First-mover advantages and disadvantages in e-commerce - the example of Internet banking

Staffan Hultn*, Anna Nyberg** and Lamia Chetioui*** Paper to be presented at the conference European Integration in Swedish Economic Research Grand Hotel Mlle, May 14-17 2002

Abstract In this paper we aim at finding the factors that were critical in the adoption of an Internet bank at the Nordic bank Nordea and the French bank Socit Gnrale and to analyse the differences in the adoption of the new technology in the two banks. Nordea is today considered to be a world leader in Internet banking while Socit Gnrale is considered to be a market leader in the French market. Both banks have been able to capture significant market shares in the Internet market. But important differences are evident if we look at the two banks. Merita has already moved a significant part of the transactions to Internet, while Socit Gnrale is still working on moving its customers to Internet. Nordea is working on creating new markets and new channels while Socit Gnrale still has to make the transition to synchronic Internet banking. Internet banking is an enabling innovation that results in both increased cost efficiency due to consumer co-production and value creation. When moving to Internet banking established banks are confronted with the problem of inertia. Internal in the form of investments in plant, equipment and specialised personnel; cognitive problems relating to incomplete or incorrect information; internal politics or cultural incompatibilities; and the organisations history. External in the form of legal and fiscal barriers; getting access to external information; legitimacy constraints in case of changes in the organisations mission; and the firms own customers. To achieve a change in strategy the bank can look for a mix of three changes in strategy: timing; its past history accumulated in capabilities, resources and competencies; and the identification of a transition path (path creation) from the old to the new technology. From the point of view of inertia we find that in the Nordea case inertia played an insignificant role while Socit Gnrale clearly was blocked by inertia in its move to the Internet bank. At least three types of inertia are evident in the Socit Gnrale case: 1) Cultural inertia with the success of Minitel and France Telecoms promises about new Minitel type solutions for the Internet. 2) Cognitive inertia in particular the security aspects. 3) Economic inertia due to the system with charges per minute in the Minitel bank. Nordbanken was captured for some time in a type of cognitive inertia when the security organisation demanded a very high level of security. In retrospect Nordea looks as a perfect case of path creation (a smooth transition from one technology to another) with a stepwise increased commitment to electronically mediated home banking.

Staffan Hultn is an associate professor at Stockholm School of Economics and a visiting professor at laboratoire stratgie & technologie at Ecole Centrale Paris ** Anna Nyberg is an assistant professor at Stockholm School of Economics *** Lamia Chetioui is a doctoral candidate at laboratoire stratgie & technologie at Ecole Centrale Paris, 1

Introduction
After a very media hyped start many e-banks and similar Internet ventures face serious economic problems. In contrast the traditional banks using a multi-channel strategy are rapidly gaining market shares in the Internet channel. Internet banking is the latest step in the development of distance banking. Internet and other distance banking services hold interesting properties for the banking firms and for the customers. The banks principal benefits are increased customer retention and lower costs due to the transfer of work to the customers. The customers most important benefits are increased accessibility to the bank service, lower service charges and avoiding waiting to be helped by a teller. But Internet is not only a new distribution channel for the bank sector it also modifies the bank sectors competitive landscape. New competitors, for example specialised share traders on Internet, specialised mortgage services on Internet and Internet banks without bank branches, have attacked the banks by promising to provide a more rapid and cheaper service. The increased accessibility to the bank system that ICT give clients have forced the banks to reconsider the bank sectors value chain. The information and communication technologies (ICT) have already resulted in two evolutionary change processes in the banking industry. In a first development stage they supported the processing of the banks internal business and inter-bank transactions. In a second development stage they became the fastest channel to get access to the capital markets and permitted the creation of global electronic market places. Today the ICT provide support for the banks branch network commercial operations and the development of new ways to organise distance bank services. Distance banking over electronic media appeared already in the 1980s. Pennings and Harianto (1992) found one US bank that adopted videotext banking in 1981, in 1985 had 37 out of 152 studied US banks adopted videotext banking. The first commercial in-home banking system in the UK was launched in 1983 using a videotext system. The early systems using a microcomputer or other terminals linked by telephone or videotext had limited success due to too high costs and narrow services (Wright, M. and Howcroft, B., 1995) or regulation (Pennings and Harianto, 1992). This was also true in France where the Minitel bank despite attracting many more customers than in the UK or the US reached only a few per cent of the private bank customers.1
1

J.M. Pennings and F. Harianto (1992, p. 44) regarded Minitel as an astounding success. 2

It has been suggested that the French banks, because of their success with Minitel, are lagging behind their European competitors in the adoption of Internet banking. The argument is that the French banks invested too much effort on transposing their Minitel services to the Internet without investigating the possibilities of Internets higher interactivity than Minitel. From a commercial point of view the business model of Minitel was built on relatively high access charges which many French banks sought to impose on their Internet clients that were accustomed to the Internets spirit of cost free services. An inherent problem in the construction of distance banking is the importance of a high security level. The banks face two important problems: 1) that a non-authorised person enters the banks internal accounts, and 2) that one person can enter another persons account. To avoid these problems the banks have constructed different security systems. The banks have tried many different ways of protecting their internal system from unwanted infringements. One solution is that the bank decide to use an asynchronic system in which the client interacts with an intermediarys system. A draw-back with this system is that it cannot handle transactions in real time, for example share trading. Another solution is that the bank allows customer synchronic access to the internal bank system. In this case security checks are crucial to keep out unwanted visitors. The banks have tried many different security solutions as we will see in the two cases. As the telephone bank and the Internet bank have matured the security systems have become more sophisticated.

Research Issues
In this paper we aim at showing the factors that were critical in the adoption of an Internet bank at the Nordic bank Nordea and the French bank Socit Gnrale and to analyse the differences in the adoption of the new technology in the two banks. Both banks had previous experiences from distant banking over electronic media. Socit Gnrale had a telephone bank and a Minitel bank. Merita, the Finnish branch of Nordea, had a telephone bank and PC:s connected over the telephone network, and Nordbanken, the Swedish branch of Nordea, had only a telephone bank.

Theoretical Framework
The introduction of service innovations typically involves a reshuffling of tasks between providers and customers. Normann (1991) distinguishes between two types of innovations relieving and enabling. Relieving innovations are those where the consumer is relieved of
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performing a certain task which can profitably be performed by a commercial provider. Ready-cooked meals are an example of a relieving innovation, increased service content of the food product relieving consumers of the need to perform much of the task of food preparation. Enabling innovations, on the other hand, provide the consumers with the tools and knowledge to perform the task themselves. Internet banking is a good example of an enabling innovation. By giving the bank clients access to their own accounts and to many financial services, the clients could take on tasks where they previously had needed the help of bank employees. Normann (1991) claims: A typical case (of enabling customers to perform the service/our comment) is the explosion of securitization in the financial markets. As business companies have increased their level of competence and their information about the markets, they have tended to issue securities on their own rather than go to the bank to get loans. To keep some of their business and the customer relationships, banks have often redefined their business, helping their customers to access the capital markets by selling them services and advice on how to do this. Enabling innovations inevitably involve consumers as co-producers, or prosumers, to use the term coined by Toffler (1980). Customer co-production is typically rationalised in terms of cost savings. Because the scope for productivity gains is relatively smaller in service industries than in manufacturing, it is argued that consumer involvement is an alternative way to lower the costs of service production. From the consumers point of view, they are able to save on the price by contribution some of their spare time to co-production. A typical example would be IKEA furniture or self-service stores. We would like to emphasise that customer co-production often entails an important value creation potential in addition to possible producer cost and consumer price savings. Such value creation may take place both from the consumers and the producers point of view. In the case of Internet banking, the cost savings come from reductions among teller personnel, and fewer bank branches. Some of these savings are passed on to Internet bank customers in the form of lower fees and better interest terms. In addition, consumer value is created in Internet banks by the ability of Internet banks to offer 24-hour banking, higher degree of privacy in banking, an increased sense of control and perhaps also positive feelings related to being a modern person. One example of how Internet banking can create value for the bank, is by allowing it to live up to institutional demands on what a modern bank should be. Providing Internet banking also builds up a customer base, experienced users who, if satisfied
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with the service, can recruit and teach potential new users. Interaction with the first users, such as through problem-solving, also enables the bank to learn and improve its services. Figure 1: The New Cost-Benefit Equation of Internet Banking Producer Cost/price savings Value creation Personnel, offices, etc. Client Lower fees, lower interest rates, etc.

Image benefits, higher Flexibility, more privacy client retention, learning,

The creation of an Internet bank is a major undertaking for most banks. The banks are confronted with a new competitive situation in which the old cost advantages and customer relations are changing. But there exist opportunities for incumbents in such turbulent markets. They can for example use their historical market position to move to markets where the advantage is more sustainable. Companies slow to accept the inevitability that new technologies will force lower prices for basic information may find themselves losing market share rapidly on all fronts. Competitive advantages based on access to raw information are under siege; the trick is to migrate incumbency and scale advantages into value-added aspects of information, where advantage is more sustainable. (Shapiro and Varian, 1999) This sounds easy but in reality such shifts in strategy are cumbersome and difficult. To make such a move towards Internet banking a bank must commit itself to many substantial strategy changes: a) It must allow the customers to participate more actively in the carrying out of the bank service. b) It must question historical investments in bank branches and other interfaces with customers. c) It must learn to make new cost and revenue calculations.2 The weight of the investments in bank branches and the competencies of the bank personnel to manage service interactions face-to-face with clients compared with the completely new service delivery system of Internet banking: home banking and machine-to-machine interactions.

Tang (1988) discusses the problem of comparing the return on investment of an old technology protected by massive fixed investments and a new technology in which no investments have been made. 5

d) It also has to make decisions on the marketing of the Internet bank service, because the increased involvement of the customers in the banking services gives both a higher value added for the customers (faster and more certain service delivery) and lower marginal costs for the bank. This new equation (see figure one) opens avenues for entrants to attack the position of incumbents.3 In short the bank has to negotiate a transition from one technology to another under the threat that other banks will make this move faster and be successful in adopting the new technology thereby gaining a first-mover advantage. The bank is confronted with the threat of structural inertia inhibiting it from responding correctly to technological change structures of organizations have high inertia when the speed of reorganization is much lower than the rate at which environmental conditions change.(Hannan and Freeman, 1989, p. 70) Hannan and Freeman (1989, pp. 67-69) distinguish between internal and external pressures towards structural inertia. Internal sources are: a) investments in plant, equipment and specialized personnel, b) incomplete information, c) internal politics, and d) the organizations history. External sources are: a) legal and fiscal barriers, b) getting access to external information, and c) legitimacy constraints. In a discussion of inertia and industrial change Robertson and Langlois (1994) identify four sources of inertia: 1. Real or economic inertia, that depend on firms failure to adapt to changing demand levels, changes in factor endowments or relative prices. 2. Incompetence, managers are either too stupid or too idle to adopt new business practices. 3. Cognitive or informational problems, that can depend on lack of knowledge or inability to measure changes in competing systems and firms performances. 4. Cultural incompatibilities, for example a society or a business system that cherish other things than entrepreneurship and innovation. Another important source of inertia is according to many writers the firms own customers, see for example Christensens (1997) discussion of innovation.4 Since inertia can originate in different ways it is not possible to find one remedy for the problem. The other side of the coin is of course that inertia or friction is normally beneficial for a firm. Repeat buys from satisfied
3

We have a case in which an entrant could get an advantage both by a perceived benefit strategy or a lower cost strategy. (Besanko et al, 1999) 4 An opposite view holds that customers can in fact drive innovation (Thomke and von Hippel, 2002) 6

customers, successful technology adoption, and other impediments to imitation and barriers to entry are the cornerstones of a successful strategy. Inertia is often a product of successful adaptation to earlier innovations, as a firm develops ways of operating that appear to be so well suited to its internal and external environment that is sees no reason to change. (Robertson and Langlois, 1994)5 Although we acknowledge the positive aspects of inertia we will onwards in the discussion of the adoption of Internet banking regard it as a problem. The problem of implementing a strategy of change to enable an organisation to successfully adopt a major innovation can be regarded as: 1. A problem of timing. Learning and adjusting structure enhance the chance of survival only if the speed of response is commensurate with the temporal patterns of relevant environments. Indeed, the worst of all possible worlds is to change structure continually to find each time upon reorganization that the environment has already shifted to some new configuration that demands yet a different structure. (Hannan and Freeman, 1989, p. 70) But, an important threat to extant organisations is entrepreneurial organisations designed specifically to take advantage of some new set of opportunities. If the new competitors can grow faster than the extant organisations the greater is the relative inertia. (Hannan and Freeman, 1989, p. 71) In the case of technology innovation and adoption the firm wants to negotiate between the error of adopting too early or too late. In the first case the firm selects a design that becomes unsuccessful, in the second case the laggard will face an uphill battle against the first-mover who enter with a right design at the right time (Pennings and Harianto, 1992, pp. 44-45). 2. A problem of capabilities and resources, capacity to learn about and adapt to changing environments. Normally an organisations past provides it with the adequate set of capabilities and resources to handle technological change. But, radical innovations that question the core activities of the organisation demand changes in strategy. The need to respond to change in volatile environments can justify adoption of commercially doubtful technologies if these experiences can preserve and enhance an organisations competitive edge in building and acquiring new skills. (Pennings and Harianto, 1992, p. 45). 3. A problem of the construction of a transition path - path creation that includes the concurrent creation of a new technology or system and the gradual dismantling of old technologies. Drawing on the literature on technological lock-in we conjure that three
5

See also Hannan and Freeman (1989, p. 67). Nevertheless, we hold that selection processes tend to favor organizations whose core structures are difficult to change quickly. 7

problems are particularly difficult when an organisation seeks to create a transition path: a) co-ordination effects, how to move the installed base of customers to the new technology, b) learning effects, both internal in the organisation and among the customers, and c) specialised fixed investments in capital improvements.6 In Garud and Rappa (1994) one of the most important conclusions was that markets are unlikely to select out complex technologies that are difficult to evaluate. Independent institutions are therefore necessary to develop evaluation procedures. In the case of Internet banking issues such as security and consumer acceptance were of key importance in this regard. Before we move on to the cases and the analysis we would like to recapitulate the major points of interrogation from the theoretical discussion. Internet banking is an enabling innovation that results in both increased cost efficiency due to consumer co-production and value creation. When moving to Internet banking established banks are confronted with the problem of inertia. Internal in the form of investments in plant, equipment and specialised personnel; cognitive problems relating to incomplete or incorrect information; internal politics or cultural incompatibilities; and the organisations history. External in the form of legal and fiscal barriers; getting access to external information; legitimacy constraints in case of changes in the organisations mission; and the firms own customers. To achieve a change in strategy the bank can look for a mix of three changes in strategy: timing; its past history accumulated in capabilities, resources and competencies; and the identification of a transition path (path creation) from the old to the new technology.

Distance and Internet banking at Nordea

Nordea is the biggest bank in the Nordic region with 10 million private customers, 1.1 million corporate customers, 2.7 million private e-clients, 1260 branch offices and 40000 employees. Nordea is the result of the merger in 1996 of the Swedish bank Nordbanken and the Finnish bank Merita that later has merged with Kreditkassen in Norway and Unibank in Denmark. This case will focus on the building of an internet bank service at Nordbanken and Merita. These two banks had together more than 2 million netbank customers in December 2001 an increase with 25 % in 2001 from 2000. These customers made 53 million log-ons in 2001 and carried out 71 million internet payments. Nordea claims that it has the biggest electronic banking traffic, and the longest e-experience.
6

Arthur (1994) argued that co-ordination effects were easier to manage than specialised learning and specialised

Merita Distance banking started in 1982 in Merita with a telephone bank service. In 1984 Merita opened the possibility for its private customers to connect a PC over a telephone line to the banks payment system. The reason for this was that Meritas customers used a cumbersome system with payment machines installed in bank branches and in shopping centres. In 1984 very few persons had a PC at home but they had access to one at the office. Therefore Merita launched workplace banking in 1986-86. Merita approached their biggest client firms and suggested that they should allow their personnel to use the office PCs to connect to the bank service.7 The early start created a willingness at Merita to be a first-mover in electronic banking. In 1988 the bank started to offer equity dealing. In 1992 appeared a mobile telephone bank service. In 1996 the bank launched its Internet bank with a number of services: bank account balance, payments, bank transfers, equity dealing, and e-shopping. Two years later the bank added e-loans, e-billing and e-signatures. In 1999 it became possible to make foreign payments and for students to get there student loans. In 2000 came e-salary and the first WAP services. In parallel the bank added new distribution channels: telephone bank 1982, PC-connection in 1984, Internet in 1996, web-television in 1998, enhanced mobile services in 1999 and 2002. In all connections the customer used the same access method and the same access codes. As stated in a document (Nordea, 2002a) One service agreement covers all channels customers can use any device. The bank regarded the strategy of adding services, channels and access devices as a value adding strategy. The Internet bank business followed three stages: create the habit, interconnect the customers and customise and personalise. The bank regarded habit as a key resource. By allowing the customer to use habits learnt in earlier stages (telephone bank, PC connection etc.) it could with relatively low friction export customers to new banking services, new devices and public sector services.8 In early 2002 Nordea in Finland runs a substantial part of the total banking activity over Internet: 80 % of equity orders, 60 % of mutual funds, 45 % of student loans, 45 % of private

fixed investments in capital improvements, because the advantages of the other two factors are not reversible and not transferable to an alternative equilibrium. 7 Interview with Bo Harald 8 Interview Bo Harald 9

small payments, nearly 100 % of larger corporate payments, 29 % of consumer credits, 22 % of foreign exchange and 15 % of car financing.9 The next step at Nordea in Finland and in Sweden is to use the installed base of customers to create attractive market places with what Bo Harald calls critical sub-masses for the banks 1 million corporate customers. Nordbanken The 1980s was a decade with many mergers and acquisitions in the Swedish bank industry. Nordbanken emerged as the result of two merger steps. First Sundsvallsbanken merged with Upplandsbanken to become Nordbanken. This bank was a few years later merged with the former state owned bank PK-banken to form a bigger Nordbanken. Distance banking at Nordbanken started in 1988 with a project aiming at a complete telephone bank service. Before Nordbanken offered different types of distance banking: for example the possibility to pay bills through the Swedish banks giro system and a simple telephone bank where the customer could check his balance and the latest movements on the account. The origin of the telephone bank project was that many clients called their bank offices to ask questions. One problem with this was that the bank couldnt offer a full service since it was difficult to be certain about the identity of the caller and another problem was that calling customers were kept waiting because of too many incoming calls. The problem was particularly pressing in Stockholm where Bo Eriksson was appointed project manager of a project to solve the problem. He first designed a system with the help of the Swedish telecommunication operator Televerket that brought together 6 bank branches in central Stockholm to one switch. This solved the problem with the waiting but the customers still couldnt get an attractive bank service over the telephone. During study trips in the US two managers had looked at American telephone banks. These two inputs resulted in a decision 1988 to launch a project aiming at the creation of a complete telephone bank. The project was rapidly conducted under the direction of Bo Eriksson and a plan was put forward in 1989. The decision to launch the bank was difficult because the costs were considered to be high, in total 15-20 million Swedish Crowns. The costs were due to investments in switches, marketing and a new office in Uppsala 70 kilometres north of Stockholm.

Nordea, 2002a 10

The new telephone bank commenced operation in 1990. The technique was taken from the former PK-bank, while the bank personnel came from the former Upplandsbanken. This created some minor problems in the beginning when the personnel had to learn how the machines and the system worked. Bo Eriksson was appointed manager of the new telephone bank and he and the management of Nordbanken decided that the telephone bank should recruit a new type of bank personnel to the call centre. Bo Eriksson recalls: We sought social competence only. This resulted in a group of employees with a completely new type of background for a bank. They employed people with such diverse backgrounds as nurses and bartenders. Nordbanken became the first bank in Europe that integrated an automatic service with a personal service. The telephone bank called Plus Direkt was from the start organised as a separate bank within Nordbanken. The audiotel system made it possible to identify the customer. After calling the Plus Direkt number the client dialled their personal number (all Swedes has a unique number consisting of their birth date and four extra digits) which is the bank account number in Nordbanken.10 Then the caller dialled a four digit PIN code. This gave access to some bank services, for example consultation of the bank account, and transfer between own accounts. If the customer wanted to have more advanced services, for example borrow money, or buy and sell shares, he dialled 91 and got connected to a person at the call centre. There he gave a one time PIN code that he got from a list of codes that the bank had sent him. These codes were printed on a paper with 20 PIN codes that were sent in a recommended letter. After he had used one code he barred it. This system was later changed to a system with cards with 50 numbers hidden under a thin film. The customer stepwise uncovered the codes. The first year of the telephone bank was difficult. The bank branches were supposed to promote the telephone bank but they were unwilling to do that because the transactions of telephone bank customer was not accounted for at the bank branch. The plan was that the telephone bank should have 30000 clients after one year but it only had 3000 customers after 8 months. In the first months the office with 15 employees got 15-20 calls per day. To improve the enrolment of new clients it was decided that the customers in the future should both be customers at a bank branch and at the telephone bank. The name of the telephone bank service was changed to Nordbanken Direkt. The slow growth continued for a couple of years and the management at the telephone bank boosted the success by including
10

The history of this is that the two Swedish state owned banks: Pk-banken and the post office after they started to co-operate used the personal number as the clients bank account number. 11

forecasted increases in the number of clients when they gave reports about the bank. Eventually the new bank service started to grow faster than the projections. The telephone bank was introduced at the same time as Sweden was in a severe financial crisis and Nordbanken faced big economic difficulties. When the telephone bank was questioned it got support from managers supervising the new activity. The telephone bank service improved gradually the first years. At the start the call centre operator had to ask the client for his name and account number. The security check proved that the client was a telephone bank customer. At the start the work environment was not fully computerised this was also the case in a normal bank branch. If a client wanted to buy or sell shares the call centre operator had to type the order on a type-writer. This type of problems created the insight that the telephone bank needed its own system to manage transactions and customers. When the bank developed such a system in 1992-93 it came to include items that we find in a market database or what we today call a customer-relationmanagement. The database included information on the mailings to the customer and if the customer had responded to these, the latest transactions, and the customers overall connections to the bank. When this type of system was developed at Nordbanken little expertise was available outside the organisation. Therefore Nordbanken developed the technique to connect a telephone operation with a customer database in-house. Competitive pressure from the Swedish bank rival SEB forced Nordbanken in 1992 to offer a 24 hour telephone bank service. In 1995 the telephone bank manager Bo Eriksson in co-operation with the information manager decided to move the telephone bank service to internet. They did this on their own initiative without any formal budget. They took some of the options from the telephone bank and created web pages for each option. The security level was not the highest possible. They kept the system with one time codes on a piece of paper. Nordbanken asked the Swedish Bank Inspection about the rules for internet banking and got the answer that the inspection had no objections since the internet service only covered transfers between own accounts. A demand for an increased security level came from within the organisation. It was the head of security with the support of internal accounting that demanded that the bank switched to a system with card readers connected to the PC. When the client wanted to connect to the Internet bank he should swipe the card through the card reader. According to the projections in early 1996 the card reader solution should become an industry standard in a couple of years. Contacts with Microsoft indicated that all PCs should be equipped with card readers in
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1997-98. In the meantime Nordbanken offered its Internet bank customers that they could install a card reader with their home computer. In early 1996 Nordbanken had approximately 10-12000 internet customers. However, the card reader solution demanded three communication portals while a PC normally only has two communication portals. Despite these problems a high percentage of the internet customers were willing to install a PC card reader. Because of the lack of standardisation as regards PCs, softwares and browsers Nordbanken had to create a support service where the customers could call and ask about the installation of the card reader. The launch of the card reader system coincided with the take-off of internet banking in Sweden. Nordbanken got more customers but lost market shares in comparison with the competitors. It is estimated that the smart card solution delayed the bank 6-9 months. Together with the smart card Nordbanken presented a new improved Internet bank service. The web pages were better designed and the number of services increased. The solution to the problem with the card reader came from the merger with Merita that took place in 1996. The two banks combined their knowledge on Internet banking. The Finnish bank also used a system with one time codes but these codes had a higher level of security, as the codes came with seals. After discussions with the security organisation at Nordbanken it was agreed that the solution with one time codes gave a sufficiently high security level. On the other hand it was found that the Swedish bank had a better solution for the web pages and the commercial offer and these were used by Merita. After 1996 Nordbanken and Merita cooperated in the development of the Internet and distance bank, but the Finnish bank remained more advanced.

Distance and Internet banking at Socit Gnrale

The goal with this case is to reconstruct the evolution of distance banking and internet banking for private customers at Socit Gnrale. The bank is a European Bank Group. Its main activities are retail banking, capital management, and investment and financial banking. The retail banking was reinforced by the take-over of Crdit du Nord. In total Socit Gnrale has more than 12 million private clients and it is the leading retail bank in France, measured in turnover, number of bank branches (Socit Gnrale and Crdit du Nord have together 2600) as well as number of clients in France (7.5 million). The Socit Gnrale is also the bank that has the best image in France according to IPSOS.

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In 2000 the bank became the first French bank to offer six different channels to access the bank from a distance: 1) telephone, 2) PC via Internet, 3) Minitel, 4) warnings over mobile phones, 5) WAP over mobile phones, and 6) interactive television. The number of customer contacts over distance banking contacts increased with 32 % from 70 million in 2000 to 95 million in 2001. The creation of Minitel banking France became in the early 1980s the first country to launch a tltel system. The French system was connected to a Vidotex network and it consisted of three principal components: the Minitel terminal, an access network with servers, and France Telecoms system Kiosque Tltel for payments. All the French banks utilised this system to provide certain types of information to their clients. In 1984-85 Socit Gnrale launched a test service that gave its clients the possibility to check the amount on their bank accounts. In 1987 the bank added the option to make transfers between the clients own bank accounts. In 1989 Socit Gnrale added a telephone bank service to the Minitel service. The bank used France Telecoms system audiotel to provide a 24 hour and seven day a week service for its customers. The audiotel included a kiosque audiotel which included in the users tariff the cost of communication and a payment to get access to the service. In 1989 the telephone server was administrated by another firm. This firm played the role of a distributor that supplied the interface between the bank and the clients and the corresponding technologies. The bank transmitted to the other firm the information about the clients accounts. At the same time the number of Minitel clients increased steadily and reached 120000 in 1990. This created bottle-necks in the server and Socit Gnrale decided to add new servers as the demand increased. Possibilities to expand the offer were discussed. In 1993 a meeting of chief executives decided not to offer stock market transactions because it was considered risky and that the clients could make mistakes. The platform BDT The affluence of Minitel clients and the bricolage structure of the Minitel product (duplication with 9 servers with different access modes: 3615LOG13615LOG9) resulted in a study on distance banking in the coming years. May 30 1994 a directors meeting declared that the ambition of Socit Gnrale was to be one of the leaders in terms of distance banking products and to meet the demands of its customers in this matter. According to a manager (Mr Bela) this was the time when people said: distance banking is a revolution and when
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there existed a willingness to create the service, and make the investments. A result of the renewed interest in distance banking was the decision to launch a stock market option on the Minitel because the competitors offered it with success. In September 1994 a project team got the mission to develop a distance banking platform for the private customers this platform was called Banque DisTance (BDT). The team should: 1) remake the ergonomy of the Minitel, 2) add functions to the Minitel, for example payments to external accounts, stock market transactions, and consultation of the stock market, 3) change of access to vocal server, and 4) the creation of a telephone platform. The project group was rapidly moved to an organisational unit dedicated to distance banking directly connected to the group that managed the retail banking activity and organised customer relations. This gave it a relatively high degree of freedom. A manager (Mr Bela) explains: the banking world is a bit rigid, we had some sort of start-up spiritWe irritated everybodyEverybody was jealous of our position and the means we were given to work. In parallel a benchmark conducted by the information department resulted in a choice to use a new architecture called the technical platform BDT. It consists of a client-server architecture with accessibility 24 hours per day and seven days per week and a security system demanded by Socit Gnrales information system department. Start of Internet banking France Telecom opened its kiosque micro service in February 1995 a private transpac network that was accessible through the number 3601 and a PC with a modem. In 1995 there existed many different networks that enabled firms and private persons to get connected on the Internet: e-world, compuserve etc. In this competitive environment some of ours [Socit Gnrales] competitors started moreover to utilise this new technology and tested already PCs Socit Gnrale had to position itself in the micro informatics offerOur competitors advanced and it is necessary to maintain a dynamic brand image.11 In March 1995 the BDT team presented a document in which they stated that the kiosque micro offer was the most attractive choice because of its billing system, its openness towards other networks and its flexibility. In addition France Telecom promised that the system in the near future would accept telecharging of softwares.

11

Socit Gnrale, 1995 15

In November 1995 Socit Gnrale envisaged to install a WEB server. At this stage most of the French banks had a WEB server, but no bank offered an Internet bank service. Some banks showed their annual report while others also offered information about their services including answering questions from the clients. To enhance its image in new technologies Socit Gnrale decided to offer its clients a selection of information on the Internet. In December 1995 Socit Gnrale bought a server and placed it at an intermediary to avoid all contact between the banks information system and the server. The intermediary had as a mission to configurate the server, to design the web pages, and to adapt them to an Internet environment. At the same time the BDT team suggested in a document that in the future when Internet will be used as a distance banking service it should be integrated with Socit Gnrales system. But before that could happen all the security issues, for example coding, should be resolved. In March 1996 the project to develop a platform run into budgetary problems. This problem was resolved during a budgetary meeting during which priorities were made and a decision made on a more formalised budget. In May 1996 the BDT team presented a document, after meetings since March 1995 and customer research, with the functions that they thought were necessary to get an attractive PC banking service based on the kiosque micro. A manager (Mr Frna) in charge recollected in an interview: we get a service with the same functionalities as Minitel. It offers consultation, transfers, and stock transactions. We get it on PC, with an Internet technology. In July 1996 a report Information on Internet products was elaborated by the BDT team to realise the Internet project. The work on the Internet project was different from the kiosque micro over a private network although the goals of the projects were similar. The report envisaged a connection between the Internet project and the kiosque micro. the web pages with information about the services for the Internet will be reutilised for the PC version of the Minitel service because of the ergonomic proximity (both used PC as a means of connection) Nevertheless, the form will be adapted to the Videotex technology12. The information on the different services offered by the bank was planned to become identical. The Internet service appeared in January 1997 with general information accessible to everyone. September 9 1996 a board of directors discussed the developments of distance banking. The future of Minitel compared with other existing services was recalled. It was considered

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probable that the Minitel service despite the efforts by France Telecom should be confronted with an intensified competition on the one hand with call-centres and on the other hand in the near future with PC connections. It was acknowledged that the work on the BDT platform was running late and consumed more financial resources than planned. Another problem concerned the delay relative to the competitors in offering a possibility to carry out stock market transactions over the Minitel service. The board of directors suggested that the kiosque micro project should aim at avoiding more delays and that it should be coordinated closely to the Internet project. They also stated that : it is important to be reactive, because when the security problems will be resolved, the project bank on PC may migrate to the Internet environlent.13 The year after Socit Gnrale investigated the options for distance banking with interactive television and mobile telephone. The kiosque micro project run into more delays because of different reasons. It was difficult to find consultants that had expertise both on Minitel and Internet. Cost increases resulted in a budget overdraft of 1.4 MF from the initial budget of 9 MF. The costs were underestimated because the managers thought that it should be easy to construct web pages from the Minitel environment. Evenually they found out that it wasnt as simple as thought from the start. Mr; Frna explains: We had to remake everything. For the consultation we finally had to spend one year. Another unexpected cost was the connection kit a cd-rom with a manual. The connection kit resolved three problems: commercial because it used the Socit Gnrales logo, technical because it used well-known navigators and financial because the kit diminished the need for a hot-line. Another problem was that France Telecoms service kiosque micro was delayed and didnt appear before the end of 1997. At that date the France Telecom system was adapted to Windows 98 which few PC users had installed on their PCs. It so happened that Socit Gnrale found out that competing banks offered Internet bank services (to start with consultations) and this was taken as a sign that the security problem was solved. In October 1997 it was decided that the Internet service should should first be tested on clients living abroad and afterwards offered to every customer at Socit Gnrale.

12 13

Socit Gnrale, 1996a Socit Gnrale, 1996b 17

Instead of launching the Internet or the kiosque micro Socit Gnrale decided to improve its Minitel service by offering the new BDT platform in September 1997. The most important changes14 were: 1) the computers supporting the connections were changed, 2) the access mode was changed. Before the system had many different access modes from 3615 LOG1 to 3615 LOG9 they were now replaced by one access: 3615 SG, 3) the BDT platform was introduced which created a time difference between the customers operations and the carrying out of the transaction by the bank, and 4) a possibility to on-line subscribe for Minitel banking, and to look and research the movements on the bank accounts. In January 1998 the project to start a PC banking service based on the kiosque micro system was abandoned due to three reasons: priority was given the Internet bank service, a too low estimated rentability, and lack of development of France Telecoms kiosque micro system. The services targeted for the kiosque micro should be used in the future for the Internet service. In May 1998 the first Internet services appeared. They were consultation of the balance on bank accounts, telecharging of historical data to be used in a customers budget planning software, a possibility to on-line subscribe for Internet banking. The Internet banking system was protected by a 40 bit SSL technology. At the start it was believed that the clients should pay for the Internet service. But due to different problems visible by the customers (the service was out of order or connections were extremely slow) it was decided to delay charging until the launch of the second version. For this version they intended to have an enhanced security system (128 bit) that in 1998 was new in the French market. June 4 1999 the second version with 128 bit coding arrived that gave transfers between bank accounts, and stock market transactions, this put the Internet service on par with the Minitel service. In 1998 before the launch of the second version the Internet service had 40000 clients and the Minitel had 208000 clients. The new system benefited from more powerful computers and a new system architecture. Despite of this the first months of the new service were difficult. We changed the architecture, and we hoped that everything turned back to normal. We put the system on-line, and it didnt work, and even more unbelievable we spend two months to find an acceptable operation. Mr Frna explains: In November 1999, it commenced to get shitty again (remerder). In December 1999, it was an appalling shamein February 2000, it worked like a marvel. To find a normal operation, it took two years. Because of these problems the service continued to be offered free of charge. Officially in
14

Socit Gnrale, 1997 18

June 2000 Socit Gnrale announced eternal cost free Internet banking connection. However, the clients have to pay for many types of services, for example stock market operations, payment of bills, and automatic payments. When the second Internet service arrived Socit Gnrale had adopted a new strategy towards direct banking. A new division within the distribution division called SGdiffusion got in charge of distance banking. It was decided that distance banking was to be regarded as a channel comparable to a bank branch. This change also meant that the BDT team lost its independence and the members were moved to different sections within the distribution division. Less than a year later the distant banking concept was abandoned and replaced by the notion of a multi-channel structure. The Internet banking service expanded rapidly and towards the end of 2000 Socit Gnrale had 200000 Internet customers. The plans to change the Internet bank to a synchronic system have step by step moved further into the future. A shift is now planned to take place in 2005 and the costs are estimated to 250 million Euros.

Discussion
When the Internet bank appeared the banks had reached from 3-5 per cent of their customers with distance banking. Nordbanken had only a telephone bank. Merita run a telephone bank and home or office banking using PCs connected over the telephone network Socit Gnrale had a Minitel and telephone bank. Nordea is today considered to be a world leader in Internet banking while Socit Gnrale is considered to be a market leader in the French market. Both banks have been able to capture significant market shares in the Internet market. The adoption of the multi-channel strategy seems effectively to have blocked the advance of start-up Internet banks and traders. But important differences are evident if we look at the two banks. Merita has already moved a significant part of the transactions to Internet, while Socit Gnrale is still working on moving its customers to Internet. Nordea is working on creating new markets and new channels while Socit Gnrale still has to make the transition to synchronic Internet banking. One question that has been the object of very much debate, is the relative advantages of the so-called pure-play retailers (Internet retailing only, e.g. Amazon) versus the clicks-andmortar (established retailers moving into Internet sales, e.g. Barnes & Noble). The issue was whether the strength in the new Internet technology of the pureplays that were designed

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specifically to take advantage of the new set of opportunities, or the retailing experience of the established firms would provide the crucial advantages. At the height of the Internet boom, most the bets seemed to be put on the pure-plays, whereas today much of the evidence is rather in favour of the clicks-and-mortar firms. The cases of Nordea and Societ Gnrale, because both banks are clicks-and-mortar operations, provide insights into what types of advantages are relevant when established banks enter into Internet business. As is shown in the case descriptions, the previous experiences of the two banks differ considerably in terms of providing the sort of self-service banking that form a basis for Internet operations. The table below summarises some of the potential benefits of the existing technology use for the introduction of Internet banking.

Benefits of Minitel Bank Benefits (SG) Value created

of

Telephone Benefits (Merita)

of

PC

Bank

Bank (Nordea) Access procedures developed

Internal knowledge of handling computerised customer self-service banking Experience in procuring complex self-service system from developer (France Telecom) Experience in working with pay-for-use selfservice bank. Customer base of users experienced in computerised selfservice banking and in the specific procedures used by the SG Minitel bank Customer base of users prepared to pay for use of computerised selfservice banking

Internal knowledge of how to create customer co-production system Customer base of users experienced in selfservice banking and in the specific procedures used by the Nordea telephone bank

Internal knowledge of how to create customer co-production system Internal knowledge of how to develop computerised customer interface Customer base of users experienced in selfservice banking and in the specific procedures used by the Merita PC Bank Long-term users strengthens customer trust in the system

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Looking at the summary of potential benefits may give us an idea of the reasons for the differences in success of the two banks. Comparing the table with the case descriptions, we find that some of the potential benefits proved realisable while others turned out to be not adequate under the circumstances. That the transferability of capabilities from the telephone and PC bank was beneficial is evident in the Nordea case. For example, the simple method of access code on a sheet of paper could be used in the early phase to get the Internet system up and running. Later on it was replaced with a more secure system, but in the meantime Nordea could launch the Internet bank and joint learning through customer use could start to take place. Similarly, building the Internet bank by transferring modules from the telephone bank was a costefficient construction method but more importantly allowed Nordea to benefit the value constituted by a customer base used to a similar design and pedagogy. On the other hand, in the case of Societ Gnrale, some of the potential benefits did not turn out to be actual advantages. For example, their experience in procuring complex systems from an advanced developer was of little value when no such off the shelf system was available. In fact, this experience may even have been detrimental in that it contributed to keeping Societ Gnrale from starting to develop a system of their own. Neither did the potential advantage of having a customer base of users willing to pay for services prove to be of actual value in the circumstances. Although the prospect of services on the Internet starting to become feebased has been discussed for several years, this is still a very marginal part of Internet business. Trying to launch a pay-for-use service slowed down adoption of Internet banking in at least two ways. By not introducing a potential disadvantage of the existing Minitel solution and thereby not giving Minitel users this incentive to try the new technology. The usage fee also constituted a disincentive for potential customers who had experience of other Internet services and who therefore had adopted the idea of Internet as a medium that should be free of charge. This discussion of benefits partly ties in with the issue of inertia. From the point of view of inertia we find that in the Nordea case inertia played an insignificant role while Socit Gnrale clearly was blocked by inertia in its move to the Internet bank. At least three types of inertia are evident in the Socit Gnrale case: 1) Cultural inertia with the success of Minitel and France Telecoms promises about new Minitel type solutions for the Internet. 2) Cognitive inertia in particular the security aspects. 3) Economic inertia due to the system with

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charges per minute in the Minitel bank. Nordbanken was captured for some time in a type of cognitive inertia when the security organisation demanded a very high level of security. We can note that the two banks aimed at two different strategies when they adopted the Internet bank. Socit Gnrale wanted to charge the customers because of the increased value added. This is logical in view of their past sucess with the Minitel. Nordea, on the other hand, regarded the Internet service from a cost perspective and therefore decided not to charge the customers. Nordeas strategy is based on the experiences of both Nordbanken and Merita. The Merita bank had the most evident path creation strategy. It consciously used the idea of customer habit as an institution (norm) to move customers to the Internet bank. The cost-focus of Nordbanken can be traced to their telephone bank first being started mainly as a way to divert costly balance-questions away from the branch offices. As other services were added, the value creation for both bank and customers has become evident, but the cost focus has remained guiding. Together these backgrounds led Nordea to the adopt a high-growth, rapid penetration strategy which ultimately resulted in its present leadership position.

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References
Arthur, W.B., 1994, Positive feedbacks in the Economy, chapter 1 in Increasing Returns and Pathdependence in the Economy, The University of Michigan Press Besanko, D., Dranove, D, and Shanley, M., 1999, Economics of Strategy, 2nd ed., Wiley Dixit, A. K. and Nalebuff, B. J., 1991, Thinking Strategically, Norton Christensen, C.M., 1997, The Innovators Dilemma, Harvard Business School Press Garud, R., and M.A. Rappa, 1994, A Socio-cognitive Model of Technology Evolution: The Case of Cochlear Implants, Organization Science, 5: 344-362 Hannan, M.T. and J. Freeman, 1989, Qrganizational Ecology, Harvard University Press Lovelock, C.H. and Young, R.F., 1979, Look to consumers to increase productivity, Harvard Business Review, May-June Normann, R., 1991, Service Management. Strategy and Leadership in Service Business, 2nd ed., Wiley Pennings, J.M. and F. Harianto, 1992, The Diffusion of Technological Innovation in the Commercial Banking Industry, Strategic Management Journal, 13: pp. 29-46 Robertson, P.L. and R.N. Langlois, 1994, Institutions, Inertia and Changing Industrial Leadership, Industrial and Corporate Change, 3: pp. 359-378 Shapiro, C. and H.R. 1999, Varian, Information Rules, Harvard Business School Press Tang, M.-J., 1988, An Economic perspective on Escalating Commitment, Strategic Management Journal, 9: pp. 79-92 Thomke, S. and E. von Hippel, 2002, Customers as Innovators. A New Way to Create Value, Harvard Business Review, April pp. 74-81 Toffler, A., 1980, The Third Wave, New York, Collins. Wright, M. and Howcroft, B., 1995, Bank Marketing, in Ennew, C., Watkins, T., and Wright, M. (eds.), 1995, Marketing Financial Services, 2nd ed., Butterworth Heinemann, pp. 212-235

Documents from Socit Gnrale

Socit Gnrale, 1995 (March), La banque sur micro-ordinateur, document de travail Socit Gnrale, 1996a (July), Information produit sur Internet, cahier des charges Socit Gnrale, 1996b (25 October), Projet banque distance sur micro Clientle des particuliers, Dossier de synthse Socit Gnrale, 1997 (21 October), Compte rendu comit projet BDT

Documents from Nordea

Nordea, 2002a (22 February), From e-banking to e-business, presentation by Bo Harald Nordea, 2002b (7 March), Will Money Talk, presentation by Bo Harald

Interviews at Socit Gnrale

Mr Bela, 28 July 2000 Mr Frna, 27 July 2000

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Interviews at Nordea
Mr Bo Eriksson, Head of Private Retail Banking at Nordbanken, 7 March 2002 Mr Bo Harald, Executive vice President Nordea, 6 March 2002 Mr Kurt Gustavsson, Head of the Telephone and Internet Bank at Nordbanken, 25 January 2002

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