Retail Conundrum

By Thomas P. Johnson Jr.

Banks face a daunting challenge in managing their cost-to-serve and customer preferences.

Given their efforts in recent years to transform their branches into more "retail-like" outlets and improve their "sales culture," banks have much in common with non-financial retailers. In recent years, for example, they've shared similar challenges in managing multiple channel distribution systems. Customers, it seems, never met a channel they didn't like, and the consequence of offering multiple channels — an Internet channel, in particular — has been greater transaction volume across all channels and higher distribution expenses.

But while both bank and retailer strive to better control their "cost-to-serve," the bank has a consideration the retailer does not: At any point in the process of trying to migrate certain customers to certain channels, the banker can expect to hear the customer's cry, "Hey, that's my money in there and this is how I want to get at it."

Another point of differentiation is that retailers know their profit margin on a product before the sale, while the bankers' margin depends on how products are used after the sale, which is why the issue of cost-to-serve is so important to financial institutions.

The recognition by bankers of the need to better align customer service and distribution expense is not a new one. An infamous test took place in the mid-1990s when the former First Chicago Corp. attempted to move low-value customers away from the high-cost branch channel by imposing a surcharge on branch usage. On paper, the analysis was solid and the plan looked reasonable, but First Chicago quickly abandoned the concept in response to withering public criticism.

Wachovia Corp. is now in the first year of a three-year project to analyze its distribution system from top to bottom. As explained in this issue's "It's Time to Rationalize the Channels," Charlotte-based Wachovia is determined to figure out ways to improve both efficiency and customer service.

Jonathan Witter, Wachovia's head of General Bank Distribution, takes care to stress the bank's commitment to maintaining its high overall customer service levels. Yet the plan, if taken to its logical conclusion, suggests that banks at some point will succeed in offering appropriate service levels to different customer segments depending on the profitability equation of each segment.

It's too early to say how Wachovia, or any other banking institution, will resolve this retail conundrum. Customers have preferences and there's a serious risk of alienating them by pricing a particular delivery channel or service out of their reach or relegating them to a "low-value" category that obviously serves the provider, but not the customer. At the same time, banks have a legitimate need to control their expenses if they are to remain profitable multi-channel retailers.

The industry will follow Wachovia's progress with great interest.

Questions or comments about this article? Post them at the Banking Strategies blog.

Mr. Johnson is publisher of Banking Strategies and president and chief executive officer of BAI.

Copyright © 2005 by Banking Strategies, published by BAI.

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