Brett King

Posts Tagged ‘customer behavior’

The Total Disruption of Bank Distribution – The Conclusion

In Bank Innovation, Customer Experience, Future of Banking on August 11, 2011 at 16:10

As we detach ourselves from physical artifacts associated with traditional businesses, traditional distribution models rapidly fail. The fact that you own or participate in a network or virtual monopoly that supports an outmoded distribution model is of no benefit when that network is surpassed by a generational leap in technology delivery at the front end or a significant and irreversible shift in behavior. The challenge is re-tasking your business to be a part of the technology or new distribution model that enables that different behavior.

Typically, the new technology or business model disrupts in one of the following ways:

  1. Creates a cheaper, simpler or more convenient approach when compared with the old method or processes,
  2. Involves a new technology that is vastly superior in speed, quality, form or function when compared with the old method (not an iteration, but next generation improvement),
  3. Creates a dynamic shift in components of the value chain such that the old method is no longer viable or worth the premium levied, or
  4. Results in the creation of a completely new model that completely replaces the need for the traditional players such as in the case of combining two previous products or business.

As in the case of the Telegraph and Fixed Line businesses, this was about a better approach to person-to-person communication. In the case of Encyclopedia Britannica, Stock Trading and Travel Agents, the new technology disrupted the value chain so that traditional distribution methods were no longer able to compete, or the ‘value-add’ of a human interaction was no longer worth the premium. In the case of media such as print, music and movie/TV content, it is a combination of disruption of the network, new technologies at the front end (i.e. computers/tablets/smartphones instead of TVs/newspapers/CD players) and a change in the distribution model in respect to the value chain and cost structures.

Is it really going to happen?

So how viable is this shift in banking? Well almost all the physical artifacts in banking can be replaced by something better. The cheque has already been replaced in most developed economies by debit cards and electronic transfer methods, but even plastic cards themselves are a target for disruption via NFC-enabled mobiles. Cash itself is increasingly becoming a poor instrument for day-to-day payments.

The branch, which originally was designed as a transaction point for cheques and cash, is increasingly facing the same challenges that Britannica, Merrill Lynch and Travel Agents faced – is the value-add of a human interaction enough to differentiate against a rich, optimized, digital interaction when and where you need your banking?

Everything about retail financial services that relies on outmoded physical artifacts, proprietary and outdated networks, and processes that are complex and unwieldy – all lend themselves to disruption. If you can think of a better way to do your banking, then you already realize that the current status quo is not sustainable. In today’s environment, if you can imagine it, then someone is probably building it.

If you are an incumbent player you might argue, for example, that NFC requires critical mass to reach adoption, but so did the internet, so did music downloads, so did Wikipedia and electronic stock trading.  The question is, do you wait until the disruption takes place to start planning for the new reality?

Where are the key threats?

The biggest single threat is distribution model changes. By 2015 aggregate interactions for retail banking will mostly have shifted away from branches to mobile, web, ATM, and call center. On that basis alone banks that are carrying large branch networks will face major disadvantages on an operational cost basis, against competitors who are more nimble, efficient and enable day-to-day behavior better. The good news is, before the decline really starts to bite, the evidence shows that when you strongly support new channels that it doesn’t cannibalize your existing business, it just adds new revenue to the mix. Get focused today on revenue generation through direct channels. Remove the friction, go after revenue.

The cloud, mobile and social will certainly be a part of the shift as well. PayPal has already shown that a new interface can work on top of the old architecture. Increasingly mobile payments are going to sit on top of that old architecture too. The opportunities, however, are more than putting new skins on the old payment system. The opportunity here is to understand the context of payments and work to augment the payments architecture through understanding payments behavior. Start focusing on why, when and how customers make payments, and work to reduce friction and enhance value.

Physical artifacts are going to continue to be challenged by modality. If you have retail banking management asking the question about how to get customers back into branches, or arguing that cash is king, ask yourself how these leaders will fare as increasingly they are faced with disruptive behavior and the breakdown of traditional models. Start looking for leaders who are excited about the future and see the opportunities for adaptation.

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An organization structure that doesn’t match customer behavior

In Retail Banking, Strategy on October 26, 2009 at 13:11

Excerpt from Chapter 2 – Measuring the Customer Experience

By examining the behaviour of customers, the glaring realization is that institutions are essentially assuming that customers only ever use one channel at a time to interact with them. Hence, it is not unusual to find a web team that believes that it can take 30-40% of branch traffic and service it online. Likewise it is not unusual to hear proponents of Branch banking telling us “the branch is back” and that the winning strategy is to be investing in more real estate and variations of branch to retain customers. It’s also not unusual for customers to receive dozens of direct mail offers, email marketing offers or sms promotions from different ‘revenue centres’ within the bank independent of each other.

In 2008 90-95% of daily transactions are done electronically and in most cases the majority of transaction volume comes through direct channels namely ATM, Call Centre and Internet. By February of 2007, HSBC in Hong Kong reported in the South China Morning Post that 90% of their daily transactions were through phone, Internet or ATM, leaving the rest to branch. RaboBank, FirstDirect, INGDirect, and others have been able to successfully operate without any reliance on branch structures. This is not a criticism of branches, because we believe that branches will remain an essential part of the future of banking. However, look at the organization structure of most banks today and you’ll see a complete and total lack of understanding of customer behaviour inherit within the organization chart. It’s really quite appalling that the organization structure of many banks have not caught up with this reality.

When you examine the organization structure of most retail banks, the Head of Branch networks is second only to the Head of Retail, and in many cases is a direct report to the CEO. In comparison the manager responsible for Internet often sits under the IT or Marketing departments three or four levels below the organizational equivalent of the branch business unit lead. So let’s get this straight. 90% of the transactions go through channels that are managed by managers who have only a modicum of influence within the organization structure, while the head of Branches has the ear of the CEO and looks after just 5-10% of the daily traffic within the bank.

Figure - Partial Retail Banking Org Chart as it relates to channel priorities

Figure - Partial Retail Banking Org Chart as it relates to channel priorities

“Ah, but the branch generates all the revenue…” we’ve heard it argued. This is a really good justification for keeping traditional structures in place. Well let us really examine if that is the case.

Let us take credit card acquisitions as an example. How do we market credit cards? Currently we might use direct mail, newspaper advertisements, web and possibly promotional marketing offering a ‘free gift’ if clients sign up for a new Visa card or Mastercard. Customers are then faced with probably two or three choices of how to apply. The first option is that they can call the call centre, but the call centre refers them to the branch because they need to present proof of income and proof of identity to an officer of the bank. The same might be the case for the internet, where the application can be filled online, but we then call them and ask them to come into the branch to complete the application.

Who gets to record the revenue for the credit card application? Not the call centre, or the internet channel. Often it is the physical branch that executes the final signature on the application form and the KYC compliance check on the proof of income – so it happily records the revenue of the sale. But the branch has actually had practically zero involvement in the sale, and simply is just a ‘step’ in a required adherence to an outmoded compliance process. So does the branch actually generate the revenue, or is it merely an accounting treatment?

The attitude of many retail banking senior executives seems to be that the branch is a serious banking channel, whereas the remainder of “alternative” channels are just that – alternatives to the ‘real thing’. The problem is that customers simply don’t think like this. They don’t assign a higher value or priority to the branch; they just see it as one of the many channels they can choose to do their banking. In fact, many customers these days choose not to go the branch because they don’t want to stand in line, or they find it troublesome to get to the branch at times when they are open. Admittedly the branch is the premium service channel, but it is not the ONLY channel. So why don’t the banks think the way customers do?

The longer banks choose to reinforce a belief that the branch is superior within the organization structure, the longer it will take them to match the performance of the bank to the changing behaviour of retail customers.