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Published: 12/22/06
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Innovating Customer Service: Retail Banking’s New Frontier

As more U.S. banks reach the federally mandated limit for deposits, they’ll have to find a new way to grow.

Between hidebound marketing ideas, long-standing structural limitations, and complex regulatory requirements, banking by and large lags far behind most other consumer retail industries in developing leading-edge products and services. The industry’s rush of consolidation, which in the last decade nearly halved the number of banks in the U.S. to 7,500, has only exacerbated the situation, say financial-services industry experts at Booz Allen Hamilton and the University of Pennsylvania’s Wharton School. “In order to make any integration — or at least make the numbers — work properly, you really have to cut a lot of costs,” says George Day, a professor of marketing at Wharton, noting that cost-cutting typically translates into a degradation of service.

The consolidation is in turn ratcheting up the competitive ferocity. By federal law, no bank may hold more than 10 percent of the total U.S. deposits, and many of the top 20 banks are closing in on that limit, says Michael McKeon, a New York–based senior vice president with Booz Allen. That means that growth by acquiring new customers will no longer be feasible. Instead, he says, the only way for banks to grow in the domestic market will be to strengthen relationships with their current customers, and to do that banks will have to innovate their offerings.

But innovation is not easy in banking. The industry has to contend with a tangle of regulations acting as “speed bumps” that can slow down product and marketing innovation, says Mr. McKeon. Before introducing new products and sometimes even new marketing programs, banks have to consider such factors as privacy laws, debt security guidelines, and fair lending practices.

Internal structural problems also inhibit marketing and product innovation. Product-focused companies typically have research and development departments, says Goran Hagegard, a principal with Booz Allen in New York. Not so in banks, where IT tends to drive R&D. Furthermore, departments within banking organizations are usually highly segregated from one another; the people who know what kind of technical innovations are needed are often completely isolated from those in a position to deliver the innovations. Cross-departmental teamwork is generally not encouraged, says Mr. Hagegard. “Few and brave are the people who have ever crossed the moat unscathed.”

Two other forces — risk aversion and inertia — can tamp down the urge to innovate. Banks must be exceptionally careful not to overcomplicate their offerings, says Alex Kandybin, a Booz Allen vice president based in New York, because product confusion can undermine the confidence the consumer must have in the bank to trust it with their money. And, although many bank consumers might not be happy, they are usually not quite unhappy enough to leave, says Professor Day. “People put up with lousy service because the switching costs are high.”

Putting Customers First
When banks do come up with new products, the products often fail because they don’t focus enough on the consumer. Eric Clemons, a professor of marketing at Wharton, cites the example of ill-defined smart-card and electronic cash systems, which have yet to take off in the U.S. By contrast, the smart-card system in Hong Kong called “Octopus,” which enables users to ride public transportation without having to buy tickets or swipe a turnstile, is a big hit. The lesson, according to Professor Clemons: “If it addresses one real need, no matter how small, we have liftoff.”

How can a bank learn to become more customer-focused and innovative? Although regulations aren’t going away any time soon, the other barriers to more customer-centered innovation can be whittled away with some concerted effort, say Wharton and Booz Allen experts.

Internal structural changes can improve the chances of success. Break down the wall between sales and customer services, suggests Jerry Wind, a professor of marketing at Wharton. In an unusual move for a banking behemoth, Citibank linked its customer service performance to sales success. “They’ve created an incredible incentive to address your concern — and then to sell,” says Professor Wind. It’s not only a brilliant way to improve customer service, he adds, it can also give the bank’s marketers greater insight into consumer needs than they ever had before.

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