Channels Y - Retail Banking Academy · Y 83 Retail Banking Academy, 2014 RET RE TA IL BANKIN ACADEM...

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RETAIL BANKINGACADEMYCourse Code 104 - Channels

104.Channels

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83© Retail Banking Academy, 2014

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Course Code 104Channels

Introduction

A bank channel is defined as “a contact point between the customer and the bank.”* Channels have two essential dimensions – the point of contact with the bank and the media by which the communication is made. For example, the bank branch is a point of contact and the media (i.e., mode of communication) may take various forms from face-to-face contact, to internet, mobile, telephone, SMS, email and video conferencing.

In the current retail banking environment, channel choices extend over a wide range that includes the traditional example of bank branch, call centre, Automated Teller Machines (ATM) and internet to the relatively recent (alternative) channels such as smartphones, mobile internet/media devices, SMS/text messaging, social media, web chat and video interactions. There is a dramatic rise in the use of alternative channels. For example, a Lafferty report shows an exponential growth in online customer-bank interactions and a concomitant exponential decline in (branch) teller interactions.

The trend continues even today. Here is a report from Lafferty Retail Banking Insights (January 2013) that makes the point.

Lloyds Banking Group says that in the last week of December it passed the milestone of one billion internet banking log-ons across Lloyds TSB, Bank of Scotland, and Halifax in 2012, with an average of more than three million customers logging on a day.

The group has seen its active internet banking customers increase by 1.1 million in the past year to 9.3 million and has grown the number of mobile banking users to three million since the service launched a year ago; a third of internet banking log-ons are made via a mobile device.

Ashley Machin, Managing Director of Group Digital at Lloyds Banking Group, said, “Reaching one billion internet banking log-ons is a major milestone for Lloyds, and demonstrates that UK consumers are living more and more of their lives through technology and the application of it, including their banking.”

* Neslin, Grewal et al, 2006; Pieterson, Teerling et al, 2007.

Course Code 104 - Channels

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In addition, retail banks are investing heavily in apps for smartphones and digital tablets that create enhanced banking convenience for customers. It is agreed that banking apps provide superior customer experience in the mobile channel.

Open Question #1

Is the importance of a bank branch as a primary bank channel reduced by the emergence of alternative channels?

On the other hand, retail banks are giving customers choice and convenience through traditional channels. For example, a recent report from Lafferty Retail Banking Insights revealed:

Barclays has announced that its personal customers will be able to bank at post offices in Scotland and Northern Ireland with immediate effect.

Barclays already offers banking services through more than 10,000 post offices in England and Wales and the extension to the agreement will allow Barclays personal customers access to bank in Post Office branches in Scotland and Northern Ireland.

Brendan Hastings, Area Network Director for Barclays in Scotland and Northern Ireland said, “Barclays is focused on making lives much easier for customers by offering a broader choice of how, where and when they can manage their money. By providing banking services at the Post Office, we can offer personal customers in Scotland and Northern Ireland more choice and convenience, especially to those who wish to do their banking face-to-face.”

Nick Kennett, Director of Financial Services at the Post Office, said; “We welcome Barclays decision to extend banking to Scotland and Northern Ireland. This is an important move which will allow thousands of customers to access their accounts through the Post Office. From Spring 2013, 95 percent of all UK debit cardholders will have access to their money at Post Office counters.

Here are some questions that emerge from the previous discussion:

a) Can alternative channels (e.g., mobility) and traditional channels (e.g., branches) co-exist and serve different roles?

b) When do customers prefer face-to-face interaction with a bank employee?

c) When do customers prefer alternative channels?

d) How do customers choose a channel to do business with a retail bank?

The questions and suggested answers will be fully discussed in this module

The rest of this module is organised as follows: Chapter 1 is a historical account of the development of traditional (and even primitive) retail banking channels leading to the emergence of alternative channels that closely reflect the ongoing technological revolution in mobility. Chapter 2 analyses the decision process that customers conduct in order to make a channel choice. The more advanced issues such as multichannel management are discussed in a Retail Banking III module titled, Operational Excellence. We conclude with Chapter 3, which deals with selected recent findings in the Retail Banking literature on bank channels.

This module concludes with a summary and review questions.


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Chapter 1: A Historical Evolution of the Bank Branch

This chapter provides a historical account of the evolution of bank channels that was written by Peter Soraparu* and that comprised a foreword to a Lafferty management report titled Bank Branch of the Future.

Since their earliest iterations, banks have had offices from which they served their customers. Most banks, especially larger ones involved with commercial customers, found that they needed more than one office, often following their customers down literal and figurative business paths.

The essence of banking – accepting deposits and facilitating commerce, usually by lending money to creditworthy borrowers – determined the types, numbers and locations of bank offices. Offices beyond the principal locations of banks became known as branches, and those branches served as commercial satellites of the main office hub.

As population centres of various industrialising countries began to shift in the late 19th Century, with people moving from rural settings to urban sites, banks began to alter their physical delivery strategies as well. Banks in cities such as London, Paris, Amsterdam, New York and Boston were opening multiple branches in middle- and upper-class neighbourhoods in addition to their offices in the commercial town centres in an effort to attract the personal deposits of people who had more advanced financial needs than just exchanging cash for goods and services. Paper drafts or cheques drawn on accounts at those banks were being accepted as payments by some merchants, and some banks even began advancing small credit facilities to individuals.

All of these transactions and interactions between banks and personal customers were done face -to-face, and most often they were completed in a bank office that was constructed according to the bank architectural norm of the time – large lobbies with lots of pillars, marble, brass and wrought iron, and usually with an impressive vault somewhere in plain view on the main floor. The banks’ availability to their customers was always limited, with offices opening mid-morning and closing by 3pm at the latest. Banks sometimes extended opening hours one evening each week until 6pm, but most often if a customer needed to speak to his banker, it had to take place during normal working hours.

* Senior executive vice president and head of the Relationship Banking Division (retail banking, commercial banking and SME banking) at American Trust & Savings Bank in Dubuque, Iowa USA. This foreword was written in May 2012.


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Serving the ‘small man’

The most experienced bankers would not bother with personal (soon to become known as ‘retail’) banking customers. They devoted themselves to their commercial and corporate customers, making sure that their growing needs were met in rapidly expanding industrial-based economies.

Of course, they were beginning to understand that most of the business they did with their new retail customers, even when those customers might be operating a small business or shop of their own, was accepting deposits. Retail customers were usually seeking safety for their hard-earned money and did not expect significant returns on deposited funds. Banks could then lever those retail deposits into commercial loans on which they were charging whatever interest rates the borrowing market would bear.

So retail customers were usually shunted off to the side or the rear of the office, certainly kept away from the main view of the commercial bankers and their very important customers. There were a few banks that began to embrace a new way of thinking about retail banking customers, though, and created a more welcoming atmosphere, both in location and design.

But most banks in population centres in the early 20th Century really did not care what their retail banking customers were thinking. They were for the most part content to let post offices, building societies, savings associations or cooperatives handle the mass market. Their physical delivery remained embodied in imposing structures that did not invite interaction.

In fact, in England, the number of bank branches had increased significantly through the 1920s, as had the market penetration of banking offices. England had the largest bank in the world at the time (Midland Bank). There was still a fair degree of popular concern over whether English banks were indeed serving the financial needs of what was referred to as ‘the small man’ – the British periodical, The Economist, said in its 19 October 1929 issue (just 10 days before the Wall Street Crash) that there was much truth in the observation that ‘the small man, living in the provinces, is neglected’.

Retail becomes core business

Economic depression in the early 1930s brought both failures and consolidation to the global banking industry, and in some ways slowed progress on the growth of the physical distribution channels of banks. But banking reforms applied new focus to retail-banking models, most notably the enactment in the United States in 1934 of the Glass-Steagall Act, which prevented commercial-banking organisations from engaging in investment-banking activities.

That meant that banks were forced to concentrate on ‘core’ banking business, and whether commercial banks liked it or not, retail banking was slowly becoming a core business in the United States.

One of the reasons for that was another outgrowth of post-depression banking reform in 1934, the establishment of the Federal Deposit Insurance Corporation. Deposits were first insured for up to US$2,500 (temporarily as of 1 January 1934); the insured deposit limit was formally increased to $5,000 on 1 July 1934. After nearly 6,000 banks and thrifts had failed the year before, effectively wiping out the savings of millions of people, it was important to instil new confidence in the banking system for ‘regular’ customers. To date, no FDIC-insured depositor has ever sustained a loss in connection with a bank failure within the limits of the stated coverage (now $250,000 per ownership category).

By the mid-1930s, the largest bank branch network in the United States belonged to the Bank of Italy, which became Bank of America in 1930 and had more than 300 branches throughout California. The Bank of Italy had started its business in San Francisco in 1904 when its founder, Amadeo Giannini, decided to form a bank to serve immigrants and other regular customers that he believed were being neglected by larger commercial banks. This approach gave the organisation a reputation for bucking the banking norms of the time.

In the 1950s, the banking industry was going through an interesting and paradoxical period – the total number of banks was decreasing, while the number of banking offices was increasing at a meteoric rate.


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Most of that expansion took place in large markets, but some local banks in smaller markets followed suit. The increasing choice that financial consumers were seeking was beginning to appear in the banking channel, but not as completely as it might have. As usual, alternative providers stepped in to fill the void.

Rise of the Post Office

Even as some banks began to expand their efforts to allow their customers to bank using the local mail system, some local mail systems were expanding their reach into financial services. The rise in numbers of post offices was even more impressive than the growth in number of banks in some countries – there was a post office in every town, and they all shared the same common, very recognisable, brand. In the UK, the Post Office Savings Bank offered small savings accounts through its branches that ‘common’ people throughout the country accessed. It offered a way for the government to re-fund itself on a regular basis, and it was willing to pay a decent return to its postal patrons for saving with their local post office. Through to today, the Post Office Savings Bank delivers a convenient form of basic banking.

In the Netherlands too, post offices expanded the availability of banking services throughout the country, although the outcome was slightly different. The National Postal Savings Bank (NPSB) was a significant retail banking presence for the Dutch, and it prospered for the better part of 100 years. It was in the latter part of the 20th Century that the government privatised the NPSB, and, through a series of mergers and acquisitions, it formed the retail foundation of ING.

In Asia, there are several post office banks that boast a long legacy and that are still thriving today:

• Japan Post Bank has been that country’s de facto retail banking leader; it became the world’s largest savings bank

• China Post spawned the Postal Savings Bank of China, and for all the talk about foreign investment in that nation’s banking system as its economy opened, the Postal Savings Bank remains the largest retail depository in China

• Korea Post has a dual identity, serving its own retail-banking customers’ financial needs and also accepting deposits for some of that country’s banks, making its post offices in effect additional branches for those banks

Post office banking has served a vital role of filling out the physical delivery channel for retail-banking customers in many parts of the world, and has proved that a local presence is indeed an attraction for those customers.

If an analogy to all politics being local can be made to the banking business, then banks (and large banks especially) must understand that the ways they deliver services to their retail banking customers must become personal and local. But what exactly are those customers seeking from their banks, and how do they rate the various channels that banks offer?

It is illustrative to assess the attitudes of today’s retail banking customers to the different channels that are available to them. How do they like the array of channels on offer?

It may be somewhat surprising to see that bank branches still retain a high degree of satisfaction among retail banking customers in 2011, even among the relatively more immediate channels that are accessible. That high satisfaction rating should demonstrate to banks that they must continue to deploy a physical channel that allows customers to interact directly with bank staff.

Branch banking takes hold

As has been discussed, in the mid-20th Century, banks were truly appreciating the value of retail deposits, and a new wave of growth and competition among retail banking providers was underway.


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In the US alone, the number of new bank branches nearly quadrupled between 1950 and 1970, providing a much greater degree of local convenience. In developed economies around the world, the population was far more mobile. This made delivering local convenience more challenging for banks, as the very definition of ‘local’ was changing, making it difficult to manage. Shifting cultural characteristics influenced behavioural changes among retail banking customers. Consumers had choices, sometimes for the first time, between national or global providers of goods and services and long-favoured local providers.

One of the more interesting, and more dynamic, industries during this period was the fast-food restaurant category. McDonald’s was a pioneer in the ‘fast food’ restaurant industry, especially when it came to counter delivery. Although it was recently surpassed by Subway in terms of having the most outlets across the world, McDonald’s has done an excellent job of maintaining the consistency in channel delivery that set it apart early on from its competitors.

Are retail banking customers similar to fast-food restaurant customers? Is consistency in food delivery more or less important than consistency in financial solutions delivery? If there are lessons to be learnt from the fast-food restaurant success of McDonald’s, perhaps consistency is the key – but not only in channel delivery, also in the consistency of the solutions delivered. The basic elements of the McDonald’s menu have not changed much over the years, and the customer experience is relatively the same no matter where in the world a customer might visit a McDonald’s restaurant. How many retail banks can say that, either about their solutions or the stability of their customer experience?

The early 1980s really were the years during which retailers began spreading their financial services wings. In France, Carrefour introduced a payment card in 1981 and began offering insurance services in 1984, and in the US both Sears and JC Penney were offering current accounts in their stores (through banking subsidiaries) by 1985.

In Western markets, as banks continued their expansive efforts, they were beginning to seek more meaningful differentiation through their physical locations. However, as banks built impressive artifices to serve their customers, it did not always translate into better delivery channels.

Banks were faced with the challenge of catching up, and finding new answers.

The alternative channels arrive

By the middle and late 1960s, banks had mostly exhausted the potential uses of their physical channel. What they did not realise is that the solution was on the desk in front of them. Putting the telephone to work was a good idea, but it became an even better idea when the transfer of larger amounts of data over telephone lines became possible. And when the growing use of computing power at banks became part of the mix, the enhanced technologies enabled banks to calculate workable solutions.

One of the earliest of those new technology solutions was the automated teller machine (ATM). One of the reasons for the development of the ATM was its potential to replace the rows of human tellers in bank lobbies. The success that banks enjoyed with their deployment of the new ATM technology lasted for several years, and in some quarters the question arose whether ATMs might even replace the physical channel that banks had employed for so long: branch offices themselves.

They discovered that the best use of ATMs might not be to replace tellers. Rather, banks determined that off-siting of ATMs was an extremely efficient way to extend their physical channel delivery through effective integration of a new electronic channel. This was especially true in those markets that limited the growth of bank offices. Younger and more open-minded customers were the first to embrace fully the banks’ new delivery system, but the ease of use offered by the machines attracted customers from all demographic segments.

Many people were initially reluctant to share information with a machine, and banks mounted


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promotional campaigns to persuade sceptics that ATMs were safe, and effective. But within 10 years of the first ATM installations, the machines had gained significant traction in the banking industry and among retail banking customers, and global deployment of ATMs advanced into the hundreds of thousands.

As banks were determining the proper mix of delivery channels, technology investments and approaches to customer interaction, customers were realising that there were expanding options for managing their personal information needs. In many ways, life was becoming more convenient than ever with the simple applications of new technologies such as personal entertainment and personal computing, which led on to personal banking.

The branch today

After all of these years of evolution, where is the bank branch today, and where is it heading in the future?

Let us first examine how today’s retail bank branches are adding to the profitability of their organisations and the financial lives of their customers.

Most of today’s retail banks around the world have embarked on a rationalisation effort around both their individual branch offices and their branch networks. The impressive banking edifices of the past have given way to much more pragmatic designs, becoming extremely utilitarian in their use of space and significantly more customer-friendly in providing access to both human and automated delivery of banking solutions.

Contemporary branch networks are much less likely to be the sprawling, countrywide expanses that they were in the 1990s; rather, they are much more likely to be a collection of strategically sited sales and service centres that are formulated to bring the latest and greatest array of financial services to a much broader area than they have in years past.

Banks have attempted unique branch designs, even in times of retrenchment and expansion, but the final arbiters of the success of those designs have been their customers. In-store deployments, most often in food retailers, have placed bank branches in and around customers and prospects who are engaged in non-banking activities.

Two recent models appeared in the northwest United States during the past decade – one by the large (now-failed) thrift Washington Mutual (WaMu) and the other by the burgeoning regional banking powerhouse, Umpqua Bank. WaMu’s offering was called the ’Occasio’ branch and featured an interior design that eliminated traditional teller windows; instead, all platform banker desks had cash drawers to serve transactional customer needs, and the cross-trained staff rotated to greet customers as they entered the branch and met any financial need they might have.

Umpqua’s entry into the branch sweepstakes is a coffee house look, relegating teller windows and banker desks to the rear of the one-storey space. The focus is a sleek seating area that could easily be confused with a stylish flat, offering free internet access, tea and coffee and encouraging customers and non-customers alike to relax, perhaps read a book and contemplate the bank’s financial and non-financial offerings. In the evening, the space becomes a neighbourhood gathering spot, showing films and booking guest speakers.

Not every bank has either the capacity or the customer base to support Umpqua’s enigmatic (and successful) approach. Branches are being built or retrofitted with smaller footprints and fewer staff. Integrating technology with efficiency, retail banks are aiming to manage expenses better while still meeting customer needs.

But will this approach work?


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The branch of tomorrow

The answer to the emergent new modelling of retail bank branches lies both figuratively and literally in the hands of retail banking customers. For in those hands are, increasingly, the powerful and efficient microcomputing devices that are called smartphones. The computing prowess of these smartphones will shape the future of retail banking branches.

Retail banking has often been able to concurrently fly ahead of the available technology of the day and also struggle to achieve the most basic delivery of products and services. Home banking was heralded as a replacement for branch banking during the late 1980s, when personal computer penetration rates among the banking public hovered around five percent; during that same period, banks routinely received customer satisfaction scores that sometimes dipped to those same relative levels.

Flash forward a generation, and mobile banking has had more than its share of the financial services buzz in the first decade of the 21st Century, but in the last three years, lift off has indeed occurred. The traction for mobile financial technology has emerged much more quickly than it did for the previous hot technological advance – online banking via the PC.

Having said that, it would be illogical to think that all bank branches will be displaced by mobile devices over the next several years. After all, there will still be some need for limited cash transactions and a more significant need for face-to-face advisory and interactive services for consumers and small businesses in convenient locations… does that sound familiar?

Tomorrow’s bank branches will be smaller versions of today’s principal delivery vehicles; the 500 square metre offices will likely shrink to 100 square metres, and laptops will become mobile phones. Plastic cards will become chips embedded in those phones, and bank notes will become radio waves. It may sound like science fiction, but banks must begin plotting their technology migration strategies today to succeed in the future retail banking environment.

Take the case of ICICI bank of India as reported in Visible Banking in December 2012.

104.1: ICICI Bank embracing new technology


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The bank’s strategy revolves around engaging customers with the brand at their convenience.

ICICI Bank is always among the first banks to explore new technology strategies, maintaining its competitive edge. In 2012 the bank announced the creation of a Facebook application that allows customers to view their bank statements on Facebook.

Facebook has over 65 million active users in India, making it a great way to get customers engaged. Facebook gives ICICI Bank another channel to interact in real conversation with prospective customers and fans. The objective is to attract younger customers to the brand.

ICICI Bank has also established a presence on Twitter, creating a way to listen to its customers.

NS Kannan, ICICI’s CFO, states that the bank launched a unique application that allows registered users to check account details on social media. They have built a 950,000-strong Facebook community within 10 months.

The bank also has a YouTube channel for advertisements, interviews, product videos, and a chance to share all these with one another. The channel acquired more than 100,000 views in less than a year and has shared information to other social media platforms.

By using social media as listening posts, the bank builds relationships with its customers. According to Kannan, the bank has improved customer satisfaction and increased positive brand perception through social media.

Key Stats

• Facebook has over 65 million active users in India

• In 10 months, ICICI bank built a 950,000-strong Facebook community

• The bank’s YouTube channel has acquired over 100,000 views in less than a year

At the same time, bank branches are going through a thorough facelift from imposing Roman marble columns to becoming welcoming centres of social activities that include, of course, banking.

As reported in the Economist (19 May 2012): “In the middle of Paris, the ornate iron and glass doors of BNP Paribas’s flagship ‘concept store’ look out directly onto the Opéra. Away from the chandeliers and down a carpeted corridor you will find bright red, green and yellow beanbags, more white benches with iPads and rooms with couches and flat-screen televisions.

“Here we are in the lounge,” says Nathalie Martin-Sanchez, who oversaw the creation of the branch. “The customer can see an adviser while having a coffee…it is designed to encourage more proximity, more interaction, more personal contact.”

This is a laboratory where the bank can test ideas such as getting customers and their financial advisers to sit side by side or letting customers speak to specialists on a video link.”

Here is an example of a bank branch with a design for the future: Capitec in South Africa.


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104.2: Bank branch with a design for the future

Online banks, meanwhile, are trying to build a physical infrastructure to supplement their online offering. The new, bright orange ING Direct Café near San Francisco’s Union Square serves coffee from Peet’s, a speciality Californian coffee roaster, and freshly made snacks at reasonable prices. But as well as asking how you want your latte, the baristas also inquire politely if you would like to talk about money or open a savings account. To reinforce the sense that this is not a bank, there is a rule against transactions. If you try to deposit a cheque, you will be given an envelope to post it to a processing centre.

We now consider an important question in bank channel management – how do customers choose a bank channel? This is the focus of Chapter 2.


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Chapter 2: Customer Channel Choice

To get a full understanding of this important consumer choice, we first present a discussion on the two main categories of customer-bank interactions. The first category comprises a vast array of transactions such as making payments, making deposits or withdrawals and checking account balance. These are high-volume activities for the retail bank and more cost effective if done outside of the bank branch. They do not require face-to-face contact for successful completion.

These are channels which are ‘self-service dominant’

The second category of customer-bank interactions involves face-to-face customer-bank contact. The customer requires advice because of information ambiguity or where the transaction might involve a large amount of money. Examples of such customer-bank interactions are mortgage applications, investment portfolio advice and private banking transactions.

The bank branch is a solution for this type of transaction

To get an understanding of the role of the bank branch within the bank’s portfolio of channels, we seek an understanding from communications theory. There it is stated that when consumers face information risk, they seek advice and comfort of a second (professional) opinion.

What is meant by information risk and what gives rise to information risk?

There are two sources of information risk that are relevant in retail banking channel choice. The first is called information uncertainty and the second is called information ambiguity. We discuss these concepts in some detail.

Information Uncertainty

Information uncertainty is present when an individual knows how to carry out a service, but does not have sufficient data to do so. In other words, information uncertainty refers to the problem caused when customers believe that they do not have enough information about the banking product they wish to purchase. For example, they might understand a core savings product and how to purchase it. They may even have enough information about this core product. In this case there is no information uncertainty.


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But when additional attributes are added to the core product as banks typically do to create a differentiated set of product choices, there could be confusion. For example, some savings will pay a higher rate if there is no withdrawal benefit; some will pay a lower rate for limited withdrawals etc. When all the conditions are contemplated by the customer, there could be perceived purchasing risk. It is for this reason, simplicity is important for consumer choice. What does the consumer do in the face of information uncertainty?

The customer wants to avoid the risk of making an incorrect choice of the bank’s products and services. The customer looks to its selected mode of interaction with the bank for help in reducing this risk. Today, there are many channels through which a customer can interact with the bank. These include the traditional bank branch, call centre, internet, mobile etc. Which of these is most likely to resolve information uncertainty?

An answer is provided by Daft and Lengel (1986)* who advised that communications channels that permit the exchange of accurate and objective data will lead to uncertainty reduction.

Importantly, this does not necessarily mean that the consumer needs to visit the bank branch and interact with bank staff.

Indeed, the internet may be an adequate source of additional information to reduce the consumer’s level of information uncertainty. This is an important point that makes the bank’s website an important source of information that may enable the customer to reduce information uncertainty. Or else, the customer may seek this information from the bank branch or call centre and thereby create higher average costs for the bank.

It is important to note that the layout of an effective website to help reduce information uncertainty must consider the following key points: The website must:

• promote the bank brand

• provide easy access to information

• provide an aesthetically pleasing environment for the user

• permit the user to provide comment to the bank

We now consider the second dimension of information risk – ambiguity.

Information Ambiguity

There is another dimension of information risk that is not necessarily resolved by access to more information. It is called information ambiguity. More information would surely reduce information uncertainty but does not necessarily lead to more clarity.

Rather than having more information, the customer requires clarification, enhanced understanding, feedback and dialogue. Information ambiguity is also called equivocality. Or doubt. Information ambiguity arises from language that the customer finds difficult to understand (e.g., legalistic or jargonistic) or contract forms and promotion brochures that are overly long and full of exceptions or alternative offers that are differentiated only slightly.

So information risk is derived from two sources – information uncertainty and information ambiguity. This is illustrated as follows:

* R. L. Daft and R. H. Lengel, “Information Richness: A new approach to managerial behavior and organisational design”. In B.M. Straw and L. L. Cunnings (Eds.), Research in Organisational Behaviour, (Greenwich, JAI Press, 1984)


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InformationUncertainty

InformationRisk

InformationAmbiguity

104.3: Sources of information risk

Here is the main conclusion:

If the main information problem facing the customer is derived from the lack of adequate information, then the customer will require a channel that provides a solution – e.g., the internet facilitates information search. But if information ambiguity is the issue facing the customer, then the customer will likely seek face-to-face contact in a channel such as a bank branch. While the internet or social networks may break down walls that prevent the flow of information to all individuals, the bank branch may be the best channel to deal with information ambiguity.

Information Uncertainity

Self-ServiceChannels After

Information Search

Face-to-FaceContact

Self-ServiceChannels

Call Centre

High

HighLow

Low

Information Ambiguity

104.4: Information ambiguity

This diagram implies that the demand for personal interaction and hence choice of channel, increases with product complexity (a main source of information ambiguity). For example:


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Savings

Personal Loans

MortgagesDemand for Personal Contact

Product Complexity

104.5: Influence of product complexity on demand for personal contact

There is some research suggesting that face-to-face communication is a natural way of communication among people.* Other research shows that social and cultural background influence channel (communication) choice.†

Open Question #2

What lesson can you derive from the research finding that ‘‘social and cultural background influence channel (communication) choice’’?

Open Question #3

“The branch is becoming the natural place where all retail banking technologies converge and the way banks intend to make the branch the centre of high-value advisory relationships.”

Do you agree?

* This is called the ‘media naturalness theory’; refer to N. Kock, “Media richness or media naturalness? The evolution of our biological communication apparatus and its influence on our behaviour toward e-communication tools”. IEEE Transactions on Professional Communication, 48(2), 117-130, (2005).

† Ojelanki K. Ngwenyama and Allen S. Lee, “Communication richness in electronic mail: Critical social theory and the contextuality of meaning”. MIS Quarterly, 21(2), 145-167, (1997).


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Chapter 3: Recent Findings on Retail Banking Channels

We conclude this module by listing and discussing some recent results found in the retail banking literature that have relevance for bank channels. We summarise each finding and illustrate its relevance to channels in retail banking.

• “Customers may move from one channel to another at the different stages of a single transaction,” (Steinfield et al, 2002).* Such inter-channel movements are more likely to happen in the case of a complex product or service. The stages of the interaction are pre-purchase, purchase, and post-purchase.

Comment

This implies that banks must seek to integrate all channels and make all information on banking offers readily available at all contact points. A silo structure of bank channels will not permit this seamless movement of customers across channels. It suggests that retail banks adopt a multichannel strategy; defined as “the effective and efficient deployment of channels for the communication, interaction, transaction with and/or distribution of products/services to the client in order to deliver value to customers”. (Teerling, 2007)

A full discussion of the issues involved in multichannel management is presented in Retail Banking III in the module titled, Operational Excellence.

• The product-channel selection is viewed by the customer at the purchase stage as the most risky, since this is where negative consequences can arise from wrong choice. This means that the product choice is more important at the purchase stage than the channel choice. This is a reflection of the concept of ‘loss aversion’ where consumers view the regret of a loss more severely than the pleasure of a similar gain. (Tyversky and Kahneman,1981)†

* C. Steinfield, H. Bouwman and T. Adelaar, “The dynamics of click-and-mortar electronic commerce”, Int. Journal of Electronic Commerce, 7, 1, pp. 93-119, (2002).

† A. Tversky and D. Kahneman, “The Framing of Decisions and the Psychology of Choice”, Science, 211 (4481), 453–458, (1981).


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Comment

This means that channel choice in the pre-purchase stage requires that consumers feel secure and comfortable about using alternative channels since this is where channel choice regret may occur the most. Not surprisingly, the drivers of alternative channel choice include affective variables – i.e., variables that reflect consumer emotions and personal feelings that may arise from previous experiences. This may justify the observation that consumers tend to gather relevant information from the internet channel and conclude the transaction in the branch. This may be true for new customers and even for pure transactions that do not require face-to-face contacts. It is just a reflection of new customers trying to reduce the risk of wrong choice. As customers experience with the bank is increased over time, they may return to alternative channels to conduct transactions.

So do not be surprised if new customers visit the bank branch even to open an account or to apply for a credit card.

• “When dealing with alternative channels, transaction confirmation is shown to be important to customers – whether by a [text] message or within the [telephone] call itself”, (Peevers et al, 2011)*

Comment

This result shows that the post-purchase stage is important for the development of an ongoing relationship with the customer especially for alternative non-face-to-face channels. This point is noteworthy. Retail banking is a high volume business and it is virtually impossible to create a personal relationship with every customer. Customer interactions in the bank branch may develop into friendly and personal relationships. But for customers using alternative channels, relationship-building is created by quick response to customer emails or SMS, loan applications, account opening etc. A relationship can still be built on ‘friendly’ electronic communication.

• “Bank managers have to realise that good service at the branch is a necessary condition for the promotion of e-banking. They cannot rely on only bank size and reputation to ‘sell’ e-banking.” (Kenneth B Yap, David H Wong, Claire Loh, Randall Bak, 2010)†

Comment

This is interesting in that the bank’s organisational structure of its portfolio of channels matters for effective customer service. This result states that the choice of alternative channels begins with good service delivery at the branch. It is not surprising that many retail banks continue to view the branch as the centre of their portfolio of channels.

* G. Peevers, G. Douglas, D. Marshall and M. A. Jack, “On the role of SMS for transaction confirmation with IVR telephone banking”, International Journal of Bank Marketing, Vol. 29 Iss: 3, pp.206-223, (2011).

† Kenneth B. Yap, David H. Wong, Claire Loh and Randall Bak, “Offline and online banking – where to draw the line when building trust in e-banking?”, International Journal of Bank Marketing, Vol. 28 Iss: 1, pp.27 - 46, (2010).


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104.6: Branch as centre of channels

Banks add channels to their portfolio but never seem to remove any.

Comment

The Retail Banking II module on Product Portfolio Management presents specific actions to rationalise the bank’s portfolio of products. Along with this necessary action by bank executives, a similar approach for the bank’s suite of channels is required. A successful channel strategy is based on certain factors (the 3Cs):

• customer/market reach – able to reach a large segment of the market at all times (24/7)

• cannibalisation – identifying channels that lose customer priority or demand and so are liable for exit

• control – the ability to maintain control to avoid reputational damage

• Ensure that customer data follows the customer across all channels.

The key point for the bank is this:

When adding a new channel, the bank must assure itself that it can still:

• deliver customer service quality across all channels (including the additional channel)

• fully integrate all bank channels to obtain an integrated view of all customers

• provide full access to all employees (especially front line employees) to the same and timely information on all customers

We conclude this module with some review questions and discussion questions that elicit the reader’s knowledge and experience in retail banking.


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Summary

This module began with a historical account of the development of traditional retail banking channels leading to the emergence of alternative channels that closely follow the ongoing technological revolution. We then considered the important question of customer channel choice and its dependence on information ambiguity, a source of information risk. Chapter 3 was comprised of recent findings in the retail banking literature on bank channels. These examples point to the conclusion that, arguably, the most important issue in retail banking is multichannel management. The key point is that banks must seek to integrate all channels, and make all information on bank offers available at all contact points.


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Multiple Choice Questions

1. Which channel will likely be most preferred by customers if they have all the information needed to make a purchasing decision but are highly uncertain about some of the jargon used?

a) Self-service channelb) Bank branchc) Call centred) Bank’s website

2. Which statement is incorrect?

a) Information uncertainty is defined as when an individual knows how to carry out a service, but does not have sufficient data to do sob) Equivocality is defined as ambiguity in how to carry out a servicec) Information ambiguity is defined as uncertainty in how to carry out a serviced) Low levels of information uncertainty require some degree of face-to-face contact

3. Which channel is likely to be where most customer advisory services are conducted?

a) Smart phonesb) Bank websitec) Bank branchd) Call centres

4. Which of the following statements regarding retail banking is incorrect?

a) Over 90 percent of transactions are conducted on digital channels b) As consumers age, their demand for bank branches changes over timec) Location convenience is a key driver of choice of a retail bank by consumersd) The reduction of bank transactions over time shows a decline of the bank branch as a channel

5. Which statement is incorrect? When adding a new channel, the bank must ensure that it can still:

a) Deliver customer service quality across all channels (including the additional channel)b) Fully integrate all bank channels to obtain an integrated view of all customersc) Provide full access especially to back office employees on a timely basisd) Ensure that data travels with the customer as he/she navigates the network of channels

6. Which bank product will likely present the highest level information ambiguity for a typical consumer?

a) Line of Creditb) Mortgage Loansc) Personal Loansd) Current Accounts


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a) Channels have two essential dimensions – the point of contact with the bank and the media by which the communication is madeb) When dealing with a bank branch channel, transaction confirmation is shown to be important to customersc) There is some research which suggests that face-to-face communication is a natural way of communication among people.d) Home banking was heralded as a replacement for branch banking during the late 1980s, when personal computer penetration rates among the banking public hovered around five percent

8. A successful channel strategy is based on the 3Cs. These are:

a) customer/market reach; cannibalisation; controlb) customer/market reach; cannibalisation; conveniencec) customer service quality; customer/market reach; controld) customer service quality; cannibalisation; control

9. To optimally serve customer needs, the bank’s portfolio of channels should accomplish which of the following:

a) deliver customer service quality across all channels b) fully integrate all bank channels to obtain an integrated view of all customersc) provide full access to all employees (especially front line employees) to identical and timely information on all customersd) provide customers with full information on all bank products and services

Choose one of the following:

I: a), b) and c) only II: a) only III: a), b), c) and d)IV: b) and c) only


a) Information uncertainty and information ambiguity are two dimensions of information riskb) Customer channel choice depends in part on customer information risk c) Having all transactions conducted on digital channels is cost effective for banksd) Retail banks aspire to sell products in branches only

Answers:

1 2 3 4 5 6 7 8 9 10

a d c d c b b a III d


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