Build-to-order

he market for personal nancial services in Asias emerging

economies is maturing: customers want more products and better
service from their nancial institutions. Can these demands be satised by
local banks? To date, though most of them still offer a one-size-ts-all
service, they have managed to hold their own against competition from
foreign banks and companies specializing in credit cards and investments.
Indeed, 95 percent of Asian customers still have their primary banking
relationships with local providers.
But the days when a bank in an emerging Asian country could thrive by
offering the same service to all customers are passing. Growing
numbers of people are seeking nancial services tailored to
their specic needsespecially in the more protable
banking productsand few local banks have the
skills to maintain a lead in such a marketplace. To
ght on, these banks will have to follow the path
taken by nancial institutions in developed econo-
mies and manage individual customers, customer
segments, products, and channels in ways specic
to them.
A growing opportunity in Asia
Despite the Asian nancial crisis and the
global economic slowdown, the market for
personal nancial services in Asia is in good
Mike Sherman and Marjon Wanders
Asian banks will lose business unless they learn to tailor their services
to individual needs.
T
banking in Asia
52
052-061_AsiaPFS 4/4/02 11:11 AM Page 52
shape.
1
Holdings of nancial products have increased: the average high-
income Asian consumer owned 3.2 of them in 2001, up from 2.7 in 1998,
although this is still less than half the number held by comparable consumers
in the United States. The balances maintained in these products have risen as
well in Asia. People in general are more willing to borrow and to search for
higher investment returns, particularly to nance their retirement. They are
also more sophisticated than they were in 1998, with a better understanding
of risks and rewards and of the need to diversify their assets. These changes
have enabled some nancial institutions to shift customers
away from less protable transactions and deposit products
and toward more protable ones, such as credit cards, life
insurance, and equities.
ROB COLVIN
53
1
From 1998 to 2001, McKinsey interviewed 400 middle- and upper-income
households in each of ten marketsChina, Hong Kong, India, Indonesia,
Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand
about their views on personal financial services. (Middle and upper income
were defined separately for each market; the definitions excluded people with
no real exposure to financial services.) McKinsey also conducted similar
surveys in Latin America, South Africa, and Turkey.
052-061_AsiaPFS 4/4/02 11:11 AM Page 53
The use of credit cards, for example, is rising steadily across the region; in
Taiwan, 62 percent of households used them in 2001, up from 44 percent in
1998. Half of the users dont pay off their balances at the end of the month,
and these protable revolvers also spend up to three times as much on
their cards as do prompt payers (Exhibit 1). In addition, savvy marketers are
targeting the many people who now value convenience or brand appeal more
than price (Exhibit 2). In Hong Kong, Aeons offer of a 30-minute credit
approval for affinity cards (such as the Hello Kitty card, targeted at
female office workers) is quite popular, even though they bear higher interest
rates than do products from most competitors.
More people now realize that a cash balance in a low-yielding basic savings
account is unlikely to provide for their future needs. In China, the percent-
age of personal household assets and liabilities held in such accounts fell
from 86 percent in 1999 to 78 percent in 2000 as consumers moved their
funds into securities and increased their use of debt. Similar declines in cash
deposits occurred in Indonesia, Malaysia, and South Korea, though Asia
still has a long way to go: in the United States, just 13 percent of household
assets were kept in low-yielding accounts in 2000. Meanwhile, the propor-
tion of individuals who say they are interested in planning their nances has
sharply increasedfrom 44 percent in 1998 to 57 percent in 2001. Most
have yet to consult a professional, suggesting another opportunity for banks.
54 THE McKI NSEY QUARTERLY 2002 NUMBER 2
100
80
100
129
Thailand 47
100
23
100
114
Hong Kong 15
E X H I B I T 1
Turn, turn, turn
1
Those who do not pay off credit card balance for at least 2 months in the year.
Source: McKinsey Asia-Pacific proprietary personal financial services survey, 2001
Revolvers
1
Nonrevolvers
Although less affluent . . . . . . revolvers drive credit card activities
80
100
100
100
91
268
100
100
100
153
86
Philippines
Indonesia
54
31
India 55
Assets of credit card
users, 2001, index:
nonrevolvers = 100
Share of all credit card
users who are revolvers,
2001, percent
Monthly credit card transaction volume,
2001, index: nonrevolvers = 100
49
052-061_AsiaPFS 4/4/02 11:11 AM Page 54
Start with a simple segmentation
If their markets are growing so well, why should Asian banks worry? The
main reason is dwindling loyalty, especially among affluent customers
(Exhibit 3, on the next page). More than half of the consumers who opened
accounts in 2001 didnt do so at their primary nancial institutiona sign
of growing dissatisfaction. Further bad news for primary banks: they are
stronger in products with lower prot margins; for example, 94 percent of
local-currency savings accounts are held at the Asian consumers primary
bank, but only 50 percent of the more protable credit cards, 33 percent of
mortgages, 25 percent of the unsecured personal loans and car loans, and
15 percent or less of pensions, life insurance, and mutual funds.
Local banks will require stronger marketing skills than they exhibit today if
they are to increase their share of the markets for such protable products. In
particular, these institutions should use segmentation to identify the differ-
ences between groups of potential customers and to decide which groups
can be served best and most protably. Segmentation has long been part of
the bankers marketing
kit in developed coun-
tries: it is common for
nancial institutions
in North America and
Europe, for example,
to invest in expensive
systems that can handle
many microsegmenta-
tions and sophisticated
customer relationships.
Some banks in Asias
emerging markets,
having exhausted the
usefulness of the one-
size-ts-all approach,
are now beginning to target specic market segments with tailored services.
For the time being, a basic customer segmentation will be a sufficient rst
step toward developing a more customer-driven approach. As long as the
Asian market remains signicantly less differentiated and less competitive,
the regions local banks wont have to rush to match the cutting-edge tools
deployed by their counterparts in the developed markets of the world (see
Emerging marketing, in the current issue).
Using a combination of personal attitudes to nance and demographic
data as distinguishing criteria, we have identied four principal segments
55 BUI L D-TO- ORDE R BANKI NG I N ASI A
E X H I B I T 2
Convenience rules
Source: McKinsey Asia-Pacific proprietary personal financial services survey, 2001
Top reason for choosing financial institutions in Asia, 2001, percent of respondents
(n = 4,214)
Primary institution
Convenience,
easy access
Many branches,
extensive ATM
network
Strong financial
stature, rating
60
15
9
Additional
financial institutions
Convenience
Best services
Best rate
46
35
25
052-061_AsiaPFS 4/4/02 11:11 AM Page 55
of middle- and upper-income consumers in the majority of Asian emerging
markets (Exhibit 4).
Simplifiers
As the name suggests, simpliers dislike the complexities of modern nance
and want someone to make it plainer. They are looking for basic savings
products, one-stop shopping, face-to-face contact, and low risk. Usually
older, less educated, and less affluent blue-collar employees, the simpliers
are also the least frequent users of bank services and the least sensitive to
price. Local banks are the natural owners of this segment because they
already offer the products that those in it seek. It wouldnt make economic
sense to try to persuade simpliers to embrace higher-risk products or more
diversied portfolios, which are not what these people want. Indeed, the very
attempt could drive them away.
Advice seekers
The advice seekers also prefer one-stop shopping, but, unlike the simpliers,
they are highly receptive to advice and to more sophisticated products and
services. They prefer face-to-face sales help but would use remote channels
for services such as
transferring money
between accounts and
checking their balances.
Of the four segments,
advice seekers hold
the greatest number
of products, are the
most willing to pay for
advice, and are the most
open to using foreign
banks. They are also
the most sensitive to
price and conduct the
largest number of trans-
actions, making them
expensive to serve. This
segment, consisting
mostly of well-educated
men, is dominated by
professionals and the affluent. Its members are natural customers for interna-
tional banks with a pervasive local presence as well as for well-established,
top-tier local banks.
56 THE McKI NSEY QUARTERLY 2002 NUMBER 2
E X H I B I T 3
Fat and fickle
1
2000 figures.
Source: Economist Intelligence Unit; McKinsey Asia-Pacific proprietary personal financial services
survey, 2001
I am loyal to my current financial institution, percent of respondents who somewhat
or strongly agree (n = 4,214)
GDP per capita,
1
$
5,000 0 5,000 10,000 15,000 20,000 25,000 30,000
Indonesia
India
Philippines
China
Taiwan
Singapore
Thailand
Malaysia
South Korea
Hong Kong
100
90
80
70
60
50
40
052-061_AsiaPFS 4/4/02 11:11 AM Page 56
Self-directed planners
Self-directed planners think they know better than the providers how to
interpret information, so they want access to it rather than advice. As a
result, they are the most open to remote sales assistance (including the
Internet) and do not demand live service. Self-directed planners are well-
educated, mostly white-collar workers with slightly above-average incomes.
They use bank services frequently, have sophisticated portfolios, are invest-
ment oriented, and will accept reasonable risks. On the whole, their current
relationships with several institutions satisfy them; although they shop
around, they are looking for information and insight, not lower prices. Such
customers are a natural market for product specialists such as Fidelity, a
mutual-fund company that uses remote channels as well as retail branches
to deal with customers.
Fickle shoppers
Fickle shoppers have accounts in several banks and care little for advice.
With less money to invest and more need for cash than the people in the
other segments, they want plain transaction products and credit. While they
like face-to-face sales help, they rely on ATMs or telephones for service. But
despite the modest needs of ckle shoppers, they, unlike simpliers, are
57 BUI L D-TO- ORDE R BANKI NG I N ASI A
E X H I B I T 4
A segmentation for Asia
Percent of respondents (n = 4,214)
Source: McKinsey Asia-Pacific proprietary personal financial services survey, 2001
Simplifiers
Fickle shoppers Self-directed planners
Advice seekers
Less educated, less affluent, older
Do not seek financial advice often;
use fewer, more basic products;
prefer local banks; least open to
borrowing
Tolerate low risk only; not sensitive
to price
Prefer face-to-face contact
Average income, predominantly
nonworking female
Do not seek financial advice; use
fewer, more basic products; open to
borrowing, particularly on credit cards
Accept reasonable risk; not so
sensitive to price
Prefer remote channelsspecifically
ATM or telephone banking
Well-educated, slightly above-
average income
Seek financial information from
variety of sources and retain control
of financial matters; frequently use
financial products; open to borrowing
Accept reasonable risk; sensitive
to price
Most open of all segments to remote
channels such as on-line and
telephone banking, ATMs
Well-educated, affluent, predom-
inantly male
Seek financial advice; heavy users
of financial products; high
transaction frequency
Tolerate higher risk; very sensitive
to price
Prefer face-to-face contact but open
to remote channels such as
telephone banking for basic
transactions/servicing
21
34
23
22
052-061_AsiaPFS 4/4/02 11:11 AM Page 57
dissatised with their current banks: they shop around for the best interest
rates and have accounts with several providers. The segment consists mostly
of housewives who enjoy this quest, viewing it as their contribution to
the family economy. Given their low loyalty and desire for basic products,
making money from these customers can be a challengeone that might
best be tackled by nancial institutions with recognized brand names, espe-
cially in credit cards, which ckle shoppers particularly like.
Choosing the right business system
Many Asian banks will nd all four segments represented in their customer
base. Which should they pursue, and how? The answers will differ accord-
ing to each banks view of the relative attractiveness of the segments and
the banks ability to develop an offer that can protably meet the needs of
customers in the most attractive ones. Each bank must analyze not only
the needs of all segments and the economics of serving them but also the
strength of its current skills and assets as well as those it could realistically
developall in relation to the skills and assets of its competitors.
So, for example, a bank with a narrow product range and a network of
branches offering basic services would be well equipped to concentrate on
simpliers or ckle shoppers. But a bank that could develop more sophisti-
cated products or offer products (such as mutual funds) from third parties
might target advice seekers and self-directed planners by using a slim branch
network, remote channels, and, for the advice seekers, face-to-face contact.
Banks can choose to tailor their offerings to one segment or more, depend-
ing on the match between their capabilities and their growth ambitions. We
have identied three models such banks might use.
Focus
Focus involves building a bank around a dominant segment and giving cus-
tomers in it what they want while limiting the banks investment in what
they dont. Say a bank decides that its best option is to focus on simpliers
because this is the segment it can serve most protably with its existing skills
and assets. The bank would require a no-frills back office to process only
the basic banking products that simpliers prefer and a low-cost network
of branches where customers could make deposits, withdraw cash, and pay
bills. By contrast, a bank that decides to focus on self-directed planners
requires a back office extensive enough to provide the many product options
and extensive product information they demand, as well as a more sophisti-
cated front office to deliver the information.
The focused approach is less straightforward than it seems, because the
bank will have to reshape its frontline force to suit its chosen segment.
58 THE McKI NSEY QUARTERLY 2002 NUMBER 2
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While advice seekers, for example, require well-trained and knowledgeable
frontline staffers, using them to serve simpliers would be uneconomical
and off-putting, for simpliers prefer automated minibranches staffed with
only one or two salespeople who can handle basic transactions. After years
of instruction to the contrary, it will be hard for banks to train employees
to serve some customers better than others. Against the investment in staff
training, however, banks will be able to set the savings from shedding unnec-
essary elements of their former offerings.
Standard Bank of South Africa has successfully employed the focused
approach by targeting urban low-income customersa niche that is proba-
bly closest to the simpliers in our segmentationand offering basic savings
accounts, debit cards, and personal loans.
2
The bank also provides nontradi-
tional but lucrative products, such as funeral-insurance policies and prepaid
mobile-telephone contracts, that appeal to low-income people.
The banks branch and ATM processes are fashioned to make them efficient
and simple to use: customers can open accounts and get cards issued rapidly;
ATMs have pictures on the screen. Branches are located in high-traffic ven-
ues, such as main streets and malls, and each typically has two ATMs and
two or three assistants to teach customers to use them. Each stripped-down
branch supports 8,000 to 10,000 customer accounts on its rolls, with costs
that are usually 30 to 40 percent below those of traditional branches because
it requires fewer employees to operate and uses more ATMs. Standard Bank,
in its rst ve years (1994 to 1999), attracted 2.5 million customers and was
recently adding 50,000 of them a month. Although their balances are
relatively low, the bank achieves a net positive contribution on the
average account, largely because it has succeeded in focusing
on one segment and in offering these customers only the
basic, streamlined services they actually want.
Aeon, targeting ckle shoppers with its credit card, uses a similar
approach in Hong Kong, while Expatriate Financial Services
aims to attract advice seekers in Malaysia and elsewhere.
Two brands, one system
Banks that take the two-brands, one-system approach aim to serve a range
of segments from a common back office, using the various channels
branches, ATMs, and sales agents operating outside branchesto tailor the
delivery of services to the needs of each segment. DBS Bank, in Singapore,
provides a good example of this model. In 1998, DBS acquired POSB
(formerly the Post Office Savings Bank), along with its vast customer base;
59 BUI L D-TO- ORDE R BANKI NG I N ASI A
2
See David Moore, Financial services for everyone, The McKinsey Quarterly, 2000 Number 1, pp.
12431.
052-061_AsiaPFS 4/4/02 11:11 AM Page 59
some 90 percent of Singaporeans have a banking relationship with POSB.
DBS Bank now maintains two networks of branches and ATMs. One bears
the century-old POSB name, by far the most powerful in Singapore for gen-
eral banking, and concentrates on the low-cost servicescash deposits, bill
payments, and home loansthat simpliers and ckle shoppers want. The
other bears the DBS brand and offers a broader range of services and prod-
ucts, along with the on-line and telephone-banking services that appeal to
advice seekers and self-directed planners. DBS and POSB products are
processed through the same service center.
To attract a number of segments in this way, a bank might have to make an
acquisition, as DBS did. But it would be a mistake for the acquirer to take
the familiar course of merging operations in search of synergies: the two-
brands, one-system approach depends on enhancing the strengths of the
banks, not on blurring the distinctions between them. Alternatively, a bank
could create separate units with distinct brands, an approach taken by Banco
Comercial Portugues, based in Lisbon. BCP has launched ten brands, each
aimed at a different segment; NovaRede, for example, offers basic transac-
tional banking to the mass market, while Banco7 targets affluent customers
with direct channels. Generally, the two-brands, one-system model is more
expensive than the focus model because the former involves the additional
cost of making acquisitions or creating start-ups, though a common back
office does allow for some economies of scale.
An umbrella brand
The most difficult approach for a bank is to serve many customer segments
through the same front and back offices. Few banks can succeed at this,
because it requires world-class skills in product and service
branding to ensure that the products have a distinct identity
in each segmentand such skills are rare in retail bank-
ing. Banks that wish to take this road have to invest a
good deal of money not only in developing products
and services but also in marketing communications
to ensure that the different brands attract distinct
segments and dont degenerate into a multiplicity of
confusing names for the same products. In addition,
branch staff must be highly trained to recognize the segment in which
customers fall and to direct them appropriately.
It would be easy for a former one-size-ts-all bank to go awry with this
approach. In the worst case, amorphously branded products would be sold
to the wrong customers by staff unable to recognize their proper segments.
Suppose, for example, that a simplier, looking for basic products, is
60 THE McKI NSEY QUARTERLY 2002 NUMBER 2
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attracted into a branch by an advertisement touting mutual funds made
easy. A frontline employee unable to distinguish among segments might
direct this person to an investment counselorwasting time and money for
all concerned.
When the umbrella approach works, however, scale effects can make it prof-
itable: a bank can push several kinds of customers through the same physical
branch and process the products they buy through a single back office. One
bank that is applying this model, in both Asia and elsewhere, is Citibank.
Although it uses the Citi name and blue logo for all segments, it has devel-
oped subbrands for each one; the CitiGold channel, for instance, is intended
for individuals with assets of more than $100,000. Although Citibanks
strategy was born of necessityin the early 1980s, Asian regulators limited
the number of branches that foreign banks could openit has been highly
successful: in 2001, Citibank Asia made net prots of more than $700 mil-
lion from its consumer-banking, asset-management, and private-banking
operations, comparable to the prots of Citibanking North America.
Asian banks will probably begin their movement out of the one-size-ts-all
approach by taking the focused route, since it offers the easiest transition.
Will they then be able to go on evolving? Some banks might be tempted by
what DBS has accomplished with the two-banks, one-system strategy or by
Citibanks success with its umbrella brand. They should resist, however, until
they have the marketing skills needed to master the focused approach.
Local banks in Asias emerging markets should stop treating customers as
though they all wanted the same thing; trying to serve everyone equally well
usually means serving everyone poorly. Apart from being expensive and inef-
cient, the approach is pushing increasingly disloyal customers into the will-
ing arms of increasingly avid competitors. Asian banks need to segment
their markets, to choose the segment or segments they can serve best, and to
adopt an appropriate business system. In the end, their survival will depend
on this.
The authors wish to thank Mun Hong Chin, Greg Gibb, Steven Pei, Patricia Whong, Lemeng Zhang, and
Wayne Zhang for their contributions to this article.
Mike Sherman is a consultant in McKinseys Hong Kong office, and Marjon Wanders is an asso-
ciate principal in the Kuala Lumpur office. Copyright 2002 McKinsey & Company. All rights
reserved.
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