A large number of banks, both global and mid-sized, took the decision to invest in web-based cash management systems over two years ago during the technology boom. These investments - of up to US$60m for some large banks - were premised on the push of the web as a lower cost delivery model, rather than on the pull of customer demand. A number of these systems are due to be delivered this year.
Many of the factors behind the original investment cases have changed dramatically since they were first formulated. For a start, the dot-com bubble has well and truly burst. At the same time, the franchise of established banks has been threatened by large corporates consolidating their banking relationships and the arrival of 'cherry-pickers' in the SME market.
Customer attitudes to web-offerings are ambivalent. Banks encounter resistance from corporates who are content with their 'thick' client functionality. At the same time, corporate Requests for Proposal habitually demand web technology as a sine qua non for reaching the shortlist.
All of which has led to a situation in which the returns projected in the original investment case are no longer realistic, and projects are limping to the finishing line in a world very different from that in which they were started. This has created a value gap between expected and likely returns. So what do banks have to do to close this value gap and deliver successful web-based cash management today?
Figure 1: The value gap between expected and likely returns on investment in web-based cash management systems
There are three major challenges that banks need to overcome. These are:
- The business case challenge - how do banks rescue business cases that in the dot-com fall out look hopelessly optimistic?
- The technical challenge - in a rapidly changing technology environment, how can banks avoid new obsolescence, inflexibility and high fixed costs?
- The migration challenge - how can banks overcome customer resistance and achieve lower 'steady state costs' rather than creating new fixed costs?
The business case challenge - deliver to the masses
A significant amount of complex functionality is required to deliver an effective and compelling cash management offering. Yet few banks have a clear view of what functionality customers, across different market segments, value enough to pay for. This is the core of the business case challenge.
Our experience is that the route to a self-sustaining business case is through first addressing the needs of the mass market SMEs rather than the highly customized needs of the large corporate top-end. Success in the mass market makes the new system economically viable through economies of scale and cost savings.
Prioritizing the delivery of the highest value functionality gives the opportunity to deliver clear, measurable value at each phase of the development. The value from each tranche of functionality can offset the delivery costs of later phases.
This helps not only to close the value gap between expected and likely returns, but also to facilitate further investment, as investment becomes intrinsically linked to the delivery of cost savings or revenue streams.
Customer preference modeling (CPM) is a computer-based interview technique which can be used to give banks a definite insight into what functionality is highly valued by customers in different segments and what customers would be willing to pay for that functionality. It involves developing a comprehensive model that takes into account customers' likely response to optional product and service 'offers' - in this case components of functionality provided by a web-based cash management system.
During an interview, customers are asked to rank benefit statements and then to indicate on a scale their preference between a series of paired 'offers'. Software responds to these valuations by altering the combinations offered and re-measuring the value placed on each benefit statement. These 'utility values' are then used in a demand model which is effectively a 'virtual market' in which existing and new products can be profiled and tested. The model also measures the impact on volume and profit of market size, brand strength, sales effectiveness, awareness and distribution. It goes on to calculate the financial and shareholder value result of different marketing strategies.
Using a CPM approach offers the opportunity to (re)direct investment and effort to the functionality that delivers the greatest value, whether banks are just beginning the project or soon to hit the streets with their offering.
The technical challenge - focus on the tip of the iceberg
Much of the functionality required to deliver web-based cash management exists 'below the water line', offering little direct value to customers.
Typically, 50% is generic to any web-based application and often more than 70% of project costs are associated with delivering a technical platform that ideally customers will not even notice.
Security, integration with back-end systems, flexibility and scalability of the architecture are not value drivers of the proposition, but rather are core components that should underpin functionality that is highly valued by customers.
Effort and investment until now have typically been focused on the delivery of these core components and web-enabling existing customer facing functionality. Typically, it is only during the second phase of development that most offerings will get above the waterline and deliver something that customers may actually be willing to pay for.
Closing the value gap requires this 'above the waterline' functionality to be delivered up front. Our experience indicates that banks should buy in this core offering from a third party to focus investment on segment specific, high value functionality. Buying rather than building the commoditized platform can yield significant benefits. These include:
- Investment focus on the bank's added value and unique offering rather than on the technical platform
- Investment focus on the functionality that will induce the installed customer base to migrate
- Lower lifecycle cost of ownership
- Reduced development timeframes, with improved time to market.
The migration challenge - finding the win-win mix
Unless banks can migrate customers off 'thick' client systems, they will simply add a new fixed cost rather than move to lower and more variable costs. By demonstrating financial benefits to the customer, banks will accelerate delivery of their own business case. The focus should therefore be on the customer's business case rather than on the bank's.
The tactics used will depend very much on an individual bank's situation, including segments served, competitor offerings, and the state of the legacy cash management offering. While some banks have resorted to give-away pricing that simply makes a sick business case dead in the water, this can be avoided if the focus is on benefit visibility and an unbundled customer offer.
Banks need to make sure they sell their benefits properly. We have typically found these benefits to be under-sold in a proposition which is overly focused on reducing banks' internal costs. The core proposition has to be that the web-based system is offering functionality that is more valuable to customers than that available on legacy 'thick' client systems. Real-time reporting, notification of important events via multiple channels, and slicing and dicing of functionality for different users, are key corporate demands which the new technology can meet. Other examples include tying together multiple on-line services for the first time via a coherent portal.
Pricing is an important lever and component of the incentive package, but banks should charge a fair price for the value they deliver while passing on a proportion of the cost savings to incentivize the migration process. Multi-level pricing is a preferred approach, linked to service unbundling - pricing the vanilla service below the old 'thick client' level, but with premium prices for added functionality.
Conclusion
Successfully delivering a major customer-facing system provides a significant challenge and web-based systems have suffered more than most from changing expectations. Action is therefore critical to ensure that these challenges are met and that changes in expectations are managed effectively to narrow the 'value gap'.
The benchmark for success is the ability to switch off the old fixed cost base through migrating customers to the web-based system. The only way to achieve this is to offer functionality that customers truly value more than the existing 'thick' client offering.
Banks that succeed will enjoy lower and more variable costs. More importantly, they will have retained revenue streams while strengthening customer loyalty, creating opportunities to add more value by integrating more closely with customers' internal processes. Those banks that fail to respond decisively to the key challenges will have to face up to the stark reality of having invested heavily only to weaken their cash management offering and undermine customer relationships. The stakes are high.
