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Breaking a taboo: why sell someone else’s financial services? Back  
There are many good reasons to offer another producer’s products through proprietary distribution channels, particularly in virtual financial services, but a key condition is to protect one’s own intellectual capital, writes Owen Purcell.
Traditionally, retail financial services (FS) companies have manufactured the products and services which they distribute. However, while in the past there have always been exceptions to this rule, we are now seeing that this rule no longer applies, particularly for virtual FS providers.

Well known examples of product manufacturers and distributors working together in the established Irish FS market would be Hibernian providing a range of investment managers for its customers to choose from and Bank of Ireland using its brand to distribute general insurance products, underwritten by third parties. In addition, Tusa the joint venture between SuperQuinn and TSB is another version on this theme.

In fact this is not a trend which is limited to FS. After decades of a purely own brand strategy, Marks and Spencer recently announced that it intends to stock other brands. Airlines are providing seats on their aircraft to other airlines, many will be familiar with Aer Lingus’ arrangements with SAS. Large pharmaceutical companies are using smaller companies to fill the gaps in their products lines. The list goes on.

Arrangements of this sort are essentially a form of outsourcing, where one company engages another to perform a business function for them, in the case of FS it tends to be product manufacturing / development or distribution.

The rationale
The question that needs to be asked is what is the business rationale which is driving this trend. Prospectus has identified five key reasons for FS companies to get involved in these types of arrangements. It should be noted that these reasons are not necessarily mutually exclusive.

1. Speed to market
Often FS companies identify profitable market opportunities but fail to realise them due to the length of time needed to develop the product or service required. In some situations, it may be possible to distribute a product or service manufactured by another FS company to meet this market opportunity.

2. Increased product/service range
FS companies who adopted sophisticated customer segmentation or one-to-one marketing strategies often need to broaden their product / service portfolio to meet their target customers’ needs. It may be faster and easier to distribute a re-branded product or service to meet these needs, rather than to develop the product / service in-house.

3. Leverage a brand
An organisation may introduce new products or services to exploit the power of their brand. For example, an FS company which has a strong brand and customer relationships may identify opportunities to profitably distribute new products or services to their customers. However, they may not have the expertise or the will to manufacture these products or services and instead may be happy to make a margin distributing other companies products. As mentioned earlier, Bank of Ireland’s distribution of general insurance products is an example of this.

4. Leverage expertise
Some organisations are recognised as having an expertise in a particular area, e.g. call centre operations, back office processing or product development. FS companies with complementary areas of expertise can develop profitable relationships where one company’s products are distributed by another company. An example of this would be AIB providing credit card expertise to EBS.

5. Reduced costs of entry
There are two sides to this coin. Firstly, a company may have spare capacity in its distribution channels and would like to enter new product markets. However, the cost of manufacturing the product may be prohibitive and it may therefore make more sense to distribute the product of another company, who already has the necessary manufacturing economies of scale.

Secondly, a company may have production capacity or the marginal cost of incremental production is minimal and would like to enter new geographical markets. However, the costs of entry in new geographical markets can be very high and it may therefore make more sense to use another company’s distribution capacity, to bring the product to market.

Protecting intellectual capital
There is one very important rule when outsourcing the manufacturing or distribution of products or services to another company, particularly a company in the same industry. It is vital that companies protect their intellectual capital if the arrangement it to succeed for both parties in the long run. Life insurance companies learnt this lesson the hard way in the 1980s when they started working with retail banks to distribute life products. The banks used this as an opportunity to gain an understanding of the market, the products and customers, subsequently set up their own manufacturing operations and the rest is bancassurance history.

Virtual financial services
As mentioned previously, the rule book is changing for virtual FS providers. At any given time all of the five reasons may apply. Perhaps the most important of which is the need to increase the product / services range, particularly for companies who are creating a FS ‘vortal’ (vertical portal). For a vortal to be successful customers and potential customers must come to think of it as a one-stop-shop for FS products and services and often working with other product manufacturers is the only to achieve this in the time required.

In addition, a new model for buying financial services is emerging on the internet. For example, there is Xelector, described by its parent enba as the first of its kind - a sophisticated, innovative internet marketplace where consumers from across Europe can select, compare and buy the best financial products, matched to their precise needs. While we are all familiar with going to a traditional broker for life and general insurance products, and possibly mortgages, the virtual broker is taking it one step further providing the consumer with a broader range of products from a wider range of providers.

There are many good reasons why traditional, non-traditional and virtual FS providers should work together. However, it is important that each party to the arrangement protects its intellectual property or it may soon find that it is no longer invited to the party.

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