Optimizing distribution channels: The next generation of value creation Following a decade of above-market performance, retail banks are feeling the fallout from strategies that, while fueling growth, failed to leverage the rich potential of these institutions’ customer-facing channels — fertile ground for growing and sustaining profitable, long-term relationships. By shifting their focus back to the customer, banks can set off a new wave of value creation.
By Vikram Lund, Ian Watson, John Raposo and Christa Maver
Optimizing distribution channels
Contents 1 Introduction 2 The past decade: How banks prospered 4 Facing the point of diminshing returns 5 Unmet expectations for channel migration 7 What banks can do: A three-stage approach to channel optimization 11 Is your bank enhancing its value across channels? 12 Get started today 12 About the authors 12 Contributors 13 References
From 1994 through 2001, the S&P Banking Index grew at a compound annual rate of 12.7 percent — outperforming the S&P 500 over the same time period.1 In driving this period of prosperity, banks pursued three key strategies: revenue diversification through wide institution of fees, consolidation through mergers and acquisitions, and risk reduction through asset securitization. While these tactics allowed retail banks to create significant value for their shareholders, they came with a heavy price: weakened customer relationships. Today, with stabilization of noninterest income, slowing securitization and a lull in merger and acquisition (M&A) activity, banks are facing a sobering reality: While they were focusing on getting broader and bigger, their customers were becoming increasingly alienated by arbitrary fee hikes, inward-looking strategies and “one size fits all” service models. In the face of a bruised and unsure economy and growing numbers of dissatisfied customers, retail banks are searching for new sources of sustainable revenue and earnings growth. To find them, they will have to shift their focus and learn to look from the outside in — from the customer’s point of view. This will require developing and deploying fulfillment strategies that map tightly to customers’ buying patterns and optimize a bank’s capabilities in the right way, at the right time, through the right channel — from the branch, to the call center, to the ATM and to the Web.
Optimizing distribution channels IBM Institute for Business Value
Optimizing distribution channels
The past decade: How banks prospered
Over the course of the 1990s, banks relied on three strategies to create shareholder value: Revenue diversification — Banks sought to diversify and grow their revenue base with additional sources of noninterest income. In just four years — from 1997 to 2001— noninterest income grew over 50 percent to US$169 billion. A sizable amount of this incremental revenue was gleaned from service charges and fees from core deposit accounts.2 Firms that weathered the storm of merger activity were able to achieve unprecedented scale and scope. In the U.S. alone, assets per bank grew a full 187 percent between 1991and 2001. 3
Bank consolidation—Banks sought to capture economies of scale and scope by acquiring other institutions. This wave of M&A activity took place in three stages: • Intra-regional: During the period between 1990 and 1995, banks concentrated on consolidating within their traditional footprint. In reaction to a recessionary environment, firms used mergers to increase productivity — closing branches, laying off employees and generally relying on fewer physical assets to serve the combined customer base. • Inter-regional: In the U.S, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 allowed banks to operate more easily across state lines. This, in turn, ushered in a wave of inter-regional mergers (from 1995 to 1998) during which banks sought to widen their...