Insights Into Distribution Channel Innovation in the Retail Banking Sector

8/13/2019 Insights Into Distribution Channel Innovation in the Retail Banking Sector

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External Environment Factors that can Inuence Channel Innovation Efforts

Consumer Variables

Shifting socio-demographics

Banks that chose to cater specically towards the Generation Y segment wereexperimenting with newer channels such as: rich-content mobile banking,social media banking and pop-up box web agents (e.g. Bank of America).

Cultural differences

Banks operating in countries with a more technology receptive customer basefound it easier to introduce high-end technology, particularly online-basedchannel initiatives (e.g. Scandinavia).

Legal Variables

Out-datedLegislation

Outdated e-regulation was found to be holding back the development ofonline-based channels in less advanced e-economies.

Industry Variables

Market position

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

Technology Variables

Infrastructure

limitations

For some banks, the incomplete rollout of broadband services, and theabsence of uniform mobile communications standards, was limiting the

development of web banking and mobile banking respectively.

Internal Environment Factors that can Inuence Channel Innovation Efforts

Fit with existingstrategy

Individual banks seek to align channel innovation efforts with their ownoverarching strategic direction. Strategic goals varied from bank to bank andas a result so did the direction of appropriate channel innovation efforts.

Integration issuesBanks with more fragmented internal channel IT systems were nding itmore difcult to execute cross-channel integration initiatives.

Availability ofresources

Sample banks in weak nancial positions tended to be cutting back theirinnovation budgets.

Staff experienceCertain banks reported having insufcient internal expertise to developcertain channels in the manner required.

Product Mix

Banks emphasising the sale of complex nancial products tended to focuson developing face-to-face channels like the branch. Banks emphasising the

sales of less complex nancial products tended to develop direct channelssuch as online banking.

Figure 1.0 Frequently Cited Variables that can Inuence Channel Innovation Efforts

Banking Ireland . Spring 2010

Insights into Distribution ChannelInnovation 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 face-

to-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 nancial 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 unied multi-channel

experience for the customer. Now

more than ever, banks must enhance

and optimize their distributionchannels to realize performance

improvements.


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Insights into Distribution Channel Innovation in theRetail 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. Non-

bank 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 rms 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

ndings.

Factors that ImpactInnovationFindings from this study showed

that each banks channel innovation

efforts are impacted by a host of

important internal and external

environmental factors (see gure

1.0 for examples). It may be more

appropriate for some banks to focustheir innovation efforts within the

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, ndings

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 innovationefforts.

Barriers to InnovationFindings 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 stie innovation. Furthermore,

outdated e-legislation can prohibit

certain online innovations from being

implemented. However, ultimately it

was acknowledged by interviewees

that regulation is a benecial

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 identied

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 signicantdevelopment due to the costs

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 onlineand 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

conicting goals that interfere with

inter-channel cooperation. Inter-

channel conict and inter-channel

competition were reported to be

commonplace. As such, cross-

channel cooperation efforts, and

subsequently innovative cross-

channel initiatives, are currently

being stied.

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, ndings from our

study indicate that many bankscould improve their innovation


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


[19]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 identied by

interviewees as best practice, itwas 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 arecatering towards the most valuable

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 morecross-functional alternatives. Finally,

ndings 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:[email protected]

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Insights Into Distribution Channel Innovation in the Retail Banking Sector