Channels don't matter

I’m sitting on a plane at present returning from Amsterdam, where I’ve been meeting with our strategic account teams who deal with the major banks of the Netherlands. Now, these are all very competent people, quite in tune with what their customers are saying. And what these customers are saying is that retail banking product distribution – their channels – provide them with competitive advantage and therefore, are a no-go-zone.

Now I don’t want to presume to tell bankers how to be bankers, but I think there are some logical holes in this position.

The report that I am presently reading (from the Tower Group, actually)  rather ludicrously uses the famous Pavlovs dog experiment – where a man rings a bell and the dogs, conditioned to expect food with the sound, salivate – as a metaphor for customer responsiveness in the banking industry.  Despite the opening of this report, it makes an interesting statement which immediately caught my eye: “…if checking accounts are checking accounts, mortgages are mortgages, and they look alike across the industry, where else can banks turn (pricing aside) but to service?”. Quite. I think most people accept that there is no long term competitive advantage available to any institution in product alone, since any innovation can be copied rapidly.

But I would go further even than that. I’d argue that there isn’t any competitive advantage available in channels either. Let me qualify this rather controversial statement.

Consider internet banking. 7 out of 10 transactions are account balance. If you can find a way to get competitive advantage out of giving the balance on an account, I would love to hear about it. I rather suspect that there are a limited number of ways to do it, and considering the amount of money that banks have spent on their internet channel, they have all been tried. Sounds pretty commodity to me.

Last week in Prague, I talked to a banker who has more than two thousand people doing evelopment on the branch platform. Apparently, they invest so much in the teller/seller that it provides competitive advantage.  Again, I find this a challenging proposition. Even given that they can make the sales process in the branch environment miraculous, they still need to get their customers through the door in the first place.

I recently saw data from Forrester – across Europe, practically every bank has very high customer satisfaction, and practically noone is planning to switch banks for their main account. But they are also not buying their next product at their main bank: only 25% would consider it for a personal loan, down to 12% for a new investment product. Customers might be sticking around, but certainly their banks are not getting greater share of wallet.

And according to Gartner, 30% of all IT investment is now in channels, with most of that going to the branch.

You can see why I’m saying that there isn’t any competitive advantage available in channels. My view is that there is something to be said for clever innovation in the way that channels are combined with product and each other, however. Add to this recepie the very special secret sauce – people – and you have a winner.

I love what Foxtons are doing with real estate in London– their branches are more like chic wine bars than stuffy old lettings agencies. People come in, are greeted by a a friendly concierge and directed to comfortable chairs with the beverage of their choice. All the while, unobtrusive displays flash tasters of product in a way designed to catch interest, and when the advisor comes over, he or she is more about building trust than selling stuff.

The experience is excellent, and there are practically no systems involved. People are combined innovatively with the branch channel, and the level of personal attention is what drives the sale. Incidentally, Foxtons are now charging twice what their competitors do for introductions to landlords. And people are paying.

Banks are spending up big on channels, but I think they may be missing something. It is customer experiences that count, and these are driven by people, not by computer systems. There isn’t much point in having the best CRM or cross selling engine on the market, if your people can’t put the customer in the buying mood. 

Given all of that, what do you think of this strategy: accept that all channels are commodity and that the only thing that isn’t is the way that you innovatively combine them with people. Spend less on channels and more on people. In fact, buy rather than build everything for your channels, and spend the savings on driving customer experience through people and process innovation.

And ultimately, if delivering innovative customer experience doesn’t drive greater share of wallet, the very worst result possible will be that IT costs for (commodity) channels will have been reduced.

Comments

[Rob Findlay]

Hi James

Very intersting article and idea there, one which I think could be fleshed out more. Whats the alternative - add more $ into serving customers directly so that they simply enter the multi-channel environment, or really make those channels target customer requirements rather than channel requirements - that is, think from the outside in, rather than inside out; or build everything from the customer perspective?

I would argue thats its the comms teams who get people to the front door, and the channels that makes them stay inside.

Regards
Rob Findlay
Manager, Customer Interaction
Direct Sales & Distribution Strategy
NAB Australia

[James Gardner]

Hi Rob, nice to hear from you.

Actually, since I wrote this post, I've come around to thinking about whether there is any differentiation avaiable *long term* in the customer experience at all, regardless of channel. What if everyone has great customer experience? Where is the differentiation?

Just the other day I visited the HBOS flagship branch in Edinburough. It has 8000 square feet of space over 3 floors. Their thinking is that this massive presence is going to get them more business. I'm thinking it is a stunt. Where on earth are all those new customers going to come from to fill that branch?

I have data that suggest to me that there are decreasing marginal returns in customer and channel investments. One of these data points is the number of originations per branch as the branch network grows: each branch is less productive as you add more branches.

On the other hand, since people costs are growing strongly, stopping technology channel investments doesn't really make sense either.

I suspect there is no perfect solution to the dilema you pose.

Thanks for taking the time to feedback.

[Hannes]

James

I recently stumbled on your blog at exactly the same time that I heard about you in another context... co-incidence?

Anyhow - so channels does not provide competitive advantage? What about mobile phones? Yes, I know what have been delivered in Europe is definitely not competitive and will not influence customer behaviour, but sufficient research have shown (see Forresters and recently a VISA study) that seems to indicate that customers would actually change banks if they could have proper banking on their mobiles. See for instance http://mbanking.blogspot.com/2007/01/people-want-mobile-banking.html).)

We have built and deployed many advanced mobile banking solution during the past eight years and have many case studies that seems to indicate that banks can drastically change the marketshare, profitability and customer stickiness by making use of mobile.