When an electronics store sells a television set, its profit does not depend on the customer's channel choices or viewing habits.
The retailer's profit is unchanged even if the customer never turns on the set. Once the sale is closed, customer behavior and channel choices have no impact on the store's revenue, capacity requirements, or delivery costs.
What a stark contrast with retail banking! In this arena, customers' behavior regarding channel choice has become crucial to the profitability of every electronic banking initiative.
In recent years, banks have added Internet banking capabilities to a complex delivery channel mix that already included branches, credit and debit card services, ATMs, call centers, and proprietary online banking networks. Each channel has imposed its unique set of cost structures and capacity requirements.
As a result, customer channel choices and utilization behaviors have taken on tremendous importance. Customer behavior has become the determining "driver" of profitability for almost every product, business unit, and relationship. That's a real problem for banks because most do not yet have the proven business models and analytical methodologies to manage customer behavior successfully.
In the absence of these crucial tools, banks tend to fall back on outmoded models of product profitability. They focus on the direct revenues and costs associated with specific online products, ignoring the impact that changes in customer activity will have on related products and channels. As a result they fail to understand the true profit dynamics of their overall operations.
With the possible exception of a "pure" electronic bank that offers no traditional services, it is not meaningful to talk about the profitability of electronic banking channels in isolation.
The most crucial issue in banking today is that, given current practices and pricing structures, most customer relationships at any bank are not really profitable. Simply making available electronic channels and services to a large base of unprofitable customers will not transform these relationships into winners.
The real issue is not whether individual e-banking services can be made profitable but how the bank can use the electronic delivery channel to make overall customer relationships more profitable. Banks that can make most of their customer relationships profitable will be the winners in the electronic and traditional arenas.
Customer profitability largely stems from the number of transactions customers perform and the delivery channels they choose. Customers who frequently choose high-cost channels for high-cost transactions will usually be unprofitable.
Almost everyone agrees that shifting customers to the new electronic channels would improve profitability by reducing marginal transaction costs. Getting customers to migrate is, of course, the crucial task.
Not all people will be willing to migrate to electronic channels, and many who do will not find enough value to continue using them. In addition, customers who embrace electronic channels will not automatically cease using traditional ones. As a result, banks will have to continue to bear the costs of older channels while developing the new ones.
The goal is to match customer revenue with the cost to serve the customer, in order to fully understand individual profitability, by channel and by product.
Therefore the transition to electronic banking at any bank will be protracted and arduous. The ability to develop and execute effective migration strategies will prove crucial to the bank's survival. These strategies must offer incentives to modify customer channel preferences. They must also provide for smooth and efficient transfers of resources from declining channels to expanding ones.
All customer migration management strategies must come to terms with an ugly reality. Though customer adoption rates for electronic banking are rising, they are still low. Most people with Internet access have not yet tried online banking services, and of those who do, roughly one-third choose not to continue using them.
Current Internet banking initiatives have essentially skimmed the cream of early adopters and tech fanatics. Until banks build more genuine customer value into their electronic bank offerings, in terms of price incentives and performance, they will have great difficulty shifting larger segments of their customer bases.
The crucial skill will be the ability to measure costs accurately for electronic and traditional channels. Unfortunately, many banks are still unable to assess transaction costs accurately, even for such well-characterized channels as the branch.
Without accurate cost information, it is impossible to price products accurately. As a result, most banks now give away services to customers who meet certain balance requirements, hoping that interest margins will offset all the costs they are unable to measure.
If a bank cannot tell which products, organizations, or relationships are truly profitable within its traditional channels, it has no plausible reason to expect better performance with electronic channels.
Mr. Prunty is president and chief executive officer of CoreProfit Solutions, a profitablity consulting firm in Malvern, Pa.
