What Blue Jeans Sales Can Teach Retail Bankers

Retail profits are critical to survival for most commercial banks.

Yet retail banking markets -- both consumer and small business markets -- have become fiercely competitive over the past decade due to partial deregulation, growing customer sophistication, new technology, and incursions by nonbank competitors.

Unfortunately, most banks offer similar services and most innovations are easily copied. More and more, banks compete on price -- a competition that can only be won by the low-cost producer, which today often is a nonbank competitor.

While cost reduction is important, that alone will not ensure the required level of earnings for most banks.

How to Set Your Bank Apart

Today, the key to retail success is how you deliver banking services and to whom.

To better understand the range of delivery strategies, we must look at other highly competitive retail industries that also offer commodity-like products or services.

Consider, for example, how Levi's blue jeans are sold. Jeans made in the same factory can be sold in many different ways to many different types of customers at widely varying prices.

You can buy your Levi's jeans from an upscale department store, a jeans specialty store, a discounter, by mail order, and in many other ways.

Most of these retailers earn acceptable profits, despite the wide variations in how they deliver and price the same product.

Customizing Your Marketing

These profits result from carefully targeting those customers that are receptive to your particular delivery style and are willing to pay your price, and tailoring a delivery system to reach those customers efficiently.

The most successful retailers have highly refined and detailed systems for customer targeting, store site selection, expense control, budgeting, sales tracking, and store profitability. Few banks can match the sophisticated retail delivery strategies of a May's department store or a McDonald's.

This is because bank delivery strategies evolved under decades of rigid regulation, when banks had few decisions to make and little flexibility with regard to pricing, store location, customer targeting, and the like.

The challenge is to restructure these delivery systems and to develop new delivery strategies and management approaches for the much tougher competitive environment that banks now face.

Nonbank Competition

Branch offices are the retail stores of the banking industry and remain the primary delivery system. But the past decade has seen the emergence of alternative delivery systems that promise to become even more prominent in the future.

Largely based on computers and telecommunications, these systems include ATMs, shared ATM networks, direct mail, telemarketing, and telephone-based customer service.

Some of these nontraditional delivery methods have been used with great success by nonbank competitors who lacked the benefits and costs of retail branch networks. Examples include mutual funds, cash management accounts, and discount brokerage.

Enhancing Shareholder Value

The ultimate goal of any new retail delivery strategy must be to enhance shareholder value: the net present value of current and future earnings. There are four principal ways in which a new delivery strategy can enhance shareholder value:

* Revenue growth: The delivery strategy must promote profits by targeting high-potential markets, selecting desirable store locations, and using effective sales programs.

* Customer retention: The manner in which services are delivered must create customer loyalty.

* Improved efficiency: Delivery system efficiency must improve in order to reduce unit costs.

* Tailored pricing: The delivery strategy should allow store-by-store pricing where possible.

An Integrated Approach

An effective delivery strategy must address marketing, sales, operations, technology, and financial and management issues.

Because these issues are connected, addressing one aspect of service delivery in isolation often fails to produce the desired benefits.

Piecemeal changes in retail delivery systems often focus on the latest fad -- such as branch automation -- rather than on the improvements that will create the greatest value for the bank's shareholders.

Given the complexities of developing an integrated retail delivery strategy, however, some bankers may wonder why they should bother?

Quick Improvements Possible

The answer is that for most larger commercial banks -- those with over $1 billion in assets -- significant and often quick earnings improvements are possible.

Most store locations -- and even the choice of many markets -- have been determined by mergers, past regulations, and other history.

As a result, many banks continue to invest in markets and stores that can never meet profit goals, while failing to invest enough in more attractive markets.

A delivery strategy based on quantifiable market, customer, and financial data will help allocate resources to the markets and sites that can produce the greatest return.

Sales programs often are implemented system-wide and not tailored to the needs of the individual trade areas. Much effort and expense is wasted trying to sell services where there is little demand for them, while other stores are not challenged to achieve their full sales potential.

A Strategy for Each Branch

An integrated retail delivery strategy includes a process for developing store-by-store marketing plans.

For many banks, growth, mergers, and centralization have caused them to lose the personal touch they once had as community banks. Impersonal service weakens customer loyalties, making customers more likely to switch banks and more likely to make buying decisions solely on price.

A key element of retail delivery strategy is deciding which functions take place centrally and which take place in the store in order to create the quality service that ensures customer loyalty.

The retail branch network accounts for up to half the noninterest expense of many banks. Yet the majority of commercial bank branches do not produce an acceptable profit contribution, according to several industry studies.

Typical Branch Shortcomings

Some branches are simply too small -- deposit and loan volumes are insufficient to justify the fixed costs of the store. Many branches are staffed inefficiently, with too many staff at off-peak times and too few at peak times.

Most branches perform too many functions that could be handled more efficiently on a centralized basis. And nearly all branches are burdened with too much paperwork, redundant operating procedures, and inefficient work flows.

Another key element of retail delivery strategy is reengineering the branch network to improve its efficiency. This reengineering typically involves reorganization, redesigned work flows, further automation, and improved management reporting.

Rewards of a Good Strategy

In sum, three types of benefits should flow from an effective retail delivery strategy:

* A decision framework: A strategic framework to guide bank investment decisions by market.

* Short-term earnings improvements: Reengineered retail delivery systems that should produce measurable earnings improvements within one to three years.

* A more effective management process: A more detailed and fact-based process for managing retail delivery systems, and sustaining and enhancing future earnings.

Steps Along the Way

There are three phases to the development of a comprehensive retail delivery strategy.

To begin with, a bank should analyze current markets, customers, and delivery systems in order to create a baseline for comparison. The bank should also reassess overall retail strategy, identifying major opportunities for earnings improvement. This first phase is the time to think about long-range projects in the context of setting overall priorities.

The second phase is the time to restructure delivery systems, designing a new delivery strategy to meet the bank's strategic and financial goals.

Finally, a bank should implement a new management process in order to continually fine tune the delivery strategy in light of changing market conditions, regulations, and bank goals.

This process may be applied to any retail banking business line with appropriate adjustments.

There are several potential starting points for an improved retail delivery strategy. The bank may choose a single project, such as identifying branch consolidation opportunities, which is expected to make significant short-term contribution.

Or, a feasibility study can be done to identify the major opportunities and the key issues.

A comprehensive approach to retail delivery strategy produces the greatest long-term contribution to shareholder value.

Mr. Frederick A. White is president of F.A. White & Associates, Potomac, Md., a bank consulting firm.

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