Insights into Distribution Channel Innovation in the Retail Banking Sector: Customer Focus as a Key Driver

In addition to the branch network, most retail banks now operate a range of direct distribution channels. Commonly employed direct channels include: call centres, web banking, mobile banking, and ATMs. While the branch provides the comfort of faceto-face interaction, direct channels provide customers with convenient remote services. Successfully managing a variety of distribution channels has become an essential strategic requirement for retail banks. However, managing multiple distribution channels particularly in the midst of the financial crisis is challenging. Banks must now work within their existing capabilities to drive customer migration away from high cost channels. What is more, banks are coming under increasing pressure to boost revenue streams by leveraging direct channels to drive cross- and up-sales rates. This must all be done while continuing to build a unified multi-channel experience for the customer. Now more than ever, banks must enhance and optimize their distribution channels to realize performance improvements.
Banking Ireland . Spring 2010
External Environment Factors that can Influence Channel Innovation Efforts Consumer Variables Banks that chose to cater specifically towards the Generation Y segment were experimenting with newer channels such as: rich-content mobile banking, social media banking and pop-up box web agents (e.g. Bank of America). Banks operating in countries with a more technology receptive customer base found it easier to introduce high-end technology, particularly online-based channel initiatives (e.g. Scandinavia).

Shifting sociodemographics

Cultural differences Legal Variables Out-dated Legislation Industry Variables

Outdated e-regulation was found to be holding back the development of online-based channels in less advanced e-economies.

Market position

A major US bank was reported to be pursuing a strong branch-focused strategy to stand out from online-focused competitors. Other banks were focusing on web banking to appeal to more tech-savvy customers (e.g. RaboDirect).

Technology Variables For some banks, the incomplete rollout of broadband services, and the absence of uniform mobile communications standards, was limiting the development of web banking and mobile banking respectively.

Infrastructure limitations

Internal Environment Factors that can Influence Channel Innovation Efforts Individual banks seek to align channel innovation efforts with their own overarching strategic direction. Strategic goals varied from bank to bank and as a result so did the direction of appropriate channel innovation efforts. Banks with more fragmented internal channel IT systems were finding it more difficult to execute cross-channel integration initiatives. Sample banks in weak financial positions tended to be cutting back their innovation budgets. Certain banks reported having insufficient internal expertise to develop certain channels in the manner required. Banks emphasising the sale of complex financial products tended to focus on developing face-to-face channels like the branch. Banks emphasising the sales of less complex financial products tended to develop direct channels such as online banking.

Fit with existing strategy

Integration issues Availability of resources

Staff experience

Product Mix

Figure 1.0 – Frequently Cited Variables that can Influence Channel Innovation Efforts

Consequently. interviewees explained that banking regulation can impede channel innovation efforts. At present. such regulation is often essential. findings from our study indicate that it is an important step for individual banks to carefully assess both their internal capabilities. [This]. This bureaucracy can stifle innovation.0 for examples)... Australia. many banks may have little choice but to cut innovation budgets. Given the need for greater levels of innovation in the retail banking sector. the Nordic Region. So when people open accounts online. As one consultant explained. Third. the Middle East. As one frustrated channel leader noted.Insights into Distribution Channel Innovation in the Retail Banking Sector: Customer Focus as a Key Driver Complicating the issue of channel development. ‘A few years ago we were looking into Web 2. First. and the EU (UK and Ireland). For those. Banking services are gradually being seen as commodities. Our core insights were derived from a series of semi-structured interviews conducted with a panel of sixteen channel experts.’ Our study found that banks seem to operate channels individually for the most part. Moreover. retail banking has traditionally underperformed when it comes to its innovative outputs.. so branches don’t want customers to open accounts online.prohibits you from undertaking any significant development due to the costs Factors that Impact Innovation Findings from this study showed that each bank’s channel innovation efforts are impacted by a host of important internal and external environmental factors (see figure 1.part of the reason for not innovating online and through the mobile channels is that these channels are sometimes not able to collectively recognise.. Geographically the panel spanned the US.’ However. silo organisational structures were singled out as a core blockage in the innovation process. banks should be conscious that underinvestment now is likely to limit future innovative outputs. etc. However. Spring 2010 . ‘. disengaging from the process of innovation can also limit a bank’s ability to recognise new innovative opportunities. are currently being stifled. the majority of banks do have the ability to change their internal organisational structures. It may be more appropriate for some banks to focus their innovation efforts within the Banking Ireland . However. and the external environment. current underinvestment in new channel initiatives was identified to be a major barrier to innovation. Now we’re just going back to basics because of the cost agenda. The following article describes some of our key findings. Thus. Most banks have little control over externally imposed regulation barriers. banks may even choose to begin developing their Smartphone channel offerings. the retail banking sector is transforming into a more competitive marketplace. findings from our study indicate that many banks could improve their innovation Barriers to Innovation Findings further revealed that channel innovation efforts are being inhibited by three primary barriers. Individual channels can have separate budgets and conflicting goals that interfere with inter-channel cooperation.0.. To stand out from the crowd. retail banks are turning to innovation. Nonbank organisations are entering the market to compete for customers. Interchannel conflict and inter-channel competition were reported to be commonplace. crosschannel cooperation efforts. the branch channel leaders see it as taking away from branch revenues. Interviewees included representatives from leading consulting firms and banks recognised as best practice channel innovators.. and the growing importance of distribution channels.. compared to other sectors. ultimately it was acknowledged by interviewees that regulation is a beneficial requirement because it serves to protect fundamental consumer rights. Customers are becoming more demanding. customer revenues. when deciding where to focus their channel innovation efforts. [18] involved.. But the bank doesn’t want to lower the branch goals. For banks. operating in more advanced e-economies. However. Furthermore. So there’s this internal battle between the channels and where the revenue is assigned.. The continuous process of innovation helps banks to develop new. regulation changes often lead to additional internal process and system changes. outdated e-legislation can prohibit certain online innovations from being implemented. Second. So while regulation can inhibit innovation. branch channel. Such additional burdens can make the current banking environment even more bureaucratic. As such. while for others it might be more appropriate to focus on web banking. differentiated offerings in a highly homogenized industry. and subsequently innovative crosschannel initiatives. UCC’s Financial Services Innovation Centre undertook research to investigate the key area of channel innovation.

It was pointed out by the panel that best practice banks are taking steps to gain a better understanding of their customer base. ethnographic consumer research.McCarthy@ucc. web analytics and advanced propensity modelling. findings strongly suggest that best practice banks are developing a stronger customer orientation to improve the success of channel innovations.fs-innovation. The Financial Services Innovation Centre. it was found that almost all had been designed with a strong customer focus in mind.Insights into Distribution Channel Innovation in the Retail Banking Sector: Customer Focus as a Key Driver performance by concentrating on breaking down silo organisational For further information contact: JB. With an improved understanding it was believed that banks can better direct their channel innovation efforts to design more appealing offerings. Other research on innovation has correspondingly showed that a deep understanding of the customer perspective is a vital determinant of an innovation’s commercial success. On conducting a comprehensive analysis of the channel innovations identified by interviewees as best practice. Spring 2010 . website heat mapping analysis. In conclusion our investigation delivered three core insights. Second. University College Cork Commissioned as part of an Enterprise Ireland Innovation Partnership between Bank of Ireland and the Financial Services Innovation Centre (UCC) Site: http://www. This stands in contrast to the small minority of innovations designed primarily to reduce cost or improve technology. observing online consumer behaviours. Interviewees reported that best practice banks were employing increasingly sophisticated market research techniques to learn more about customer needs and behaviours. silo organisational structures seem to be a key innovation bottleneck that management could potentially address by moving towards more cross-functional Banking Ireland . it seems prudent for each bank to carefully assess its internal and external environment before deciding where to concentrate innovation efforts. interviewees stated that leading banks were ramping up their segmentation modelling capabilities to ensure that they are catering towards the most valuable [19] customer segments. Such techniques included: website click-stream analysis. Finally. First. given the heterogeneity of channel innovation. leading banks seem to be leveraging consumer data to guide channel innovation efforts based on the needs of key customer segments. As such. Furthermore. Customer-oriented Innovation Findings from our study also indicated that banks could improve their innovation performance by developing a stronger customer orientation.