Over the past several years, the banking industry has invested huge sums of money in call centers. The earned returns, however, have been shamefully below expected marks. Given such disappointments, why would the use of call centers continue to expand?

Consumers are increasingly embracing self-directed services from businesses across all industries; telebanking is a natural outgrowth of this key trend.

Taco Bell, long an innovator of outsourcing in the food industry, is allowing customers at test sites to place orders through new ATM-style registers, with the option of paying by debit card.

Nontraditional banks continue to expand product offerings and adjust pricing to encourage self-directed service delivery. But PC-banking requires a steep learning curve and a significant capital investment. Telebanking remains the most logical alternative delivery channel.

Alternative channels already represent a staggering 50% of banking transactions. Telebanking alone, by the year 2000, is projected to represent 32% of all transactions, lagging behind in-person service (41%).

Surveys have shown that banks investing in call centers have experienced strong improvements in perceived customer service quality, and that in actuality the quality has improved more than 25%, relative to branches, due to centralization and standardization of call center resources.

Even transaction costs favorably compare, with telebanking averaging between 10 cents and 25 cents, versus other services costing anywhere from $1.03 to $1.25.

The paradox is that these banks have not witnessed a corresponding revenue or margin boost.

Several major issues have contributed to this profitability dilemma. First, costs have risen. The capital investment required to develop the call centers has not been offset by the savings from anticipated branch closings. Far from making branches obsolete, the call centers are providing an overall higher level of service while meeting the needs of a larger cross-section of the customer base.

Second, incoming call activity has jumped exponentially. The challenge lay in the fact that the mix of calls has been heavily if not completely weighted toward service issues. Call center personnel have not been adequately trained to take advantage of the opportunities for cross- selling.

Finally, the traditional marketing function has not been fully leveraged to generate revenue. Most banks have not aggressively packaged, priced, and promoted their various products and services through telebanking.

The idea of call centers as revenue generators instead of simple cost reducers is just slowly catching on. We believe that call centers have the potential to significantly enhance bank profitability. The trick is that they must operate under an appropriate management philosophy. Benefits can be realized, but banking executives must learn from the initial mistakes to avoid continued disappointment. We have identified eight myths surrounding telebanking as a new delivery channel. They are the lessons that, if heeded, will impart a new profitability to banking call centers.

Myth 1: The solution is technology driven.

Reality: Technology is only one tool among the many required to achieve success.

True success really begins with a clear banking delivery strategy that addresses all of the available products and services, and the targeted customer segments. The strategy will establish the expectations for the telephone channel, and define performance measures, personnel skills, compensation programs, business processes, and the appropriate level of technology investment.

Myth 2: Implementation is easy.

Reality: There is not a standard "silver bullet" solution that can be applied off the shelf. In fact, successful telephone delivery is surprisingly complex since it affects all the elements of the traditional banking structure. The challenge comes from the fact that the customer serviced by telebanking must be owned by the organization. Implementation of telephone banking may take as long as three to four years, but expect no less than 18 months.

Myth 3: Aggressive cost reduction will be achieved.

Reality: Merely implementing telephone banking does not guarantee a reduction in expenses. While it is dramatically cheaper to complete a transaction via telephone, two critical shifts must occur to realize cost savings: Customers must use the phone instead of the branch, and the branch network must be reconfigured to see that that happens.

Myth 4: Selling products by telephone is easy.

Reality: Buying bank products by telephone represents a significant paradigm shift for some customers. Additionally, many banks are not equipped to sell by phone, nor do they have the sales culture needed to embrace this channel as a viable revenue generator. The good news is that not only are more customers buying complex bank products by telephone, but companies such as Fidelity Investments have achieved dramatic successes by distributing their financial products primarily via the telephone.

Myth 5: A call center can turn all unprofitable customers profitable.

Reality: Today, call centers complete transactions at a fraction of the branch cost. This will enhance the profitability of some customers only if their branch transactions decline and channels continue to be viewed separately. However, many customers will continue to be unprofitable simply due to the overhead required to run a bank. Additionally, if the bank does not reduce its branch network and the associated expenses, branch overhead will be allocated to fewer branch customers, making those profitable customers unprofitable. Therefore, the customer base must be viewed as a whole unit as well as individually in determining the profitability impacts.

Myth 6: Telephone banking will create a "service" driven competitive advantage.

Reality: Many leading banks believe that opportunities exist to build competitive advantage through better service at the telephone channel. Competitive advantage implies that an organization possesses a unique, differentiable offering. In reality, many top banks are investing heavily in call centers and developing similar value propositions. As a result, telebanking service quality ratings are improving across the board, and the variance between the good and mediocre providers has narrowed significantly.

Myth 7: Economies of scale will be gained by consolidating telephone delivery units.

Reality: Economies of scale will occur in telephone banking up to a certain point, then diseconomies set in. There are rules of thumb that apply to achieving economies of scale in telephone delivery, including:

*Between 200 and 500 full-time employees in a call center to leverage economies of scale, after which management challenges contribute to lower productivity;

*Have at least two or more geographically distinct sites for appropriate backup recovery;

*Achieve economies of scale through consolidation of common processes, e.g., collections, fulfillment.

Myth 8: Implementation is relatively inexpensive.

Reality: Based upon actual implementation experiences, telephone banking expenditures can easily range from $20 million to $150 million. The primary reason for the spending is that for many banks telebanking involves an environmental change, since it utilizes a distributed systems technical infrastructure. Furthermore, the new technology must be integrated with existing legacy mainframe systems. The typical information system organization is functionally aligned to support a mainframe environment and challenges exist in terms of realigning the organization and building skill sets to support the new technology.

Developing a robust strategy which takes these myths into consideration is not easily accomplished. Financial institutions that successfully navigate the lurking risks surrounding telephone banking will be handsomely rewarded.

Missteps will be costly both in the wasted assets and lost time to market. A well-thought-out plan which encompasses everything from a solid business strategy to choosing appropriate technology and everything in between is paramount to creating a sustainable competitive advantage.

Those that fail will have a very expensive new cost center, while successful institutions will be well-positioned for the rapidly approaching new age of financial services. Mr. Bahl and Mr. Meyer are with Andersen's Atlanta office.

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