Insights into Distribution Channel Innovation in the Retail Banking Sector: Customer Focus as a Key Driver

In addition to the branch network, most retail banks now operate a range of direct distribution channels. Commonly employed direct channels include: call centres, web banking, mobile banking, and ATMs. While the branch provides the comfort of faceto-face interaction, direct channels provide customers with convenient remote services. Successfully managing a variety of distribution channels has become an essential strategic requirement for retail banks. However, managing multiple distribution channels particularly in the midst of the financial crisis is challenging. Banks must now work within their existing capabilities to drive customer migration away from high cost channels. What is more, banks are coming under increasing pressure to boost revenue streams by leveraging direct channels to drive cross- and up-sales rates. This must all be done while continuing to build a unified multi-channel experience for the customer. Now more than ever, banks must enhance and optimize their distribution channels to realize performance improvements.
Banking Ireland . Spring 2010
External Environment Factors that can Influence Channel Innovation Efforts Consumer Variables Banks that chose to cater specifically towards the Generation Y segment were experimenting with newer channels such as: rich-content mobile banking, social media banking and pop-up box web agents (e.g. Bank of America). Banks operating in countries with a more technology receptive customer base found it easier to introduce high-end technology, particularly online-based channel initiatives (e.g. Scandinavia).

Shifting sociodemographics

Cultural differences Legal Variables Out-dated Legislation Industry Variables

Outdated e-regulation was found to be holding back the development of online-based channels in less advanced e-economies.

Market position

A major US bank was reported to be pursuing a strong branch-focused strategy to stand out from online-focused competitors. Other banks were focusing on web banking to appeal to more tech-savvy customers (e.g. RaboDirect).

Technology Variables For some banks, the incomplete rollout of broadband services, and the absence of uniform mobile communications standards, was limiting the development of web banking and mobile banking respectively.

Infrastructure limitations

Internal Environment Factors that can Influence Channel Innovation Efforts Individual banks seek to align channel innovation efforts with their own overarching strategic direction. Strategic goals varied from bank to bank and as a result so did the direction of appropriate channel innovation efforts. Banks with more fragmented internal channel IT systems were finding it more difficult to execute cross-channel integration initiatives. Sample banks in weak financial positions tended to be cutting back their innovation budgets. Certain banks reported having insufficient internal expertise to develop certain channels in the manner required. Banks emphasising the sale of complex financial products tended to focus on developing face-to-face channels like the branch. Banks emphasising the sales of less complex financial products tended to develop direct channels such as online banking.

Fit with existing strategy

Integration issues Availability of resources

Staff experience

Product Mix

Figure 1.0 Frequently Cited Variables that can Influence Channel Innovation Efforts

Insights into Distribution Channel Innovation in the Retail Banking Sector: Customer Focus as a Key Driver
Complicating the issue of channel development, the retail banking sector is transforming into a more competitive marketplace. Customers are becoming more demanding. Banking services are gradually being seen as commodities. Nonbank organisations are entering the market to compete for customers. To stand out from the crowd, retail banks are turning to innovation. The continuous process of innovation helps banks to develop new, differentiated offerings in a highly homogenized industry. However, compared to other sectors, retail banking has traditionally underperformed when it comes to its innovative outputs. Given the need for greater levels of innovation in the retail banking sector, and the growing importance of distribution channels, UCCs Financial Services Innovation Centre undertook research to investigate the key area of channel innovation. Our core insights were derived from a series of semi-structured interviews conducted with a panel of sixteen channel experts. Interviewees included representatives from leading consulting firms and banks recognised as best practice channel innovators. Geographically the panel spanned the US, the Middle East, the Nordic Region, Australia, and the EU (UK and Ireland). The following article describes some of our key findings. branch channel, while for others it might be more appropriate to focus on web banking. For those, operating in more advanced e-economies, banks may even choose to begin developing their Smartphone channel offerings. Thus, findings from our study indicate that it is an important step for individual banks to carefully assess both their internal capabilities, and the external environment, when deciding where to focus their channel innovation efforts.

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involved. However, banks should be conscious that underinvestment now is likely to limit future innovative outputs. Moreover, disengaging from the process of innovation can also limit a banks ability to recognise new innovative opportunities. Third, silo organisational structures were singled out as a core blockage in the innovation process. As one consultant explained, ...part of the reason for not innovating online and through the mobile channels is that these channels are sometimes not able to collectively recognise... customer revenues. So when people open accounts online, the branch channel leaders see it as taking away from branch revenues. But the bank doesnt want to lower the branch goals, so branches dont want customers to open accounts online. So theres this internal battle between the channels and where the revenue is assigned. Our study found that banks seem to operate channels individually for the most part. Individual channels can have separate budgets and conflicting goals that interfere with inter-channel cooperation. Interchannel conflict and inter-channel competition were reported to be commonplace. As such, crosschannel cooperation efforts, and subsequently innovative crosschannel initiatives, are currently being stifled. Most banks have little control over externally imposed regulation barriers. At present, many banks may have little choice but to cut innovation budgets. However, the majority of banks do have the ability to change their internal organisational structures. Consequently, findings from our study indicate that many banks could improve their innovation

Barriers to Innovation
Findings further revealed that channel innovation efforts are being inhibited by three primary barriers. First, interviewees explained that banking regulation can impede channel innovation efforts. For banks, regulation changes often lead to additional internal process and system changes. Such additional burdens can make the current banking environment even more bureaucratic. This bureaucracy can stifle innovation. Furthermore, outdated e-legislation can prohibit certain online innovations from being implemented. However, ultimately it was acknowledged by interviewees that regulation is a beneficial requirement because it serves to protect fundamental consumer rights. So while regulation can inhibit innovation, such regulation is often essential. Second, current underinvestment in new channel initiatives was identified to be a major barrier to innovation. As one frustrated channel leader noted, A few years ago we were looking into Web 2.0, etc. Now were just going back to basics because of the cost agenda.... [This]...prohibits you from undertaking any significant development due to the costs

Factors that Impact Innovation

Findings from this study showed that each banks channel innovation efforts are impacted by a host of important internal and external environmental factors (see figure 1.0 for examples). It may be more appropriate for some banks to focus their innovation efforts within the

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Insights into Distribution Channel Innovation in the Retail Banking Sector: Customer Focus as a Key Driver
performance by concentrating on breaking down silo organisational structures. Customer-oriented Innovation Findings from our study also indicated that banks could improve their innovation performance by developing a stronger customer orientation. On conducting a comprehensive analysis of the channel innovations identified by interviewees as best practice, it was found that almost all had been designed with a strong customer focus in mind. This stands in contrast to the small minority of innovations designed primarily to reduce cost or improve technology. Other research on innovation has correspondingly showed that a deep understanding of the customer perspective is a vital determinant of an innovations commercial success. It was pointed out by the panel that best practice banks are taking steps to gain a better understanding of their customer base. With an improved understanding it was believed that banks can better direct their channel innovation efforts to design more appealing offerings. Interviewees reported that best practice banks were employing increasingly sophisticated market research techniques to learn more about customer needs and behaviours. Such techniques included: website click-stream analysis, website heat mapping analysis, observing online consumer behaviours, ethnographic consumer research, web analytics and advanced propensity modelling. Furthermore, interviewees stated that leading banks were ramping up their segmentation modelling capabilities to ensure that they are catering towards the most valuable

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customer segments. As such, leading banks seem to be leveraging consumer data to guide channel innovation efforts based on the needs of key customer segments. In conclusion our investigation delivered three core insights. First, given the heterogeneity of channel innovation, it seems prudent for each bank to carefully assess its internal and external environment before deciding where to concentrate innovation efforts. Second, silo organisational structures seem to be a key innovation bottleneck that management could potentially address by moving towards more cross-functional alternatives. Finally,

findings strongly suggest that best practice banks are developing a stronger customer orientation to improve the success of channel innovations. The Financial Services Innovation Centre, University College Cork Commissioned as part of an Enterprise Ireland Innovation Partnership between Bank of Ireland and the Financial Services Innovation Centre (UCC) Site: http://www.fs-innovation.org/ For further information contact: JB.McCarthy@ucc.ie

Banking Ireland . Spring 2010