Mike Pedersen, executive vice president of branch banking for CIBC, is responsible for the Toronto-based bank's $200-million, three-year project to rebuild customer service. He envisions branches as relaxed, comfortable places to check on portfolios and keep up to date with the newest products.
MANAGEMENT STRATEGIES: What was the inspiration for this scenario?
PEDERSEN: The wake up call for the Canadian industry was the impending arrival of ING Direct, a Canadian operation of ING Group from Holland. They're here now, and we have an operation called Citizen's Bank, which is a countrywide virtual bank. Also, one of our big five banks, Bank of Montreal, launched a semi-virtual offer called mbanx. We saw this coming.
MS: How do you start to make this vision real?
PEDERSEN: Before, the interface with the customer was basically through branches. Alternate channels like ABMs (automated banking machines) existed to support the branches. Now, it's totally different. Customers deal with us through many channels and we see the branches as just one of those. They deal with us through ABMs, PCs-increasingly, by the way- telephones, and so on. More than 80 percent of our customers' transactions are done through electronic channels-telephone, ABMs and PCs.
The big issues for us are managing our distribution system and the costs across these channels and integrating this from the customer's viewpoint so that they don't see significant differences between channels.
MS: How do you manage the distribution and costs related to these channels?
PEDERSEN: You get your mind around what you use each channel for. Rather than thinking about branch banking, you think about distribution and distribution systems. You think about total distribution costs, where you put sales and service and so on. The paradigm shift is from thinking about branch banking as distribution to one of think ing about distribution as the entity and the branch and other channels are parts of that distribution system.
MS: How do you integrate those channels in terms of the customer?
PEDERSEN: We've built new systems for telephone and PC banking and ABMs on the same platform, so it feels to the customer as if things are similar in all channels. To support the notion of an integrated system, we've also aggressively advertised to any customer that has shown propensity toward electronic channels. In those advertisements, we characterize it as one distribution system where they have choices.
MS: In the past, when choices were added, customers used more channels, which is not economical for the institution. Do you agree?
PEDERSEN: The trouble is that with this added convenience through choices, customers use the cheaper channels more and transact more. Two things have lead to that not meaning cost savings for all banks. One is that we're investing in these channels without being able to take the cost of the old ones; the other is that the savings from customers using cheaper channels are outweighed by the increased use of those channels.
MS: How do you plan to get around this situation?
PEDERSEN: You can influence customer choice. We've had tremendous success in incenting customers to use particular channels. In one market we tried to divert customers from branches to ABMs. In three months, we took that diversion from 61 percent to 91 percent without using economic (leaders). That stayed-and that was 18 months ago.
We chose an atypical market with more resistance than elsewhere to electronic banking, a rural area with a disproportionately large senior population. We found that seniors were disposed to electronic banking if you patiently took them through the (stages) of learning. There was one customer segment that was not: men between the ages of 45 and 54 years old. (Perhaps that is because ) men don't want to ask.
MS: In planning for this retail bank of the future, how do you address the consumer psychographics to figure out when and how many customers are ready?
PEDERSEN: That's the million dollar question. We're using the learning we have in terms of where we've been successful with this in the past. (Also,) PC banking has been a big surprise in terms of customer uptake. We're five months into this launch of PC banking, and we have 76,000 customers on-line and over a million transactions per month. This is growing way quicker than telephone banking, for example.
We're trying to stay flexible in deployment of these channels and monitoring trends carefully-in most cases, day by day, and revising our planning on a monthly basis to take that into account. We're also making sure that we can capture customer information across all channels. Customers that are relationship managed by account officers, for example, will be able to monitor customer activities, portfolios, etc. across the channels. We see that as key to maintaining this as an integrated offer.
MS: Can customers get the same information whether they call, fax, whatever?
PEDERSEN: Yes. We (don't) have that capability yet, but we're designing systems to do that.
MS: When will CIBC be able to do that across the board?
PEDERSEN: Within a year. We have it for all the electronic channels; the trick is to integrate it with the branch-based systems. The other huge question is what to do with the branch network. For two years now, we've been doing experiments around that and we think we've come up with the format that will work in the future. It's using the branches almost solely for an advice and sales platform and a place to nurture and build relationships. We're aggressively transforming our branch network into that kind of platform.
MS: It sounds like a pleasant, leisurely place, where customers can have coffee, attend seminars, etc. Where would be the urgency for people to go there?
PEDERSEN: We are talking about potential scenarios ten, 15 years out. We're in the process of implementing this strategy in our largest market-greater Toronto, where we have probably 1.5 customers-and we're going into branches, removing teller counters, installing offices and meeting spaces and we will be able to do some of the things you're talking about in a few months. We're combining that with a new offer to our (mass affluent) market customer base.
MS: Can you give me some examples.
PEDERSEN: We'll have the advisory capability in place: offices, technology tools, newly trained, hired and differently incented staff and so on. We will be doing the customer seminars; we'll have access to information for customers that we didn't have before. We have a central advisory service accessible to employees, and through them to customers, to answer almost any financial question that you have.
MS: Is this just for affluent customers?
PEDERSEN: It's the mass affluent. If you have $100,000 in funds managed with us, a combination of mortgages, credit cards, investments and so on, you'd qualify for this offer. It will be targeted at 15 to 20 percent of our customer base.
MS: Would other customers have reason to go there?
PEDERSEN: They might. Some of these branches will have an area with an offer for the mass market. That would consist of product fulfillment, limited advice, some services capability-but very little compared to what we have now. We'll be able to meet all the needs of the mass market customer through partition areas there, (in most cases) electronically. That's already the case.
One of the principles that we're using in all this is that at CIBC you always have the option of either speaking or meeting with a human being.
MS: Are you going to need more advanced systems than you have now, or do you have everything in place?
PEDERSEN: We've built all kinds of new capability. We've chosen to build a new banking system for our electronic channels because we decided that our legacy systems were not built with that in mind. They're in testing now and we'll be operating within two months. We'll then integrate those systems with the branch banking system.
MS: What have you built?
PEDERSEN: It's the basic banking system; the DDA system, all the product capabilities, transaction processing-a full standalone banking system. This is a first for us and we believe a first in Canada. We believe that our competitors have chosen to modify their existing systems to support electronic channels.
MS: So why did you decide to build?
PEDERSEN: It gives us a lot more flexibility. Most banks have legacy systems that were more or less patched together over the last 30 years. We see the future of electronic channels as huge. So we want to design a system that could optimally and flexibly support those channels however they might evolve.
MS: As you move deeper into electronic delivery mechanisms, how do you keep relationships with customers who hardly ever see a human face, much less cross-sell them new products?
PEDERSEN: Good question. (Since) we already do in excess of 80 percent of transactions with customers electronically, it's an issue that we've already faced. There's a few things we're doing. The first is much more sophisticated database management, or as we call it, relational sales management, where we employ a data warehouse and processing capability to identify opportunities in our customer base. Our relationship managers know where the opportunities are to a greater extent than they did. We also do telephone outbounds based on where those opportunities are.
MS: Earlier you talked about competing virtual banks. How do you attract customers in an electronic world?
PEDERSEN: So far, based on the evidence, it's difficult. None of the virtual offers that exist here-and there are three-have had any discernible effect on the marketplace. Part of the problem is that most customers want to do some things electronically, but there are many things that they don't want to do, such as receive investment advice, sign up for a mortgage-that's been less successful in Canada than it has in the U.S. Increasingly, at least in Canada, the game is advice. So far no one in Canada has demonstrated that you can provide advice via electronic means to a large portion of the customer base.
MS: What about kiosks where you can still see and interact with a human being?
PEDERSEN: I'm keeping an open mind on that, but I'm not convinced. We've talked to some of the folks around the world who are experimenting with that. We'd say there's limited applicability. We are going to test (it) ourselves as well, though. There may be some differences in the Canadian marketplace. This is like in-store banking, which has been very large in the U.S.; it's not up here.
We're not sure why. We're all testing it, given its popularity in other markets. Some of the reasons might be our different payments systems. Check use is not as high as in the U.S. Debit cards account for a larger portion of our payments than credit cards. We also have an over-branched system compared to the U.S., so the notion of more physical distribution points isn't as appealing in this marketplace-either to us or to customers- as it has been in the U.S. But we'll continue to test some of these things.
MS: CIBC's goal is to simultaneously provide fast transactions and financial advice across various channels. How do you do this?
PEDERSEN: There are two thrusts in our distribution. One is to move to an advice platform in general, where rather than just taking product orders, selling proactively or even cross-selling, we're providing advice in the context of financial plans and selling off that. That's going to be through this branch transformation that I described combined with targeted electronic approaches to customers. The other part of it is to reengineer our entire delivery system to provide better transaction capability. Primarily we're doing that through the PC, telephone and enhanced ABM network.
MS: Are you trying to be all things to all people?
PEDERSEN: In banking we have tried to serve all customers the same way and in the course of it, in your typical bank, 20 percent of customers make up about 100 percent of the profits. Also, customers have different needs. These are the (concepts) that are behind our redistribution strategy. We will service our customer base differently by segment. It will be the first time customers see that in the physical and electronic distribution systems across the country. By moving to electronic channels we think we can make the unprofitable segments profitable.
MS: What is the role of strategic alliances in all of this?
PEDERSEN: As you get into advice, for example, there are elements that are not economical for banks to provide, but are still needed across broad customer segments. That might be an opportunity for alliances, with providers that are in the advice game. We're working with several technology advisers-including some who wouldn't normally be in the same room together-to develop the next generation of our PC banking release.
MS: What's the most immediate challenge?
PEDERSEN: What to do with the branch system. That's the only obvious place to get significant cost out to pay for new investments in electronic channels. But it is also the channel that most customers rely on with respect to their relationship with the bank. The danger is that if you try to cut costs too quickly, you'll end up not retaining customers. The issue of how quickly to proceed is probably the most tricky dilemma facing retail commercial banks in North America now.
MS: How are you approaching that?
PEDERSEN: Carefully. We're doing extensive customer research. We're not going to make (this decision) basis on what costs we need to take out, but on the basis of the emerging customer preferences and behaviors and what does the integrated distribution system need to look like in the future. How many branches do you need; what do they need to do; what mobile sales specialists do you need; and how much electronic capability do you need?
MS: What do statistics show?
PEDERSEN: Canadian customers were asked, "To what extent have you used each channel in the last month?" Twenty one percent of people-this is a very large, reliable sample of people across the country-used branches exclusively; 61 percent used branches and electronic channels. Eighteen percent used only electronic channels-ABMs. PCs and telephones. That's interesting information; it shows there really is an opportunity for direct providers, at least for some products. The other thing that's of interest is how quickly things are changing in CIBC's experience. At CIBC, the percentage of people who used branches dropped 9 percent in one year between 1995 and 1996. That speaks to fairly dramatic change in customer behavior. That was a drop across the board, with regional variations, but nothing significant.
-bosco tfn.com
