not made any investment banking
acquisitions and remained a retail and commercial bank.



 

Increasing customer sophistication and new electronic banking channels enabled customers to
perform more transactions without interacting with banking personnel. In retail markets this was
consistent with the bank's strategy. A 1996 Dove Associates survey found that the average
branch transaction cost over $1.10. The same transaction done by phone cost approximately
$0.40 and the cost dropped to $0.03 if the transaction was done over the Internet. In order to
encourage retail customers to use these less expensive channels, banks followed a number of
different strategies. First Chicago NBD was the first to start charging customers to use tellers
instead of ATMs. Bank of America experimented with using greeters to guide banking customers
to ATMs for simple transactions. Citibank launched people-less branches that contained only
ATMs and banking kiosks. Kiosks were modified automated tellers with phones that could be
used to connect the customer directly with a bank representative. In 1995, the first all-Internet
bank, Security First National Bank, opened for business.

This trend was also extended to the securities business. Charles Schwab, the country's largest
discount broker, allowed customers to perform a variety of equity and mutual fund trades
through the telephone or the Internet. New all-Internet discount brokers also emerged to vie for
customer's business, including E-Trade and Sure Trade.

›   

From the banks' perspective, the products that most retail customers used were commodity
products. Simple deposit and loan products such as checking accounts, savings accounts,
certificates of deposit, personal loans and most mortgage loans were all standardized. Regardless
of whether the customer used an electronic channel or a teller, all transactions for deposit
accounts were processed electronically. Loan accounts required a credit scoring process to assess
the risk of the applicant, but by 1997 even most of this process was performed using information
systems. The marginal cost of a transaction within the bank was extremely low. Banks relied on
customer information systems to consolidate the various products that a customer owned into a
single statement. The challenge for banks was to make the customer feel that the products he or
she was using were customized to their needs, while processing these products as commodities.
Wealthy individuals and corporations usually received more customized service from banks
through their private banking or small business divisions.

  

The rapid growth in ATMs, telephone banking and online banking enabled customers to use
banking services anytime and anywhere. This recognition was first exploited by Wells Fargo,
who began aggressively marketing "7/24 Banking" (7 days a week, 24 hours a day) in the late
1980s ("Branch Banking is Not a Dinosaur," McKinsey Quarterly, 1996, Number 1). The
availability of banking services and products to customers around the globe meant that banks had
access to a larger customer base than ever before. It also meant they faced more competitors than
ever before. Citibank, with over 3,400 offices in 97 countries was the most global of the U.S.
banks. Citibank served both commercial and retail customers around the world. Bank of America
also had a growing international presence, with operations in 38 countries. The IMF bail-out of
several Asian countries in 1997 and the European Monetary Union schedule for 1999 were both
expected to further encourage the liberalization of financial services.

cell
|ag
Saeg

Wells Fargo CEO, Paul Hazen, called delivery of anytime, anywhere service a "must-do" priority
for Wells Fargo. Hazen's strategy for Wells Fargo included a focus on customer service and cost
control. To accomplish these two seemingly conflicting goals, Hazen relied on Wells Fargo's
ability to create innovative delivery channels that were more convenient for the customer and
less expensive for the bank.

"The trick is to show customers the broad range of choice and pricing they
have for interacting with the bank. In some cases, they'll choose the
personalized services we offer, in our Investment Group, for example. In
others they may benefit from alternative, lower-cost channels such as
telephone, ATM or Online Banking."

The announcement of the separate Online Financial Services Business Group as part of Wells
Fargo's reorganization for the 21st century demonstrated the key role that innovative delivery
channels to played in accomplishing Wells Fargo's strategy. Executive Vice President of the
Online Financial Services Group Dudley Nigg said, "The bank will do everything we can over
the next 4 or 5 years to make all transactions electronic." By moving transactions into the lower
cost electronic channels, the bank expected dramatic cost savings. In 1993 before the merger,
Wells Fargo and First Interstate had a total of 1200 brick and mortar branches. By 1996 the
combined bank had reduced this number closer to 400. Industry critics speculated that electronic
delivery channels would further distance the branch from the customer. The cost savings also
impacted stakeholder relations and caused bad publicity. John Mcquinn, a San Francisco-based
lawyer who represented a number of ex-Wells Fargo Branch Managers affected by branch
closings, said "Bank of America and Wells are very good at selling services, and not so good at
delivering them."

The strategy had other detractors as well. In his book The Bankers, famed industry observer
Martin Mayer noted that the interesting thing about the Wells Fargo strategy was its rejection of
growth as a strategy. Mayer contended that Wells Fargo's profit increases were expected to come
from cutting the costs of existing business. Mayer quoted Wells Fargo President William Zuendt,
who said "As our assets shrink, our labor base shrinks and our costs shrink, we will simply be
running at higher octane". Mayer compared Wells Fargo to a smaller bank, saying that the
smaller bank was using technology to make standard transactions cheaper for the customer while
working to sell them more customized services. In contrast, Mayer said that Wells Fargo was
using technology to standardize its service offering in the hope of selling these products to
customers for more than they cost.
Emplee
& Ogan a n

The bank liked to initiate employees into the 'Wells Fargo Way.' The 'Way' had five main
components:

a Ë
 

 x the bank believed that this philosophy made employees act as if
they were the owners of the business, understanding the returns and controlling the costs
a â
  x this principle advocated a disciplined approach to managing the
business
a â
    x a principle designed to improve customer services
a     x the bank's belief in entrepreneurship and decentralized decision
making was embedded into this philosophy centered on training and retaining people
a 
 


Wells Fargo management felt that these principles were central to growing the bank in the future.
Martin VanDerSchouw expressed that Wells Fargo's ability to innovate was a result of their
corporate culture. He emphasized that each business unit was run as if it were a separate
organization, which spurred entrepreneurship and innovation. VanDerSchouw said, "Most
innovation comes out of the business unit and initially the hurdles to develop these ideas are
fairly low; however, when a group does roll-out an idea, there is some fairly strong review that
focuses on shareholder value." .VanDerSchouw did note that Wells Fargo's location in San
Francisco was both an advantage and a disadvantage. Although there were a lot of technically
skilled programmers and engineers in the area, the recent economic growth had intensified
competition for resources.

When asked his opinion on Wells Fargo's leadership in banking innovation, VanDerSchouw
said:

"I personally believe Wells Fargo is a leader in the industry because we take a
very different approach to the industry. I look at us as a technology company who
happens to be in financial services. Our core goal is to provide shareholder value
by providing consistent, solid customer experience on-time, every time. It helps
us to have this approach a great deal because of our proximity to the Silicon
Valley where a great deal of innovation occurs. Finally, we are not traditional
bankers. We dress business casual and probably have a lot fewer MBAs and a lot
more PhDs and other degrees than most other financial organizations. To put it
bluntly, we just look at the world differently."

cell
|ag
Cuen 6nnva n

Wells Fargo had several innovations in progress in 1997, including Mondex, Online Banking and
WebTV, Business Centers, and Virtual Stores.
-
 

In 1996 Wells Fargo, Chase Manhattan, AT&T, Dean Witter Discover, First Chicago NBD,
Mastercard and Michigan National Bank announced the formation of Mondex USA. Mondex's
goal was to roll out an electronic-cash card to consumers nationwide by mid-1998. Mondex was
one of a number of competitors trying to create a standard for these 'smart cards'. The cards
resembled a credit card, but included a computer chip. The chip could be loaded with cash at
'cashless ATMs' and then used at merchants whose card scanners would debit the electronic cash
from the chip when purchases were made. These 'cash purses' were expected to become
extremely popular with customers and merchants. Similar to credit cards, customers would not
have to worry about holding cash; however, Smart cards had the added advantage that because
the cash was essentially electronic, it could be exchange anonymously. In addition, the Mondex
technology allowed the card carrier to transfer money to other card carriers to pay small personal
debts. This feature was unique to the Mondex technology and was expected to give it the lead
over other smart card technologies. Wells Fargo also considered Mondex to be 'a natural for
small Internet transactions' because it was an electronic form of cash.






 

Wells Fargo had been a leader in electronic banking since its entry into PC-Based Home
Banking in 1989. It began offering Internet services in 1995. Since then, Wells Fargo had been
recognized as a top provider in Web services. As of 1996, 11% of Wells Fargo's customers
accounted for 70% of its revenue. The bank believed Internet customers were part of this 11%.
Internet banking customers tended to be younger and more educated. As such they represented
the customers of the future which many banks were competing to attract.

By mid-1997, Wells Fargo's Web site recorded 450,000 visits per week and customers conducted
12,000 banking sessions per day. This meant that Internet customers were visiting the site an
average of once every ten days. This segment was expected to double every 6 months.

The goal of the Wells Fargo Online Financial Services Business Group was to continue to
expand the number of products and services offered over the Internet. By the middle of 1997,
customers could access and move money between checking, savings, market-rate, money
market, credit card accounts, equity line and other lines of credit. They could apply for credit and
other new accounts and buy traveler's checks and foreign currency. In addition, they could
download account balances and history into Quicken, Microsoft Money and other spreadsheet
software.

The growth of the Internet as an entertainment medium and the convergence of technology and
communications had let to the creation of WebTV. The idea behind WebTV was that households
could access all the entertainment services they required through their television. This included
regular television and cable, movies on demand and Internet services. WebTV was also expected
to appeal to people who did not currently have computers in their homes. To access WebTV,
customers would need to buy a set-top box that would be hooked up to their TVs. These set-top
boxes were predicted to cost between $200 and $600 a price significantly lower than the
cheapest desktop computers available at the time. In addition WebTV sites were designed to be
more user friendly and not require knowledge of existing Web browsers, DNS (Web site)
addresses or file transfer protocols.

WebTV had both proponents and detractors. Proponents felt that the lower cost and ease of use
would open the Internet up to a wide range of customers who had never used the Web before.
Critics argued that the people who were interested in the Internet already had access through
their computers. They also argued that without a full keyboard and other capabilities, WebTV
would be very limited in its applications. There was probably some truth to both arguments.
Nonetheless, WebTV was expected to have more than 250,000 users by the end of 1997.
American Banker magazine cited initiatives by Wells Fargo and a handful of other banks to
redesign their Internet sites for WebTV.


›



In 1997, Wells Fargo introduced Business Centers. These centers catered to small businesses
through a mixture of personnel and electronic services. The centers included special business
ATMs that could accept bagged deposits (deposits of currency and coin taken from the cash
registers of merchants) in a secured area, 24 hours a day. The Business Center also contained
kiosks with direct phone connections to Wells Fargo's National Business Banking Center. Wells
Fargo planned to open 50 Business Centers by the end of 1997.




In 1997 Wells Fargo, Microsoft, Digital Equipment Corporation (DEC) and VeriFone signed a
unique partnership to sell electronic commerce solutions to small and medium sized businesses
that wished to sell goods over the Internet. The solution included the design of online catalogs
and electronic storefronts for Wells Fargo business customers. The bank provided Internet credit
card clearing service using the VeriFone merchant software. All transactions were processed
through the customers' Wells Fargo bank account. The partnership used the Wells Fargo's sales
force since this sales team had established relationships with retailers. Michelle Banaugh, Vice
President of Marketing for Wells Fargo's Electronic Payment Solutions Group, said, "We're
selling to our own customers who want to expand their position on the Internet. This is also a
great way for us to generate new sales with retailers".

A small retailer would pay about $48,000 for an Internet server and start-up services. A medium
to large size merchant would pay anywhere from $60,000 to $140,000. Merchants were expected
to gain from additional sales and savings from avoiding hard copy catalog costs. The solution
was expected to take 30 days to install and test. Industry observers were impressed. Bill
Burnham, senior analyst for Piper Jaffray, said in Financial Net News, "Wells is really grabbing
the bull by the horns and making transactions happen. They're acquiring the whole transaction,
getting the profits, while providing extra banking services."

Onl ne Bank ng Sae Cncen

Although it online transactions were just as safe as those completed by mail, telephone, or in
person, consumers were concerned about security, a fear that could limit the success of Internet
banking. Many consumers feared that they would be vulnerable to Internet fraud if they decided
to use the Internet as a means to banking. Furthermore, in a recent survey, Intuit, the home PC
software producer best known for its popular Quicken software package, found that the number
one fear of consumers who considered using the Internet for banking was 'cyber fraud'.

There are three tiers on which online security needs to be maintained: (See Exhibit 7)

1. Where information is sent from the customer's PC to the Internet server

2. Where information is transferred from the Internet banking server to the
banking customer database
3. Where direct logon to customer's online account occurs

Security between the customer's PC and the Internet server was handled through a security
protocol called Secure Sockets Layer (SSL). SSL was a security feature standardized by
Netscape, the popular browser manufacturer. The main function of SSL was to provide data
encryption. Additionally, SSL provided a security handshake used to introduce the connection
between the customer's PC and the Internet client/server. Information between the Internet
banking server and the banking customer database was provided by internal banking controls.
The separation of the Internet banking server and the banking customer database in itself
provided an additional security feature. Finally, a unique account number/password combination
provided a third layer of protection that guarded against direct logon to the customer's account.

Netscape was in the process of adding advanced security options to their current browser,
Netscape Navigator. Additionally, the University of Southern California was developing
software that would allow banks and their customers to send electronically encrypted checks
over the Internet. Finally, in order to ease consumer fears about Internet transactions, many
credit card companies, such as Visa and Master Card, began to advertise the fact that protection
against fraud was guaranteed regardless of the mode by which the fraud took place.

Cmpe 

Wells Fargo faced a number of traditional and non-traditional competitors in delivering

innovative financial products and services. Martin VanDerSchouw noted that "Actually our main
competitors to delivery innovation in the financial arena are not banksx.only a very few banks
are able to compete currently in this arena."


 


Bank of America, also headquartered in San Francisco, had been a direct competitor of Wells
Fargo for over a century. In 1994, they chose to include in their line of products a Web site that
enabled customers to perform a variety of both personal and business banking functions. The
Web site included access to over 2,200 HTML pages of information. Among the services
provided were listings of bank-owned properties for sale, listings of ATM branches and locations
in 11 states, lending services for automobile dealers, and merchant services for business banking.
Home banking was available to users with access to Netscape Secure, America Online, or
Managing Your Money. Customers also had the option of "building" their own banks through
setting up a personal Web page. The user would enter in his or her interests, and the bank would
automatically send and update information to the user's Web page. In providing this service,
Bank of America was able to acquire crucial demographic information about the online banking
customers through the personal profiles that they had created in order to set up their Web pages.
By June 1997, Bank of America's web site received 150,000 "hits" per day.

Bank of America's Internet vision was best summarized by Jeff Hershberger, spokesman for the
interactive banking division:

(Bank of America's goal is) "xto provide the entire array of our services and offer a virtual bank
branch in cyberspacexWe want to offer customers multiple options to meeting their needsxOur
customers will be able to build their own banks."

›


Citibank had developed online banking in 1984 with its Direct Access program. Their Internet
banking service was unveiled in 1997. Direct Access 6.1, as the new service was known, offered
basic banking services as well as the ability to buy and sell securities and mutual funds, a service
previously prohibited by Section 20 of the Glass-Steagall Act. Citibank offered this service in
response to requests by customers, 92% of whom reportedly used the Internet. Direct Access
allowed Citibank to circumvent ownership regulations in countries such as Brazil and India in
order to expand their customer base.

Citibank hired The Mining Company to build its Web site into a medium by which customers
could access not only information about Citibank's services but also information around any area
of interest. The agreement prohibited The Mining Company from collaborating with any other
financial institutions during its 2 x year relationship with Citibank. Additionally, Citibank
recruited Josh Grotstein away from Prodigy to head its Internet development.
 

 

!"

Security First Network Bank, opened in October 1995, was the first bank to exist entirely on the
Internet and amassed more than $40 million in assets in less than two years. It spun off a
subsidiary, Five Paces Software, that developed the software enabling SFNB to offer basic
online banking services. The software was licensed to other financial institutions. Regional banks
such as Huntington Bancshares of Columbus, Ohio and National Bank of Commerce of
Memphis signed contracts with Five Paces to build their Web pages. By the middle of 1997, Five
Paces was working with more than 30 financial institution clients. Five Paces could develop a
fully-secured Web page for as little as $25,000, an option that appealed to many smaller banks
who were more price-sensitive but wanted to follow the larger banks' lead in establishing a
presence on the Internet. In cyberspace, the local banks' smaller asset base and smaller traditional
branch network was less of an issue.

#
 



Formed in September 1996, Integrion was a consortium led by IBM and fifteen of the nation's
largest banks. These banks served 60 million households (60% of total American households)
and held more than $1 trillion in assets. In many ways, Integrion resembled the system of
regional ATM networks in the US. Member banks included the following:

u
u






 





 u   
 





    



   

 

 

!
 "  
##  ##   "  
 
  
#$
"   # #

%

 "  

 


$
&
  & #  %   % ' "#

 

    (

#!% ! ) *+, %
 
#

%


-..* #%  %

'  #%
 # 


 

/0   (

!$

%%
 #  "  
" #'
  
%"
%

# 
#    "  
& 



 

'&" #%
% 

# #
 

%

u #
 12 &3& 
 


&

4!%


#
#
  
 ## "
 %

 
#x
 

 


    



 


 

 


  4

$
 #  
"# # 
 
"
# #&$ ## 

"  
/  
 

 

# #0   " %
 5 
 
 $
 ##
&$ ## % " 
# #    

" #% % #'  #% #
 
# # &$


 # '
#' 
  

# #% 
 
 



 6)
/70&  

##' 
%  &$
&
#


 
 %
## "  
# $

  %
8
%' " # ' % 9#  

 

&$

8
 "   
4##" 4 " # #%


#



 
! 
 
 
" #%
##%$ 
# 
'
# &"%
" #  
 
 " #% % 

#
 

% %
8 # # % 
#  



 

 " $

8  " #



 %
8
"  

" #
#
 


! 
  # %  %
  $



 

 
 
 %
  &$

  # 
 
$

%   $  % 
" /$
0


## 
 '  
"   " "
#
  

"
  
8 %
&$  #  
  
 
$



#

 

#

'$
$ &%
 
# 
 $  % 
" &" #8 

u
#


 


"$ 8    &% $ 
#%%
 # 
 



#
     
#$


$


'# 
 #& #
# #&
 -..:! #

# #"   
 
# %
8
" 


#   

"  $

! 
; 
  "#  
 
 "%

#'
# ' # 
#$



$

 #< $
 '&< 8

%

%# &
-..=!

  "#<   
 
  &% 
&%
 # "
# $

&"  #4#4


 
#>

   
  #


$



%&-..=

× 


 ×




 6)
"  5 
 5   &$

#


#
3
 -..=$
%# 


 "  # "
 #
 
#  
# %' $



u 
# #




  % $

8
#
78
# #&%   #   # 
# #" )  #&

  

 #
 #


 $

%

7
'#
  ##
 
 
%"
 8# 
#
%
8 %'$

8 " 
 
%"
%
8 %
'
#  

'
&

 
 
u%#
 & # "  #" 
 
# #
  )?

4! 5  %
 
 
 
##  % 
 @$ '
# x

  %
# #&
$ &  &
#$

 
 %
4


 7
##  '  5   " /(


#
0
#8# 


 
 
'
8   
 
 " 
 #%
  $
'   
& %#  $
& ABBC

-..*
5 

 &$
 ##%# 
# 
%
 
&
#

 #   
 
 CD


X

 
 
 

u
    


%


#" 3 1

#
u  /31u031u" 

 #' '# 
  
 
 
%

#

 


  ' 
" 
#' 


%

  

 

u #
 

6!
&-E  :*%
#
# 4$

%
4 #

%


' '##%31u  %
 # 
#A+EE
u 
-..=&31u #-B*E   
#" #

/6)%C  &

; #
  0
Th h

 h 



 &#

 # 
  # #'

#
%
  " 1%'#
%
8   
 #
#
'  

#
"1  
"$

" #%

 '"  # 
&% "# "
# "

!"# # $


"   
  %
# 



'"#'
%
 " #$

&  
  "
 

 
#   % ! 


#$

%

 # 

" 
 "

%
&% 

 #
   #

    
   8$

%

 
/6)%. 

)  ?FF""""   F0 

&%
 %

#

u  # "
$

%

& $

#
 & #"  &
 # #'   

# # 

#' #%$ 
#$


  %
 '& 
  8    
## &
%
&" "
" % 
$

%

   ABD&EEE

$
 ##
 
"  &
" # % # 

' 

"
 #
#'#' # 


 # %

  
     #& & #  #  
&%" 


"

  
"" #%  
# #

!$

   # %   
%
  
  
"%
% 
 


"



%

" #  
 &    # 
#


 
"   ' #'
 G##$

 
 



#  
 H

## 8
 
   
# 
  #

# #9#  #;
 #1 
"  ' 

#
# "  $


 %# 


$
 ##
  
&
 # ) 

 # 
 
     #
#  ##
%



'

1"
## % 
; 
  
 
%