Changing customer preferences demand banks adopt new retailing strategies, says Towers Perrin Consultant; "Banks Are Only Capturing 5-15% of Their Customers' Economic Value".

NEW YORK--(BUSINESS WIRE)--Jan. 24, 1995--Given the changes in customer expectations and the irreversible integration of the financial services industry, U.S. commercial banks must rethink their retailing and customer retention strategies if they are to succeed in the year 2000, said Towers Perrin consultant David M. Partridge in a presentation given to banking executives last Wednesday in Orlando.

"Fundamental shifts toward fee-based revenues, alternative delivery channels, new products, new competition for marketshare -- particularly from nonbanks -- and changing customer preferences are making old retailing strategies obsolete," he said. "Under these outdated strategies, banks are only capturing 5-15% of every customer's potential economic worth, which clearly leaves great room for dramatic improvement."

Partridge's remarks were delivered in a speech, titled "From Retail Banking to Bank-Based Financial Services Retailing: 1995-2000," at the Tandem Finance Industry Forum. He cited several underlying trends transforming retail banking and noted that banks that adopt a "business as usual" stance in the face of these changes are not likely to remain viable.

"Faced with tighter profit margins from these new marketplace challenges, most institutions have undergone cost reduction and reengineering initiatives," Partridge said. "But while many may have achieved impressive results in the short run, most will not be able to sustain them. Profits will be squeezed even tighter as the decade closes. Banks simply cannot continue to cut staff or other costs without fundamentally repositioning their core business strategies."

Partridge also noted that the marketplace has influenced how institutions organize the retail function internally. Retail banking has separated into three distinct, business groups: 1) branch delivery-based financial services retailing, 2) product specific retailing, and 3) portfolio management.

Unfortunately, as Partridge pointed out, this development poses further challenges for banks. "Because each business line is managed differently to achieve optimum performance, there are new inherent inter-business conflict of interest issues which banks must address and alleviate."

Partridge outlined three emerging models financial institutions are using to respond to the changing environment:

o Relationship Retailer Model. These institutions aim to build customer loyalty through relationship-building and life-event retailing strategies. They offer credit, investment and risk management products through a variety of delivery channels, and they emphasize tailoring products and their distribution to meet the specific needs of targeted customer segments. While many institutions aspire to follow this model and achieve the 2.8-3.0 cross-sell ratios that some institutions realize, most banks and thrifts fail to understand the extent of organizational change necessary to implement it successfully.

o Product Push Model. Institutions in this category follow a traditional approach to the retail banking business. They offer very narrow product lines via equally narrow delivery options. They also pay more attention to reducing costs and increasing the number of customers than raising product cross-sell ratios to existing customers.

o Portfolio Funding Model. Banks in this category only offer basic credit products, CDs and FDIC-insured money market accounts through the bank's traditional branch network as a means of funding the bank's asset portfolio. Large banks thus positioned may not achieve the institutional loyalty evidenced with true relationship retailers or community banks, but selected price leadership and low cost delivery can be sources of competitive advantage for them.

"Regardless of which model a bank follows, future financial services retailing success depends on aligning the business with an explicitly formulated, viable business model," said Partridge. "Retailers need to know who their customers are, how they want products delivered and when they want them. Towers Perrin's experience is that customers don't want to do their banking in the branch lobby, but where they work, shop and live."

Towers Perrin is an international firm of management consultants with a staff of approximately 5,000 in more than 70 offices. The firm currently serves almost 600 financial institutions on five continents, including 50 of the Fortune-ranked commercial banks and a significant number of the top-ranked diversified financial and savings institutions. The firm's general management consulting services group has a specialized practice in the banking and finance industries.

CONTACT: Bliss, Gouverneur & Associates

Jacqueline M. Ruegger, 212/840-1661