Innovations in Bank Service Marketing or How to Market a Bank

Kamery, Rob H., Pitts, Sarah T., Academy of Banking Studies Journal

INTRODUCTION

In 1775 there were no commercial banks in Britain's rebellious American colonies. The commercial Bank of England was almost a century old, but few colonists had any dealings with it or England's enormous funded debt. There did exist colonial institutions, both public and private, which had 'bank' in their name. Most of these institutions were so different from commercial banks that when Robert Morris, Alexander Hamilton, and the other "Founding Financiers" proposed the Bank of North America in 1781, and the Bank of New York in 1784, every aspect of banking had to be discussed repeatedly and in great detail (Wright, 1997).

Despite strong earnings the largest U.S. commercial banks are currently in the process of restructuring their retail operations. A stagnant deposit base and intense competition in the marketplace for financial services have made the overhead costs of an extensive branch network increasingly onerous. At the same time, electronic communications technology is making low-cost remote delivery of banking services more of a reality. While remote delivery provides banks the means to cut overhead in retail operation, it also enables nonbank and even nonfinancial firms to pose a credible threat to the industry's retail franchise. This threat adds urgency to this restructuring.

The main purposes of this investigation are: (1) describe the innovations that are being adopted in banking, (2) explain the integrated strategies for restructuring retail operations, and (3) review the policy issues that emerge. Banks are restructuring by developing complete customer-relationship profiles, switching over to remote electronic delivery channels (phone centers, home banking, and next-generation ATMs), relocating branches to large retail outlets, and redesigning selected branches as investment centers. To emphasize the necessity and urgency of bank restructuring plans, some banking officials maintain that they do not expect their institutions to ever build another traditional branch.

STAGNANT DEPOSIT BASE

The bank's much diminished role as holders of personal savings is the first major force prompting banks to revamp their retail operations. Deposits at banks, thrifts, and credit unions measured as a share of the household sector's financial wealth, have fallen by a little more than half during the past 21 years to 17.0% at year-end 1995. Depositories' share peaked at 38.2% at year-end 1974.

The decline in the importance of deposits in the household sector's asset holdings has accelerated during the past few years. Despite significant increases in total personal financial wealth, the dollar volume of savings and time deposits has been virtually unchanged over the past several years without adjusting for either inflation or economic growth.

COST DISADVANTAGE OF BANKS

The rapid decline of deposits in relative terms and their stagnation in absolute terms has left banks with a high cost structure for their branch operations. The disadvantage that this creates can be illustrated by breaking down the cost and revenues of a typical branch into a few major categories. A typical branch has total annual direct expenses of around $700,000, of which the largest category is staff compensation (for 12 full-time equivalent employees). The cost of the building itself is the next largest category of total direct expenses, and the remainder is for electricity, supplies, etc. On top of direct expenses are indirect operating expenses, incurred by the head office or other centralized functions for items such as computing, preparing and mailing monthly statements, and advertising. These indirect expenses are roughly equal to direct expenses, bringing total annual operating expenses of a branch to $1.4 million. The costs of branch operations cannot be allocated precisely because many noninterest expenses are shared by two or more units.

REMOTE BANKING

The second major factor prompting the consolidation of retail branch operations is "remote banking," meaning contacting or transacting with one's bank from outside the branch office using any of several electronic devices: ATM, PC, video-phone, screen-phone, fax, point-of-sale (POS) terminal, and automated clearing house (ACH). It also includes the mundane "delivery channels" of the telephone and the mails. "These are just a few of the trends driving rapid and sometimes disordered change in business today, leaving some companies struggling to catch up, while other firms crash and burn and still others flourish. Successful companies have learned to leverage today's lessons of challenge and competition and turn them into tomorrow's best practices and stories of customer satisfaction" (Koonce, 1998). "Online financial firms are investing heavily on the Web, making firms that offer services such as online trading and banking …

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Publication information: Article title: Innovations in Bank Service Marketing or How to Market a Bank. Contributors: Kamery, Rob H. - Author, Pitts, Sarah T. - Author. Journal title: Academy of Banking Studies Journal. Volume: 1. Publication date: Annual 2002. Page number: 53+. © 2008 The DreamCatchers Group, LLC. COPYRIGHT 2002 Gale Group.

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