As we discussed in previous articles, a radical reengineering of retail banking is required to win the future. Here are the key elements of this reengineering:

Market segmentation and customer profitability. Historically, the banking industry has not segmented its market or customer base. The lack of customer segmentation has been a key reason behind the industry's loss of market share over the past decade and the tremendous success of the credit card and mutual fund industries. Online companies have used data base management and aggressive direct mail efforts to profitably gain market share at the expense of the majority of competitors in their lines of business.

We see some banks beginning to develop and use customer segmentation information in their approach to developing retail banking beyond credit cards. However, broad segmentation techniques used by the cutting-edge banks are light-years behind what their competitors are doing. Segments such as affluent investors, broad economy, or blue-collar suburban, are not useful in competing with single-product companies. It is like fighting laser weapons with sticks.

Demographic segmentation has become obsolete before most banks have even considered using it. Segmentation based on life cycle and behavior is the future. Identifying the propensity to buy and the profitability associated with each segment is key. Examples of effective segmentation will include attitudinal dimensions such as self-reliance, satisfaction with primary financial institution, and the need to diversify. It is only through such segmentation that retailing can be successful.

We should note that obtaining segmentation information isn't enough; acting on it is essential, since the strategy to enhance income from and retention of attractive segments varies by segment, as does the marketing, solicitation, product design, and delivery channel.

Today, the vast majority of banking companies do not make use of market segmentation data in their day-to-day retail banking activities, and they do not have usable customer profitability information on which they can act at the branch level. Those that do so will have an important competitive advantage.

New management accounting. To repeat an old adage, if you don't measure it, you can't control it. Unfortunately, many of the things most banks measure today, and the way they measure, do not provide useful information. For example, most companies still credit the branch that opened the original customer account with all the revenue generated by that customer, regardless of where the customer does business (at another branch, over the phone, or through the mail). Going forward, internal accounting should be based more on activity, using separate measures for sales and service.

First Bank System and Wells Fargo have altered their internal accounting systems to better identify activity in their individual branches so they can use this information to better serve customer segments. First Empire measures each branch as a profit center to provide incentives for the branch staff to serve "their customers." Huntington Bancshares allocates personal bankers, as does Wachovia, to most of their customers. Account load varies by the attractiveness of the customer segment, ranging between 200 and 2,000 accounts per personal banker.

Without new management information systems, banking companies will continue to be at a disadvantage vis-a-vis more sophisticated banks and nonbanks.

Aggressive development of alternative delivery systems. Banks have relied heavily in the past on branches as the primary sales and service delivery systems. That has been unavoidable, given the level of technology evolution. Today the picture is different. Nonetheless, we believe branches will remain the primary delivery system for the foreseeable future.

In the future, the most successful companies will be those that manage down the size and cost associated with the branch delivery system and redeploy some of the expense dollars to aggressively developing alternative delivery systems. This must be done both from a defensive standpoint (reducing costs) as well as an offensive standpoint, because a growing proportion of banking customers prefer to do their banking outside the branch.

When we say alternative delivery systems, we are referring to all nontraditional modes through which banking services are performed, including automated teller machines, the telephone, personal computers, point of sale devices, interactive videos and mail, as well as low-cost minibranch locations in supermarkets, retirement homes, hospitals, airports, and malls.

Anticipate and exceed customer expectations. In Robert Hall's book "The Street Corner Strategy for Winning Local Markets," the basic premise is quite simple: Successful retailers meet customer expectations by providing the right sale, right service, to the right customers at the right cost. Mr. Hall lists six keys to what we'll call "right marketing":

*Analyze the local market potential.

*Provide different service levels for different large groups.

*Enhance local competitive differentiation.

*Develop alternative delivery channels.

*Reallocate sales and service resources based on customer profitability potential.

*Allow local market autonomy.

Mr. Hall describes a delivery premise that, as it turns out, underlies the super community banking executed so well by companies such as Community First, Norwest, Banc One, and Barnett. Super community banks have been extremely successful in retaining their customers and improving their share of wallet. However, the next challenge for these and other banks is to execute segmenting super community banking effectively.

*At this point, only 15% of banks tier their customers by relationship profitability.

*Only 5% set growth goals by market segment.

*Only 29% have developed strategies to differentiate service by enhancing service quality for the best customers and lowering the cost to service the least profitable.

*Only 17% provide managers with any training in analyzing local market data.

The successful banks of the future will recognize that they are in the retailing business, but rather than retailing clothes or food, they retail financial services. Other retailing businesses have segmented into nationwide megacompanies, regional providers, and mom-and-pop stores that offer the ultimate customization at a relatively high cost.

The restaurant business ranges from McDonald's to Houlihan's to the best French restaurants in the country. The underlying premise is customer segmentation and effective execution. The successful retail banks of the future will have to achieve both.

Ms. Bird is chairman and CEO of Finexc Group LLC, New York, and editor in chief of The Community Banker, a quarterly journal. Mr. Brown is vice president of Donaldson, Lufkin & Jenrette Securities Corp., New York.

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