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Friend or Foe?

Financial Firms Join Microsoft to Develop Online Banking, but Keep Wary Eye on Partner


When Microsoft Corp. Chairman Bill Gates was quoted in a magazine four years ago calling banks "dinosaurs" and suggested that his company should "bypass" them in its push into home banking, he set off warning bells throughout the financial industry.

But there was a flaw in Gates' vision. Banks are among Microsoft's biggest customers for business software and key players in the Redmond, Wash., firm's bid to capture the enterprise computing market.

Microsoft executives have been busy mending fences ever since, insisting that Gates was denigrating the banks' computer systems rather than the banks themselves.

As Microsoft pushes its way into new online services, from travel to real estate to car sales, it is increasingly finding itself on a collision course with its largest corporate customers. And while these new Internet services for the most part continue to lose money, Microsoft's biggest profit growth comes from selling its Windows NT operating system to those very customers.

It's a Catch-22 that demonstrates that Microsoft's apparently relentless drive into new markets may not be easy.

Not wanting to alienate its big banking clients and risk losing them to competitors such as IBM Corp. and Oracle Corp., Microsoft is shifting its strategy in the financial services industry, positioning itself more as a technology partner than a competitor.

But cognizant of Microsoft's take-no-prisoners reputation, financial services companies are watching the firm closely even as they join with it in partnerships.

When Microsoft last fall announced a joint venture called MSFDC with Hackensack, N.J.-based First Data Corp. to offer a service allowing consumers to receive and pay bills electronically, banks cast a wary eye.

Paraphrasing Intel Corp. Chairman Andy Grove on the importance of identifying a key rival, Bank of America Chief Executive David Coulter recently suggested that if he had one silver bullet, he would use it for Microsoft.

"There are areas we would consider a traditional banking role. In these cases, we look at them [Microsoft] as a competitor," BofA Executive Vice President Michael DeVico said, a little more diplomatically.

Bankers say they fear Microsoft is trying to deal directly with consumers, thereby undermining the banks' critical relationship with its customers.

Microsoft dismisses such worries, saying it is far more interested in gaining a bigger chunk of the billions of dollars a year banks spend on computer technology. The software giant wants to put Windows NT into everything from banks' ATM machines to Web sites and eventually into the banks' back-office operations, where typically computers running the competing Unix operating system handle billions of transactions a day.

"We already do $1 billion in business with financial institutions every year," said Charles Stevens, a Microsoft vice president who works with large customers such as banks. "We would be on a suicide mission if we were to compete with them."

So Microsoft is now placing a higher priority on selling its new Internet technology to corporate customers. This summer Microsoft will begin offering banks and brokerage houses the technology behind Investor, the company's popular investment Web site ( And Stevens has encouraged his colleagues at MSFDC to include banks as shareholders in the joint venture.

Are banks buying into the kinder, gentler Microsoft? Not exactly. Nearly half the 50 financial institutions that responded to a recent survey by Cambridge, Mass.-based market research firm Forrester Research saw Microsoft as a threat.

One test case for Bank of America and many other banks will be how Microsoft handles the MSFDC "bill presentment" service later this year.

Americans spend on average about two hours a month paying the 18.2 billion bills a year sent to them, according to Tower Group, a Newton, Mass.-based market research company.

"If we can cut that time in half," said Jessica Ostrow, vice president at MSFDC, "more people will use their computers to get these things done."


Although many banks offer online banking today, it's a clumsy system that requires CheckFree, a Norcross, Ga., company, to take computer checks, convert them to printed checks and mail them to merchants. The system ends up costing billers more money than the paper system because the checks have to be manually matched with bill stubs.

"When you talk to billers, they actually dislike online bill payment because there are often delays," said Lewis Levin, vice president of Microsoft's desktop finance division.

Analysts agree that a truly automated system would save billers, banks and consumers tens of billions of dollars. But to be useful, the system requires bringing together tens of millions of households with thousands of banks and businesses.

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