banking innovation in a margin pressured environment.

Context.

Banking has emerged from the great recession with a very different landscape.  With many of the standard revenue sources from Retail are being undermined by new niche players (foreign exchange, payments processing, personal loans).  The next 5 years will be characterised by unprecedented margin pressure alongside a need for higher innovation levels than ever before.

During the recession banks have moved to cut costs and to help customers to better self-serve.  The implementation of a coherent digital strategy based on customer’s ability to access bread-and-butter services through web, app, ivr and also (in exception) through bank representatives is the primary investment direction of the majority of retail banks today.  We argue in this paper it is time to step back from the delivery of functionality (apps, web etc) and time to look again at how customers will “spend” their money, attention and recommendations with regard to their personal financial needs.

The change in perception.

In 2005 Net Promoter Score was all the rage.  The idea that customers were persuaded by word-of-mouth from friends and colleagues about the effectiveness of a banks offering and the service quality was a new idea.  Investing in building “golden experiences” that led customers to promote the bank became a key part of many banks strategies.  However, it didn’t happen!  Even before the recession the backlash had started, the rise of Customer Effort Score was an attempt to refocus service improvement effort on removing transactional friction and improving all customers ease of use rather than creating stand-out experiences.  Now a more pragmatic story is emerging;  customer will leave because of a bad service experience or other cause for complaint – but they join you or find you based on your great product.  They will use Amazon style peer-validation to check your offer before buying but are more likely to start their search for a product to meet a new need on Google rather than on their banks website.  Take-away lessons;

1. Your products must compare well against well-known competition (other banks) and your message should prompt some doubt and a request for expert advice against insurgents (TransferWise, Peer-to-peer lenders)
2. Complaints should be welcomed as valuable feedback.  Within a large institution inertia can quickly build with front-line staff that complaint resolution success is about the reduction of complaints as shown on an internal complaint tracking KPI.  Driving down on complaints can create complaint suppression rather than resolution and improvement.

In 2005 a significant proportion of Bank revenue came from commission based services based on insurance products or penalty fees on badly managed accounts.  As the recession finishes, teller offers such as “I see it is time for your account review – I can set up an appointment with our adviser next Tuesday” are seen by customers as clumsy sales ploys.  As governments start to push and publicise the importance of non-commission based products, customers are continuing to separate their day-to-day transactional banking from where they choose to discuss their new and more profitable needs. 

1. Building a narrative for front-line staff which is simple & honest to stimulate a new conversation is an important and ongoing part of maintaining the customer relationship. 
   
   An example:  Recognise that when a customer is at the bank counter they have come in to have their request serviced – making a pitch at that stage is both disrespectful of their time and that of all the people in the queue.  However – when in line, approaching the customer with a simple and valuable request IS respectful.  In one example a bank employee approached customers in queue with the offer “Hello, while you are waiting I just wanted to mention that Bank X offer car insurance, a fair number of our customer don’t know this.  We do offer good rates to our customers, but we know that most people choose on price – would you be willing to give us a shot at quoting for you when renewal comes up?”.  This works – but why is it better?
   1. It is respectful of the customer and of the other customers in line – the requestor is not taking up their time, they are perceived in a bank-serving role other than the transactional role at the front desk who is seen to be there to service customer needs
   2. The person making the request has positioned themselves as open to rejection in public from their customer.  If the customer declines others will see that happen.  The willingness to make an offer and be open to public rejection is paradoxically valued by the offer recipient and also by the observers as a more sincere offer.
   3. The offer is presented honestly, the request is not to ask for high-margin business by shielding the customer from their best opportunity.  The bank has shifted its goal of the sales representative from; “get me a protected conversation where I can sell” to “get the customer to give us the final chance to match their best price before committing to their new provider”
      
      
   4. Equip your more sophisticated sales staff to let customers uncover their personal banking strategies and needs.  An example:  A customer has a daughter at college in UK, they transfer money regularly to them and have recently stopped using the banks service and are now using TransferWise to reduce transaction costs.  The customer has asked about how they might open a UK “Basic Bank Account” or a prepay debit card with low fees.  Traditional customer advice will look to avoid this conversation as the customer is obviously looking to erode the banks margin by using external services to avoid retail transaction costs.  However – the customer is going to do this anyway!, by levelling with the customer and accepting that these new services might sometimes be in their best interest – the salesperson opens the space to talk about the compelling product the bank does have.  They also open the space to have an honest conversation about the strategy that is in the customers best interest.

In 2005 customers remained to be convinced about the security around on-line banking.  Card readers and additional layers of security looked diligent and of added value.  In 2015, even though the security threats have risen, customers are more trusting of the banks ability to manage the online transactional space.  This customer complacence also creates new potential service problems and new complaint areas.  While a customer may value a card-reader for their business accounts, they may be frustrated that they need a card reader and a card-reader facilitated online transaction to setup a payment before they can use the payment transfer app for their personal account.  As channels proliferate customers will develop a diversity of habits using different providers or tools for different things.  For the bank this creates more complexity.  However for an individual customer, these new tools promise simplicity which can then appear to be snatched away by clumsy implementation.  Example; I can see the payee on my app on my phone, but I cannot make the payment because I have not used my personal card-reader in an on-line environment to make the first payment.  I can use the contact centre to make one-off payments, but they cannot enable the app either.  I can go into branch to see if they can enable my app, but no-one seems to know if that’s possible!

1. Recognising the usage profiles of new types of customer segments based on usage-style rather than profitability or revenue is likely to improve the customer service proposition (reduce complaints and defections) and cut costs.  Leveraging big-data capabilities to look for customer segments based on common behaviours (self-selecting segments) and building streamlined banking to those segments will be important.
2. Building new capability in staff to deal with these self-selecting segments and being able to move quickly to answer questions which are expected within the context of this new behavioural segments needs will be important.

In 2005 Paypal was relatively new, as disruptive incumbents they had no turf to defend and everything the banks were doing was slow and bad (according to Paypal).  As banking moves toward 2020, the cracks in the surface of these new players will start to appear.  Paypal doesn’t work well with Amazon and if you need cash in a hurry Paypal will not help.  As Banks start to build out their new digital platforms new opportunities will emerge to rebuild market-share (albeit at lower margins) in markets they have lost. 

1. Use the banks multiple channels to look for weaknesses in the new players offerings – Example; Customer account reviews (as 3 above), teller complaints, online complaints. Move earlier to redesign current offering even at the expense of short-term profits to build larger market share – BUT set a higher expectation of taking market share from competitors when a new-world offer is created.