Channel Harmonics

By Steve Klinkerman

By animating all delivery channels with interactive technology, Royal Bank is moving toward the day when the system owns the customer.

Martin Lippert is wrestling with a central issue in banking these days, which is how to carry the richness of the branch experience into venues where customer interaction is limited to the sound of a voice on the phone, a display on the screen of a personal computer, a touchpad on an automated teller machine.

Is it possible to electronically harmonize all delivery channels and infuse them with interactive technology that is truly responsive?

The question is not an idle one for Lippert, chief information officer at Royal Bank of Canada. Last year alone, Royal Bank processed 565 million customer transactions electronically. That was more than five times the transaction volume handled in its branches. As online activity continues to grow in volume, complexity and economic importance, Lippert must assure Royal's commensurate progress in serving and selling electronically -- and do it in a way that perfectly meshes with the branch, so the whole process is seamless to the customer.

In the following interview with Banking Strategies, Lippert portrays Royal's information technology initiatives as being revolutionary in nature, hastening the demise of the traditional banking model but also forging important new opportunities.

Banking Strategies: People are giving a lot of thought to the question of how banking capacity should be configured, not only the proportions of business that will be directed through the branch, the automated teller machine, the call center and the Internet, but also the commonality of features and capabilities needed to serve customers in a manner that is both compelling and consistent.

As you broach these issues at Royal Bank of Canada, what customer feedback and basic value propositions guide your thinking?

Lippert: Through surveys and focus groups, we asked customers to identify the banking attributes they considered to be most important, and to tell us how we measured up on those attributes. Although we ranked well on operational factors like extended access, product capabilities and transaction processing, we discovered that those things are expected. You don't differentiate yourself by being good; you have to be good just to be in the game. Instead, customers cited relationship-oriented variables as being most important. Factors like problem resolution and consistency of treatment. Sentiments like "I feel that you value my business," and "I feel like you can anticipate my needs."

Translating that into a technology plan, what customers really want is to receive personalized service regardless of the type of interface being used. Nothing is more frustrating than having a verbal discussion or an electronic dialogue one day, returning the next day to find that none of the information was captured, and having to start all over again. Or being forced to go to one specific place -- which almost always seems to entail inconvenience -- to get an answer or transact a piece of business. So we want all of the interfaces to deliver a consistent, responsive experience to the customer.

If we provide a significantly higher level of service to the customer than what the average bank provides, then we believe the sale of additional products to each customer will follow. We are not looking to shove products down the customer's throat. That's not how you build long-term loyalty. We are trying to understand customers, understand their needs, make sure we are there when they are ready to make a purchase decision, and be positioned to offer suitable products that also are best in class.

Banking Strategies: Among other things, this implies a need for sophisticated customer segmentation capabilities. Populating various channels with identical, scripted spiels about generic products is one thing; tailoring responses and offers in real time to maximize the potential of each interaction is quite another.

Lippert: In fact, segmentation figures prominently in the system just now being rolled out. In profiling the customer, we begin by looking at three strategic factors: current relationship profitability, upside potential, and life-cycle/life-event considerations. From there we establish transaction priorities, and these also fall into three categories: cost reduction, retention, and growth. Then we have three tactical codes, which are propensity to buy, defection vulnerability, and channel preferences. At any given time, we are able to overlay all of these considerations to segment the customer base.

We come up with specific treatments for the different segments, and that's where technology comes in. The treatments are translated into business rules carried out by software agents, which retrieve the appropriate information from the data warehouse, perform the appropriate analysis, and forward suggestions and relevant information through the appropriate channel.

Beginning this spring, our branches will successively be equipped with systems that can supply composites on every single client. When a customer comes in, the representative can pull up a screen showing service priority and sales potential codes, a list of the things the customer is most likely to purchase, and a history of all of the solicitation activity related to that client. For example, the rep can see if we've contacted the client through direct mail, along with the types of offers and the responses.

We will have as well -- and this is where the other channels come into the picture -- what we call courtesy overdraft. If the customer writes a check that exceeds the account balance, the banker can use the system to perform some credit scoring right on the spot and pay that check. We will have that same ability in our ATMs and at the point of sale.

The rest of the rollout will come in stages. You can't hit the network with everything at once. You pick the channels where it makes the most sense to start. Later on, there will be an implementation of the new system on the telephone banking side, and in Internet banking.

Banking Strategies: All of this functionality seems difficult enough to implement in a single setting, much less across a set of heterogeneous channels. What does it take to pull this off?

Lippert: When you look at the channel delivery aspect of this, the complexity associated with pushing this data down multiple paths, it is not as complicated as you might think -- if you have the back-end architecture put together correctly. What's essential is having actionable data: the background on the customer, the segmentation analysis, the value propositions. Once all that's in place, the particular electronics that deliver it become almost a secondary consideration.

But that's not to trivialize system requirements, which are substantial. Specifically with respect to the Internet, the challenge is to link the customer relationship management system with the technologies that drive the Web. Middleware, essentially translation software that allows different types of systems to talk to each other, plays a key role in this.

Another important undertaking -- one that U.S. superregional banks can identify with -- is merging regional systems. You don't want data to be imprisoned in geographically-defined legacy systems that can't talk to each other. Instead, you want to be able to incorporate all of the data in segmentation analyses. Going the other direction, you want to be able to drive value propositions into all territories. Above all, you want customers to receive good, continuous service, whether traveling, or relocating, or conducting business from multiple sites in different regions. Hence the need for data portability and accessibility.

Banking Strategies: Much of the discussion about multiple channels revolves around efficiency. We've seen some sophisticated presentations on channel pricing, and creating incentives for customers to conduct more transaction-intensive activity through low-cost electronic venues. Is this your priority?

Lippert: Yes and no. From a corporate perspective, efficiency certainly is a priority. Our ratio of operating expenses to operating revenues is hovering at 64% right now. That compares with efficiency ratios of less than 50% for some of our non-traditional competitors. We've announced restructuring plans and are working to realize a C$400 million reduction in annual expenses by the end of next year.

Branch rationalization plays a role in this. We are trying to match the footprint and functionality of each unit to the locale it serves. The emphasis is shifting to customer acquisition and consultative selling. We do hope to shift more day-to-day transactions out of the branch. One of our bundled offerings, which packages Internet banking, PC dialup banking, telephone banking and 50 or so monthly check transactions for C$9.50 per month, is helping to entice people to those electronic channels.

However, we don't view cost-cutting as the path to prosperity. Our overriding emphasis is on the denominator of the efficiency ratio: revenues. We want to retain our best customers, sell more to each customer and acquire more customers. Information technology will play a major role in these pursuits.

Banking Strategies: Of course, much of the work you're doing right now pertains to Canada, where you have a substantial presence. How would all of these factors play out in a new market, where you wouldn't be encumbered by a lot of traditional banking capacity requiring reconfiguration?

Lippert: This is where the story gets more exciting. Instead of being a complement to an established suite of delivery channels, Internet capabilities can come to the forefront in opening new markets. Under the Charles Schwab & Co. model, for example, most customer interaction is accomplished over the Internet. The company sprinkles a few select physical sites in each market to anchor its presence and accommodate those special situations when the customer wants to sit down face-to-face with a live representative.

A similar approach would work for Royal Bank in Florida, where a fair number of our most valued customers go for the winter, and to retire. Primarily, we'd like to support those customers through Security First Network Bank, the Atlanta-based Internet bank that we purchased in 1998. I wouldn't want to portray customer adoption as being a given, but there is evidence that customers in all age groups are getting more comfortable with online banking, and that usage will grow strongly. Rounding out the strategy is just a matter of identifying where we ought to put the anchoring physical sites. We're already at work installing a branch in Clearwater.

And there's more. In SFNB, we have a vehicle that offers a conventional retail banking component, a mortgage component, a credit card component and a brokerage component, all delivered through a single site. Operating over the Internet, the bank arguably has seamless access to any U.S. market.

Banking Strategies: But how do you establish critical mass and brand awareness? In the United States, banks are spending enormous sums just to get a single icon placed on the home page of an Internet portal. Also, the Royal Bank of Canada brand name might prove limiting in the U.S. market.

Lippert: The short answer is that we're counting on the distinctive quality of the SFNB product to win customers and generate the publicity and word-of-mouth referrals that will help it grow.

You can spend vast sums to market an online product. But if you're not careful, those outlays begin to undercut the economics of the venture. A book of business also can be built by offering above-market rates on deposits. But you have to wonder about the loyalty of customers attracted solely on that basis.

We are scouting for acquisitions in the U.S. There is always the possibility that we will join forces with a financial services entity already having a certain brand strength and critical mass. Then we can synthesize capabilities and accelerate the process. Partnerships and alliances also present some possibilities.

Banking Strategies: We've talked about some of the technical and conceptual aspects of multi-channel service, but what does it take to make customers feel comfortable when using branch alternatives?

Lippert: One thing to keep in mind is that electronic channels have their own allure, primarily based on convenience. Any time of day, any day of the week, people can read their account balances, pay bills and transfer funds, either by terminal or telephone. Often, all it takes is a brief personal session -- a demonstration by branch personnel, for example -- to awaken people to the benefits and take the fear out of the transition.

When customers graduate to decisions of higher order, such as applying for a loan or making an investment, then the challenge is to create the proper context. What additional information can we offer that helps the customer feel informed and comfortable in making an online decision? With a mortgage, perhaps it's residential listing information, or a directory of home improvement companies. With an investment, perhaps it's a report on how certain indexes are performing, or a listing of mutual funds.

Then, you want to assure that the customer can gain quick access to a live representative when necessary. You can't escape the need to have sensitive, well-trained people on the service side. Our call centers are set up so that the typical rep can immediately handle about three-fourths of the inquiries that come through. If it's a deeper question that requires more product knowledge, then the call is carefully handed off to a specialist. It won't be too long before people can click a screen icon during an online session and establish voice communication with the bank, without having to disconnect the line and redial.

Banking Strategies: How do you build the business case for all of these capabilities?

Lippert: We started with a vision, a broad view of the things we thought we needed to do. Then we looked at the capabilities needed to support that vision. We conducted a gap analysis -- or a comparison of the current state versus the desired state -- across four divisions: data management, contact management, statistics management and value propositions, just to see where we stood.

Then we mapped out a timetable, and set some intermediate goals. We can point to some specific results, such as improved retention and heightened response rates to certain solicitations, as evidence that we are moving in the right direction.

However, this is not an exact science. Sometimes, you have to step out on the ice without knowing how thick it is. Definitely, you can't go to market with an ineffective platform. Even quick followers, or players who make a point of racing within striking distance of the leaders, risk being marginalized in this period of market upheaval.

You have to have a company, a management team and a chairman cognizant that the market is changing and willing to assume the risk entailed in moving forward. John Cleghorn, our chairman and CEO, has been very receptive to the e-commerce ideas and initiatives advanced by the senior management team, which is pursuing this collaboratively. And, fortunately, we haven't had a project that really tanked on us.

Banking Strategies: What are some of the issues and risks you face in following through?

Lippert: One challenge falls under the broad heading of organizational transformation. We've got an enormous amount of structure in place that supports a 150-year-old banking model. Now we have to reinvent ourselves, and come into alignment with an online business model that has stood the world on its head in less than five years. To do this, we need broad-based participation within the company.

Together with this is the need to develop a sense of shared customer ownership. Typically, representatives like to think that they individually "own" customer relationships. But the act of guarding the account dampens referrals and information-sharing. It's a big issue. To meet our goal of being able to supply virtually any financial service through a variety of touch points, we must move to joint ownership.

Legal and strategic issues with regards to data sharing and privacy also are important. Although technically we are able to compile information on every type of account into formats that representatives would find useful, we are legally prevented from doing so. And even when restrictions ease, we must be circumspect in balancing the extensive use of information with the customer's desire for privacy.

Another issue is managing expectations. We can't over-promise to management, our staff, or our customers. As exciting as the long-term prospects may be, we have to keep everyone focused on taking the next step, however modest, that will help us move down the road.

With regards to the various channels, there's a certain consistency and balance to be maintained. You don't want everybody rushing over to one side of the boat. Also, scaling capacity is a very tricky exercise. The unfortunate pattern in our industry is that costs rise with the addition of a new channel. Customers view the new venue as an added service, not as a substitute, and overall transaction volume rises. Knowing this, we have to be careful not to over-invest in any one area.

Finally, and most importantly, we have to maintain a customer focus amid all of the restructuring. The customer need continues, the competition continues, no matter what we're up to internally. So the quality of the transition is inextricably linked to the quality of the end result.

Mr. Klinkerman is managing editor of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

back to top