At a Bank Administration Institute marketing conference last March, James McCormick of First Manhattan Consulting Group asked his audience, "What's wrong? Why aren't we getting the results we anticipated from retail?"
Security analysts argue for, and confidently predict, more mergers because retail revenue growth is not occurring. As a result, profit growth will have to be fueled by merger-expense savings in order to appease impatient markets and shareholders.
Second-quarter profits from the consumer group at one of the largest American banks set a record, while revenues from its North American branch banking activities were down 1% from the same quarter in the prior year.
Shouldn't these be golden years for retail banks? The economy is strong, unemployment is low;, inflation is in check, baby boomers are saving for retirement, and small businesses are thriving. Where is the organic internal revenue growth that should result? Why does the current growth seem to be coming only from mergers and/or price increases?
In a now famous article in the July 1997 Wired magazine, Peter Schwartz and Peter Leyden wrote about "the beginnings of a global economic boom on a scale never experienced before... a period of sustained growth that could eventually double the world's economy every dozen years and bring increasing prosperity for -- quite literally -- billions of people on the planet.... Two major forces -- fundamental technological change and a new ethos of openness -- are driving our era, forces that could bring about the long boom, a 25-year global expansion with all its consequences."
Whether one agrees or disagrees with the prognostications, one must support the premise that the current economic boom in America has led to increasing household prosperity and an accelerating need for financial services.
In the "money revolution" gripping the United States today -- and the rest of the world in the near future -- customers are better educated about their finances, have assets to manage, and want solutions that provide them with better lives. At the time of the Gulf War, the Dow Jones was at 2,500, nobody knew about the Nikkei index, and credit cards charged near-usurious rates. Today, the Dow is above 10,000, we wake each morning to hear what the Nikkei did last night, 25% of the assets of American households are in some form of the equity market, and price competition has come to credit cards.
The American consumer embraced the money revolution. But are retail banks embracing it? The evidence suggests not.
Some of the more egregious bank responses include:
Continued flogging of the sales staff, even though product offerings are incomplete and do not meet customer needs.
Imposition of nuisance fees to shore up short term earnings, even though these clearly annoy and drive away customers.
Worshipping by senior managements at the altar of customer relationship management, even though the customer and front-line personnel know that retail banks are a collection of product companies and operational fiefdoms that are no easier to do business with than competitors who have never done business with the customer.
Image marketing campaigns that do not sell products and are not what customers want (the money revolution presents a whole new set of products and decision points that consumers need to be educated about).
Retail banks are losing contact with their customers, giving average service to all instead of specialized offerings to the behavioral segments that are demanding it.
Examples are numerous: customers did an about-face toward equities, and retail banks worried and still worry about disintermediation. Customers want banks to know them, but we ask them for information on credit applications as if they were from another planet. Customers want simplicity, and banks give them a bewildering array of fees, products, and pricing nobody understands.
Customers want education and help, and banks give them buzzwords, ads, and voice response units that prove we do not understand and make them ask, "What's the point?"
Retail banks are losing the minds and hearts of consumers. We are being left with the crumbs from customers' financial table. Banks will have a 100% market share of checking accounts (customers will keep a local account to avoid ATM surcharging), but most of the profits will accrue to monolines and the brokerage/insurance/e-commerce houses.
Every retail bank in America is facing the challenge of increasing internal organic revenue growth. If revenues are growing annually at a generously assumed 4% to 5% (excluding acquisitions and price increases), that means expenses will have to grow 2% to 3%, which results in no monies being left for important investments in people, product, distribution, and technology, unless there are expense reductions in ongoing operations.
Modest revenue growth of 5% or less is not sustainable in today's market. It leads to continued expense reductions that eventually become debilitating. The end result is a franchise that has not invested in itself and must be sold.
To achieve the desired double-digit, profitable revenue growth and remove retail banking from the current quagmire, I propose 10 actions for fulfilling customer needs and focusing on revenue expansion instead of expense contraction.
I call these 10 actions "Radical Brand Management." It is not the solution for every retail bank; however, every bank must realize that the current state of affairs demands action. In fact, it demands radical action.
1. Decide on your brand. What is your institution's reputation now, and what do you want it to be? You have several choices: high-quality product, new product development, low price, customer relationship management, service delivery. For purposes of this analysis, we will assume that the chosen reputation is customer relationship management. But whatever the decision, by choosing you make allocation of resources easier.
2. The chief executive officer must own the brand and marketing. They cannot be delegated. If the CEO, who is the head of the bank or head of retail does not own it, stop. The organization has chosen a different strategy, so do not waste time on Radical Brand Management.
3. Fixate on quality. The best way to sabotage a customer relationship management approach is to provide poor-quality service. There are no exceptions to this rule.
4. Align the organization with the brand. Alignment must be achieved around the following: educated staff; frequent, generous, and targeted incentives; full product offering; competitive pricing with rewards for buying more services; effective technology; hands-on management; and customer and product measurement. All parts of the organization must be synchronized, with product/company profitability subservient to customer relationship profitability.
5. Target the middle class through education. The race for the rich is lost. Do not fight a war that a retail bank is destined to lose. The competition in the money revolution is for the increasingly affluent middle class, which is more sophisticated, needs education about financial services, and is in play right now. The middle class is the natural playing field for retail banks and an untapped source of phenomenal profits because of its size. It is crying out for help. Educating the middle class about financial services will result in a community of lifelong customers. If General Motors can create a community of loyal customers for Saturn through seminars, mailings, t-shirts, and so on, why can't retail banks do the same? Retail customers must be as passionate about doing business with us as we are about doing business with them.
6. Hire and educate passionate missionaries; you need them to build a brand. Pay them in a very competitive fashion (the competition is other banks, brokerages, and insurance companies). Educate them so that the customer does not know more than the front line.
7. Rethink the marketing mix. I question the percentage of marketing dollars that goes to advertising instead of more targeted communications. The two fundamentals of advertising are reach and frequency; reach enough people often enough, and someone will buy the product. Here we are treating consumers as unthinking receptacles. Radical Brand Management emphasizes the individual and makes more use of targeted, meaningful communications, ranging from direct mail, Web pages, and billboard and print advertising to sponsoring neighborhood basketball tournaments to seminars and speeches. One cardinal rule is that marketing expenditures must result in quantifiable product sales; do not waste the shareholders' money on feel-good, award-winning, expensive advertising that does not.
8. Embrace a full-financial-services offering. Investments and insurance are not add-ons to payments, deposits, and credit. They are part of the complete offering that satisfies customer needs and makes them lifelong partners in financial services. The retail bank's ability to be fully competitive in investments and insurance is the highest priority in achieving double-digit revenue growth. Every front-line person must be educated and certified in financial planning, investments, and insurance.
9. Invest in branches and front-line staff. Build a complete physical and remote distribution system, but never forget that the branches and front-line personnel are retail banking's competitive advantage in customer relationship management. Branches will clearly be different, but the competition cannot duplicate these face-to-face opportunities.
10. Improve profitability accounting. Current accounting is biased toward product profitability and against customer relationship profitability. Middle-market and corporate groups long ago built systems that tracked profitability to the customer, focusing relationship personnel on customer needs and profitability, not individual products. Retail bankers must learn from their business banking peers the importance of the collective approach to the customer rather than subordinating customer needs to products.
What does all this do for a retail bank? Radical Brand Management begets an organization that has a customer relationship brand and provides an experience that every customer wants. It energizes a staff that will win in the market.
Lots of approaches exist today -- one-to-one marketing, stealth marketing, inside-out marketing, targeted marketing, direct, indirect, guerrilla, and gorilla marketing. What Radical Brand Management tries to do is create an environment that percolates with all these ideas because it is so attuned to the customer and front-line personnel. It is an environment that will deliver on such needs as asset management accounts (if a retail bank does not have a competitively priced cash-management-type account, it is not putting customer needs first), automatically filled-out applications, instant approval for credit cards at the time of a checking account opening, one-page small-business loan applications, no-load mutual funds for retirement, 24-hour turnaround on loan applications, and free financial planning.
These and similar actions will lead from the current quagmire to high revenue growth.