Telephone banking has lower transaction costs than branch networks yet has not generally increased bank profitability. This paradox is often said to arise from the fact that branch networks are not really shrinking enough to realize the savings. Another reason offered is that bank call centers are becoming like automated teller machines - the market advantage is lost because just about every bank has them. So how do banks justify investing in a call center? What are the right questions to ask at the outset to help ensure success? So far, the promise of call centers has centered around cost reduction. While it is true that telephone transactions are much less expensive, the reality is that the convenience prompts a lot more use and, sometimes, excessive use. So a lower transaction cost multiplied by much higher transaction volume erodes anticipated savings. If branches are not closed to offset the cost of building and operating the call center, net costs actually increase. Further, customers tend to think anything that saves the bank money should result in lower fees; they want the savings passed along to them. Instead of emphasizing cost savings, bankers should justify investments in call centers for two other reasons.

Defensive strategy. As with ATMs, banks must offer telephone banking to avoid customer defections.

Revenue generation. Call centers should be built to enhance sales, customer loyalty, and fee opportunities. With the volume of telebanking transactions expected to equal in-person transactions by early in the next century, it appears easy to make the defensive case. The hard part is positioning the service in the eyes of customers.

Take fees as an example. If telephone banking is positioned as a way for the bank to cut expenses, customers will expect to share in the savings. So instead of creating a fee opportunity, it can fuel customer expectations that charges should be reduced, though costs have not really gone down. On the other hand, customers are well conditioned to pay a premium for added convenience. If telephone banking is successfully positioned as increasing convenience, the customer will come to expect paying higher fees.

But how much convenience can justify higher fees? It is virtually impossible to call most businesses today and not get some form of voice- response unit. The good news is that the public in all demographic groups is becoming proficient at using basic telephone technology. The bad news is that their expectations are being set by experience with all industries, and it is not always seen as providing added convenience.

Most customers today can readily relate tales of very good and very poor telephone service; they have a refined idea of what their base expectations are. Customers measure telephone banking services at two levels: speed and ease of use for basic banking transactions and the convenience of being able to manage funds across financial products. They generally prefer to talk to an automated system for routine questions, like a balance inquiry, and want to talk to a person when they have a problem or complicated question. One other point to remember: ATMs and tellers offer a receipt, which telephone banking does not. The banks that successfully position telephone banking as adding convenience will be able to increase loyalty and fees more than enough to pay for the added cost of telephone banking. The other major justification for call centers is increased revenue through added sales. This raises two questions: How does the telephone channel get extended from a service channel to a sales channel? And how will customers react? There is vigorous debate on the second point, usually based on anecdotal evidence. How will customers react to a proactive sales message when they call in for a service transaction? What will they think when they are called at home with a pitch for additional products or services? Customers still tend to trust banks more than brokerage firms. Will telemarketing jeopardize that trust? The debate is illustrated by the following quote from a recent Bank Administration Institute conference: "The reason our customers trust us so much is that we haven't tried to sell them anything for the past 75 years." The middle ground is safest: Customers respect well-grounded advice on how to use their funds and assets more effectively. But they resent sales calls without any personalized attention to their financial needs and situation. Banks have more information available to them than any financial service competitor with which to personalize advice, but very few have successfully crossed product-line barriers to share and exploit that information on behalf of customers. In an environment where employee turnover in call centers can be as high as 30%, even more training is required. This also means giving call center agents personalized information about customers, including what offerings would help that specific customer, and why. Banks must learn to respect customers' past responses - including requests not to get sales pitches. Ideally, this means creating the ability to prompt call center and branch agents with information about which customers to approach proactively, with what product, and for what customer-benefit reason. A lot of money is at stake here. Results to date are generally frustrating senior executives, just when unprecedented levels of investment are being sought. Here are some questions that should be answered before making major new investments in call centers: Is telephone banking's primary mission to increase convenience for customers or to save operating costs? Should telephone banking be a cost center or profit center, and if a profit center, how does the existing branch management organization need to change? Is telephone banking just a service channel or also a sales channel? Should the products and services offered via telephone banking automatically or necessarily be the same as those offered through branches? What percentages of customers are likely to use branches, personal computers, or telephone access three years from now? And how do fulfillment capabilities need to straddle or support those customers? What is the pricing strategy for telephone banking versus branch banking? Is it based on convenience to the customer or cost to the bank? Jim Deupree is a principal in the IBM Consulting Group who specializes in direct banking strategies.

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