The Dawn of a New Financial Services Industry

Increasing competition. Consolidation. Waning customer loyalty. Increasing customer expectations. While these challenges are profound, they are far from being intractable. In fact, successful companies are not only weathering the storm, but they are also turning these challenges into opportunities for competitive advantage. They are adopting profitable product lifecycle strategies, providing superior value to their customers and increasing their customer relevancy. They are moving aggressively to address lucrative, rapidly growing market spaces with pervasive customer-centric strategies to provide enhanced customer value. It is truly the dawn of a new era in the financial services industry and this article will show you how to claim your stake.

Market Challenges Grow
The Gramm-Leach-Bliley Act and other legislation have opened up markets and increased competition. The result has been increased merger and acquisition activity and industry consolidation, including the acquisition of Fleet Boston by Bank of America. Consolidation has changed the market landscape. Today the 10 largest commercial banks control 49% of all banking assets in the US; as recently as a decade ago this figure was only 29%.

Competition has been a growing part of the market landscape. Online banking has grown in popularity and the resulting decrease in "switching friction" has made it easier for customers to change banks. Customers have also grown more sophisticated and more aware of their banking options. This has led to the twin challenges for financial institutions of declining loyalty and increasing churn as customers shop around more and switch more frequently.

Another trend compounding the challenges for the industry is simply customer sophistication with technology. This has steadily grown over the last few years with widespread access to broadband and familiarity with the Web. We have all gotten used to free, nearly instantaneous searches that put vast amounts of Web content our fingertips. As the sophistication of consumers has grown, so have their expectations.

Furthermore, as consumers have grown more Internet-savvy, they have naturally assumed that if they can access information for free online, then large, profitable banks should be able to provide them the same easy, quick access to information. At the very least, consumers expect that the personal data collected about them should lead to a better quality of service and greater personalization. These heightened expectations represent an opportunity to provide differentiated services for which customers are willing to pay a premium.

Opportunity Knocks
There are several key strategies to take action and turn these rising market challenges and customer expectations into opportunities:

• Adopt an adaptive product lifecycle strategy to fully capture the value of product innovation. Increase the value extracted from product innovations over their lifecycles, from differentiated new offers to commoditized products.
• Increase customer inertia. Make the customer experience more "sticky" by increasing switching costs. This makes it easy for customers to stay and hard for them to leave.
• Differentiate by delivering a superior customer experience. Enhance service through effective customer intelligence. Innovate to provide value for your customers. Increase personalization and improve targeting. Boost your relevancy to your customers.

Adopt an adaptive product lifecycle strategy to fully capture the value of product innovation. One approach banks have used to address the challenges in the marketplace is through product innovation. A lot of money is spent in the financial services industry in this area. Research conducted by Deloitte revealed that the world’s top 100 financial services institutions spend a total of $11 billion annually to develop new products. This would make business sense if the result were products with a competitive edge that justified their investment. However, the reality is that most financial products are easily copied. In fact, among the bankers interviewed, most felt that it was better to be a fast follower rather than an innovator in product development.

New products start life as high-margin innovations but quickly get commoditized over time. In order to profit from these assets, a flexible technology is required which can sensibly accommodate new products across their entire life cycle.

A $70 billion global financial services institution has chosen to build an Enterprise Data Solutions (EDS) infrastructure based on service-oriented architecture (SOA) principles to support the company’s information orchestration needs through their products’ lifecycles. The number of systems and data sources has quickly grown over time, with EDS currently holding more than 34 million records from nine separate systems. The search capability is extended as an XML service using a pub/sub model to applications requesting the data. Using this model to abstract the architecture provides maximal flexibility and performance. Response time has dropped from 10 to 20 seconds to less than a second even as total data volumes and query rates have quickly increased with time.

Increase customer inertia. An effective way to combat customer defection is to make the experience more "sticky." This may be accomplished by increasing process benefits, which raise the switching costs for your customers. In the retail financial services arena, encouraging online bill pay is a way to increase customer switching costs, as customers would think twice about the considerable trouble of reestablishing bill payment instructions to various merchants before they switched to another bank.

Reuters, one of the world’s leading providers of financial information, has found a way to make their service very sticky for their customers and increase their switching costs. More than 300,000 subscribers to Reuters use their alerting service to get notified whenever a certain trigger is satisfied that matches the profiles they have specified. For example, an alert can be set to trigger when the price of a certain stock falls below a certain point, or when the volatility of a commodity increases beyond a threshold. This service can potentially lead to a subscriber reaping millions of dollars in profit because trades are executed based on the right information at the right time. In this context, what is the sense in switching to a competitors’ subscription service, even if an alerting service with a similar level of performance were available? It would require a good deal of time and trouble to set up an alerting profile all over again. Time is money, and often a lot of money, for many of Reuters’ customers. With a high-performance alerting service, Reuters has found a way to make their user experience sticky and make it harder for customers to leave.

Differentiate by delivering a superior customer experience. Delivering superior value is the foundation for building long-term customer loyalty. Strategies that successfully enhance the customer experience require at their core a commitment to customer centricity and the ability to use customer data flexibly and in a timely manner to better understand customers and enhance their interactions with the bank across multiple touch points.