retail banking - managing competition among your own channel

FINANCIAL INSTITUTIONS

RETAILBANKING: MANAGINGCOMPETITION AMONG YOUR OWN CHANNELS

Channels don’t own customers

How far into your bank do you allow the market to penetrate?

Rules of the road

Cato A. Holmsen, Robert Nathan Palter, Peter Robert Simon, and Paal K. Weberg

PICTOR INTERNATIONAL

THE PROMISE OF LOWER TRANSACTION COSTS, increased sales produc-tivity, and more convenient service has lured banks into setting up newelectronic and product-specific channels. But they have quickly found

that their delivery capabilities are outstripping the traditional branch-centeredmodel they use to manage them. As a result, they face stubbornly high eƒfici-ency ratios, expected revenues that never materialize, and channel managersat odds with the standards by which they are measured and rewarded.

To resolve these problems, banks must adopt a new approach to the manage-ment of multiple channels. In particular, they must address four issues:

• Who owns the customer?

• How are operational issues resolved?

• How are managers measured and rewarded?

• Where does each business fit?

Customer ownership

“By all means add the new channels, but book the revenues with the branchnetwork, where they belong.”

The notion that customers can be “owned” is championed bybranch managers seeking to preserve a branch-centered

organization. They maintain that the branch remainsthe prime point of contact for sales, service,

and relationship management. Buttheir argument does not stand up

to close scrutiny.

Far from staying loyal to a branch, most customers today use a number of channels (Exhibit 1). They graze from ATM to telephone to branch,

depending on their needs at any given time.They are no more “owned” by a bankingchannel than they are by a TV channel. If abank designing a multichannel organizationpersists in assuming that a channel can owncustomers, it is deluding itself about howcustomers use banks and the range of choicesthey enjoy.

Operational issues

“Maybe individual channels don’t own thecustomer, but there has to be a single point ofaccountability for coherent product and channel

oƒferings, branding, and resolution of customer service issues. Someone has tolook out for the customer in this institution!”

This familiar refrain is sounded by advocates of “customer-centered”management. For them, retail banks should be organized around customersegments, and those who manage these segments should dictate whatproducts and services are available and how they are delivered.

But this approach can be dangerous. Most delivery channels are used byseveral customer segments, and a channel decision made by the managerof one of them could adversely aƒfect other segments. Say the owner of amass-market segment directed branch tellers to encourage these customersto use ATMs. If the tellers inadvertently encouraged mass aƒfluent cus-tomers to do the same, they might prompt unwanted defections among thesecustomers.

Resolving operational issues such as how products and channels will be oƒferedto target customers must be an explicit part of multichannel managementdesign. It is also likely to require CEO involvement, for two reasons.

First, decisions on these issues help to shape a bank’s customer valueproposition. Will customers enjoy universal access to the full portfolio ofchannels, for example, or will there be incentives (or disincentives) to usecertain channels?

MANAGING COMPETITION AMONG YOUR OWN CHANNELS

84 THE McKINSEY QUARTERLY 1998 NUMBER 1

Cato Holmsen and Paal Weberg are partners in McKinsey’s Oslo oƒfice; Robert Palter and PeterSimon are consultants in the Toronto oƒfice. Copyright © 1998 McKinsey & Company. Allrights reserved.

We would like to acknowledge the contributions of our colleagues Rudy Adolf, Dominic Barton,Dorlisa Flur, Lenny Mendonca, and Patricia Nakache to this article.

Exhibit 1

Channel usage by bank customers

North America, percent

Electronic only

More than one channel

ATM 46

18 61 21

28

20

3

3

Branch

Telephone

Mail

PC

Branch only

Second, a decision that is optimal from a business unit’s perspective may not be optimal for the institution as a whole. The CEO must be involved in decisions such as: can dedicated product delivery platforms, such asinvestment centers, develop their own brands independently of the bank’sumbrella brand? Can individual channels choose to distribute other pro-viders’ products, such as mutual funds and mortgages, if they see a profitopportunity? Will the various salesforces be allowed to compete directly, or be required to collaborate?

Performance measurement and rewards

“You’re not going to take away my revenues and just give them to some newchannel, are you?”

In a multichannel organization, developing performance measures means:

• Allocating accountability for profit and loss to the right people

• Closely tracking the key economic drivers of the business, whether bychannel, product, or customer

• Obtaining meaningful channel, product, cost, and revenue data frommanagement information systems so that appropriate standards can beestablished.

One unfortunate legacy of the branch-centered system is that a customer’sbalances and revenues are normally allocated to branches, regardless of thechannels actually used by that customer. As a result, the contribution ofbranches to the network is oƒten overestimated, and that of newer channelsunderestimated. This means that the new channels have to depend onacquiring new customers for revenue, even when most of their customers arebranch based.

Allocating revenue to branches has two consequences. First, only the CEOhas a true P&L, and hence bears all the responsibility for managing perfor-mance. Other senior managers are unable to find out how profitable theirbusinesses really are. Second, banks lack the tools and measures to makeinformed decisions about resource allocation.

Structure and reporting

“Please – not another matrix!”

As banks add new channels to their delivery networks, it becomes harder for the branch-centered organization to manage products, segments, and


THE McKINSEY QUARTERLY 1998 NUMBER 1 85

channels, and the connections between them. Decision making slows down,issues get “kicked upstairs,” and managers’ view of how their businesses areperforming is blinkered by unresponsive IT systems that have failed to keeppace with the evolution of the network.

Within the bank, leaders become more internally focused. Instead of run-ning their businesses, they get caught up in the issues and conflicts thatarise because the decision-making framework does not match the com-plexity of the business. In one bank, all marketing decisions concerningproducts and delivery were still funneled through a single strategicmarketing group, despite the fact that the number of choices oƒfered toconsumers had increased five-fold in recent years. The group became abottleneck and the focus of internal conflict as it tried to prioritize andreconcile the bank’s marketing messages.

Possible models

Any bank seeking to improve its channel management must explicitlyaddress these four key issues. For its organizational design, it can choosefrom three broad models on a scale that ranges from tight coordi-nation to unfettered competition (Exhibit 2). The choice of model will

ultimately depend on the bank’s strategy (does it emphasize customersor products?), its market position (low market share would argue for moreaggressive competition between channels because the bank’s objectiveis acquiring customers rather than increasing its share of wallet ofexisting customers), and its view of how the market is likely to evolve



Exhibit 2

Three models for channel management

…Design

Increasing reliance on…

…Market

Description

What banks need to be good at

Coordinated channels model

“Centralist: Coordination through hierarchy”

Clear hierarchy

Branch as dominant profit center

Prescribed channel roles

Integrated capacity management

Customer-based value propositions

Highly involved COO-type leadership

Making decisions and tradeoffs based on multiple variables

Managed competition model

“Federalist: Competition governed by central standards”

Management of a few critical product/channel customer interfaces

Multiple profit centers and shared resources

Clear rules and transfer pricing

Customer- and product-based value propositions

Devolving responsibility while managing complex product, service, and channel matrix

Incentive design and transfer pricing

Competing channels model

“Darwinist: Competing channel, product, and customer groups”

Competing businesses (everyone has a P&L)

Independent capability and infrastructure

Product- and channel-based value propositions

Line of business leadership and incentives

Introducing next generation of winning businesses

Selling

(for instance, the speed ofproduct commoditization,changing customer needs,and the costs of complexity)(Exhibit 3).

The coordinated channelsmodel“I’ve sorted out the issuesaround the use of brand andpricing across the channels,but cumbersome transfer pric-ing arrangements and lack of true P&L mean I still getcaught up in resource alloca-tion discussions.”

Most banks trying to improve their multichannel management exert morecoordination rather than less. A coordinated channels model has a clearhierarchy, dominant profit center, defined channel roles, and integratedcapacity management (Exhibit 4). To succeed, this highly structured,

centralized model needs a carefully designed governance structure, a hands-on CEO, and responsive IT. It is most banks’ default option.

Any bank opting for this model should understand the assumptions on which it is based. First, if investment in the mechanisms that are needed to



Exhibit 3

Choosing the right model

High Market share

Starting position

View of industry evolution

Bias toward coordinated channels

Bias toward competing channels

Low

Average Products Distinctive

Strong IT Capabilities Strong frontline sales

Concentrated oligopolies

Marketplace Highly contested/ deregulated

Slow Commoditization of products Fast

Low Cost of complexity High

Advice seekers Client preferences Individual product/ service seekers

Exhibit 4

The coordinated channels organization

Product units

Deposit products

Creditcards

Mortgages

Mutual funds

Retail bank

Affluent customers

Small business

Region A

Branch network

Region B

Region C

Direct channels

ATM

PC banking

Call center

Specialized salesforces

Standalone telephone

bank

Potential product/channel overlaps

coordinate channels is to be justified, the benefits of greater cross-sellingeƒficacy, lower customer acquisition costs, and better customer retention mustoutweigh the drawbacks of slower response times, more costly processes, andlack of broad-based P&L accountability.

Second, the costs of complexity must be more than oƒfset by the value ofretaining customers through the deliberate management of their experiencesacross all the bank’s channels. This means that tellers, call center operators,and salespeople must coordinate their eƒforts and share information so thatthey show a single face to customers. Say a customer asks a call centeroperator about the bank’s mutual fund oƒferings. Next time that customer

visits a branch, a teller should ask whether heor she needs any more information or wouldlike to see a salesperson.

Third, although day-to-day decision makingmay get slower, this approach can allowsenior management to respond quickly andto dedicate resources to new opportunities

that might be too risky for an individual profit center to pursue. The Bankof Montreal was able to build its leading-edge telephone bank, mbanx, in justone year – fast work for this highly coordinated multichannel organization.Concerns about cannibalization from the branches were forestalled by thefact that the CEO sponsored, funded, and launched the venture.

Though a comfortable and safe choice, this model fails to isolate theeconomics of individual products and channels, and thus perpetuates thesubsidy of less cost-eƒfective channels. In addition, since it tends to pushdecision making up the organization, it draws the CEO’s time away fromimportant issues.

The competing channels model“I’m all for making people accountable for results, but allowing open competitionin the network will confuse the customer and raise further channel conflicts.”

A free marketplace for channels and products has strong appeal at bothintuitive and practical levels. The competing channels model devolvesaccountability for results down the organization, exposing channels to thediscipline of the market (Exhibit 5). Greater transparency in its economicsshould lead a bank to reduce the resources invested in its mature channelsand reinvest in new businesses and channels.

While a more competitive marketplace improves innovation, resourceallocation, and accountability, it also means that capabilities in areas such asmarketing, product design, and IT may have to be duplicated in each unit.



The competing channels modeldevolves accountability for

results down the organization,exposing channels to thediscipline of the market

Another drawback is that this model fails to leverage opportunities acrossthe bank, such as the consolidation of the customer relationship in one place.There is also a risk of channel conflict as each channel and product groupcomes to believe that it deserves to be a standalone business.

The managed competition modelFor most multichannel banks, the cost of a coordinated approach may exceed its value. Equally, for a bank to turn itself into a cluster of competingchannels can undermine the value propositions and brand equity that it hasbuilt during years of serving its customers.

What is needed is the best of both worlds: a model that sets standards acrosschannels based on the bank’s strategy for customer and product oƒferings,but relies on internal competition to secure eƒficient resource allocation.Under this managed competition model, product, channel, and service pro-viders independently pursue opportunities to achieve their financial targetswithin strategic boundariesset by senior management(Exhibit 6).

Banks adopting this modelmust be willing to take threesteps:

Set marketplace guidelinesacross channels on those few product/channel inter-faces that really need it, suchas checking and savingsaccounts, consumer credit, and investment sales. Theseguidelines ensure that eachbusiness unit pursues the



Exhibit 5

The competing channels organization

Product group

Consumer lending

Creditcards

Mortgages

Retail bank

Traditional branches

In-store branches

Specialized salesforce

Segment/ marketing group

Remote distribution (call center,

ATM, PC)

Channel group

Product and channel groups negotiate deals independently

Exhibit 6

The managed competition organization

Mass market

Credit cards

Affluent customers

Small businesses

Standalone product groups (some with captive channels)

Insurance Mortgages Credit cards

Small business

Standalone channels Branches

ATM Relationship managers

Negotiated transfer

price sales

“Rules of the road” define which groups can contact which customers

Segments open to full competition

Segments where point of contact is limited

corporate strategy even though it may not represent the most profitableapproach for that unit. They also recognize that product lines with their owndistribution capability (for example, credit cards through the mail and phone)need transfer price and service level agreements specifying the terms underwhich they provide their delivery capability to other products.

Recognize that, within the limits set, channels will compete and aƒfectone another’s performance. This internal tension, while less comfortable thana coordinated approach, permits clearer insights into the performance ofindividual distribution channels and the abilities of those managing them.

Make the reinvestment and divestment decisions that are now apparent. Any channel portfolio has both mature and emerging components, andinvestment must be focused where it can earn the highest returns. Whencustomer revenues are no longer allocated to the branch network, managedcompetition will expose the economics of marginal branches. Those thatcannot be restructured to improve cost-eƒficiency or sales eƒfectiveness willprobably have to be closed.

The rules of the road

At the heart of managed competition are the “rules of the road” within whichbusiness units pursue their own strategies. These rules will vary from oneinstitution to another. However, most banks will want to consider the issuesraised in the following questions:

Who initiates contact with the customer? One bank worried that compet-ing channels might give its customers conflicting advice. It stipulated thatonly the assigned relationship manager could initiate contact with high-valuecustomers. For other customers, channels are free to launch sales and mar-keting programs at their own discretion.

What roles will each channel fulfill, and what levels of support will berequired? When every channel has its own P&L, creative managers will

seek to manage their channels’ revenues andcosts to the best eƒfect. But certain channelroles will need to be prescribed. A managerseeking to make branches profitable bycharging for individual transactions, forexample, should not charge (at least directly)high-value customers who use branches as aconvenience. “Fee for service” arrangements

for channels, segments, and products are needed. Without clearly definedcross-channel roles, channels might withdraw service from some customers ofstrategic value to the bank (for instance, those who have high projected



Two drawbacks of a competingchannels structure are

duplication in infrastructureand the failure fully to leverage

customer information

lifetime value even though their current profitability is low), or fall intodestructive competition with other channels.

Who determines minimum service levels? Customer segment managershave traditionally been the conscience of the bank, ensuring that line busi-nesses deliver on their promises. Under managed competition, they are morethan a conscience: they are P&L owners directly responsible for decidingwhich products and services are oƒfered to customers and making necessarycost and service tradeoƒfs to retain their most attractive customers. The man-agers of product-based channels are free to craƒt value propositions to maketheir oƒferings competitive both internally and externally. The manager of achannel that is used as a convenience by separately managed customer seg-ments – an ATM by an aƒfluent customer, for example – should be compen-sated for providing the service. Minimum cross-channel service levels arecentral to multichannel management, and must be defined explicitly.

What infrastructure investments are required? As we saw, two drawbacks ofa competing channels structure are duplication in infrastructure and the failurefully to leverage customer information. It is the CEO who must decide whereto spend on infrastructure to ensure that overall capacity is adequate and thatgrowth options are realized. Universal banks clearly need to invest in providingonline services to customers, for example. But very few standalone businessunits would build these services for themselves, because they require heavyinvestment and produce poor economic returns. The decision to commitresources to such services must be based on their strategic importance.

Which channels have the right to revise the institution’s umbrella brandimage, and to what degree? It would probably be unwise to allow branchmanagers to alter a bank’s brand for their traditional channels: control ofthe brand might be lost, or multiple modifications might dilute the brandimage. However, a co-brand or sub-brand might be appropriate for, say,branches that specialize in the sale of investment products, or supermarketbranches that carry a restricted product range. The same principle appliesto electronic channels.

In general, when channels are tightly coordinated, the brand should be usedin a uniform way; when they are competing with one another, they shouldhave some latitude to modify the brand.

Wells Fargo’s supermarket distribution employs the same brand as its core channel, reinforcing the company’s strategy of providing multiple points of access to a standard array of products that require little advice. The Toronto-Dominion Bank of Canada’s telephone banking, on the otherhand, uses a diƒferent brand from its core branch network, and the twochannels have attracted very diƒferent types of customer.



Where do you place top talent, and how do you reward them? Under amanaged competition approach where each business has its own P&L, thecompensation of individual managers is tied to the attainment of specificprofit and growth objectives.

Competition for high-performing managers will be both internal and external.Although managers lower in the organization should be free to try to attractthe best talent, staƒfing decisions for the top 15 to 30 positions in the organi-zation need to be made by the CEO. The success of managed competitiondepends largely on the abilities of the channel leaders – not just the currentones, but the next generation too. Populating these ranks with “promotable”leaders is critical to realizing the potential of the current network andcapitalizing on future opportunities: witness former PepsiCo CEO WayneCalloway’s role in shaping the careers of the company’s top 200 or somanagers, ensuring that waves of leaders with crossfunctional experiencewere being groomed for the future.

A managed competition approach can be appropriate for any bank pursuinga relationship-oriented strategy aimed at deep penetration of target customersegments, such as the aƒfluent. Paradoxically, perhaps the most compellingreason to adopt this model is the decisions the bank’s top managers don’thave to make. The managed competition model oƒfers banks a way of keepingtheir options open: they do not have to commit themselves immediately to the challenges of a competitive model even if that is their ultimate objective.Neither need they prescribe individual channel conduct (other than throughthe rules of the road), as they would have to if they adopted a coordinatedmodel. The “marketplace” aspects of managed competition determine mostelements of channel conduct.

Banks are far more complex institutions than they were ten or even fiveyears ago. They sell more types of product and deliver them through moretypes of channel. In the process, they have outgrown their traditionalbranch-centered approach to bank management. Managed competitionoƒfers them a solution. Instead of simply adding incremental channelcapacity and hoping for improved performance, banks pursuing this strategyhave the opportunity to realize the full potential of the multichannelcapability they have built.



CHANNEL CONFLICT: WHEN IS IT DANGEROUS?

“While it is clear that some channel conflict can be devastating,many manufacturers have a hard time figuring out exactlywhich conflicts will pose a threat. We believe the key to spottingdangers ahead lies in answering four simple questions:

First, are the channels really attempting to serve the sameend users? What may look like a conflict is sometimes anopportunity for growth as a new channel reaches a market that was previously unserved. . . .

Second, do channels mistakenly believe they are competingwhen in fact they are benefiting from each other’s actions?New channels sometimes appear to be in conflict with existingones when in reality they are expanding product usage orbuilding brand support. . . .

Third, is the deteriorating profitability of a griping playergenuinely the result of another channel’s encroachment?Poor operations, not conflict, may be the cause of a decline in a channel’s competitiveness. . . .

Fourth, will a channel’s decline necessarily harm amanufacturer’s profits? Channels sometimes deterioratebecause of economic shiƒts and changes in consumerpreferences.”

Christine B. Bucklin, Pamela A. Thomas-Graham, and Elizabeth A. Webster,The McKinsey Quarterly, 1997 Number 3

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