Last week’s European Financial Services Exchange, run by IQPC in London, highlighted a number of key dilemmas facing retail financial services (RFS) companies as they try to improve relationships with their customers. This editorial will cover off the key dilemma, but I want to start by focusing on another issue, the emerging channels.
There’s no doubt that we now live in a multi-channel world, and this has been a major cause of difficulties for the established banks. Trying to provide a seamless integration for customers to their various channels is proving hugely expensive, and very difficult to implement. Indeed, there were the beginnings of murmurings as to whether the game was worth the candle, and perhaps they could live with the consequences of a less than perfect integration. To make things more difficult, new channels are still emerging, and we focused on a number of those at the conference.
Firstly, we looked at interactive digital TV. For me the great hope of this technology is that it could raise the 49% of the UK population who already use the Internet to close on 100%, by adding a keyboard to the TV and converting the channel into a two-way communication, so providing ubiquitous access to the Internet. The feedback from attendees at the conference who had used the technology in pilot mode is that it looks unlikely to happen in the near future for a number of reasons: the number of people with interactive, digital TV is still relatively low (around 10% in UK, I believe); very, very few have keyboards, and the quality of the image does not lend itself to text capture; and the costs of using the channel are currently prohibitive. I also suspect that the ‘owners’ of the channel are resisting the use of it as a perceived low-added-value access channel to the Internet, and would prefer it to be a higher-value standalone channel. Whatever, the consensus of those who had used the channel was that, at best, it was an expensive channel for lead-generation, and at worst, not really worth bothering about. So it looks as if it will be a good few years before iTV lives up to its potential promise.
On the mobile-commerce front, there was a similar story. Too much competition for the added-value piece is causing different players in the mobile space (mobile operators, handset manufacturers, RFS companies) to compete, each providing different standards for how mobile commerce should work. Of course too many standards is the same as no standards. A rather discouraged presenter on the topic suggested that it would be a long time before we saw any realistic emergence of m-commerce as a reality. In the mean time, quite a few RFS companies are ignoring the technical issues of this approach, and using the concepts of PayPal, are implementing an alternative to the credit-card for mostly virtual-world transactions via the Internet, and via SMS messages on mobile phones (at least in the UK). Royal Bank of Scotland (NatWest) presented their FastPay service which allows the consumer to make payments via their Internet terminals to merchants, or from UK mobile phone to UK mobile phone, and if you’re lucky enough to live in Edinburgh, to make payments from your mobile phone to a parking meter. It works. After the conference, I set myself and my wife up with a virtual account, paid for a DVD with the FastPay service, and paid my wife £5, who promptly sent it back to me, with a loss of 40 pence, due to the 20p charge per transaction. The key issue is whether or not RBOS can get such a service to critical mass, and the key to that seems to be to get sufficient merchants to accept it as a payment mechanism. That shouldn’t be too difficult as the merchant charges look like being around half what they would have to pay a credit-card supplier. That should prick up the ears of Visa and MasterCard, who are believed to be working on similar systems. So perhaps we see the beginnings of a viable mobile payment mechanism, which can also be used on the Internet. Nevertheless, it may be some time before it is an accepted payment mechanism. As the RBOS presenter pointed out, it took 10 years for credit cards to become ubiquitous. Maybe we need a similar timeframe for a mobile / Internet payment system to become accepted.
SMS is also beginning to be used in other ways in retail financial services. Both First Direct and Cahoot reported encouraging results from testing user-selected SMS alerts. The idea is that the customer can define circumstances when they would like to receive an SMS alert (e.g. a payment of more than £1,000 is made on a credit-card; my current account goes overdrawn). First Direct reported 25% take-up of their version of the service, and they were also beginning to detect a consequent reduction of calls to the contact center, which has to be good news. Cahoot, who has had a soft launch of the service, reported a smaller 10% take up by customers, but with positive user satisfaction. Expect to see the SMS alert service become ubiquitous, but note that it has to be user-requested! Sending unsolicited SMS messages is unacceptable!
So we can expect to see the multi-channel world get more complex, and without exception conference presenters are expecting the unexpected. Everyone is looking for the new channel that is going to come ‘somewhere from left field’ and surprise us all. The general view was to wait for that to happen, driven by customer demand, rather than proactively go out to make it happen.
Enough about channels, let’s get back to those dilemmas facing the retail financial services. It might help to remind ourselves of the macro-economic environment facing the RFS industry.
The heady days of the late 90s are long since gone. We seem to be in a low-growth or potentially recession environment, so unsurprisingly there is a low appetite for huge investments. Competition is getting intense, both between RFS companies themselves, and new entrants to the sector, particularly the supermarkets and the mobile operators. There is concern that new entrants may be able to change significantly the economics of the business model, by for example, the supermarkets’ significantly reducing customer acquisition costs. Companies are also slowly getting used to the idea that price transparency is a key attribute of the future. The Internet provides consumers with access to better and better comparative data on financial services products (e.g. see www.moneysupermarket.com), and this is supported by government pressure to move to simpler and more comparable products. As a result of all these pressures, margins are decreasing and the trend is likely to continue. In the words of one presenter, “In the future, we’re all stuffed.” In such an environment the reality is that all RFS companies need to find some way of persuading the customers to let them make money out of them.
How do they do that? Well there’s a growing view that service is the key, and perhaps only, differentiator. Charles Breslin of Churchill Insurance reported that 42% believe this to be so. We also had an interesting case study on the importance of self-service from Tim Sawyer, head of Cahoot.
Cahoot has now reached break-even and beyond. They have 650k customers and are growing at 5-6k per week (~45% p.a.) without TV advertising and around 10k per week (~80% p.a.) with TV advertising. Their core strategy is to appeal to those who want self-service, whilst offering near best-of-market pricing. The channels they support are a relatively small subset of the total range including; the Internet; email; phone; and mail. The self-service focus allows them to keep staffing levels low – 450 for 650k customers (around 1,400 customers per member of staff).
The most important point that Tim made was that it is key to make the service as simple as possible for the customer. It is key for customer satisfaction, and key to customer retention and cross-sales. Since the service was launched, they have focused on improving the ease-of-use (from a customer perspective) of the service, and they have seen customer satisfaction rise from 3.49 (out of 5) to 4.45 as a consequence.
A concern raised by many delegates from more traditional banks was how one can sell in a self-service environment? If there is no need to talk to the customer, when do you get the opportunity to sell them something? This ignores the point that customers use the internet to buy things, not to be sold them. Sales and Marketing is moving from ‘push’ to ‘pull’. As Tim put it, “If you make it easy for the customer, they get used to the service and like it, and so stay with you. When they need a new product, they will buy it from you, because they like the service.” Is it also possible that at a time when there are no standards on the Internet as to how customers interact with web-sites, if you provide an easy-to-use service, aren’t you likely to become the de facto standard? Isn’t the way you buy books online the Amazon way? A source of long-term competitive edge perhaps. Mary Murphy, head of Abbey National’s online channel, reinforced Tim’s message. Abbey National have launched an Internet channel for their 16 million customers. Take-up has been around 10%, but Mary made the point that customers in that channel have deeper product relationships, and are more profitable.
For many from the more traditional banks, the self-service issue is a double-edged sword. They fear that providing a self-service channel will not reduce transactions, or even shift transactions from more expensive channels to the cheaper channels. It will, instead stimulate more transactions. For example, in response to a proposal that self-service facilities should be provided to allow customers to check on the status of a transaction (the processing of a product application, or an insurance claim), the consensus of traditional bank representatives was that this would be likely to stimulate more phone calls complaining about the long time to complete poor processes. Now there is no doubt that such positive feedback cycles can be created, but maybe it is not such a bad idea to find out where there are poor processes, provided of course that you can fix them.
And here, I think, we come to the heart of the problem. The issue for many large traditional banks is that they cannot fix processes very easily. The issue is the legacy systems that are still at the heart of many of these organizations. The complexities embedded in ancient systems which are very difficult to change, do not contain many of the concepts needed to support the modern environment, and are almost impossible to integrate, constrain what these organizations can do, and the timeframe in which they can do them. They constrain business flexibility. At the same time, the huge cost of replacing them makes such a project almost inconceivable. And why should we replace them, when the vast majority of customers are perhaps quite happy, thank you very much, with traditional banking services. These new-fangled, demanding customers who want to use self-service facilities, and don’t like to be sold to are only a small percentage of our customer base. The problem is, they are a growing percentage, even if they may take a generation or more to become the majority.
Well, Mr CEO of a large RFS organization, what should your strategy be? My view is that you need to back two horses.
Keep your traditional bank going for the traditional customer base. Make changes and improve things, but always within the context of hard ROI. Milk your cash cow for as long as you can, but don’t try to transform the organizational culture, or your IT systems. It’s just too big a job, and you certainly won’t see the returns whilst you’re at the helm.
On the other hand, get yourself an Internet bank, and imbed in that organization the business agility, IT agility and service culture needed to appeal to the new consumer. Make sure that the basic customer processes work slickly and easily from a customer perspective to ensure good customer retention and ‘pull’ cross-sales. Then add the added-value electronic services that will provide you with competitive edge. Once it’s running smoothly, you might even think about cannibalizing your other bank’s customer base.
And that is probably what most such CEO’s are already doing.
Now seeing you’ve got this far in the editorial let me make you a ‘push’ offer you cannot refuse. If you’re interested in getting an external view of how your CRM program is going, why don’t you let me come in and provide my pennyworth? We’ll do it for free, provided you let us sell a fairly detailed case study on the CRM-Forum, anonymous if you so wish. We’re only interested in talking to companies directly implementing CRM, so no consultants or supply-side companies, please.
As always we’d like to hear your comments. Make them below or email me at [email protected]