Connecting with Customers

By Steve Klinkerman

Great change has swept the financial services industry, as reflected in the pages of our magazine. Yet the old truths still apply.

Five years ago, Banking Strategies began its quest to explore strategic and managerial issues in financial services. As the flagship publication of BAI, Chicago, the magazine has devoted itself to serving a national audience of senior executives in a time of breathtaking change. It's been a wild ride, but on our fifth anniversary, we remain dedicated to the cause and enthusiastic about the possibilities in the powerful, complicated industry we cover.

Looking back, it's been an exciting era, marked by mergers of colossal proportions, rampant experimentation with information technology and accelerating convergence between the banking, brokerage and insurance industries. Bank of America goes national; Citigroup emerges as the first U.S. universal bank; the Internet rattles the world — we've struggled alongside our readers to try to comprehend the forces that drive such developments and to discern how institutions can best respond.

The work is never finished and there are no final answers, but two things have become crystal clear to us during this half-decade of editorial pursuit: Strategic success largely hinges on execution; and every major issue ultimately relates to the customer. Simple concepts that are easily acted upon? Not when you're running a far-flung corporation with perhaps tens of thousands of employees. That's why we continue to dig inside the strategies to see what it takes to make them work.

Fall of the Titans

In the early days, our signature editorial piece was a cover story featuring the CEO of a well-known organization. Our goal was to show how individual executives and companies were dealing with major issues common to most institutions. We caught up with John McCoy while he was reorganizing a massively expanded Bank One Corp. (November 1996); chronicled the hostile takeover of First Interstate Bancorp by Wells Fargo & Co.'s Paul Hazen (November 1997); and delved into Ed Crutchfield's technology rationale at First Union Corp. (March 1998).

To their great credit, these executives and others were candid about the challenges they faced. But instead of forging a bright new path for the industry, many banking stars of the 1990s ran into serious trouble. McCoy departed Bank One after earnings collapsed at First USA Inc., the priciest acquisition of his career. Wells Fargo threw in the towel shortly after the fractious First Interstate deal and merged with Norwest Corp. First Union went too far in substituting technology for people during the acquisition of CoreStates Financial Corp., and Crutchfield retired.

Such incidents shattered the common wisdom that mergers provide a clear path to growth, setting us on a deeper course of investigation. Were the mega-banks experiencing mere growing pains, or actual diseconomies of scale? Could these sprawling empires be managed efficiently? And more to the point, did they provide the products and services that customers wanted? Since the mega-banks weren't generating much internal growth, it seemed that acquisitions and technology, the industry's preferred strategic drivers, were leading to failures in the all-important court of customer opinion.

In sorting through all this, we talked with some of the brightest strategy theorists — including Michael Porter, Fred Wiersema and Clayton Christensen — and came away with some powerful concepts that influence our thinking to this day.

In "The Power of Saying No," January 1998, Porter warned that huge mergers do not address the larger question of how competitors can differentiate themselves in a crowded field. In fact, said the famed Harvard Business School guru, business line and product diversification can actually undercut performance by distracting the corporation from the things it does best. "The essence of strategy is tradeoffs — making choices about what you won't do in order to do other things uniquely well," Porter said.

In "The Specialist Challenge," March 2000, Harvard professor Clayton Christensen predicted that specialization rather than financial supermarkets would become the dominant model in banking and financial services. The author of The Innovator's Dilemma noted that it's tough to compete with specialists who can offer clients better value in specific product lines. "Rather than integrate and generalize, the evidence suggests the industry inevitably will segregate and specialize," he said.

Fred Wiersema, the author of The Discipline of Market Leaders, detailed the depth of customer feedback needed for an organization to be truly responsive to customers. Information systems can only speculate about client preferences statistically, he said in a January 1999 interview, so a human touch is essential. Wiersema said banks should solicit direct feedback from customers about the key factors that influence their loyalty and satisfaction, and he insisted that senior managers should be directly involved in that process.

We've seen some of those lessons at work in cover stories featuring Charles Schwab Corp. (May 1997), Comerica Inc. (July 1998), Fifth Third Bancorp (May 1998) and Mellon Financial Corp. (July 2001). All of these institutions deployed their resources in a disciplined way. They focused on a few key customer groups and then aligned everything in their organizations to support those selected activities. The result has been generally excellent financial performance and an apparent close bonding with customers.

Internet Explosion

The world doesn't sit still while you're trying to solve a particular problem, and it's fair to say that the commercialization of the Internet thrust a tidal wave of additional change upon the financial services industry.

Our early coverage tended to extol the great potential the online sphere held for banks, such as personalized marketing in real-time. Later, as the limitations of the technology became apparent and customer usage lagged expectations, we took a tougher stance.

In "Internet Banks: Superstars or Shooting Stars?," July 1999, we questioned the viability of the Internet-only business model at a time when Bank One's Wingspanbank.com was still in formation and institutions such as NetBank Inc. and CompuBank were riding high. In the contrarian vein that is a hallmark of our style, we noted that marketing costs at the Web-only banks were offsetting much of their operational efficiency and concluded that the larger, multi-channel banks had the staying power to win the battle for the online audience. Given the subsequent eclipse of the Internet-only model, we feel justified in our conclusions.

The online debate continues to rage in other areas, however, as institutions sift through all the e-gadgets for activities that can actually turn a profit. In conversations with Mellon's Janey Place (May 2000) and Wachovia Corp.'s Lawrence Baxter (May 2001), we explored the intricacies of guiding a Web strategy at a modern bank. In July 2000, writing about the emerging trend of wireless banking, we went so far as to feature an Internet-enabled cell phone on the cover of the magazine.

It was about at that point that we started wondering whether we were editing a management journal or a technology magazine. Of course, that was also about the time that the NASDAQ crashed and the dot-coms imploded. So technology — for all of us — may be in the process of being restored to its proper role as a supporting actor.

Our current view, common to the industry, is that online banking is a channel rather than a product. It can help institutions retain and economically serve existing customers, but doesn't do much to spark sales and attract new customers since it has largely become a commodity offering. If bankers want a panacea for their growth problems, they'll have to look elsewhere.

Data Diving

For many institutions, that "elsewhere" is the use of customer information for strategic marketing, a process currently referred to as customer relationship management, or CRM. This is a topic Banking Strategies has covered exhaustively over the last five years.

We began in January 1997 by interviewing Jonathan J. Palmer, a data-mining pioneer who formerly ran the technology department at Florida's Barnett Banks. Palmer outlined all the difficulties involved in extracting usable information from the vast, splintered data systems at a typical bank. We followed that up, in January 1998, with an article called "No Guarantees in Database Marketing," in which freelance writer Bill Stoneman reported, sure enough, that "success stories are hard to find."

The struggle continues, as shown in our March 2001 cover story about CRM. As described by writer John Engen: "Banks are having a hard time collecting data from diverse sources, delivering it to front-line employees in a useful format, and then getting those employees to handle it correctly." Technology provides only one leg of a three-legged stool, Engen found, the other legs being new business processes and cultural/organizational transformation. Without all three, CRM cannot stand.

Certainly, institutions are doing a better job of delivering all sorts of descriptive information on customers to front-line employees, even calculating the precise levels of profitability contributed by those customers. But responding directly to people and real-life situations is another matter. When the rubber hits the road, demographic profiles don't necessarily help you do a better job of selling, serving and retaining customers.

Some of our contributing writers have weighed in on the reasons for that. In November 1997, consultants Peter Carroll and Madhu Tadikonda warned that banks were misapplying customer profitability data. Instead of using raw scores to try to fit people into broad categories, they said, institutions should look behind the numbers to understand customers' individual behaviors.

We put the whole segmentation question into focus in our November 1999 cover story, "Mixed Signals," where writer Stoneman found that although some institutions were successfully using profitability data to retain their best customers, that wasn't the complete answer. In that article and its companion, "Rx for Segmentation," we presented a vision of using technology not merely to categorize customers, but to discern and profitably fulfill their needs.

Cross-Sell Conundrum

The connection between companies and customers often rests in the hands of front-line personnel, and our exploration of this theme began with the March 1997 cover profile of Royal Bank of Canada. Under CEO John Cleghorn, the Toronto-based institution was working intensively with branch representatives to cross-sell a wide array of financial service products. This required, among other things, an effective referral system.

When Citigroup burst onto the scene with its powerful blend of banking, insurance and brokerage operations, however, consultants Carroll and John Rosen sounded an alarm about cross-selling. In "Making the Most of Citigroup," January 1999, the two pointed out that the foundation of cross-selling is establishing an advisory relationship with clients, but that advisors can hardly be objective if their every solution consists of a proprietary product offered by the parent company.

In subsequent interviews, Citigroup's Joseph J. Plumeri (November 1999) and his successor, Marge Magner (November 2000), defended their products as being best-in-class. But they also emphasized the importance of equipping representatives with the necessary certification, coaching and customer diagnostic tools.

Elsewhere, we explored the cross-sell strategy of Conseco CEO Stephen Hilbert (January 1999), whose fusion of insurance and consumer finance operations subsequently blew up and cost him his job. The jury's still out on another cross-sell play at the new Wells Fargo (May 2000), where CEO Richard Kovacevich is attempting to apply an approach developed at predecessor Norwest to a much larger organization.

The pressure to deliver sales growth is tremendous, and in "Pressure Cooker," January 2001, we warned that some institutions might be overreaching. According to writers Stoneman and Karen Kahler Holliday, aggressive sales campaigns can backfire badly by engendering inappropriate sales tactics that alienate customers. This highlights the need to strike a careful balance between corporate goals and customer needs, and to reflect that balance in the incentive structure for sales reps and the myriad daily activities that directly affect the customer connection.

Back to Basics

One conviction we've gained over the years is the importance of nuts-and-bolts branch banking. We explored this topic most recently in our July 2001 issue with a story called "Coddling the Customer," which chronicled the effort by many institutions to upgrade their branches to win back customers alienated by a decade of indifferent service and rising fees.

We came at this issue from another angle in "Liquidity Drought," May 2001, which looked at banking's shrinking pool of deposit funding. In that story, written by senior editor Kenneth Cline, we showed how Commerce Bancorp's Vernon W. Hill had transformed the mundane branch into an upscale experience — and attracted a flood of customers and core deposits. But for the larger industry, we warned that neglect of the branch had become a metaphor for neglect of the customer.

Now, flash back to our very first issue, September 1996, when we carried a commentary by Les Biller, who is currently chief operating officer of San Francisco-based Wells Fargo. Biller wrote: "In the act of destroying branches, bankers risk valuable relationships." While he agreed that the telephone, automated teller machine and personal computer delivery channels would become more important in the years to come, Biller said branches must be maintained (and improved) for the large proportion of the customer base that will always want face-to-face contact.

That turned out to be about right. People value electronic channels, but they always want the option to connect with human beings. Banking, after all, is about cultivating relationships, not manufacturing widgets. The quality of the interaction between company and customer often matters as much as the substance of the transaction. This is a lesson bankers seem to forget when they become engrossed in internal organizational issues.

Like the industry that we cover, Banking Strategies conducted an exciting flirtation with technology during the last five years. But we've always kept sight of the foundation of retail banking, which is human interaction, either at the branch level or via telephone. That human factor seems every bit as strong today as it has ever been, despite the computer revolution of the last two decades.

So looking into our crystal ball, we see an industry that needs to keep up with evolving technology to economize delivery and provide its customers with choices — but also keep sight of relationships. If the customer accepts electronic service, fine. But if the customer prefers quality face-time with a real live individual, you have to provide that too.

The art of the thing, however, is coming up with a distinctive formula that aligns organizational strengths with the needs and preferences of specific customer segments. In other words, you can't throw organizational resources at everything under the sun. And that's why we see a need for a publication such as Banking Strategies. Operational excellence is hollow when it does not support a business activity that customers are willing to pay for, and it's up to the strategists to sculpt the resources of the organization in such a way that makes a difference in the market.

While we occasionally express an opinion, we primarily aspire to be trusted scouts who can be depended upon to scour the strategic landscape and come back with information and ideas that will help you, our reader, be better informed and make better decisions. Indeed, in our midyear 2001 reader survey, respondents cited "explores strategic and managerial issues" as our single most distinguishing editorial trait.

Ultimately, then, our cause is joined with yours — connecting with customers. That's the core issue we intend to cover, and we hope you'll come along for the ride.

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

A Word of Thanks

Any magazine represents a collaborative effort that draws upon the hard work of many people, not only those listed on the masthead but also many behind the scenes.

In the case of Banking Strategies, nothing could have been accomplished without BAI. We particularly appreciate the support shown by the board of directors; Thomas P. Johnson Jr., BAI's president and chief executive officer (who also is the magazine's publisher); and the BAI management team.

The list also includes our loyal advertisers; Korzenowski Design Inc.; and Brown Printing Co. For the all-important editorial content, we've benefited from the efforts of our freelance writers and the many contributing writers who come from academia, consulting and banking. We're indebted as well to the many practitioners and experts who have so generously shared their time and insights. The quality you see in the pages of this magazine reflects the dedication of all of these people over the years.

Copyright © 2003 by Banking Strategies, published by BAI.

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