Insurers are getting deeper and deeper into the banking game.Although the original impetus of recent regulatory changes wasgeared at the consolidation of financial, banking, and insuranceservices, middle market insurers are making their own mark in thefinancial services convergence story. Insurers such as State Farmand MetLife have developed or acquired banking arms and investmentarms within the umbrellas of their other services. The real focushas been on using the banking arms as added distribution channelsand as venues for providing a broader slate of services not onlyfor existing insurance customers but also in an effort to attractnew customers.

For many people, the opportunity to have one place to do all oftheir banking, their financial investments, and their insurance ispretty attractive. So we really saw getting into banking as a wayto respond to what weve been hearing from many of our customers,notes Fraser Engerman, public affairs specialist at State Farm. Themiddle market State Farm targets, he adds, traditionally has beenunderserved by the financial community.

State Farm Bank was created to round out the companys existingofferings to its customers. It is not necessary to be apolicyholder to use the banking services, but the company hopes theallure of being able to access banking services and investmentservices along with insurance guidance and provision will promotemore crossover selling of its products.

State Farm differs from others in its foray into banking for anumber of reasons16,500 of them, to be exact. Thats the number ofindependent agents in the companys sales force. There isnt afinancial institution in the world that Im aware of that has over16,000 locations, explains Terry Nichols, assistant vice presidentof State Farm Bank. The vast sales force is used to bring thecompanys banking services, which include checking, savings, IRAs,auto loans, home loans, and home equity loans, to its insurancecustomer base of over 27 million.

We have a tremendous customer base to draw from, and its therelationship be-tween our agents and our policyholders that no oneelse can match, adds Engerman. But having over 16,000 distributioncenters (agents) can also pose some interesting challenges,especially involving training and IT considerations. The biggestchallenge we found [when State Farm started the bank in late 1998]was having no roadmap to follow. Because our folks are independentcontractors, the process had to be engineered to support theirneeds specifically, Nichols says.

Challenge and Opportunity

Those needs encompassed everything from getting more than 16,000people up to speed on computer technology to educating the forceabout the new products. Its been a challenge, but with challengecomes opportunity, offers Nichols. We tried to go into [setting upthe bank] without any preconceived ideas about having to do thingsthe way they had been done in the past. We wanted to allow someflexibility as we moved into the future because we knew there wouldbe some surprises along the way.

Included in the positioning of that flexible mindset was therealization that the firms legacy-based systems would not supportbanking services very well. In 1996 and 1997 when the bank firstbecame an idea, the technology being used then was more legacy andplatform based than Internet or Web based. We realized we had tobuild a thin-client environment because we recognized having over16,000 locations would make it extremely difficult to update andmaintain software using the old technology, explains Nichols.

State Farm bought the components it needed to set up theWeb-based system for its agents. It then wrote the code necessaryto integrate the various parts of the system, allowing agentsaccess to the range of bank services.

The company is still in the throes of transforming its legacyinsurance systems to the thin-client environment, with the mainsystems residing on centralized servers. Core processing of thevarious banking functions involved in, say, checking or savings,have been outsourced to third-party processors, allowing thesignificant State Farm telecommunications backbone to be leveragedto provide accessibility to the force.

New Infrastructures, New Skills

The educational process has been a huge success, evidenced bythe fact that 95 percent of the State Farm agency force hasrecognized the opportunity to offer banking services to theircustomers and has taken advantage of the banking educationprograms.

Adding new services is right in line with agents normal mode ofseeking new ways to do business. Having to retrain deeplyestablished habits in using legacy-type systems is not. Theaddition of banking services brought with it an entirely newinfrastructure based on the Internet. Many State Farm agents,however, were not used to Web-based applications, so the firmrolled out the banking system in a controlled manner. The companygave agents pre-study materials for the training classes that wereheld to get the agents up to speed on current technology. Trainingwas held on a regional basis, causing the initial rollout to takeabout two and a half years.

We ended up embracing interactive distance learning, and we nowuse that to train agents and their staffs much faster, saysNichols.

The legacy system still exists on the insurance side,accommodating insurance sales, which now include fixed and variableannuities that are sold through the bank. It coexists with the newWeb-based systems on the agents platform. Its a cross between athin-client and a pseudo-fat-client environment, Nicholsexplains.

MetLife created MetLife Bank through acquisition. Its primarypurpose is the same as State Farm Banksto round out services tocustomers. The bank offers regular services, such as checking,savings, and certificates of deposit, but will soon be rolling outcollege planning, retirement planning, and wealth managementproducts along with loan products and rate calculators. There willalso be a feature on the site that will help customers comparevarious investment products. The firm uses its Web site primarilyas an educational venue for its customers as well as a marketingchannel for product.

Through its investment arm, MetLife Investors, the insurer hasalso formed relationships with outside banks, creating a vastdistribution channel for its life insurance products in addition toMetLife Bank.

We sell fixed and variable annuities, and we also have aformidable life group that is not quite as prevalent within thebanking community as it is within the independent, regional, andwirehouse broker/dealers, explains Les Sutherland, executive vicepresident of sales for broker/dealers and banks at MetLifeInvestors. Being in the marketplace for only two years, we havetremendous capacity for fixed and variable products.

Banks Are Different

Sutherland contends the needs of a banking channel are differentfrom those of other distribution channels. Its comprised of twogroups, primarily. Large and regional banks have platform programswith the Series 6 people [selling mutual funds to retailinvestors], then they have dedicated reps that are Series 7licensed who go out and call on the branches [with mutual funds andother investment products]. So at a big bank, you may have as manyas 1,600 reps supporting the banking interest in the community, hesays.

Both Sutherland and Nichols stress the importance of technologyin serving the banking networks. Being up to speed with technologysystems is paramount to your success within the banking community.Without a current technology platform, you can have all theagreements in the world, but youre not going to get anywherebecause you just cant do business without effective IT, offersSutherland.

One of the first things MetLife does in looking to bring onadditional banking distribution is to make sure that were synced inand that we involve our service people in Des Moines as well as ITpeople to assure well be synced in with them going forward,Sutherland adds. Many banks MetLife deals with are set up forelectronic order entry and even field issue on contracts. Wevefound at MetLife we can accommodate just about any systemsfunctionality they may have, explains Sutherland.

We realize new technology is out there providing someopportunities for us to be able to handle challenges better in thefuture, but theres a lead time in maintaining old stuff andinstalling new, so theres always a challenge there, explainsNichols.

Scale is extremely important at State Farm. The company has madea commitment, as has MetLife, to support and enhance its financialservices offerings going forward. According to Nichols, technologycompanies have been developing servers that can bunch smallerservers together to provide huge processing capabilities, creatingscaling abilities that will enhance platforms and streamlineservices offered on the Internet.

Slow in Changing

But the transformation on all sides is slow. For State Farm, wehave 16,000-plus agents who run the gamut of being comfortable withtechnology and not. We keep encouraging folks to try it, and wethink they will like it. The next issue for us is, now that we haveGeneration One in, what should Generation Two look like? Whats thefunc- tionality that we need to put into play? offers Nichols.

Generation Ones primary goal was to get the entire agent forceat basically the same level of comfort with using the Internet anda Web-based system, which went hand in hand with the rollout of thenew Web-based banking services. That was no easy task, consideringthe variety of comfort and use levels that existed over such alarge sales force. The one-on-one sessions were a big factor inaccomplishing this feat. In addition, the switch to distancelearning through the Web facilitated learning at each agentsindividual pace.

Both companies see the future holding increased participation inthe insurance side of the business by non-traditional players, suchas CPAs, attorneys, and other new entrants into financial services.Competition will increase, creating further demand for firms to beon top of current technology.

An additional fly in the ointment in providing financialservices through insurance companies is the privacy provisions setforth in the Gramm-Leach-Bliley Act. Adds Nichols: We try to makesure we provide the tools we need for everyone, but we have to doit in a controlled environment.