Opportunities for Action in Financial Services. Activate and Integrate: Optimizing the Value of Online Banking

Transcription

1 Opportunities for Action in Financial Services Activate and Integrate: Optimizing the Value of Online Banking

2 Activate and Integrate: Optimizing the Value of Online Banking It was just a few years ago that the Internet first beckoned to the banking industry, promising the world. The dream was vivid and seductive: the online channel would provide a cost-cutting engine more powerful than bankers had dared ever hope for; it would create new profits by bringing in legions of new customers; it might even develop into a robust new business in itself. But the dream, for many financial institutions, has turned into something of a nightmare. Not only has the online channel proved extremely expensive to develop and operate, it has not enabled significant cost cuts elsewhere. While banks have enrolled some existing customers in their online programs, droves of new ones simply have not appeared. Despite billions spent, the online offerings of most institutions remain unprofitable. Many have started to question whether there is value in the online channel after all. In fact, the value is there. It s just that banks, except for a small minority that are ahead of the curve, have been using the wrong means to extract it. Enrolling customers in online programs is a good start, but it only adds cost if they do not actively use the site. Investing in fancy functionality can be counterproductive, since usability and security are what customers want most. The main drivers of value in the online channel cost reduction, cross-selling opportunities, and higher retention will never be optimized until institutions can significantly increase site usage and effectively coordinate the channel with branches and call centers. The bottom line: banks must activate their online customers and integrate the new channel with traditional

3 ones. This is the winning proposition of the future. Moreover, in doing so, financial institutions can actually reduce their technology expenses by redirecting them toward the 20 percent of online initiatives that bring 80 percent of the value. A Wealth of Opportunity Recent research by The Boston Consulting Group (BCG) involving 30 of the world s largest retail banks each spending an average of $55 million per year on its online channel has revealed some eyeopening facts. Although 15 percent of the typical bank s customer base is enrolled online, only 7 percent of customers are active on the site, logging on at least once a month to check a balance or move money between accounts. A subset of these are highly active users, whom we call transactors. Transactors use the site as their principal banking channel, and, in some markets, such as the United States, pay most of their bills online. Yet these highly profitable users represent only 2 percent of the average bank s customer base. Overall, banks vary widely in the levels of activation they have achieved. (See Exhibit 1.) Although many institutions have compared the current profitability of online and offline customers as distinct groups, only about 10 percent of banks have measured the profitability of individual customers both before and after they have gone online. Banks that have taken this extra step which isolates the effects of the online channel from those of other factors, such as demographics have found that, on average, customers are 26 percent more profitable after going online than they were before. They hold 8 percent more products, have a retention rate 40 percent higher, and cost 9 percent less to serve, mainly because of declining growth in call-center volumes. (See Exhibit 2.)

4 Exhibit 1. Banks Are Performing Very Differently on Activation Online activation (% of enrolled customers) Online enrollment (% of customer base) 6% active online users 9% active online users 14% active online users Participating bank SOURCES: Bank interviews; BCG database. NOTE: Active customers are defined as those using online banking at least once a month. Exhibit 2. The Online Channel Is Making Customers 26 Percent More Profitable Profit per customer (Indexed) Customer profitability (before going online) Newcustomer Pricing changes acquisition Retention increase Crossselling increase Cost-to- serve reduction Fixedcost profit- Customer reduction ability (once online) SOURCES: Bank interviews; BCG casework; BCG analysis. NOTE: Median of the small sample of banks able to adjust for segment bias.

5 Moreover, there is ample evidence that as the number of active, online customers grows at any given institution, so does the profit lift that each customer provides by becoming active online. The reason is that virtuous circles develop. From the bank s viewpoint, a greater number of active customers leads to more feedback, continuing refinements, and better sites; for the customer, more time online leads to greater comfort and more activity which leads to cost reductions and cross-selling for the bank. Broken down into segments, the profitability trends are even more illuminating. BCG research suggests that active customers are roughly a third more profitable after going online and transactors are nearly twice as profitable. The inactive online customer is actually less profitable, because there is an added layer of cost. But scale is the key. There simply aren t enough active users to cover the channel s high operating expenses. Our research indicates that online channels do not usually show a profit until 20 percent of a bank s customer base is active online. At the 40 percent level, we estimate that many leading banks would see a profit increase of more than $100 million annually. A primary goal of financial institutions, therefore, must be getting customers to use the online channel for at least some and ultimately most of their banking transactions. Driving Activation People who are not active online clearly represent the vast majority of banking customers. And they have rational reasons for staying offline. Typical laments include feeling intimidated by the site and uncer-

6 tainty over the value proposition in other words, Why bother? There are also lingering concerns about security and frequent complaints that signing up is complicated and time-consuming. Financial institutions can counter these forces by refocusing investment on improving the site s basic functionality and user-friendliness, and by avoiding costly endeavors that most people neither understand nor value. For example, banks have invested heavily in a host of peripheral projects such as aggregation, with little or no return. The truth is that developing advanced capabilities that appeal to a relative handful of customers creates far less value than strengthening core capabilities and getting people to use them. Indeed, institutions must follow up this redirection of investment by pushing relentlessly to familiarize customers with their sites and by showing people how easy and efficient the online channel is to use. Pricing should encourage migration online (providing staff with at least one quick answer to the Why bother? customer), and registration should be simple. BCG s research suggests that roughly 80 percent of the online channel s potential value can be realized by implementing these initiatives, plus a handful of others such as developing retail and commercial online lending facilities. By concentrating on the basics, banks can cut costs substantially now. Exhibit 3. Banks Must Integrate the Online Channel with Other Channels The Key Is to Manage Handoffs Between Channels Call center Provide multiple, integrated exit points on the site Mail Internet Callback button Telephone number service Find branch service/ arrange appointments ATM Branch Mobile banking SOURCE: BCG analysis.

7 There are, moreover, specific ways to approach these tasks. For example, usability tests can be extremely helpful in evaluating the navigability of your site. When people struggle mightily to execute what may strike you as elementary transactions, take it as a sign that the site needs redesigning. And make the design process user driven customers should be involved at every stage. It is their comprehension, not that of a technology-savvy few, that is important. Above all, keep things as clear and simple as possible. A home page that lists everything a bank does is more overwhelming than helpful. Banks can also stimulate usage by marketing to consumers personally. When customers contact the call center to request a transaction, a representative should mention that the task is easily done on the Web and ask whether the customer would like to be walked through the process or register. Internetequipped road-show kiosks can periodically be placed in branches where staff is available to explain to curious customers how basic transactions are carried out. In promoting online usage, banks need to think in mass-market terms but keep in mind that people come aboard one by one. It is grinding, unglamorous work, but the potential benefits are substantial. The Multichannel Experience: Integrating the Online Offering Achieving high levels of activation will go a long way toward optimizing the value of the online channel. But there is another big piece of the puzzle: integrating the new channel with the rest of the bank. This is critical because nearly all the value of the online channel is realized offline in cross-sales completed in other channels and in cost reductions. It is vital

8 that investments in the online channel be tied to commitments to capture the benefits offline. An actively used online channel should thus serve as a conduit to the branch staff, the call center, and the relationship manager. The focus must be on smooth handoffs because integrated channels working together are far more effective than a group of silolike entities working principally alone. To engender this integration, it helps to formulate paths that people in various customer segments are likely to take among channels. The interactions in each channel can then be fashioned around the paths. For example, a relationship manager needs to think about which channel(s) the customer used before coming to her, and which channel(s) the customer is likely to visit next. Each venue must have entry and exit activities designed to welcome customers and then send them on to still other channels. The goal is a seamless multichannel experience. (See Exhibit 3.) For example, a customer who begins a mortgage application online but quits halfway through should not be abandoned. The next time he talks to the bank, the telephone representative should see the unfinished business on his screen and suggest an appointment with the relationship manager. Through this type of teamwork, one major bank turned nearly 10 percent of online mortgage browsers into offline mortgage buyers. Take another scenario. If a customer receives an e- mail from her bank offering, say, a special rate on home equity loans, the should contain an Internet link to the exact page on the bank s Web site that contains additional information and an applica-

9 tion. The page should also contain a call me back button (to request contact with the call center) and a request appointment button (to schedule a face-toface meeting with the relationship manager). Banks can also learn from online retailers. For example, in the United States, the Lands End Web site is fully integrated with the company s call center, enabling sales representatives to observe consumers browsing, chat with customers online, push certain catalog pages to the screen, and even control a customer s cursor when asked. Shared knowledge of the customer between channels is the key. And banks that effectively meet this challenge will create an environment in which everybody wins: the customers, by being given multiple, linked ways to search out the financial services they need; and the institutions themselves, by being there to deliver those services. Seizing the Moment To begin the process of optimizing the online channel, financial institutions must ask themselves some tough questions: Is our online channel creating value for the whole bank? Do we have a compelling plan to double or triple the number of active customers? Are we committed to delivering cost cuts and cross-sell targets? Many institutions, if they are honest with themselves, may have a trio of negative responses. Fortunately, the game is still relatively young. But banks must do the following: Recognize where the channel creates value across the bank cost reduction, cross-selling, and higher retention and explore where further potential lies.

10 Invest in the 20 percent of online initiatives that create 80 percent of the value, paying particular attention to getting customers active online by making the site more usable. Migrate activities with the greatest, most easily realized cost-saving potential first. These include moving funds between accounts (which previously had to involve the branch staff or call center), and, in some markets, paying bills online. Focus the online channel on driving offline sales by seamlessly linking all channels together. Set targets for online customer transactions, cost reduction, and cross-selling growth. Closely monitor results. Remember the basics: Activate and Integrate. Martin Essayan Carl Rutstein Peter Wetenhall Martin Essayan is a vice president in the London office of The Boston Consulting Group. Carl Rutstein is a vice president in the firm s Chicago office. Peter Wetenhall is a vice president in BCG s Melbourne office. You may contact the authors by at: essayan.martin@bcg.com rutstein.carl@bcg.com wetenhall.peter@bcg.com The Boston Consulting Group, Inc All rights reserved.

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