Creating the Successful European Retail Bank (Financial Times Executive Briefings)

Creating the Successful European Retail Bank

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Creating the SuccessfulEuropean Retail Bank

MARK MOORE

An imprint of Pearson Education

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About the author

Mark Moore is a highly experienced financial journalist specializing in state-of-

the-art implementations of technology, especially in the areas of e-business and

e-commerce. He holds a BA (Hons) in Classical Civilization and Philosophy from

Goldsmiths College, University of London. He writes on financial and business-

related technology for a wide range of publications in Europe and the US.

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Acknowledgements

I am extremely grateful to the following people, who were most generous with their

time when I was preparing this briefing, despite their own extremely demanding

business schedules.

Bill Bougourd (Royal Bank of Scotland), Andreas Bruck (Wincor Nixdorf),

Harold Dempster (Kindle Banking Systems), Martin Dolan (Kindle Banking

Systems), Peter Duffy (Barclays Bank), Brian Foss (IBM), Bruno Giversen (Critical

Path), Annette Hughes (Cisco Systems), Uwe Krause (Wincor Nixdorf), Gug

Kyriacou (Abbey National), Nick Masterson-Jones (Charteris), Ambrose McGinn

(Abbey National), Paul McKeown (IBM), Clive McNamara (AIT), Ian Ogilvie

(HSBC), Laurel Powers-Freeling (Lloyds TSB), Ross Roy (Critical Path), Gordon

Sharpe (Bank of Scotland), Frans Van Cauwelaert (Kindle Banking Systems), Nick

Watson (Cisco Systems), Alan Woodward (Charteris).

My sincere thanks also to Zoë Cooper, Janice Mezzetti and Harvey Wolff.

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Contents

Executive summary xiii

New dimensions in customer acquisition andmanagement 1

Chapter overview 3Introduction 3The customer-centric revolution: the background 4Key defining characteristics of how today’s customers view their banks 11Disintermediation 13Why opportunities have arisen for newcomers to get in on the act 14The struggle for survival: the move to the customer-centricbusiness model 18What exactly do customers want from their retail financial service providers? 21The strategy of the customer-centric retail financial serviceprovider 22

Customer-centric management of multiple delivery channels 45

Chapter overview 47Introduction 47Creating a customer-centric channel strategy 47The customer loyalty challenge 47

Financial services and the Internet 57

Chapter overview 59Introduction 59The security issue 59Strategic aspects of delivering financial services via the Internet 63

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Contents

The commercial challenge of the Internet 69

Chapter overview 71The challenge posed by non-bank players 71The six major trends in how e-commerce will impact on business 72The relationship between e-commerce and e-business 76The increasing popularity of the Internet as a way of shopping 77Barriers to online shopping 81

The branch 83

Chapter overview 85Introduction 85Evolution, not extinction 85Reasons for the decline in the traditional branch 86

The ATM and the self-service kiosk 89

Chapter overview 91Introduction 91ATMs and security 91The strategic direction of the ATM 92ATMs around the world 93Origins of UK ATM networks 95Strategic guidelines: making the most of ATMs 97ATMs and smart cards 98

Telephone banking 105

Chapter overview 107Introduction 107Types of banking service available via the telephone 108The cost of telephone banking 109The primacy of the call centre in a telephone banking system 109Conclusion 115

Banking online 117

Chapter overview 119Introduction 119

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Contents

Interactive digital television 127

Chapter overview 129Introduction 129

Conclusions 137

Managing the threats and exploiting opportunities 139

Glossary 143

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I think it unrealistic to launch a new type of banking service via a remote

channel, and imagine that customers will be happy to migrate all their

banking activities to that one channel. That seems to me entirely impractical.

What customers really want is the opportunity to select from different

channels according to how convenient the channel in question may be at

that particular time and for that particular transaction.

Ian Ogilvie

Head of electronic services, HSBC

xiii

Executive summary

This briefing provides comprehensive tactical and strategic information to help all

types of institutions selling retail financial services to solve a fundamental challenge,

namely, in a highly competitive commercial environment where financial services are

being delivered to customers via a multiplicity of channels, how can we maximize our

competitive success?

The channels that are specifically discussed here are as follows:

■ the physical branch

■ the automated teller machine (ATM)

■ electronic funds transfer at point of sale (EFTPoS)

■ telephone banking

■ Internet-delivered financial services

■ Internet-delivered banking services

■ mobile Internet banking

■ interactive digital television.

Each of these delivery channels is radically different in nature, but each plays a

similar strategic role within an institution. This is the justification for creating a

briefing such as this, which provides strategic and tactical guidance.

It is not a market report as such – it does not set out simply to provide information

about the extent of the proliferation of the above channels. Information is provided

about the take-up of the channels where necessary, especially the take-up of more

recently developed channels. But the main aim is not to produce another overview

of proliferation rates and predictions for the future.

The point is that financial institutions are not in any position simply to observe

what is happening to the roll-out of initiatives based around these new delivery

channels. If they were merely to be observers, they would shortly find that their

market had been taken from them by other, more participatory institutions.

Customers enjoy using multiple delivery channels and in principle are ready to

use any new channel which offers them clear benefits in terms of the things they

need most: speed, accuracy, breadth of information, convenience and, above all,

the ability to access the service whenever, wherever and by whatever means they

prefer to use.

Naturally, in a scenario where institutions are delivering a wide range of

financial and banking services via a similarly wide range of delivery channels, the

issue of creating and maintaining intimacy with the customer is far from trivial.

Yet it is a mistake for an institution to assume that just because electronic means

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Executive summary

are being used to communicate with customers, it is impossible to maintain the

level of intimacy which customers may have enjoyed when the bank’s only

delivery channel was the physical branch.

The truth is that in those days, customers – even wealthy ones – were in awe of

banks and were often treated condescendingly by them. Furthermore, the level of

convenience of access to cash, payment methods and account information was

extremely low, so much so that the banking scenario of today would seem beyond

belief to a nineteenth-century banking customer.

Overall, multiple delivery channels give retail financial institutions the

opportunity to make enormous cost savings compared with traditional methods,

and to personalize their services and attain the ideal of ‘marketing to a target

audience of one’.

1New dimensions in customeracquisition and management

Chapter overview 3

Introduction 3

The customer-centric revolution: the background 4

Key defining characteristics of how today’s customers view their banks 11

Disintermediation 13

Why opportunities have arisen for newcomers to get in on the act 14

The struggle for survival: the move to the customer-centricbusiness model 18

What exactly do customers want from their retail financial service providers? 21

The strategy of the customer-centric retail financial serviceprovider 22

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New dimensions in customer acquisition and management

CHAPTER OVERVIEW

■ The retail banking world is moving rapidly towards a situation where customers

can choose from one of several delivery channels offering a variety of retail

financial services.

■ There has been a revolution in the way banks and their customers interact. The

days when customers considered it a privilege to be allowed to be a customer

of a bank are over.

■ Customers today typically have relationships with several banks and financial

service providers simultaneously.

■ A retail financial institution can expect success only if it focuses its delivery

channels and its entire culture on meeting customer needs and demonstrating

customer benefits.

■ The new banking industries have created extensive opportunities for newcomers.

Newcomers pose a serious threat to traditional banks because they often have

skills and capabilities that traditional banks do not have.

■ Banks face the serious problem that they provide only payment facilities and

access to money rather than the things that customers really want.

INTRODUCTION

This briefing investigates the most pressing challenge facing the retail financial

services industry today. It is a problem that looks set to challenge the sector

throughout the twenty-first century. It is a challenge that lies at the heart of the

reason why any retail financial services provider (RFSP) is in business.

This challenge is the need for retail financial services players to develop their

operations so as to make the most of the opportunities for delivering services to

customers via a wide range of channels than has ever been available before.

Within the retail financial services industry, the importance of the challenge derives

from its great impact on a provider’s profitability and – in many cases – survival. Put

simply, the challenge cannot be ducked or fudged. It has to be confronted head-on.

A retail financial services provider either has to accommodate its operations to deal

with the challenge or leave the industry. There are no half measures.

The industry is driven by customer choice, customer opportunity, customer

convenience and, ultimately, the ease with which customers can access financial

services and get on with their lives.

The value of this briefing lies in the following areas.

■ It provides comprehensive strategic advice and insight into how major retail

financial services providers are dealing with the challenge and restructuring

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their operations to make the most of the opportunities which the challenge

has generated.

■ It provides tactical information about specific initiatives that leading players

have embarked on in order to meet the challenge.

■ It provides details of senior managers’ thought processes when they envisage

the future of the retail financial services industry.

■ It shows what leading vendors of software, systems and consultancy are doing,

and what offerings they are bringing to market to maximize their market share.

A newcomer to the retail financial services arena might imagine that it is the

providers of retail financial services that have all the bright ideas and

innovation, and that the vendors merely respond to their need. However, the

considerable rewards accruing to vendors that are successful at selling branded

products and consultancy services mean that vendors have every incentive to

devote as much time to researching the field as the institutions do. Furthermore,

vendors are no less likely than institutions to recruit high-calibre executives

with many years of experience in the industry. Many vendors even head-hunt

senior executives from retail financial service institutions. There is consequently

considerable cerebral cross-over in the retail financial services industry between

institutions and the vendors that serve their needs.

■ It provides a consistent and comprehensive picture of customer behaviour.

Institutions and vendors spend a great deal of time and money every year – both

in focus groups and in market research surveys – on researching customer

behaviour as consumers of retail financial services products. It is understandable

that institutions and vendors would want to engage in this activity; after all,

millions of dollars of investment are likely to be at stake. This briefing has been

designed to give you a detailed insight into the customer agenda as it is now, and

as it is likely to develop in the future.

THE CUSTOMER-CENTRIC REVOLUTION:

THE BACKGROUND

Important new business models

Understanding the fast-changing present of the retail financial services sector

involves taking a look at key developments in the sector in the past.

The business model which has been used to run the banking and retail financial

services industries for more than two centuries is finally being superseded by

something completely different. In the computing industry, for example – the

evolution of which is intimately related to the subject matter of this briefing – the


conceptual and social importance of computers and how this has changed over

the past 50 years can best be understood by looking at how the computer model

has evolved.

As processor speeds increased enormously with the invention of transistors and

subsequently the development of the microchip, the model of what a computer

was changed considerably. They went from the size of a room to being sited on a

desk top. The model of what a computer was had become, in effect, a typewriter

attached to a television.

Today, the model of what a computer is is changing again. Desktop computers are

more popular than ever and are rapidly penetrating the domestic market. Already,

in Western Europe, on average about 30 per cent of people have access to a PC at

work or at home and half of these are linked to the Internet. These figures are

expected to climb sharply in the future. The implications of this for Internet-based

banking – one of the principal ‘next-generation’ delivery channels considered in

detail in this briefing – are sweeping and profound. An excellent indication of the

growing importance of Internet banking comes from Datamonitor research which

suggests that between 1999 and 2004 expenditure by banks on information

technology (IT) connected with Internet banking (e-banking) initiatives will increase

at a compound annual growth rate of 30.9 per cent, with the total value of the

e-banking IT market increasing during this period from $360 million in 1999 to

$1.4 billion in 2004. In value terms, Datamonitor research indicates that the most

important market will remain the UK, which will increasingly distance itself from

France and Germany. The strongest growth will be in Italy and the Netherlands, but

from proportionately much lower bases.

Other research suggests that the new model of the computer within society in

general and the banking industry in particular is the ubiquitous or pervasive computer:

that is, the computer that is located exactly where one wants it. It is perfectly possible

that the day will come when people will take it for granted that they will have a

computer nearby at all times. Nor is there anything illogical in this. A quick glance at

the development and deployment of the mobile phone illustrates this point very well.

Yet an ordinary telephone, by definition, offers only one narrow – if extremely

important – level of functionality. A computer, on the other hand, can perform an

extremely wide range of functions. Even today, hand-held or notebook computers

offer as a matter of course word processing, spreadsheet, e-mail, calculator,

calendar, diary, jotter, contacts book, time and Internet access facilities. Yet in time

even this multiplicity of functions is likely to seem function-poor compared with

the richness of computer functionality to come.

Furthermore, until 2005 we are likely to see a quantum leap in terms of

inanimate objects that at present seem anything but ‘intelligent’ being linked –

either permanently or on a regularly sampled basis – to the Internet in order to

provide a user-friendliness of function that seems unthinkable now. There is no

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reason why, for example, a refrigerator should not be linked via the Internet to the

customer’s favourite supermarket’s delivery service to provide information about

which groceries have run out or are running short and which need to be re-ordered.

Similarly, a customer’s personal digital assistant (PDA) – that is, a small mobile

computer that the customer uses as a tool to run some aspects of their life – might

be connected to a Global Positioning Satellite (GPS) system that automatically

provides the customer, via the Internet, with information about the locations of

branches of their bank in a town or city they might be visiting.

It is precisely this kind of advanced, ambitious, mobile and highly feasible

computer application that senior executives with retail financial service providers

spend much of their working lives planning and considering. If there is a sector of

commerce that provides enormous rewards for an intelligent, resourceful and

well-informed approach to using new types of computers for new types of

banking, it is the retail financial services sector.

It is not only computers that have gone through an enormously rapid evolution

of their principal business models. The same can be said of the Internet itself,

which is in an even greater state of flux.

When, in the mid nineties, the Internet first started making a dramatic impact on

the economy and on society as a whole, those companies which made use of it did so

almost entirely thanks to display advertising material. This kind of material does of

course have its uses, but the contemptuous description often applied to it,

‘brochureware’, indicates its limitations as a means of winning competitive edge. One

can certainly say that this initial model of the Internet was, for many organizations,

merely that of a promotional brochure, albeit available in electronic format.

Within a couple of years of the Internet becoming popular, however, a new type

of model had emerged. This did not completely supersede the first model but it

was perceived as more important. It involved existing processes – that is,

important tried and tested business processes – to be carried out via the Web.

Many of the financial services discussed in this briefing belong in this second

category of Internet business models. This category of model sees the Internet as

‘merely’ another way of doing business. For example, a banking service where the

customer is able to check their balance on order statements fits into this second

category which includes business-oriented e-mails. This second Internet business

model is becoming more and more important.

But it is not accurate to regard this as the final type of Internet business model.

There is, in fact, a third type of Internet business model which is slowly starting to

emerge and which in time is likely to become the dominant one. This involves the

development of entirely new processes around the Web which exploit the particular

features of the Internet – especially its capacity to convey simultaneously very

substantial amounts of graphically presented information in an extremely user-

friendly way to millions of terminals around the world.


These new processes are almost always exciting. By its very nature the Internet

creates many opportunities to involve such new processes very quickly. People

often make comparisons between the Industrial Revolution of the early nineteenth

century and the current Internet revolution. To some extent it is a useful

comparison, but generally all that happened during the Industrial Revolution was

that existing processes were made much more effective, productive and rapid by

enormous amounts of power being attached to them and new materials becoming

available which made the finished products far stronger and more suitable for

their final applications than anything that had been produced before. The Internet

revolution, on the other hand, has created the possibility of the processes

themselves being transformed, if not entirely out of recognition, certainly into a

different order of being.

Business models for the banking industry have also undergone enormous and

revolutionary changes. This will be made clear by the discussion in the next section.

The historical role of banks and retail financial services providers

If you had been a prosperous customer of a London bank in 1851, this is the kind of

customer service experience you would have enjoyed. The experience was crystallized

for posterity in the diary of Johann Konrad Fischer, a successful Swiss industrialist.

When I returned to the bank a little before nine o’clock I was shown to a

seat facing a counter where five cashiers conducted their business. At five

minutes to nine the official to whom I had to give my cheque took his place

behind the counter. I had it in my hand and showed it to him. He did not

say a word but emptied several little bags of gold coins into a drawer. Then

he produced the well-known little cash shovel that is used for coins in

banks. And then he just waited. At the stroke of nine he asked me if I

wanted gold or banknotes. I said I wanted gold. He did not count any of the

sovereigns and half-sovereigns but simply weighed them on his scales and

then put them on the counter without taking any further notice of me.

Johann Konrad Fischer

It is true that this was only an over-the-counter interaction with a cashier and even

today such transactions are carried out in a methodical and routine way. The

difference is that this silent, cold, grey attitude which the cashier of 1851 displays to

his customer would have been representative of how the bank interacted with its

customers throughout its organization. This was how banks operated. This was

how banks thought, how they conducted themselves and how they felt they ought

to behave. And what was true of banks was also true of every type of retail financial

service provider, whether insurance company, savings institution or building society.

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Why did nineteenth-century banks and other retail financial service providers

behave like this? Not because Victorian people were inherently any less lively,

cheerful or fun than we are. The Victorians were, in fact, a good deal more lively,

cheerful and fun than we often tend to believe. The reasons why banks and other

retail financial service providers were not, however, very cheerful organizations

had more to do with:

■ the role these organizations played in society;

■ the expectations which their customers had of them.

The nature of the cultural changes in retail financial services

When a new technological implementation of any kind is under discussion, too

many people focus their thinking and energies on the question of how the new

implementation works and what it does. These are, of course, important issues,

but they are strictly secondary to the most important question of all: why bother

to develop and implement the initiative in the first place?

This is the question that needs to be addressed before anything else can be discussed.

Retail financial services providers, and their vendors, need to keep their finger on the

pulse of changes in cultural and social attitudes towards the provision of financial

services. If they don’t, there is no doubt whatsoever that their competitors will.

Making comparisons between attitudes towards retail financial services providers

in the nineteenth century and similar organizations in the twenty-first century is

extremely fruitful and an excellent way to understand the fundamental question:

why? This is particularly so because the basic nature of the retail financial services

products has not changed very significantly. In almost every other industry the

nature of the products or services delivered has changed so much that there is very

little comparison between what is delivered now and what was delivered then: for

example, consider the extent to which transport services have changed during the

past 150 years. But retail financial services have not changed very much, at least in

their essential nature, mainly because the corresponding needs of the people who

buy them have also not changed very much in their essential nature.

It was possible for a creditworthy customer to obtain from a nineteenth-century

bank a savings facility, a cheque-book account, a loan and a system for relaying

funds abroad via internationally accepted letters of credit. Similarly, the types of

insurance available to Victorian customers were much the same as those available

today, although the modern insurance industry insures a much wider range of

risks and has much more sophisticated methods for evaluating premiums than

were available to its nineteenth-century counterpart.

The basic types of services provided by retail financial service organizations

have not changed enormously during the past century and a half. But the methods


by which these services are delivered, the culture of the organizations that provide

them, and the expectations which customers have from them have changed, and

to a phenomenal extent.

Consider the preconceptions of a typical Victorian customer regarding their bank

(and, by extension, other providers of financial services). These preconceptions

would almost certainly have included the following. It is true that the customer

might not have consciously articulated them in this way, but they would have been

in their head, all the same.

Traditional attitudes towards one’s bank

■ ‘The fundamental purpose of my bank is to keep my money and other valuables

such as jewellery, gold and share certificates safe.’

■ ‘I know I live in a society where most people have little or no money and where

the vast majority of the population are hungry and desperate much of the time.

They would be only too glad to get my money and leave me poor like them if

they could get at it.’

■ ‘There is a huge divide in this country between those who have financial

security and those who don’t. Thank God I am one of those who do.’

■ ‘I would be most disconcerted if my bank started being anything less than an

ultra-formal organization which takes its work, and me, extremely seriously.’

■ ‘With the exception of a few eldest sons indulged by their foolish parents,

young people – even those from the best society – rarely have any real money

under their command.’

Twenty-first-century attitudes towards one’s bank

Now consider the preconceptions that the modern bank customer brings to their

interaction with the bank. For convenience and ease of comparison, the various

issues are set down in the same order as above.

■ ‘The fundamental basis of my willingness to be a customer of my bank is that

I believe they are giving me the best deal they possibly can. I look for a good

rate of interest on my savings, convenient access to my money and to payment

facilities, access to information about modern accounts as and when I need it,

and authoritative professional advice about particularly important matters such

as mortgages, stock market investment and pensions.’

■ ‘I take it for granted that my bank keeps my money safe. Of course, I live in a

society where nobody needs to go hungry, but there are always crooks about.’

■ In any event, the term ‘my bank’ is not entirely accurate, because in fact I have

a savings account with one bank, a cheque account with another and a mortgage

with a third. I know this is not how my parents managed things, but I myself am

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entirely used to having relationships with more than one bank, as well as with

several other retail financial services providers.

■ ‘I would be terrified if I felt my bank was indifferent to me. If I thought it was,

I’d take my business away from it at once.’

■ ‘Oh, of course I realize that banks need to appeal to young people nowadays;

after all, many young people seem to have more disposable income than I do! But

I don’t want my bank to seem so informal and ‘youthful’ that I lose confidence in

it. Let’s face it, money is always going to be a serious thing, isn’t it?’

■ ‘I don’t want to indulge in chit-chat with the cashiers who work at my bank,

not because I dislike them but because I’m simply too busy for that. Frankly,

most of the time I’m happy not to need to visit my branch at all and to do

everything via cash machines, the telephone, the Internet or via my television.’

■ ‘I have been with my bank for three years. Before that I was with another bank

for more than ten years, but then my current bank offered me a slightly better

rate of interest on my savings and a gold credit card, so I switched to them. I’m

afraid, as bank customers go, I’m not too loyal. I’d certainly switch again if the

deal was right!’

■ ‘I travel out of town at least twice a week and abroad about once a month. Not

that this causes a problem from the point of view of getting access to money.

Obviously, I can use my cash machine card in any LINK terminal, and there

seem to be LINK terminals all over the place: I’m even finding that an

increasing number of garages and even smallish rural late-night shops have cash

machines in their walls, too.’

■ ‘Of course I take it for granted that I can use my bank’s cash machines and

remote banking facilities to get access to cash, and account information, 24

hours a day, even at 2 a.m. on Christmas morning. I also buy insurance by

phone or via the Internet, and I’m considering a pension plan, details of which

I downloaded via my new digital television.’

Reasons for changes in customers’ attitudes towards their banks

The precise reasons for such wide-ranging changes in the attitude of customers

towards their banks and other financial service providers need not detain us long.

This is, strictly speaking, the province of the sociologist. The profound changes in

society over the past 150 years have been due mainly to economic development.

This has made it feasible for most people to enjoy a comparatively high standard

of living and aspire towards an even higher one.

These changes have gone hand in hand with the deployment of technological

developments which have helped to fulfil egalitarian philosophies by means of an

evolutionary rather than a revolutionary process. It would be difficult to oppose


the viewpoint that people in developed countries have never had it so good.

Furthermore, it is important not to underestimate the changes in cultural attitudes

towards what one can expect from life. Few people nowadays adopt the viewpoint

that certain pleasures and opportunities are not for ‘the likes of us’. Everything

feasible seems possible to many people, and there is every reason why it should.

KEY DEFINING CHARACTERISTICS OF HOW TODAY’S

CUSTOMERS VIEW THEIR BANKS

From the perspective of the retail financial services industry, the following are the

most important key characteristics of customer attitudes and customer expectations.

■ Customers will readily change their bank, or switch to another provider of a

retail financial service they need, if they think they can get a better deal

elsewhere, and they are happy to have relationships with more than one retail

financial services provider.

■ People, including the young, are becoming more and more prosperous, expecting

their bank to offer them deals (and accounts) which are tailored to their own

needs. Young people also tend to be particularly adept at using new, high-tech

service delivery channels and to enjoy doing their banking this way.

■ Customers use branches less and less. There are some caveats here: branches

remain comparatively popular among organizations with corporate accounts

(including small businesses), mainly because businesses like to be able to discuss

things in person with a banker in a branch. Also, some older people (including

some older, wealthier people) like to be able to ‘pop in’ to their branch. There is

a need for some good research about why this is. If it is simply that older people

are less adept with new-style technology than younger ones, then of course in

time, by a natural process, the need for branches will start to erode. But if older

people inherently feel more comfortable with being able to do their banking at

a physical branch, this may limit the extent to which banks can afford to get rid

of branches entirely, especially branches which cater to wealthy customers.

On this particular point, in April 2000, the UK retail bank Barclays suffered

considerable bad publicity stemming from its decision to close more than 100

branches, almost all of which were, tellingly, located in economically depressed

areas. The whole thing was a public relations disaster for Barclays, which seems

to have assumed, incorrectly, that it should close all the branches within a short

time frame and get the bad news over with quickly. The public outcry that

followed may tempt one to believe that there was a backlash against branch

closures, but in fact the branches remained closed and the story soon died down.

If Barclays had managed the PR side of the development more adeptly, it might

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have taken steps to emphasize that in most of the towns in question, it was the

last bank in town anyway. In fact, it could have claimed that it had been more

customer-loyal than its rivals, which had shut up shop long before. In the case of

the Barclays branch closures, as with so many apparently negative business

stories, it was a matter of it being inconvenient for customers: the post offices in

the affected areas are looking forward to boosting their level of business as a

result of collaboration with Barclays to enable the bank’s customers to undertake

counter transactions with the bank across post office counters.

■ Generally, people throughout society are becoming more adept at using high-

tech service delivery technology and – which is even more to the point – are

becoming more familiar with using this technology to do their banking.

Furthermore, they find this way of banking more enjoyable.

■ People are travelling more and more in both their leisure and working lives.

They take for granted that they can access their bank’s services anywhere in

their own country and when they are abroad, too, unless they are travelling in

some very remote area.

■ People who are economically active tend to be getting busier. People do indeed

want access to the best deal in financial services they can obtain, but they also

want to spend absolutely no more than the minimum of time interfacing with

their bank or other retail financial services provider.

The notions of primary and secondary levels of utility

This last point leads on to a fundamental issue which it is essential to address in this

preliminary discussion of the environment in which the next-generation delivery of

retail financial services is actually taking place. The point is that banks and other

providers of retail financial services are condemned, possibly for ever, to only

providing their customers with the means to do what the customer wants to do, or

the means to buy what the customer wants to buy.

In practical terms, these ‘means’ will include access to payment facilities, a loan

facility, an overdraft facility, a mortgage or any other credit facility, and of course

access to cash. These are all services of high utility, but they do not represent the

fulfilment of the customer’s ultimate desire: all they do is give the customer the

means to fulfil that desire.

One can talk, therefore, about a bank or a provider of retail financial services only

being able to offer customers a secondary level of utility. It is the organizations

which provide customers with the things customers want – consumer goods, travel,

new homes, clothes, food and so on – which are providing customers with a primary

level of utility.


Whether the provision of specialized financial services such as insurance and

pensions constitutes secondary or primary level of utility is a debatable point.

Strictly speaking, financial services such as insurance and pensions can only ever

offer customers a tertiary level of utility because what they actually offer is a

possibility of gaining the financial means to buy what they want to buy if certain

events take place.

This, however, is a somewhat pedantic distinction and not very helpful. People

clearly realize the importance of insurance, just as they realize the importance of

pensions, and these services do have a kind of primary utility in that they are useful

in themselves. But when all is said and done customers are never going to get over-

excited about insurance or pensions. In the retail financial services industry, it is often

said that these are products that need to be sold and that customers rarely buy of

their own volition. This very point sums up how customers tend to feel about them.

In other words, the banks and retail financial service providers are fighting a

competitive battle with one hand tied behind their backs. This is not to say that

banks do not have some serious weaponry for the struggle. For example, they are

often comparatively wealthy organizations (although not always as wealthy as the

public imagines them to be). Because they can afford to pay high salaries they can

attract high-calibre people across their entire operations, from operational

managers to technology experts and those who mastermind strategic change. Such

high-calibre people are an essential resource in the competitive battle. Another

important point is that banks have a branding which wins customer confidence

and in effect obliges customers to take them seriously.

DISINTERMEDIATION

Despite these last-mentioned factors which in a sense provide a counterbalance, the

handicap of being able to offer customers only a secondary level of utility remains

a serious one. It inevitably leads on to the most serious fear which banks and many

other retail financial service providers have: the fear of disintermediation.

Disintermediation describes the omission of an intermediary – usually a traditional

intermediary – from a process. It can happen in almost every industry, but it is a

particular problem for traditional banks. Why? Because they provide only a

secondary level of utility to customers and as such are inevitably handicapped when

competing against newcomers which are able to provide a primary level of utility.

This is not, however, the only advantage newcomers have over banks. If it were,

bankers could sleep more soundly at night. Other advantages which newcomers have

over traditional banks are discussed below.

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WHY OPPORTUNITIES HAVE ARISEN FOR NEWCOMERS

TO GET IN ON THE ACT

For a long time governments have been pursuing policies which protect existing

industries and existing commercial organizations, and encouraging competition.

During the past 20 years, the general consensus among all governments is that the

need to encourage efficiency within industry and commerce is, ultimately, more

important than the temptation to protect existing national industries and

organizations from competition.

Margaret Thatcher, Britain’s Conservative Prime Minister of the eighties, preached

and implemented a gospel of free competition, pursuing policies which deliberately

set out to deregulate many previously protected industrial and commercial sectors.

Similar policies were pursued during the same period in the United States and indeed

these policies also spread to much of Continental Europe and the Far East.

Ironically, one of the initial consequences of deregulation is often actually to

tighten existing statutes which apply to an industrial or commercial sector.

However, this is not done to restrict entry to these sectors but rather to lay down

very precisely the criteria which an organization must follow if it wishes to enter

these sectors. Once these criteria have been laid down and existing favouritism and

privileged trading practices dismantled (in the financial industries of the eighties in

the UK and the US this was no mean achievement), any new organization which is

able to meet the criteria for entry to the sector can, in principle, do so.

The proliferation of technology in a sector also tends to be a factor that encourages

newcomers into the sector. Almost by definition, technology is a democratizing force.

Any organization which can afford to deploy it can, other things being equal, become

a player in the sector in question.

Indeed, newcomers often start with one inherent advantage here because they,

unlike existing players, are not handicapped by technology that is old-fashioned

and constitutes a legacy system that is an obstacle to technological modernization.

Thus, they are able to make a great deal of headway very rapidly. Additionally,

customers are always looking for a good deal and will often migrate to a new

player, whether this is a bank or type of retail financial services organization, if

that player is offering them a better deal.

Who are the newcomers?

Newcomers in any field tend to come in a great variety of shapes and sizes, and

so do the newcomers entering the banking industry today. Of course, to call them

‘newcomers’ at all is slightly to beg the question as far as their status is concerned.

From their point of view they are not newcomers but simply energetic, resourceful


businesses, hungry for profitability and market share, and exploiting an exciting

and potentially lucrative commercial opportunity. However, the challenge they

pose is a frightening one and most definitely questions the entire assumption of

the need for a traditional banking industry.

Newcomers potentially consist of almost any type of organization which has the

financial resources to launch a workable virtual banking resource and to maintain it

during the first couple of years when profitability is likely to be low or non-existent,

and which has the inclination to move into the banking sector.

One should not rule out any large organizations as potential entrants. After all, if

General Motors can buy and make a success of an organization like Electronic Data

Services (EDS), which is in a very different business from that of making motor cars,

it should not be difficult for any large organization to move into banking.

As one might expect, the types of organizations most likely to move into banking

are large retailers with substantial customer bases and a high profile among the

general public. After retailers, the next most likely class of organization appears to

be financial services organizations (such as insurance companies and investment

companies) which already have a track record – and often a very lengthy one – of

supplying financial services to the public. The next most likely class to get involved

in banking appears to be telecommunications (telco) organizations, which already

have networks set up through which virtual banking services might be delivered.

Whatever the nature of the newcomer, it will obviously have decided that

entering the banking business makes sense to it from a commercial standpoint. In

order to investigate the nature of the competitive threat posed by these

newcomers, we need to confront the precise reasons why they are so well placed

to become bankers, and also look at problems they face in their endeavour.

Reasons why newcomers may be well placed to enter thebanking business

Assuming that we are talking here about a newcomer which fits into one of the

three categories listed above (large retailer, large financial services company and

large telco), the reasons why entering the banking business will probably make

sense for them are as follows, in order of importance.

■ The newcomer is likely to have a widely recognized brand name. It is infinitely

easier for an organization to win the public’s confidence in a new venture if the

organization has already won their confidence with another type of venture. Large

retailers have by definition a considerable number of loyal customers who associate

them with the generally positive experience of doing their weekly shopping on the

retailer’s premises. The notion of the experiences being positive is important. The

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importance of weekly visits to supermarkets and superstores is being increasingly

recognized by sociologists as an important part of the fabric of modern life.

In the case of financial services companies, the association with agreeable

weekly shopping visits will not apply in the same way, but should be readily

compensated for by the solid reputation they will presumably have built up.

Telcos have the least advantage in this respect, since even though their name is

likely to be well known to the public, there will be little truly advantageous brand

association. Most people take their telecommunications companies for granted

and do not think much about the name of the company that supplies this basic

utility. One might say that telecommunications companies are handicapped by

the fact of their service being supplied in a virtual way from the outset.

■ The newcomer will have a large customer base and will be ideally placed to

market the new service to it. Next to the brand name, customer base will be the

newcomer’s most valuable resource, in terms of both its entry to the banking

sector and its commercial activities generally. Furthermore, modern marketing

methods – including a variety of methods which enable the buying potential of

different customers to be assessed with considerable accuracy – greatly assist

with maximizing the success rate from marketing new types of service, such as

banking services, to customers.

■ The newcomer will have considerable financial resources. Entering the banking

business is extremely expensive and, as we have seen, is unlikely to produce

much in the way of return for the first year or so. It is consequently essential

that the organization entering the market is well funded. The organization also

needs financial credibility and creditworthiness to a level beyond any suspicion

that it would ever default on its liabilities. All developed countries nowadays

have extremely stringent regulatory requirements which any organization

entering the banking sector, or for that matter already in it, must comply with.

In the case of large retailers, financial services organizations or telecom-

munications companies, the requisite levels of financial resources will almost

always be in place. Furthermore, these types of organizations frequently have

better credit ratings than many traditional banks (this is particularly true in the

US). While the average customer is unlikely to be aware of the credit rating of

a traditional bank compared with that of a newcomer, the organizations with

better credit ratings can borrow money (by the issuing of bonds) more cheaply

than those whose ratings are not so good, and this gives them an in-built

commercial advantage.

■ The newcomer will already be experienced at operating in a highly competitive

environment. In the vast majority of developed countries the banking industry

has been extremely competitive for at least ten years. Prior to that, restrictions

on who could enter the industry, coupled with the persistence of traditional


ideas that having a bank account was some kind of privilege, meant that many

traditional banks were not especially effective at operating in a highly

competitive environment.

Even though the time when banking was – arguably – too respectable and

uncompetitive for its own good has passed, many traditional banks still, to

some extent, appear to regard fierce competition as somewhat below them and

still consider that they have a God-given right to their customer base.

Newcomers to the industry – especially if they are in the three categories

identified and consequently used to operating within highly competitive markets

(admittedly, this is less true of telecommunications companies but it applies to

some extent) – will be adept at competing fiercely and consequently they have

an edge over traditional banks in this respect.

Problems newcomers may face

In addition to the advantages newcomers are likely to enjoy from the perspective

of competing with traditional banks, they will inevitably face some problems.

These, listed in order of severity, are as follows.

■ The newcomer is unlikely to have a track record of operating in the banking or

financial services industry. This is an obvious problem for newcomers, but its

obviousness does not detract from its severity. It amounts to just about the only

thing the traditional banks have going for them in a competitive sense in relation

to the threat posed by the newcomers. The public will not automatically associate

the newcomer with being a provider of banking services, and consequently the

newcomer will have to launch a vigorous marketing initiative to project itself in

this way to its potential customers.

However, there is ample evidence that customers quickly get used to the idea

of a new organization offering banking services, especially if the organization

is one with which they are already familiar.

Furthermore, the point that newcomers will not have experience of offering

banking services and delivering them is not really a valid one. The whole point

of the virtual banking revolution is that an organization can buy in the requisite

delivery technology, as well as specialized banking expertise (from a consultancy

or simply by hiring banking specialists), and set up a bank from scratch.

■ The newcomer may initially be restricted to relatively unprofitable customers.

This is not such an obvious problem as the first, but it is likely to be more

persistent. The point is that newcomers to any banking industry frequently find

themselves landed with customers who are not particularly creditworthy and not

especially rich. This is because more creditworthy and wealthier customers are

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likely to have their banking arrangements already deeply embedded in a

relationship with a traditional bank. As such, they are unlikely to want to change

those arrangements unless a very good incentive is offered to them for doing so.

There is also the status factor, especially in countries like the US and the UK,

where personal status – and implicit differences in status – is an important part

of general culture. For example, a London-based customer of Coutts Bank is

unlikely to want to become a customer of Sainsbury’s Bank without a great deal

of persuasion. Some say that this problem is not as severe as it might seem,

because there is plenty of money to be made from less wealthy customers as long

as stringent credit-testing procedures are put in place. Furthermore, wealthier

customers might move to the newcomer in time if the newcomer is perceived as

offering a consistently good deal.

■ The newcomer’s entry will be credible only if the technology it deploys is extremely

reliable and its staff are highly trained in customer service. This is not so much a

problem as a warning. Clearly, a newcomer’s technology and remote delivery

systems will have to work to the highest level of efficiency if the newcomer is to

establish and maintain its competitive credibility. Similarly, customer service staff

deployed by the newcomer must be highly trained in the often difficult and sensitive

business of handling bank accounts and providing advice on financial matters.

Fortunately for their customers and themselves, newcomers understand the

need for technological infrastructures and staff capabilities to be of the utmost

quality. Which is essential. If you are delivering a banking service via remote

channels and making use of telephone staff to assist customers, these are your

only resources and they have got to be of superb quality.

THE STRUGGLE FOR SURVIVAL: THE MOVE TO THE

CUSTOMER-CENTRIC BUSINESS MODEL

The outline above has made three fundamental points that govern every new

development in the retail financial services industry.

1 The relationship between an RFSP and the customer has changed profoundly

in the areas of increased informality, vastly increased customer awareness of

choice and tendency for customers to have relationships with more than one

RFSP simultaneously.

2 RFSPs have had to confront the fundamental problem that they are inevitably

only supplying a secondary level of utility rather than a primary level.

3 As a result of both the above two points, newcomers have enormous scope and

opportunity for entering the retail financial services industry.


The scenario created by these points means that in today’s retail financial services

marketplace, a battle for survival is being fought which has a fearlessness,

desperation, tumult and energy that has never been seen before in this traditionally

reserved, cautious industry.

It is not only the traditional banks that are fighting for market share, profitability

and even survival: the newcomers are in exactly the same position.

One significant difference between the experiences of the traditional players and

the newcomers is that, almost by definition, a newcomer cannot be profitable

from the outset. The level of initial and continued investment necessary – heavy

expenditure must be made on infrastructure, technology, staff and marketing – is

comparable with the level of investment necessary to establish some presence as a

start-up in a major industry such as the car manufacture business.

Many newcomers do not envisage profitability for five or even ten years. The

fact that they can move into the banking and financial services business at all is

due only to the financial resources of the much bigger organization of which they

are a part. The umbrella organization covers the losses, provides encouragement,

judgement, contacts and strategic direction of the whole enterprise.

No bank or venture capitalist would lend money to a newcomer that wanted to

create from scratch a presence in the retail financial services industry: the

financials simply do not add up. The only way to finance such an initiative is for

a major organization to take the decision that it is worth enduring many years of

unprofitability, and even considerable losses, in order to gain a foothold in what

can be an enormously profitable industry, once market share has been won.

The retail financial services business is so vast, and has so many players today

in every developed country and most developing ones, that conducting a useful

analysis of it, investigating what exactly is motivating the players in the industry,

may seem a daunting, even impossible task. But in fact it is not. The truth is that

despite the breadth, number of players and sheer size of the industry, most players

are trying to achieve the same goals.

They are all seeking to make themselves as attractive as they possibly can to

their customers. To use the slightly irritating but nonetheless widely used

terminology employed in the retail financial services business: all the players are

seeking to turn themselves into a truly customer-centric organization.

There is no readily available and widely accepted definition of what a customer-

centric organization actually is, so it is necessary to create a definition for the rigorous

analysis of the industry required in this briefing. A useful definition would be:

An organization which bases and focuses its entire operations, business

strategy and culture around the prime directive of maximizing the quality of

its customer service and customer attentiveness.

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A player in the retail financial services industry which not only believes this creed

but also implements it with real energy, creativity, wisdom – and money – might

be considered to be entitled to call itself a customer-centric organization.

Retail financial service providers do not set out to be customer-centric for reasons

of altruism or social responsibility. They do so because all the evidence thrown up

by customer surveys, user focus groups, industry strategists and marketing activity

proves beyond question that the only route to success for a retail financial services

provider is to maximize the appeal of its overall service and specific products to

customers. There is always going to be a trade-off between the need to appeal to

customers and the need to do so in a cost-effective way.

Applying sensible business thinking to the issue, one can see really quite easily

that all the providers in the marketplace are basically doomed to offer customers

very similar deals and products. The only real advantage for which one can hope

lies in the area of brand strength, for it is possible that a real innovator may retain

a stronger branding over rivals beyond the point at which rivals are all offering a

similar product or service.

This is not to say that there are no opportunities for a provider to gain an edge

over its rivals by coming up with a particularly original idea, translating this into

product innovation and winning market share from this. But it is impossible to

patent such ideas and any good ruse is going to be imitated by competitors sooner

rather than later.

A good example is the enormous success which the UK ‘insurance by telephone’

organization Direct Line achieved in the early nineties from its innovative, but now

obvious, strategy of selling insurance over the telephone. It enabled the company to

build up an enormous customer base very rapidly, and make multi-millionaires of the

founders in the process. However, within a couple of years the UK insurance industry

was full of rival organizations that had done exactly the same thing, although Direct

Line has retained its brand strength. How significant a competitive weapon this

brand strength actually is remains a debatable point, although it must be said that all

the founders of Direct Line have cashed in their chips and sold the organization to a

traditional bank. This seems to suggest that they do not consider the Direct Line

brand strength, while undoubtedly strong, to give it a huge advantage over rival

organizations offering similar products and services.

No industry with an edge derived from product innovation can maintain it for

long due to the inevitability of effective competitor imitation. We can look to the

airline industry for an example.

Because airlines all fly basically the same planes, charge similar prices, use the

same airport within a specific geographical location and offer comparable journey

times, they are in a difficult competitive position. It is hard for an individual

airline to differentiate itself from its rivals. Yet they need to try to do so, because


anti-trust legislation prevents them from merging into one or more super-giant

airlines and thus they must each strive for maximum profitability.

The way they do this is evident from any examination of the advertisements they

put out. These advertisements almost always focus solely on what really are very

marginal advantages that relate to quality of customer service. Leg room is an

extremely popular one, with some airlines now going so far as to offer business

travellers a bed for long-haul flights. The beauty of air hostesses is another

(strictly speaking, in these days of sexual equality, the handsomeness of stewards

should also be promoted, but it never seems to be). The quality of the food served

is yet another popular focus of attempts to differentiate, and even the nature of

the cutlery and crockery used is promoted.

But the point is made. In a highly competitive marketplace where there is a

strong element of commoditization in the nature of the products or services

supplied, differentiation can only really take place in terms of the quality of

service provided. Whether or not the differentiation is a genuine one is of little

concern; what’s important is that one retail financial services provider can derive

a lasting edge over its rivals through customer service and branding.

WHAT EXACTLY DO CUSTOMERS WANT FROM THEIR

RETAIL FINANCIAL SERVICE PROVIDERS?

Financial service providers are continually undertaking customer surveys addressing

this particular issue. The validity of many of the findings of these surveys is

questionable. Too many of them feature loaded questions (e.g. what is it you most

like about Internet banking?) and the survey samples are often too small. Even if it

seemed useful to quote examples of such surveys and the findings they have thrown

up, space would prevent more than a highly unrepresentative sample of such

findings to be set down. Instead, it seems to make more sense to provide certain

composite conclusions from a range of surveys that seem more reliable than most

and whose findings also appear to be supported by common sense and general

observation of the industry. These findings are as follows.

■ Customers do not interface with their bank or other retail financial services

provider for fun but to obtain access to cash, payment facilities and financial

services.

■ In the vast majority of cases, customers are only too happy to avoid visiting

their branch.

■ Customers like using the high-tech delivery channels deployed by their banks or

other financial service providers, not for the inherent pleasure of doing so, but

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because these services allow them to access the banking and financial services

facilities they need quickly, conveniently, round the clock and from home.

■ Customers don’t care about the technology that is delivering these services to

them; all they care about is the end-stage benefits it brings them.

■ Many consumers find insurance and investment products difficult to

understand and frequently feel that these are sold in an intimidating way.

Consumers are therefore highly susceptible to buying these products from a

large, well-known bank.

■ Despite customers’ desire for quick, convenient and round-the-clock access to

banking and other financial services, there are certain financial services that

they perceive quite rightly as more momentous and complex than others.

Examples would be mortgages, pensions, some loan facilities and some more

sophisticated forms of insurance. Many customers – though by no means all –

still prefer to receive information about these more complex types of services

from a sales consultant or adviser about whom they feel confident rather than

via a machine.

■ The retail financial services industry often talks about the ‘value proposition’ of

a type of product or service to customers in a very jargonistic, and sometimes

even quite cynical, way. It is important for institutions to keep in mind that the

vast majority of customers have no idea what the term ‘value proposition’

means, and wouldn’t care about it even if they did. All they care about is the

practical benefit and advantage which a new service offers to them, which

almost always means the speed, convenience and availability of the banking

service. It is hardly possible to overstate the importance of the customer

perception that time spent interfacing with a bank or other retail financial

service provider is ‘dead time’ and that the sooner they can get on to doing

something more interesting, the better. This driver – essentially a purely

psychological one – is what has made today’s high-tech retail financial services

industry possible: customers have been more than happy to accept and use the

new delivery systems it brings.

THE STRATEGY OF THE CUSTOMER-CENTRIC RETAIL

FINANCIAL SERVICE PROVIDER

We have seen that a customer-centric retail financial service provider is focused

entirely around delivering retail financial services products in such a way as to

maximize the level of satisfaction it extends to customers. Or, to use industry

jargon, to maximize the sum of the value propositions it extends to customers.


What strategies should govern the development of such an organization?

The prime directive of a customer-centric retail financial service provider is to

maximize profits by winning the maximum amount of profitable business from

new and existing customers and carrying out this business by minimizing risk and

minimizing costs.

The secondary directive of a customer-centric retail financial service provider stems

directly from the primary directive. Cost reduction is important in every industry; in

the retail financial services industry, where by definition an institution is aiming to

provide a comprehensive range of services to the widest customer base via a number

of delivery channels, cost is absolutely fundamental to being in business.

After overall profit, the most important financial statistic for a retail financial

services provider is the cost–income ratio. This is a straightforward statement of

the cost (including overheads and ongoing running costs) of providing a service to

customers expressed as a percentage of the income which the institution receives

from providing the service. The lower the cost–income ratio, the less of the

income is being swallowed up in cost.

For example, the cost–income ratio of a mortgage product is the cost of

overheads such as that of selling and marketing the products (different institutions

have different ways of calculating this) divided by the net interest which the

institution receives from customers. (It is of course net interest that must be

considered because the institution will itself have to pay a price for the money it

has made available to customers: the net interest is what matters.)

The reason why high-tech delivery channels are so attractive to banks and other

providers is basically very simple. The cost–income ratio of most traditional

banking products and services tends to be very high: frequently 60–70 per cent.

Traditional banking products and services here means those which are delivered

via a branch. The enormous cost of bricks-and-mortar branches is one of the

primary factors governing the development of today’s banking and retail financial

services industry. As the cost–income ratio figures just quoted indicate, it is

perfectly possible that an institution will have to spend around £600,000 on

overheads to obtain a net income of £1 million. Because the cost–income ratio is

so important, many bank merger and takeover battles are fought to a considerable

extent over the validity of the would-be owners’ claims that they can reduce the

cost–income ratio to a significant extent.

The cost–income ratio for a product or service delivered remotely is much lower

than that for one delivered via the branch. In many cases it can be as low as 20

per cent. The reason for this is not difficult to fathom. Remote delivery of services

means that the channel being used is primarily an electronic one, whereas when a

service is delivered via a branch, the channel is primarily a human one, with the

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people in question operating within a physical structure. It is, to use shorthand, a

question of ‘clicks’ versus ‘bricks’. Like most such jargonistic polarizations, this is

a fairly clumsy way of describing the situation, because in practice a bank is

aiming to create a seamless interface with customers which in effect makes use of

electronic delivery channels and virtual delivery channels simultaneously. As Fig.

1.1 demonstrates, a typical RFSP which already operates a branch network has in

the past tended to conceptualize the creation of additional electronic delivery

networks in terms of them being virtual extensions of the branch network itself.

This is yet another business model that many RFSPs have used.

Fig. 1.1 The virtual banking facility as an extension of a traditionalbank’s branch network

Source: Accenture Report (2001) ‘The winners and losers in the next generation delivery of financial services.’

Whether this model is a valid one or not is a matter of debate. It is a conceptual-

ization that works for many RFSPs which are committed to retaining their branch

network. One interesting feature of the retail financial services industry today is

that institutions with a branch network already in place have a very different

attitude towards such networks than do those which are starting out from scratch

and using only the electronic delivery channel. Generally, institutions with a branch

network in place invariably say that branches will continue to play a major role in

retail financial services for the foreseeable future. Institutions which are starting

out in the industry via electronic delivery channels, on the other hand, tend to

support the opposite view: they do not see branches as necessary at all, and are

fond of vocalizing this belief at many industry conferences and seminars!

Physical channels

Traditionalbranch of bank

Electronic channels


It is undeniable that delivering a retail financial service via electronic channels

is significantly cheaper than doing so via a branch network. The school of thought

that states all branches are doomed in the long term is probably close to the mark.

Certainly, the conceptual business model used by many newcomers that are

operating in an entirely virtual way is radically different from that in Fig. 1.1.

Their conceptual model tends to be rather like a cycle wheel, with the spokes

radiating out from the organization at the centre to the customers on the

periphery. The logic of a line being drawn around the circumference is that in

some communities of customers of e-RFSPs there is scope for customers to

communicate with one another, such as by e-mail. This is, for example, the case

with the online financial services organization E*TRADE, profiled in Chapter 3.

The second type of model used by new entrants is shown in Fig. 1.2.

Fig. 1.2 Customer interaction model for an RFSP with no branch network

Source: Accenture Report (2001) ‘The winners and losers in the next generation delivery of financial services.’

Can one say that one of the above two business models is ‘better’ or ‘more correct’

than the other? The answer is, no. They are both, in effect, ways of meeting the same

challenge: to maximize the quality of customer service provided to retail financial

services customers. As so often in business, an organization’s vested interests tend to

determine the perspective it takes on a situation. Not because organizations are

hypocritical, but because their culture and way of doing business are inevitably

based on their own resources.

25

Customers

RFSP

Customers

Interactivecommunications

26


So what needs to be said about branches? Exactly how likely is it that they will

continue to play a key role in the retail financial services industry? Consultants

working in the industry tend to be dismissive of branches. Nick Masterson-Jones, for

example, a UK-based consultant with the e-business consultancy Charteris, comments:

The branch networks that RFSPs operate will continue to shrink as the bulk

of the population switches to Internet banking. The 14 000 branches of

retail banks (in the UK) will probably be reduced by anything up to 75 per

cent. The only branches likely to survive will be those which satisfy normal

retail business hurdles such as sales per square foot. The idea of a branch as

a place which a bank provides to allow its customers to carry out simple

banking transactions will seem laughable.

Nick Masterson-Jones, Charteris

Masterson-Jones’s radical comments on the question of the future of branches are

interesting in the light of his relatively conservative perspective of the future of

cash. On this front he says:

Don’t expect cash to disappear. It was forecast in 1990 that by the year

2000 we would all be using electronic purses. This ignores the fact that there

is still, and for the foreseeable future is going to be, a demand for

completely untraceable, unauditable transactions.

Nick Masterson-Jones, Charteris

He might have added that there is considerable evidence from customer surveys

that customers enjoy the speed and convenience of using cash as well as the fact

that it is particularly useful for small transactions (less than around £20). Even

today, in a retail industry which is certainly making more and more use of

electronic channels, many shops either do not accept electronic payments for

transactions much below £5 or make disincentive charges.

In fact, the radical perspective that branches are likely to reduce in number to

the extent that Masterson-Jones suggests is vigorously opposed by many senior

executives in RFSPs themselves – even executives who are actively responsible for

new channel development. The idea that branches are increasingly irrelevant in

the retail financial services industry is a highly dubious one.

For one thing, RFSPs need physical locations where they can meet with their

customers for the selling of complex and potentially emotionally fraught products

such as mortgages, pensions and insurance. It may be that by around 2005 a

substantial majority of customers will be prepared to purchase these complex products

via a remote delivery system, but there is no definite proof that this will be so.


Furthermore, even if a majority of customers are prepared to buy these services

remotely, there may still remain a core who prefer to buy the services via a branch,

and whom the institution continues to find it profitable to serve in this way.

There is no data available to support the fact that consumers are willing to buy

such complicated products via an electronic channel such as the Internet. However,

Ian Ogilvie, head of electronic services at HSBC in the UK, says:

Our own research suggests that there is limited correlation between the

value of a complex product such as a mortgage and the likelihood that a

customer would prefer to buy it via one channel or another. Instead, we

have found the correlation to lie in the customer’s attitude towards

technology and how they like to manage their personal banking. In

particular, we have found two factors to be important. These are:

■ people’s self-confidence in using self-service banking techniques;

■ how comfortable people are with technology.

We believe these are the factors that matter, and that the value or complexity

of the product in question are not the crucial issues.

Ian Ogilvie

Even if RFSPs are uncertain whether they are likely to sell more ‘complex

products’ via their branches than via remote delivery systems, branches are an

important means of advertising complex products to customers. Any retail

institution’s branch will nowadays feature numerous posters and other

promotional material. It is clear that no matter how committed institutions are to

their new electronic delivery channels, they continue to see physical branches as

important promotional points and are in effect promoting complex products to

customers who enter the branch to carry out routine transactions.

This is a paradox of course, because from a cost perspective it makes no sense

for institutions to deliver routine transactions across a counter in a branch.

Customers who enter a branch to cash a cheque are absolutely anathema to

institutions that prefer such customers to use electronic channels. Conservative

estimates of the cost of handling a routine transaction via a bricks-and-mortar

branch are that it will typically cost an institution around £20 to service such a

transaction if costs of human labour, premises and electronic systems (and it

should be remembered that electronic systems are also necessary to handle a

routine transaction) are factored in.

However, it is doubtful whether the only function of a branch is to provide a

means for customers to conduct complex transactions and to promote such

transactions. Branches also have a social function as the epicentre of a customer’s

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own banking relationship. Even customers who hardly ever go into their branches

generally like to feel that there is a branch in the vicinity if they did want to use it.

There is also the practical consideration that it is difficult to make deposits at an

institution if there is no physical branch available. Customers can use the postal service

and many entirely virtual banks do accept deposits in this way, but only because there

is little choice. Otherwise, deposits can only be accepted in branches during opening

hours or via lobby ATMs which have deposit facilities. The latter still requires that the

customer has access to a branch of their own institution, even though they may visit

the branch outside office hours to make the deposit. For practical reasons, it is not

usually possible for customers to make deposits at lobby or through-the-wall ATMs

operated by another institution. It is interesting that consultants who expound on the

uselessness of branches frequently ignore the problem of making deposits. It is true

that in the future, electronic funds transfer will be used more and more, and it is also

true that many countries – notably Scandinavian ones – have almost entirely

eliminated cheques from their banking system, with the vast majority of deposits being

made by the bank giro system. But it is surely unrealistic to assume that customers will

cease to want to make deposits in branches.

The reality of banking for many people is that it is primarily a ‘local’ activity. It

is certainly true that there will be considerable reductions in the number of

branches operated by banks, partly as a consequence of consolidation and merging

between banks which means, for example, that a merged bank’s two or three

branches in a small town can simply be reduced to one. But it seems unlikely that

the number of branches in a particular country will be reduced by anything like as

great an amount as Masterson-Jones’s 75 per cent. It is probably much more likely

that every institution with a branch representation in a particular town will want

to retain that representation given that the branch itself retains a sufficiently high

level of profitability.

The strategy of a customer-centric RFSP which already has branch representation is

therefore likely to be based around deploying virtual banking systems – that is, new

channels – which in effect, enhance the branch service rather than seek to replace it in

its entirety. Certainly, the institution will be motivated to transfer as high a proportion

as feasible of routine transactions from the branch to the electronic domain, but as we

have seen, there may be a commercial disadvantage to replacing the branch entirely.

What if the institution does not have a branch presence?

In this case, the institution will, frankly, have little choice other than to offer a

fully remote service based around existing delivery channels and new ones that

might develop in the future. As things stand in August 2001, the range of remote

delivery channels available to all types of financial institution is as follows.


Automated teller machines (ATMs)

Bankers in one country often not realize to what extent the functions offered via

ATMs differ in other countries. One of the great advantages of ATMs is their

enormous flexibility, their capacity for rapid deployment and their relatively

modest unit cost. It should be noted, however, that unit cost is only one element of

the cost of operating an ATM. ATMs are so important as a means of delivering

financial services remotely that an entire chapter in this briefing is devoted to them.

Electronic funds transfer at point of sale (EFTPoS)

In its various forms (including instant debit against a standard current account,

instant debit against a credit account and postponed debit against either of these

two accounts), EFTPoS, also known as debit, is scarcely less popular today in the

retail financial services industry than ATMs themselves. It has revolutionized

payment, enabling customers to purchase goods at the point of sale (POS) without

the need to produce cash or cheques. Furthermore, the popularity of the function

whereby customers can actually obtain cash from a POS has meant that retail

outlets do not need to end the day with so much cash in their tills and that

customers can in effect use the POS as a source of cash withdrawal.

Telephone banking

This also comes in various forms. Some telephone banking systems make use only

of human operators who provide what is essentially a branch-based banking

service via the telephone, with the sole exception that it is – obviously – not

possible to withdraw cash or deposit funds via the phone. But even the

impossibility (on the face of it) of withdrawing cash via the phone can in fact be

circumvented by the use of an electronic purse that is loaded via a specially

designed remote terminal. These remote terminals have been an important part of

many electronic purse schemes such as Mondex, which was piloted in the UK and

Brussels, and has laid the foundations for more widespread electronic purse

systems being deployed in the future.

Internet banking

As the name suggests, this is the provision of a banking system via the Internet. The

nature of Internet systems, and the functions they provide, varies considerably. All

are to some extent constrained by the needs of maximizing security, which

explains, for example, why no Internet banking system anywhere in the world is

yet offering customers the facility to transfer any amount of funds from their

account to any named bank account in the world. There is simply too great a

danger of security breaches and the bank’s subsequent liability.

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Interactive digital television (iDTV)

This is a means of using spare channels on a digital television system to provide a

banking service which offers interactive capabilities. This poses the challenge of

being particularly user-friendly because people associate television with

entertainment and will take it for granted that the service will be both easy to use

and fundamentally entertaining. It is a great growth area in the retail financial

services industry and we are only at the start of it.

An essential strategic point to make here is that RFSPs need to ensure that as far

as possible they are delivering banking services which make full use of the remote

delivery channel, at a practical, technological and conceptual level. We have

already seen how the third stage of Internet deployment (that is the Internet has

allowed some more complex transactions to be carried out in a DIY manner)

involves the development of completely new processes that exploit key features of

the Internet. This is also true of state-of-the-art implementations of retail financial

services based around the above delivery channels. To take just one example, the

former Halifax Building Society scored an immense success in the eighties by

developing a new type of bank account which not only gave customers the

opportunity to access it via an ATM but was actively based around the ATM. The

product was known as ‘CardCash’ and helped to popularize the use of ATMs as

a key element in customers’ personal banking activities.

This is not to say that simply providing a traditional service via one or more

remote channels cannot be a highly successful way of doing business. The UK and

now worldwide telephone insurance company Direct Line achieved phenomenal

success during the nineties by selling an extremely traditional product (insurance)

via a traditional enough channel (the telephone), but one which had never been

properly exploited for selling insurance.

Direct Line was a model of how a new channel can be deployed within the retail

financial services industry with enormous effect, but institutions should not allow

themselves to be limited in their strategic approach towards exploiting these new

channels to merely delivering traditional services on them. Instead, they need to

think hard about how they can create new products and services which exploit all

the technological and operational elements of the new channel. There is plenty of

room for creativity here.

Additional tools available to customer-centric retail financialservice providers

In addition to the range of remote delivery channels outlined above, there are

other important tools which need to be mentioned. These are datamining systems,

branding initiatives and call centres.


Datamining

This covers a variety of techniques deployed in order to get the best handle on data

that has been gathered by an organization: with ‘best’ in this context meaning an

analytical control of data and ideally also a means of gathering customer data in a

central repository and making it available for use in a wide variety of remote

delivery channels; indeed, all the delivery channels discussed above.

For most RFSPs today, customer information is a severely under-utilized asset.

In many respects it is one of the most precious assets an RFSP has, but few – if

any – are making the most of it. The vast majority underestimate how important

customer information is to them, and as a result come nowhere near extracting

the maximum benefit from it.

As RFSPs have become aware of the opportunities locked up in their data, the

computing industry and consulting gurus have come up with a popular, if hotly

debated, term to describe this whole process of seeing data as a dynamic and

potentially extremely valuable tool: data warehousing.

Data warehousing is best understood in terms of an RFSP’s essential need to

capitalize on the true value of the customer information it holds. By looking at

customer information in this way, we can categorize data warehousing as a means

of exploiting the value of what is essentially a hidden asset of the RFSP.

For RFSPs operating in today’s world – and this applies in whatever country an

RFSP is doing business in and whatever type of business the RFSP is handling –

the challenge to retain the most profitable customers, sell them more products and

services, and find more of them is becoming increasingly difficult to meet. This is

partly a result of the increasing sophistication of the customer, partly the result of

a broadening in the traditional marketplace (e.g. UK building societies now offer

a comprehensive range of banking services) and partly a result of the fact that

retailers, supermarkets and entrepreneurs of all kinds are offering ever more

appealing packages of services to customers. The traditional providers of banking

services know they must rise to the challenge or risk being eliminated.

In order for any bank or other type of financial services organization to compete

successfully in a highly competitive industry – and for newcomers to the industry

to make the most of their competitive challenge – it is essential that organizations

offering banking services are able to identify who their most profitable customers

are. The types of questions which banking organizations must get into the habit

of asking and be able to answer are:

■ Who are my customers?

■ What products and services do they want?

■ What is the lifetime value of specific customer types?

■ How can I improve the lifetime value of individual customers?

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■ What products/services are most profitable and how should we be assessing

this profitability?

■ What services can we expect the customer to want to buy?

■ Where can we find new customers and how can we identify them?

■ How can our marketing campaigns by more effectively targeted?

■ How can an assessment of a product’s value be made, in terms of both the

product’s value to the customer and to the bank?

■ What delivery channels shall we use?

■ How do we manage these delivery channels to our greatest competitive effect?

■ How do we make our marketing more effective?

■ How do we develop our entire commercial activities and culture to maximize

the value of the customer information we hold?

Today, the retail financial services industry is, as we have seen, all about focusing

on the customer and managing the customer relationship with energy, creativity

and real dynamism. To understand the precise nature of the role, we need to think

about the data which RFSPs have on file, which principally means data they hold

in some form of electronic storage and retrieval system.

It is no exaggeration to say that the information which RFSPs own is a real

diamond mine. Most RFSPs hold vast amounts of data about customers and the

products they buy. Every processing system, from payments to cheque processing,

creates volumes of detailed data: on the customer, the transaction, the process, the

place and the time. This data is a valuable asset that needs to be hoarded, mined,

manipulated and interpreted.

Indeed, there is a strong argument for an RFSP looking at data in a completely

different light to information. Data is the raw and unanalyzed stuff generated and

printed by the bank’s technology; information is what data is magically transformed

to when human beings attempt to interpret it.

There is significant empirical proof within the retail financial services industry that

when this data is turned into refined information to support management decisions

there can be an enormous potentially positive impact on an RFSP’s bottom line.

Data when transformed into valuable information moves from a strategic dimension

into tactical implementations in one-to-one marketing contexts.

Initially, RFSPs which were pioneering data warehousing techniques tended to

focus on the utility of the data in a particular area of marketing activity. The

success they achieved from this approach led them to add more and more data

into their analysis until they were starting to create an enterprise-wide view of

their banking operations. This was the birth of enterprise-wide data warehousing.

Naturally, this required a targeted and technologically advanced approach to

finding the right type of data from the very large data warehouses that were being


investigated. Consequently a new term, ‘datamining’, has come into use to describe

the process of searching for hidden patterns in large databases. The beauty of

datamining is that it can be undertaken at several levels, depending on the

evolutionary state of the RFSP from an operational and technological perspective.

Recent years have seen a particular surge in the power and sophistication of

datamining tools used to access large data warehouses. These tools range from

executive information systems to decision support systems, neural networks and

artificial intelligence.

A data warehouse typically contains data that can only be accessed but not

changed by the user. It is linked but not integrated into departmental or central

operational processing systems. It often comprises data collected from distant

systems that are spread all over the RFSP. The data is held separately and is often

based on powerful parallel processing computers. Experience has shown that it is

necessary for the data to be investigated at a level of detail which enables patterns

and connections to be found. Summarized data is an unreliable source when looking

for those elusive diamonds.

Data warehousing has become big business and every computer manufacturer and

consulting firm has created its own solutions and methodologies to enable customers

to create a data warehouse which is susceptible to rapid, detailed datamining and

which can produce precisely the type of information which is so useful in all aspects

of the RFSP’s activities. The data warehouse itself, coupled with the highly skilled

managers who know how to use state-of-the-art datamining tools, is now an essential

part of an RFSP’s competitive armoury.

It is no exaggeration to say that there is no part of an RFSP’s activities which is not

to some extent affected by the latest data warehousing techniques. These techniques

are relevant throughout the RFSP because they relate to the entire issue of the RFSP’s

relationship with its customers. This relationship is the hub of all banking activity

today, whether we are talking about traditional banks or newcomers who have only

joined the industry in recent years.

An extremely important type of computer system for the future of the virtual

banking revolution is one which allows the RFSP to integrate all its customer

information (as opposed to the less useful data, according to the definition above)

and make that information available across all the different delivery channels which

the RFSP uses. A number of vendors offer products that are designed to do this.

Distribution channels which have traditionally been very much operated as

individual entities – such as the branch or call centres – have dealt with processing of

data independently and in different ways. As a result, data can frequently be duplicated

or hard to access. Some products offered by vendors provide a more integrated

approach, and enable the data to be transformed into information in the best sense.

In essence, the data which the application holds will be the same whether it is

being viewed by a call centre operator, a customer in the home, a teller in a branch

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or a customer using a self-service kiosk. Only the presentation layer changes in

accordance with the user’s needs. For example, information entered into the main

computer system by a customer using a branch system can be accessed and dealt

with via another channel such as a call centre. By integrating information across

all channels, duplication of data and transaction processes is avoided, thus

improving efficiency and customer service.

Branding initiatives

Central to the success of any new type of product or service that an RFSP offers

via a remote delivery channel is the RFSP’s understanding that what it is selling is

not some new technological initiative but rather a product or service with a

particular appeal for customers.

This point can hardly be overstated. Customers are not interested in how a new

facility is provided to them; all they care about is what benefits they get out of it.

Most RFSPs employ new channel executives who understand this crucial point, but

even today some institutions are liable to get blinded by science by vendors and

forget that being a customer-centric RFSP means precisely that you are above all

concerned with the benefits you can offer customers, not with the innovativeness

of your technology.

Having overcome that hurdle, the issue of branding of a new service becomes

extremely important.

Historically, RFSPs are often relatively poor at developing effective brand names.

Some of the brand names of new channel initiatives discussed in this briefing seem

rather contrived and if anything, too obviously designed to make the customer

forget that they are dealing with a banking service at all. Calling a banking service

‘Smile’ or ‘Egg’ seems an unusual choice of branding, but generally, there is evidence

that the market prefers branding which is down to earth and which states as

precisely as possible what the basic customer benefit is. ‘Direct Line’, one of the

most successful new channel brandings ever, emphasizes this customer benefit very

well indeed, whereas it might reasonably be argued that a name such as ‘Smile’

could be equally effective for a brand of cosmetic, or indeed for almost anything

other than a financial product.

Ian Ogilvie of HSBC was reluctant to be drawn on whether he thinks ‘Smile’ or ‘Egg’

are good names for new financial products, although he did remark diplomatically

that he presumed such names were chosen after careful market research.

HSBC itself has chosen not to go down the ‘catchy, consumery name’ avenue but

instead to call its new channel products very simply after what they actually are. For

example, its new digital TV banking service (launched in June 2000) is branded

simply as ‘HSBC TV Banking’. Ogilvie explains that HSBC believes its customers

seek simplicity, clarity and ease of use from these kinds of remote systems and that


these brandings achieve this objective. It is difficult to dispute this perspective.

Incidentally, in its previous incarnation as Midland Bank (in the UK), HSBC launched

two types of bank account which had brandings which sounded as if they were

expressly drawn up by trendy agencies that provide brand names. It may or may not

be significant that these accounts, branded ‘Orchard’ and ‘Vector’, have been

discontinued. It is, surely, a debatable point whether customers really want their bank

accounts to be branded with names that would be more appropriate for shampoos.

Call centres

Call centres have become ubiquitous in the retail financial services industry during

the past five years. They are for many institutions an essential resource in the delivery

of telephone-based banking. Their ultimate usefulness, however, is debatable.

The computer giant IBM has somewhat contemptuously described call centres

as a ‘dying point in the past’. This does not mean that IBM regards them as

entirely useless, but rather that it considers them to be a dying breed.

Call centres tend to illustrate the deficiencies of an approach towards delivering

banking services remotely which is more concerned with the agenda of the

institution than the customer. For many customers, interacting with call centres is

a profoundly demoralizing experience. For one thing, customers frequently wind

up in a queue where they are forced to endure the call centre manager’s taste in

music. When they finally get through to a staff member, the caller is frequently

irritated by having been held in the queue and forgets to ask the right questions.

All too often, customers end up with less closure on their particular query or

problem than they did before they phoned the call centre.

A major problem here is that those organizations which operate call centres are

doing so because they are under continual pressure to minimize costs, especially

if they are providing the call centre as an outsourced service. Cost minimization

tends to be prioritized at the expense of customer service.

Telephone banking has always suffered from the fundamental limitation that it

provides the customer with no depth of information on a screen and makes it

difficult to backtrack to confirm some information already provided. For the

interim, call centres are an important resource for RFSPs, but through the

evolution towards Internet and iDTV banking it is reasonable to expect that the

reliance on call centres will decrease.

What perspective do bankers really think of their organization’s developing new

electronic delivery channels whilst simultaneously reducing traditional face-to-

face branch members? Invariably, they regard the need for an RFSP to become

fully customer-centric in its outlook, strategy and tactical deployment as central

to success. Bill Bougourd, for example, head of electronic communications at the

Royal Bank of Scotland in Edinburgh, told Reuters:

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The most important thing that a bank can do is to make itself a truly

customer-centric organization by listening to its customers and acting upon

what it hears. We believe that customers are above all asking for:

■ products that offer value for money, ease of understanding and range of

functionality;

■ quality, speed and convenience of service;

■ control;

■ multi-channel access.

In a time-pressured mobile world, mobile wireless services are already

important and are likely to become even more so. With next-generation

wireless likely to remove effective bandwidth restrictions, the only

limitations to the available service are likely to be device-form factors.

Bill Bougourd

Laurel Powers-Freeling, director of retail banking development at Lloyds TSB,

told Reuters:

Being customer-centric is merely an aspiration unless a financial institution

can ensure that every aspect of business delivery is focused squarely on

putting the customer first. This process needs to start with an understanding

of the customer and an insight into customer behaviour, which must be

delivered to every possible location – physical or virtual – where a customer

might touch the organization. Customer insight is not just data, it is the

thoughtful interpretation of a customer’s history, circumstances and

behaviour. Basing a delivery strategy on that insight does not mean offering

investment products and absolute flexibility; it does mean figuring out what

actually matters and getting that right.

Laurel Powers-Freeling

We conclude this chapter with two detailed interviews with leading RFSPs,

analyzing their attitudes to new delivery channels and the implementations they

have initiated.

Case Study 1.1

Abbey National

The UK bank the Abbey National has a reputation for competing aggressively and intelligently,

and for taking considerable pains to find out what its customers want from the banking

services it provides. It is perhaps the classic example of a much-respected building society

that has incorporated itself into a bank, with the added edge that it offers the widest range


of financial services to a burgeoning customer base. The Abbey National has more than 15

million customers in the UK, which means that about one in four Britons have some sort of

relationship with it.

Ever since the eighties, the building societies – including those which are now banks –

have displayed a remarkably canny awareness of opportunities arising for delivering retail

financial services to customers in new ways, especially new technology-enabled remote

delivery channels.

Clearing bank branch networks typically numbered more than 3000 branches in the

eighties, while many building societies had only several dozen branches or fewer. This was a

serious problem for the societies. Britain was on the move; British people had never before

been so mobile in their personal and business lives. The UK is not a large country – people

were increasingly looking for a banking service that was nationwide rather than regional. How

could a small, regional building society such as the Sussex County or the Eastbourne Mutual

possibly hope to compete on that basis?

In fact, the answer was very simple. It came in the shape of the cash machine, or the

automated teller machine as it is known more formally in the banking industry. By the mid

eighties, many building societies were running their own ATM networks and generally these

were extremely small; frequently they comprised no more than a dozen machines. Some

smaller societies did not have any at all.

In the US, small financial institutions had, by the mid eighties, demonstrated that they

could compete highly effectively with even the largest banks by taking their own ATM

network and ‘merging’ it with the ATM networks run by other, rival institutions to form a

shared ATM network – except that the merging would only be a convenience for the

customer. The shared ATM network would have its own branding and the plastic cards that

gained access to it would feature the branding prominently, but the ATMs that participated

in the shared network would continue to be run by the institution that installed them. The

difference was that any customer of an institution that was part of the network would be

able to use the ATM. It was one of those situations, quite rare in business, where there were

only winners and no losers.

Except, perhaps, for the clearing banks, which gradually came to realize that even the

tiniest building society could become a nationwide player by the straightforward expedient

of joining a nationwide shared ATM network. Such a society might not even have any ATMs

of its own. But the point that really matters is that by participating in the shared network

and offering its customers plastic cards which gave them access to the entire network, even

the smallest institution could claim, and deliver, a nationwide service basis.

Indeed, once shared ATM network development got under way in Continental Europe, the

national banking infrastructures tended to move towards a completely unified nationwide

shared ATM system (i.e. one where all institutions and all bank cardholders participate)

much more rapidly than in the US and the UK.

But state-of-the-art technology is not only a tool that allows ‘the first to be last and the

last first’. It is also a terrifically potent equalizing force. What this means is that it tends to

create, in any sector in which it is implemented, a level playing field. It is always thus with

a new, highly innovative technology: it tends to render ‘experience’ and a lengthy tradition

of achievement in a particular sector much less significant than it would be otherwise.

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In a banking environment where new technology has made a real impact, an ability on an

institution’s part to use the technology to deliver better – and ideally outstanding – customer

service is what matters. This does not, of course, mean that traditional players who do have

experience and reputation are necessarily going to have to cede their positions of

competitive supremacy to technologically wise newcomers. But it does mean that traditional

players have got to rethink everything they were doing in the past, and how they were doing

it, in order to ensure they give themselves a better-than-even chance of maintaining their

competitive position.

Which brings us to the Abbey National. At the time of writing in September 2001, the

Abbey National’s head of retail e-commerce and strategic development was Ambrose

McGinn, who had already gained a reputation within the UK retail financial services

community as a pragmatic, down-to-earth senior manager who makes every effort to keep

his finger not only on the pulse of what the bank’s customers want but on the leading edge

of what is happening in retail banking today. He sums up his mission like this:

Our task as a bank is to deliver flexibility and choice to our customers. The industry is

more competitive than ever, with existing banks bringing out new brandings and new

banks coming in from outside the sector.

On the changing needs of the bank’s customers, he says:

Whereas in the past, the vast majority of our customers wanted above all to make use

of branch-based services, nowadays they expect quick and convenient access to

banking services, ideally without actually visiting their local branch, other than for

important purchases. Recently, consultants have unsupportedly forecast the death of

the physical branch within the medium to long term. This seems to me complete

nonsense. I can only think that the people who say this sort of thing have no real

knowledge of the banking industry.

So if the Abbey National’s customers generally prefer to avoid the branch for anything but

important purchases, how do they want to obtain services from it? Clearly, they will use

conventional electronic channels such as ATMs, electronic debit and telephone banking,

which, whilst being of enormous usefulness, are pretty conventional nowadays and at least

from a conceptual standpoint, becoming almost as ‘traditional’ as the physical delivery

channels they were designed to replace. The real emphasis of the leading edge today is on

online delivery channels. What does McGinn have to say about these services and his

customers’ needs?

Despite only 15 per cent of our entire customer base being online, we know that our

customers still have an intrinsic interest in using online services but simply may not be

able to use them yet. As for the nature of the online service they need, I would say that

it must meet three basic and absolutely fundamental criteria. First, it must be easy to

use. Second, it must be intuitive to use, meaning that the interface must be a natural


and to a large extent foolproof one. Third, it must be delivered via hardware with which

our customers are familiar. With these requirements being so fundamental, it is clear

that delivering a banking service through a television makes abundant sense to us.

Abbey National is, in fact, a pioneer in Europe in developing an online banking service via a

digital television. The bank’s blueprint for its digital TV banking service is shown in Chapter 9.

As McGinn explains, such a service is inevitably going to have certain significant

differences from an Internet-based banking facility. First, there is the simple fact that

televisions are viewed from farther away than computer screens. This obviously places a

severe limitation on the level of detail you can put on a digital TV screen compared with

what you can put onto an Internet banking screen. In practice, the user interface design for

a digital TV screen requires a great deal of ingenuity in order to maximize the amount of

detail that can be provided within the constraints of the screen interface. Abbey National’s

aim is to create a system whose navigation demands are no greater than those required for

the use of Teletext.

McGinn’s concept of a digital TV banking system is of something which fits neatly and

snugly into the range of benefits which the Abbey National’s customers will be enjoying from

their digital TV. They will be using their digital TV to access comprehensive entertainment for

the whole family. The access to banking systems they will receive from their TV will be a

useful bonus. The whole thing needs to be utterly user-friendly and ultra-helpful.

In a wide-ranging discussion, McGinn also discussed the impact – or, as he sees it, the

lack of impact – which ‘newcomers’ have had on the marketplace.

I know that everybody in the industry is always talking about the frightful menace these

newcomers are supposedly representing to traditional players like us. However, in my

view they are seriously underestimating the cost of acquiring customers. I would

certainly concede that customers are always looking for a good deal from a financial

institution, but customers also put a premium on quality of service, and most will

happily forego, say, a small percentage of potential extra interest on their savings in

order to benefit from the quality of service which a long-established player can offer. Of

course, Abbey National gives customers an exceptionally good deal across its range of

products, but the deal offered by a particular product or service isn’t going to be the

only consideration in customers’ minds. After all, any attractive interest rates offered by

newcomers is hardly worthwhile if the inconvenience of the service they provide leads

you to wasting time and energy that could be spent making money!

Having already emphatically made the point that it is entirely wrong to assume that banks’

physical branches are ultimately doomed, McGinn expanded on this point.

Rather than envisaging a future scenario where ‘bricks’ are abandoned in favour of

‘clicks’, I have no doubt that what the customer really wants is access to both. I do,

however, think that the nature of many physical branches is radically changing; some

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40


of our UK branches are now converting into places which customers are likely to find

more attractive to visit, such as superstores, for instance.

McGinn sees the use of cheques reducing dramatically in the UK, although this is in a sense

an easy prediction, especially when considering Continental Europe, where they have been

phased out entirely in some countries.

Another of McGinn’s predictions concerns the acceptability of new developments in online

banking among the older generation. While conceding that older people are uneasy using

new technology, he said it was a mistake to underestimate the enjoyment which many older

people had in using new technology and that it was naive to think only children and young

people had a facility with it.

I tend to think people will grow old with the technology and that in five years or so most

people will be using this technology without giving the matter any serious thought. After

all, the whole point of retail banking systems to them is that they can be used easily

and quickly, without the customer really being aware that he is interfacing with a high-

tech system at all. Yes, some people aged over 50 are technophobic, but many in that

age range are really getting into the Internet and what it can offer.

Above all, McGinn recognizes the enormous and continuing importance of banking services

being delivered at what is essentially a local level. McGinn’s position is that the fundamental

nature of the relationship between a bank and its customer will itself be an essentially local

one, even if the customer is able to get access to services around the world.

The notion of the call centre as a specialized location for selling products and services to

customers and giving them advice and information on a centralized basis is all very well, but

surely the usefulness of the call centre is limited when it comes to selling customers complex

products and services? After all, when it comes to a complex and potentially emotionally

fraught banking service, who really wants to be contacted by someone in a call centre in an

unknown location hundreds of miles away? Surely we’d prefer to discuss this with a manager

who works locally to us and knows the area we live in and our neighbourhood.

I think it’s extremely important that everybody involved in electronic banking in general,

and e-banking in particular, remembers that banking is at heart a personal service and

that as important as speed, accuracy, reliability and service availability round the clock

both at home and abroad are to customers, the customer also wants the service to be

personal. They do not want to feel that they are customer number 876543, or whatever,

but that their bank sees them as an individual. A banking service based around friendly,

interactive branches which are as likely to contain a coffee shop or a crèche as a cash

machine, complemented by a powerful range of user-friendly electronic banking and

online banking services delivered by digital television and by a PC, and with staff always

available to discuss more complex types of transactions: that’s how I see the future of

retail banking.


41

Case study 1.2

HSBC

As a former executive with the travel agency chain Thomas Cook, who was involved with

setting up pioneering holiday reservation systems for the travel company, Ian Ogilvie of

HSBC has extensive experience of delivering to customers benefits via computers. Now

head of electronic services at HSBC for its UK bank, he sees the basic customer need from

RFSPs as never having changed to a significant extent.

The ways in which customers receive financial services has changed radically, but the

nature of those services has in principle remained the same. Customers need

convenience, ease of access, simplicity, reassurance and trust from their banks.

Another fundamental point that has remained the same is that they don’t like to spend

time on arranging their banking facilities.

He adds:

At HSBC, we identify four major classes of banking products that our customers need.

First, there are the banking accounts and products that relate to routine, day-to-day

living and housekeeping. Second, there are products which relate to saving for the future

and ideally making some provision for people growing in prosperity as they progress

through their lives. Third, there are what might be termed ‘protection’ products, such as

insurance. Finally, there are products which relate to borrowing. Some people are happy

to live beyond their financial means most of the time. Other people simply need help

from time to time. One can gain a great deal of insight from thinking hard about the

behaviour of oneself and one’s friends as customers and by thinking about what one

likes and doesn’t like about banks with which one has been involved in the past or is

involved now. Once you take on board that, for most people, banking is not their number

one favourite activity, many important conclusions about banking and what people

expect from their banks tend to follow.

Ogilvie went on to discuss the challenges facing him as someone who heads a major

institution’s electronic services capabilities.

My biggest challenge is getting the timing right for market entry and seizing the potential

of an opportunity. Launch too soon, and you may end up making expensive mistakes

which your competitors are only too happy to learn from since they are not paying for

them! Launch too late, and your rivals will have stolen a march on you. When a new

electronic channel system is launched, the business capability, customer appeal and

technology must all be harmonized, ideally into a proposition which your competitors are

themselves not offering, at least not yet. Fortunately, at HSBC, we learned a great deal

from our successful launch in 1989 of the telephone bank First Direct, which was initiated

by the Midland Bank. Back in 1989, there was no real competition to First Direct; we were

42


consequently in the enviable position of being able to offer something which nobody else

was offering. This gave us the opportunity to investigate very thoroughly what customers

want from a non-branch banking service.

Nowadays, I tend to think it is risky for a bank to assume that an Internet banking

system is what every customer wants. Many customers are not yet easy with using the

Internet at all, let alone for something as personal as their way of interacting with their

bank. For example, Wingspan – the Internet-only bank operated in the US by Bank One

– has progressed slowly. I tend to think that some Internet-only banks are launched to

be a fashion statement rather than because they are going to play a major role in

winning profitability for shareholders.

Ogilvie’s philosophy towards new delivery channels is that they need to be assessed entirely

in terms of the benefit they are going to be delivering to customers. He believes that what

is required is for the new banking system to provide a service which as a minimum gives

customers a new way of accessing something with which they are already familiar. He warns

against underestimating customers’ willingness to use different types of systems for

different purposes.

I think it unrealistic to launch a new type of banking service via a new channel, and

imagine that customers will be happy to migrate all their banking activities to that one

channel. What customers really want is the opportunity to select one channel or another

according to how convenient it may be at that particular time and for that particular

transaction. To take an analogy, consider the microwave oven: people didn’t trust it at

first but later got used to it, and some saw it as almost a one-stop solution to cooking

problems. The end stage of microwave usage is very different: people recognize its

enormous usefulness for cooking some things and for reheating food fast, but many

types of cooking are not suited to it. If someone has a microwave oven in their kitchen,

they have the opportunity to use it for appropriate types of cooking, but it is not going

to replace the oven or grill entirely. I tend to think this way of using new technology also

applies to new delivery systems. And after all, there are many things that the Internet

does not do. You can’t get cash out of it, for one thing, not unless you load an electronic

purse from it, and this technology (and electronic purse networks themselves) is still

embryonic in terms of customer take-up.

The fact is that customers enjoy having a choice of channels. Some appreciate the

speed of a telephone banking service; it’s certainly a quick way of checking one’s

balance on current accounts and on credit cards. It’s difficult to see how such a routine

transaction could be carried out as rapidly by logging on to the Internet, assuming that

particular enquiry was all you wanted to conduct. Older people frequently enjoy ‘going

to the bank’ and visiting the branch; younger people often prefer to use ATMs. Some

people are too busy ever to visit their branches and prefer non-branch services; other

successful people like to have a very personal relationship with their bankers. It’s all a

matter of choice and that is what we are in the business to provide.


As part of this philosophy, HSBC has set out to become a leader in iDTV worldwide. It is

equally pursuing Internet-based banking initiatives.

Ogilvie emphasizes that an interface for a digital television system has to be very different

than one for an Internet banking system because customers associate television with

enjoyment and relaxation. The interface needs to be straightforward and user-friendly, as

well as robust and tolerant of user errors. The service HSBC has launched incorporates

video and clever graphics to maximize the visual and functional appeal of the service: it’s

clearly designed to be used by families and to be fun to operate.

Ogilvie firmly believes that the future of banking is via multi-channel development which

gives customers choice. He also believes that banks need to take some measures to avoid

being relegated to providing a secondary level of utility. He and his colleagues at HSBC are

working on initiatives here, but he insists that at present they have to remain confidential.

43

2Customer-centric managementof multiple delivery channels

Chapter overview 47

Introduction 47

Creating a customer-centric channel strategy 47

The customer loyalty challenge 47

■

■

■

■

45

Customer-centric management

CHAPTER OVERVIEW

■ The multiple delivery channel initiative must be made customer-centric in every

sense.

■ The wider the range of channel delivery options available to the customer, the

more likely the RFSP is to be successful.

■ Customer loyalty issues need investigating in depth.

INTRODUCTION

RFSPs have little choice today but to accept that they are going to have to operate

in an environment where customers want to access retail financial services via

multiple channels. The new model for running an RFSP in this environment is one

which utilizes the entire delivery network that the institution has created and

which allows customers to interface with that network wherever (geographically),

whenever (chronologically) and by whatever channel (i.e. physical or virtual) they

may wish to use.

CREATING A CUSTOMER-CENTRIC CHANNEL STRATEGY

It is not easy to canvass channel delivery managers of leading RFSPs regarding

their approaches to creating a customer-centric channel strategy. However, there

is not really any secret in how to do this. Ultimately, all the evidence suggests that

customers want to be able to select from a range of delivery channels when they

are interacting with their RFSP. This being so, and because a customer’s precise

channel preference at any particular time cannot readily be predicted, the RFSP

has little alternative but to aim for excellence in all channels that are technically

feasible and which have either already proven their usefulness in the marketplace

or which seem certain to do so.

THE CUSTOMER LOYALTY CHALLENGE

Customers are, understandably, motivated by self-interest: as indeed are RFSPs,

vendors, consultants and everybody else involved in the retail financial services

area. If RFSPs have found that their customers are no longer inclined to be

particularly loyal, that customers will, in fact, go for the best deal they can find

in the marketplace, they should not be surprised. After all, the retail financial

services industry is a marketplace, and in marketplaces people play the field.

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48


RFSPs, which nowadays tend to offer the full range of retail financial services,

resent this. It is natural that they want to know why a customer has chosen to go

to their opponents for some services that they offer themselves.

Persuading a client to do all of their financial business with one provider only can

be tricky. However, astute firms are beginning to question the ‘grab all the business

you can’ mentality. They are realizing that not all customers are necessarily

profitable. A customer relationship can be made profitable and maintained only

through detailed knowledge of that customer.

Do successful firms really want every customer to use every service that they

have available? In a non-business relationship, would it be reasonable, for

example, to lend a car to a friend who was in the habit of crashing? By the same

reasoning, why should an RFSP want to insure that same person? On the other

hand, that friend might be very good at investing their money in interesting

ventures, and so funding the occasional investment wouldn’t be such a bad idea

(so long as it was nothing to do with cars!).

The aim is clear: to identify the good or potentially good customer. The problem

is how to keep them. The range of services on offer is obviously important, but it

is the delivery of those services in a multiple channel environment that is crucial.

Today’s customers expect to be able to use every means of communication

available to them whenever they want. The service provided at the end of every

channel of communication therefore needs to be consistently excellent.

Not all channels are equally suitable for all transactions at all times. A telephone

call should be enough for the customer to check their bank balance. However, the

telephone is not the best way for them to view their statements, so they access

their details on the bank’s Web site. And when they need to talk to someone about

a mortgage or overdraft, they might prefer talking face to face with the manager

and pop into their local branch. The most important thing is that each contact

occasion has to be of an equal standard. The same body of knowledge has to be

shared by each channel. After all, people recognize their friends and acquaintances

no matter how they are contacted, be it by phone, e-mail or post.

Managing customer loyalty is not an easy task. However, research completed by

IBM shows an effective way of measuring and improving customer loyalty

management in the financial services sector. Bryan Foss, a customer loyalty

solutions executive with IBM, explains the rationale behind the research.

The ideal of customer loyalty management is to know the customer (this

requirement applies equally whether the customer is an individual or a

company) in order that the right offer can be made at the right time, and at

the right price. In practice, all too often these areas are poor performance in

many companies, including companies focused on the financial services

marketplace. Adopting a rigorous, thoughtful and truly results-orientated


approach towards customer loyalty management is in many respects a new

discipline for business. In practice, effective customer loyalty management is

based on some very sound and long-established principles drawn from areas

such as direct marketing, key account management, customer service and

quality maintenance. But because it is new, many companies find it difficult.

Furthermore, because companies have been discussing the area for quite

some time, there is a tendency for senior managers to think that they are

already doing the thing that they have been talking about for so long. IBM

calls this ‘intention = reality’. It is important to be able to identify the

differences between intention and reality to identify where a company needs

to focus its efforts to improve its customer management capabilities.

Foss continues:

When a client approaches IBM in order to improve the quality or

profitability of the customer service it delivers and the customer loyalty it

wins, the client is rarely starting from scratch in its customer management

efforts. Because the need to identify and deal with any disparity between

intention and achievement in customer loyalty is so important, IBM has

developed a business model that will facilitate this. The model is known as

the ‘Customer Management Assessment’ (CMA). It is designed to support

and accelerate, in a consistent and repeatable manner, this process of

identifying any disparity in the customer loyalty actually achieved and

believed to be achieved. Through the application of the assessment it is

easier to analyze what companies actually do to recruit, retain and develop

their customers. The assessment supplies the missing part of the picture,

because many companies measure customer loyalty outcomes (customer

retention, cross-selling, and sometimes even customer profitability) without

being able to say how and why they have achieved these results. The

assessment looks at the capabilities of customer management analysis,

planning, policies, processes, systems and data, and how they are managed

to improve the customer experience.

Foss adds:

By using the CMA, we are able to identify the extent and nature of any gap

between the level of customer service the client believes it is offering and

winning, and what is really happening in this respect. This identification of

any such discrepancy is the first, crucial step in prioritizing efforts and

rectifying the problem.

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50


Specifically, the CMA looks at the following stages.

■ Targeting: The first step is when the customer is targeted as being an appropriate

customer for the company and induced to ‘join’.

■ Enquiry management: The customer is then in the process of joining.

■ Welcoming: After the customer has joined, depending on the complexity of the

product or service, it is important to ensure that the customer is ‘securely on

board’, e.g. knows who to contact if there are problems, knows how to use the

product or service.

■ Getting to know: This is a crucial period, when both sides exchange information

with each other. Additional customer needs may become apparent, and the

customer’s profile of use of the product or service becomes known. More is also

learned about the customer’s honesty, ability to pay, risk profile, etc.

■ Customer development: The customer is now being managed securely, with

additional needs being identified in time and met where feasible.

■ Managing problems: The customer has such severe problems that special

attention is needed to ensure that the customer returns safely to account

management. These problems may be because of poor service or because the

customer’s needs have changed and the company is unaware of it. This state is

called ‘intensive care’. If this attention is not given, the customer is so

dissatisfied that divorce is imminent (‘pre-divorce’). If the customer does leave

(‘divorce’), they will usually, after a cooling-off period, be ready for ‘winback’.

■ Winback: Sometimes the customer left because of high price or the wrong

product, so winback can be initiated when these issues are resolved. Winback

is hardest if the customer left due to poor service – unless the competitor’s

service is even worse!

The model was developed out of many years of consulting practice and project

experience, developed further through university research and published in the

IBM-sponsored Close to the Customer Series. The areas that CMA focuses on are

shown in Fig. 2.1.

The model encompasses all the essential elements of practical customer

management. It assumes knowledge of what market the assessed RFSP is in and

where it wants to be – but that is all it assumes. When an assessment is carried out

it asks more than 260 questions to understand what goes on at present and to

stimulate ideas for the future. Trendy or unfamiliar jargon has been removed from

the questions because the purpose is not to confuse, generalize or show off

knowledge of the latest tools and techniques but to be clear and specific about

proven sensible practices. Questions are asked of people responsible for setting

policy and of the doers, for instance customer-facing staff, analysts and so on, so

that it is possible to comment on intention and reality. The assessors ask for evidence


where appropriate and try to ensure that the practice or behaviour is widespread

and not isolated. Because of the ‘intentions = reality’ problem, CMA is only used by

trained assessors, who are particularly on the look-out for unsubstantiated claims.

Fig. 2.1 Areas upon which Customer Management Assessment Tool focuses

Source: Prepared for this report by IBM thought leadership

Customer management assessments using CMA show that most companies are

weak at analyzing customers, planning what to do with them and measuring the

results of their activities. Particularly common weaknesses include the following.

■ Customer data analysis tends to focus on history (which customers left or

bought less, for example) rather than on the future (which customers might be

at risk, for example).

■ Most companies do not consistently measure the success of their customer

management activity and processes, so they do not know what works and what

fails.

■ Customer management processes are rarely identified fully, let alone documented

and communicated, and improvement activity is ad hoc. This means that even

when a company finds out what works, it cannot necessarily repeat it.

■ The links between satisfaction and loyalty are unclear to many companies, yet

most still measure satisfaction to make themselves feel good.

■ There is a lack of senior management contact with a wide range of customers

or involvement in the processes of customer management.

■ Benchmarking work is often obsessed with competitors rather than with what

could be done within the company.

51

Analysisand

planning

Theproposition

Competitors

Measuringthe

effect

THE CUSTOMER EXPERIENCE

Processes

People and organization

Technology

Customer management activity

TargetingEnquiry

management WelcomingGetting to

knowCustomer

developmentManagingproblems Winback

52


■ Work in an area of systems and data is often planned and implemented without

clear connection to decisions on customer loyalty management plans and processes.

This analysis shows that despite ever-increasing consultancy and research support,

companies are not applying common-sense business practice that will allow them

to manage customer loyalty properly.

The CMA supported assessment process

The initial focus of the work is to:

■ complete an assessment of current customer loyalty practices with a business;

■ measure their success against benchmarks.

The six-stage CMAT (Customer Management Assessment Tool see p. 56) audit

process involves significant interview work and sessions with a large cross section

of management and staff from all customer-facing and supporting departments.

The work is led by a senior consultant who has been trained in the assessment tool

and has experience of relationship management work in other financial services

organizations. The final stage, the customer loyalty management programme plan

workshop, will be facilitated by the senior consultant.

Organization

■ Gain understanding of the business and the issues that the management team

would like covered.

■ Provide context for the study and allow the process to be tailored for the

organization – some questions may not be relevant, e.g. agent channel for direct

organization.

■ Determine interviewees and interview timetable.

■ Complete administration, e.g. access to building, interview rooms allocated, etc.

Review existing data

■ Sales and marketing plans.

■ Satisfaction surveys and other relevant research.

■ Organization charts.

■ Analysis data.

■ All other data already collected.

Issue briefing pack

A briefing pack is developed and issued to relevant participants, covering:

■ nature of the assessment


■ process

■ potential value

■ pre-interview requirements

■ ‘memory-jogger’ questions.

CMA interviews

■ Three days of interviewing a cross section of managers and staff in key customer

facing-roles so that the alignment between policy and practice, intention and

reality can be assessed.

■ Interviews are one-on-one and are typically one hour each.

■ Two further days are allowed to follow up on outstanding issues and seek evidence.

■ Typically at least half a day would be spent in a branch.

Produce CMA report

■ Drawing on their experience and intellectual property, the assessors will draw

up a detailed CMA report (20–30 pages).

■ It will identify strengths and weaknesses, enabling detailed recommendations to

be made.

■ The report will contain an objective score, specific to each client business.

■ This score is obtained from the software analysis and facilitates benchmarking

in all areas against other market leaders.

■ The findings will be discussed with the audit sponsor prior to issuing the final

report.

Present findings

■ The assessment team will formally present the findings to the senior management

team and to the customer loyalty management sponsor.

■ The session will focus on the benchmark results, the key issues and the key

recommendations.

■ The team will then discuss with the sponsor and the senior managers the possible

next steps for their consideration.

From audit to reality

Obviously, no one is interested in doing a CMA audit for its own sake. The main

value of the CMA assessment is that it supports the decisions required to achieve a

rapid move from evaluation to changing how to manage customers’ loyalty. A

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simplified view of the position of CMA in improving customer loyalty management

is given in the Foss quote below.

Bryan Foss explains:

Once the problems have been identified and an audit commissioned, it is

simply a question of professional programme planning and implementation.

The IBM research has identified two basic models of programme planning

for implementing customer loyalty management, as follows.

1 Big bang – moving as rapidly as possible to implement customer loyalty

management principles across the business. In general this works only for

‘green field’ businesses, where there are no existing practices. It is very

rare, and normally works only in direct-only businesses, where strong

central control can be used to ensure implementation. Even many direct-

only businesses are product orientated and have not succeeded in

implanting customer loyalty management as they planned.

2 Steady progress – moving steadily towards customer loyalty management

vision, while recognizing that the vision will continue to change. For

larger companies, often with a background of several customer loyalty

management initiatives, and usually a mixed history of relationships

between marketing and IT people (especially in the area of data

warehousing projects), this is usually the better option. However, it

requires very strong programme management disciplines as a series of

projects are rolled out across the business, often starting with pilots to

establish possibilities, capabilities, etc. before rolling out a customer

loyalty management activity to the rest of the business. It also requires

some tough choices to be made about where to start, and where not to,

and indeed whether parts of the business should be left untouched.

One of the key decisions facing the company is how to combine breadth (doing

something ‘partial’ across the business) and depth (doing something ‘comprehensive’

in part of the business). In order to define these terms, we need to indicate the

possible scope of change, i.e. what other dimensions there are to customer loyalty

management projects.

One set of dimensions relates to the business area or activity. It includes:

1 Business unit.

2 Product.

3 Customer group (however defined, e.g. by need, value, growth, affiliation,

behaviour).


4 Geography, e.g. area or branch (this refers to the company’s organization, not

necessarily a geographical group of customers, which would be a customer

group as below).

5 Function or other organizational sub-division, e.g. sales, customer service,

claims, or department within function, e.g. call centre within customer service.

6 Communications channel, e.g. mail, outbound telemarketing.

7 Distribution channel (not only which channel to focus on but also what level

of channel: in an agent-managed channel, concentrating on agents rather than

on final customers).

8 Relationship stages, e.g. targeting, welcoming, cross/up-sell, retention.

The scope can also be defined according to particular capabilities or enablers, often

relating to infrastructure:

1 Data (focusing on a subset of the data required for customer loyalty management).

2 Systems (focusing on some of the systems required for customer loyalty

management, e.g. specific software).

3 Market research and analysis (focusing efforts, bringing together and analyzing

data, e.g. understanding customer profitability, future customer value).

A depth project could be customer retention across the business or targeting high

(current and/or future) value customers across the business. A depth project could

be complete customer loyalty management for high-value customers in one

channel for one product (i.e. to include cross-sell of all other products).

Mapping out the programme in this way is important for the following reasons.

1 The learning created as a customer loyalty management programme rolls

across the company is highly transferable but takes time to arrive. Rushing

ahead means doing things without exploiting potential learning.

2 The approach generates explicit attention to learning/knowledge management,

ensuring that the relevance of lessons is identified and that relevant lessons are

transferred quickly.

3 The infrastructure requirement can be identified and planned more securely

using this approach. In many companies, some of the required systems

products and services have already been identified, but the direction in which

the weapon is to be pointed has not.

4 Success generates a demonstration field effect – rather than being asked to butt

in to change as an act of faith or on the basis of business case analysis,

managers can see the results.

5 Financial benefits arrive more securely, in line with the investment.

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The data analysis organization QCi, working in conjunction with IBM, has

developed a tool, known as the Customer Management Assessment Tool

(CMAT), that supports the CMA by providing the questions and benchmark

comparisons for every case. The IBM consultants and the CMA process provide

the interviewing skills, evidence checking and consolidation of findings and they

report back with recommendations, details of potential return on investment

(ROI) and suggestions.

CMAT is a systematic, rigorous and highly effective tool for supporting the

assessment of how well an organization is managing its customers. It defines

strengths and weaknesses in existing customer loyalty management activity. It

makes detailed recommendations based on interviews, evidence gathered and

analysis. It provides a solid foundation – a roadmap – for decisions about which

systems, processes and resources are required to support customer loyalty

management objectives. It illustrates the gap between intention and reality,

dispelling ‘corporate myths’.

IBM’s Bryan Foss concludes:

Our work in customer loyalty management shows that the best way to gain

and retain customers is to have detailed knowledge both of the customer

and of the business. By understanding the customer’s needs, offering the

right products at the right time, at the right price, and by delivering

consistent, efficient service through every channel of communication, there

should be no need for the customer to stray.

3Financial services and the Internet

Chapter overview 59

Introduction 59

The security issue 59

Strategic aspects of delivering financial services via the Internet 63

■

■

■

■

57

Financial services and the Internet

CHAPTER OVERVIEW

■ The Internet has revolutionized financial services to an extent that even the most

enthusiastic e-RFSP may, ultimately, have underestimated.

■ The Internet offers unprecedented benefits to RFSPs and to their customers. In

many respects it is almost the perfect means for delivering financial services.

INTRODUCTION

For banks and other financial institutions, the convenience the Internet offers for

delivering banking services for customers is a happy accident. The Internet started

being used by academic establishments in the early eighties simply to allow

university libraries in North America to join together to provide readers with

more convenience. Not surprisingly, once the technology to make this link had

been proven in the marketplace, the enormous advantages of offering such a

facility to many types of users became clear. The result is that today, the world is

in the midst of a computerized data revolution that is unquestionably the greatest

communications revolution of all time.

The importance of the Internet in the retail financial services industry stems from its

interactive capacities. It allows customers and their financial institutions to exchange

information via a computer screen on a secure basis. The specific advantages of the

Internet as a banking delivery system can be summarized as follows.

■ The Internet enables interactive communications with customers.

■ An extensive amount of information can be displayed on the computer screen.

■ Computer graphics offer considerable opportunities for branding.

■ The use of Internet ‘links’ allows users to access additional information in a

very convenient fashion.

■ Customers can scroll through displayed information to find what they need and

scroll back to check details.

■ Far more functionality can be delivered through the Internet than through any

other delivery channel, including branch delivery.

THE SECURITY ISSUE

Research from around the world shows beyond question that security issues are by

far the most pressing concern of consumers and businesses which would otherwise

wholeheartedly embrace the opportunities for buying and selling via the Internet.

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For example, according to research published in 2000 by the international

management consultancy KPMG, security issues are easily the biggest fear which

British business people have in relation to the Internet. KPMG’s second

Information Security Survey involved sending a questionnaire to the 15 000 UK

organizations with a turnover of more than £10 million. A total of 1000 replies

were received, with the vast majority provided by senior managers, including

financial directors, information technology directors and security officers. We can

be confident that the findings echo the anxieties of organizations outside the UK

as far as information technology is concerned.

The KPMG survey found that 70 per cent of respondents used the Internet,

which, interestingly, is more than double the figure from the previous survey in

1996. However, of these organizations, more than three-quarters had failed to test

the security of their Internet site at all. Less than half of the users and intended

users had any procedures in place covering the use of the Internet. A third of

Internet users had systems which did not provide security violation reporting or

did not review it, while half of all organizations using mobile computing did not

have procedures covering the security of this activity.

As KPMG observed:

These risks and exposures are not properly managed because organizations

either do not fully understand them or cannot visualize their impact. By

contrast, the survey results showed an improvement in the number of

organizations taking more traditional security procedures – for instance

against loss of hardware (through inventories and physical protection) and

against damage to software (through virus protection). Perhaps this reflects

a better understanding of the risks involved. Computer hardware is a

physical asset and a software virus leaves its mark on-screen.

KPMG also quite rightly points out that security procedures actually save money

in the long run (or even in the short run).

Many companies pay three times over for security breaches. Losses are

suffered through a security failure, costs are recurred recovering from the

incident, followed by more costs to secure systems and to prevent further

failure. Our survey identified that there is a direct financial benefit of

implementing effective security procedures. Quite apart from saving money

which may need to be spent on solving security problems after the event,

one-fifth of respondents said that their risk management programme enabled

them to obtain a discount on the cost of insurance when they had proper

Internet security in place.


Judging from the KPMG survey and many other surveys like it, an awareness of

Internet security hazards is growing among businesses but is still far less

widespread than it ought to be. Furthermore, it appears that many businesses are

adopting a cavalier attitude towards Internet security, imagining somehow that it

is not going to be a problem for them.

Most human activity, from private life to professional life, thrives on exclusivity.

Private life depends on privacy, confidentiality and the perception of a loved one

as special. In our career, we rightly guard our own contacts, both within our

organization and among counterparties, very jealously, knowing that, for many

people, the quality of their contacts and the quality of their career is synonymous.

One admires people who can pick up the telephone and enjoy the confidence of

a famous or important person; one is, too, increasingly coming to admire people

who not only know a similarly famous or influential person’s e-mail but enjoy

interactive conversations with them rather than merely the opportunity to send

them a message which is unlikely to be returned.

One of the ironies of business life is that the more global the world’s business

becomes, the more countries reach the stage of having a developed economy, and

the more opportunities there are for communicating to others in all types of

business organization, the more important exclusivity becomes. Business life is not

founded on dealing with people en masse, but on dealing with customers who are

known to us. A large organization may have many millions of customers, but it

quickly understands that it needs to treat them as individuals and respect their

needs and problems from this perspective if it is going to keep them.

The Internet is a wonderful communications tool, but its two biggest advantages

– that it is an entirely virtual system and that it is unregulated – create major

security problems.

The first advantage of the Internet, its virtual nature, means that it requires no

physical contact between counterparties. One can do business with someone else

over the Internet without the slightest knowledge of what they look like or even

where they are physically located. How many people, for example, who buy

books from Amazon know where Amazon’s warehouses are located? The point is

that this knowledge is not important. The Internet is purely an information

exchange and as we have already seen, the essence of any commerce system is the

exchange of information. The Internet essentially reduces commerce to its purest

form. Unfortunately, in doing this, it also creates the obvious security problem

that one cannot always know who one is dealing with.

This is not only a problem from the security perspective. It is also a commercial

problem in its own right. As Frédéric Engel of Internet Security vendor ActivCard

points out: ‘If the purpose of a business is to acquire and retain customers, how

can the Internet help you to do this if you don’t know who your customers are?’

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The answer is that the Internet does not help you from this perspective unless you

do know who your customers are. Therefore some method of being certain about

who you are dealing with is essential. It is interesting that people embrace the concept

so readily of using a screen name which may not in fact bear any resemblance to their

own name. One might say that the Internet is the only communications device where

even bona fide, totally honest people give a false name! This dramatizes the

fundamental nature of the security challenges relating to Internet use. Of course, the

reason why people ‘give a false name’ across the Internet is simply that the amount

of space available for communicating one’s details is limited and one needs to choose

a name which others will not already be using. But the fact that the intentions are

usually entirely honest does not detract from the fact that the very nature of the

Internet tends to disguise the users’ identity.

The second big advantage of the Internet, its lack of regulators, is undoubtedly

one of the factors that has contributed to its stunningly rapid implementation.

Not only do users of the Internet enjoy a certain ‘buccaneer’ feeling that they are

pioneers (as they are) of an exciting and limitlessly opportunity-rich application,

but they don’t feel that anyone will be breathing down their necks.

We can draw the following conclusions about the nature of the Internet security

problem facing retailers and their customers. (In practice, of course, the very

nature of the Internet’s global infrastructure and the difficulty of knowing exactly

who one is dealing with would make regulation very difficult.)

■ An Internet retailer needs to know who they are dealing with if it wants to (the

company) provide that customer with the level of service required.

■ The customer of an Internet retailer needs to be certain that personal information

sent to the retailer will remain confidential.

■ Both retailer and customer need to be confident that personal information they

exchange cannot be modified or changed in any way.

■ Before the customer sends any information at all to the retailer, the customer

needs to know that they are actually dealing with the right person.

These crucial issues are covered by the principles of Internet security and trust.

Internet security means keeping the data communications conveyed over the Internet

secure from external interference and from being read by unauthorized persons.

Internet trust means ensuring that the counterparty a bank or customer thinks it is

dealing with is the counterparty that it actually is dealing with. Of the two challenges,

Internet trust is regarded as representing the most serious problem, because of the

fundamentally tough challenge which verifying someone’s physical identity is bound

to represent across a totally virtual delivery mechanism. Fortunately, the increasing

use of formal secure tokens when sending transactions over the Internet is tending to

solve the trust problem. Smart cards making use of encryption codes that change on


a second-by-second basis (often generated by an algorithm based on a chronological

starting function) are especially useful in this respect.

STRATEGIC ASPECTS OF DELIVERING FINANCIAL

SERVICES VIA THE INTERNET

There are a number of strategic points to make about the Internet as a channel for

delivering banking services. These are as follows.

The customer controls the relationship

The first and arguably most important point is that it is the customer who controls

the relationship. This is not always the case in banking. In delivering services via a

branch, for example, the customer can only enter the branch to use the full range

of services during opening hours. Furthermore, the customer will need to wait in

line until a cashier is free. Even in today’s user-friendly branches, customers are

often treated rather as a inconvenience than as something intensely desirable.

The Internet changes all that. In an Internet interaction, the customer chooses when

to access the system (which can be any time, day or night); they choose how long to

access the system for; they are given opportunities to control the entire interaction

and can even choose the type of access device used to access the system. With an

Internet banking system, customer choice in banking acquires a whole new meaning.

The momentum towards mobile Internet banking access

This is a crucial issue in Internet banking and is likely to change the face of Internet

banking beyond recognition by 2005. When the telephone was first developed, it

stood on people’s desks at work or on their telephone tables at home. It could, in

principle, only be used by a customer who was situated close to the desk or table.

Human beings had discovered how to send voice communication reliably beyond

earshot but were still limited in how they could use that new system.

The advent of widespread mobile telephone systems in the eighties changed all

that. Cellular technology made it possible for a phone to be carried on one’s

shoulder or in one’s briefcase. Subsequent technological improvements in mobile

phones made them very much smaller and lighter than the average wallet. The

model of using a telephone ceased to be that of a person sitting or standing at a desk

and became that of a person with a personal communications device accessible at

all times. The mobile telephone is the closest people will ever get to having evolved

a remote voice communications facility.

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At the time of writing, mobile Internet technology remains embryonic and

largely untried. However, there is no doubt that it will become a major

phenomenon in the future, because there is no more sense in an Internet service

being constrained to desktop or tabletop access than there is for a voice

communications system to be constrained in a similar way. Voice communication

is, of course, already possible over the Internet, and it may be that in time most

land-line or mobile telephone voice communications will take place via the

Internet rather than via traditional telecommunications networks.

But mobile Internet access is not only about using the Internet as a substitute for

the voice communications provided by a telephone. It is also about giving people

access to the Internet wherever they are on earth. The nature of the mobile devices

for doing this is not yet clear: it is not known, for example, whether customers

will ultimately prefer the much-touted WAP (wireless application protocol)

phones – which are basically mobile telephones with larger screens to permit some

useful access to Internet screen data – or whether customers will come to prefer

larger access devices, such as those being developed by many major vendors.

These devices may look something like today’s palmtop (notebook) hand-held

computers that either incorporate miniature keyboards or input devices featuring

a stylus used by the customer to hand-write information into the device.

But even though it is not yet clear which types of devices are going to be most

popular with customers (and there is no denying the fact that WAP phones

provide only very limited useful Internet access), the importance of mobile

Internet access can hardly be overstated. There will be new devices, too, such as

personal digital assistance (PDA) which may even allow customers to modify

details of their bank accounts themselves to accommodate transactions they have

undertaken. These PDAs may be updateable by being interfaced with home or

office Internet banking terminals. The devices could also be linked to digital

television services in order to give customers a true breadth of choice in how they

access their bank’s Internet site.

Electronic bill presentation and payment

Clearly, it will eventually be possible to integrate an Internet banking system

(whether delivered to land-line terminals or to mobile devices) with systems for

paying bills electronically. This is already possible in some Internet banking

systems. The customer sets up an arrangement in advance to make funds transfers

to particular accounts (such as utilities accounts and to other organizations to

which the customer makes regular payments) and simply activates the funds

transfer via the Internet banking system. This is not a contradiction of the earlier

observation that Internet banking systems restrict funds transfer operations for

security reasons, because a transfer to a prearranged account does not usually


carry significant risk for a bank because the money can probably be recovered

from the organization receiving it if an erroneous transaction is made.

E-services and the risk of disintermediation

We have already seen that disintermediation is a serious problem or challenge for

traditional retail banks and other traditional RFSPs. Internet banking is a

particularly dangerous means of disintermediation because a newcomer can easily

set up a Web site and generally the initial investment required to start an Internet

banking service is minimal.

Admittedly, the investment becomes substantial if the bank is aiming to win

many thousands – or even millions – of customers. The Web site may not be

expensive to run, but making sure that there is enough capacity for customers to

access it without being kept in queues is not a trivial consideration, and of course

the bank must provide a support service to ensure that transactions are properly

accounted for and followed up.

To date, traditional players have tended to confront the threat of disintermediation

by starting their own Internet banking initiatives without giving competitors much

chance to steal a march on them and win customers from them. It remains to be seen

how effective this ultimately defensive technique will turn out to be.

Achieving the successful virtual customer relationship

It is arguably too early to be certain exactly what the ‘successful virtual customer

relationship’ consists of. If industry experts such as Ian Ogilvie of HSBC are to be

believed – and there is every reason to trust these experts – the secret of achieving

this successful relationship with customers is not to be so overawed by the

potential of the Internet as a delivery system for banking services that one forgets

that it is only one of several important channels available to banks. Unfortunately,

there has been so much hype about the Internet – hype that intensifies all the time

– that many bankers seem to have become convinced that the only way they can

achieve success is to put most of their remote delivery channel resources into a

new Internet banking initiative. This seems dangerous, because it is likely that the

Internet will turn out simply to be one of many possible channels. Furthermore,

it is probably unrealistic to assume that a situation will eventually be reached

when Internet terminals are as ubiquitous in the home as televisions.

Those institutions which have initiated their own digital television banking

services seem to share this belief. After all, television is popular because it is a

source of ready, easy, high-quality entertainment which requires no input or effort

from the viewer. This will never be true of Internet terminals. While no doubt

there is still an enormous amount of slack to be taken up in terms of Internet

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terminal deployment (especially among the private domestic market), it may be

that within a few years the Internet terminal proliferation graph slowly starts to

flatten out. Digital television may then come into its own. At any rate, the last

thing anyone involved in creating new service delivery channels to banks can

afford to be is short-sighted or over-preoccupied with one particular channel.

Case study 3.1

first-e

Launched in November 1999, first-e the Internet bank was formed by first-e group plc and

the Banque d’Escompte of France. first-e was eager to position itself as Europe’s first

Internet-only bank. Shareholders include Apax Partners & Co., Capital Z, Intel Corporation,

Invision, Morgan Stanley Dean Witter & Co. and Vertex.

When the bank was launched, it offered some of the best interest rates available, hoping

to attract customers to online banking and away from other banks that were operating

online services. It currently offers financial services online in the UK, with a portfolio of

110 000 registered users.

The first-e Internet bank has been successful, and came as a real challenge to Egg when

it was launched, but first-e suffered bad press over ‘security’ breaches, as one account

member was able to view the details of the inactivated account of another first-e customer.

first-e has also come under attack from the media over its non-membership of the UK

Banking Ombudsman Scheme and the British Bankers Association. first-e was quick to

issue the statement that as first-e the Internet bank is licensed under French banking law

and not under the 1987 UK Banking Act and does not have a branch presence in the UK,

neither the UK Banking Ombudsman nor the British Bankers Association feel it can gain

membership to their respective schemes.

In May 2000 the bank announced that first-e group plc and Uno-e, the Internet bank that

is being formed by Banco Bilbao Vizcaya Argentaria (BBVA) and Terra Networks, plan to

merge to form unofirst group, which will pursue worldwide financial services expansion

across Europe and into Latin America.

Case study 3.2

smile

smile, the Internet branch of the Co-operative Bank, was launched in September 1999 and

went live in October 1999. It attracted customers with the promise of a full range of

competitively priced products.

On the same day that smile went live, the company was already offering a wider range of

services available after the New Year. Chief executive Mervyn Pedelty said that smile could

be offering mortgages, children’s and youth accounts, share dealing services and life

assurance. He added that smile hoped to make available added features such as financial

planning – illustrations and information relevant to a customer’s financial circumstances –

and money management.


Concerns about Internet security have been a serious issue for all e-commerce

businesses. smile realized that British Standards Institution (BSI) recognition would help to

put potential customers’ minds at rest. The bank’s multi-levels of security have met all the

criteria laid down by the BSI in its code for information security management.

On 15 March 2000, smile announced that it had appointed Bob Head as its first chief

executive. Head was a founding director of Egg and was a key acquisition for smile. He

announced on 18 April 2000 that the bank had recruited 120 000 account holders in less

than six months, putting smile slightly higher than first-e in the number of customers.

Case study 3.3

Egg

Prudential Financial Services Group launched Egg in October 1999, making it one of the first

organizations offering personal financial solutions to make comprehensive use of the Internet

on a fully integrated basis. Egg’s target market includes young professionals, well-off older

people at or near retirement, and busy younger people with fluency in new technology.

Sir Peter Davis, chief executive of Prudential Corporation, said that Egg was part of

Prudential’s strategy for the UK to provide a broad range of products through a wide range

of distribution channels. He added that the launch of Egg anticipated the projected growth

in direct distribution and electronic commerce. Egg initially launched with three products –

a savings account, mortgages and personal loans.

In 2001 Egg remained the market leader in terms of online customer numbers. In the 18

months after launch, it built up a customer base of 900 000. More than 250 000 of these

were credit card holders, acquired since September 1999.

The latest initiative from the Prudential is a combined loyalty and credit card teaming up

Egg and Boots the Chemist. Benefits to the consumer are to include low interest rates and

Boots Advantage points wherever the card is used. The initiative also brings excellent

business benefits to Egg, which will have access to the Boots customer base, with the

potential to accelerate dramatically the rate of customer acquisition.

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4The commercial challenge ofthe Internet

Chapter overview 71

The challenge posed by non-bank players 71

The six major trends in how e-commerce will impact on business 72

The relationship between e-commerce and e-business 76

The increasing popularity of the Internet as a way ofshopping 77

Barriers to online shopping 81

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■

■

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The commercial challenge of the Internet

CHAPTER OVERVIEW

■ The Internet will extend and accelerate familiar business models.

■ The Internet will change the nature of channel partner relationships.

■ The Internet will place an increasing emphasis on services.

■ The Internet will establish new frontiers of sales and service efficiencies.

THE CHALLENGE POSED BY NON-BANK PLAYERS

For RFSPs, the most serious commercial challenge posed by the Internet is that

non-bank players might beat banks and financial institutions in the race to extract

maximum profit from e-commerce. The threat posed by non-bank contenders is

very real and so it is necessary to consider how and where the threat is likely to

come from.

Postal service organizations

A major type of contender which seems ideally placed to play a key role in the

burgeoning electronic commerce market is the postal service organization. These

organizations rarely have the same level of knowledge of a customer that a bank

would be expected to have, but the very fact that postal service organizations

operate within the communications industry makes involvement with the Internet

in general, and electronic commerce in particular, important for their expansion.

For example, the UK postal service company, the Royal Mail, has launched a

service called ‘ViaCode’, which is a public key infrastructure (PKI) system

developed for the Royal Mail by Entrust Technologies. (PKI is a special way of

achieving Internet trust and security by means of an encryption system.) ViaCode

uses 128-bit cryptography techniques that were designed in Europe, and is already

in use in more than 800 major organizations.

Quite apart from anything else, the Royal Mail initiative shows how successful

a service provider can be when it makes a significant paradigm shift to delivering

an Internet-based service to existing customers with whom it has built up a

relationship of trust. The Royal Mail’s view of PKI is illuminating:

PKI replicates in cyberspace what introductions, signed paper documents and

secure courier services have done for traders during the last 2000 years or

more. Without it, safe e-commerce on a broad scale simply cannot happen.

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Telecommunications companies

Telcos are major contenders in the battle for Internet trust industry dollars. After

all, they have a key role to play in the actual infrastructure of telecommunications

lines on which Internet messages are transmitted. It is a natural step for them to

offer a PKI system and supporting services, either as a trusted third party (TTP)

or as a software provider. In the UK, for example, BT successfully launched

Trustwise, its own PKI system in May 1999, and initial results suggest that this is

destined to become a market leader.

Information technology service companies

Naturally enough, information technology service companies are also anticipating

a very substantial market for software and systems relating to PKI and all aspects

of Internet security and trust. Generally, these service companies tend to offer a

combination of hardware, software and consultancy support, with the precise mix

of offerings depending on the nature of the relationship which the IT service

company has with its customers. Several such service companies are offering

digital certification systems, as well as end-to-end PKI systems which are often

supplied on a full service.

One of the regular features of the electronic commerce industry is the tendency for

vendors to team up to offer a comprehensive service rather than only one element

of it. The motivation for this is clear: to develop a more attractive customer

proposition. In e-commerce services, the name of the game is very much developing

partnerships with other contenders which do not directly compete with you.

THE SIX MAJOR TRENDS IN HOW E-COMMERCE WILL

IMPACT ON BUSINESS

Research shows there are six major trends in how e-commerce will impact on

business.

■ It will extend and accelerate familiar business models.

■ It will change the nature of channel partner relationships.

■ It will expand global trade.

■ It will cause a dramatic explosion in Internet revenues.

■ It will place an increasing emphasis on services.

■ It will establish new frontiers of sales and service efficiency.


How the Internet will extend and accelerate familiar business models

In a world where the Internet is playing an increasing part via the medium of

e-commerce, consumers and businesses will continue to buy and sell in a wide

variety of ways. Their basic motivations for buying and selling will remain the

same. They ultimately want to get the best goods and services at the lowest

possible price. In particular, we are likely to see the following developments.

■ Internet auctions will play an increasingly important role in e-commerce. They

are already extremely popular in the United States as a means of sellers disposing

of perishable, scarce and end-of-life goods. The beauty of the Internet from the

perspective of facilitating auctions is that descriptions of lots, asking prices, last

offers and time remaining for bids are all readily communicable to bidders via

Internet technology. Internet auctions will also offer significant price reductions

to buyers compared with conventional means of selling.

■ The Internet will facilitate suppliers quoting for the provision of particular

goods and services. It facilitates the creation of online markets which match

many buyers to many sellers. Just as with auctions and quotations, the online

market broadens participation, sets up a level playing field, and speeds up

transactions enormously. Spot markets in the oil and gas industries are already

in place, and an increasing number of retail and other business-to-business

markets are being created every day.

■ The Internet facilitates a completely new attitude towards sales catalogues.

Unlike the physical catalogues, Internet sales catalogues can readily be

customized to reflect the target customer’s known preferences, acceptable price

parameters and, usually, distribution arrangements. This can be taken further

to allow the seller to make suggestions for other products which may interest a

customer who wishes to buy one product.

■ Similarly, the Internet enables customers to scroll between different online

suppliers’ catalogues with great facility, and even to store details of particularly

interesting catalogues in their own computer.

■ The Internet facilitates the growth of what is known as ‘embedded trade’. This

simply means that buyers and sellers – especially in the business-to-business

arena – who have already established relationships with each other can readily

arrange via the Internet for embedded products and services to be incorporated

into major systems and other types of products they buy. An obvious example

of this is the way in which software such as Microsoft Office is embedded in

many PCs sold over the Internet. The great advantage of embedding products

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and services in this way is that routine transactions need no longer dominate

conversations with customers, and organizations will be able to spend more time

managing and dealing with exceptions and generally improving relationships.

How the Internet will change the nature of channel partner relationships

There is a sense in which all banks are a form of middleman between the customer’s

source of income and their use of this income. Disintermediation, which can be

defined, simply, as the rendering obsolete of a middleman in any commercial

situation, is a genuine fear for banks, which can see that electronic banking gives

many non-bank retailers the perfect opportunity to handle banking as a sub-set of

their traditional retail activity.

There is no doubt that disintermediation is already happening in e-commerce and

e-business. By definition, any Internet retailer is essentially disintermediating

traditional retailers operating from physical bases. Similarly, Internet-based

distribution and wholesaling is disintermediating many distributors and wholesalers.

It is, incidentally, perfectly possible that in time the growing popularity of the

Internet, and the increasing willingness of people to use it for e-commerce, will

actually lead to ‘Internet retailers’ also being disintermediated to a greater or

smaller extent. After all, if Internet shopping is so easy, we might ask why

manufacturers and producers need to bother with retailers at all?

The point is that e-commerce is creating a revolution in the nature of channel

partnerships which has the potential to change almost everything. Organizations

have the opportunity to rethink almost completely their use of other organizations

which in effect put an obstacle between themselves and their customers. Everything,

literally, is up for grabs.

How the Internet will expand global trade

By definition, the Internet is a global communications medium. Even more than this,

it actually tends to make the very concept of global irrelevant, because the Internet

creates a community of users whose physical existence is irrelevant. There is even a

sense in which Internet users are not even on planet earth: they very literally exist in

a cyberspace. The real point is that any commerce taking place across the Internet

is global, and organizations which want to launch into e-commerce have to be

prepared to receive international orders on their first day of operation.

Organizations selling via the Internet must begin to enlarge their business scope

right away by anticipating worldwide customers and arranging facilities for

international delivery. Naturally enough, since goods will need to be delivered

physically, prices for international customers must reflect this.


How the Internet will cause a dramatic explosion in Internet revenues

Even people who are already making their living from some activity relating to the

Internet often underestimate the prodigious potential of Internet revenues. There can

be no doubt that a substantial amount of all commerce and business will migrate

from physical locations to the Internet. Total Internet commerce and business will

explode, having exceeded $30 billion in the United States by the end of 1999 and

growing to $350 billion in the United States by 2003 (Forrester Research, 2000).

The pace of Internet growth among nations will vary widely, with Germany and

the UK alone (as Europe’s major users of the Internet) representing 45 per cent of

online revenues by 2003. Asian Internet commerce will lag behind US and

European activity while developing nations struggle with economic issues and

build their infrastructures.

How the Internet will place an increasing emphasis on services

The Internet will tend to place an increasing emphasis on services because it

facilitates a direct service delivery channel from the supplier to the customer. There

is already substantial evidence that the Internet is encouraging organizations to

differentiate products based on the services bundled up with them. For example, in

addition to such features as power locks and CD players with automatic changing

of the CD, luxury cars will include GPS-based automatic emergency calls when the

airbag deploys and the ability to telephone the customer’s favourite repair shop

when the car senses a need for preventive maintenance.

How the Internet will establish new frontiers of sales andservice efficiency

One of the basic principles of business is that you make money by not spending it!

The Internet will facilitate this philosophy by giving organizations opportunities to

wring costs out of their services and supply processes. Industry projections show

that Web-enabled customer support will be able to cut the labour costs per contact

by 43 per cent.

Dealing with customers via the Internet is always going to be much cheaper than

using a physical retail outlet or sending a person to see the customer. Instead of

the cost of a physical retail location or the travel and time expenses involved with

a physical person, organizations simply use the Internet with its inexpensive

communications charges.

One famous computer software supplier is Cisco Systems, an enormously

successful global organization that is the world’s leading supplier of routing and

switching hardware for Internet networking. Cisco (whose market capitalization,

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incidentally, has risen enormously due to the boom in Internet stocks) announced

in early 2000 that it is already saving about $250 million per year by focusing its

customer support through the Internet.

THE RELATIONSHIP BETWEEN E-COMMERCE

AND E-BUSINESS

At this point, it is essential to be clear about the distinction between e-commerce

and e-business. As with any nascent industry, there is always a certain amount of

confusion about definitions of key terms.

The first thing to say here is that it is essential to keep in mind the definition of

e-commerce as buying and selling goods and services over the Internet. Sometimes

e-commerce is defined as retail buying and selling over the Internet, but this, as

we have already indicated, is an unhelpful and in fact entirely unjustified

narrowing of the remit. Consequently, it is much better to regard e-commerce as

the generality of Internet-based buying and selling.

An even more important point is that e-commerce needs to be regarded as a

sub-set of e-business, which we now define as ‘the entire conduct of business over

the Internet; not just buying and selling, but also servicing customers and

collaborating with business partners’.

There is, then, a very important distinction between e-commerce and e-business.

Unfortunately, even today, when the above definitions tend to be solidifying, some

regard e-business as buying and selling, and e-commerce as the entirety of

Internet-enabled business. This is an obviously logical flaw and one that should

not be pursued: e-commerce is the subset and e-business the entirety.

Another term which is useful here is the notion of technology-enabled

relationship management, which is usefully abbreviated to TERM. Focusing on

this idea is valuable because it dramatizes the fact that the Internet has essentially

created an entirely new way for organizations to deliver services to their

customers and to sell them things they want. The dramatic nature of the growth

of this new channel can be seen worldwide every day, and is well documented in

a survey from which we quote below, the Ernst & Young Internet Shopping Study,

and in other surveys like it.

The point which needs to be taken on board about Internet technology is that,

for very good reasons, an organization’s customers expect to be able to take it for

granted that the organization can operate the technology needed to deliver

services, and supply goods, over the Internet. As Alan Woodward, principal of

UK-based information technology and Internet consultancy Charteris, told us:


The point is that Internet technology is a commodity which every player

needs to have in place as a matter of course. It’s essential for any

organization which wishes to make the most of the Internet to remember

this: there are no prizes for installing technology which works.

He continues:

Internet commerce and business is business-focused and technology-enabled,

but the technology is only an enabling force: what matters is the business

use that is being made of it. As so often with computers, and as so often

with new technologies, the technology itself is fairly irrelevant, except to

specialists. How many people who enjoy watching television and enjoy

videos/laser disks/DVDs know how these technologies work? These matters

are of great importance for making the technology work, but they will not

usually interest the television or video fan. With new technologies, what

matters is the application, and this is as true in e-commerce and e-business

as in any other new technology area.

THE INCREASING POPULARITY OF THE INTERNET AS

A WAY OF SHOPPING

In today’s justifiably Internet-obsessed business community, surveys and reports

about the Internet are released almost every day. The one we have chosen to

illustrate the phenomenon is the second annual Ernst & Young Internet Shopping

Study, issued in 1999 and covering Internet activity up to the end of 2001. It is an

extremely thorough and well-researched report and provides ample evidence for

the dramatic growth of the Internet as a shopping medium and of its continued

growth in the future.

As the Ernst & Young report says in the introductory pages:

The Internet is rapidly becoming a vibrant marketplace for buyers and

sellers of a fast-growing pool of consumer goods and services. Though still a

small slice of the total shopping pie, the World Wide Web in just four years

has become a viable outlet for manufacturers and retailers of everything

from clothes, food and books to computers, toys and travel arrangements.

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Consider today to be akin to the 1960s, when regional malls, chain stores

and other novel retailing concepts were beginning to reshape consumer

shopping habits. The online shopping landscape will eventually reconfigure the

supply chain of many consumer goods and services, retailers, wholesalers and

other parties which come between producers and consumers. With a vast

digital retailing territory still to be won and returns still to be made, it’s

becoming more and more important by the day to understand why consumers

are going to the Web and how pioneering manufacturers and retailers are

satisfying online shoppers’ buying needs – or leaving them frustrated.

Before providing some details of the Ernst & Young report’s findings, it is

particularly important to emphasize the point of the sheer fact of the fortunes to be

made in Internet business. Ernst & Young’s comparison between the current

e-business explosion and the explosion of novel retailing concepts in the sixties is a

strong one, but an even better analogy can be drawn between the rise in e-business

(and especially in e-commerce) and the dawn of the Industrial Revolution: a time

when Britain led the way in bringing powerful machinery to the service of industry,

thereby multiplying productivity by vast amounts.

For those pioneering the processes which underlay the Industrial Revolution, the

fortunes to be made were prodigious. Yet while – ultimately – only a relatively small

number of people made a fortune in the Industrial Revolution compared with the

hundreds of thousands who became wage-slaves labouring in nasty conditions for

12 hours a day or longer, the e-business explosion is good news for everybody.

By definition, e-business creates virtual structures that do not need a vast

amount of labour to operate. The potential for personal wealth gain in e-business

is almost beyond belief. For example, look at Cisco, the importance of whose

global activities has already been mentioned. Founded in a Californian garage in

1984 to link a Stanford University academic’s office computer with his wife’s, by

1992 Cisco was already a highly successful organization, with 300 employees and

$70 million in revenues. By 1994, when John Chambers became chief executive,

Cisco’s sales had jumped to $1.3 billion. In 2000, Cisco made $2 billion profit on

$12.2 billion revenues. Cisco’s stock, which was floated on Nasdaq in February

1990, was the best performer of the decade. An $1800 investment in 100 Cisco

shares on its flotation (between March 1999 and March 2000) is now worth more

than $1 million, and the shares have doubled in the last year, valuing Cisco at

$225 billion. Of the 17 000 employees, 2000 are paper millionaires.

How many industrial organizations born of the Industrial Revolution made

2000 of their employees millionaires? The answer is none. At most, Industrial

Revolution organizations made a handful of their senior people very wealthy,

while the rest stayed poor.


One more point before resuming our look at the Ernst & Young survey is that

there are relatively few failures in the e-business explosion. The industry is so

exciting, and so full of potential, that almost every viable retail idea which is

moved (or started) on the Internet tends to be a success. The e-business explosion

is not a ‘no losers’ industry, but it is not too far from that. We should say that until

the end of 2000 there was tremendous faith in unusual ‘Internet business models’

that proved to be fatal in the markets’ rationalization.

The Ernst & Young survey profiles the e-commerce situation in the US. This is

an important initial observation: it isn’t designed to depict the way e-commerce is

today throughout the whole world or even throughout the developed world. But

anybody who has followed the fortunes of technological innovations over the past

two or three decades will be forgiven for believing that the US provides a

straightforward and almost always accurate ‘time window’ on the way technology

and its applications are going to develop in other countries.

The study took place in September 2000 and surveyed 1363 consumers, 41

retailers and 74 manufacturers across the US. Consumers were polled through

randomly dialled telephone calls to households across the country. Retailers were

surveyed through contacting the most senior marketing officer. Importantly,

retailer respondents were asked either to complete the survey at a special Web site

or else to fill out a paper version of the questionnaire. This eliminated any danger

of skewing participation towards Web-oriented executives.

Key findings of the survey

The Ernst & Young survey revealed the following points.

■ In 2000, only one out of every ten American households shopped regularly on the

Internet, but this figure is increasing rapidly. Generally, the survey showed a strong

increase in the number of households shopping online and indicated that those

who do shop in this way tend to make more frequent and larger purchases over

the World Wide Web. Furthermore, the percentage of retailers and manufacturers

selling, or planning to sell, to consumers over the Internet is rising dramatically.

■ By the end of 2003, all retailers of any significant size will be well advanced

with creating their own virtual sales outlets or developing existing outlets to

win even more customers. These statistics tell the true story of the impact of the

e-commerce revolution.

■ The survey also took care to look at how consumer goods manufacturers were

behaving in relation to the Internet. This is an important issue because it is quite

clear that the second factor which makes the Internet shopping revolution so

important (the first factor being the sheer availability of online shopping at all)

is that it removes the middleman from the shopping transaction.

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This does not necessarily mean that the middleman will always be removed,

but it does mean that the potential is there. For example, the highly successful

online bookseller Amazon does not actually remove the middleman (i.e. the

retailer), it just appears to give the impression of so doing. Why should

publishers not sell direct to consumers? Similarly, why should any

manufacturer not sell direct to their customer? The answer is that

manufacturers are usually not geared up to selling directly to customers.

Publishers, for example, find themselves sufficiently busy with commissioning,

editing and marketing books. But there is no inherent reason why they should

not go into the book-selling business, and the survey makes clear that all types

of manufacturers will be doing this in the future.

The trend in favour of this, however, is not as pronounced as the trend towards

the acceleration of e-commerce generally. The majority of manufacturers

participating in the study (57 per cent) said that they do not and will not sell online

to consumers. Others, however, were clearly not content to let retailers have the

monopoly on online contact with consumers. Some 15 per cent reported that they

were selling online, an increase from 9 per cent in 1997. Furthermore, the number

that plan to sell online in the future more than doubled in the period under survey,

from 12 per cent to 28 per cent. However, it is mainly smaller manufacturers

which are planning to become online merchants, not large companies which

produce established brands sold through traditional retail channels.

Ernst & Young is absolutely right to point out the fact that larger, more

traditional (and possibly more conservative) manufacturers are less interested

in online selling direct to consumers than smaller retailers. Two points need to

be made, though. First, this situation may change very quickly, and if it does,

the large manufacturers have the financial muscle, business experience and

access to know-how which will allow them to create an Internet retail presence

very promptly. Second, even though large manufacturers are not necessarily

using the Internet at present for distribution to consumers directly, they

frequently used the Internet extensively to communicate and distribute to their

customers: the retailers and wholesalers. Consequently, large manufacturers

can hardly be said not to be involved in e-business.

■ It is quite clear that both retailers and manufacturers do expect online sales to

become a significant – although still minority – portion of total sales in the next

few years. Today’s online retailers expect the Internet to account for a steadily

increasing percentage of their revenue. From an average of about 1 per cent of

total sales in 2000 (remember that the survey studies all retailers, not just

specialized Internet retailers) to 9 per cent for the fiscal year 2003. Manufacturers

already selling online projected that the Internet would represent around 7 per

cent of their total revenue by their fiscal year 2003.


■ As something of an appendix to the main findings, though by no means a trivial

point, most organizations reported that they were far from satisfied with what they

had been able to achieve to date via the Internet in a business sense. They

considered that this dissatisfaction was due to their own failings in exploiting the

potential of the technology, not due to the failings of the technology. In particular,

retailers and manufacturers alike believe that their Web sites must be easy to

navigate, updated frequently, informative and interactive, but most respondents

gave their own sites mediocre grades according to these attributes. Ernst & Young

also reported that the organizations with greater-than-average online success had

sites that were highly informative, intuitive and current.

BARRIERS TO ONLINE SHOPPING

The Ernst & Young survey revealed two fundamental barriers to online shopping.

Interestingly, despite these barriers, according to shop.org and Boston Consulting

Group the market for goods and services sold to customers over the Internet (i.e.

the e-commerce market) is estimated to reach $13 billion by the end of 2003 in

the US, growing in excess of 200 per cent per year over the next few years.

What are these barriers?

The first is easy enough to identify: it is simply the continuing lack in the majority

of households of a PC through which they can actually conduct Internet shopping.

The survey found that as of September 2000 (the situation will have improved since

then) 57 per cent of all households polled lack a personal computer. Furthermore,

the survey found that the presence of a PC is not a guarantee that its users are

shopping on the Internet. Of those households with PCs, only a slight majority (52

per cent) were online and only a minority (38 per cent) of those had actually bought

something over the Net.

The second barrier to online shopping is security. The Ernst & Young report

provided overwhelming evidence of what anybody who has contact with the

online shopping industry already knows: people are nervous about putting secure

information (such as credit card details and personal information) on the Internet

because they do not feel such information is sufficiently secure.

An astonishing 97 per cent of consumers blamed their lack of comfort in

sending credit card data over the Internet for their unwillingness to buy online.

The next most popular culprit – their preference to see a product before

purchasing it – was only blamed by 53 per cent of respondents (note that

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respondents could choose more than one factor). The next most popular cause of

unwillingness to buy online was the inability to talk to a sales representative.

Interestingly, a feeling of security in sending their credit card data over the Net was

the most important factor cited by online shoppers when they explained what made

them want to buy from a particular vendor. As this report shows, most current

techniques for sending credit card details over the Internet are comparatively secure

for low-level types of transactions, but it is clear that any consumers who feel that

one particular retailer offers an especially good level of Internet security are –

considering the nature of current Internet security applications – generally labouring

under a misconception. The fact is that Internet security fears are such a potent

concern among so many potential consumers that it is no exaggeration to say that

they are seriously inhibiting consumers buying over the Net.

It is interesting that despite setting down the findings relating to security very

clearly, the Ernst & Young survey appears deliberately to de-emphasize the

security problem in its narrative commentary. This is not to say that any deliberate

misrepresentation is involved, but it does appear that Ernst & Young wants to

promote Internet shopping in a bullish and positive way for commercial reasons

and is reluctant to focus on the security problem to the extent to which it deserves.

In this briefing, one cannot have the same luxury.

In Europe, Internet shopping is, if anything, even more popular than it is in the

US. By the year 2004, more than 57 million Europeans will be connected to the Net

from home, school and the office. Consumers and business will account for $64.4

billion in European online sales by 2003. The precise nature of the e-commerce

interface which triumphs in what is increasingly being seen as a European race to

achieve e-commerce supremacy among various technologies is not clear. It is

perfectly possible, for example, that the highly effective European global satellite

mobile (GSM) mobile communications standard – which, as we have seen, means

that anybody with a GSM mobile can use their phone almost anywhere in Europe

– will become the most favoured way of accessing the Internet in terms of volume

of users. Obviously, PCs are never going to be eradicated as the way of gaining

Internet access, but the potential of mobile phones in this area is enormous.

The penetration among users achieved by the Internet by 2003 will represent

around 13 per cent of the total population (Forrester Research, 2000). It is arguable

that Europeans are actually less conservative than Americans when it comes to using

new retail techniques and being ready to implement them if they are retailers. For

example, virtualization in many European industries has proceeded at a faster pace

than in the US. And the banking and travel industries have become highly virtual in

Europe but are not yet so in the US.

5The branch

Chapter overview 85

Introduction 85

Evolution, not extinction 85

Reasons for the decline in the traditional branch 86

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The branch

CHAPTER OVERVIEW

■ Branches are not efficient locations for routine transactions. But they remain

useful for other functions.

■ They are evolving into being part sales office, part social location.

■ They remain an important, though not essential, part of the mix of available

delivery channels.

INTRODUCTION

We have already mentioned the enormous changes in how banks view their physical

branches. There is no doubt that branch numbers are declining and will continue to

do so both in absolute terms and in relation to the size of the customer bases they

serve. However, this does not mean that the branch itself is dying. On the contrary,

any detailed study of the multi-channel retail financial services industry reveals that

the branch, in a sense, is healthier than ever.

Not all RFSPs operate branches. Many that do not are pleased not to have to

be concerned with them. But those that do operate them recognize the potential

which branches have as a venue for profitable activity.

EVOLUTION, NOT EXTINCTION

The branch is healthy, but it has changed its nature profoundly. The description

‘evolution, not extinction’ is applied to many things in this technological age of

ours, but in the case of the bank branch, it is particularly appropriate. Things

avoid extinction if they have good genes and their environment is safeguarded.

Figuratively speaking, both these criteria apply to branches. They have good genes

– the services and overall functions they perform are valuable and important – and

their environment is safeguarded for the very simple reason that the high streets

of towns and cities need them.

If there is one overall consensus of this briefing, it is that those who believe

branches to be on their way out have got it wrong. Anybody walking around a major

town or city in AD 2100 is not going to see as many bank branches as there are today,

but there will still be such branches, and they will still be performing an important

role. What the nature of those branches is likely to be must be considered here.

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REASONS FOR THE DECLINE IN THE

TRADITIONAL BRANCH

Many traditional bank branches were, in every sense, a waste of space. The vast

majority of transactions carried out in them were boring for the customer, boring

for the staff and generally mundane and tedious. Worse, such transactions not

only made no money for the institution but actually tended to cost it money, if the

price of labour, premises, heating and lighting were all factored into the equation.

Even ten years ago, it was routine for people to enter their branch to cash a

cheque – surely one of the greatest wastes of energy and time known to man. Not

surprisingly, the instant banks realized how much money they could save by

encouraging customers to use ATMs and other remote delivery services wherever

possible, they did so.

The encouragement never reached the stage of customers attempting to cash a

cheque in the branch being frogmarched into the street and compelled to use the

ATM, but even so, it could be pretty forceful. The Abbey National, for example,

has for some years run a policy whereby when a customer makes a transaction at

branch level, they are strongly urged to use the ATM next time, and subjected to

a somewhat inquisitorial probe as to why they did not do it this time. In the US,

where indulging one’s whims is particularly expensive, some banks actually levy a

charge on customers who insist on cashing a cheque at a branch when there are

alternatives available.

But just because branches are expensive locations to undertake routine

transactions does not mean that they are redundant for any kind of transaction.

In fact, a careful analysis of trends in retail banking over the past decade reveals

very clearly that staff have been liberated to handle more interpersonal and

demanding types of transactions than was the case in the past. Which, naturally,

makes abundant sense: partly from the efficiency standpoint (bored staff are never

efficient) and from the cost perspective (there is no sense, cost-wise, in a staff

member spending time on a routine transaction when they could be spending time

selling a complex and valuable product).

The evolution of bank branches is, clearly, a movement in precisely this direction:

The momentum towards using branches as sales offices for complex products is

enormous, partly because some customers will only buy such products from real

people working in real, physical locations. The extent to which customers will be

reluctant to buy more complex products via the telephone or via an Internet

banking service remains to be seen, but it is likely that there will always be

sufficient customers who want real personal service for banks to find operating

branches thoroughly financially viable, especially because selling complex products

is only one useful function that can be carried out by branches. Another is the

The branch

promotional value of the branch: something which many reports on retail financial

services seem to ignore. Branches constitute, in effect, a permanent, large-scale

advertising placard promoting the bank’s deals and services. And the logic of

avoiding banning routine transactions from a branch lies in the fact that customers

coming in to make such transactions may see advertising and convert their routine

visit in to one which has enormous implications for their lives.

The future of branches

The future role of branches is likely to cover the following types of functions:

■ provision of routine transaction facilities for people who simply cannot get on

with technology, or whose finances are in too much of a mess for them to be

allowed remote banking facilities;

■ a location for selling complex products such as mortgages, pensions and insurance;

■ an important means of promoting profitable products and services;

■ a social focus for customers in a particular locality. This sounds like a wishy-

washy type of function, but in fact it is an important one. Abbey National has

deliberately started a programme of rolling out new types of branches run in

conjunction with an international chain of coffee shops. The collaboration is

designed to create branches where people will want to visit and where people

can make informal enquiries about financial matters.

An important element in the future of branches is likely to be the creation of ‘mini

branches’ which may be open seven days a week and typically located in large

supermarkets, major department stores or shopping malls. These branches will

offer most of the functions associated with a larger branch and will have the

benefit of being allied with the major retail outlet which is hosting them. Mini

branches are, if you like, a means for banks to deal with the second level of utility

problem. The idea is to make the visit to the branch as much part of an enjoyable

retail experience as visiting the retailer itself.

Configuration of a new type of branch

As Fig. 5.1 shows, major branches of the future are likely to be laid out with a

clear logistical objective and to provide a dynamic and interesting location for

routine transactions conducted via machines, social contact and discussions with

trained staff members over complex products.

Figure 5.2 demonstrates the breadth of functions available via self-service delivery

channels, including branches. This depiction of the physical branch as an important,

but not essential, part of the overall multi-channel mix seems perfectly accurate.

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Fig. 5.1 New branch business

Source: Prepared for this report by Wincor Nixdorf, August 2001

Fig. 5.2 Self-service delivery channels


Teller areaConsulting

zone

Self-servicezone

Targets of the bank:■ Sales and customer-focused business■ Low-cost service■ Standardized branch design (acc. to process structure)■ Customer loyalty elements■ Access to consultant

Adm

inis

tratio

n

Information/transaction

Cash dispensing

Cash dispensing

CRSSafety deposit boxes

Video-conferencing

Self-service zone(incl. 24-hr zone)

Teller area

Consulting zone

Administrationzone

Accesscontrol

• Call centre• Video- conferencing

Passbook Smart card

Statement

Cash dispensingCoins

Passbook ATS Smart Card

Reception

• Pro View server• Security server

Phone

Home PCKiosk

Off-premisesinstallation

ATM

Multi-functionATM

compactBANK

Self-servicebranch

■ Special functions, e.g. foreign exchange■ Coin processing■ Bundle deposit■ Passbook processing■ Deposit■ Cash dispensing■ Franchise products■ Videoconferencing■ Electronic purse■ Account statements■ Transactions/enquiry dialogue■ Orders

■ Consulting■ E-commerce■ Electronic delivery channels■ Services/flexibility

■ Web presence■ Customer loyalty systems■ Business processes■ 1-to-1 marketing■ Cross-selling

6The ATM and the self-service kiosk

Chapter overview 91

Introduction 91

ATMs and security 91

The strategic direction of the ATM 92

ATMs around the world 93

Origins of UK ATM networks 95

Strategic guidelines: making the most of ATMs 97

ATMs and smart cards 98

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89

The ATM and the self-service kiosk

CHAPTER OVERVIEW

■ The ATM has led the virtual banking revolution and continues to provide

important information about what customers need from this revolution.

■ Online, multi-function ATMs that are available 24 hours a day and seven days

a week are rapidly becoming the norm.

■ Smart cards used in conjunction with ATMs are bringing increased functionality,

increased quality of customer service and increased security to the equation.

■ Institutions need to look hard at the cost of operating ATMs as well as of buying

them.

■ Cash recycling is an important new application of ATMs.

INTRODUCTION

The cash machine – or the ATM as it is more formally known – was the first

major new channel for delivering retail financial services and remains the most

visible. It is undergoing an important evolution into an extremely powerful self-

service banking facility which will interface with customers’ smart cards to offer

an extremely wide range of banking services delivered via ATMs located in many

sites convenient to the customer.

In addition to fully fledged ATMs, there are many dedicated automated banking

machines used to carry out specific functions both inside branches and inside 24-

hour lobbies. These include deposit-taking machines, statement printers, machines

for ordering statements, machines for updating passbooks and even machines for

printing out cheques.

International ATM sharing has created a scenario where people can now be

confident that when they go abroad they can gain self-service access to funds in

the local currency. This method is particularly attractive from a security point of

view: because the cash is sourced locally, there is no danger of it being lost or

stolen during transit.

ATMS AND SECURITY

An overriding need facing ATM operators is that their machines dispense requested

functionality to a bona fide holder of a card which operates the ATM, and prevent

an unauthorized user of the card from gaining access to the machine’s functions.

This dual functionality is met in the vast majority of ATMs by the use of a four-

digit personal identification number (PIN). Four digits seems from experience to

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represent an appropriate balance between being easy to remember but with

sufficient permutations (10 000) to disregard the possibility of it being guessed by

an illicit user. PINs are so confidential that even staff who operate the banks’

computer systems do not have access to them, seeing them only in encrypted form.

The most obvious security hazard associated with any PIN occurs at the point

at which it is issued to customers. For this reason, plastic cards and the PINs

relating to them are never posted together to a customer. This prevents the illicit

use of the card and the PIN by someone who intercepts the customer’s mail.

The next most obvious security hazards associated with a PIN occur if a customer

discloses the PIN to a third party. The most effective authorization systems of all

depend on a biological attribute – a thumbprint, voiceprint or retina scan for

example (depending on how advanced the system is) – of the bona fide person being

used to verify that the right person is attempting access. Such authorization systems

are known within the security industry as biometrics. However, these systems suffer

from the basic problem that they are not really suitable for use with an ATM

because of their great expense, the susceptibility of the components to damage, and

the intrusiveness of the authorization process.

In the medium to long term, it is likely that thumbprint or fingerprint

authorization will become inexpensive and reliable, and then it would be an ideal

authorization system for an ATM. In the meantime, banks and customers are

stuck with the PIN system.

The actual functions which ATMs provide can be separated into two types: core

functionality, provided by most ATMs in most countries, and additional

functionality, provided by some ATMs in some countries and often varying

considerably between countries.

THE STRATEGIC DIRECTION OF THE ATM

The importance and worldwide popularity of the ATM as the world’s first virtual

banking delivery mechanism means that for most RFSPs providing banking

services, the ATM is always going to be at the core of their commercial strategy.

Even RFSPs committed to maintaining a branch presence to a greater or lesser

extent rely heavily on ATMs to provide a means for their customers to carry out

routine transactions. The banking industry could not continue in its present form

without ATMs.

As the Abbey National Insight case study earlier in this briefing made clear,

shared ATM networks have been a particularly important strategic element of the

success of ATMs. There has been a clear trend towards regional ATM networks

in large countries merging, and for the gradual emergence of a relatively small


number of national networks in a large country and for the creation of just one

or two national networks in smaller countries.

The nature of shared ATM networks varies between countries. Some networks

are only for ATMs, such as LINK in the United Kingdom. Others include both

ATMs and EFTPoS: this is generally the case, for example, among the networks in

the US. Whatever the function of the shared network, the benefits of sharing are so

great that it is certain to be a permanent fixture in the virtual banking world.

ATMS AROUND THE WORLD

The ATM has established a dominating presence in the world’s banking industries

and, indeed, in the social infrastructures of our towns and cities. To an extent the

increasing tendency for networks (and even banks) operating ATMs to merge in

order to save overall costs is a great benefit to the consumer, as it means that many

high streets today accommodate several or even numerous ATMs, which all run

on the same network and which are therefore accessible by the customer.

Worldwide, the highest concentrations of ATMs per capita, as might be

expected, occur in countries where the payment culture is primarily cash-based

(Forrester Research, 2000). This is especially true of the Far East, and it is

therefore not surprising that Japan has the greatest number of ATMs per capita,

with the total running at around 140 000 for a population of about 110 million,

compared with around 180 000 in the US for a population of about 250 million.

Incidentally, in Europe, the country with the highest density of ATMs in relation

to population is Spain, with around 800 machines per million people. Note also

that, great as the total of ATMs in Japan is, most of these are located inside bank

branches and are not accessible most evenings and weekends.

The US has the largest number of regional cash ATM networks. This is primarily

for historical reasons: US banks have always been to some extent restricted to the

geographical areas where they are permitted to operate and as a result shared ATM

networks a long time tended to be substantially state-based. Today, however, the

largest regional networks in the US span several states, normally within a particular

part of the country. For example, Star System, which comprises a grand total of

around 1000 financial institutions, operates mainly on the West Coast and the

adjacent states. In total, the network operates around 31 000 ATMs located in the

walls of branches and around 11 000 ATMs located away from branches, plus about

500 000 EFTPoS terminals. These ATMs and terminals can be accessed by a total of

around 38 million issued cards, and are located in 12 states. These are, in order of

the number of ATMs in each one: California, Nevada, Arizona, Oregon, Hawaii,

Utah, Washington, Idaho, Colorado, New Mexico, Wyoming and Montana.

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Case study 6.1

LINK

The highly successful growth of the shared ATM network LINK provides considerable insight into

how such a network wins success by developing a strong branding, marketing the network as

an entity in itself and not simply a mere convenient linkage of its members’ networks.

LINK is the brand name of LINK Interchange Network Limited, the UK’s only shared,

branded ATM network. It operates its own computer systems which provide a switching

service to member institutions. LINK was established in 1986. The network operates 24

hours a day, 365 days a year. As of June 2000 it had 34 member institutions, operating a

total of 28 500 ATMs. LINK members have 74.7 million cards in circulation.

As a consortium organization, LINK is owned by its members. As of June 2000 these were:

■ Abbey National plc ■ Derbyshire Building Society

■ Airdrie Savings Bank ■ Dunfermline Building Society

■ Alliance & Leicester Group ■ Halifax plc

■ AIB ■ HFC Bank

■ American Express Europe ■ HSBC

■ Bank of Ireland ■ Lloyds TSB

■ Bank of Scotland ■ NatWest

■ Barclays Bank ■ Nationwide Building Society

■ Bradford and Bingley Building Society ■ Northern Rock Building Society

■ Bristol and West plc ■ Norwich and Peterborough Building Society (A)

■ Britannia Building Society ■ Prudential Banking

■ Chelsea Building Society ■ Royal Bank of Scotland

■ Citibank Savings (Diners Club Europe) ■ Sainsbury’s Bank

■ Clydesdale Bank ■ Tesco Personal Finance

■ Co-operative Bank ■ Woolwich plc

■ Coventry Building Society ■ Yorkshire Bank

■ Cumberland Building Society ■ Yorkshire Building Society

LINK summarizes its overall benefits to cardholders as:

■ a strong, clear, national identity which is widely recognized, providing a clear customer right

of way;

■ a consistent, known set of services, namely cash withdrawal up to a maximum of £250, a

fast cash option, balance enquiries and (depending on the type of machine) a transaction

receipt with a balance;

■ service available round the clock;

■ a high level of redundancy within the network as there are usually several LINK ATMs

within any high street;

■ a fully online service with high levels of protection and security.


Benefits to LINK members include:

■ the ability to offer customers a countrywide ATM network with minimal investment and

running costs;

■ the opportunity to earn income by supplying ATM usage to customers of other institutions;

■ mutual reinforcement of each member’s advertising and marketing;

■ membership of a mutual interest group which enables members to compete more

effectively with other institutions.

ORIGINS OF UK ATM NETWORKS

The UK’s first cash dispensers, branded ‘Barclaycash’, were installed by Barclays

Bank in 1967. They were not strictly speaking ATMs, as their function was

restricted to providing cash. They were open for only limited periods in the day

and were off-line (i.e. not connected to the central computer in real time). Still,

they were obviously an important new resource for banks, and other major banks

– showing that unerring ability to follow the crowd for which banks are,

generally, famous – were quick to follow suit. In particular, the Midland, National

Westminster (which was formed from the District Bank, National Provincial and

Westminster Banks in 1970), Clydesdale, Williams & Glyns Bank and the Bank

of Scotland all took to implementing cash machines with some enthusiasm. By

1972 there were nearly 900 machines in the UK, most of them owned by the

Midland and National Westminster.

The first implementation in the UK of a machine which was recognizably an

ATM rather than simply a cash dispenser took place on 30 June 1975 when

Barclays Bank installed a machine outside its High Street, Oxford branch. This

machine could provide balances and offered a statement-ordering facility, as well

as dispensing cash.

These early ATMs, though, like the cash dispensers, were off-line machines,

with all the inherent security problems.

In 1977, the number of off-line cash machines and ATMs in the UK peaked at

just over 1300. From then on, off-line terminals began to disappear in favour of a

new generation of online machines, where real-time contact with the institution’s

central computer is maintained at all times when the machine is switched on.

In addition to the change of attitude which led to the majority of the machines

being online, there was, from the late seventies onwards, the view that ATMs

ought ideally to be operational round the clock. Previously, many ATMs were

open only when the bank branch itself was open, which was often from only 9.30

a.m. until 3.30 p.m. every day. The machines were originally seen as

supplementary resources to the branches’ daily operation: it took some time for

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institutions to realize that the whole point of ATMs was that they could be used

at all times of the day and night, and particularly by people who were not able to

get to their branch during the day. Nowadays, when bank branches are typically

open until 5.30 p.m. most days and on Saturday mornings, and when institutions

make concerted efforts to present themselves as customer-friendly organizations,

it is easy to forget that only about 20 years ago banks still behaved rather like

government offices which see themselves almost as doing customers a favour by

being open. Furthermore, people who worked long hours in a factory or offices

well away from the town centre would literally never be able to visit their branch

during opening hours, except on days off or during holidays.

In fairness to the UK’s institutions, a similar mistake had been made in the early

days of ATMs in the US, where banks not only kept their ATMs open for strictly

limited periods of the day but confined the issue of ATM cards to their wealthiest

customers. The less wealthy customers – such as the blue-collar workers who

could rarely visit their banks and who were therefore the very people who could

best benefit from an ATM’s services – were not given access to ATMs at all in the

first instance.

There is no specific date which marks the dawn in the UK (or the US, for that

matter) of the notion that far from being mere mechanical supplements to a

branch’s resources, ATMs had the potential to be exciting, dynamic delivery

systems which could greatly extend an institution’s operating base and give it a

real competitive edge over its rivals. All that can really be said is that by the early

eighties institutions were finally cottoning on to this idea and had started to

realize that their ATMs ought to be open for the longest possible part of the day

(which, in practice, meant all the time) and that cards ought to be as freely

available to customers as was compatible with the institution protecting itself

against potential loss and dishonesty.

In 1982, an agreement was reached between the Midland and National Westminster

banks and their subsidiaries for the provision of reciprocal cash withdrawal facilities.

The Clydesdale and Northern Banks (previously subsidiaries of the Midland) have

remained as sharing partners since their sale to the National Australia Bank in 1987.

In 1989 this agreement was expanded to include the TSB.

In response to the initial Midland/National Westminster agreement, the remaining

major clearing banks – Barclays, Lloyds, Bank of Scotland and the Royal Bank of

Scotland – came to an agreement to share their ATMs. Technical considerations,

however, meant that the network did not become operational until 1987.

Despite the UK banks’ efforts to share their ATM networks, they never adopted

the same competitive attitude to ATMs that the building societies did. It was the

building societies that led the way towards the recognition of the true role that

ATMs play in virtual financial services, namely:

■ specifically, to enable customers to obtain cash round the clock;


■ generally, to provide a dynamic, online, round-the-clock tool for delivering the

institution’s services to its customers;

■ to give customers levels of speed and convenience with which a visit to the

branch cannot compare.

Why did the building societies steal a march on the banks in the development and

creative conceptualization of the possibilities of ATMs, and especially of shared

ATM networks?

The most important reason is the sheer scale of the competitive benefits ATMs

could offer the societies. The building societies tended to draw their customer base

from specific cities or regions, where the societies had originated in the nineteenth

century as providers of savings schemes whereby artisans could purchase their

own homes. Even in the eighties – by which time the largest societies tended to

have nationwide customer bases – many societies were still essentially regional in

their operations. The prospect of participating in shared ATM networks gave

them the chance not only of dramatically extending the geographical domain of

their activities but also of being able to offer existing customers a nationwide

banking service. Even if a society was small and could only afford to install (say)

about a dozen ATMs of its own, by taking part in a shared national ATM network

it could nonetheless offer a genuinely nationwide service. ATMs, therefore, had

the potential to wipe out all that portion of the national clearing banks’

competitive advantage that stemmed from their national presence.

There were other reasons, too. ATMs appealed greatly to the new, dynamic, go-

getting generation of financial institution executives, who saw more opportunities

to make a mark at building societies than at clearing banks and who were

fascinated by the opportunities technology offered for changing the face of

financial services. Many of these executives accurately perceived that the clearing

banks’ monolithic structures and traditional approach to the provision of

financial services represented an obstacle to the clearing banks’ ability to compete

effectively with small and more dynamic financial institutions. Furthermore, in

the early eighties the clearing banks, despite their efforts to form shared networks,

were not exploiting the functional possibilities of ATMs to their fullest extent,

whether in terms of keeping the ATMs open for the maximum periods or in terms

of the actual facilities offered by the ATM. Many banks’ ATMs were shut late at

night and on Sundays, and the facilities offered tended to be limited to cash

withdrawals, balance enquiries and statement ordering.

STRATEGIC GUIDELINES: MAKING THE MOST OF ATMS

How can banks make the most of ATMs? The following guidelines seem

particularly useful.

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■ Ensure that your ATMs operate round the clock and on every day of the week,

and take every step to minimize periods when the network is out of service.

■ Operate online as much as you can, ideally all the time.

■ Take active steps to research (e.g. from focus groups) what particular functions

your customers need from the ATMs you operate and provide those functions.

■ Avoid charging customers for using ATMs: it is in your financial interests to get

customers out of your branches and using your cash machines.

■ Ideally, avoid charging your customers for transactions that take place over an

ATM operated by an organization with which you share within a network. If

you insist on making a charge for this, keep it low.

■ If you are a small bank, take every opportunity to compete with larger banks

by offering a regional or national service via a regional or national shared ATM

network.

■ Remember that many of your competitors may not yet realize how useful

international ATM sharing is for their customers. You may be able to win an

edge over them by offering such an international facility.

■ Be constantly vigilant about seeking opportunities to offer services via your

ATMs which rival banks will not be offering.

■ Make maximum use of lobby ATMs, including ATMs with specialized functions.

They are popular with customers because they speed the transaction time in the

bank, and they relieve the burden on your cashiers.

■ Do your utmost to create new types of account that make the most of virtual

banking services such as your ATM network. One clever way of promoting these

new accounts is to offer people a free cheque for a few pounds (or equivalent) and

inviting them to deposit it into one of your ATMs. When they have deposited it

there, it is their money.

■ Support a shared ATM branding in which you participate and compete

vigorously behind it.

ATMS AND SMART CARDS

The way ahead for ATMs is unquestionably for these machines to be used in

conjunction with smart cards (chip cards) rather than with magnetic stripe cards.

In 2000, smart cards were being rolled out in the UK and in several other

European countries, and were already used throughout the French banking

industry; by around 2003 will be the dominant protocol for bank cards in the UK,

too. Currently, newly issued UK bank cards are ‘hybrid’ cards, featuring both a

magnetic stripe and also a chip.


The proliferation of smart cards provides many important opportunities for

RFSPs to deliver much more personalized banking services via ATMs, with the

ATM even being capable of offering customers ‘prompts’ regarding new products

and services in which they may be interested as a result of their circumstances. Of

course, the need for ATM transactions to be completed rapidly means that there

will be an inherent practical limitation on the complexity of these transactions.

Case study 6.2

Wincor Nixdorf

Introduction

Wincor Nixdorf (WN), a German company, is a major vendor of IT solutions, products and

services in the field of banking and retail. The company employs in the range of 3500

people and earned revenue of DM 2.6 billion in the fiscal year 1999. It operates in 40

countries and has 21 subsidiaries. In the field of electronic POS systems, WN is market

leader in both Germany and Europe, and number three worldwide. In the field of automated

teller machines, WN is market leader in Germany, number two in Europe and number three

worldwide.

WN’s banking sector products include automated teller machines, printers, multi-media

information systems, microchip cards and terminals for airlines. The latest innovation is a

compact modular system combining the basic functions of a small self-service branch.

Worldwide, WN is the only supplier to offer a software package for financial institutions that

is based on universal standards and can be used throughout the self-service sector. The

organization also has a services division which provides service for products and solutions,

including installation and maintenance of hardware and software products, regular routine

inspections, repairs, software upgrades and management of market rollouts.

Strategic issues

A wide-ranging discussion with Uwe Krause, a director in the marketing and sales support

area of WN’s banking division at its head office in Paderborn, Germany, and Andreas Bruck,

director of corporate communications for the entire organization, provided comprehensive

insight into the philosophy which governs the development of the solutions which WN offers

the retail banking industry today. Not for the first time, it became clear that while certainly

vendors like WN obviously have their own agenda – namely to sell hardware and systems –

the level of insight and thought that vendors bring to the retail financial services market is

actually by no means dissimilar to that generated by retail financial institutions themselves.

Indeed, there is frequently crossover of thought and insight: many senior managers at

vendors have worked at institutions, even for long spells.

The reverse is sometimes also true, though less often, because, generally, successful

senior managers at vendors have remuneration packages they would be unlikely to want to

give up for even a senior banker’s salary. However, the point is made: institutions and

vendors tend to think with similar levels of intensity about state-of-the-art developments in

the retail financial services sector. Their vested interests are different, but the industry on

which they need to focus to achieve their goals is the same.

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Uwe Krause explains:

We see three major developments in retail financial services as of paramount

importance in defining the future of the sector. First, the enormously important trend

towards consolidation, which has led to many mergers between banks and takeovers of

one bank by another. This trend is a direct result of a great increase in the

competitiveness within the sector, and of the fact that banks feel – with complete

justification – that if they are to compete to their best advantage within the sector, they

need to deploy new types of services which require very considerable investment to

develop, bring to market and operate.

Krause adds:

Second, the arrival of newcomers in the market has changed everything. I know that

some traditional, long-established banks say they have nothing to fear from newcomers,

but this seems to me like unwise bravado when more and more people are using the

Internet to search for good deals in the retail banking sector and these newcomers are

using the fact that they can operate with very low costs via the Internet to seek to obtain

a significant price advantage over longer-established players.

Krause moved on to what he considered the third major factor that has conditioned the

changed nature of the retail financial services environment: the new channels that have

become available for the delivery of retail financial services.

It is difficult, and probably inadvisable, to generalize on a global basis about how the

new channels that have become available are being handled by retail financial

institutions. Our business is a worldwide one, but historical, cultural, social and practical

reasons have created a situation where the rates of takeup of the new channels vary

considerably from one country to the next. Consequently a vendor such as ourselves

can only attain its goal of truly global operation by understanding the precise national

needs of each of the markets in which we operate. This is a difficult and precise matter,

and requires great sensitivity and a real ability to listen to what the market wants; a real

ability to listen that vendors are always very ready to claim but which is by no means

easy to put into practice.

So who does WN listen to?

We hold workshops for bankers that are emphatically not sales workshops but are

rather designed to allow a free and straightforward exchange of views about the current

conditions in the marketplace. We have also found that it is important to talk to key

people in different areas of a bank’s operations, because even though the overall

commercial aim of the bank might harmonize across all different departments, the

agendas of senior people in different departments are likely to be very different. It is


particularly important to talk to people in the IT and operations departments. We also

hold discussion groups with the banks’ own customers. We take every measure we can

to maximize our knowledge of what the market wants now and what it is likely to want

in the future.

Andreas Bruck adds:

Obviously, in a global environment where we are offering solutions to banks and other

financial institutions in countries whose national market conditions differ significantly,

we have to provide a technology platform that offers real flexibility. To this end, we have

developed an architecture which enables institutions in every country to choose the

right mix of resources to meet their needs.

To put this into action WN has created a business field, Financial Enterprise Solutions (FES),

which focuses on four fields of activity:

■ customer relationship management

■ platform/middleware/e-commerce

■ document-embedding solutions

■ financial solutions.

These can be elaborated on as follows:

Customer relationship management (CRM)

CRM solutions are those that manage and maximize the economic value of a financial

institution’s customer. Such solutions usually need to incorporate three different elements:

■ the required data (e.g. relating to the customer, the product and the delivery channel)

■ the bank’s sales and services processes

■ the customer interfaces.

At WN, Financial Enterprise Solutions focus within the CRM business field on solutions,

products and counselling services. These are all designed to:

■ facilitate the research of existing data structures and enhancement of this, enabling the

creation of solutions that allow a bank to explore opportunities to get in touch with

customers;

■ optimize the acquisition, advisory and sales process of a financial institution by

automating and structuring its various activities and managing these. All this activity is

geared specifically around one aim: the maximization of the profit margin;

■ facilitate an integrated channel approach making ‘unified delivery’ possible. The concept

of unified delivery means that with any possible channel, a customer must have the

opportunity to get in touch with their bank and vice versa. The new delivery channels must,

of course, fit in with an integrated marketing, sales and delivery pattern of the bank.

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Platform/middleware/e-commerce

This constitutes the principal elements of the infrastructure of the FES integrated solution

landscape. WN’s solution portfolio within this business field consists of:

■ hardware devices and system software

■ transaction modules

■ high-availability consulting

■ storage solutions

■ database solution consulting.

WN’s strategic partners in this area are Sun Microsystems and BEA.

WN is also developing an e-commerce platform which will offer its financial institution

customer e-mail messaging facilities and individualized portals. These individual portals are

Web-based marketing instruments which enable financial institutions to get to know more

of their customers in-depth by offering these customers an opportunity to get filtered

information from the Web.

Document-embedding solutions

In a world where information is of such absolute importance, paper information remains at

the hub of strategic and tactical competitive initiatives by financial institutions even where

the institution is thoroughly part of the e-age. WN’s business field document-embedding

solutions offer consulting services and solutions designed to facilitate the easy, efficient and

streamlined handling of documents.

Financial solutions

The business field financial solutions consists of products and solutions that cover different

processes in a financial institution. The actual portfolio consists of the following:

■ high-scalable self-service server on Java Enterprise Beans (JEB) technology to make the

‘blue tube’ become reality. This self-service server meets the net-centric market trend

and supports the strong reduction of total costs of ownership;

■ self-service control products;

■ R-Teller, a JEB technology-based solution to manage different peripherals in the cash and

teller process of a bank.

The branch

As a vendor whose banking division specializes in self-service solutions, WN views bank

branches as a resource whose efficiency needs to be increased dramatically rather than

scrapped. WN adopts a realistic and down-to-earth approach to bank branches, recognizing

that in many countries where it operates, the national banking infrastructure is going to be

dominated by branches for many years to come, and that even in countries with retail

banking industries that are themselves dominated by remote banking and e-banking, there

is a general belief that branches are here to stay, albeit in reduced numbers.


Krause says:

The most pressing need banks have from their branches is that they will become truly

efficient and cost-effective. At the moment they simply are not. Reducing the cost of

operating branches is one of the most serious challenges banks face. Running a physical

branch network is currently a serious money drain for banks, but it does not need to be.

There is no reason at all why, with the proper use of branch automation systems in the

branch back office and powerful, multi-functional leading-edge self-service devices in the

lobby, branches cannot develop a rapid, attractive facility for handling routine

transactions while making it easy for customers to discuss more complex – and, for the

bank, potentially extremely profitable – transactions in private rooms or secluded parts

of the branch.

The model of the branch of tomorrow which WN has developed is of a branch where

traditional branch services will occupy only around 40 per cent of the floor space and

resources, with online banking, direct banking (i.e. by telephone) and automated tellers and

devices making up the remaining 60 per cent of branch activity.

Krause and Bruck also explained WN’s perspective on ATMs, which remain one of the

most visible elements in the vendor’s activities worldwide. Here, too, WN sees its ATMs

conceptually as a solution rather than a product.

Uwe Krause remarks:

The real issue in ATM deployment is cost of ownership. This is far from being the same

as sales price, although some ATM vendors pretend that it is. Cost of ownership

includes everything: the sales price, the cost of power, spare parts, maintenance

throughout the typical seven to eleven years of an ATM’s life, and so on. Vendors who

seek to compete on price need to compete on all those factors, and banks need to bear

these factors in mind when making buying decisions. We aim in the provision of our

solution here to offer lowest cost of ownership. For example, our engineering tends to

be based around LCD (liquid crystal display) technology.

The cash recycling function

A problem with ATMs is that they tend to offer seriously restricted functionality. A major

initiative on which they have embarked at WN is to develop a platform for ATMs on which

they can be developed with a range of functionality to suit the country in question. WN is

also looking hard at new applications of ATMs. One of the most promising is the use of ATMs

as cash recycling devices. Their research shows that 60–70 per cent of branch activity

involves a financial institution taking cash from retailers. Cash recycling is a highly effective

answer to this problem.

WN has invested heavily in a cash recycling solution that it has branded as ProCash CRS.

As Fig. 6.1 shows, cash recycling offers significant benefits to RFSPs in terms of reduced

cash replenishment costs.

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Fig. 6.1 ProCash and CRS cash circulation


Cash circulationwithout recycling system

How ProCash CRS changescash circulation

Central bank

Cash distribution(main safe)

HandlingSavings of approx. 75%

in handling deposits

(Replenishmenteffort can be

reduced by 50%)

ATMTeller/ATS

Nightsafe

Privatehouseholds Retail

SupermarketsPrivate

households Retail SupermarketsATMoff-premises

Central bank

7Telephone banking

Chapter overview 107

Introduction 107

Types of banking service available via the telephone 108

The cost of telephone banking 109

The primacy of the call centre in a telephone bankingsystem 109

Conclusion 115

■

■

■

■

■

■

105

Telephone banking

CHAPTER OVERVIEW

■ Telephone banking is equally likely to be accessed from the customer’s home or

office.

■ Telephone banking is easy to use and user-friendly. It is likely to continue to

hold its own despite some customer migration to Internet-based banking.

■ Mobile Internet banking can be seen as the ultimate – though not the final –

stage of the evolution of telephone banking.

INTRODUCTION

Experience shows that telephone banking services are almost as likely to end up

being accessed from the customer’s office as from home. Research by UK telephone

bank First Direct confirms that about half the phone calls it receives are made

during conventional office hours. Furthermore, First Direct has found that around

75 per cent of its customers are in full-time employment. Clearly, not everybody in

full-time employment works during conventional office hours, but it is clear that a

significant proportion of calls received by First Direct are made by customers from

their workplaces.

Take-up rates of telephone banking vary between countries, but generally it is

already an extremely popular channel for accessing banking services. For

example, around 880 000 of the Abbey National’s 2.5 million current account

customers are regular users of its telephone banking services.

To date, many customers use ATMs to withdraw cash and make deposits, while

handling their more complex banking transactions via telephone banking facilities.

As already noted, these systems are especially useful for obtaining account balances

quickly.

Customers access telephone banking services via both landline and mobile

channels. Inevitably, a significant proportion of those using landline telephone

banking access are likely to migrate to Internet banking systems in the near future.

Probably an even higher proportion of customers currently using mobile telephone

banking access are likely to switch to WAP phones as soon as they are widely

available and the technology is reliable. The reason for this is that obtaining a

balance via a WAP phone is extremely easy and rapid, with transactions often

taking no longer than 30 seconds. Yet despite the inevitable migration of many

telephone banking customers to Internet systems, telephone banking retains the

advantage of giving customers the option of talking to a live operator when

required. Consequently, and because of its general convenience it is unlikely to be

replaced entirely by Internet banking but to retain a status as yet another important

delivery channel.

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TYPES OF BANKING SERVICE AVAILABLE

VIA THE TELEPHONE

The beauty of telephone banking is that it can deliver every major banking service

apart from cash withdrawal. Even this last service can be included in a real sense

in stored value card (SVC) schemes which permit the ‘loading’ of cards over the

telephone. More details of this are in Chapter 6.

The typical range of services available via the telephone is as follows:

■ balance enquiry;

■ statement ordering;

■ chequebook request facility;

■ funds transfer between different accounts held by the customer at the bank (but

note that for security reasons these accounts usually have to be ‘linked’ by the

customer in advance by a visit to the branch;

■ funds transfer (i.e. payment) to third parties (e.g. payment of utility bills);

■ general account queries and advice (this would typically be supplied by a

human operator even if the system used automated voice response technology);

■ ordering travellers’ cheques from the bank, with these typically being available

for collection from a physical branch or else supplied to the customer by

registered post.

Types of telephone banking system

There are in general three principal types of telephone banking service. The first

makes use of automated voice response technology. This involves the customer using

his tone-phone to send what are in effect digitized data messages to the system in

order to activate a particular service. The customer will always be ‘prompted’ by the

service to provide one or more type of instruction. Alternatively, some automated

voice response systems require the customer to say one of a number of particular

words down the telephone, with the system containing software which recognizes the

word. The system works on a similar principle to those using tone commands.

The second type of service makes use of human operators entirely, with no use

of automated voice response. As we have seen, even systems which do use

automated voice response will use human operators for non-routine transactions.

Finally, some telephone banking services are PC-based, that is, they use a

personal computer which interfaces with the system via a data communications

process delivered by the telephone. Some PC-based services use the customer’s

standard desktop PC, while others make use of a special dedicated terminal which

Telephone banking

is typically either supplied gratis to the customer or leased to the customer by the

bank for a nominal charge.

THE COST OF TELEPHONE BANKING

Like other remote delivery channels, telephone banking offers RFSPs substantial

opportunities to save money by transferring expensive branch-based transactions

to automated, relatively inexpensive telephone-based systems. Because of this,

most RFSPs find more than sufficient financial reward from offering telephone

banking services in having the opportunity to facilitate this transfer. For this

reason, banks and other institutions seek to give customers an attractive deal to

make them want to use the system.

The practical outworking of this sentiment is that most banks are happy to

subsidize much of the cost of making a call to the telephone system. Some banks

actually offer free telephone calls, but the more usual system is to provide a special

telephone number which is charged at the local rate and will be subsidized by the

bank. Where the bank is providing a special PC to the customer for use when

accessing the system, the bank will usually make the terms of supply of this PC,

and the cost of making a ‘call’ by means of it, extremely favourable to the customer

in order to encourage the customer to want the PC in the first place and to use it.

THE PRIMACY OF THE CALL CENTRE IN A

TELEPHONE BANKING SYSTEM

Central to the successful functioning of any telephone banking service is the call

centre. This is the management and operational location to which customer calls

are relayed and where operator technology and human operators are situated.

The past few years have seen considerable advances in the organization and

automation of call centres, as well as a realization among banks that a good call

centre can be a superb competitive weapon. Without doubt, call centres are an

integral element of the virtual banking revolution.

Note, incidentally, that even where a human operator is handling the call, there

are abundant opportunities for them to be more effective and efficient by making

use of screen-based software which gives the operator access to a wide variety of

information about the customer. One bank’s use of this type of technology is

detailed below.

So great is the importance of the call centre in today’s financial services industry

that some software organizations and consultancies are thriving merely from

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providing services relating to call centres to financial banks. One of these

consultancies is known as the Customer Contact Company. Based in Bristol, it

specializes in providing assistance with designing, implementing and managing

integrated customer contact centres.

Its CEO, Tony Collins, is a forthright commentator on the role of the call centre

in today’s retail financial industry. Commenting on the role, he says:

I regard the role of the call centre as being to help a financial bank build a

high value relationship between itself and its customers. The days of the

old-fashioned bank manager who would have a personal relationship with

most of his customers are over, partly because of the sheer number of

customers banks nowadays have and also because delivering banking

services remotely is more cost-effective. Even though the ‘bank manager as

delivery mechanism’ days are over for all but the most wealthy customers, a

bank is still obliged to offer a similarly personal level of service.

He adds:

My conception of the role of the call centre is to act as the location where

telephone operators are based who represent the bank in every respect: that

is, the contact the customer has with them will in many cases amount to the

bank’s projection of itself to its customer base. People operating the service

must therefore have real personality because their voice is representing the

bank. Furthermore, it follows from this that the potential a particular bank

has to differentiate itself from its rivals is substantially limited to how the

operator differentiates himself or herself from other banks’ operators. With

the role of the operator being so crucial, it’s difficult to see how a bank

which only offers a facility for a customer to talk to an automated service

can really obtain a great deal of edge in this respect. Of course, most banks

which use automated facilities do offer customers the opportunity to talk to

a real person as an alternative, but generally I think the use of a human

operator most or all of the time is much more satisfactory.

He goes on:

At the Customer Contact Company we have undertaken a wide range of

projects for banks around the world which want to create call centre

facilities. What all these projects have in common is that we facilitate the

opening of a dialogue between the bank and its customers. In many cases,

we are helping banks re-open a dialogue with customers, because the

customers will in many cases have got used to no longer having a bank

Telephone banking

manager with whom they can regularly discuss their financial affairs and

will have been in a kind of limbo, without any easy access to staff.

In a nutshell, banks want to talk to their customers and enable their customers to

talk to them.

As this briefing has already noted, the call centre as originally conceived is a

moribund thing. Call centres are going through a period of rapid evolution. The

days when they were simply a resource that enabled a bank to deliver a telephone

banking service to its customers are over. Today’s call centres are customer contact

centres in every sense of the word, providing telephone banking, Internet banking

and human operator functionality. They should ideally be conceived as a resource

that enables an RFSP to maximize the quality of the service it offers, not merely

as a way to save operational costs.

Figure 7.1, which illustrates diagrammatically the customer perception of the

elements of the call centre, suggests how call centres can be used as customer

contact centres in a strategic sense.

Fig. 7.1 Customer perception of the elements of a call centre

Source: Part of a presentation to clients by BT, April 2000

Types of technological assistance in the telephone bankingdepartment of a call centre

Technological assistance to staff in the telephone banking department of a call centre

plays an essential role in maximizing their efficiency. What technology is available?

In essence, two types can be identified. These might conveniently be described as

standard customer service technology and advanced customer service technology.

111

CUSTOMER SERVICE STRATEGY

CUSTOMER IN CONTACT

‘Personality’ of the organization

Processes SystemsPeople

112


Standard features provided by this screen-based customer service package

typically include:

■ a resource to enable all telephone-based customer contacts the staff member

has during the day to be logged directly onto the screen;

■ screen-based scripts providing prompts for the staff member when dealing with

the customer. Different scripts should be capable of being summoned up

according to the different types of enquiry;

■ a facility to speed the process of taking the customer’s address. This requires the

package to incorporate a comprehensive database of addresses corresponding to

postcodes. This means that the member of staff only needs to ask the customer

for his or her postcode and house number rather than the whole address;

■ the opportunity to build up a comprehensive database of the organization’s

customers;

■ the potential to scan into the system any documents relating to a particular

customer’s requirements. This is an important resource for bankers whose

customers’ complaints and queries usually need to be investigated. This scanning

facility naturally saves the banker storage space and makes retrieval of images

much easier;

■ the provision of a screen-based daily diary which enables the staff member to

schedule in actions for the future and which will also provide a reminder of

what needs to be done. This is an especially important resource for cementing

the customer relationship, as customers will understandably be seriously

annoyed by failure on the part of someone in the customer service department

to do what was promised;

■ a tool for prioritizing specific tasks which the department needs to undertake

in terms of their urgency. These tasks would normally be highlighted on the

screen-based daily diary;

■ the provision of a variety of tools which will enable the banker’s management to

analyze data generated within the customer service department. The different

bases for the analysis would vary depending on management requirements. For

example, an analysis could be made of product groups to which enquiries or

complaints related, and of specific brand categories within these groups. Ideally,

the customer service package should provide considerable flexibility here.

In summary, what an RFSP ideally needs is a customer service system which

efficiently, rapidly and professionally manages widely disparate complaint and

contact types in the front and back office, and facilitates learning from them.

These standard features which a bank can reasonably expect to obtain from its

customer service system are not, however, the full story. More and more call

Telephone banking

centres make use of a new type of customer service system resource which

integrates the computer and telephone even more efficiently than when the staff

member has access to the standard features above. This additional resource is –

reasonably enough – known as ‘computer telephone integration’ (CTI). Its aim is

to enable the organization operating the customer service facility to make its

customer service even more efficient and customer-friendly.

Customer service systems featuring CTI can reasonably be described as

representing ‘advanced’ technology by today’s standards. The advanced functions

facilitated by CTI would typically include the following.

■ A facility to enable the location of customer records automatically from the

incoming phone call (which it will match to the customer’s telephone number),

thereby enabling the staff member to have the customer’s details on the screen

immediately when they start to take the call.

■ A facility to transfer calls and the associated customer information to the

customer service system from other departments.

■ Where customers are likely to be phoning in relation to different promotions or

products, and where different response numbers relate to different promotions

or product lines, it is now possible for CTI systems to detect from the number

the customer is phoning what the subject of a customer’s particular enquiry is

likely to be. The system can then automatically provide the staff member with

a screen-based script relating to that particular enquiry. Again, this saves time

and creates customer goodwill.

Call centre staff

Call centres place a special burden on RFSPs from the recruitment perspective.

Even where RFSPs use automated voice response systems to deal with routine

telephone banking transactions, human operators are needed to handle more

complex transactions or anything related to sales. Furthermore, some banks use

human operators for all transactions. Whatever option the bank chooses, the

importance of people at the call centre is unarguable.

Where real people are being used to deal with telephone transactions, it is

essential that they are:

■ courteous and helpful to customers at all times, not only when the operators

are relaxed at the start of a shift or in a good mood;

■ professional and efficient. The service being provided relates to the customer’s

personal finances. Staff should not be monotonous in their tone or manner, but

neither will the customer expect to encounter frivolity or flippant levity;

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■ accurate and reliable in terms of the information they provide;

■ able to develop a friendly and harmonious interactive conversation with the

customer and thereby have the opportunity to spot possible selling opportunities

for the bank.

Staff of a high calibre are therefore required. Generally, the kind of people who

are best at this job tend to be young – up to, say, around 30 years old – intelligent

and confident. A careful and thoughtful approach to recruiting staff is required.

Sometimes temporary staff, such as students and ‘resting’ actors, can be very good

at this work, although they do of course carry with them the drawback that time

involved in training them may be less well spent if they are not going to work for

the bank for long.

Intensive staff training will be needed. This is frequently best provided by

external organizations which specialize in training call centre staff. No matter

how well-trained and highly-motivated the staff members may be, however, they

will on occasion suffer troughs in their morale. Since the success of the call centre

operation depends substantially on the quality of service being maintained at all

times (and in particular not just during the early honeymoon months), it is

important that refresher training is provided to staff on a regular basis.

Incentive schemes can also be introduced, with the proviso that these should

somehow be made to focus on the quality of the service provided (i.e. by assessing

staff on the number of new accounts they had set up within a certain period or on

products sold) rather than on banal numerical targets such as number of calls

answered. Indeed, it is a mistake to give staff high numerical targets for taking

calls since, again, what is required is the quality of the staff–customer interaction

rather than the number of such interactions.

A pleasant and congenial working environment is also extremely important for

keeping staff motivated. Air-conditioning, bans on smoking, plants in the vicinity,

subdued lighting, sufficient space available for each staff member, and generally an

agreeable internal decor for the call centre are all important facets in helping staff

to be happy to do what they do. This happiness should translate into a pleasant

telephone manner and into the maximum proportion of satisfied customers.

Finally, what about scripts? Do they have a role to play in the staff–customer

interaction for the telephone banking department of a call centre? Generally, the

advice here is that the use of scripts should be avoided. They can be important in

staff training, but in real-life staff–customer interactions they are too restrictive.

Not only is there a serious danger that they will prevent the conversation from

running into areas that can allow the staff member to spot an important

opportunity to sell a product or service, but customers usually readily detect the

use of a script and they will usually feel demeaned or even insulted that they are

being spoken to in this way. Neither feeling is likely to make for a happy customer,

receptive to what the staff member has to say or has on offer.

Telephone banking

Of course, just because it is inadvisable to use scripts, it does not mean that staff

members should not be given lists of objectives to try to attain during the call.

They should be, and it is part of the skill of a call centre staff member to try to

fulfil these objectives during the conversation without making it obvious to the

customer that this is happening.

CONCLUSION

The successful call centre will feature all of the following characteristics:

■ It will employ courteous, professional and capable staff.

■ It will focus on the needs of the customer.

■ It will operate consistently and reliably.

■ It will be supported by technology but will make this technology strictly subservient

to the guiding directive of meeting customer needs. The implementation of

technology in a call centre must be a means to an end and not an end in itself.

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8Banking online


Introduction 119

■

■

117

Banking online

CHAPTER OVERVIEW

■ Online banking is the most revolutionary new channel of all.

■ The bank and customer benefits of online banking are particularly pronounced.

■ Mobile Internet banking looks set to become enormous for online banking, but

the inherent limitations of the complexity of the bank–customer interaction will

probably limit widespread use of the mobile channel to routine transactions.

INTRODUCTION

It should be abundantly clear from what we have discussed so far that online

banking is a momentous phenomenon that is in the process of changing not only

the face of the retail financial services industry but also society itself.

Bank and customer benefits of online banking

Online banking brings unquestionable benefits for banks and customers. Benefits

which banks enjoy include:

■ inexpensive delivery to customers of a comprehensive range of banking services;

■ the ability to deliver far more detailed information than can be delivered by any

other remote banking channel;

■ the ability to create a readily audited record of all transactions;

■ the opportunity to engage in a dialogue with customers in which all aspects of

the customer’s needs can be thoroughly investigated;

■ the opportunity to provide customers with a comprehensive mobile online

banking facility.

Benefits which customers enjoy include:

■ the convenience of using a comprehensive banking system when they want to

use it;

■ detailed screen-based presentation and corresponding opportunities to verify

and check all crucial details, as well as obtain screen-based account details;

■ the opportunity to use mobile Internet banking services.

The extent of Internet banking throughout Europe

The extent of Internet banking throughout Europe is growing all the time. Figures

8.1–8.3 show key trends.

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Fig. 8.1 European Internet banking customers 1999–2004

Source: Electronic Banking Strategies, published April 2001 by Datamonitor

Fig. 8.2 European Internet banking customers 2004

Source: Electronic Banking Strategies, published April 2001 by Datamonitor

01999 2000 2001 2002 2003 2004

5

10

15

20

25

Num

ber

of c

usto

mer

s (m

)UKGermanySpainFranceSwedenNetherlandsItalySwitzerland

UK26%

France10%

Germany23%

Italy8%

Netherlands8%

Spain12%

Sweden9%

Switzerland4%

Banking online

Fig. 8.3 Total Internet banking customers as a proportion of retailbanking population 1999–2004

Source: Prepared for this report by IBM, May 2001

Mobile Internet banking

An extremely important element of Internet banking is mobile Internet banking.

This offers customers the opportunity to check their balance using a mobile Internet

access device at any time of the day and night and wherever they have a mobile

phone service.

Case study 8.1

IBM

The convergence of the Internet and mobile banking is the biggest thing to hit the retail

financial services industry in 40 years. It is changing everything, providing banks with

opportunities to improve service, reduce the cost of delivery, deliver a wide range of value-

added services and offering customers an unbeatable proposition. IBM has invested

heavily in becoming a major player in this important and opportunity-rich new technology.

Paul McKeown, IBM

During an interview with Reuters, Paul McKeown, IBM’s market development manager in its

pervasive computing division, provided extensive insight into the tactical and strategic

advantages of mobile Internet banking. He emphasized that it offered banks enormous

potential in winning new customers who would be attracted by the functionality and by the

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01999 2000 2001 2002 2003 2004

5

10

15

20

25

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Num

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of c

usto

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s (m

)

% o

f ret

ail b

anki

ng p

opul

atio

n

Total Internet banking customers% of retail banking population

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ease of use. He also emphasized that new customers could be won not only in a domestic

market but also across geographical borders. ‘Mobile Internet banking is creating a much more

fluid, dynamic and competitive environment for banking than has been the case before.’

IBM recognizes, however, that this powerful new technology, like all such powerful

technological innovations, brings significant challenges in its wake, challenges that must be

confronted by banks. As McKeown explains:

One of the biggest challenges presented to banks in this new competitive scenario is

the number of newcomers who can enter the market by virtue of the technology being

readily available and easy to use. These newcomers do of course include other RFSPs,

but it must not be forgotten that mobile phone companies also, by definition, have the

infrastructure and are ideally placed to make a success of implementations in this area.

They are highly adept at making charges for small transactions and because they are

at the leading edge of technology, they are already likely to be working on state-of-the-

art functionality such as mobile phones which can be trusted to make payments.

Similarly, Internet service providers are well placed to enter this sector.

IBM recognizes the huge impact which mobile Internet technology is going to make on the

question of who, in the banking environment, owns the customer relationship. The company

believes that disintermediation is a particularly potent problem where mobile Internet

banking is concerned.

How does IBM see this type of delivery channel rolling out? IBM is predicting that more

customers will soon be using mobile phones than personal computers for Internet access.

It also believes that financial services are the lead application in a suite of mobile Internet

applications, such as travel, entertainment and gaming. Naturally enough, IBM is aiming to

position itself as the business partner of choice for banks and other financial service

providers, pointing to its pedigree in providing banking solutions, its product range and its

strategic understanding of how retail financial institutions can ‘mobilize’ their services by

putting them on to mobile Internet phones.

Paul McKeown comments:

Mobile Internet banking represents an entirely new world: a world of new markets, new

customers and new competition. There will be new partners too – organizations such as

wireless network providers and ISPs. The current ‘digital divide’ which cuts off many people

from the Internet because they do not have access to a personal computer will be

narrowed: almost everyone is going to have a mobile phone that can handle the Internet.

But it is not only mobile phones that will connect to the Internet. As McKeown explains:

In the future, almost anything the user is wearing could communicate with the outside

world. A watch, a badge, even a piece of jewellery could fit into this category. These

devices will communicate locally with each other via a new protocol called ‘Bluetooth’

and remotely with service providers via WAP. IBM coined the term ‘pervasive computing’

to describe the anytime, anywhere nature of the applications of these new technologies.

Banking online

He adds:

The interface between the pervasive computing devices and the customer will be largely

invisible. Computers work best when users aren’t conscious that they’re using

computers, and this type of user interface experience is exactly what IBM wants to

promote. Pervasive computing enables modern multi-channel retail financial services

delivery because it allows banks to offer their customers many options for service: the

Internet via PC, or phone, branch, ATM, call centre – even traditional paper post – are

all valid customer service channels. The customer, of course, for his or her part, receives

the huge benefit of the easiest access to retail financial services: on the move, with

enormous accuracy, great rapidity, and with maximum convenience.

McKeown regards the potential for pervasive computing devices in the customer delivery mix

as nothing short of revolutionary.

The more access routes a bank or other institution offers its customers, the more likely

it is that the customer will be retained. Traditional banks are competing as vigorously as

newcomers over winning those customers and retaining them, and pervasive computing

devices play an essential role in the competitive battle. Everyone knows that the

traditional relationship between bank and customer is already pretty close to being part

of history. It’s been an extraordinary rollercoaster of a journey: from monolithic banks

serving customers from monolithic physical branch outlets to a much more fluid and

technological scenario where especial computer applications have been developed to

give customers what they want, when they want, and via the delivery channel they

choose. I think you’d be hard pushed to find such an extraordinary change in customer

service delivery techniques in any other industry.

When Reuters met McKeown, there was plenty of high-tech pervasive computing hardware

on the table: mini-modems, WAP phones, standard mobile phones, palm-top computers that

you access using a stylus to handwrite information into it, even a trusty old Psion 5mx.

Looking at this hardware, one is struck by the extraordinary ingenuity of the human mind in

developing machines to meet customer needs: whether those customers are sitting at a

desk, travelling on a train, or even halfway up Mont Blanc. There is something profoundly

satisfying in the powerful functionality of these small but extremely useful computers.

McKeown explains:

IBM believes that the future of banking lies in banks concentrating on what they do

best, and what their customers trust them to do – which is to manage their wealth.

Banks should look to partnerships with exciting service providers – for example,

entertainment or travel companies and network providers. By adopting extensive multi-

channel deployment they will be better placed to win and retain customers. WAP

phones will play a key role in the future, with users logging on with passwords and using

pretty well the same banking services online that can be supplied to the branch

customer. The WAP phone’s push-button system and instruction confirmation facility

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reduces the potential for errors. Essentially, the WAP phone will become the bank in the

palm of your hand.

In the battle to maximize profitability, despite being confronted with very strong

challenges from newcomers, the WAP phone and systems that run on it seem to me an

important weapon with which all kinds of banks – traditional players and newcomers

alike – can compete to the full.

McKeown concedes that the demand for bandwidth has run on somewhat ahead of the

networks powering the WAP capability, but he regards this as a temporary problem.

Pretty soon, the Universal Mobile Telephone Service (UMTS) network will give customers

the bandwidth to do everything they need to do. IBM expects the WAP phone to become

as ubiquitous as the mobile phone within a couple of years, and we are certain that for

many people it will be the device they use at the core of their banking activity. Future

WAP phones may even reduce the need for the customer to call the bank. Rather, the

bank will alert you in time to attend to an issue relating to your banking or if something

is happening which could interest the customer – like availability of tickets for an event

or a significant share price movement. Now that is added value.

McKeown emphasizes that any vendor which wants to participate in this market needs to

move fast both in terms of exploiting opportunities now and in delivering solutions when and

in the form that customers want. The biggest requirement is speed. Banks want to learn

from early user experience and claim some of the high ground, the better to fend off

competitors and attract partners alike. Most of the 20-plus European banks IBM has helped

were mobile within weeks, not months.

In order to bring home the message of its commitment to pervasive computing to its staff

and customers, IBM has invested in many important pilot schemes and extensive

promotional material, including broadcast-quality television commercials. One of the most

entertaining – and visionary – commercials it has produced depicts a scruffily dressed young

man wearing a long overcoat strolling into a supermarket and looking shifty as he walks

around the shop, selecting items from the shelves and stowing them beneath his coat. After

he has obtained about a dozen items in this way, he walks equally shiftily past the cashier

without glancing at her, his coat clearly bulging from all his shopping. He leaves the store,

walks about 20 yards down the street, and is then accosted by someone from the shop –

apparently a store detective about to arrest him. But no, it is simply a sales assistant who

informs him: ‘Excuse me, sir. You forgot your receipt,’ and hands it to him, all smiles.

A farcical example perhaps, but by no means a far-fetched one. Having to queue up at a

supermarket check-out to pay for items one has picked up from the shelves is, after all, a

primitive and highly inefficient way of doing it. The technology to make the commercial come

true exists already, albeit it is yet too expensive to be deployed on a widespread basis. But

what happened in the commercial will happen in real life because it makes everyone’s lives

easier. Why should a computer be something that looks a bit like a television connected to

a typewriter? Why should the Internet be something you can access only via such a clumsy

machine? Maybe people will never become cyborgs – and who would want to – but the use

Banking online

of small, extremely powerful and multi-functional computer devices that are so easily

portable as to become part of our clothing accessories makes abundant sense. This is the

vision towards which IBM is driving, and it is a vision of electronic banking as much as it is

a vision of electronic retail.

IBM’s WAP-enabled mobile phone pilot project

As McKeown explains:

Around the world, retail banks and other financial institutions are capitalizing on the

power of the Internet channel. Industry observers estimate that in Europe alone, nearly

2000 banks have already adopted online banking. Internet banking is no longer a niche

service for a few high-tech banks.

The trend to online banking is evolving into its next generation: delivering online services

to mobile customers via WAP-enabled wireless phones. Customers on the move can now

enjoy a convenient new way to bank using mobile phones and even personal organizers.

IBM has developed a WAP-enabled mobile phone pilot scheme for financial institutions

which need to prototype, test and evaluate this new market opportunity and also want to

lay the foundation for a reliable new service. The configuration of software components in

the pilot scheme is designed to leverage existing online financial services applications that

were originally targeted at PC-based home banking and stock trading services.

The components include:

■ the WAP-enabled phone

■ WML (wireless mark-up) encoder

■ WML (wireless mark-up) script compiler

■ protocol adapters.

Figure 8.4 shows the configuration in action.

Fig. 8.4 IBM’s WAP-enabled mobile phones

Source: Part of Pervasive Computing presentation by IBM August 2001

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PCor

LaptopINTERNET

Existing WebApplication

Server

IBM WebSphereEveryplace Suite

Connectivity ContentHandling

Security Optimization

Subscriber and DeviceManagement

Systems

HTTP Server

ExistingTransaction

System

WAP-enabledPhones

WAPGateway

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Paul McKeown summarizes:

Whichever vendor an institution uses to make the most of mobile Internet opportunities,

the user experience has got to be perfect from the outset. People using these phones

tend to be high-performing business people, as is usually the case with pioneering

technology. They have zero tolerance of ineffective technology or of pervasive computing

devices that don’t do what they are supposed to do. IBM is eventually predicting a

scenario where WAP phones, palm-top computers and personal digital assistants of all

kinds are redefining the potential and capabilities of Internet banking.

Gordon Sharpe, director of e-business at the Bank of Scotland, is a major customer of IBM.

He comments:

IBM is currently replacing our core banking system with a system that allows us to make

the all-important step of replacing this system with one that will give us a single view of

our customer by integrating our existing information on each customer into a single

perspective. This will allow us to maximize the quality of customer service we provide.

IBM’s pervasive computing division has also played an essential role in creating for us

a WAP banking system that permits us to pursue our policy of offering customers a

multi-channel, multi-advice service which meets their choices, not ours.

9Interactive digital television


Introduction 129

■

■

127

Interactive digital television

CHAPTER OVERVIEW

■ Interactive digital television is an important new channel for delivering retail

financial services. Its enormous advantage is that it uses an interface system that

is extremely familiar to customers and is associated with entertainment and

easy access.

■ Usage of iDTV can be expected to burgeon until 2005.

INTRODUCTION

Interactive digital television is an ideal channel for delivering retail financial services.

Television is a familiar, user-friendly communications technique with which the vast

majority of the population are at ease. Using a television interactively is a new

experience for most people, although the widespread use of text television has

certainly prepared people for using TV in the way.

There can be little doubt that during the next few years iDTV will become an

essential channel for the delivering of banking services and retail financial services.

The projected extent of iDTV

Datamonitor research has provided detailed projections of the likely development

and take-up of iDTV until 2005. These projections are shown in Figs 9.1 and 9.2.

Fig. 9.1 Percentage of UK households with access to digital TV in 1999

Source: A report published on behalf of Abbey National by INTECO, Interactive Services 2001

129

Digital terrestrial2%

Digital satellite5.5%

Digital cable6%

No access86.5%

130


Fig. 9.2 Forecast percentage of UK households with access to digital TV 2003


Case study 9.1

The Abbey National’s briefing on iDTV

Within Europe, a financial institution that has devoted particular attention to iDTV is the

Abbey National.

Introduction

Digital television is set to radically transform the way millions of people in the UK use their

television. The television which is present in 99 per cent of homes, and an integral part of

everyday lives, is now set to become an information medium and an e-commerce distribution

channel. With the additional benefit of interactive capabilities, users will be empowered to

control many aspects of their lives via the TV set, including their personal finances.

Retailers will be able to reach consumers relaxing in their homes, thus further extending

their opening hours. Recognizing the opportunity presented by interactive digital TV, Abbey

National has been one of the first retailers to adopt this new channel, and aims to be at the

forefront of offering personal finance via interactive TV.

The purpose of this case study is to:

■ explain the current offerings in the digital TV market;

■ look at the drivers of growth for digital TV in the UK;

■ examine interactive digital TV services and its appeal to TV viewers;

■ consider the potential impact of interactive digital TV on banking;

■ explain Abbey National’s response to the new opportunity.

Digital terrestrial7%

Digital satellite15%

Digital cable21%

No access57%


Background

In the UK today, analogue TV predominates. Digital television is in its infancy, but predictions

are for explosive growth until 2005. In a recent (November 2001) survey by INTECO, the

number of homes with digital television is expected to increase from 6.1 per cent in 1999

to 36.4 per cent by 2003. A Gallop study found that 42 per cent of consumers intend to

subscribe to digital TV by 2005.

Digital TV allows more data to be transmitted at a higher speed than analogue TV. This

results in more efficient use of bandwidth, resulting in consumers having a greater number

of channels and improved interactive service. Digital TV also allows a greater degree of data

manipulation, making special effects easier to generate, and gives better picture and sound

quality than its analogue counterpart.

The key factors driving growth include the following.

■ Digital television offers significant improvements in TV viewing that appeal to the whole

family, such as extra entertainment channels, wide-screen pictures and tailored news.

Digital TV offers a much wider range of channels and entertainment, including TV film

premieres and exclusive coverage of major sporting events.

■ There are very attractive deals available to new subscribers.

■ TV is already well understood by the majority of people. It has 99 per cent penetration of

UK households and watching TV is one of the top two hobbies in the UK.

■ Governments are keen to encourage adoption of digital TV as they wish to free up the

frequencies occupied by analogue broadcasting.

There are three different digital television services available in the UK.

■ Digital terrestrial TV – this service is provided by OnDigital, a joint venture between Carlton

and Granada. The signal is received via an aerial. Reception quality is dependent on

distance from transmitter. A set-top box is required, as is a telephone line for interactivity.

Digital terrestrial TV services offer up to 30 channels.

■ Digital satellite TV – Sky dominates this market in the UK. A satellite dish and a set-top

box are required to receive the signal and a telephone line is required for interactivity.

Customers pay a monthly subscription for the access to entertainment packages, with

cost varying depending on the package chosen. Satellite TV offers more than 200

channels. Additionally subscribers get access to interactive shopping, branded as OPEN.

There are 24 high street retailers with a presence on OPEN.

■ Digital cable TV – digital cable connection is via a broadband cable network, which is

operated in many areas throughout the UK by franchises. Digital cable TV offers 45–150

TV channels, but the technology theoretically offers the possibility of up to 2000 channels.

A set-top box containing a cable modem is required for interactivity.

The digital television market is dominated by the satellite company BSkyB and cable

operators Telewest, NTL and Cable and Wireless.

Although predictions by analysts and research agencies for the growth of digital TV

penetration in the UK vary, all are agreed that it will be explosive.

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An additional benefit of digital TV is its interactive capabilities which enable users to have

two-way communication with their television. Interactive services include home shopping,

home banking, online travel booking, Internet access, e-mail, games and information

services. Some digital TV providers aim to offer unlimited Internet access to subscribers,

while others such as OPEN do not offer Internet access but instead have chosen a ‘walled

garden’ approach. This aims to prevent the consumer being confused by the infinite choice

and quantity of information on the Internet. Given the reduced number of retailers within the

walled garden, it makes it easier for retailers to target consumers more effectively, with less

risk of losing their audience to other sites.

The digital television attracts a wide range of consumers, many of whom are families from

across the socio-economic groupings, which complements the Abbey National target

customers. A recent Fletcher research states that 28 per cent of the population are already

comfortable with the idea of shopping via their TV, and hence take-up and adoption of the

new technology is likely to be swifter than PC Internet. Interactive TV will upgrade the

household television from a purely entertainment system to a shopping and banking terminal.

Figure 9.3, based on research by INTECO, shows that UK households are very amenable

to using interactive TV services for banking purposes.

Fig. 9.3 Percentage of households interested in the followinginteractive services


Impact on banking

AIT predicts that by 2004, 15 million adults in the UK will be able to carry out financial

transactions via TV from their living rooms. Given the penetration of televisions in UK

households, the predicted growth rate for digital TV and the new opportunities being

0

TV viewingeducational programmes

tailored newsviewing/booking holidays

checking bank statementson-screen reviews

catalogue-style shoppingpaying bills

booking travel ticketsplaying games

e-mail via the TVinsurance/loan quotes

fast Internet accesssupermarket shopping

placing bets

% of households

Interactive services

5 10 15 20 25 30 35 40 45


presented by interactivity, Abbey National believes that interactive digital TV will become a

significant distribution channel for its customers.

Abbey National is convinced that digital TV offers banks a real opportunity to reach a large

mass market audience in the comfort of their homes. It offers customers a new way of

dealing with their personal finances, which is easier, more accessible and more convenient

for them. As TV is the most effective advertising medium in the world, TV banking will allow

banks to build higher value relationships across a wider customer base.

Appeal of TV banking for customers

From a customer’s perspective, TV banking is likely to appeal because it is:

■ convenient – customers can bank from the comfort of their own living room, 24 hours a

day, 7 days a week, 365 days a year. They will be able to view their bank account

statements, check balances, set up standing orders, transfer funds between accounts,

pay bills from their living room sofa;

■ easy to use – customers can interact using their standard TV remote control, which they

know and understand;

■ fast, easy to access, confidential;

■ cheap – digital TV is inexpensive, with low connection/set-up costs as providers compete

to grow their customer base and entertainment packages costing from nothing to £30

per month, and interactive services come free. Purchasing a digital TV set is not a pre-

requisite and there is no need to purchase a PC.

Security

Security is often a major issue for customers when it comes to a new retailing channel. Banks

are well positioned to help allay customer fears regarding security while transacting either

with the bank or shopping via interactive TV. While customers may not trust banks to deliver

low cost and value, they do believe that banks are safe places to put their money and that

the banks will provide recourse should customers have problems accessing their funds.

Systems, service and operations impact

Interactive digital TV provides banks with the opportunity of a low-cost, high-volume

channel, although there is a substantial capital investment required initially in IT and

significant organizational changes. Integrated IT systems are required to ensure customers

receive consistent information and service across all channels whenever and wherever they

‘touch’ the bank. Any e-commerce channel, including digital TV, requires an action-based

culture and an operational environment where decisions are made quickly, with processes

in place which enable e-commerce services to be launched in the shortest possible

timescales and incremental improvements to be added with minimum effort.

To derive the highest value from digital TV as a banking channel, banks need to move

beyond a focus on transactions and focus instead on customers. This requires:

■ a single view of the customer and their product holdings and relationship with the bank;

■ understanding of who the bank’s most profitable customers are, and leveraging this

knowledge together with targeted marketing campaigns to maximize sales generation;

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■ understanding the customer’s current and future needs and being able to provide targeted

offerings to meet these needs;

■ empowerment and training of bank staff interfacing with customers to respond speedily

to customers’ information requests and queries;

■ consistent, accurate, up-to-date information about products available through all channels;

■ the ability to generate sales on any channel from leads generated on a different channel

in accordance with the customer’s preference.

Risk

There is considerable reputational risk for established banks if they fail to meet customers’

expectations with their digital TV offering. Given that there is no history of success or failure

for digital interactive service platforms, a trialling and learning approach must be adopted.

On the other hand, if banks fail to embrace the new channel opportunities offered by digital

TV, they risk disintermediation by existing competitors and new entrants which can exploit

the new technology and excel at customer relationship management.

Abbey National

Digital TV is part of Abbey National’s clicks-and-mortar approach, i.e. an integrated channel

delivery strategy, where clicking online with Abbey National provides a full gateway into and

help with sorting out life event issues. It is Abbey National’s aim to allow customers to

access the bank through any channel or combination of channels of their choosing, offering

the customer convenience and accessibility.

Digital TV via satellite and cable has strong appeal for Abbey National’s target mid-market

segments and hence it aims to dominate the digital TV banking market, having signed deals

with Open, Telewest and NTL. Abbey National was a fast second mover in the satellite TV

banking market. It launched its retail financial site on the OPEN platform in November 1999

and aims to be offering transactional banking capability on the OPEN platform by mid 2002.

Abbey National has signed more digital TV deals than any other UK bank, which should give

it a speed-to-market advantage in this space.

Abbey National plans to offer its customers an ability to transact, apply and communicate

with their bank at a place and time more convenient to them in a confidential, fast and

flexible manner. In practice this will mean:

■ 7 � 24 accessibility to banking;

■ transactional bank account online;

■ overdraft application online with decision within 24 hours;

■ transactional savings account online;

■ ‘call me’ facility allowing customers to set up telephone appointments with Abbey National

staff at a time and place convenient to them;

■ Financial services shop allowing customers to browse and buy ‘off the shelf’ products.

Additionally, Abbey National’s digital TV site will provide the customer with tools and

information to aid them with their financial budgeting and planning.


Summary and conclusions

It is as yet uncertain what will be the dominant technology for interactive TV. This requires

retailers and banks to decide how they will spread their risk. Do they select the technology

they believe will be the winner and risk having all their eggs in one basket? Do they hedge

their bets and invest in all digital TV technology, even though it requires very significant

capital outlay? Do they wait until the technology winner emerges but risk losing that all-

important customer relationship to those competitors which have chosen to adopt a digital

TV distribution channel earlier?

For banks, these decisions are even more important given the intense competition in the

banking sector and the arrival of new players in the marketplace, unburdened by legacy

systems and able to exploit customer relationship marketing with the latest tools and skills.

Traditional banks have the advantage of already having a customer base and having multiple

touchpoints for their customers, e.g. branches, ATMS, telebanking, etc. By building on

existing customer relationships and integrating e-commerce channels such as digital TV into

their existing channel portfolio, thereby giving a consistent customer experience regardless

of where/when/how a customer interacts with their bank, traditional banks can add real

value for their customers by offering them greater convenience and accessibility.

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10Conclusions

Managing the threats and exploiting opportunities 139■

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Conclusions

MANAGING THE THREATS AND

EXPLOITING OPPORTUNITIES

This briefing has sought to characterize at a particular point in time the trends,

tactics and strategies of an industry which is undergoing extraordinary, even

tumultuous, changes. This has, inevitably, been an ambitious and difficult task. It

has been like, for example, trying to put a finger on the changes which occurred in

British industry at a particular point in time during the 1820s, when the Industrial

Revolution was in full swing.

It is much too early for a retrospective on the multi-channel banking revolution,

but the emphasis here on strategic matters means that the information will

continue to be useful even when – by about 2006, say – technical developments

have dated much of the technical content of this briefing.

The principal conclusion of this briefing must be that in order to manage threats

and exploit the opportunities offered by the multi-channel revolution, RFSPs need

to accept three principal points:

■ The customer must be the prime focus of all their activity.

■ The RFSP must display excellence in all the delivery channels and must be

constantly probing the limits of technical and operational excellence in this respect.

■ In competing with other RFSPs, the best form of defence is attack.

Developing multi-channel strategies for the twenty-first century

There is also a clear consensus among banks that the only way ahead must be a

multi-channel one. The Royal Bank of Scotland’s Bill Bougourd, for example, is

typical of so many bankers when he remarks:

The Royal Bank of Scotland continues to believe in a multi-channel delivery

strategy. The channels will provide complementary services, but the

mechanics of each channel may drive some specialization, e.g. the complex

advice may be better given face to face in a branch.

With an eye clearly on the future, Lloyds TSB’s Laurel Powers-Freeling comments:

I envisage a world where our customers choose how they wish to deal with

us to fit with their lifestyles, their requirements for advice and guidance and

their comfort with technology. Most customers will want to reach us several

ways, depending on what they happen to need on that occasion, and that

will include telephone banking (both interactive voice response automation

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and real people in call centres), WAP, Internet, ATMs and face to face. Three

things become critical: seamless connection between the various access

modes, totally efficient delivery to keep economics manageable, and – most

importantly – continuous, fresh and specific customer information used to

identify and meet people’s needs each time they touch us.

Peter Duffy, head of online banking at Barclays, observes:

All the evidence suggests that customers do want a multi-channel model.

Even the most prolific Internet banking users still regularly use telephone

and branch banking. It’s all about customer choice. Banks will offer

products designed specifically for Internet-only use, where they can pass the

cost savings on to the customer. But banks will also offer products which

don’t offer such an attractive rate to customers who want a product they

can use via several channels.

Clive McNamara, marketing director of Henley-on-Thames-based financial

software and systems vendor AIT plc, says:

The future is multi-channel: more of everything, anywhere and everywhere!

The rush for providing more distribution channels is still on and it’s getting

busier all the time. Traditional banks and other financial services providers

with Internet channels are now investing in mobile and TV banking, while

the Internet companies are developing call centre channels and many

looking to support agents in the field. Gone are the days of one or two

dominant channels; now we have a world where customers demand the

choice of communication and will dictate which channels they use for what

and when they use them. It is now clearly recognized that e-channels will

not replace existing distribution infrastructure, but they are an essential part

of providing personal financial services in the twenty-first century.

He concludes:

In terms of transactions, ATMs, the Internet, call centres, interactive TV and

wireless devices will all support significant volumes, with no clear winners

or losers.

All these convictions stem, at heart, from a keen awareness on the part of people

like Bougourd, McGinn, Ogilvie, Powers-Freeling, Duffy and McNamara that

customers feel themselves best served if the widest range of technically viable

channels is available to them. The correct model of how these channels should be

Conclusions

made available by banks is that of the à la carte restaurant menu, where a

customer enjoys the opportunity to choose whatever dishes they like at that

particular time. The key to developing successful multi-channel strategies for the

twenty-first century is to ensure that one remains a successful leading-edge

deployer of new delivery channels, even if one chooses not to be a pioneer.

The growth of alliances and partnerships

Naturally, the objective of excelling in all delivery channels requires considerable

efforts of resourcing on the part of RFSPs. In particular, alliances and partnerships

can offer important opportunities to present a more varied and more technically

accomplished face to the market. There is always a danger that alliances and

partnerships may not work strategically because neither party really wants to

disclose competitive information to the other, but often these link-ups can be

highly effective. After all, institutions that use vendors in order to obtain access to

certain types of software and hardware are, in a sense, fostering such alliances and

partnerships. Frequently, in the retail financial services world, institutions work

with vendors to create a state-of-the-art application that makes the partnership a

collaboration rather than the vendor simply being hired by the institution.

The focus on the customer

Fundamental to the material in this briefing is the belief that an institution which at

all times trains its focus on customers and is alive to the benefits they seek will enjoy

success, and that the main danger is that an institution finds the new multi-channel

world so complex and daunting that it becomes preoccupied with its own agenda

rather than with that of the customer. As so often with business, the secret of success

in the new age of retail financial services is to strive to empathize at all levels with the

customer’s agenda and to make that strictly secondary to one’s own internal issues.

WAP technology

There is a general consensus that WAP technology will play an immensely important

role in the future. Peter Duffy is typical in his decisive conviction of its importance:

WAP technology is really going to take off over the next five years. It’s going

to become very important indeed. The potential offered by WAP technology

to put banks in really close contact with their customers is enormous. The

technology also offers the huge benefit that it can be used to react to certain

triggers. For example, if a stock reaches a certain price, the bank can call the

customer and ask whether he or she wants to buy or sell the stock in

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question. This would be a truly interactive banking service. Similarly, if an

account gets overdrawn, customers can use WAP technology to browse and

use their ‘dead time’ more effectively. For example, they can use it to sort out

their financial affairs or surf the Internet while stuck in a queue.

This comment makes a fundamental and extremely important point about the

new delivery channels such as Internet banking and iDTV that seems certain to be

a factor in their inevitably enormous popularity in their future: the same channel

that is delivering banking services is also delivering a wide range of other, more

entertaining and interesting services. Customers will enjoy positive reinforcement

from using those same channels to handle their banking and also these access

entertaining services. Ultimately, this positive reinforcement will mean that

customers and RFSPs will both be the winners in the deployment of the new

generation of retail financial services.

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Glossary

Retail financial services are financial services of any kind, including current

account banking services, deposit account banking services and the provision of

mortgages, loans, credit facilities and pension plans on a retail basis. Note that

this definition includes retail financial services provided to private individuals and

also to businesses. It does not, however, include financial services and banking

services provided by one bank to another.

A retail financial services provider is a financial institution that provides the

services described above. For convenience, the abbreviation (RFSP) is used in this

briefing to describe any institution providing these services.

An automated teller machine (ATM) is a machine that provides a variety of

banking services both within and outside normal banking hours. ATMs are

usually situated in the external wall of an institution’s branch or inside the lobby

of a branch (typically accessible to cardholders outside office hours). An

increasingly high proportion of ATMs, however, are being situated more

imaginatively, in locations where large numbers of people are likely to gather, such

as airports, railways and shopping malls. Another important new phenomenon in

ATM business is the increasing deployment of ‘premium’ ATMs in particularly

convenient locations such as hotel lobbies and local shops. These ATMs usually

require the customer to pay a special transaction cost for using the ATM: in effect,

the customer pays for the extra convenience.

A channel is a physical or virtual means of delivering a service to customers.

Digital television is any television system which receives the picture information

in digital rather than analogue format. Such systems have sufficient channel space

to permit the inclusion of information running interactive systems for delivering

personal banking facilities. There is also the possibility of such systems being used

in conjunction with a specialized card-reader to download credit to an electronic

purse (q.v.).

E-business is the sum total of any organization’s interactions with its customers,

staff and suppliers via the Internet.

E-commerce is the buying and selling of any product or service over the Internet.

Electronic funds transfer at point of sale (EFTPoS) is a system where a customer

can pay for goods or services by presenting a card at the point of sale (POS) (q.v.)

terminal. These systems are also known as debit systems.

An electronic purse is a smart card (q.v.) capable of having credit loaded on to its

chip. This credit can then be spent at a special point-of-sale (POS) terminal by the

customer. The importance of the electronic purse in new channel development is

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Glossary

that when the credit is loaded via a terminal in the customer’s home, the entire

system amounts to the closest feasible scenario to an ‘ATM in the customer’s home’.

Point of sale (POS) is the physical location in a retail outlet where payment is made.

A smart card (also known as a chip card) is a plastic card featuring a computer chip.

This can contain far more information than a standard magnetic stripe – the latest

generation of chips in smart cards contain 32k of memory, more than enough to store

comprehensive details about an individual’s relationship with the retail financial

services provider in question. Another important advantage of smart cards is that it

is difficult or impossible to copy the chip and the information it contains. This means

that smart cards are far more secure than standard magnetic stripe cards.

Creating the Successful European Retail Bank (Financial Times Executive Briefings)

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