Keith Von Seggern, Nick Wilde & Steve Hadaway
March 24, 2005
L'Agefi - Industrie Financière

Old and New Approaches to Revenue Creation

For years, many in the banking industry have focused on revenue-generation initiatives that were essentially unsustainable: mergers and acquisitions, offers of free current accounts, , or aggressive campaigns to win or grow customers with large bundles of unprofitable products.

These should be grave concerns for executive management: Will revenue panic unleash another round of promiscuous, uninformed cross-selling, or of buying customers from competitors? Will there be a product-of-the-week – a “Want fries with that?” tagline to every customer interaction? Will the absence of a particular product in a customer’s portfolio be deemed proof of need? Will this mean more massing marketing of credit cards and debit cards, and so on? This is a costly path – costly in terms of the hard-dollar costs of the sales programs, the energy of the sales resources so applied, and the customer relationships subjected to a sell-sell-sell onslaught.

In The Discipline of Market Leaders Fred Wiersema and Michael Treacy assert that there are only three broad strategies that any organisation can choose from, and to be successful, just one must be chosen for an organisational focus.

• The first is a product strategy. You can relentlessly innovate, delivering new and differentiated products that make customers willing to pay a premium for them. Nike is a good example. So is Porsche. Hewlett-Packard is not. HP CEO. Carly Fiorina recently said, “We make three new product announcements a day. Can you remember them? Our customers can’t.”
  
  Similarly, for a financial institution, the product route is a difficult one. There are few ‘new’ financial services product that cannot quickly be copied by competitors – or that would affect the customer in an emotional sense to the degree that they would pay appreciably more for it from one bank than another.
  
  
• The second strategy is based on operational excellence. This involves using the mastery of the value chain to deliver quality product at a price that competitors cannot match. Wal-Mart is the standout here. This type of organisation successfully manages to make profits with only having a transactional relationship with its customers.
  
  While this may once have been the hallmark of some banks‘ relationships with their customers, few today make this their primary strategy. In The New York Times, Paul Goldberger aptly described the commoditisation of quality, saying, “While everything may be better, it is increasingly the same”.
  
  
• The third alternative strategy is customer intimacy. This strategy focuses on building customer base and profit from the relationships you build. The better the relationship, the longer customers remain loyal and the more of their business they give you.
  
  This is clearly the new banking battleground, but while many have declared that their primary focus is the customer, relatively few have been pace setters of customer intimacy.
  

Many banks espouse a customer focus and score well on surveys that purport to score satisfaction, but sometimes all a high score indicates is that they have avoided offending the customer recently.

While there are many valiant efforts made to achieve customer intimacy – branding and advertising are a favourite – they are increasingly doomed because of the ‘noise’ in the marketplace. Consumers can be hit with something like 3,000 messages a day.

Consider how unique a bank is that offers Internet banking, a 1-800 number, convenient hours, short queues, and ATM access? The answer is not at all. That can be a galling realisation considering the time, effort and capital spent to deliver these proficiently.

So if customer intimacy is the goal, yet customers see the provisions above as simply “hygiene factors”, how can financial institutions achieve differentiation?

A Payments Evolution – Intimacy Between a Customer and His Wallet

The payments industry is beginning a period of unprecedented change. Increasingly customers appear to be ready to move beyond the “paper based checking account” as the primary means of paying for goods and services. New alternatives are being tested everyday by well-established household names giving credibility and visibility to the latest alternatives.

What makes this potential change particularly problematic to banks is twofold: (1) the revenue at risk is significant in light of fairly rapid change, and (2) very few banks have a defined management system (people, process, metrics, and technology) that either owns or has sole / singular responsibility for the payments line of business, which means getting control or even defining the “payments business” is difficult.

For most banks there is no “officer in charge”, no one specific control point, no MBO’s or critical success factors and therefore payments typically cannot be found on the P&L. This sets the stage for the core of the problem – no one person owns it!

At the bottom of the payments conundrum for banks, however, is a tradition of underestimating customers’ value for their payments services. McKinsey & Company’s Jack Stephenson writes,

“…Despite what would seem to be the clear strategic importance of payments to banks, few banks manage payments as a strategic business. Senior bankers often look at payments as a mundane set of back-office functions…”

Yet these mundane back office transactions hide huge untapped opportunity.

Each payment can differ on many variables. These include transaction types, the channels through which they are processed, and the ‘three Vs’ - velocity (how fast funds move from one state to another), volume (what number of transactions are occurring in a given period), and value (the size of the transactions). With so much information, and finally banks developing the means to capture, sort and understand it effectively, surely useful customer insight can be built – and acted upon?

Converting Transactional Data to Customer Insight – and Action

In some worlds, information is power. In the business world, it can be financially valuable.

The good news is that payment information already captured by your back office is a treasure trove of indicators about customer preferences, propensities, and behaviour. Most banks simply have yet to make that information a part of their customers’ “profile”, and they have yet to make it accessible and actionable for their employees who work with customers.

In fact, in many cases, they have yet to recognise at all, at the executive level, the value inherent in the information.

Gartner have revealed that less than 25% of financial services companies (banks, brokerages, credit card and insurance) are able to monitor customer transactions for events that will trigger marketing contacts. Of these, half responded to the customer triggers on a monthly basis, by when the opportunity may have well passed them by.

One-third of the total respondents said they have no plans to use event triggering soon.

Looking for a couple of tangible examples, consider:

• A credit card doesn’t begin to pay for itself unless it is activated and then carries reasonably high balances. How many opened but inactive credit card accounts does your bank have? What do the customers that have not activated their cards have in common? Is there a segment that you can persuade to activate? Is there a segment likely never to activate – and if so, how will you avoid opening more accounts in that segment? Are your sales and marketing organisations incentivised on account opening, or just on activated accounts? If you asked them to, could they increase account activations and activity? Would they know which account holders to target – and with what approach?
  
  
• What customer activities, discernible in your back office payment information, are reliable alerts that a previously profitable payment customer is an imminent retention risk? Do your people who deal with customers recognise these signs? Do they have access to the information? Do they know how to engage an at-risk customer? What does a precipitous drop in deposits mean? What if a monthly expense check that used to be deposited in your bank is now deposited elsewhere? Suppose a report indicates that an entire segment of customers appear to be migrating to alternative forms of payments?
  
  
• How many of your customers are using their products – or your bank’s channels – in a way that is costly to the organisation and sub-optimal from the customer experience perspective? What if certain customers could be migrated to propositions that not only cut bank costs but also increased the customer’s satisfaction?
  

All this is fairly easily “known” at most banks, but generally not leveraged in a systematic way.

So if the information is readily available to create these customer alerts, and the appropriate bank responses can be easily codified, if nobody’s doing it, it must be because the potential rewards are weak?

Wrong. Gartner have measured that response rates for offers that are based on daily customer triggers vary from 16% - 50%, as opposed to 2.3% - 3.3% for traditional telemarketing campaigns.

To find the gold you have to be able to work across key organisational silos – operations, marketing, distribution, for example. And herein lies another part of the challenge. With one of the more dreaded types of committees – the multi-functional task force – each silo representative is typically high enough in the organisation to make decisions, but so high that they don’t understand the complexity in the details. Find resources who are very comfortable understanding the detail, and they’re in roles that probably restrict them from making the empowering decisions.

This is why finding an external partner to act as a guide becomes key to finding the gold.

After years of making external investments for revenue generation, we see our clients ready to look a little closer to home for their next breakthrough. As one client pointed out, “This time around, I’m more like Dorothy in the Wizard of Oz – I don’t have to go any farther than my own back yard to find what I need.”