Magazine article The Journal of Lending & Credit Risk Management

Danger! Distribution Potholes Ahead

Magazine article The Journal of Lending & Credit Risk Management

Danger! Distribution Potholes Ahead

Article excerpt

Don't count on delivery systems to single-handedly propel a bank to greater profitability. A new delivery system is only as good as its uniqueness and its pilot's ability to use it well. Even then, however, if the delivery system is sterling and the product is second-rate, the bank is sure to be disappointed. This article lists a number of potholes to be wary of and guidelines in implementation of any new delivery system.

It is widely believed that the next decade - and certainly the first 25 years of the next century - will see financial services providers speeding down the road to introduce remote or "virtual" delivery systems as a way to reduce distribution costs and provide the "anywhere, anytime, anyhow" availability of financial services that businesses and consumers seem to want. While the technology is available and the customer interest appears to be there, financial companies may be jumping on a speeding bandwagon while ignoring the potholes that can prevent arriving at the right destination.

There is, of course, the fear of being left behind. Bankers have been particularly sensitized to the ways in which novel distribution can take away market share - having been stung by mutual funds distributed by telephone and direct mail and telephone solicitation of credit cards. Affordability is another - with the high costs of revamping distribution systems a real barrier to being competitive in the short term. And a third fear is that customer preferences will change quickly as novel delivery systems - Internet, cash cards, etc. - come on the scene. But when one steps back and looks at the realities of what has happened in the past, the situation is not all that bleak. It's not all that rosy, either. In effect, it's time to take a look at the past in order to discern the potholes of tomorrow.


Despite hopes that success would come quickly and fears that success would come too rapidly, the experience to date is that adoption of delivery system changes do not occur precipitously. After all, bankers are still waiting for the "checkless" society. As can be seen in Exhibit 1 on household transaction distribution, transaction growth has been substantial in itself, and consumers have been steadily, albeit slowly, redistributing these transactions among new delivery system options. Only in the past five to 10 years, as delivery options have proliferated - call centers, Internet, POS, and the like - has this redistribution become speedier. Thus, no single distribution system has yet to reach the dominance that bank branch systems had 20 years ago. Some of the potholes this presages:

* Consumers pick the channels they want to use, not the channels that the bank may push. It has taken major incentives or changes to speed up consumer adoption rates for new channels or to wean consumers away from old channels: for example, ATMs had to be shared before consumer usage picked up; consumers have to be charged more to get them to stop using tellers.

* Banks, with their dominance in physical distribution (branches), will continue to suffer the disadvantage of having to carry the cost of multiple distribution systems while they build new ones, well into the next decade. On the other hand, new competitors will have the cost and marketing advantage of focusing only on one distribution method, such as the Internet.

* Managing the transitions among distribution systems will continue to be costly and continue to inhibit the pace at which banks can introduce new delivery devices, unless they are willing to make substantial investments while also covering the costs of delivery options that consumers continue to use heavily. Thus, "direct banking" must be funded while also modernizing branch delivery or deploying kiosks.

* Since consumers self-segment by choosing the delivery, mix they prefer, market segmentation strategies will be implemented more by delivery system strategies than by demographic targeting. …

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