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Internet Banking - separating the issues?


The last few months have provided an interesting insight into the psychology of markets. The technology boom, having has been gathering momentum for a number of years, has boiled over with internet mania.

Most of the hype has died but an interesting and lasting effect of this period has been that banks without an internet strategy have been forced to get one fast. In some senses this was the easy part for banks to deal with. Seeing these strategies through will involve much work to set up relevant, cost-effective on-line offerings.

As with any new technology there are opportunities and for banks this must be for making money. It is very easy to get bogged down in the jargon: WAP, SSL and any other buzzword that might be floating around at the time. But the ultimate objective must be the same; to develop a complete internet banking system which will enable and allow the bank to concentrate on attracting customers. In this respect, the IT must serve the organisation and not the other way around.

One of the most crucial questions in developing the right approach to any internet banking offer, then, will be how to harness, and harvest, the rich pools of customer information that reside within most banks; and use them to deliver market-leading service.

In many respects, this will boil down to the ease with which an internet distribution channel can be "bolted" on to a myriad of existing technology platforms, or whether a more efficient route to market will be to start from the internet up.

Banking 2010
The approach to this issue very often depends on the time horizons over which it is considered; and the views that are taken of where banking and financial services markets will be in, say, five or ten years time.

 Will banks be able to make the same assumptions on the lifetime value of a customer that they can today?
 Will a typical banking customer in 2010 still be more likely to get divorced than to change banks?
Will customers be as un-demanding of the service they get from their providers as they are now?
 Or will customers expect of their banks the same level, quality and flexibility of service that they are increasingly demanding from providers of other goods and services in today's environment?

At factor-e we believe that the banking environment in five or ten years' time will be very different. Customers will be both more demanding and more independent. Market information will be clearer and more readily available and customers will go where the best value is.

They will think nothing of having multi-supplier relationships and will only accept "bundled" product offerings where each element of the bundle warrants it on its own merits.

Twenty years ago, the ability to raise a mortgage very often depended on an established track record with that mortgage provider. Ten years ago the same could almost be said of the credit card market. Customers were almost grateful that they qualified for either of these products - not so today.

The internet offering that is developed will be core to the banks' ability to meet these challenges. On one level, the internet is just another delivery channel. On another level it is much more than that; internet banks have to compete on two axis: against other banks (on and off line) and against the best of the best on-line providers of any goods or service.

Put bluntly, customers often accept a certain level of service from their financial service providers that they simply will not tolerate from an on-line provider; whether that is a bank or a book shop.

Thus as well as creating a technological challenge for any bank considering an on-line offering, the internet also throws up testing questions on customer relationship management.

Customer relationships
Just as many private banks have developed strategies to wean their less profitable customers off their premium service, the challenges of the 21st century will encourage traditional banks to find more efficient ways of managing their mass market client portfolios. This may involve migrating less profitable customers to an internet-based service; allowing human resources to be concentrated more efficiently on the more complex customers.

Incumbent bank managers will have a vast amount of customer management knowledge, which could be tapped by an internet offering. And existing legacy and CRM systems contain a wealth of customer information; but very often this is pooled by broad product offering rather than individual customer portfolio.

So one of the questions for any bank considering an on-line offering is whether it will most fruitfully understand its customers by developing a bolt-on internet offering which attempts to replicate an existing, fragmented, customer interface. Or would it be better served by starting from the internet up and capitalising on existing customer relationships both to migrate existing customers and to interest new ones attracted by the promise of a more convenient and holistic approach to banking.

Integration: existing systems or from the ground up
The internet can be a very expensive medium due to the integration needed for all the systems to run smoothly. Building a customer centric system from the ground up can be a time consuming activity.

On the basis that an internet approach to banking is only explored as a means of increasing revenue, it is worth noting that entirely defensive strategies may leave a financial institution open to negative market sentiment, which will not assist in the development of the new channel.

One way around this can be to use the internet as a vehicle to sell your own as well as other companies' products; to increase revenue and give product-hungry customers a broader choice.

Though decisions like this may seem remote at the outset, when the overriding imperative is to develop an on-line offering, they should be considered before any investment is made; so that both the approach and the technology can be got right from the start.

To view technology as an enabler is a good way of kicking off the on-line project. The technology will be underpinned by the judicial use of marketing and entrepreneurial focus that will be critical in securing the customer base which, in turn, will be largely determined by the product range on offers. However, at the core of this will be the technology that enables both product and marketing innovation.

Though the bolt-on approach to distribution may provide a seemingly quick route to market, does it simply store up problems for another day when the shortcomings of existing legacy systems simply have to be addressed? If not, and it the existing customer relationship and product development systems can be easily integrated with the on-line customer interface, then well and good.

Certainly, the UK market seems to be split in its approach to this question. On the one hand, first-e the internet bank, Egg and Smile are already building up their financial one-stop-shop offerings; with Cahoot and IF to come. Conversely, Barclays and NatWest are leading the charge of the bolt-on customer interface.

Market fragmentation
Essentially this breadth of offer is good news for consumers who will find that they have more and more choice in selecting their banking relationships; but for the banks, the question is whether the market will sustain this many offers?

In reality, the answer is probably that many institutions will not have the clout or the desire to become a major player but will find excellent niche offerings to suit their experience and risk profile. In turn, the growth of the niche market will make it all the more important for any mass-market customer portfolio to run efficiently in all of the customer segments that it covers.

Where one group of customers find that they are subsidising another (or that they can get better value elsewhere) they will vote with their feet. Though this could theoretically raise the specter of "social exclusion" - with banks pursing ever more cut-throat marketing policies aimed only at the profitable sectors of the community - the converse is more likely to be true. A low-cost internet channel can run efficiently with very low margins.

Variable cost internet banking
The corollary of this is that the investment in any on-line banking venture should be considered against today's market dynamics; and the niche dynamic in which it will have to operate over time. To ensure upside potential with downside protection costs are key.

The obvious answer lies in building a structure in which the cost components are mostly variable; which is possible through applications service providers; thus the initial outlay is relatively low and the running costs entirely predictable and geared to volume. Though this solution often encounters resistance from IT departments as it requires a major outsourcing deal, the benefits are worth reiterating:

n The on-line approach to financial services is best served with a customer centric approach

n In many cases this in not easily achieved with a plethora of legacy systems

n The outsource approach also allows a high degree of flexibility when deciding on business direction changes and new market possibilities

The central theme must be that IT serves the company and not the other way around

There is a good range of products available to banks nowadays. factor-e can supply an end-to-end solution which is designed around the customer and ports critical information to a dashboard allowing bank executives to concentrate on marketing and customer acquisition from day one. The reduction of back-end processes and a flexible IT architecture allows factor-e to respond quickly to the requirements of the marketplace in the provision of new services.

Any financial institution looking to implement their internet strategy should use their hard won knowledge to increase the value of their business.

David McIntyre




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