Battling for the Wallet

By Mendonca, Lenny; McCallum, Gordon D. | The McKinsey Quarterly, Spring 1995 | Go to article overview

Battling for the Wallet


Mendonca, Lenny, McCallum, Gordon D., The McKinsey Quarterly


For many players, bigger profits hide weaker positions

Who will be the discount stores, warehouse clubs, and category killers?

Capturing 1,000 pieces of information per customer

Those rejoicing in a decade of record profits at banks, brokers, insurers, and mutual fund sellers are in for a shock. Despite their outstanding performance, these institutions now face unprecedented challenges from a completely new breed of competitor, leaving them with the daunting task of having to remake themselves around the needs of customers. It will not be an easy process. Yet there are models for this remaking and they can be found in an industry that has recently suffered some of the same structural upheaval that financial services is about to suffer: retailing.

Take department stores in the late 1980s and 1990s. After long years of prosperity, these broad-line retailers, with high cost structures and little-to-no product differentiation, were targeted by a series of focused competitors with "bare bones" cost structures, including warehouse clubs, category killers, and specialty chains. History was much kinder to those that anticipated this trend and adapted, improving the quality of their assortments while simultaneously driving down operating costs and improving asset efficiency.

Other illuminating examples of retail businesses transforming and reinventing themselves can be found in the gasoline industry and in discount store and fast food retailing. In the gasoline industry, the OPEC crisis forced major oil companies to rethink the configuration of their distribution networks - gas stations. In general merchandise and grocery retailing, discount stores grew rapidly at the expense of competing formats by offering wider assortments at lower prices in convenient suburban locations. In the fast food industry, leaders have had to develop new formats to reach customers in different places and on a range of occasions, in a market oversaturated with both competitors and outlets.

What has all this got to do with personal financial services? For a start, traditional strategies stemming from geographic dominance, regulated profits, limited customer choice, and protection from competition must be jettisoned. Today, like retailers before them, personal financial services (PFS) companies must begin to deliver distinctive products and services to well-defined sets of target customers, even if that means cannibalizing existing business. What is more, supporting these new offerings will require massive upgrades in infrastructure and skills. Like successful retailers, PFS companies must:

* Find the right number and type of differentiated distribution formats, both physical (usually fewer) and electronic (usually more).

* Obsessively focus on costs and operational efficiency and pass on as much of the savings as possible to consumers.

* Master information-based sales and marketing to pinpoint customer needs and purchase occasions.

* Launch loyalty programs to retain core customers.

* Merchandise creatively, whether products are branded, private label, or a mixture of both.

* Foster a company-wide culture that encourages entrepreneurialism, testing, and learning.

* Devise information and incentive systems that mirror the new competitive reality.

This is all quite new and challenging to even the most sophisticated PFS companies. Perhaps it even seems a bit unnecessary in the light of rosy recent history.

Deceptive success

Over the past five years, everything seems to have fallen into place for US PFS companies. Household assert have swelled from $8.5 trillion to $14.9 trillion, driven by real gains in household wealth, tax changes encouraging retirement saving, and a robust stock market. Mutual fund balances grew at nearly 14 percent per year on average, partly thanks to population growth of 1.7 percent, and partly because of the wealth of an aging population and the savings habits of the baby-boom generation. …

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