The renovation of distribution channels

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The renovation of distribution channels
Dr. James Gardner Global Director, retail
banking
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My points today

• Historically banking has had phase changes driven
  by technological innovation, but this is a losing
  game
• The current battleground is people. But will this
  drive long term differentiation?
• The business of banking is changing for the
  first time ever

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The diffusion of innovation
What was initially innovative becomes a cost of
doing business
Maturity
New business idea or technology created an
implemented by innovative institution
All other institutions rush to copy to alleviate
competitive threat
Take Off
Emergence
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Banking Phase Changes innovation diffusion

• First automated bank statements available
• Central accounting units possible
• Funds transfer is automated
• Greater range of transactions available in
  branches
• Labour intensive tasks (paper based) reduced

• Trade execution reduced from 6 weeks to 1 day
• Securities price differentials reduces
• Money transfers settled through clearing houses
• Electric tabulation machines come into use

Convenience and Value

• Systems interoperate and IP emerge
• Self service
• Branch counts decline
• Relationship databases emerge

ElectricCommunication

• Customer can transact at any branch
• ATMs become available
• Real time operation and control of branches

1945
1846
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A different View long term advantage
Long Term Advantage
ElectricCommunication
1945
1846
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A third view cost to sustain
70
of IT Budget Required
ElectricCommunication
1945
1846
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IT budgets and sustaining the past
available for new innovation
Today
sustaining old innovation
Processors Database
Electrification
Automation LANS
Standardisation
Accenture Spending Data
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The fifth phase systems supporting people

• Technology innovation drives rapid change in the
  industry
• In banking, technology innovation does not
  generate competitive advantage
• Technology innovation does drive up IT budgets
• Can people provide the answer to the
  differentiation problem?

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Evolution of labour in financial services 1960 -
1996
Labour Data from academic sources
People get more expensive, and do less
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of branch staff that agree
I feel no pressure to go beyond needs based
selling Sales goals established by management are
not fair I do not receive adequate competitive
information The company does not prepare
employees to sell The systems available to me do
not greatly assist my sales effort Staffing
levels are not appropriate for the volume of work
BAI DATA 2006
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The economics of people

• People get more expensive
• They do less
• They are generally poorly utilised
• They are the new scarce resource

• What might a service environment that uses
  systems to support people be like?

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Hypothetically speaking

• All technologies current now or in three years

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The banking service arms race

• Two men standing waist deep in gasoline one
  with three matches, the other with five
• Carl Sagan describing the Nuclear Arms Race

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Selected headlines
Sunday Mail, August 2006
FinExtra August 2006
Citi extends banking hours
Asian Banker August 2006
Boston Globe, August 2006
Sunday Herald, March 2006
CRM spending grows in FSI
Asia Mail August 2006
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The service arms race hypothesis

• What is the competitive response when everyone
  has systems supporting people?
• Build more systems?
• Get more people?
• Make people more productive?

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Branch growth in the U.S Market
90,000
85,000
80,000
75.000
Number of Branches
70,000
65,000
60,000
55,000
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
Sample consists of US domiciled banks and
thrifts, offices at year end Source FDIC
Historical Statistics on Banking
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Effect of adding branches on small business
lending
originated per branch per month (millions)
FDIC Study, 2005
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Bank worker productivity in Mexico slowing
Data from Foreign Banks in Mexico New
Conquistadors or Agents of Change? Dr. Heiner
Schulz, University of Pennsylvania
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The nature of customers
survey research in Australia, UK, and USA
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Customer attitudes to relationship banking
BAI 2006
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The services arms race
Adoption
Service Proposition
Take Off
Time
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So what next?
By 2015, the results of two prominent
competitive forces will be visible a middle
squeeze of traditional banks and the emergence
of industry specialists and non-bank banks IBM
Institute for Business Value 2006
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The long tail in banking

• 25 of Amazon.com revenuecomes from products
  that sell less than 2 units a month
• What are the forces that drive the long tail?
• What does this mean for banks?
• Selling to the niche may be the next place to
  differentiate

The long tail a customised product for every
person
Volume Sold
The long tail is worth more than the hits
Units in Inventory
Traditional products of banks one size fits all
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P2P Lending
www.prosper.com
www.zopa.co.uk
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Propser.com Auction style linking of borrowers
and lenders
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Social networking
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Monthly performance of Prosper.com since launch
Social aspect seems to have ve effect on loan
quality
millions per month
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The non-bank payment system
20 of volume taken from cards, 30 long term
(Booze Allan August 2006)
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Paypal results
Accounts (Millions)
USD billions
Source Ebay public filings and analyst reports
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Some thoughts

• Banks should associate themselves with an online
  transaction steam perhaps a telco?
• Banks can combat the long tail P2P business model
  by leveraging their strengths. (How would you do
  a P2P mortgage or other complicated instrument)?
• Doing nothing threatens long term access to the
  payment system, to cheap deposits, and a minimum,
  unsecured lending

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In conclusion

• Historically banking has had phase changes driven
  by technological innovation, but this is a losing
  game
• The current battleground is people. But will this
  drive long term differentiation?
• The business of banking is changing for the
  first time ever

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Thank you james.gardner_at_getronics.comBlog-
http//bankervision.typepad.com