Retail banking is a tough business-and, thanks to the Internet, getting trickier by the day.

The problem-a double-edged sword, to be exact-is that while technology has opened new doors of opportunity for banks, it's done the same for consumers. Banks and other financial institutions find that they are allocating a greater amount of time and resources identifying ways to differentiate themselves (hence, be more competitive) in an environment where the consumer is increasingly willing to deal with almost anybody- forgoing brand for the sake of the best price in town.

And, as more and more new players offer bank-like financial products and services, the dilemma is worsening. "When you really get down to it, all financial services to the consumer are commodities. You can argue that Coke and Pepsi are different because they taste different, but a mortgage is a mortgage," says Lazard Freres & Co. svp Ned Davis. "Companies may come up with slightly different bells and whistles, but, for the most part, it's a homogenous product."

Consumers want the convenience of-and are increasingly comfortable with-accessing information and conducting transactions remotely. Many banks, on the other hand, have done a poor job of mastering customer information management. Herein lies banking's greatest retail challenge: how to gather, build and manage electronic customer information profiles so that a bank can proactively market tailored products to customers from which the institution will profit.

Although many industry players espouse the benefits of target marketing and customer information management, it oftentimes turns out to be more rhetoric than reality. A true electronic customer profile "meshes" information from a wide spectrum of sources, says Davis, including that accessed from credit quality data providers, Department of Motor Vehicles, U.S. Postal Service and consumer groups, to name a few. Even more, smart institutions will strike partnerships with companies that specialize in capturing consumer behavior and transaction data through direct interfaces- the Internet and ATMs, for example-to build complex consumer profiles."The only way that a bank can differentiate itself, take market share and improve profit margins other than by the obvious way of swallowing up institutions and capturing the accounts is to have more effective marketing," he says.

But specially crafted target marketing initiatives aren't enough; in a commodity business, lowering the cost of distribution is crucial. The Internet, like ATMs before it, will play a greater role for banks in reaching only the customers that they so desire. "You must have a very selective way of reaching customers. The good news: The whole country, and maybe the whole world, is your oyster," says Davis.

To pull in customers, Davis says that banks must focus their efforts in four critical areas: building consumer profiles to enable target marketing to reach the right customers; abandoning the supermarket strategy and "take your best shot" by offering the consumer only the products that he or she wants; delivering products at the lowest cost possible; and outsourcing marketing and information-related customer interface functions to achieve better performance in those areas, which, ultimately, leads to identifying more profitable customers. "The real frontier is (building) the customer interface and management of the customer information profile."


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