.
Convenient Access to Products and Services
No longer a myth, a reality - but still evolutionary, not revolutionary
A Question: Will traditional financial institutions maintain their market share?
An Answer: No, but they can minimize the loss by getting their "act" together.
.
By Donald P. Crivellone ©1996
A 1978 vision of a fairly complex Alternative Delivery System.
During the early 1970s, the common wisdom among the operational, product management and item processing staffs at major financial institutions was the possibility and vision of a checkless society with fuzzy dreams of a cashless society. Automated Teller Machines (purely cash dispensers then) were prevalent. However, several failures of telephone banking and point of sales experiments occurred throughout the United States, putting a damper on the dreams of the future.
While ATMs in particular processed a significant amount of cash transactions, those transactions were not a one-to-one reduction of checks cashed with live tellers. In fact, ATMs in some parts of the country probably helped other organizations that manually dispensed cash as much as the financial institutions themselves. In California, two situations delayed the immediate need for installation of ATMs. First, every major bank in California (and they dominated the "check" marketplace) had for years issued Check Guarantee Cards to a significant portion of its customer base. These cards were honored at any merchant for purchases and cash up to $200 generally and the banks firmly stood behind their pledge as long as the merchant recorded on the check the Check Guarantee Card number. If the banks ever "flinched" and failed to honor the guarantee, the program would have died. Bank of America had an excellent system; utilizing an inexpensive, unsophisticated paper card that worked for many, many years. The second reason is that major supermarkets were open 7 days a week and 24 hours a day. Supermarkets understood retailing and they loved customers (and potential customers) coming in to cash checks guaranteed by major banks, and the supermarkets did not charge a fee. They also understood positive incentives to gain market share. Banks realized that not all customers were credit worthy for check guarantee cards and did not have access to this informal alternative delivery system, but the bank's "profitable accounts" usually qualified.
The potential of reducing the cost of transactions finally became an excellent reason to explore the installation of ATMs as a productivity device and a method of making this 24 hour, 7 days a week service available to a wider section of its customer base at the reduced cost.... coupled with the fact that ATMs and the debit card would well be the start of a much broader electronic delivery system, a strategy not only for ATMs, but other forms of Point of Sale (POS) and location independent delivery systems.
It certainly did not take a "rocket scientist" to understand that ATMs would not remain cash dispensers forever. Customers gained faith in the ATMs (they were immediately rewarded with cash) and in almost all cases the transactions were posted properly. Lo and behold the start of electronically educated customers. Soon, utilizing interactive "buttons" and a "screen," customers would be able to communicate with our computers (and even live people one day - utilizing interactive cameras and screens). We could then deliver or initiate a wide variety of services or information (detailed data on deposit accounts, loans and credit cards, trust relationships, budgeting, bill paying, transferring funds, tax preparation) all independent of our physical locations.
Now financial institutions could install "Mini ATMs" (actually point of sale devices) in gas stations. "Mini ATMs" in Supermarkets - this point of sale device allows customers to purchase groceries (requiring a human interface until we figure out how we build big mechanical, refrigerated grocery dispensers). The profitable, productivity possibilities were clearly endless. Add a little color to the screens of these soon-to-be-called-something-besides-ATMs, and customers would be able to order refills for their personal checks, purchase stamps, official checks, obtain government payments or ?.
NO MAGIC HERE: Alternative Delivery System devices are nothing more complicated than a mechanical or plastic remote device that has the ability to communicate with a mechanical computer that communicates back. The form of the communication can be invisible, visual, audio or a combination of all of these.
Technology is certainly not an issue. It is critical, and it is important to stay abreast of devices available and how to use them to advantage, but not an issue as it applies to being a player in the marketplace.
Vision, management, leadership and marketing are the real issues.
Keeping this in mind, there was absolutely no restriction on the dreams of the future as it pertains to Alternative Delivery Systems. Alternative Delivery Systems, referred to as Self Service Banking in the 1970s were indeed a realistic vision of the future. Successful Point of Sale systems, Plastic Checks, Smart Machines (formerly ATMs), Smart Cards (a device), personal computers, an enhanced ACH, smart telephones and smart televisions were all justified sparkles in the eyes of operational, product management and item processing staffs.
First Interstate Bank of California in the middle 1970s to the early 1980 had a well thought out, coordinated strategy for Alternative Banking Systems, principally through electronics. This strategy was integrated with a vision of customer attitudes, their education and acceptance over time, a branching or location strategy and their design and functions, its financial capabilities and the education and training of its staffs.
As an aside, one must never lose sight that Alternative Delivery Systems must be made available to all customers, whether Fortune 500 companies or home based entrepreneurs. Consumers should be able to transfer funds electronically to a relative overseas electronically. Large organizations should be able to pay their vendors, collect receivables, monitor float, transfer funds to third parties independently - all electronically. We tend to exclude businesses when we focus on Alternative Delivery Systems. There are worlds to conquer in the business arena.
The several "edges" traditional financial institutions had and have to a lesser degree today are their customer base, the efficiency of processing and the settlement of financial transactions and a community presence that services customers. Competitors of traditional financial institutions, however, may have an advantage of utilizing more efficient capital intermediary systems.
Traditional financial institutions understand that they do not "own" customers and their deposits, transactions and services utilized by customers. This is clear based the on the ongoing reduction of the traditional financial institution's share of the marketplace. This reduction of market share will continue unless the traditional financial institutions aggressively approach the marketplace in the coming years and maintain their core competency.
I have heard too often from some that community presence (branches) are a thing of the past. I feel sorry for those who truly believe this or are too anxious to eliminate this important strength. Yes, there are millions of computer literate users out in the marketplace and growing rapidly, but, I do not believe they cover the entire spectrum of what a financial institution might consider their "profitable" customer base. Granted, the locations financial institutions utilize are in constant revision. However, they are the principal delivery system and will be necessary for some time to come. Community presence is important.
Other than a problem in the 1980s when real estate values fell, real estate has always been a reasonable investment (this includes the value of a lease), particularly if one puts in perspective that in most cases traditional financial institutions are location sensitive, require adequate parking and they utilize buildings that can easily be converted to alternative uses, such as a restaurant or law office. Both of these example conversions could well use the vault (wine cellar and document safety). So one may conclude that locations are not burdens and can be modified as circumstances require.
Offering financial services will always be a "people" business. Alternative Delivery Systems and Call Centers eliminating routine transactions will allow staffs time to assist customers with additional profitable services. An early or sudden change in a community presence or business strategy will preclude an institution from retaining its "profitable" customer base and the institution might get sick or it just might be fatal. Timing is everything.
Evolution, not revolution is the key.
The following is from the ending of an interview with the American Banker newspaper, dating back to July 23, 1982. I believe I was correct regarding customers' attitudes then, and those attitudes still apply today.
"Mr. Crivellone noted that when ATMs were first promoted in California, the general public did not exactly go wild with enthusiasm. And he does not anticipate that its home banking system will have the public pounding on its doors to open new accounts. But he also observes with a smile that if banks were to wait for the customers to demand new and improved ways of offering services before actually making them available, 'we would still be using quills and inkwells.' "
Alternative Delivery Systems - "convenient accesses" to financial services - are still seeking a market. The products and services they deliver must pass the marketplace test of need, quality and price.
I do not see major changes in market share between traditional financial institutions; they will "catch up" with each other. However, there will be changes between industries. Bill paying and E-Mail (co-branding with third parties) may well impact the US Post Office and give traditional financial institutions an additional source of fee income.
However, on the flip side, non-traditional providers will impact the traditional financial institutions. I well remember Merrill-Lynch draining financial institutions' deposits with an uninsured money market account (total reliance can be placed on insurance). Even if insured deposits are an issue with consumers, what will stop large, well-capitalized organizations from providing insurance for depositors either through outright insurance or re-insurance? Traditional financial institutions need to understand and protect their "core competency."
Beware of Microsoft, Schwab and other clever organizations out there.
Regarding alliances and co-branding: Take care when choosing a partner. They may well "pick the pocket" of the industry.
One of the most significant lost opportunities in the past several decades is that of AT&T and the Baby Bells. The future was extremely predictable way back in the 1970s.
AT&T and the Baby Bells had the three most important ingredients to be the principal link between people and businesses and the wealth of information that was obviously going to be available on computers-and, if they chose, to capture a large portion of the financial services market, much more than an insignificant portion of the credit card market. Consumer assets are among the most profitable assets financial institutions have on their books.
AT&T and the Baby Bells had the capital, a sophisticated research and development mentality, and almost every single home in America had an interactive device the phone companies knew well... the telephone. Granted, the telephone's capacity was limited, but it was sufficient to communicate by pushing those buttons to interact with an audio response unit and a computer and then communicate back via audio response or a computer screen or that other screen we all know so well, the television. Think about it.. everyone (almost everyone) in every household knew how to use a telephone and television. The Internet, even before wireless and sophisticated hard lines came to the mass market, relied on standard telephone lines. The phone companies could have invested wisely and captured a lucrative market for themselves, particularly if they formed an alliance with a traditional financial institution. The preponderance of cable companies, because they lacked interactive devices, just did not have a chance back then.
Anyone, including traditional financial institutions could have used the telephone lines to provide Alternative Delivery Systems and "lock in" customers, but most traditional financial institutions had neither the vision nor the desire to invest in the long haul. Combine this with the tremendous loan losses suffered during the 1980s, it would have, at a minimum, been a difficult decision for traditional financial institutions. However high the price, it would have been reasonable to protect their industry.
If customers don't initiate changes in delivery systems and if history is a measure of the future, how do we hasten the evolution of Alternative Delivery Systems from its past.
A committed vision has passed most of the traditional financial institutions by and they are now followers rather than leaders. It has given other providers an opportunity to enter their traditional marketplace, but the field is still wide open for all. The Internet's success and the profound data available to everyone is exactly as some visionaries predicted over 20 years ago. The explosion of data and individuals interfacing with The Internet will hasten the evolutionary process, but I still contend it will not be revolutionary as it applies to the overall profitable marketplace of the financial institutions.
There are several basics that need to be in place in order to hastening the process of "locking up" the marketplace with a primary goal of maintaining market share - hopefully gaining market share and in the final analysis maintaining a viable organization. No one wants to be the famous "buggy whip" company, who did not see or understand the future.
Many of the forces that bring change are beyond our control. But, with relatively few exceptions, the means we employ to adapt to change are within our control. "Failure to prepare is preparing to fail." - John Wooden.
Commitment, Product Management, MARKETING, Support and a Professional Manager
Commitment
Financial institutions are not prone to commit to long term research and development, particularly if the commitment is not related to short-term profitability. However, it only makes sense to put aside, even at the expense of earnings per share, a portion of an organization's capital with an eye to the future. Institutional investors, who demand higher levels of performance, need to be educated by financial institutions in order to understand the importance of investing in the future. By investing in the future, financial institutions will increase productivity, maximize the retention of its customer base rather than losing market share, and return long-term profits rather than focusing only on short-term profits.
Alternative Delivery Systems were clearly systems that were coming sooner than later.
But it is not too late, considering the undefined status of the broad spectrum of competition and the fact that Alternative Delivery Systems are still in an evolutionary process. Each financial organization needs to clearly define the real character and then the direction of its future. Then, if appropriate, a definite Alternative Delivery Systems game plan must be developed by financial institutions that plan to stay in the consumer marketplace and remain viable competitors. Execution of a well thought-out Alternative Banking Systems game plan requires:
A CHAMPION (a sponsor) who is a very senior officer within the financial institution, who has more than a hint of a visionary, who has the power to "make Alternative Delivery Systems happen," who is dedicated to Alternative Delivery Systems, who is hands-on and who is highly visible internally and externally. Most importantly, this champion must understand the traditional financial institution, its strengths and weaknesses, its historical role and how its future fits into the complex world of financial providers. The distinctions between traditional financial institutions and the broad spectrum of competition of financial providers continues to disappear.
Product Management
Product management works, as financial institutions have discovered in the past 20 years. The focused approach fosters team building, ownership and pride in a product, which translates into product or service success. The process of delivering products and services normally belong to specific units within an organization.
I have always observed that the marriage of product management and the systems responsible for delivering those products and services works best when reporting to the same senior person. This maximizes the penetration to the organization's customers.
MARKETING Poor marketing coupled with poor commitment is the principal reason for the failure of financial institutions to educate and penetrate the marketplace with Alternative Delivery Systems - that is, systems with enough volume to make them profitable.
The ultimate success of individual systems within the family of alternative delivery systems will depend on how well the organization markets that system internally and externally. I have observed that some institutions have systems where the preponderance of the public is totally unaware of its existence. A single brochure lost in a "rack" with 50 other brochures is not going to sell a system. A one-time or a flight of advertisements will not "brand" a new system. Branding requires an ongoing visual process before it is successful and "branded."
Packaging a system requires thought and a quality approach. Each system should have a well thought out logo, identified with a specific color. For instance, if I were introducing a new system such as telephone bill paying, utilizing a simple telephone and audio response unit, I would color-coordinate the brochures, mail stuffers, large posters (in fact, all the collateral material), the demonstration phones in each branch or sales location,, and require the people responsible for demonstrating the system in each location to wear jackets of the same color. A total, undeniable look that will "grab" the attention of customers.
An educational package outlining the benefits and convenience must be developed for the staff and customers, and merchants if they are in the loop. Traditional financial institutions have not always been outstanding educators of change particularly as it applies to the marketplace. We can site the struggle to truncate checks. An excellent productivity tool for banks, but they have not overcome the resistance of the customer base, yet we know it works in other countries and has been successful in some domestic financial institutions, so it is not an impossible task. The Automated Clearing House still presents traditional financial institutions with enormous additional opportunities for new products and opportunities to increase current ACH products, yet this growth has been slower than the potential it presents. These are lost opportunities for traditional financial institutions.
We know traditional financial institutions can brand products. Take VISA and Master Card as an example. This branding was an industry effort; maybe there is a message here. However, one may wonder if these two organizations create opportunities or are a catalyst for non traditional financial institutions to enter the consumer market.
Training is critical and must consider the attitudes of the various segments of the marketplace such as seniors, Hispanics, and so on. I, for instance, would not normally assign a "youngster" as a demonstrator in a location were the demographics are heavily weighted with seniors.
In the book Megatrends, John Naisbit describes the relationship of High Tech - High Touch. This is so true. The more we traverse into technology, the more we need to hold the hands of the customers and staff. Yes, there are millions of people out in the marketplace that need no hand-holding, but there are even more that do. And if Alternative Delivery Systems are to be profitable, eventually they need volume, so one cannot ignore profitable segments of the marketplace.
If one believes that it is easier to draw bees with pollen rather than vinegar, then one must believe that providing people with incentives works better than penalizing people to use or sell a service or product. This philosophy applies to customer and staff and merchants, if they are in the loop.
Organizational structure requires serious thought - particularly as conflicts may arise between "products and services" and "their delivery systems." "Turf" conflicts will weaken the institutions marketing success.
Pricing needs to be well thought-out vis a vis traditional services. The productivity gains should allow a price that will induce customers to use new Alternative Delivery Systems, and that should be a real incentive: Profit through productivity
Regarding financial institutions that charge a penalty fee for using live tellers, rather than an incentive to use Alternative Delivery Systems ... all one could ask is an opportunity to be that institution's competitor.
Support
The best plan, commitment and management of a new delivery system falls completely flat if the final product or service is not delivered in a quality manner to the customer. Too often new products or services are not tested or piloted in an controlled market area. Every new system has bugs and they must be worked out in a controlled environment that facilitates communications with pilot customers.
Customer service must be available to customers on a very timely basis. Remember High Tech - High Touch. Don't let customers get discouraged when they are beginning the new service. Nothing will kill a new product or service quicker than poor quality.
Support from the back room is a must. Programmers, systems analysts, data processors, hardware, customer service representatives and the unit that actually performs the back room functions of the product or service need to be an integral link and support for the product management team. Support staffs work best when assigned to support a product manager when they are assigned by a senior officer of their own group.
Professional Management
To compete in the marketplace financial institutions will be required to present a multi-faceted approach. This will necessitate a group of product managers reporting to a senior product manager who is truly a professional manager with all the skills to interface with all the required support units within the organization.
This manager must not only have an overall grasp of the customer base, but also understand the strength and weaknesses of the traditional financial institutions and those of their many competitors, some of which are still undeclared.
Summary
Traditional financial institutions: continue to BEWARE. As Alternative Delivery Systems become accepted on a wider basis, non traditional financial institutions who develop or cleverly use Alternative Delivery Systems will have greater access to your customer base and they must and will make excursions into your ever-diminishing customer base.
It is important to always remember Alternative Delivery Systems are simply "convenient and hopefully productive accesses" to products and services. The products and services must still pass the test of need, quality and price.
Technically developing Alternative Delivery Systems is the easy part. The real keys are:
Quality management, committing to the future, understanding the vast potential the future holds, being a pioneer; professionally approaching and educating the marketplace will be the best offense to protect traditional financial institutions in the world of the future. "The best thing about the future, it comes one day at a time." -Abraham Lincoln.
A valuable benefit to those organizations who succeed with Alternative Delivery Systems will be the opportunity to execute "Data Mining." Successful organizations have always used their wits (just being smart) and available information to enhance their ability to create new products and services, cross-sell and market customers. The amount of data gathered electronically, transformed into information, will open smart, very specific target marketing opportunities never before available to traditional financial institutions.
The race is finally on and wide open to all.
Who will emerge as the winners in the marketplace?
Mr. Crivellone is currently the president of Dobin Enterprises, Inc. in Atlanta, Georgia
He was formerly Executive Vice President of First Interstate Bank of California, where he held two key positions, Group Manager of the Retail Banking Group and Group Manager of the World Wide Administration Group.
He successfully managed the initial bankwide installations in California of ATMs, telephone bill payment & telephone banking, home banking, and was a co-founder of Interlink.