Brett King

Posts Tagged ‘revenue’

Lessons from Apple – Great Branches don’t bring customers back

In Branch Strategy, Customer Experience, Retail Banking on March 8, 2012 at 13:22

The new iPad just launched to the usual hype, anticipation and fanfare. Every time a new Apple product comes off the assembly line, it gets put under the biggest magnifying glass imaginable as crowds of onlookers parse the announcement with scholarly intensity, hoping to piece together a picture of what might emerge and what the implications for the world at large will be.

Apple calls their latest release “Resolutionary” in reference to the retina display capabilities of the screen embedded in the new iPad. The New iPad’s “Retina Display” has 1,000,000 More Pixels than a HDTV, and its resolution is so dense that it is beyond the capability of the human eye to recognize individual pixels. We’re reaching the theoretical limit of display resolution – higher resolutions won’t matter if we can’t see the detail.

But that’s not the interesting observance. Apple is the most valued company in the world right now, and it is in that position because it inherently understands consumer behavior in respect to product, brand interaction and purchasing behavior. There’s a lot of banks that would like to think if we turn all our branches into “Apple Stores” that customers will flock back to the branch. But that’s not what the Apple story is telling us.

Will “Apple Store” Branches Save us?

On the eve of 16th December, 2010, Citi opened a glamorous, high-tech branch in New York City’s Union Square. The 9,700 square foot branch was designed by Eight, Inc., the same firm of architects responsible for the unique design of the iconic Apple store. Although Citi actually launched their store concept in Singapore first, the New York store was almost positioned as the saviour of branch banking itself and the “Apple store” moniker was applied repeatedly to indicate it’s revolutionary nature. If you read some of the reports and commentary on Citi’s branch it was clear that many bankers believed that if you just got the branch format right, made the space more attractive for customers, that they’d storm the branch and all would be made right with the world.

But that’s not what happened. While Citi’s “store” was certainly innovative, there’s no evidence that there’s been any net gain in retail activity because of the evolution in branch design. However, some brands like Umpqua, Jyske (Danish) and Che Banca (Italy), playing on the same premise, have claimed some increased branch activity as a result of their evolved spaces. So what is the reality? Are innovative new branch layouts going to change behavior when it comes to banking?

You only need to look at Apple to answer that question.

Store First?

For many Apple newbies their first interaction with Apple products is through an Apple Store or a Apple retailer, but not always. The new iPad that was released yesterday is not yet available in-store, but already there are tens of thousands stacking up to buy the product through their online store. Pre-order activity for the iPad has already had an effect on the online store for Apple.

Checks by Computerworld through 4:15 p.m. ET from multiple locations in the U.S. found the Apple e-store either still sporting a “We’ll be back soon” banner, or if it did load in a browser, becoming unresponsive during the purchase process – Computerworld Article March 7th, 2012

What we know of Apple is that they don’t insist on you coming into a store to make a purchase, or start your relationship with their brand dependent on some process that requires a face-to-face registration for their first product. For the release of the iPad Apple had to actually restrict online customers to buying only two of the devices, due to overwhelming demand through the online store.

The argument often heard by bankers is that regulation forces physical face-to-face compliance processes on us, but even regulations don’t force chartered banks to insist on a face-to-face interaction to onboard or identify a customer. Like Apple, today’s behavior of consumers means we should be ambivalent to the channel a customer chooses.

For the sake of the argument though, let’s assume that the first interaction is in an Apple Store or in-branch. How do customers behave in their interactions with the Apple brand once they have purchased their first iPad, iPhone or Mac computer? Does the most excellent ‘store’ experience drive them back to the store repeatedly over time? No

Great "Stores" don't bring customers back

Let’s look at the revenue story.

Show me the Money!

The average Apple Store makes approximately $34m in revenue annually, with $8.3m in operating income. However, if you examine the 10-K filing for Apple, revenue is split almost 50/50 between online (& device-based store) sales and their retail presence.

Since the Apple “App store” opened on July 10, 2008 Apple has booked close to $6 billion in revenue just on “Apps”. CyberMonday is used as the benchmark for US online and mobile retail sales, and figures show that iPhones and iPads account for a staggering 7-10% of all US online sales activity on those days.

What we know from all the data is this. Customer’s might start their relationship with Apple in-store, but they don’t have to, increasingly they’re choosing not to. Even if they do, 70-75% of the lifetime revenue from the average customer comes from sales online and that is increasing over time.

Customers simple won’t ever go back to the store to buy an App after they’ve bought an iPad or iPhone in-store.

There’s a lot about banking that are like Apps in our financial relationship. Credit limit upgrades, wire transfers, bill payment, CDs/Fixed Deposits, etc. In fact, once we’ve started our relationship with a bank as a customer, pretty much every product we engage with could be purchased just like an App through a better ‘store’ interface online.

Banks don’t sell well online because unlike Apple, we think that the primary store customers want to shop at is our ‘branch’ and when they come to internet banking, we often don’t even integrate sales into that ‘transactional’ platform. But the behavior of Apple customers shows that even with the best benchmark retail presence in the world, customers don’t come back time and time again to your store or even chose the store first. Once they are connected with your brand, they buy your product and utility wherever is most convenient, and that isn’t at the store or branch.

The big question is, how many branches can you afford to support if customers only visit them the first time out and do the rest online?


What The Beatles’ success on iTunes means for Banking…

In Customer Experience, Economics, Media, Retail Banking, Strategy on November 26, 2010 at 03:01

The Beatles are arguably one of the most successful bands of all time, but their foray into the digital music space has long been frustrated. In their first week on the iTunes store, however, the Beatles amassed a staggering 2 million individual song downloads and over 450,000 in albums sales. Not bad for a band who stopped recording music 30 years before the iPod was even invented. Their success is evidence of something else entirely, and it should terrify banks mired in physical methods of banking.

Apple versus The Beatles (also Apple)

The fact that The Beatles held out on launching their ‘content’ into the digital space for so long is sadly typical of many very traditional businesses confronted with changing modality and business models. The Beatles conflict intellectually with the digital space actually commenced as a legal battle between Apple Computers and Apple Corps (The Beatles Holding Company) that started more than 30 years ago in 1978. At that time The Beatles filed a lawsuit against Apple Computers for trademark infringement. In 1981 the initial case was settled for just $80,000. Conditions of the settlement were that the two “Apples” would not infringe on each other’s businesses, i.e. Apple Computers would not enter the music business, and Apple Corps would refrain from selling computers. Thus, in 1986 when Apple allowed users to record songs to their computers, it was perceived they were in breach of that agreement. The legal jostling continued until February 2007, when a reported settlement of some $500 million was reached over the trademark dispute in favor of Apple Corps.

Modality shift kills physical music distribution

Confronted with the digital age most of the recording industry bristled. They saw changing modality, a shift to digital music as a threat to their entrenched distribution channels. Rather than embrace digital distribution the likes of the RIAA, when confronted with innovation in their sector, lashed out with lawsuit after lawsuit, starting with the famous case against Napster. The RIAA’s strategy was built on the sole premise of trying to prevent people from using file sharing networks so their existing distribution networks could be propped up indefinitely, and they celebrated Napster’s decline into bankruptcy as a sign of success for this strategy.

Clearly most saw the writing on the wall, but rather than change, the RIAA and the industry as a whole buried their head in the sand, hoping to limp along till change was absolutely inevitable, or worse thinking that they were immune to change. By all accounts, the RIAA was woefully unsuccessful in this strategy. Today, new artists live or die based on their ability to move product in the digital space, and The Beatles move at long last into the digital space singles that the last bastions of support for traditional, physical music distribution is crumbling. In fact, physical “record” sales peaked in 1999 at $14.65 Bn. By 2007 Physical sales of music content were already less than in 1993 having reduced to around $10 Bn, and by then end of 2010 it is expected digital music sales will finally overtake physical sales all together. Clearly the sector was in massive trouble with its decision to resist digital sales and the hundreds of millions spent by the RIAA on legal bills were largely a complete and utter waste of money. Those precious funds should have instead been put into revitalizing the industry digitally. The RIAAs actions in this light were reprehensible.

The RIAAs attempt to kill off digital distribution failed dismally

It’s not just ‘physical’ music that’s at threat

Others have faced similar battles in recent times, including Blockbuster who filled for Chapter 11 in September of this year, clearly signaling the near death of physical distribution of DVDs. Encyclopedia Britannica faced the same type of troubles when Microsoft introduced Encarta to show Windows’ multimedia capability in the mid-90s. This almost spelled the end of Britannica’s 300 year old business overnight.

What is under attack here is not DVDs, it’s not The Beatles, RIAA, Books or CDs and vinyl – what is under attack is Physical Distribution of goods that can easily be digitized. In that sense, the bank sector is in massive trouble because almost everything a bank does can be digitized.

Much of what our banking experience today means is wrapped up in the banking sector’s love of physical distribution. The centre of retail banking from an organization structure perspective in most cases remains the branch, which started life arguably as a physical distribution point for cash. Branch P&Ls exceed ‘digital’ by a factor of 50-100 times in most retail banks of today – an inequity that speaks volumes to ghastly outmoded thinking in bank boardrooms. Cash, Cheques, Plastic Cards, Branches themselves are all inevitable victims of this modality shift.

The Financial Times reported last week the following sentiment in the banking sector:

Banks across the UK, Europe and the US are now bringing service centres back into their local markets and investing heavily in their branch networks. More significantly, many are attempting to restore their battered reputations by putting customer satisfaction at the heart of their business
Financial Times, November 17, 2010

Physical banking is dead (at best dying)

This strategy is massively flawed. While improvements in customer service should be applauded, the fact is, based on distribution metrics, take up of mobile banking, internet banking, mobile payments, and other such indicators, the investment should be going into improving customer journeys, experience and service in the digital space. Most banks need to increase their investment in the digital space ten fold in the next 3 years at a minimum.

Like The Beatles, most banks when threatened with this modality shift, will find it extremely uncomfortable. The reality is, though, if they embrace the change revenues will follow. To give you some indication of the vast gap between shifting modality and the reality of bank distribution strategy, most banks still classify Internet Banking as a ‘transactional platform’ for saving distribution costs. For most customers today, though, they are 30-50 times more likely to visit your bank by logging in to Internet or Mobile Banking than visiting a physical branch. The problem with bank strategy in this respect is, if you come to a branch a core strategy is to try to sell you a new product. Today, most banks don’t sell anything through Internet Banking. If they did, most banks would be shocked to find out that they’d be actually selling more product online than through their entire branch network today.

It’s not branches that is under threat today – it is physical distribution. Banks can take the music industry approach and stick their head in the sand until things are absolutely inevitable, or they can adapt.

The Branch is Alternative, Internet and Mobile are your Bank

In Internet Banking, Mobile Banking, Retail Banking, Strategy on May 15, 2010 at 10:58

Since the introduction of internet banking, customer behavior as respects day-to-day banking has been rapidly changing. Whereas in the mid-80s you might have done 70% of your banking through the branch, cash and cheque, today most of our retail banking interactions occur through electronic channels. For some segments, like seniors passbook holders in Hong Kong, pensioners in the US, and SMEs in Indonesia and India. But increasingly, while branch is still being used, it is not being used as the preferred method of banking by the majority of customers today.

The American Banker’s Association have been tracking this shift for some time. While 21% of customers in 2009 still cited the Branch as their preferred method, 25% chose the internet. The more telling statistic is that the branch as the preferred method has gone from 36% to 21% in just 3 years – that is a decline of 41% in 3 years for the branch as the ‘preferred’ method of banking. With mobile internet banking adoption skyrocketing, cheque usage in question, we can expect this rapid decline to continue over the next 3-5 years. The fact that in some markets branch visits have increased, is not a significant statistic considering the rate at which they have increased in comparison to utilization of direct channels.

source: ABA - Preferred Banking Method 2007-2009

HSBC has found that 45% of their Premier customer base (their high-value, preferred-banking retail segment) in Hong Kong were online and using Internet banking on average 10 times per month. Between 2002 and 2007 Internet Banking grew 174% in the UK. In Japan over 2/3rds of consumers use Internet Banking regularly according to a survey by gooResearch in February of this year (some of the data is translated here). 38% of the survey group reported using Internet banking more than 3-5 times per month (about 6% said more than 10 visits per month), and and about 22% of the sample size reported using mobile phone based banking more than 3-5 times per month. Nielsen have found even more significant results in markets like Australia and New Zealand.

Research suggests the #1 driving force behind this increasing adoption of internet and mobile, regardless of geography, segment or market, is the convenience factor. It’s just too easy to log on to your bank as compared with driving down, finding a parking spot and standing in line at the branch.

Thus far, however, revenue is trailing adoption rates significantly. How could it be that more than 40% of customers for most banks in developed economies cite Internet Banking (and other direct channels) as their preferred method of banking, transaction volume through Internet outpaces branch by a ratio of more than 4-to-1, and yet 80% of revenue still comes through the branch? How can it be that these same customers visit their “Internet” bank 5-10 times per month, and the branch only 3 times a year and yet 4 out of 5 products they apply for through the bank are sold through a branch? The revenue factor is constantly cited by traditional bankers in support of the branch, but there are three reasons for this trailing revenue versus adoption rate data:

1. Your “home” branch gets allocated the revenue by the system

Internet is the primary 'preferred' channel for most customers today

For most banks their IT systems still record the customer as being ‘allocated’ or ‘attached’ to a branch. This is most likely the branch you first visited to sign up for your account. If you’ve moved City or location and you visited a new branch and asked for you account to be moved over to that branch, it has changed. But for most banks you are ‘owned’ by a single branch as a business unit.

Thus when a personal loan is applied for online, or you deposit money in a fixed income account, many banks record this as a ‘sale’ for the branch you are attached to regardless of which channel it came through.

2. The final compliance step is in-branch

On many occasions you can’t actually complete the application for certain products online. There are various reasons for this. For a mortgage product, for example, a bank might want to cite documents associated with the land purchase. For investment products ‘that carry risk’ you need to sign a document to show the regulator that you weren’t coerced into making an investment and that you understand the risk.

So while 90% of the leads today for new mortgage product might come through the internet or call centre, the final sale is still recorded against a ‘branch’ because that is where you did the last piece of the compliance process.

3. Most banks are awful at selling online

Despite the increasing adoption rates, the increased usage of the internet channel by customers, the flagging branch usage, and the increasing revenue through online channels, most banks still consider the internet as an alternative to the branch or as a cost-reduction strategy for transactional banking. The branch is seen as the premier sales channel for customers – and it is. But it just isn’t the only channel for sales.


If banks honestly supported the internet as a sales channel, measured existing sales with better granularity as to where the revenue actual came from and used customer behavior as a leading indicator of where the money should be spent – our online and mobile banking experience would be far better than it is. For now, most bankers are still perpetuating a system that rewards physical distribution networks over direct channels because they are out of step with customers.

Today the branch is an alternative choice for the majority of customers. The branch, while retaining a role as a premier sales engagement channel, is still day-to-day a secondary choice. With the rapid rate of mobile banking adoption we can expect the role of the branch to be further diminished as part of customers day-to-day banking needs.

So, what happens next?

When we get an accurate picture of sources of revenue, many branches will no longer be viable from a business case perspective – at the very least they will have to change form and function. As banks realize that behavioral shift can not be arrested and real revenue is suffering due to lack of support, we will start to see a land grab for better positioning of product online, through mobile, through other direct channels, third-parties and partners. This means straight-thru-processing, automated credit risk assessment and better offer management through electronic channels becomes absolutely critical. The organization structure needs to change too; Branch can’t dominate strategy, products must be manufactured for all channels, and compliance needs to find better ways of digital enablement.

Bank Customer Channel Intensity

In Retail Banking, Strategy, Technology Innovation on April 7, 2010 at 23:43

As I’m speaking to more and more banks about BANK 2.0 a glaring realization is coming together. I think this has to be a core role with the bank moving forward – why? Because this is what someone needs to tell management for them to get it right.

Right now today I believe that in most developed economies if we properly measured Internet as a channel we’d find that it contributes on a par with Branches in respect to revenue. Internet is the primary day-to-day channel for almost half the retail bank’s customers today.

My argument is as follows. Let’s take a product like mortgages – in the USA, UK, Hong Kong, Singapore, Australia, Malaysia or similar with 70-75% internet penetration. Most people would be doing their primary product research on the web before committing to a mortgage. In some cases they might actually apply online, but even if they don’t apply online they are still doing the bulk of their research online then they’d call to make an appointment or use an online enquiry form, etc. The key component of the sales process has really happened outside the branch (i.e. the ‘hook’), but in the end it’s likely that a bunch of sales get recorded as ‘branch’ revenue when actually the lead was generated online. Same with credit cards, life insurance, etc.

Now, internally as a bank we tend to have revenue as a key measure because it directly effects profit and therefore EPS (Earnings per share). What we look from a financial metrics perspective is what Branch A, Product B and Direct Channel C did month-on-month as a comparison of relative performance over time. We look at revenue for product as a whole, we look revenue for the channel as a whole, but I don’t believe banks generally have a clear picture of how customers engage for a product ‘journey’ and where the revenue is really coming from. Additionally, we probably have a fair idea on transaction traffic per channel, but do we know how that traffic has changed over the last 2-3 years? What is the pattern? Can we predict more accurately where customers will be going in the future.

The fact that we’re recording product revenue like mortgage, cards, life policies as ‘branch’ or inbound ‘call centre’ revenue when the lead and initial engagement was likely through the online channel, this results in skewed operational budgets, management strategy, etc. Revenue alone is a poor reflection of the actual customer engagement with the bank from a channel perspective.

You can tell me if I’m wrong here…

What we need to do is inform bank strategy. To understand how to engage customers more efficiently, we need to know what they are doing holistically, not just channel by channel separately. This will better inform organizational strategy, marketing, etc.

Mortgage Journey – Customer Channel Intensity

What triggers a mortgage buy? Normally the initial trigger is when someone finds a property they want to buy. So they have two or three potential contact points before they engage with the bank on a mortgage – a real estate agent, a real estate website and a developer. Then we know that a customer engages with a bank. They’ll probably go to their own bank first, but if they have multiple bank relationships, they’ll make an enquiry through each. How do they do it?

They’ll either ring the call centre, walk into a branch, or go online. Since 2002-2003 that the number of leads that have come through internet and call centre have been increasing relative to branch. This is a trend we need to know about because it tells us where customer behavior is going and where we need to support the customer engagement most efficiently to secure their business. It’s hard to predict when a customer is going to need a mortgage, but we do know that when they are ready to ‘apply’ our ability to close that customer depends on three things, approval time, rate or how competitive the proposition is, and how easy it is to engage with your bank on that product.

Measuring how much revenue we did on mortgage product through Channel A or Channel B and how much it increased from Q409 to Q110 doesn’t help the bank understand effectiveness in engaging the customer through the journey. Revenue could be a function of economic conditions, housing supply and demand, etc. So revenue management doesn’t necessarily inform the bank from a strategic perspective. However, if we know at which points of the journey the customer used which channel, and how that pattern of engagement is changing over time, then we have a winner. This can help Banks more accurately target marketing/media buy, it can help us figure out which partners (real estate, developers, etc) to be targeting, it can help Banks optimize channel experience where it most matters, etc.

Recording mortgage application 'revenue' through the branch is a 'false positive'

The objective is as follows:

1. Help the organization quantify changing behavior in respect to bank contact/engagement
2. Form more productive budgets and targets based on more balanced channel metrics and expectations
3. Help inform organizational strategy so that org/reporting structure can be reformed
4. Help inform marketing and media buy strategy where dollar spend will be most effective (this in itself will help reform marketing too).

We all recognize that a total channel, total relationship, total profitability view of the customer is essential moving forward for retail banking. So the question becomes how to collate that data organizationally. Until you lift the hood and see all this data, then it’s just too hard to really know where revenue lies.