An emerging truism in retail banking is that continued growth hinges on tailoring products and services to the needs and value of each customer on an individual basis. Through the fine art of one-to-one relationship management, banks can maximize the value of each customer as never before. But how? As with every 21st century problem, the initial response is "technology." But what kind of technology would be the most cost-effective and the most accepted by the key customer segments banks should be targeting?

To put customer relationships in the fast lane, banks need to get onto the information superhighway. The Internet will be crucial for growth strategies in retail banking during the coming decade. Specifically, it will enable banks to leverage one-to-one customer relationships more extensively-and more intensely-than anything previously possible and reach out directly to a new generation of banking consumers.

Most banks aren't yet heading in this direction. They have developed one-to-one relationship programs focused on two activities: identifying and maintaining their historically profitable customers, while using targeted marketing techniques to pursue the profitable customers of other institutions. Achieving these two objectives may be essential to every financial institution looking to maintain profitability. But they will not be enough for a sustainable growth strategy, because nearly every bank's competitors will have the same capability to chase after the same customers. It will become a zero-sum game.

The Internet Advantage

Sustainable growth will come only through one-to-one relationship programs that target two other sets of customers: Existing customers that have not historically been profitable, and new customers who need financial products and services for the first time. It is clear that electronic financial services via the Internet must be a key element of any strategy to achieve these objectives. Here's why:

The vast majority of an institution's customers are unprofitable, typically 80 percent. Because the proportion is so large, even a small incremental improvement can be significant (Think of the impact of a $2/month improvement in profitability per customer.). While some customers would be unprofitable under any circumstances, the majority are unprofitable due to their transactional behavior and the resulting cost of service. Only electronic services such as the Internet offer the opportunity for significant change in the cost structure across the broad set of services a bank can offer.

For example, according to studies by Cap Gemini and Payment Systems Inc., the cost of providing branch/teller-based services ranges from $1.07 to $1.50 per transaction, while electronic-based services that do not require human interaction (like a VRU, ATM, or Internet transaction) cost in the range of $0.10 to $0.55. Thus, a marketing program that could successfully move two transactions per customer per month to an electronic channel would deliver the $2/month savings. Of course, as customer usage levels shifted between channels, the capacity of each channel would need to be adjusted in order to bring these cost savings to the bottom line.

So why the Internet? Unlike other electronic channels, the Internet is especially suited to attract the most desirable new customers. Almost all new retail banking customers are college-aged new workforce entrants and new small businesses. This engine of future industry growth is sizable. In 1996, the U.S. population for the age group from 18-24 years old was just under 25 million, slightly more than 12 percent of all available financial service customers (age 18 and older). In addition, the number of new small business incorporations in the U.S. was estimated at around 800,000.

Such new consumers of financial services have a broad set of financial needs for which they have not yet chosen a preferred provider. Small businesses and entrepreneurs, in particular, have complex financial needs. They may require checking, payroll, and/or money market accounts; reconciliation services; loans; financing; and other business banking services, all of which provide banks with substantial opportunities to develop profitable relationships.

These new customers are frequent electronic service users who are comfortable with computers and the Internet. Members of Generation X, aged 18-29, comprise 31 percent of the total universe of online service users (approximately 5 million of close to 16 million users). This percentage is almost double their representation in the U.S. population. Furthermore, according to the American Internet Usage Survey by FIND/SVP, Internet users aged 18-22 spend on average 9.2 hours per week online, while Internet users aged 23-29 spend 6.8 hours per week online. And fully one-third of all new businesses are started by individuals under the age of 34.

This population of new financial service customers is comfortable with technology, regularly uses personal computers, utilizes Internet services, and expects the convenience of electronic services that allow anytime access.

A Wiser Investment

Through the Internet, financial institutions have a unique environment in which a single technology investment can be used to provide highly tailored services to customers any time the customer pleases. Through the Internet, banks can tailor the experience each customer receives as part of a strategy to gain share of wallet, control transactional costs or promote new services. Each strategy can be targeted to the individual customer, their behavior, and interests. Banking, service, and financial planning activities undertaken by customers at the Web site can be tracked, analyzed, and responded to with rigor and certainty, using all information about all of the relationships with the customer - a feat which is still eluding most financial institutions in their traditional channels.

The Internet offers a significant cost advantage in operating, managing and upgrading customer-centric services compared to alternative electronic offerings, such as a PC banking program, or the investment required to fully "customerize" all of the existing distribution channels. It also protects the bank's one-to-one relationship with the customer, unlike electronic offerings delivered through a third-party or over an ATM network.

Thus, the Internet can offer retail banks a cost-effective, user- friendly and highly personal vehicle for pursuing sustained, profitable growth among the most valuable group of new customers: the educated, computer literate, entrepreneurial self-starters who will shape the nation's economic activity during the next 20 years. There's no time for delay. If banks don't move quickly and appeal to the specific interests and needs of this group through customer-centric programs over the Internet, other financial service providers will. The way to beat the competition is to take banking onto the infobahn and make "bankers' hours" any time the customer wants them to be-24 hours a day.

Rob Kramer is vice president of American Management Systems, a technology consulting firm in Fairfax, Va.

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