Retail: The Hub of Financial Services: In October 2003, the AIBF Held Its Highly Successful Retail Financial Services Forum in Sydney, Featuring Presentations by Some of the Banking and Insurance Industry's Most Dynamic Executives and Prominent Experts
Unkles, John, Journal of Banking and Financial Services
The forum was an outstanding opportunity for financial services professionals and those in associated industries to gain insights into current developments and the latest strategic thinking by industry leaders.
My opening remarks at the forum
"With representatives here from a wide range of financial services professions--as well as those from many other industries--I can't think of a better indication of the growing importance of the retail financial services sector within the economy.
Participants come from industries including retailing, telecommunications, IT, educational institutions, accounting firms, human resource consultancies, regulators and even crime investigation!
This forum will examine the key strategic issues for financial institutions as providers of retail financial services including:
* the prospects for growth in an increasingly crowded and competitive market;
* alternative value creation and distribution models;
* how to harness technology to deliver optimal customer relationship management solutions; and
* market developments and regulatory intervention.
Why the renewed retail focus?
Let's look firstly at why there's been a renewed focus on the retail financial services segment. The answer is there have been more opportunities for growth in this area and greater stability.
Wealth management has been the fastest growing segment of the financial services sector and will continue to grow, with the baby boomer cohort stepping up their savings efforts as they move towards retirement.
Declining net interest margins and low interest rates in the past decade have shifted the strategic focus of financial services suppliers back towards retail banking services. This is where income growth is derived from non-interest sources, such as fees from long-term savings and securities transactions.
Whereas wholesale and investment banking have been very volatile and damaged financial institutions' balance sheets, diversified consumer banking revenues are more stable. Banks can leverage their wide distribution networks and broad customer bases to access long-term savings.
In fact, the distribution model in retail banking is now swinging back to branch networks and face-to-face customer relationship management.
Key strategic retail issues in Australia
Although profits have been fairly stable in retail banking in Australia, fee incomes and margins are under pressure.
Some of the other key challenges in next 12 months will include:
* investors' reduced appetite for risk and limited available low-risk investment growth opportunities;
* reduced institutional interest in retail lending relative to other income-generating products and services (due to rising bad debt levels, etc);
* uncertain economic conditions both in Australia and the rest of the world;
* the potential for the current boom in the residential property market to bust; and
* the possibility that the Reserve Bank could increase interest rates to forestall further escalation in property prices.
Changing competitor landscape
The major financial institutions and specialised providers face strong competition from new market entrants seeking to build or extend brand and distribution capabilities.
Cost reduction pressures are also likely to remain, with ongoing industry convergence and more new entrants into the retail banking industry including stand-alone internet banks, supermarkets and other non-financial institutions.
Strong emphasis on customer retention
It's always been cheaper and more efficient to retain profitable customers than to win new ones, but increasing the "share of wallet" is now a critical element of customer relationship management strategies.
Service quality is increasingly important, due to strong competition from non-traditional institutions and more sophisticated customers demanding more personalised attention.
Despite concerns about service quality, the trend towards outsourcing seems to be escalating within the industry. Some of the big-ticket outsourcing deals recently include:
* IT group EDS' $480 million contract to run the Bank of Queensland's IT and call centres;
* a $146 million deal for Unisys to operate RAMS Home Loans mortgage operations; and
* a $10 million deal for Kaz Computing to take over Aussie Mortgage Market's IT operations.
Some commentators have suggested that outsourcing may raise issues in terms of the higher capital adequacy requirements under the new Basel 2 global capital adequacy rules, to be introduced in 2006.
Under Basel 2, companies will be assessed on operational, as well as capital adequacy, risk. Firms that outsource may have higher risk profiles and face higher capital adequacy requirements.
A tactical approach
Highly competitive and uncertain market conditions are likely to keep the institutional focus mostly on achieving short-term operational efficiency, low cost to income ratios and high rates of return on investment. This is in preference to overall operational effectiveness and research and development expenditure to achieve better long-term growth prospects.
However, some institutions such as the ANZ Bank are still taking strategic initiatives such as moving to a decentralised organisational structure. The bank has only four layers of management between the chief executive and its 8000-strong branch teller network.
Growth through acquisition is also still on the agenda but is limited by the Federal Government's Four Pillars policy prohibiting a merger between any of Australia's big four banks.
But a key strategic issue--whether to adopt an allfinanz or best-of-breed provider approach--remains.
Financial services providers need to decide whether they have the scale to be a broad-based bank or allfinanz player, or whether they should target specific customer areas and product ranges where they may have some competitive advantage. Do they go deep, or go wide?
Smart specialist providers are setting benchmarks for their industries: in credit cards, insurance, pensions, and long-term investments.
Some institutions decide it is better to focus on core competencies and more conservative long-term strategies to deliver better credit quality.
One example of this is the funds manager MLC, acquired by the National Australia Bank in 2000. Post merger MLC has grown rapidly, taking market share from the more traditional players by writing only profitable business.
Emerging retail channel strategies
Many new products and channels have been developed to reduce costs, increase access and service clients. Financial institutions are often under pressure to build better client relationships, at the same time as reducing head count, including limiting the number of staff-facing customers.
Multi-channel integration issues remain a key focus, with the relationship landscape often very complicated. In the insurance sector, for example, there can be numerous stakeholders apart from the insurer itself. These include employees, independent advisers and insurance brokers, which all distance the initial provider from its customers.
Institutions also need to decide whether to be product originators or distributors.
The branch network has recently been recognised as a critical element of a multi channel distribution model. Some banks, such as Westpac, are moving to re-open branches.
Which customer strategies will drive growth?
The banks' efforts to direct customers towards being multi product holders are still some way from being realised. But technology now provides greater opportunities to track customer transactions and deliver more focused marketing.
This objective should be achievable in the long term as CRM technologies are refined; and through ongoing investment in customer strategies, staff training and customer education.
Indeed, real results are starting to be delivered in terms of cross-selling and up-selling, using technologies that can support sales and services across multiple business and product lines as well as internet, phone and branch sales channels.
With costly infrastructure already in place, most financial institutions are facing limited budgets for technology investments. The focus now is more on getting the most out of existing technology and harnessing CRM platforms, to enable the most efficient approaches to customer relationship management.
Key exceptions to this are security and probity issues and compliance with regulations.
Along with a number of other banks, Suncorp Metway is looking at getting more out of its CRM investment, by using its facility to analyse large quantities of customer data to tackle fraud and other criminal activities.
Increased regulation such as new accounting requirements, Basel 2, financial services reform legislation and corporate governance reforms is demanding significant increases in resources to ensure compliance.
Going forward, the key strategic challenges in retail banking and insurances are likely to remain unchanged: providing better customer service at lower cost, as well as differentiating yourself from competitors.
We are likely to see ongoing strong demand for specialist skills and core competencies to deliver a wide range of products, from flexible personal lending to cost-effective risk management.
Organisational and cultural change within organisations will also be a key feature of the industry. Financial institutions will continue to shift their CRM strategies to gain an integrated view of their customers and change their distribution models to focus on targeted customer segments.
Operational complexity is a key issue for organisations to grapple with as they attempt to move away from vertically integrated to networked structures; and from product-centric channels and management processes to customer-centric channels.
Unfortunately there are no short cuts to success. All of the issues are complex and none of the solutions is easy."…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Retail: The Hub of Financial Services: In October 2003, the AIBF Held Its Highly Successful Retail Financial Services Forum in Sydney, Featuring Presentations by Some of the Banking and Insurance Industry's Most Dynamic Executives and Prominent Experts. Contributors: Unkles, John - Author. Magazine title: Journal of Banking and Financial Services. Volume: 118. Issue: 1 Publication date: December 2003. Page number: 2+. © Not available. COPYRIGHT 2003 Gale Group.
This material is protected by copyright and, with the exception of fair use, may not be further copied, distributed or transmitted in any form or by any means.