Financial services companies have seen their market transformed by
the Internet and new players. Sue Norris reports on what they have
done to keep their business
The financial services sector has learnt over the past year that a
preoccupation with all things "e" is to miss the point of the Web
as a business tool. Many IT projects in this market are now being
focused on integrating Web activities more closely with other parts
of the business.
Twelve months ago, for example, Alliance & Leicester abandoned
its online-only financial services plans, acknowledging that,
however glamorous, the Internet is merely one route to market and
should not be pursued in isolation.
"Organisations initially saw Internet banking as a low-cost channel
to market," says Carole Gillespie, director of financial services
at IT consultancy CSC. "But anyone who takes an Internet-only route
has to be very competitive as it's so easy for customers to compare
prices online. It's hard to retain loyalty in that
environment."
The preferred approach for financial firms now is to employ a wide
range of communication channels and allow the customer to choose
how they want to deal with the company. "Organisations are moving
away from offering Internet-only services and are developing
multi-channel financial services offerings," says John Willmott,
managing director of market analyst firm NelsonHall.
This, he explains, involves building full channels - redeveloping
contact centres, adding in mobile phone access and creating
interactive TV, for example - and, most importantly, ensuring that
these channels are integrated with customer relationship management
(CRM) packages. "The challenge here is to retain customers and to
cross-sell to them," says Willmott.
Since the Woolwich started moving customers over to its
multi-channel, customer-centric Open Plan service and cross-selling
products into existing accounts, it has achieved an average
penetration of three products per customer, compared with an
industry average of 1.2. Not a bad argument for CRM.
Yet, effective CRM relies on closer integration of different parts
of the business. Financial firms have for many years been
sub-divided by product category, with business units often
operating autonomously and failing to share customer data. For
companies to get the most from their existing customer base, they
must organise their activities by customer rather than by
product.
Back- and front-office integration have become a major focus for
this reason, with middleware seen as a vital ingredient in freeing
up the flow of information across the financial services
organisation. Research by consultancy KPMG suggests that it is not
unusual for a bank to devote 40% of its total IT budget to
integration. Because IT is so integral to the business in the
financial services sector, the chances of a merger succeeding or
failing often rest on the ease with which the two companies'
systems can be integrated.
Of course, the ability to integrate may well be hampered by the
loss of staff experienced in the legacy systems often found in the
back-office set-ups of older financial institutions. "My fear is
that a lot of core, mission-critical applications are being
supported by a group of people who are getting ready to retire,"
says Annemarie Earley, a research director at Gartner specialising
in retail banking.
Although standards such as XML will make data movement and sharing
much easier, Earley believes newer integration and middleware
specialists will need support from the legacy experts for at least
another five to eight years.
One solution to the shortage of specific skills is outsourcing,
which remains popular in the financial sector. Firms also see it as
a way to keep on top of the multitude of ambitious projects.
However, the growth of interest in CRM and cross-selling, Earley
says, means there is a drive to bring information back in-house,
even if the business processes remain outsourced.
Although wholesale outsourcing of the back office remains rare, a
growing number of service providers are now offering to take care
of back-office administration on behalf of the larger institutions,
as banks begin to see this as a way of offloading cost. The trend
is already established in the US and market analysts expect to see
it take off in the UK soon.
Security issues remain at the heart of all IT projects in this
sector. Public key infrastructure has experienced some popularity,
but is seen as complex to install and support. This has paved the
way for initiatives such as electronic wallets and smartcards,
which protect the consumer from having to supply their credit card
details online. Because Internet security is still perceived to be
a concern among many consumers, some financial services firms are
now offering guarantees that they will bear the cost of fraudulent
use of their Internet credit cards.
Large-scale market consolidation, new threats from new players such
as supermarkets and utilities, and pressure on margins from
multiple sources, have propelled process-based cost-cutting and the
maximisation of existing revenue streams to the top of the business
agenda in the financial services industry. As a result, practically
all current IT expenditure in this sector is being focused on these
two areas.
To remain competitive, financial services firms are removing
non-essential costs from their sales, customer care and transaction
processing activities, outsourcing where possible, or moving them
through new, automated channels as rapidly as the customer will
accept such moves. Companies can save up to 70% on the costs of
printing statements and bills if they move such activities to
electronic channels such as the Internet, for example.
Meanwhile, branch outlets and call centres are too expensive to
maintain if financial services companies are to remain profitable
in an increasingly cut-throat market.
One cause of cost pressure is the regulation on stakeholder
pensions (introduced in April), which forbids financial services
firms from taking more than a 1% cut on the policies sold. Where
five years ago a company might be making a 2.5% margin each year on
the funds it managed for clients, this has now reduced to more like
0.8%.
The Internet has shaken up the market for share trading, with
brokers now being forced into small fixed-fee charges compared with
the more considerable percentage-based fees of old.
Customer retention
Now that margin pressures have
rendered the cost of acquiring new business unviable in many cases,
the emphasis for some financial services firms has shifted to
increasing the yield from existing clients. While it used to be
true that people were more likely to swap marital partners than
move their bank account, customers are becoming more fickle as the
process of switching service providers becomes easier - and more
attractive. As a result, finance houses are having to work much
harder to keep their clients sweet.
Add into this equation the finding that in the financial services
sector the 80/20 rule of customer value [that 80% of business comes
from 20% of customers] is more exaggerated than in other markets,
and it is no wonder that CRM has risen to the top of the corporate
agenda.
According to research from KPMG Consulting, the top 20% of
customers typically deliver 160% of an organisation's overall
profits in this sector. "At the same time, 20% to 40% of a bank's
customers are eroding over 50% of its profits, typically," says
John Pattison, KPMG's director of financial services strategy.
However, he notes that it is getting harder for financial service
institutions to separate good customers from bad.
Research carried out by NelsonHall at the beginning of the year
established that CRM would be a major focus of any e-business
activities of financial services organisations during 2001 -
significantly more so than other market sectors. Some 59% of all
e-business initiatives in this industry were to be devoted to CRM
services, compared with a cross-industry average of 48%.
And this sector has learnt the hard way that the Internet really is
just another means of communication and not the panacea that the
press originally made it out to be. While the Internet offers 24x7
account access and easy service comparison, some consumers complain
of "overkill" and find it unfriendly as a medium.
As a result, the sector has shifted its focus to developing other
distribution channels and offering the customer a choice. The key
challenges here include ensuring a consistency of service across
all channels, and true integration between all areas of the
business, so that the same information is available to both
customer and service agent regardless of how the contact has been
made.
Digital television and mobile Internet services are becoming the
big new areas of focus, while call centres are being transformed
into true multimedia contact operations which are able to deal with
e-mails and Web queries alongside traditional phone calls.
In their attempts to exploit the Internet to better commercial
advantage, several financial services organisations have embarked
on more ambitious services such as the provision of Web portals or
"magazine" sites. These boast the dual purpose of providing a wide
range of value-added information and e-commerce services to
customers, thereby increasing loyalty, while at the same time
bringing in new revenues through innovative sponsorship and
partnership arrangements with suppliers from complementary market
sectors - from estate agents to furniture stores.
The role of the traditional financial service company is slowly
changing. Analysts claim that this reflects a desire among banks to
be retailers rather than manufacturers. Some are beginning to
offload their core transaction processing activities to third
parties, such as utility companies and other non-traditional
players as well as smaller banks, so that they can focus on the
sorts of value-added activities outlined above.
Earley feels that in future banks will become intermediaries and
trusted advisers rather than financial administrators.
Case study: Prudential moves to customer self-help
The
man from the Pru has been consigned to the history books, now that
the insurance and pensions giant Prudential Financial Services has
reduced its direct sales force from about 1,400 to almost zero.
Technology services manager Matthew Gouldstone now has the remit of
maximising Prudential's other contact channels, to keep costs down
but business productivity up.
The priority is to automate wherever possible within the Prudential
group, to minimise repetition and run a tight ship. The launch of
stakeholder pensions, introduced by the Government in April, has
presented an extra incentive for this.
The Government ruled that financial services companies cannot take
more than a 1% margin on pensions sold and managed. For Prudential,
the stakeholder pension business has been treated as a blank page.
The company has created a new business unit and is experimenting
with new ways of dealing with customers. Rather than using
Prudential's traditional call centre facilities (2,000-strong
across the group), the new business unit has established a much
more concentrated (70-strong) multimedia contact centre which will
be the main focus for sales of the new pensions.
Since analysts such as Gartner are predicting a massive growth in
the use of Web and e-mail interactions for financial services - in
future accessed via digital TV and mobile devices as well as
computers - Gouldstone wanted to put an infrastructure in place
that would allow the consistent management of customers and
information regardless of the means of communication.
The different media are treated as part of an integrated system.
This means that the same few people can handle customer contacts
however these come in, rather than the different media types having
to be handled separately as is traditionally the case. With the new
model, the idea is that customers serve themselves as much as they
can, but have access to a call centre agent if problems arise, with
the agent able to trace the customer's self-service activities -
say, on the Web - while the conversation is in progress.
Aspect Communications, the customer relationship portal company,
provided the contact centre technology at a cost of £723,000. It
claims that at least 60% of call centre costs are people-based and
that improving and integrating media can lead to a substantial
reduction in overheads. Then there are the added benefits of
improved customer service, and the ability to exploit CRM through
closer integration between the different media channels.
Initial take-up has been slow, despite partnership arrangements
with the British Trade Union Congress and British Chamber of
Commerce, designed to give Prudential priority access to these
groups' members.
"More marketing is needed at that end," says Mike Gibbons, the
Pru's account manager at Aspect.
Defining events of the past year
July 2000- AXA and the Woolwich announce launch of combined personal
finance service based on Woolwich Open Plan
- Mobile banking partnership between Lloyds TSB and BT
Cellnet
August 2000
- The Woolwich launches online mortgage service
- Barclays reaches agreement to acquire the Woolwich
September 2000
- Royal Bank of Scotland offers free Web coaching in
branches
- The Woolwich launches e-banking services on digital TV
channel
- BT announces plans to set up a network of 10,000 automated
teller machines that will enable people to buy electronic currency
to spend on the Internet
October 2000
- Scottish Widows unveils plans to outsource the back-office
functions of its investment management business
November 2000
- Barclays partners with Mothercare to offer online financial
services with Mothercare Direct
- NatWest launches Internet-only savings account
- Evolvebank.com - Lloyds TSB's pan-European standalone Internet
bank opens in Spain
- Abbey National and Bank of Scotland enter merger talks (which
are later abandoned)
- Alliance & Leicester announces £130m restructuring
plan
- Egg considering plans to set up high-street branches
December 2000
- IF partners with E-Loan to offer mortgage sourcing
services
- Lloyds TSB and Centrica announce joint venture between
evolvebank.com and Goldfish to offer multi-channel banking
- January 2001 - Nationwide ISP service ceases; is replaced by BT
Internet
January 2001
- Lloyds TSB launches online e-marketplace for B2B
trading
March 2001
- Abbey National and Bank of Scotland abandon their plans to
merge
April 2001
- Stakeholder pensions launched
- Lloyds TSB launches TV banking service with Telewest
- Nationwide starts Internet banking service via digital
TV
May 2001
- Halifax, Nationwide and Alliance & Leicester invest in
Mortgage Brain
- Beenz.com cuts its international offices from 15 to two and is
still seeking a buyer for its Internet currency business
- Online personal financial services operator Moneygator.com
closes down
- Barclays and Vodafone launch Wap service
June 2001
- Lloyds TSB announces roll-out of major CRM initiative
- E-marketplace for Treasury and Capital Markets Products created
by consortium of European banks including Royal Bank of
Scotland
July 2001
- Nationwide launches Wap banking pilot
Sources include: NelsonHall and ukbusinesspark.co.uk