The First Bank Of Redmond

By MICHAEL KRANTZ

Of all the product arenas Microsoft is stomping into these days, none looks more enticing than financial services, a $1 trillion-plus industry built on just the sort of slick software at which Bill Gates & Co., um, excel. Led by its financial-management title, Microsoft Money and its brilliantly realized investment Website, Microsoft Investor investor.msn.com) the company has more than made its mark in home-financial software. But consumer-side successes are just the tip of the Microsoft iceberg, and industry watchers wonder whether giants like Chase and Citi might yet turn into Titanics.

Microsoft's initial revenues come from software licensing; the code for the hit travel site Expedia, for instance, will soon fuel sites for American Express and Northwest Airlines, among others. And the financial sector is next. Last week Microsoft unveiled its Investor Platform Kit, which lets banks and brokers put mix-and-match versions of Investor on their own sites.

But the killer app is Microsoft's MSFDC, a software suite created with data-processing giant First Data Corp., that lets consumers pay bills directly on their bank's Website. MSFDC rolls out this fall. It's a big deal. Mike Dusche, Microsoft's manager for worldwide financial services, says MSFDC will help banks navigate the coming online-commerce maelstrom by building closer customer ties. He's right: a product like MSFDC--with, say, Money and Investor along for the ride--will surely help your banker retain your allegiance. "The financial industry is based on transaction processing," says Cliff Condon, a senior analyst with Forrester Research, which estimates Microsoft's financial-services sales at $1 billion a year. "MSFDC puts Microsoft squarely between banks and their customers."

Location, location, location. Microsoft's plan to charge merchants for MSFDC on a per-transaction basis is a first for the company--and just the sort of Infobahn-tollbooth scenario that Gates spent years swearing he wouldn't pursue. Then there's Windows DNA FS (Distributed Internet Applications for Financial Services, for those keeping score at home), Microsoft's bid for the banking industry's long-term back-office software business, which looks like one of the biggest cash cows high-tech capitalism has yet to offer.

So, could Gates become the world's de facto banker? "I don't have any interest in bringing Microsoft into that arena," says Dusche. "Frankly, it's a really tough business." But his boss is a really tough businessman. As banking evolves into a competitive, complex business conducted over the Internet, Microsoft software--just as in the PC era--could become ever more valuable even as the products it enables grow ever less so. "I can go online and find hundreds of checking accounts," says Condon. "Microsoft wants to sell more servers and software, not become a financial institution." But Gates could find the insular banking world a tough nut to crack. Well before MSFDC, the industry launched the software consortium Integrion as its bulwark against territorial infringement. Today Integrion competes with MSFDC even as it licenses Microsoft Money. Microsoft, meanwhile, plays the good citizen, agreeing to abide by the E-commerce software platform that an industry group will release this August. For now, at least, it looks like everyone can just get along.

--By Michael Krantz