This is the first part of this article - part two was published in the January 2003 edition of European Banker .
Les Stewart and Jayne Houlihan of PA Consulting Group look at how to deliver the optimal solution to increase sales and lower distribution costs.
We livein a multi-channel world, and customers have come to expect and demand the flexibility and convenience of access to multiple channels at times and places to suit them (see Figure 1). Banks and building societies have embraced new channels, attracted by potential cost efficiencies, the opportunity to build deeper customer insight and a desire to match or outdo competitor offerings.
Figure 1: Households using multiple channels to conduct financial services business (%)
Source: The Risk Management
Association, July 2001
However, financial institutions are finding it increasingly difficult to deliver against the cost saving potential, while also maintaining the appropriate customer interactions so important for developing relationships and cross-selling. New channels exist, and are being created, which deliver additional customer convenience, but not always improved opportunities for the bank. As customers discover new distribution routes' convenience and flexibility, transaction volumes have exceeded forecasts, requiring additional capacity. More significantly, customers have not entirely given up using old channels (see Figure 2), requiring capacity to be maintained. Overall, the net impact has been rocketing total distribution costs and limited evidence of the delivery of anticipated additional sales.
Aligned, integrated channels' benefits
Achieving the twin goals of improved cost effectiveness and increased sales from optimal channel integration is difficult, but not impossible. The challenge is to fuse physical and digital channels so they can deliver seamless services to different segments. This needs to be achieved while meeting the bank's own commercial needs - this will require actively determining each distribution channel's role, functionality and integration. Banks and building societies are investing heavily in CRM (customer relationship management) systems to facilitate the inter-channel data interchange needed, but this investment in itself will not deliver results unless companies:
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identify opportunities through understanding how customer channel preferences integrate with the bank's commercial needs
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prioritise initiatives to optimise the alignment between customer needs and bank objectives, and
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develop a business model that supports and reinforces the optimal, integrated channel solution.
Identifying opportunities
Different customers like to use channels in different ways. Some will be more than comfortable using the newer, more remote channels, while others will be quite averse. Customers expect the financial institution to deliver service to them on a "segment of one" basis with full, real-time integration across the channels they prefer. These preferences are based on a whole range of factors - product, transaction type, position on the service or sales value chain, degree of acceptability of (and aversion to) existing and emerging channels, habit, location (where the customer is at the time), how much privacy is required, etc. Identifying preference groups to meet such highly personalised channel requirements is challenging, yet not impossible.
Through analysis of these factors, the dynamics of customer channel preferences can be understood, ie where and how different customer groups prefer to undertake different activities and where critical hand-offs between channels need to be effective.
While this analysis will define the customers' preferences, this needs to be compared with the bank's optimal commercial solution. From a cost perspective it would be ideal if all customers operated through remote, e-channels, but the optimal commercial solution is significantly more complicated.
Figure 2: Customers accessing bank at least once a month by
channel (%)
Source: Forrester Research
Technographics, May 2001
Factors such as profitability and customer satisfaction constitute the bank's commercial needs. When assessing the bank's perspective, one must consider:
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different products have a range of optimal channel delivery solutions depending on their complexity, frequency of purchase, frequency of access, etc
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some channels can undertake certain tasks more efficiently and effectively; certain channels will have more effective sales performance and leverage potential and
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newer channels will not carry out the same role as traditional ones and may, in fact, in many cases only deliver value over the long term through enhancing the relationship with the customer and through developing customer insight - requiring benefits to be monitored through total customer lifetime value, rather than current period bottom-line profitability.
Figure 3: An illustrative 'customer channel preferences matrix' for product 'x'
In some cases, customers' channel choice and preferences conflict with commercial needs of a bank. The first step in aligning and integrating channel propositions to optimise value is to identify the "win-win" proposition for each customer group - matching these competing imperatives.
Optimising alignment.
Once armed with a customer-driven definition of desirable channel usage by product and service, and a clear understanding of their own commercial needs, banks and building societies can identify and prioritise future courses of action. Customers need to be encouraged to use channels in particular ways: it is important for certain activities to attract customers with higher value potential to channels that build and deepen the relationship and maximise sales opportunities, while letting those customers with lower value potential deal via less costly routes.
Customers fall into four broad value/satisfaction groups (see Figure 4).
Figure 4: The channel proposition value/satisfaction matrix
Satisfied value creators
These are the competitors' target customers - your most "attractive" customers - those whose channel and product/service needs are in line with your own commercial needs - the satisfied value creators. You must avoid complacency and concentrate efforts and resources on retaining them. While the temptation may well be to leave them alone, continual effort is required to ensure that they do not migrate to the bottom right box. The channel proposition - covering both the range of channel types available (traditional and new generation) and the integration between those channels - must continue to meet or exceed their expectations, and any changes implemented for other customer groups must not be perceived as adversely affecting these top priority customers.
Dissatisfied value creators
These customers are critical to your organisation - they meet profitability and commercial requirements - however, they are dissatisfied. Unless urgent action is taken to migrate them to the top right-hand box, they will migrate of their own accord and exit the organisation. Competitors will encourage this transfer and in fact are aggressively targeting them as their acquisition targets. The sources of their dissatisfaction must be identified and the service proposition must be reconfigured to enable the journey to the top right-hand box as quickly as possible. Experience shows that through prioritising initiatives to deliver a dynamic integrated channel proposition these customers can be migrated.
Satisfied value destroyers
This is a difficult category as the customers' and the bank's requirements are in conflict. The change required here is on the part of the customer and it must be achieved in a manner that retains their satisfaction. Migration is achieved through two routes - increasing the product ratio per customer, and/or by redesigning the channel proposition. While the former may appear to be more achievable, this represents only a short-term solution. To achieve long-term change and commercial viability, customers need to be taken through a change management process, whereby value-driving activities and behaviours across their channel usage profile and purchasing propensities are identified and then encouraged. Achieving this while maintaining their existing satisfaction levels is not an easy task, but is possible.
Dissatisfied value destroyers
Clearly it is desirable to find ways of converting these customers into satisfied value creators. However, for a number of customers, meeting the bank's commercial needs will not be possible now, or in the foreseeable future.
Other customers may have the potential to deliver considerable value in the future, such as today's students who will become the professionals of tomorrow: so there is a need to support them. Accordingly, the emphasis in the short term must be to meet their requirements from a channel perspective to convert their satisfaction levels. It will be through the longer-term customer lifetime value view that migration to the top right-hand box will be seen.
Some tough decisions will be required
Across the two value destroying quadrants there will be some customer groups where current or future services cannot ever be met economically. These include customers who are only ever likely to have nominal balances, but want to use only the expensive delivery channels; or wealthier customers who chase the best rate and whose service expectations cannot be met economically.
If providers cannot find ways to change the proposition to achieve a "win-win" scenario, tough decisions must be made. No organisation takes a decision to exit customers lightly, but if this is necessary, it is important to do so in a way that minimises any risk to reputation. Examples of successful migration techniques include encouraging customers to move to more basic services, adapting channel usage behaviours to commercially effective activities and using various economic incentives or disincentives to influence behaviour (however, the unique tradition of free banking in the UK makes this even more difficult: economic levers have to be introduced rather than just modified).
Prioritising investments
Funding is always at a premium to develop new channels and enhance existing ones. It is often the case that each individual channel owner is competing for this budget and it is difficult to optimise investments. Information generated from the above analysis can be used to make investment decisions more effectively, as it will be clear across the entire customer base and all channels where the greatest need and potential exists. It may also become clear that certain existing initiatives are not contributing to the overall long-term integrated solution.
In EB 210: the development of multi-channel business models.
