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Thursday 17 July, 2014
Digestible insights connecting the dots between
Economics, Strategy, Transformation and Delivery
The Radar
FINANCIAL SERVICES
A week marked by the awaited release of the Murray Inquiry
Interim Report. A few handpicked highlights:
Too-Big-To-Fail buffer: UBS believes the Inquiry is likely to
recommend Domestic Systematically Important Financial
Institution (D-SIFI) add-ons to Common Equity Tier I
Capital of 2-3%: meaning they will need to provision an
extra substantial $23B.
> In practice it might not result in further capital being raised
per se but could lower ROE and limit future dividends increases.
CBA (+$3.4B CET1, 16.7% ROE) and Westpac (+ $4.7B CET1, ROE
remaining at 14.9%) come off best according to the analysis,
with ANZ and NAB hit much harder (need an extra $7B each and
might see their ROEs drop to 13.3% and 12.2% respectively).
It would also close a gap between the Regionals and the
Big4. Indeed today the regional banks are currently
required to hold twice as much capital because they do
not hold advanced accreditation from APRA. The inquiry
seems more likely to opt for forcing the big banks to hold
more capital against mortgages than cutting the amount of
capital the smaller banks should hold.
> In a nutshell Murray wants to steer banks away from home
loans towards business financing (Nation building agenda
through small business lending and vanilla bonds). However by
granting the regionals accreditation status it would
supercharge the mortgage segment, which is not the desired
outcome. Instead it is likely to raise the minimum risk weight
for the Big 4: it would level the playing field but wouldnt make
mortgages more attractive.
In superannuation, the Inquiry recognises the system is
inefficient and members of super funds are paying too much
in fees. It says we need to wait to see the implications of the
MySuper reforms. But it raises the possibility of fees charged
for super being slashed by about $7B a year with the
adoption of a system of government tendering for low-cost,
government-run default funds. That would shake up the
funds-management status quo.
OTHER INDUSTRIES
Following Woolworths partnering with Macquarie and Visa
mentioned in the previous radar, Coles is now also stepping
up bank competition: Australia's 2nd largest supermarket
chain, is introducing a mobile wallet and plans to offer
personal loans and credit cards via a new 50:50 joint venture
with GE Capital expected to begin operating in 2015.
> It will initially offer loans, Coles-branded credit cards and a
mobile wallet. Interestingly their strategy is to promote
customer loyalty and spending: they are not targeting revenue
for the first year. Implying they might be very aggressive on
price. Coles' push into financial services began in 2010 with car
insurance (growing to 350,000 customers), and in May was
broadened to Life. It has another 400,000 customers using
Coles-branded credit cards. In total Coles is targeting 1 million
customers across its offerings.
> Woolworths, launched Life and pet insurance in 2011, has
expanded into travel and home, adding 125,000 customers.
> The next revenue pool is Australia's $1.4 trillion home loan
market which has higher-margins.
A CBA study flagged there is room in Australia for a 2nd
discount grocery chain after Aldi has successfully become the
3
rd
retailer with 10% of market share behind Woolworths
(39%), Coles (33.5%), hence pushing IGA to the 4th spot (9.5%).
> The trend is that consumers become increasingly frugal and
seek to reduce the cost of their weekly grocery shop. The same
trend that has benefited IKEA in the home furniture segment.
This is to also be read in the context of Tescos fall from grace
in the UK, which is also a cautionary lesson for WoW and Coles.
After years of being held as the example to emulate
(profitability; expansion into adjacent businesses such as
Personal Finance, Telecoms; use of customer data from the
loyalty program), Tesco has been taken over by Sainsbury and
in 2012 reported its first fall in earnings in 2 decades.
> The lesson to be learnt is the neglect of UK shoppers at the
expense of overseas growth. Once famous for innovation, Tesco
British operations were used as a cash cow: underinvestment in
stores, cut staff hours meant less open registers and unfriendly
service. Tesco started to be seen as too caught up in the
science of retailing rather than the experience: instead of
being greeted with a hello at the checkout, shoppers would be
asked if they had a loyalty card. A stark reminder of the
imperative to focus on service (cue our Service Revolution).
MACRO-ECONOMICS
On the international macro-economic front, difficult not to
mention US Fed chair Janet Yellens unusual comment that
Wall Street Equity valuations for small firms, social media and
biotechnology companies appear to be stretched. On the
fixed income front she also warned that credit spreads on
corporate bonds have reached record lows (a sell signal - given
the inverted rule of thumb from equities: low bond spreads
mean high prices)
> The question at stake is when the US Fed will start raising
historically short-term rates currently at near-zero. Yellen
flagged it might happen sooner than expected in 2015 if the
decline in US unemployment rate keeps exceeding expectations
(6.1% in June vs 6.7% in March).
On the home front (pun intended), a RBA study on home
ownership has reignited a classic: is renting better than
buying? Real house prices, adjusted for the quality and size of
the dwelling, rose 2.4% a year on average over the past 60
years. However, the same measure of house prices has only
risen 1.7% a year over the past decade - if this growth rate was
to be maintained, it would be 19% cheaper to rent than to buy.
> The insight is that houses are not overvalued but to recoup the
costs of ownership such as mortgage rates, stamp duty and
council rates, house prices will need to keep growing as fast as
they have over the past 2 generations. Probably a sensationalist
topic but a reminder that reliance on home loan needs to be
hedged by alternative strategies in different segments (all the
more if the Murray Inquiry recommendation are being followed
and put pressure on that home segment).

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DEEP-DIVE: After putting the Service Revolution in the context of the broader Australian Banking landscape in the
previous radar, this weeks deep dive is focusing on global Customer Servicing trends across industries.
You say you want a Revolution, Well you know, We all want to change the world .
You say you got a real solution, Well, you know, We'd all love to see the plan The Beatles, 1968

1 A first trend highlighted by the 2013 Accenture Global Consumer Pulse Survey is that
customer service is overtaking price and product as a key brand differentiator. In other
words, Customer Service is moving from cost centre to differentiator.
This study sized the Switching Economy at 10-15% of total annual disposable income in
most mature markets against 20-25% in emerging ones. It is a $5.9 trillion global pool.
Accenture found that globally in 2013, 66% of consumers switched service providers due
to poor customer service experiences, up 4% from 2012. And 82% felt this could have been
prevented, primarily on first contact resolution.
Globally, the biggest frustrations with customer service experiences are having to contact
a company multiple times for the same reason, long hold times, dealing with unfriendly
employees and having to repeat the same information multiple times.
Question asked: Could your service provider have done something differently to prevent you from switching?


2 The study highlights several drivers underpinning a customer-driven approach,
which align with our 3 Service Revolution goals (Know Me, Empower Me, Bank Wow)
- Hyper-relevance (Know Me): Consumers reward relevance but punish irrelevance by
disengaging and broadcasting their dissatisfaction.
- Relationships at scale (Show me you know me): Digital brings a new level of
intimacy but companies must redefine how they create trust with customers online
and offline.
- Seamless experience (Wow Me) across multi-channels offline and online is required
- Inherently mobile (Enable Me) throughout the sales and service relationship.
- Naturally social (Value Me) consumers can now easily raise their voice and want
to control the interaction process



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3 Forrester adds several insights to the fairly comprehensive framework proposed by Accenture:
> In the Know me category (ie personalize customer service):
- Proactive Outbound Communication are on the rise: Originally,
outbound meant telemarketing, which was an inefficient, brute-
force method of reaching out to potential customers en masse.
Modern outbound is distinguished by its proactivity relying on a
more nuanced understanding of how customers want to be
contacted, and what messages they want to receive: Your account
is overdrawn, Storms are causing 2-hour flight delays to
Melbourne".
In a recent survey, Ovum asked US customers how they would like
to be contacted by a business in different circumstances.
Unsurprisingly the more urgent the problem, the higher the likelihood that customers want to speak with a live agent. This is
clearly an opportunity for companies to reach out to warn customers of abnormal situations such as fraud. Email and phone
calls are the channels most customers prefer businesses to use to reach them, across a wide range of scenarios.
What this data suggests is that customers are not averse to outbound contacts, but that they are intensively weighing the
context of a contact: its timeliness, urgency, and value to them.

- Voice Of The Customer (VoC) Programs are increasingly operationalizing insights: After years of hearing the voice of the
customer (e.g. on social media channels), companies struggle to distribute the analysed data and act on pertinent feedback
to deliver quantifiable business value. The service trend is to leverage VoC data on 2 fronts:
(1) better focus on end-to-end feedback processes to deliver the right insights
(2) use of customer feedback as a direct measure of operational success.

> in the Empower Me category (ie self-service):
- Next-Best-Action Solutions are increasingly powering targeted offers: A key insight from Forrester is that organisations
continue to investigate methods to recommend agent next best actions during the service resolution process in an attempt
to offer service tailored to the customers unique needs and past purchase history. These next best actions are not limited to
cross-sells and upsells, but also help guide agents through the most successful resolution path by presenting them the next
best process step to take which is aligned with business imperatives.
- Finally, analytics continue to be directed at improving the end-to-end experience: an insight is that business will start
merging analytics and customer communication channels to understand the cost and success of end-to-end customer
journeys and pinpoint areas of addressable pain such as an escalation from a mobile self-service session to an agent-
assisted call.
4 - Whilst retail banking has traditionally been heavily regulated with high barriers to entry, and characterised by asymetry
of information in which customers find it difficult to compare offers and services, undeniable forces at now at play.
A recent McKinsey study provides several
insights specific to banking in the US but the
pattern would be similar in Australia
(graph):
> While they embrace multichannel access,
customers actually expect higher value from
face-to-face interactions at their bank
branch.
> The delivery capabilities to enable this:
- Big data analytical methodologies to map
and quantify customer pathways that
lead to specific positive (e.g., successful
cross-selling) and negative (e.g., silent
attrition, customer complaint) outcomes
- Design-to-value economic approach: Bank
P&Ls are typically highly disaggregated into
functional areas. They know how much they
spend on branches, call centers, technology and marketing and have methodologies for cost allocation to the household level.
However, when designing target customer experiences, many banks do not design to an economic goal. They must be able
Urgent
Fraud
Timeliness / Urgency
Not Urgent
Value to Organisation
Value to Customer
Value
Sales Debt recovery,
Collection
Appointment
reminder
Surveys
Human Source: TD analysis
Examples of Proactive Outbound Communications

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to measure the all-in economics of pathways (e.g., in-branch versus call center service costs) and design target end-states
that meet economic objectives.
- Cross-functional, rapid prototyping capabilities. Banks often take a pilot approach, where one element of an ecosystem is
well-built (e.g., a product or a technology), but the rest is neglected. Armed with a big-data approach to analyzing customer
pathways and a design-to-value economic tool, banks must develop rapid, cross-functional processes to create minimum
viable experiences. A key insight to keep in mind in our Garage
- Treat changes as a design exercise. Few banks designate an owner of the customer experience. Instead, they typically
have functional owners: head of branches, head of call centers, head of online, head of products, head of marketing. As a
result, the customer experience can be inconsistent. In most cases the axis of power in these institutions is still the retail
branch distribution team. Some banks are now shifting to a segment led approach, but still lack the language, tools and
techniques to design and build customer experiences.
5 - In conclusion, McKinsey
believes that this shift in
customer servicing represents
an opportunity for retail banks
to transform their distribution
and go-to-market strategies,
and can improve efficiency
ratio by up to 7 percentage
points as per the breakdown
outlined on this graph.

McKinsey also believes the
creation of a new distribution
model that meets the evolving
demands of customers is
founded on 4 imperatives:
1. Shift from a linear
customer funnel approach
to optimizing multichannel
journeys for customers, which echoes the philosphy of Customer Centred Design.
2. Design the branch network to achieve the minimum effective dose through multiple format types and carefully built
networks, echoing the Agile approach of minimum viable product.
3. Empower the front line to provide distinctive face-to-face interactions with customers: in line with our Service Revolution.
4. Increase marketing sophistication to meet customers emotional needs: also part of our Service Revolution objectives.