Tailoring Delivery Channels

By Charles B. Wendel and Sharon Williams

The favorable economics of “first mover” small businesses that use online banking drive their current focus. These businesses generate higher revenues and profits and are generally more satisfied with their banks than offline customers.

Unfortunately, online customers currently represent only 15-20 percent of the total customer universe. Management faces a dilemma concerning how best to balance online investment and encourage online use versus other sales and service channels while offering different customer groups an optimal channel mix. By evaluating both the current economics and behavior drivers related to key customer segments, management can tailor delivery channel strategies and make them more effective.

What about the remaining 80 percent of customers?

Right now, over 80 percent of all small business customers are not actively participating in online banking. Yet, for most major banks, the online service is available, inexpensive, and highly publicized. So why are so many companies failing to adopt this channel?

Based upon the 1999 American Banker/ FIC annual Small Business survey and the early results of our 2001 report, business research dominates as a key focus for online use while purchasing of office supplies and equipment is on the increase. At the same time, only eight percent of the businesses interviewed say that online sales represent more than five percent of their total revenues. This suggests that while small businesses use the web, most have not fully incorporated it into how they manage their companies.

For some businesses, the Internet has become an established tool for running their day-to-day operations. However, Internet users seem most comfortable in going online to conduct relatively “passive” banking transactions. 67 percent of users will obtain account balances from the web while less than 20 percent say they will apply for credit or buy/sell investments online.

Passive activity suggests that current online value propositions offered by banks fail to resonate favorably with most small businesses. Most customers do not see a compelling reason to change their current branch-or phone-based method of conducting banking.

Tailoring a multi-channel strategy.

To maximize small business customer potential, organizations need to create targeted approaches and value propositions for key customer segments. Depending upon the segment-specific product and channel preferences, each approach will incorporate an optimal mix of online and offline channel use.

Ultimately, banks need to manage successful delivery channel integration by the incremental addition to the bottom line. This requires that small business leaders manage with some key milestones in mind. Milestones should be both discrete and highly measurable, allowing banks to gauge both near and long-term success.

Create actionable customer segmentation schemes. Too many small business segmentation schemes generate confusion rather than action. For most banks the number of small business segments should not exceed three or four in total. For example, segmenting the small business customer base into three categories, early technology adapters, mass market, and branch junkies captures some motivating factors such as importance of time savings, degree of branch reliance, and interest in technology.

Early adopters (we estimate to be 5-10 percent of most small business bank portfolios) are those relatively few companies that operate at the leading edge of technology. Whether this involves wireless communications or smart cards, they are ready targets for the new, new thing. The mass market (70-75 percent of most small business bank portfolios) represents the vast majority of customers who are content with the way they currently manage their banking needs. Branch junkies (20-25 percent of most small business bank portfolios) are particularly branch dependent, such as local retailers.

Each segment responds differently to the same delivery channel. For example, a mass market-type may be intrigued by the Internet but wary of security-related risks. For this business an appropriate action involves training to overcome concerns and continuing the existing channel configuration while slowly introducing the Internet. Such an approach may enable both cost reduction and relationship expansion through effective cross-sell.

A branch junkie consumes too much branch time vis-à-vis profit potential and requires an approach centered on delivery cost reduction. Persuasive actions include incenting reduced reliance on the branch and other more cost intensive channels.

Early technology adapters are current online users. For this highly desirable customer group, the focus centers on three core objectives: protecting and retaining established relationships, maximizing revenue growth in new areas, and cost reduction for current and future product sales. Accomplishing these goals will secure a bank’s ability to maintain this segment’s favorable economics.

Define distinct value propositions for different segments. Banks need to create different messages to incent online use by different groups.

Elements motivating the mass market include simplicity, security, and comfort with established relationships, including existing channels. With this group, banks need to emphasize how e-banking makes life easier. In addition, management needs to support this contention by providing training to explain available options and encourage use.

With early adopters, banks should focus on new product sales and account retention. Banks need to emphasize that the Internet provides an improved way to manage a business when and where needed. This segment should also be recognized for its loyalty, value, and long-term importance.

Branch junkies may embrace the Internet if their actions result in both money and time-related savings. However, it may not be easy to convince a branch-dependent retailer that a portion of its needs can be filled via a faceless channel. Successful small business bankers will offer rewards for migration while, to the extent possible, “penalizing” excessive branch channel use.

In light of these value propositions, product and channel choices can be reevaluated and new segment priorities set. For example, while early adopters are valuable, the mass market surpasses them in size and potential impact on the bottom line.

To encourage delivery channel changes, branch personnel, in particular, need to be incented to give priority to Internet banking services. Incentives offered include: cash for each sale made, referral credits for a banker in one part of the bank signing-up a customer to the Internet, and payouts based upon a customer’s profitability to the bank. Different approaches will be appropriate based upon the bank’s culture and available systems. Internally, management should highlight the benefits of the Internet and encourage active selling and training.

Continue to provide multiple delivery channel access. Most customers will continue to require more than one channel for product delivery and servicing. In fact, many internet-only providers are modifying their customer strategy to include branch access. While small businesses may prefer to perform some basic transactions online, most require traditional channels, giving banks an edge over Internet-only competitors. Bank management needs to judge which products and services are better suited for online versus offline distribution. A combination of both customer needs and business line economics provides the foundation for an effective delivery strategy.

Create performance evaluation metrics to benchmark progress. Measuring incremental increases in customer value is critical. To get there, organizations must first assess current channel and segment performance and, then, establish benchmarks based upon industry best practices and internal indices. Metrics should be segment-specific and can include: account retention, product sales, branch usage, and transaction cost reduction.

Customizing action enhances implementation success.

Tailoring these tactics to organization-specific objectives will improve the likelihood of successful implementation. The alignment of segmentation with a value proposition alignment evolves from effectively integrating and tailoring offline and online delivery channels to various customer groups. Effective integration results from action-oriented customer segments supported with strong, differentiating value propositions. Marketplace leadership will come to those bankers who work who improve overall customer value by matching customer segment value propositions with the appropriate delivery mix.