How Gravity and Flow Explain Winning in Financial Services

Since the turn of the century, the financial services markets and business landscape have undergone radical changes. These changes are driven by several converging market forces. They threaten the dominance of market leaders while providing opportunities for new entrants.

Two fundamental principles from the physical world are central to understanding how financial institutions succeed. This article describes these two physical principles and explains how they apply to financial services companies.

Financial services businesses, like many others, can be divided into two focus areas, the external and the internal. The external component is customer value, the aggregate sum of total value that the business offers its customers. The internal component is operational efficiency.

Gravity Pull: Keeping the Customer on Your Planet

The ultimate objective of all customer-facing businesses is to delight the customer. The process of delighting the customer ought to begin with the very first point of contact. The customer experience must be maximized by providing the precise information the customer seeks in their native language, offering customized products and services, linking seamlessly with partners where necessary, and offering world class customer service.

The goal is to exert a strong gravity pull on customers to prevent them from leaving your planet. The pull of the customer experience must be strong enough to keep the customer engaged with your enterprise. When a business loses this gravity pull on its customers, it loses wallet-share and eventually the entire customer relationship.

The first step toward building a compelling customer experience and value offering is to know your customer. This may be easier for a retail consumer business such as a student-loan service at a college credit union, but it is more difficult for many financial services companies that have a complex and diverse customer base, such as global deposit banking for a large multinational bank.

The typical customer bases of financial institutions differ widely in demographics, wealth levels, legal structures, risk preferences, languages and currencies. Nonetheless, although it is challenging and time-consuming, understanding the goals and product interests of all customers is imperative to deliver a rewarding customer experience.

Customer experience is the collection of all interactions a customer has with an institution, its offerings and its employees, across all customer touchpoints, all geographies and throughout all stages of the customer lifecycle, from initial customer attraction through fulfillment to retention.

Creating gravity pull with a compelling customer experience and value offering is one of the central challenges facing financial services business today. Few have mastered the challenge, but the ones that have are leaders in their markets. For example, by the time Fidelity Investments decided to create an online brokerage, several competitors were well entrenched. Fidelity's approach was simple but powerful. The firm sought to first understand the full cycle of needs and priorities of its customers. Then it developed strong, targeted offerings based on the analyses. Fidelity determined through its research that its target customers were less interested in bargain-basement commission rates, and attached more value to online help, an easy-to-use website, research tools, reports and access to live, expert phone support. For the past several years, surveys have ranked Fidelity as the best online broker. As a result, Fidelity has a very strong gravity pull—one that its customers are delighted to stay with.

The creation and delivery of great customer experience does not happen by accident. An institution must plan the experiences it wants its customers to receive, and then create the component services and content required. Finally it must deliver them consistently across whichever touchpoints—websites, email, printed mail, ATMs, in-person representatives—a customer prefers to use.

So we can see that increasing the pull of gravity depends on two core competencies: creating relevant, accurate customer-facing information and services; and delivering them consistently. These two competencies are stages in the process called customer experience management, and any institution that wants to generate enough gravity pull to keep customers on its planet must become an expert at it.

Volume Flow: Unblock Your Pipes

Volume flow is the second core competency that successful financial services enterprises develop. Optimized operational efficiency enables volume flow.

Think of internal enterprise processes as a series of conduits or pipes through which information and service flows. Inefficient processes are like blockages or kinks in those pipes. They impede the flow of service. By extension, inadequate operational infrastructure is akin to pipes that are too small and choke the flow.

Consider the example of a retail mortgage broker that prepares and processes documents by hand. Manual document processing is inherently more time-consuming than automated processing. In addition, manual processes introduce errors, which require yet more time to correct. Because these inefficient processes restrict the number of deals the brokerage can support, they can block the firm's future growth.

Inefficient financial institutions waste a surprising amount of time looking for, re-creating and handling documents. Addressing these inefficiencies with solutions that streamline document management, workflows, and processes is the metaphorical equivalent of increasing an institution's throughput with bigger pipes.

Another set of volume-flow blockages has drawn media and regulatory attention in recent months: the confirmation backlog that has grown between the buy- and sell-sides in the over-the-counter (OTC) derivatives market.

Hedge funds have embraced OTC derivatives to increase returns from an increasingly competitive investment market. Those firms that previously processed small volumes per day have seen trading activity multiply dramatically. Existing manual processes and back-office systems—the pipes in financial institutions' operations—could not cope with the volume and complexity of credit derivatives trade confirmations. Operational staffs without the correct systems to deal with the flood of trades have been stretched beyond their limits, often unable to process confirmations.

As a result, many confirmations remained unprocessed, causing backlogs to build between buy- and sell-side dealers, as well as between sell-side dealers. Confirmations still outstanding after 30 days caused the most concern and posed the greatest risk. It wasn't unheard of for confirmations to remain outstanding for months, even years.

As a result, in 2005 the Financial Services Authority (FSA) issued a caution to U.K. market participants, highlighting its concern with the growing number of outstanding confirmations in the credit derivatives market. The SEC warned U.S. traders. At that time the OTC derivatives markets and credit derivatives in particular were (and still are) growing at a phenomenal pace.