Strategic Business Managegent case study of FIRST DIRECT BANK by SADIQ YUSUF YABO | Online Banking | Banks

Strategic Business Management on First Direct By SADIQ YUSUF YABO

In only 7 years First Direct became the fastest growing bank in the Britain. It was the UK’s first branchless bank and retail telephone banking service. The following report analyses the case of First Direct: Branchless Banking, it attempts to explain the various factors employed which made it such a success in an industry that was plagued with customer apathy. In the first section of the report we give a brief history of the company; we then analyse the company’s current position using the marketing audit (macro and micro analysis). We are then able to use SWOT to identify the strategies used by First Direct between 1989 and 1996 which made it an innovative market leader in an era of technological advancement. In Chapter 2 we give our recommendations of strategies that could be employed by First Direct after 1996 based on our analysis results. Chapter 3 is an updated company overview, outlining the strategies the company employed and the company’s current position in the market (1996 onwards). In the conclusion we identified the various factors that

Chapter 1: Analysis
1.1 Brief History
First Direct was set up as an independent division of Midland Bank, the fourth largest bank in the UK. Market Research conducted by a team of executives lead by Mike Harris, found that a substantial amount of customers did not use branches and the level of satisfaction of those that did was relatively low. This can be supported by an MORI study in 1988. Consequently, First Direct was launched on October 1, 1989. First Direct operated from a central location which could be accessed by customers via telephone 24 hours a day, 7 days a week, and 365 days a year. Customers were increasingly disillusioned with the traditional banking system. First Direct could take of advantage of this situation as they were able to offer customers an efficient

service that was easily assessable. By the end of 1994, First Direct achieved break-even and gained their first full year of profitability by the end of 1995. The highest net gain of UK customers transferring their checking accounts was secured by First Direct from 1994 to 1995. First Direct far extended the original aim of building a niche position in the market. First Direct had attracted more than 650,000 check account customers since its conception (Key Note Report, 1997). 1.1.1 Overview of Performance and Strategies employed The low cost of running the company and high customer satisfaction served the company well; profits were higher than other financial organisations and the company was able to gain more customers through advertising and recommendations from existing customers. Exhibit: 2 First Direct: Estimated Account Data
Date Apr-96 Dec-95 Dec-94 Dec-93 Dec-92 Dec-91 Dec-90 Dec-89 Total number customers 641,000 586,000 476,000 361,000 241,000 136,000 66,000 11,000 of Total number accounts 1,100,000 800,000 700,000 500,000 350,000 200,000 105,000 N/A of Calls/day 32,000 26,000 21,000 16,000 11,000 7,000 3,000 N/A Staff 2,400 2,300 1,900 1,500 1,000 500 300 250

Source:” First Direct: Branchless Banking” INSTEAD, Fontainebleau, France, 1997.

First Direct has a number of guiding principles which served to make them such a success.
• •

Brand differentiation - They built a brand customers could identify with. A proposition designed for the customer - they decided to build a bank for the customers and not for the bank. They didn’t and still don’t talk about the process but rather the customers.

An internal culture founded on clear core values, constant mining of customer information and the relentless pursuit of alignment.

They made sure internally that their values and behaviours were consistent with the way they wanted the brand to manifest itself to the customer. First Direct had six core values with which to achieve this namely: responsiveness, openness, right first time, respect, contribution and kaizen.

1.2 Environmental Analysis
1.2.1 Macro-environment (PESTEL analysis)

Economic-Subsidiary of Midland Bank and from 1992 part of HSBC – had economies of scale due to HSBC resources. Meant less expenditure as it benefited from the development of HSBC.

Economic – The large number of branches opened by banks and building societies in the early 1990’s had an adverse effect on the economy. This resulted in mergers and banks had to be downsized and costs had to be cut to prevent a recession.

Social Cultural – fast paced lifestyles. Professional Individuals who lived increasing fastpaced lifestyles were enticed by speed, efficiency and convenience.

Technological – The early 1990’s were rife with Technological advances in banking. Automated Teller Machines were becoming increasingly popular and telephone banking was widespread. There was a radical change in payment options during the early 1990’s and the Plastic card (debit cards and smart time) were increasing used as a replacement for cash. Home banking was launched in 1995 by Barclays bank which could be accessed from the customers’ personal computer.

1.2.2 Micro-environment (PORTERS)

When it launched First Direct had no direct competitors in the UK as it had an improved speed and service for customers, attracting a niche market (affluent and regular depositors’). There was increased competition by the mid 1990’s as most banking institutions offered some form of direct access for their customers.

The Likelihood of entering the market is high, this is due to the Banking act of 1979 which allowed banks and building societies to offer a wide range of personal services and not much investment, which made the market easier to enter. By 1996 the use of telephone banking (see Exhibit 1) was widespread throughout the industry and many banks and building societies have started to realize the benefit of telephone banking services. New organisations like Virgin Direct were offering savings plans and low cost life insurance via the telephone. Many companies were learning from First Direct’s example and following suit.

Substitutions: Traditional banking A significant minority of First Direct customers had spontaneously requested PC access to their accounts, although most banks and building societies offered their customers some form of direct access

Buying power of customer: The power of the customer is high. As described in the case study one, 1 in 5 people could not distinguish between the services offered by different banks and customers are usually unwilling to switch banks. Banks had to offer unprecedented service and offers to lure potential customers from the competition.

Power of suppliers:

As banking is a service industry, there is a low supplier power.

Telephones and computer are obtained from the suppliers but the company probably has many different suppliers from which these are sourced 1.2.3 SWOT Strengths • Easy Access

24 hour banking enabled customers to retrieve their bank information at any time. Customers were not forced to go into the branches to make minor enquiries and transactions. Faster, simpler, more efficient methods of banking attracted many customers. • Customer Service Business Representatives used a Customer Information System to have access to customers’ accounts and history; it also records every customer contact. Business Representatives could handle 85% of all calls without transferring calls. Minimum company service objectives required that 75% of all calls be answered in 20 seconds or less. Business Representatives could

record customer information gained during telephone conversations (such as customers’ vacations) on MIND and so allowing BR’s to comment on them in the future. Customers’ felt valued and individual which gave First Direct a distinct advantage; customers’ could easily differentiate between First Direct and other banks. • People development

First Direct recruited individuals who were from social professions. Individuals who were fast and efficient workers with empathy and able to work under pressure while maintaining warmth and sincerity. Business Representatives had to undergo a 7 week intensive training course. BR’s were required to pass a total of 54 internal accreditation tests within 9 months of employment. With career development and performance bonuses (which could go as high as 5% of the annual wage) employees were given incentives to remain with the company. Various team building exercises were regular to maintain good team rapport. An open plan office environment ensured a good working relationship between staff and managers. • Low costs

First Direct offices were based in Arlington and Stourton in Leeds. The lower cost of wages and rental rates were highly attractive to the fledgling company. The ‘hot desking’ approach was used to be able to utilize all available space and keep costs low. First Direct made use of efficient information systems; this was instrumental as the databases were used in every aspect of the business. First Direct had only 2400 staff members in 1996 serving 641,000 customers. A branch based bank would require almost 4000 employees to serve the equivalent number of customers. Weaknesses • A culture built on innovation was difficult to maintain as the company needed to continue to develop their technologies to be on the forefront of the financial services sector. If an easier and faster means of banking was developed by another organization customers would be drawn to them.

Another potential obstacle would be maintaining that ‘innovative culture’ as the company inevitably expanded to more than 10,000 employees spread over numerous sites.

The company was growing at an incredible rate and they had to maintain the service and price that made them a success.

Opportunities: • Room for expansion while keeping costs low. With profits from 1995 onwards, and growing number of customers due to word of mouth and advertisements, there was ample room for expansion. Currently with over 640,000 customers and objectives to increase customer base to 1 million customers by the year 2000. First Direct could expand to more sites.

Technological Investments As an arm of HSBC, First Direct would be able to benefit from their technological investments, keeping it at the forefront of technological innovation whilst keeping their costs lower than other banking organizations.

As the call centers were a hub for all communications, this forced service standards to be higher than usual. Customer relationships were built and this would lead to more opportunities to expand customer base due to word of mouth advertisement.

Cross selling of various services Databases which recorded customers personal details could be accessed by BR’s and promoting services which they required, as well as sending them brochures of services at times they might need them, would increase sales and profit for First Direct. Lower prices for these services which ensure more customers were attracted by them. Also the higher wage individuals whom First Direct targeted, most likely car owners, would be more than likely to be attracted by the insurance, mortgages, credit cards, offered by First Direct.

Threats • Increased competition from retailers as well as private companies i.e. Virgin Direct could pose a problem in the future as many of these new organisations also offered the same services and the market could become saturated.

Increased use of electronic banking being offered by Nationwide, Bank of Scotland and Clydesdale- If electronic banking were to become the norm and First Direct did not enter the market, they would not have the advantage in the electronic age and would not be able to maintain competitive advantage.

Increased use of electronic banking also meant lower costs for other banks, if First Direct did not enter the market, they would have to increase prices to maintain their outgoing costs and would not have the competitive advantage in terms of pricing it currently has.

CHAPTER 2: RECOMMENDATIONS This section will in essence capture concepts and deliver thorough recommendations as to where the growth can be steered for First Direct for 1996 onwards in order to sustain and enhance market position in what is an ever so growing sector. Through our research of First Direct & the industry as a whole, we would propose and expand the following four recommendations: 2.1 On-line home banking One of the key elements of First Direct was innovation. They were leaders in telephone banking. To be able to maintain their customer base they had to continuously be innovative to stay ahead of the competition. If on-line banking took off, by not entering the market, First Direct could forfeit many customers, wanting faster easier access to their accounts. This graph, taken from a recent Gartner Group report shows a prediction of the number of Internet users worldwide to 1998. Even in this limited timescale, the prediction varies between a "conservative" 40 million and the "optimistic" forecast of some 160 million users. To set these global statistics into a national context, a recent study by IDC suggests there are some 1.3 million users in the UK in 1995 and forecasts this will grow to 7.7 million by the turn of the century.

Studies carried out by research organisations indicated that in 1996 there were 3.40 million internet users the UK. If these predictions were to be realized it would be a good investment for First Direct offer online-banking to their customers. One of the key features of first direct was the high standard of service quality which reduces prices and adds value to the customer. By going for an on-line banking route, First Direct would have to ensure high service quality, easy access to accounts and be able to transfer funds, transfer to third party and order cheque books a service that was already offered by Clydesdale. By offering 24 hour on-line access to customers as well as the telephone banking service, customers could clear up any transactional or account queries. 2.1.1 Implications of online home banking • Low cost

By entering the on-line home banking market, would decrease costs. By being an arm of HSBC, First Direct could make use of their technological investments. Customers using on-line banking would reduce the number of calls made to the centre; more employees would not be needed if the customer base were to increase, thus reducing costs to the company. These lower costs could be then passed on to the customers • Disappearance of one –on-one customer relationship On-line banking would reduce the contacts between the customer and the Business Representatives. This would limit First Direct’s opportunities. The aspect that set First Direct apart was their customer service; they would lose this aspect with the onset of on-line banking. First Direct would need to find other methods of delivering value to customers. By introducing customer personalized websites- allowing customers to choose designs and ‘themes’ to personalize their on-line account. Also when customers signed up for on-line banking they would be asked a series of required questions relating to car ownership, amount of travel they did, family details etc. Information could then be forwarded to them relating to various forms of insurance, travelers cheques etc.
2.2 Business Banking The culture structure through the generation of First Direct has been to accommodate the needs and requirements of the individual, this being their core competence. First Direct have done extremely well to

implement and sustain their high levels of service, showing in the fact that they are currently attracting over 1,200 new customers every week. Using the Internet as a platform, they should now be thinking of introducing Business Banking to cater for the needs of those in the corporate sector. They can offer lower, more competitive rates and offer a 24/7 facility which no other bank is offering. We feel this move would be advantageous for the growth of First Direct. (Example of services which could be offered- Appendix 3)

2.2.1 Implications
First Direct would need to set up a separate section focused only on businesses. This section would comprise of Relationship managers who deal specifically with 1 or more businesses, offering personal banking advice. 2.3 Expansion into Republic Of Ireland & Within UK First Direct is enjoying a commandeering market position within the banking sector in the UK, in line with the company’s aspirations to grow; we believe that their culture and ethics can see them grow organically, with the Irish population of 3.6 million and an environment that is close to the UK. First Direct could have first mover advantage by offering this branchless banking facility, their call centre, depending on the size of the operation, could either be based in Ireland or integrated within sites in Yorkshire with the company rapidly expanding; adding approximately 10,000 current account holders every month. First Direct would need to expand. Their call centers are currently based on 2 sites in Leeds. In order to manage the influx of new customers, First Direct would need to establish one or two more sites to house the staff required for the expanding business. By having more sites, we think First Direct would need to re-organize their management methods. In 1996, First Direct had restructured their business into 5 units. Each business could acquire customers directly. We think that this structure would be effective for going forward, the art to sustainable growth is to have key organizational skills. 2.4 Corporate Restructuring At present, First Direct headed by Kevin Newman, who has positioned the structure of the company into 5 business units led by Richard Ruston, with six other directors jointly looking after different aspects of the business. In order to sustain the culture of delivering to the individual needs and also a significant growing client base (On average 10,000 new accounts per month, plus the added potential of increasing Irish and Business Bankers). A sound recommendation may be to create individual areas for different departments with allocated team leaders, for example; Personal Banking (UK & Irish) /Savings/Investments alongside the Business Banking and Mortgages/Lending (Secured/Unsecured).

With expansion First Direct has to keep the ‘soft’ implications of their decisions in focus. A

business like First Direct whose operations are around the clock, 365 days a year relies heavily on the customer service provided by its employees. They can motivate their staff by having team building sessions in order to involve them and treat them as an integral part of the company. It can also provide educational facilities so that all staff can practice all aspects of First Directs business e.g. In an event of having to deal with multiple queries with the same customer if need be, but also if a high volume of calls in any one department spilled over and the need to respond was exercised within the 20 second policy of the company. This will also keep the employees in high motivation and retain them longer.

CHAPTER 3: FIRST DIRECT POST 1996 First Direct has maintained their customer loyalty from their inception in 1989. According to MORI and NOP research, First Direct has been the most recommended bank in the UK for the past 13 years and currently has over 1.2 million customers 3.1 Innovations First Direct has remained innovative since 1996 offering customers easier, more efficient access to their accounts via various channels; fitting in with increasingly faster paced lifestyles and technological advances. These innovations have kept them ahead of competition and have ensured First Direct’s success in the banking industry. • On-line home banking The bank began limited trials of Internet Banking in July 1997, launching the service fully in 1998. 880,000 of their customers currently use internet banking. Indeed, in an effort to reduce costs, First Direct has implemented measures to divert customers to lower-cost channels. First Direct managed to boost profits considerably by redirecting 80% of transactions online without
impacting satisfaction levels. In addition First Direct introduced web chat to their online service allowing customers to receive immediate answers to queries about their accounts.

Text Banking

First Direct, the first company to do so, offers a truly innovative service where you can have free weekly mini-statements sent to your mobile phone as a sms text message. You can also set up the service to send you a message when your account gets above or below a certain balance, or when your account is about to be overdrawn. Text Message banking works with savings, credit cards and the First Direct current account.

iPhone Banking

First direct is making use of the latest technologies to bring Internet Banking to the iPhone. They enhanced their Internet Banking service to provide a seamless online experience for all iPhone and iPod Touch users. iPhone and iPod touch users can access their online account, make payments and apply for new products. 3.2 Expansion First direct is based at two call centres in Stourton (Leeds) and Hamilton, South Lanarkshire, Scotland. Hamilton is the larger of the two call centres however the Leeds call centre handles risk assessment and some processing roles. First Direct did not extend outside the UK, showing sustained growth. By managing their growth they were able to concentrate on customer service as well as innovative technologies to keep existing customers and gain more customers within the UK. 3.3 Offset Mortgages Alongside looking after the needs of the customers, in 2001, First Direct introduced an offset mortgage to its list of products on offer, which was to encourage some of its heavier depositors who have their mortgage with First Direct to reduce the amount of interest payable on the debt owing. This can be seen as a great product and cost saving to many mortgage holding customers. 3.4 Customer dissatisfaction with the Business Model The company, First Direct enjoyed the business model of attracting affluent customers, who frequently deposit money or keep a consistent balance in the account. This way of operating worked for the company since birth in 1989, however the bank in November 2006 gave plans to implement a statutory charge of £10 for those account holders having an average balance of less than £1500. It was meant to encourage clients to keep their current account in such amount of credit to enjoy the free banking. The idea may have seemed like a good from the company’s perspective, i.e. keeping only the most affluent customers, who brought the company the most profit and discouraging the less profitable ones. Unfortunately, it alienated a vast amount of its client base as an article published by the Financial Times claimed that, within a month, almost 20,000 accounts had been closed down.

3.5 Environmental Awareness First direct has become the first direct banking operation to go 'carbon neutral' and reduce carbon dioxide (CO2) emissions to zero. First direct is achieving its goal by reducing energy use, buying green electricity and then offsetting the remaining CO2 emissions in carbon reduction projects. To go that one step further it has also introduced initiatives on its Leeds and Hamilton sites to help expand its environmental CONCLUSION The main recommendation for First Direct is to control the levels of growth in and around the company; they will need to ensure that the employees and customers are in tune with the targets set and plans outlined. They will have to ensure that they continue to meet the needs of their existing client base in order to platform this success onto new clients. For the development of First Direct in the future, in order to sustain target driven growth they will need to continue their cultural stance on being a leader of innovation and cutting edge technology throughout the banking industry. First Direct’s success is quite limited due to the fact that they only operate within the financial sector. Due to this they do not have an exit strategy and in the current climate (credit crunch) future success is unpredictable.

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