UK Multichannel Benchmarking Study in Retail Financial Services Interview: Stephen Regan February 2009 SM
I am examining today a report produced on UK Multichannel Benchmarking in Retail Financial Services and this was produced in November 2008. It was commissioned by Charteris, the Chartered Institute of Bankers in Scotland and the Building Societies Association. Cranfield did the work on this in terms of the study. Stephen Regan headed up this study. Now Stephen, give me some background. Why did the study take place, and what was coming out of the report? SR Both I and Charteris at the time were looking at the degree to which some of the issues in the banking sector were due to their failure to understand the concept of service. Charteris, a consultancy firm, had a strong retailing background and they felt that the banking industry could learn something from the way that retailers organised themselves around their customers. My approach was to – I had become somewhat concerned by retail banking in the UK being very much focused on products, very much focused on sales, very much focused on transactions and being rather short term and growth driven. SM And that was a rather centralised, lean manufacturing style? SR Yes and they were wedded to that and it appeared to be giving them some significant profits, but I could see, with my kind of industrialist economist head on, I could see margins disappearing. I could see that a lot of what they were selling, they were selling at ever lower prices and I could see them getting into certain problems with that model and what they needed to do was they needed to create the concept of a service. So the phrase I would use to banks would be would be it’s not a product, , it’s a service. It’s not a sale, it’s a service. Banking is a financial services industry. SM Now your study highlighted some aspects both positive and negative of this service model in action – granted that it was in the middle of the start of a really serious financial services crunch. SR Effectively one of the hypothesis that we had, and actually the building societies were part of this process, the building societies had a view that because of their lack of scale that that might actually be an advantage to them. The building societies had retained some element of personalised customer service and the ability to understand the overall relationship with Stephen Regan
their customers, whilst the larger banks had become very focused on spending. A typical bank in the UK in 2007 would have spent a minimum of a billion pounds a year on IT, they were very much technology based, very much process driven and operations driven businesses. And somewhere in that process they lacked the ability to understand the entire customer relationship. The phrase that was used in the report is customer centricity – being organised around customers rather than being organised around products. SM So what were the results of the survey? SR The results were that there was no overall understanding in the industry of what customer centricity meant. We broke down the features of customer centricity and tested banks’ performance against each other on each of these features. The main ones being people, processes and technology. And we found that – actually what was quite interesting was that there was some quite negative performance in terms of people. It appeared to be that by then already the credit crunch had begun to impact on staff morale. So people were unclear as to what the service concept in banking was and they were unclear about the way they could deliver more value for customers. Different banks were very wedded to technology and they felt that technology and processes was effectively using data better and being clearer about the way that they did what used to be called CRM, which banks don’t like any more because it didn’t quite work for them. But using data in order to get a better understanding of their relationships with their customers. And it turned out that actually building societies were better at the overall customer centric piece and actually they weathered the storm slightly better I think than banks have. SM One of the things I noticed in the report was a comment that said if you mishandle this whole issue of technology you can actually end up worse off. SR Yes and a number of banks did do that. You can be extraordinarily unprofitable. So for instance the typical bank strategy to a problem in its marketplace might be to open up a call centre because that deals with customer service – for customer service read complaints. They would open the call centre, they would then train their cashiers, who liked to deal with just transactions with customers, into becoming sales people. They would encourage customers, unless they were valuable customers, whatever that meant, to go to dumb terminals around the edges of the branches because it was more efficient. So the whole efficiency drive in banks became very much a way that they all competed with each other and they were spending billions on these efficiency based systems and actually it wasn’t what their customers want Page 2
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– it still isn’t what their customers want. And it’s high time they learnt it. SM So out of this study there are some seeds for the future that you can say, well, if you develop those things you are going to have a successful future, if you put emphasis in other areas then you are not going to have a successful future? SR Yes. I think the main thing that has been discovered is that banks need to understand and to give customers line of sight of their overall relationship with the bank. Banks have made a great deal of money by customers not fully understanding what they are paying for and not fully understanding the prices of different products. If banks can do that, it makes a big bet though, because if they give customers a complete awareness of the relationship with the bank, then it is more easy for the customer to understand perhaps where they are being overcharged etc. The way forward for banks is not big loans at high rates of interest. That actually turns out not to be profitable. Profitability for banking is a relationship based approach. The main drivers of profitability for banks are the number of products a customer has with them and the length of time they keep the customer and that requires service. That is not divorced from technology, but it requires that technology, people and processes are linked in a very, very smart way. SM That’s strange because a lot of the talk has been about multichannel, in fact the report itself talks about that. How does that square‐ this idea of almost personalised service and multichannel? SR The way banks have done multichannel is they tend to adopt a push model. So for instance, they have said this product and this type of customer with this product, for instance let’s say a particular type of insurance product, we don’t think it is a particularly profitable product for us, so we want this customer and this product will only be offered online because it costs us 0.01pence to service that customer there. So we will push that customer in that direction. That isn’t what customers want, but that customer might have three or four other products with the bank and the customer might get unhappy with the bank, they might complain with the bank and they might eventually leave the bank or they might eventually not take up some of their other products. So that push model tends to mean that banks adopt channels online, call centres, branches – and branches are expensive – in a way that suits the bank. Our argument has always been that actually what you need to understand is the way that customers want to relate to you and to make profit out of that, which is a more difficult thing to do and in fact what they now need to do. Page 3
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SM So if you were to have the ability to draw a line under the past and some of the past mistakes and to say in future these are the areas you need to concentrate on? SR The first thing I would say is that it has not all been mistakes. It’s only three years ago that Royal Bank of Scotland was posting profits of £13 billion and a level of profits that were unimaginable compared to other admired UK companies like Tesco, for instance. So this is by some way the UK’s most important industry and for a long time has been its most profitable industry. There has been a turn in the banking cycle, there has been a crisis and perhaps it has been badly managed and badly regulated. But I think we will get through it. What won’t happen is that banks will be able to return to the model they were adopting in say 2005/2004 which was low, cheap credit and taking ever more risky bets in retail and wholesale markets. That is not going to happen. The way that we go forward is, I think, that a bank will emerge that appears to be particularly good at giving ever more cautious, and ever more regulated customers what they want. And banks will begin to copy each other and perhaps even some of the more successful new banks – if you like, Type 3 banks, or customer centric banks – will start to acquire some of those that don’t adapt quickly to change. And if you like, I could predict who might be able to do that – but I won’t. SM On that note Stephen, we will leave it there. Thank you. SR Thank you. Page 4