Financial institutions are ill-prepared for the changes sweeping the industry -- consolidation, regulatory reform, foreign competition, industrial companies entering the market, interstate branch banking, niche opportunities, and more.

The industry is not entirely to blame. Historically, its regulated environment rarely demanded competitive, market-oriented approaches to product development or service delivery.

Now, however, the forces of change are converging to create new threats as well as opportunities.

Institutions that recognize the challenges and develop clear visions of the future will quickly adopt market-driven approaches to managing their business.

What is needed is better understanding of competitive strengths and weaknesses, customers' needs and desires, the general market, and external trends.

The world's great industrial companies have understood these critical elements for some time. Financial services companies are just now recognizing their importance.

Business Intelligence

The key to a market-driven approach is business intelligence.

Business intelligence involves gathering and analyzing information - on customers, competitors, technology, products, services, markets, the economy, demographics, the political and regulatory environment, and so on - and applying it to the company's activities.

To be truly effective, the intelligence process must be continuous, not an ad hoc activity conducted during the annual planning exercise.

This process provides powerful knowledge - a sound basis for long-range plans, product development, marketing actions, and day-to-day tactical decisions.

Business intelligence will largely replace the back-of-the envelope, seat-of-the-pants ways of operating that has afflicted the industry.

Financial services companies have far to go in the use of business intelligence. A recent survey shows how far.

The survey, covering a variety of industries, polled executives about the use of different types of intelligence.

Not surprisingly, the financial services industry as a whole lagged behind all others in the use of internal as well as external information.

In-House Data

Only 6% of the intelligence that was used by financial services institutions came from internal sources - sales reps, brokers, loan officers, and so on.

In the manufacturing sector, the figure was 33%.

Internal data on profitability, market share, penetration, and so on can help an institution understand emerging opportunities and seize the initiative. But few banks use internal data well.

In financial services, most of the raw material for business intelligence is already floating through the organization. What is needed is to assemble it, analyze it, and apply it in a systematic fashion.

For example, bank branch tellers and customer service representatives are some of the best collectors of intelligence on current and prospective customers.

These employees are also well positioned to provide information on the competition, since customers often tell them about the pros and cons of competitors' products and service.

Business intelligence is crucial because the marketplace is becoming more crowded.

Soon banks, insurance companies, brokerage firms, industrial entities, retailers, and employers will all compete for retail banking customers.

The appearance of Ford Motor Co., General Electric Co., American Telephone and Telegraph Co., Sears, JCB, and others on the financial services landscape is just the beginning.

To survive, banking institutions will have to understand their current and potential competition better. That includes competitors' products, market positions, customer bases, strategies, strengths, and weaknesses.

Consumers will look to providers that meet all their needs. The inclination to use four or five different institutions will fade. The traditional division of offerings among different sorts of providers will become largely immaterial to end users.

Increasing penetration or market share will require taking share from someone else.

Truly understanding customers will be essential. And learning about them is a relatively new enterprise for most financial services institutions.

It will not be enough to push product. The customer's needs and preferences will have to be studied. In addition to using the typical age and income segmentation schemes, financial institutions will have to look at the customer's present life stage and the total lifetime value of an account.

Such analysis will result in products and services designed for target customers and to appropriate ways to deliver those offerings.

Banks in particular may find that cookie-cutter branches and traditional hours of operation do not satisfy their customers. Adjustments may be needed to retain or increase the customer base.

High Tech and 'High Touch'

Changing technology offers great promise in adapting financial services to the changing world.

However, it is not enough to make product and service delivery more efficient from an operations prospective. New offerings must also appeal to consumers' desires to save time and effort.

Technology should not be pursued for it own sake. That can lead to such missteps as the video phone and home computing. High-tech must go hand in hand with "high-touch."

Technology now allows us to put tremendous information resources at the fingertips of the sales force.

Each time a customer makes a transaction, for example, a teller or service rep should be able to call up the customer's "portfolio" with the bank to seek opportunities for selling current promotions or packages.

These customer files can be automatically segmented into profiles describing the typical needs of various kinds of consumers. Such segmentation will result in more personal banking relationships - and more positive banking experiences for the customer.

Farewell to Follow-the-Leader

Instead of just trying different products and services in the marketplace, product planners should look more closely at what customers really want.

In the increasingly competitive banking environment, it may no longer be sufficient to just follow the leader.

Continuous innovation based on a thorough understanding and intelligence about customers and competitors will be the key to gaining market share or even maintaining the status quo.

Mr. Bergstrom is a senior manager in the Atlanta office of Edgar, Dunn & Co., management consultants.

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