Continuing bank consolidation - and the certain acceleration of this trend - has caused bank executives to wonder as never before how best to deploy their branches and agents.
Branches are a high-cost and low-control delivery channel.
Management understands the issues of the channel's cost and profitability, the cost structures of the competition, and customer service needs. However, bankers generally approach their channel strategy by thinking of channels as independent conduits.
For example, they ask, "What am I going to do with my branches? Should I get into home banking? Should I invest in Microsoft's new products? Should I invest in interactive TV or screen phones or smart cards? Should I team with a card association, or should I consider them the enemies?"
Unfortunately, this approach misses the point. The answer does not lie in a focus on a particular channel but in a bank's ability to respond to what people will buy today and to change as they change.
The main point is that the channels themselves are not the answer. Banks first need to build the capability to deal with their customers and their "buyer values."
So if a bank has targeted customers who happen to want their products delivered via personal computer, then that is how the product should be delivered - but only once those customers are ready.
Another reason that banks err when devising their channel strategies is that they tend to think customers value their relationship to the bank more than they actually do.
From Andersen Consulting's experience in the area of consumer buying decisions, for most consumers, the relationship with a bank did not come close to the top of the list of what influences purchase decisions.
This reveals a critical point about customer attitudes, channel strategy, and technology.
For example, customers want timely decisions on whether their mortgage applications will be approved. However, it may be of no value to the customer for that application to come through eight hours faster.
For the bank, though, saving the customer that eight hours may cost millions. And if the bank doesn't know, as most banks don't, its customers' buyer values, it may spend $10 million for faster technology that customers don't care about.
Banks should make channel investments based on evidence of what customers will buy so that they can squeeze as much margin and add as much value as possible as the business becomes increasingly commoditized.
Instead of looking at channels independently, bankers should be looking at profitability, and at business processes that can be shared across channels.
Rephrased, the bank's questions really should be broader than branches: "What overall strategy will generate as much revenue as possible from all channels, especially the branches? What is my revenue per cubic foot?"
A bank's branches have an important role. They are like the retailer's storefront. Though bank executives debate whether they want to sell or further automate their branches, the solution really depends upon their strategy for making money.
It will also become more important for banks to segment their customer bases by behavior so that they know which people are impulse buyers and which are price-driven, convenience-driven, etc.
Then branches must be used in a way that complements these "psychographics."
For example, some people like to come into branches for the social contact, and bankers must decide how they are going to make money from them. Some branches might support this strategy.
Unfortunately, bankers have grown up in a highly regulated world in which their branches tend to look alike. Now they are faced with competition from Fidelity Investments and others whose few branches are showcases of product and marketing virtuosity, not workmanlike primary sales areas.
To succeed, banks will have to set a unique franchise strategy - specific to their own concerns - then act on that strategy and monitor it continually.
Picking the right strategy is particularly important because of the changes that automation has brought to banking.
First, it has reduced the cost of delivering the product and made many products commodities. With thin margins, getting the customer to choose the "right" channel will mean the difference between a bank's making or losing money.
Second, converging technologies of business, entertainment, and finance have allowed new entrants into the financial services marketplace at relatively low cost. For example, today, a customer who is connected to the Internet can release a "buying agent" that can "shop" for compact discs from 20 retailers and choose delivery from the one with the lowest price.
There is no reason why that couldn't be done with home mortgages. Though we cannot predict which product lines or segments will be affected first, we believe we will see such developments soon.
Think of the changes this will create in the nature of the business. The financial services provider then becomes part of a different industry.
We feel strongly that knowledge of buyer values and a strategy to act on them can lead to significant revenue enhancements.
If customer data bases can be populated with the correct buyer values, then time to market can be sharply reduced. This is critical because products in a technologically oriented marketplace can be copied very quickly. The future, quite simply, is that customer preferences, not marketing organizations, will drive product development.
Banks will gain a competitive advantage if they enhance responsiveness to customer values via product development flexibility.
If a customer wanted a mortgage loan with a flexible payment schedule tailored to decrease as his or her children entered college, then it could be created without putting a cumbersome marketing or operations effort behind customized delivery. The process would be somewhat analogous to that in the auto industry, which customizes cars as the customer places an order, instead of trying to make custom features fit a car that's already built.
The technology-induced compression of product development time will let customer information files move from marketing people to the decision- makers.
Data will spend far fewer hours in warehouses and move closer to real time. The bank of the future will know that someone in your family bought something and an hour later will be able to make decisions that help create new products, prevent fraud, and manage risk.
Banks will be able to tell faster what kind of exposure their customers have to competitors. They will know more about their own customer bases when a competitor or acquirer enters the market, as one inevitably will.
More rapid electronic delivery of smaller pieces of customer information is transforming channel strategy and making channel flexibility paramount. Tomorrow's channels will have multiple players owning, using, and supporting the bank. The only constant is that there will be no single right answer or channel.
The key is to keep the emphasis on channels as a means to an end rather than as an end in themselves.
