Driven by new technologies, changing customer needs, and increased competition, retail banks continue to invest heavily in new distribution channels.
By making these investments, banks believe they will cut costs, win new customers, and retain old ones.
But all too often, that hasn't happened. Instead, banks have saddled themselves with heavy costs and have failed to win or retain customers.
Many have paid insufficient attention to channel strategy and economics and have added channels haphazardly. Boston Consulting Group's research, however, shows that an integrated strategy can increase the profit contribution of banks' channel networks by as much as 50%.
By managing channels in an orchestrated way, banks can substantially reduce the costs of their distribution networks, move certain customer transactions to lower-cost channels, and exploit the full sales potential of each channel. Adopting this approach requires managers to oversee many delivery channels-and to stop viewing their careers as being tied to branches.
The handful of banks with successful integrated-channel strategies have a deep understanding of both the economics of each channel and the banking habits and revenue potential of each customer. This knowledge helps these banks develop strategies for using their channels to deliver a tailored array of products to each customer in the most cost-effective manner.
To achieve such success, executives need to be wary of the myths that so often cloud managerial thinking about the realities of channel management. Here are some of the most common ones:
Only high-income customers produce good profits.
The cost of serving customers, not just revenue, drives bank profitability.
One big U.S. bank discovered that 16% of its affluent clients ranked among its least profitable customers whereas 28% of its mass-market customers brought in above-average profits. BCG's research found a similar pattern in the London branches of a large British bank.
Only younger, higher-income customers will ever use touch-tone banking and electronic channels.
Many different types of depositors and investors are taking to electronic channels.
In Germany, for example, the percentage of people older than 40 who are using the Internet rose from 9.8% to 26.2% between 1995 and 1998. Using the Internet, of course, is the first critical step toward on-line banking.
Branches are dying because they are an expensive way to serve customers.
Branches are a key part of the channel mix and remain among the very best places to market and sell to customers throughout the industrialized world.
BCG's research at a large Italian bank found that marketing pitches made during customers' branch visits were almost five times as successful as those made by representatives in sales calls.
Electronic channels are always cheaper, so banks should always encourage customers to migrate to them.
Customers often cancel out much of the cost advantage that ATMs have over branch tellers by stepping up their ATM use.
Recent research in Spain and Portugal showed that when customers have access to ATMs they generally carry out 2 to 2.5 times more transactions than they did through tellers.
Executives should manage each channel individually to control costs.
Executives who manage channels individually will incur higher total costs and won't reap the advantages of orchestrating the channels.
One big U.S. bank cut branch operating expenses 20% by remodeling its branches into lean marketing platforms and coordinating the branches with other delivery channels, including advanced ATMs and telephone and personal computer networks.
Channel management and integration is all about finding the right information technology.
Executives who focus too closely on information technology will end up with expensive IT and no channel strategy.
In Germany, some of the new direct banks, which offer telephone and on- line banking services, have hastily invested millions of marks in IT. In many cases, these investments have produced little value.
Banks can take several steps to build strategies that will attract and retain their preferred customers in a cost-effective manner.
To start with, they should develop a deep understanding of the various customer and channel costs and how they affect one another. To do so, banks should go beyond traditional customer segmentation and learn precisely how each customer uses each channel. They will then know the exact costs of serving each and every customer.
This discipline should uncover hidden opportunities. For example, some banks may discover that they have many low-income customers who rely on cheap self-service channels. These customers could be just as profitable as high-income customers who carry out a lot of high-cost branch transactions.
Banks can then start to design their overall channel strategy. They should decide how they want to use channels and pricing to mine attractive segments and to move unprofitable customers to less expensive channels or to other providers.
They should closely examine the options for remodeling the branch network. Reformatted branches, including mini-, in-store, and self-service branches, can dramatically cut operating costs, particularly when they are managed alongside and coordinated with newer channels.
Banks should also frequently monitor and, if necessary, realign channels. As they increase their remote and on-line capabilities in the new multichannel world, they should fine-tune other delivery channels, reduce or retrain branch staff, and reformat branches.
Organizing and managing multiple channels in an orchestrated fashion is one of today's great banking opportunities. So far, few banks in the world are exploiting that opportunity effectively. If they do not move soon, they risk losing ground to industry newcomers. Those that move swiftly will gain the greatest rewards.
