Direct Banking as a tool of a multi-channel distribution strategy

1. INTRODUCTION.

Banking strategists and marketeers find that, nowadays, distribution is the key element of the marketing-mix of financial services. And this is progressively true, as far as financial products, themselves, are becoming more and more product commodities.
Financial business does not deal with tangible products but with services - which are of course intangible - so a specific role has to be performed by the delivery system, I mean people and network.
In fact, the increasing degree and transparency of market information, and the impact of technology, has made possible a certain standardization of financial products, in a way that customers do not really appreciate their technical differences, but rather their availability and convenience. And this is surely pioneered by the delivery channels, and by the way customers can accede them.

2. LEGISLATIVE, COMPETITIVE AND TECHNOLOGICAL ENVIRONMENT.

Over the last two decades major changes have been happening in a business environment that was conservative by nature, fairly well regulated, and protected by financial and regulatory barriers to entry.

On the supply side, and particularly in Europe, mainly due to the integration process, deregulation and re-regulation introduced a new competition environment in the (financial) industry. I mean, EEC directives concerning cross-border financial movements, the freedom to provide services, and the supervision and regulatory changes, such as disclosure and advertising.
As far as competition is concerned, another issue that has to be considered is the awake of new competitors into the market, namely the so-called "non-banks".
These new entrants - other "non-banks" financial companies and the big retailers - began either a branchless competition, or through large retail outlets, providing services to the innumerous crowds that use their premises to do their shopping and so are able to solve several problems in a one-stop fancy way.
Another important, and clearly determinant issue, is the huge development of hardware and software solutions, and electronic communications, the so-called information highways.
In fact, apart from internal organizational impacts, technology developments turned possible the emergence of new concepts in banking:

-transactional banking, mostly performed through automatic ATM's, POS, PC Banking and Telephone outlets;
-retail business, selling products, through the new role of the branch network, and direct marketing/telemarketing procedures;
-advisory banking, through the increasable trained bank staff.
On the demand side, certain changes have clearly created new needs and behaviors in the market. These changes concern the degree of information, increased mobility, personal revenues, and consumerism.
Growing competition, educational development and the spread of new means of communication, gave pace to an increase in the level of information, (which has contributed to develop new needs in the market).
Convenience, which had along time been - and still is partially - satisfied by branch proximity and physical location, found a new more performing role through remote solutions.
The "information society" also increased the mobility of people and their demand for higher levels and time-saving, services.
The complexity of the products and the growing individuality of demand has created the need for customized and flexible services.

As some physicians say, "there are no illnesses, there are patients" so, in equal terms, each customer eventually needs different solutions, in a one-to-one marketing approach.
Quoting Mr. Hans van der Velde, President of VISA's European Union Region, "we are faced with a "New Reality" shaped by a number of factors - convergence, non-bank players, the information highway, customer demand and access".
The late developments have been possible by convergence, say "the coming together of a variety of elements, such as transformation and integration of communications, entertainment, information and computing".


3. DISTRIBUTION AND STRATEGIC IMPLICATIONS FOR FINANCIAL INSTITUTIONS.

The continuous development of technology, namely call centers' and communications' hardware and software solutions, has allowed banks to automatise certain operations which are highly transactional and so do not need real time human intervention.
This movement has helped the evolution of the banks' branches role towards customers, from money transmission and processing centers, into selling and solution providers centers.
So, banks - at least the most active ones - have been changing their role, from passive stand-by processing-focused centers, to pro-active selling ones - product-focused retail branch centers - and to added-value financial, asset and tax information management and consultancy, customer-focused centers.
In fact, banks have been externalizing low added-value transactions through automatic devices, letting branches to develop and increase their selling and consultancy capabilities.
One of the basic marketing concepts - adjustment of the offer to consumer needs - which was traditionally managed, as far as the financial industry is concerned, at the product level, and afterwards at the mix level, has been progressively tackled at the distribution level, in terms of a delivery-mix strategy, instead of a dominant channel.
Customers look for service and convenience, which can only be satisfied by integrated delivery solutions - "proposals of value" and not "proposals of products" - so, we are facing the primacy of
distribution, which is in fact the way to let services be available to consumers, and an efficient way to differentiate them.
The overall corporate strategy is therefore impacted by this reality, as it (impacts) geographical coverage decisions, product flexibility, price strategies, funding decisions and even enlarges market (capabilities).
Distribution has also been an instrument to improve customer service and to provide different solutions to different targets.
The distribution-mix approach is, nowadays, a key issue for every retail bank, as it is essential to develop the different policies of getting higher market shares, lower distribution costs, price competitiveness, and therefore higher profitability.
Distribution performs a key role in every industry, although the specificity of the financial services, have turn this issue, eventually, into the most relevant that has to be dealt with.
Marketing theory and practice teaches us that one has to find the right product, the right solution, to the customers' needs. From the corporate viewpoint, as a whole, the search for an optimum delivery mix is needed, in order to respond to those market needs in the most efficient and profitable way.

A major change that has been happening is really what we could call a "translation movement" or "change of scope", from the branch as the center of attraction of the bank - or the focus on physical evidence and the institutional place - into the customer, wherever he might be in any moment: the need of integrated service delivery networks.
Having this for granted, one of the first steps shall be the choice between integrated or stand-alone operations.

There is no special recipe through which we may apply everywhere as the best solution. In general, traditional banks might benefit from launching integrated remote channels, as they can profit from back-office synergies and, strategically will higher service level and availability, for their customer base.
This may typically be the basis of a defensive strategy towards the market, although an offensive retaining policy towards present customer base (cross-selling opportunities; expansion in the share-of-wallet and image).
Alternatively, a new or a small bank may choose a stand-alone operation - to enlarge its retail network - or even a traditional bank might do it - to target specific markets, in a more pro-active and cost-effective approach.

In broad terms, comparing a direct operation with a branch-based operation, the level of expenses will be lower for the former, in salaries, premises and processing costs, and higher in promotion, hardware and communications, the overall balance being in favor of remote banking.
These (empirical) conclusions lead to the evidence of the best choice, being the need for a multi-channel integrated distribution strategy.

4. INBOUND AND OUTBOUND TELEPHONE BANKING

Some studies have been carried out, among the banks in Europe and in the United States, showing the acceptance and usage of remote and telephone banking services. As it is known, the Americans are definitely leaders in the field. It is averagely accepted that, while less than 5% of banking transactions are done by telephone in Europe, this figure equals around one quarter in the U.S.

Apart from different cultures and habits, this shows a potential that already exists and has to be explored by the banks.
Notwithstanding the development of remote banking, the branch network - mostly in Europe - will still continue to be, at least for some years, the center of customer contacts and services. That does not mean that its role will not change, in fact it is already changing.

Talking about retail business, most of the customers will eventually search for (personal) branch advice for some more elaborated solutions, as far as asset allocation and fiscal advice is concerned.
A relatively large number of European banks already offer telephone banking services and eventually more than 3/4 of them will be offering these services by the end of the century.
Concerning market penetration - apart from the UK - a 20% average rate might be expected (UK=30%), in five years.
Actually, the response demand rate is quite low at the moment, and a range of different services is provided.

Direct banking strategies, concerning inbound and outbound operations, have been put in place, related to the different financial institutions, markets and services provided.
As far as inbound services are concerned, the role of telephone banking has been strategically faced, either as a complementary channel (integration), an alternative channel (virtual branch) and/or an alternative Bank (stand-alone operation), but always based on a customer service concept.
Customers are able to solve their problems, give their financial orders and get their loans.

So, apart from cross-selling opportunities that will eventually emerge following the initiative of the contacts with the clients, banks mostly have a passive approach, as far as inbound calls are concerned.
In fact, these solutions have been put in place, altogether or alternatively. Clearly, in the end, each bank in each country and each market, has to define its best solution, in order to reach its own priorities and objectives.
Surely, one has to take a segmented approach to the market in order to make the best choice, based on customers' demands, but also on an integrated and well-defined corporate and marketing strategy.
Outbound telemarketing is differently based on proactive strategies, targeting existing or new potential customers, in order to promote and sell financial products.

6. KEY FACTORS OF SUCCESS FOR AN EFFECTIVE INTEGRATION

There are multiple factors of success that have to be taken into consideration, in order to get the highest synergies with the branch network and an effective and integrated delivery strategy.
A clear understanding of customers' preferences is the main key point, as far as delivery choices and product offer are concerned.
Good understanding of branch managers of the overall process and impact in their branches and to the customers, is needed. Direct banking is supposed to give a positive contribution to the branch's own targets and objectives, and to increase the level of service, so the degree of satisfaction of the customers. In consequence, an effective role is supposed to be performed by the branch in promoting the service.
When the branch clear understands the value of the service, and their role to increase customers' satisfaction and reduce their administrative tasks, it will definitely help its promotion.
In the short run, the service must not be understood by the branch managers as a threat, but as a support, through a clear integration into the branch's retail strategy and marketing plan.
The ability to attract the customer base and to generate the usage of the system is also a key factor of success.
An exact definition is needed, as far as the customer is concerned, of "who decides what", and "when", so as an integrated M.I.S. and real time information .
A clear delivery strategy, must be put in place, avoiding internal competition and conflict among distribution channels and services, in order to (avoid) misunderstanding and confusion among customers and service providers (staff).

Another basic key factor of success is a (clear) segmentation strategy, as far as the distribution-mix is concerned, in order to adequate the offer to the right targets.
Although, empirical evidence shows that the early adopters of technology-based solutions are generally the younger adults (up to 35), an evaluation of the specific market conditions has to be made, in order to formulate the better and adequate strategy.
The developments of demand created new customer segments, and so segmentation has to be established considering the new consumer attitudes, behaviors, expectations and needs.
Among the younger, who are generally open-minded towards new technological solutions, some have a greater potential - as the young professionals - others might already have a wealth to protect, and others have low-earnings, and so will only use the bank for money transmission.
But older customers can also be targeted, considering that some of them have limited needs, and others are more affluent.

So, a multi and cross-matrix approach has to be adopted in order to identify behavioral types, namely the "conservatives" (branch-oriented, that eventually will never use remote banking solutions); the "integrated" (mixed-channel users, with medium or higher earnings), and the "early adopters" (technological and self-service oriented), affluent or not.
Assessment procedures and the package of services offered, have to fit the different characteristics and needs of each of those segments, I mean IVRU touch-tone services, standardized (human assistants services) or higher-level added-value consultancy services.

So, there is a wide room for the development of customized remote services, efficiently structured and priced and well-integrated in targeted mix strategies.
Facing retail business, in general terms, and for the average customer, products available through the telephone have to be simple and highly transaction-intensive.
People look for remote services for convenience and to get rapid responses for their problems. Generally speaking, customers do not look for products, but for solutions to their needs and problems. So, a wide product range of simple products is the answer to provide the solutions to those problems.
Talking about automatic services, a friendliness interface is essential to capture those who, not being so technological-oriented, belong to the "multi-channel users", and so, although more reactive than the "early-adopters" may, in the medium-run, be also targeted.

The effective promotion to existing customers, is most successfully done through direct marketing and at the branch. In-house promotion can help customers see the advantages of having alternative ways to contact the bank, mainly sponsored by their usual contacts of the branch.

7. CONFLICT OR SYNERGY WITH THE BRANCH NETWORK?

This is really an issue that has to be dealt at a corporate level, strategically in terms of medium/long term choice and, tactically in terms of the interaction with the present branch network and management.
At the strategic level, senior management has to be sensitive to customer needs and convenience and their compatibility with corporate objectives and goals, namely profitability and cost efficiency.
At the tactical level, the impact over the traditional branch network has to be evaluated and their potential (reaction) over new alternative delivery solutions, in order to diminish eventual negative reactions, not favorable to the spread out of the service.

The general argument is that a universal retail bank, in order to be efficient and competitive, has to pursue a multi-channel distribution strategy, based on a segmented target approach.
It is, in fact, a basic marketing issue, to segment the market, evaluate their needs, attitudes and behaviors and establish the most efficient and adequate mix of products and services, price, promotion and delivery solutions.
Facing customers' convenience and cost-benefit effectiveness, banks will continue to automatize low-added value operations - through ATM's, PC's and telephone-based solutions, and at the same time, letting their branches have enough time to sell products and perform customer service.

Anyhow, and in order to succeed, this cost-driven approach has to leave enough degrees of freedom to the customer. Successful banks, instead of pushing new technological solutions into the market, have to allow customers to choose and feel, each time in every moment, in every place, the most convenient "channel" to perform their operations. New developments, at the technological level, shall be understood by the customers as enhancements and ways to simplify their lives.

These are, in my perspective, the basics of a multi-channel distribution strategy: to provide a broad and efficient choice, and let consumers choose, each time in each place, the most appropriate one.

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Carlos Manuel de Oliveira
Seminário EFMA, European Financial Management and Marketing Association
“Telephone financial services, conflict or synergy with the distribution network”
Munique, 27 Junho 1996