ONE OF THE MORE innovative approaches financial institutions have taken recently to improve the services they offer involves creating separate service delivery arms or corporate entities. These offshoots of the parent bank are devoted to specific niches such as so-called "B and C loans" to borrowers with marginal credit, high-end mortgages, custodial or technical support operations, and telemarketing.
A prime example highlighting this trend is a Midwest bank that decided to set up a service corporation dedicated to targeting and identifying marginal loan applicants who had failed to meet traditional mortgage requirements. In setting up the corporation, the bank was able to tap an emerging market that would not otherwise fit under the umbrella of its existing structure. Operating under separate regulatory guidelines, the new entity could write loans with higher interest and stiffer late-fee penalties than the bank could. The service corporation thus was able to open up a new market and increase profits for the bank.
The decision to form a service corporation is one management must examine carefully. As in most ventures that promise high returns, the potential pitfalls and perils are steep. Senior management faces many complicated issues -- including legal and regulatory ones, as well as the more obvious ones that deal with what functions are best delivered by a service corporation.
Identifying theses services is especially critical in determining the type of technology and operating design an institution should have in place. The technology supporting the new service operation is a major factor to consider when deciding which functions or services lend themselves to a separate environment. All of these decisions have a price tag, and all should be considered in light of the financial institution's overall strategy.
The traditional back-room functions necessary for delivering the new corporation's products is another issue facing bank management. Management must consider which functions are to be provided in-house, which can be outsourced, and which operations the parent bank can provide. These questions must be addressed at the front end of the process.
A financial institution should have a list of these questions when weighing whether or not to go the service corporation route. First on that list is defining the customer. In our example, the target market was well defined. A clear understanding of who the intended customer is produces more realistic goals and objectives for the venture. It also enables an institution to provide services tailored to its customer's specific needs.
A bank must also know exactly what service it intends to provide the customer. Without an understanding of the nature of the product or service, delivery is impossible. Equally as important is determining whether or not the service involves direct client contact. This "brick and mortar" question addresses the need for a structure or facility.
An institution also needs to consider the legal and regulator/issues associated with setting up a service corporation. Again, our example proved that doing the legal legwork ahead of time can pay off handsomely. If the holding company had merely set up another branch or bank to handle the marginal-loan requests, applicants would still have failed to conform to traditional bank regulations and guidelines thereby negating the original goal.
And finally, the future of the service corporation must be looked at as well. Should it be positioned as a service to be outsourced in the future? And what measuring tools are to be implemented in determining if objectives have been met?
It is important to answer these questions and to consider them at every stage of a service corporation's formation. The biggest mistake a bank can make is appropriating old work flows and procedures for the new entity. Without taking into account all the technology and procedural requirements necessary for a service corporation's product delivery, a bank winds up with less than stellar results.
The best way is the "'white sheet of paper" approach, establishing from scratch the new corporation's structure, responsibilities, and service level measurement controls. This approach allows the organization to install the technology as it was designed to work, without the worry of changing it to fit existing procedures and work flows.
For example, a large southeastern bank recently decided to install an automated dialer system for its consumer loan collections. The original loan collections process had been done ad hoc among the bank's various branches and locations-with mixed results. The bank created service corporation responsib le for all types of consumer loan collections. Then it selected a system capable of
supporting and growing with all of its staff, departments, procedures, and work flows. The result was a system that quickly realized the benefits of a unified c ollections operations. Those benefits included a 35% reduction in the number of full-time collectors, and a near-doubling of collection calls--to more than 45,000 per mon th.
Another example involves a regional financial institution that was considering several major technology upgrades for its multiple sites across a three-state ar ea. The organization decided to centralize these functions into a service cooperatio n supporting all locations. As in our previous example, the instituion defined pro - cedures, work flows, and service levels at the fron end of the project.
However, one of the prime considerations for centralizing the technical funct ions into a separate service arm was to provide a more accurate monitor for all opera tional costs.
Instead of site by site, department by department, cost breakdowns of the org anizations new technologies can be measured at a central, providing a true reflection of th e actual savings of each system.
As with any new technology, it's important to make sure the staff is well trained and comfortable with a system. There are plenty of horror stories detailing the inefficiencies produced by a staff resistant to change or unable to operate an unfamiliar system. This is an especially important consideration for any bank attempting to create a service entity. The time line for a service corporation's learning curve is considerably shorter and much more abrupt than with a traditional inhouse upgrade.
New technologies are becoming increasingly important to provide the level of service today's customers expect. As banking moves toward its place along the information highway, the need to deliver information to the customer is crucial. The service corporation approach offers a new opportunity to address the issue of information control and which technologies best connect the customer to bank services.
As we discussed in last month's column, platform automation provides customer service representalives with complete access to customer accounts and bank product and service information. Many financial institutions have installed platform automation systems to support the front line staff, but have neglected the technology' s potential for supporting back room-functions such as bookkeeping and data processing.
Creating a service corporation dedicated to supporting a bank's platform system allows senior management to redefine the responsibility of the customer-contact staff. By making responsibility for servicing the account a clear domain of the people who have direct contact with the customers, the bank allows its resources to concentrate on improving and marketing new services and products while ensuring that its technical support needs are being met.
Another technology implemented by more and more banks is voice response systems for customer service inquiries. This technology has traditionally fallen under the control of the telephone customer service unit and new-account staff at branch locations. Transferring the support of these services to a service corporation can incorporate the technology as a pan of an overall communications tool for marketing to the customer by all departments throughout the bank. The voice response unit can be engineered as pan of the electronic branch delivery system.
If the organization is a multibank holding company, the service corporation can work with the various banking subsidiaries to customize the voice response unit so it will reflect the markets in which each individual bank competes.
The service corporation approach offers an institution the oppotunity to establish a new organization dedicated to delivering the products and services necessary for succeeding in today' s financial market. Using technology as the building blocks of a service unit, a bank can improve its profitability while expanding services and products. After all, there's no vendor who knows the needs of your institution as well as you.