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MP65147

MAPS IT IN BANKS AND BUILDING SOCIETIES DECEMBER 1997

Overview

Table of Contents

Executive Summary

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EXECUTIVE SUMMARY

In an industry with ageing computer systems and a heavy reliance on a bricks and mortar infrastructure, a significant investment in IT has rapidly become a requirement as a defence to new entrants in an online world. As increasing numbers of non-banks and non-financial services players bring services online, without the financial millstone of a branch network, the banks are being forced to focus on new distribution channels or else risk losing the customer relationship.

A further motivation for the banks extending their distribution channel mix is to improve their margins in the quest for increasing returns on equity. The fact that this is succeeding is highlighted by rising profits being declared by the banks and building societies through the past five years.

Many jobs in financial services have been lost during the 1990s, and a significant proportion of the jobs that remain are part time posts. The number of high street branches has also decreased as institutions have sought to cut costs. Investment in IT has brought about automation of many previously labour intensive tasks, enabling the industry to downsize their workforces and branch distribution chains, whilst investing in new distribution channels.

Competition in the marketplace has become fiercer in recent years and the banks are increasingly concerned about new entrants who are able to ally low-cost distribution with strong customer management skills. The flip side of this oversupply is an increase in the power of the consumer.

The consumer benefits from having access to a wide range of information and products, and the fact that increasing numbers of financial companies are now competing for their custom. The ability of consumers to buy products direct from the supplier rather than through commission earning brokers and advisors has fed through into lower charges and better value products. Alongside this is a more flexible service for customers who are able, via the telephone, to contact suppliers at hours suitable more to themselves than the supplier.

By utilising their IT investment, banks and building societies are able to offer an improved service to their customers along with a wider product choice. Customer Information Systems (CIS) are also being used to enable individual companies to target their customers more effectively.

The number of automated teller machines (ATM) available to the consumer has increased steadily and more people are now using these machines to carry out transactions. The use of PC technology with the ATM has meant that more services can be offered via this medium.

At present banking technology is being led by the telephone. Companies that provide a telephone-based service, such as First Direct, have been very successful and other personal finance providers are finding that the telephone is a popular medium with customers for communicating with their bank.

In time, interactive television will bring with it another medium for conducting financial business via a technology which virtually the whole population are comfortable using.

In the U.S. virtual banking via the Internet is growing and it is likely that this medium will soon be widely available in the UK. Internet banking remains, however, in its infancy and like much of the IT being put to use is still very much supply-led rather than demand-driven. The key to a successful Internet banking service will be strong branding - an area in which traditional suppliers may find themselves facing significant challenges from new entrants already having developed a strong brand in other areas.

Use of IT in all industries will undoubtedly continue in the future, and the successful banks and building societies will be those who utilise their IT most effectively to cut costs, improve service and target customers most effectively. The future of cash is a much-debated subject and, with the use of smart cards, it is likely that we are indeed evolving into a ‘cashless society’, although it may be some time yet before this happens.

Market Assessment believe that on the whole IT in the financial services industry, and in other areas too, will benefit the consumer but there are areas where a significant minority may ‘lose-out’, or at least perceive themselves to be worse off. Such consumers need to be carefully considered by the banks and building societies and marketing to this group should take into account the reservations they may have about the headlong rush into a more technological society.

Exclusive research commissioned by Market Assessment reveals that although consumers generally feel new technology has enabled their bank to supply them with a better service, similar numbers also believe that technological change has more benefits for the bank than for the customer. The danger for the banks and building societies is that consumers will resist new distribution channels if they view them as an economy measure rather than an improvement in the current system of distribution.

Only around one third of respondents said they preferred to carry out banking transactions via machines, highlighting the importance that is still attached to personal contact by many consumers. Those who were happy to use automated systems were the youngest age groups, with preference for this system declining rapidly after the age of 35.

Although telephones, ATMs and PC banking may be faster, cheaper and more efficient, the banks and building societies would be foolish to overlook the importance of personal service. Less than one third of people questioned said they would prefer to carry out all their financial transactions from home, whilst the majority still feel the need to make branch visits.

In fighting-off the competition from new entrants to the industry the traditional banks and building societies seem to start from a strong position with nearly six-out-of-ten respondents saying they would only buy financial products from a specialist financial services company. More of a worry, however, is that most of these people were over the age of 35, whilst the younger age groups seem more likely to respond to non-specialist providers.

Security and regulation remain an issue and is one of the main barriers to advisory services being offered over the telephone and financial services being offered on the Internet on a wider scale. Credit card fraud is on the decline, but many consumers are still wary of giving out information over the telephone or on the Internet. 53 percent of respondents questioned by Market Assessment expressed concern about the security of banking over the telephone.

At the heart of IT and its uses is consumer choice. IT developments are allowing financial institutions to increase the range of options available to customers when deciding how they want to conduct their financial transactions and relationships. Some segments of the population will choose telephone banking, some ATMS or PC banking whilst others may prefer to use the Internet or simply carry on visiting their local branch.

The industry must become much more consumer led rather than driven by IT and products, which may or may not meet consumers needs. The trick will be in allocating resources between each channel that match the preferences being expressed by customers.

Text © 1997 MAPS

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