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The changing face of retail banking in Ireland - strategies for profitable growth Back  
Derek Moriarty says that Irish banks are still only in the second stage of reaching profitable growth and have yet to capitalise on tailoring their customer offering further at a local level.
This is the second of two articles focussing on strategies for profitable growth in Irish retail banks. The first article considered recent trends in Irish financial services, the market structure and economics, and areas for improved cost management. As discussed previously, significant cost cutting is underway in Irish banks e.g. branch rationalisation, increased automation etc. However, there has been relatively little innovation in strategies for profitable growth. This article will address this issue and, in particular, will consider the role of the branch. We believe the branch will remain a crucial part of retail banks’ strategies and instead of being seen as a cost centre, it can become a source of competitive advantage and enhanced revenue generation.
We have observed three broad stages to profitable growth that vary in degree of sophistication and impact. There are overlaps between the stages and each one builds on the previous set of ideas and initiatives.

Stage 1 - Quick wins to gain momentum
There are a number of simple and effective measures that banks can take to enhance their offering. These initiatives may not be particularly radical and are in fact viewed as essential for most banks in today’s competitive environment. For instance, many are adopting a retail mindset in thinking about new ways to grow their business. Examples include enhanced customer service and longer opening hours. Some US banks are even referring to their branches as ‘stores’ as they focus more on selling rather than handling paper-based transactions. Other initiatives that support the move towards a retail focus revolve around the use of technology e.g. increased automation and the facilitation of transactions through ATMs etc.
Recent entrants to the Polish market, Lukas Bank and Handlobank, quickly differentiated themselves from incumbent players by using innovative customer service strategies. Examples include free coffees and snacks, a children’s play area and speedy issuance of credit cards.
The impact of these initiatives has largely been on customer satisfaction (through longer opening hours etc.) and brand differentiation. In addition, branch costs have been cut through increased automation and centralisation etc. This can also have a follow on impact on revenue generation, as branches become more conducive to browsing and purchasing.
Irish banks have progressed through this stage, albeit employing less radical measures than American banks. Transaction processing has been centralised and most banks have extended opening hours recently. In addition, banks have set up more accessible facilities such as ATMs and ‘express lodgment’ depots for increased convenience.

Stage 2 - Differentiation through tailoring the proposition
Stage one initiatives by their nature are easy to replicate and cannot be relied upon for any sustainable competitive advantage. Therefore, as competition increases and customers become more sophisticated there is a need to differentiate in more innovative ways. How can banks react to this more challenging environment?
Stage 2 involves gaining a deeper and richer understanding of the current and potential customer through segmenting the market on variables such as demographics, behaviors etc. Insight is gained into what products customers need, how they like to buy and where they like to buy, yielding actionable results for a more tailored offering, and enhanced format strategy. The main objective of segmentation is to win and retain the customer groups that contribute most to profits. Banks can then plan their strategic direction and effectively allocate marketing efforts across these segments. This enables more proactive and efficient targeting of segments to increase satisfaction and ultimately customer contribution and retention.
In terms of product tailoring, UK banks have been adapting their offering to different segments for some time. They differentiate what are essentially generic products, such as mortgages and current accounts, by tweaking them with new features and fees e.g. Nat West offers various permutations of its current account to distinct customer segments based on needs. The New Zealand Bank offers a rural banking service to its rural customers. This is essentially a centrally based service with rural managers calling to customers as needed. This ensures that location is not a barrier to good account management.
Greater customer insight has also ensured that the concept of ‘one-branch-fits-all’ is diminishing. Branch format is being tailored to what suits the needs of the local catchment area. Retail banking in the US is quite sophisticated in this regard e.g. Bank of America started a pilot in 2000 changing some branches to ‘BOA Express’ i.e. transaction centers offering quick and basic services aimed at busy customers on the go. Other larger ‘financial centers’ are loaded with internet linked computers, wide screen TVs and other high tech touches for customers that want more advice and value add touches. The company reports that customer satisfaction has risen dramatically in Atlanta where the stores are being tested. Washington Mutual (WM) has recently begun rolling out financial ‘stores’ branded as Occasio stores. Here, tellers work a retail floor to help customers giving it the feel of a shopping experience. The staff wear headsets should they need to take a call while on the floor. The stores also sell toys, software etc in addition to regular financial products. There are no teller counters, no roped off lines and no assigned desks for employees.
Format tailoring can increase customer satisfaction by offering a place to bank that meets needs e.g. convenience and advice more effectively. It can also enhance the efficiency of the branch network by reducing costs, space etc. in branches where customers just want a basic service. Overall, this stage will have a larger impact on revenue generation than Stage 1 as an increased focus on selling is applied in the most appropriate locations. For example, WM reported that customers are opening new checking accounts at twice the rate and making deposits at nearly three times the rate in their ‘Occasio’ stores as at newly opened traditional branches.
In the Irish market, new entrants such as MBNA and Northern Rock have led the way in terms of product tailoring. By offering favorable rates and features, they have been successful in ‘cherry picking’ from distinct (and profitable) segments. Some incumbent banks have dabbled with tailoring formats such as introducing ATMs centres. Overall however, there is little evidence of segmentation being carried out on a sophisticated level by any of the incumbents.

Stage 3 - Thinking nationally, acting locally
While a richer understanding is gained of customers at an aggregate level in Stage 2, Stage 3 involves tailoring the customer offering further at a local level. This is called segmenting on ‘geodemographics’ i.e. demographic data broken down by geographical area. These tend to perform better than those based only on behavioral information. Consumers generally live where they do because of their age, household and socio-economic circumstances. These factors influence their buying habits.
Essentially, branches have a portfolio of corporate product and format offerings at their disposal but have responsibility over how and where these are deployed. Implicit in this strategy is greater input and decision making from the branch manager, utilising his local community understanding. This is contrary to the recent corporate agenda of branch closures and centralised decision-making. While centralisation can, of course, offer efficiencies over the old model of ‘branch does everything’ (e.g. transaction processing), other activities may be more suited to a local level. Indeed, evidence exists internationally of a swing back to greater control at a local level of certain issues e.g. product offering. The rationale for this move is that more empowered managers make more value creating decisions. In this stage, the branch is maintained and enhanced and seen as a source of competitive advantage. But how successful has this strategy been?
In New York, North Fork Bank and Commerce Bank quickly grew market share and differentiated themselves by simply offering a branch service to the local community. While their established competitors were busy transforming themselves into investment banks and closing local branches, they entered the market and took the business in prime territories. Managers reported that they basically waited for local disgruntled customers to join up after other major banks closed local outlets. Wells Fargo has embraced decentralisation too and has actually added more to its middle management layer in California. One example that executives there like to cite as proof that local is better is a Spanish language advertising campaign that would seem obvious to anyone trying to target the growing Spanish speaking population in the area, but had not happened before at Wells. Increased delegation has led to radical new ownership structures in some instances e.g. opportunity to franchise branches in Abbey National and Handelsbanken in Sweden. In Abbey’s case, sales increased by between 15 and 25 per cent while raising credit quality in the franchised branches. Fortis, the Belgian/Dutch retail bank says that its cost/income ratio is about 10 per cent better in their franchised branches than in traditional ones.

How is this model of local responsibility different to before?
• Profit accountability - Branch managers are fully accountable for the profitability of their branch. There is a new culture of personal responsibility and entrepreneurial spirit allowing managers to take key decisions locally e.g. marketing initiatives, service offering etc. However at the same time managers have higher goals to achieve than before.
• ‘Internal customer’ mindset - As branches are viewed more as profit centres rather than cost centres, there is a new focus on the value derived from internal services. Managers are not burdened with unnecessary central overheads that they may not even benefit from. Instead they purchase ‘pay-as-you-go’ central services such as Marketing materials and certain products as appropriate.
• Increased transparency - While head office will still have visibility over what is happening at branch level, there is increased transparency up and across the bank network. Branch managers have increased visibility of corporate strategies and products and services available. They also leverage off other branches’ experience of what works well in terms of products or formats etc.
• More sophisticated customer analysis - Instead of relying on personal judgement/local knowledge to tailor the offer, branch managers now have access to more sophisticated frameworks and tools for analysing their local customer base.
Irish retail banks do not appear to have entered this stage yet. While some minor format renewal and product tailoring has begun (Stage 2), there has been minimum innovation to date in profitable growth strategies. Locally, the branch is still very much controlled at a corporate level, offering the same products and formats that other branches (and competitors) employ. As competition increases locally and from international entrants, increased focus on differentiation strategies is required - what makes customers want to do more business with your bank than any other?
The successful players will be those that invest money in research, development and trial of new branch concepts. They will be increasingly able to capitalise on their experiences and commitment as they operate in a more dynamic and flexible environment, constantly adapting to customer needs as appropriate.

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