Profiting from saving the readies

Financial services companies have seen their market transformed by the Internet and new players. Sue Norris reports on what they...

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

  • - 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 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

  • cuts its international offices from 15 to two and is still seeking a buyer for its Internet currency business

  • Online personal financial services operator 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

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