Incentives Revisited

by Steve Klinkerman

It takes more than pricing to lure customers into low-cost electronic channels.

One of the most important challenges facing financial services providers is redirecting customer traffic. The idea is to reserve the expensive branches largely for high-value activities, and route everyday transactions through efficient electronic channels. But what does it take to get customers to go along?

The great inspiration of a few years ago was to use price-related incentives. It seemed reasonable that customers would willingly curtail their branch usage if they could see a financial benefit for doing so. The extreme application of that theory was disproved by the Internet-only banks, however, whose high account yields and low fees were met with a yawn by the majority of customers.

Out of that experience came an affirmation that pricing is but one of many factors that customers weigh in their usage patterns and purchase decisions. That's why incentives must be built around packages that meet the full range of customer needs. Internet banks, for example, learned the hard way that customers, though possibly willing to scale back usage of branches, did not want to abandon them altogether.

Thus, the starting point for channel migration is building a value proposition from the customer's point of view. Done right, for example, electronic channels offer 24/7 access, enhanced account information and transaction capabilities, extra convenience, the privacy of home usage and generally faster execution than can be had with paper payments media. Properly linked with other traditional capabilities, these benefits can be compelling, and tweaking the whole arrangement with price-related incentives can make them sweeter still.

The high road carries a high price, however, in terms of the careful preparation necessary for a sound channel migration campaign. The effort to ascertain customer requirements and motivations inevitably goes into segmentation, and targeting the most promising groups of people is not a simple exercise. Then, within each of the major segments, overarching customer needs and usage patterns must be identified, and specific campaigns must be built around them.

Of course, the groundwork's not complete without an analysis of channel economics, a very murky science. Does the provider really understand the cost differential between branch, automated teller machine and Internet delivery? Another kicker is systems integration. Customers don't want to live in a world of fractured information, and unifying everything behind the scenes is a big job.

This level of thoroughness may be beyond the reach of some players right now. In its 2000 survey of 125 financial institutions worldwide, Cap Gemni Ernst & Young found that many major financial services providers simply make no attempt at channel incentives. Others are still struggling with customer profitability metrics, segmentation frameworks and systems integration.

That's discouraging, but it's no reason to give up. The sheer fact that customers can be influenced by so many factors other than price offers hope that providers can ultimately find profitable new delivery formulas. Already, some players are detecting signs of financial strength in Internet banking packages that are integrated with all other delivery channels. Bank of America, for example, says its online customers are more loyal and profitable than those in the traditional branch.

Such progress is imperative if institutions are to rationalize traditional brick-and-mortar operations. The physical infrastructure has got to be pared back, but the realistic way to get people to embrace electronic alternatives is to lead with value — not just price.

Mr. Klinkerman is editor-in-chief of Banking Strategies.

Copyright © 2003 by Banking Strategies, published by BAI.

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