Channel Innovation in The Retail Banking Sector: Best Practice Initiatives, Customer-Orientation and Emerging Strategic Foci

International Journal of Arts and Sciences
3(2): 66 - 82 (2009)
CD-ROM. ISSN: 1944-6934
© InternationalJournal.org
Channel Innovation in the Retail Banking Sector: Best Practice

Initiatives, Customer-orientation and Emerging Strategic Foci
Kevin Philpott, University College Cork, Ireland
Lawrence Dooley, University College Cork, Ireland
Abstract: This study presents a selection of key findings from a wider exploratory
investigation into the nature of multi-channel innovation in the retail banking sector. Drawing
on interviews conducted with industry experts, the following investigation makes four core
contributions. First, the study highlights a wide range of best practice channel innovations for
further consideration by bank management. Second, the study provides evidence that banks
are looking outside the banking industry for best practice inspiration. Third, the study
hypothesises that best practice channel innovations tend to be customer-oriented in nature.
Finally, the study hypothesises that best practice multi-channel strategy is moving away from
the current, unfocused ‘all-things-to-all-people’ approach.
1. Introduction
Innovation is positively related to firm performance (Goosen, de Coning & Smit, 2002;
Rauch, Wiklund, Frese & Lumpkin, 2004). Managing multiple distribution channels is now a
key strategic challenge for retail banks (Bruce, Bondy, Street & Wilson, 2009; Capgemini,
EFMA & ING, 2008). Drawing on the findings of a larger study, this paper examines best
practice innovations across the multi-channel mix. This is done from the perspective of a
clicks and mortar retail bank. Clicks and mortar retail banks are those banks that have both a
physical branch network and an online presence. First, the study provides a brief review of
the relevant literature, followed by a summary description of the exploratory methodology
employed. Next, the study presents core findings related to: best practice channel
innovations, channel functions, and channel evolutions. Finally, the implications of these
findings are discussed and recommendations for future research are made.
2. Literature Review
2.1 Innovation and the Retail Banking Sector
Innovation can be described as the means by which either new wealth producing resources
are created or existing resources are endowed with enhanced potential for creating wealth
(Drucker, 1985:67). At the organisational-level, innovation has been shown to be positively
related to individual firm performance (Goosen, et al., 2002; Rauch, et al., 2004). One key
industry where there are calls for greater levels of innovation is the retail banking sector
(Sullivan, 2009; KPMG & Innovaro, 2007; Capgemini, et al., 2008). The retail banking
sector is currently struggling as it comes under greater competitive pressure from a number of
sources. Customers are becoming more demanding (Accenture, 2008). Banking services are
gradually being seen as commodities (Onufrey & Moskowitz, 2008; Genesys, 2008). Non-
banking organisations are increasingly entering the marketplace to compete for customers
(Deloitte, 2008). Combing these trends, there appears to be a strong impetus for greater levels
of innovation to enable individual banks to differentiate themselves in an increasingly
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competitive marketplace. Yet retail banks are behind other industries in terms of managing
the process of innovation (KPMG & Innovaro, 2007; Mckeon & Kandybin, 2006). In order to
address this issue, a deeper understanding of innovation in the retail banking sector would be
valuable. Indeed, relatively little is known about innovation in the retail banking sector. This
is symptomatic of the wider problem that relatively little is known about ‘services
innovation’ in general (Tidd & Bessant, 2009).
From the body of research that has been conducted on innovation in the retail banking sector,
some significant findings have emerged. For instance, KPMG and Innovaro (2007:15) point
out that innovation in this sector tends to be both incremental and short-term in nature (ibid).
A longitudinal study conducted by Roberts and Amit (2003) on the Australian retail banking
sector offers further insights. According to this study, between 1981 and 1995, the vast
majority of innovations in the Australian sector were imported from banking industries in
other countries. Furthermore, the study shows that within the Australian sector, innovations
were quickly copied by competitors, usually within one year. In fact, only one of the twenty-
six major innovations observed by the study avoided imitation for a prolonged period of time.
What is more, this rare proprietary position did not realise significant financial performance
improvements for the bank in question. The study showed no evidence that innovating first in
the market significantly impacted financial performance. Rather, findings from the study
suggest that a bank’s financial performance was positively related to historically undertaking
incremental innovative activities that were new-to-the-firm, but not necessarily new to the
sector as a whole. The findings from this study appear to align with Michael Porter’s
assessment of the retail banking sector (Klinkerman, 1998). According to Porter, ‘The
banking industry is overwhelmed by imitation...One bank goes into Internet banking; all
banks go into Internet banking. One bank puts branches in supermarkets; all banks put
branches in supermarkets’ (ibid. p.40). However, Porter suggests that now is the time for
banks to move away from their imitative instincts in order to provide a differentiated offering
in the marketplace. In summary, these key findings demonstrate that innovation in the retail
banking sector tends to be incremental and imitative in nature, and retail bank performance is
positively related to the continuous adoption of new-to-the-firm ideas.
2.2 Distribution Channels

A key area of strategic importance for retail banks is distribution channel management (Bruce
et al., 2009; Capgemini et al., 2008). Fundamentally, a distribution channel can be described
as any delivery method through which a bank can provide services to customers. Each
individual bank typically operates an array of distribution channels, collectively termed the
bank’s multi-channel mix. Across the multi-channel mix, those channels that do not involve
physical face-to-face contact with bank staff members have been called ‘direct channels.’
Examples of the most commonly employed direct channels include: call centres, web
banking, direct mail, and automated teller machines. Historically, banks have actively sought
to migrate simple transactions, products and services away from tellers towards direct
channels. This global trend has been driven by a combination of three underlying forces.
Firstly, migration towards direct channels represents a cost saving opportunity for banks,
particularly migration towards web banking (Peppard, 2000; Farquhar & Panther, 2007).
Secondly, the migration of simple, low-value activities away from in-branch tellers, allows
staff to focus instead on the sale of high-value products and services (BearingPoint, 2006).
Thirdly, direct channels have the potential to offer customers enhanced levels of service and
convenience (Peppard, 2000). As a result, most clicks and mortar banks must now manage
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innovation across a broad range of both direct and indirect distribution channels. Given the
aforementioned importance of innovation to firm performance, it is surprising that there are
no academic studies to our knowledge that have focused specifically on the nature of
innovation in the context of the multi-channel mix. Consequently, this study seeks to provide
a deeper insight into the nature of distribution channel innovation in the retail banking sector.
In particular this study seeks to identify best practice channel innovations for management
consideration. Moreover, the study also seeks to bring to the surface relevant emerging
channel innovation trends.
3. Methodology
Quantitative studies can underemphasise or miss potentially important distinctions between
the innovative activities of different organisations (Tether, 2003). Thus, this investigation
adopts an in-depth qualitative methodology. Given the absence of specific multi-channel
innovation theory, an exploratory-style investigation was considered most suitable (Martin,
2003). With insufficient theory to test, the study takes an inductive approach (Eisenhardt,
1989). As with many other previous studies, semi-structured interviews were deemed the
most appropriate data collection technique for an exploratory-style investigation (Petkova,
Rindova & Gupta, 2008; Rogers, 2008; Doyle, Hughes & Glasiter, 2009; Ramstrom, 2008).
Informal, conversational-style, interviews were conducted with a panel of sixteen channel

experts. Ten Interviewees were sourced through research advertisements targeted at
specialised professional groups. Six interviewees were sourced by approaching companies
identified by other sample informants as information-rich sources. Indeed, all interviewees
were purposely sampled to provide information-rich and insightful cases (Patton, 2002). Each
informant was initially screened based on their job description and past channel experience.
In order to protect against a myopic bias, ten bankers and six consultants were recruited.
Bankers provided organisation-specific perspectives while consultants provided industry-
wide perspectives. Bank informants were either: channel managers, multi-channel leaders or
equivalents. Consultant informants ranged from the vice president of a financial services
consulting firm to a director of distribution channel research. Informants were further
selected to provide a broad geographic mix, with a focus on mature retail markets.
Specifically, the sample spanned: the US, the Middle East, the Nordic Region, Australia, and
the EU (UK and Ireland).
Overall confidence in the sample selection increased as informants unknowingly indentified

other banks represented in the sample as best practice firms. However, the following study
does not make direct associations between best practice banks and the sample to protect
interviewee anonymity. Interviews covered a wide range of topics including: channel
functions, best practice channel innovations, and channel trends. Interviews were conducted
either over the phone or in person, and typically lasted between sixty and ninety minutes.
Interview transcript notes were reviewed by a second independent researcher to assure
informants had sufficient knowledge of the research area. Interview transcript notes were
coded and iteratively assembled into emerging categories and overarching themes as the
study progressed. As key ideas developed during the interview process, existing literature
was surveyed for corroboration and conceptual clarification. The core findings from the
investigation are now presented under the following three thematic headings:
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(a) The main distribution channels identified by informants

(b) Informant perspectives on channel functions and best practice innovations
(c) Emerging channel trends
4. Findings
4.1 The Main Distribution Channels Identified by Informants
As a starting point, respondents were asked to identify the main distribution channels that can
exist between a bank and its customer base. Figure 1.0 presents informant responses. The
following five traditional channels were identified by informants: the branch, web banking,
Channel Main Sub-channels Descriptive Quotes from Expert Informants

Category Channels
“Still, the primary banking channel for most. Central
In-branch Staff to the sale of value-added services that require face-
to-face contact.”
Branch “Trying to reduce printing and paper costs here, but
In-branch flyers this channel is still invaluable for people that like to
physically take away and read a document.”
In-branch ATMs Used “to reduce queues and costs for the banks”
“...its importance will continue to grow over time due
Web
- to the benefit of cost efficiencies for banks, and
Banking
potential conveniences for consumers.”
Conventional
Channels Interactive Voice “Customers hate it because IVR is usually badly
Response (IVR) designed, but its cost efficient for banks.”
Call Centre
Call Centre Agent “Needed for more complicated remote queries, and
(CSA) increasingly used for cross-selling.”
Generally, not seen as a competitive differentiator,
External but more important in countries like the US where
-
ATMs “ATM pricing strategy is important” due to surcharge
competition.
“Banks are looking to move a lot of this
Direct Mail - communication to e-messages”, due to cost
efficiencies.
Video interface Possible future “alternative to face-to-face contact.
Web Agent Capable of providing convenient access to bank staff
Chat box interface without leaving your home.”
Social “Banks believe social media is an important space to
Facebook, Twitter,
Media be in, but they aren’t really sure what to do within
etc.
Banking this space just yet.”
SMS-based, “Seen as an extremely promising future channel, but
Mobile
Innovative browser-based, generally still only in the early stages of development
Banking
Channels client-based. and testing.”
“Popular in Australia and could potentially be
Field
- applied in other countries for the sale of complex
Agents
products like mortgages.”
Partnering Post offices,
with supermarkets, other “There are a number of benefits to piggy-backing off
Another financial service another organisation’s existing channel network.”
Firm providers, etc.
Figure 1.0 – The Distribution Channel Spectrum
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call centres, external automatic teller machines (ATMs) and direct mail. These channels are
employed by the vast majority of banks operating in more developed markets. Informants
further reported that the traditional channels could be supplemented by a host of more
innovative channels including: web agents, social media banking, mobile banking, field
agents and non-bank distribution partnerships. These channels are present to varying degrees
across more developed markets and represent new distribution alternatives. The next section
of this study describes the functions of each of the main distribution channels as well as
identified best practice innovations.
4.2 Informant Perspectives on Channel Functions and Best Practice

Innovations
4.2.1 The Branch

There was widespread agreement amongst the sample that the branch remains the primary
distribution channel for the vast majority of retail banks. The physical, face-to-face nature of
the branch was considered a core competitive advantage when it came to banking activities
that require high levels of trust, for example the sale of complex financial products or the
resolution of complicated customer service issues. Aggregated sample responses showed that
the core strategic objective of the branch was to build customer relationships in order to
preserve loyalty and drive high value sales. One particularly experienced informant stated
that it is the ‘essential human element of branches that allows best practice banks to move
into the high value adding, trusted financial advisor space.’ At present, the comfort of this
face-to-face relationship was reported to be the key competitive advantage that clicks and
mortar banks have over purely online banks.
A general innovation trend emerging from the interviews was that innovation in the area of
planned branch enhancements borrowed heavily from practices outside the retail banking
industry. For instance, three informants noted that best practice banks were beginning to
borrow same-store-growth metrics from the supermarket industry to increase deposit growth.
Similarly, six informants identified copying the extended opening hours of non-bank retailers
as a best practice evolution. In addition, seven informants noted that a number of banks have
re-designed branches to physically appear less like traditional banks. Umpqua Bank was
identified as best practice for physically designing its branches to have a much more casual,
open-plan, sales-conducive atmosphere. Umpqua’s branches have been designed with special
customer-centric features like, coffee spots, sit-down zones and ask bars. Along the same
vein, Bank of New Zealand has designed a range of financial products that are displayed in
physical packages. In this way consumers can more easily browse through their financial
options when making purchase decisions. As a result, banks appear to be progressively
looking towards more consumer-focused industries for branch best practices.
4.2.2 Web Banking

Across the sample web banking was found to be the second most important distribution
channel, growing in importance to meet that of the branch. As a channel it tends to be more
suited to addressing simple customer queries, carrying out simple transactions, and selling
simple financial products. However, it was reported that over time customers are becoming
more comfortable buying increasingly complex products online (e.g. shares and life
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insurance). From a banking perspective, an inherent benefit of the web channel was cost
reduction. While exact costs differed across the sample, it was generally reported that average
transaction costs were most expensive through in-branch tellers, followed by CSAs, followed
by ATMs or IVR, followed by web banking. This makes web banking a cost-effective
distribution channel. Using a specific example, one bank informant estimated that ‘it costs...
[his bank]...about $12 to open an account using a human as opposed to $4 online.’ Thus,
migrating customers towards web banking offers a significant cost saving for banks.
Additionally, it was reported that the public section of a bank’s website is becoming a key
acquisition tool. This is because, as online life proliferates, customers are increasingly
considering the offers of competing banks by browsing competitor websites. From a
consumer perspective, web banking can
represent a highly convenient service. A
representative quote from a bank informant
stated that websites are currently being re-
designed, “so that customers can enjoy using
the site, and so that they can interact and play
with their finances...It’s all about allowing
them to do things nice-and-easy, and upfront,
and making things as simple as possible for
them.”
As a general innovation trend across the

sample there appears to be a strong push
towards making banking websites much more customer-centric. For example, four informants
pointed towards the homepage of Progress Figure 2.0 - Succinct Homepage (Progress
Bank as a best practice design (see figure Bank of Florida, 2009)
2.0). The page is distinctive, visually
appealing and easy to understand for both customers and non-customers alike. In terms of
customer-centric functionality ten informants pointed towards Mint.com as a best practice
example. Mint.com is a non-bank money management site that allows users to make savings
through improving their personal finance decisions. Mint aggregates the customer’s credit
union, credit card and bank data so that the consumer can easily see an overall picture of their
personal financial activities. The site displays attractive graphs that break down the user’s
monetary activity so that they can better understand and adjust their financial behaviours. The
site can also send text alerts to warn users of changes in bank fees, low balances and
suspicious account activity. In this way Mint offers users a highly desirable customised
service. Additionally, respondents stated that best practice banks were looking more and
more at personalising the secure section of bank websites. Bankinter was identified as a best
practice example. This bank targets its affluent customer base with messages that depend on
individual customer behaviours (Gemes, Konik & Moss, 2008). Based on the specific online
behaviours, the site will recommend products such as: tax planning, trusts and access to
equities. Moreover, Bankinter offers users fast access to frequently used areas of the website
based on individual usage patterns (Booz Allen Hamilton, 2007). Surprisingly, the vast
majority of web banking innovations identified by the sample as best practice, focused not on
cost reduction, but rather on enhancing the online experience. In summary, it was found that
although web banking is inherently cost reducing for banks, it seems best practice innovation
focuses more on enhancing the customer experience.
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4.2.3 Call Centres

Informants stated that call centres were originally introduced as a cost reduction tool. In fact,
within the sample, up to 90% of calls were handled by low cost interactive voice response
machines (IVR). Calls that could not be answered through IVR were directed to a call centre
agent (CSA). It was reported that banks are seeking to leverage these inbound services calls
to drive cross-sales. The call centre acts as a necessary remote channel for less tech savvy
customers and for those without internet access. It also acts as a useful customer support
service for both the web banking and branch channels. However, evolving from their original
purpose call centres were perceived by thirteen out of the sixteen informants as cost centres.
Perhaps more importantly, it was widely remarked across the sample that customers
increasingly preferred web banking or branch channels to call centres. As one consultant
comment exemplifies, ‘IVR is usually very poor. Call centre customers are very frustrated
with it. Customers would prefer not to phone call centres at all, except when they have to.’
First Direct was identified by informants as a best practice call centre example. Unlike most
other banks, First Direct uses its call centre to build customer relationships. This is done by
specifically training CSAs in customer empathy and mood matching techniques to deliver a
highly personalised, rapport building customer experience (Millard, 2003). Six informants
further added that ‘call me back’ buttons on websites were a best practice method used to
improve sales conversion rates.
While some banks were reported to have outsourced their call centres to control costs, across
the sample the call centre was generally expected to remain a relatively steady channel for
banks in the near future. However, in the long-term this may change, given the reported
unpopularity of the call centre channel for most banks in the sample. Gemes, Konik & Moss
(2007) have corroborated this finding at the global level by highlighting the decreasing
importance of phone banking as a purchasing channel.
4.2.4 Automatic Teller Machines

The sample unanimously stated that the primary objective of external ATMs was cash
withdrawal. While some banks had external ATMs with the capacity to sell products (e.g.
theatre tickets, airline tickets, and mobile top-ups), others consciously minimized sales
features to avoid queues. Typically across the sample external ATMs were not perceived to
be strong sales channels. Moreover, ATMs were not generally perceived to be effective
market differentiators, with the possible exception of banks operating in countries where
surcharges play a noteworthy role. Perhaps most importantly this study questions the long-
term viability of the external ATM network. One bank informant, operating in the sample’s
most technologically advanced market, stated that ATM transactions in his region were
already seeing a ‘1.5-3% decrease in transaction volumes per annum’ due to movement
towards electronic payment methods. While for the foreseeable future cash will remain a key
payment method in most countries, it is slowly declining at the global level (Denecker,
Sarvady & Yip, 2009). Since external ATMs are generally not seen as market differentiators,
and since the importance of cash withdrawals looks set to decrease in the long-term, findings
appear to call into question the long-term strategic role of external ATMs in the multi-
channel mix.
On the other hand, sample informants noted that most banks are leveraging in-branch ATMs
to free up teller time for high value adding sales opportunities. One key area of in-branch
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ATM innovation identified by informants was automated deposit machines. Such in-branch
machines allow customers to self-deposit cheques, cash and coins. However, it should be
pointed out that respondents had mixed experiences with the success of such machines. Some
informant criticisms included: customers being ‘too afraid to use the machines,’ ‘coin
deposits being too slow,’ and the existence of ‘some margin of error in counting.’ On the
other hand, other respondents reported strong growth in usage. Indeed, Commerce Bank was
identified as a best practice example, using free in-branch coin deposit machines to attract in
non-bank customers. In-branch ATMs were generally considered to be useful cost reduction
mechanisms and branch supports, but individual differences between machines may need to
be considered when making strategic choices.
4.2.5 Direct Mail and In-branch Flyers

Direct mail was reported to be especially useful for: mailing foreign currency to customers
(e.g. HSBC’s Travel Money service), launching large-scale credit card sales campaigns, and
catering for the needs of less tech-savvy customers. In-branch flyers were considered a
critical channel for those customers that like to physically take away and read banking
information. However, it was additionally reported that many banks are now seeking to
significantly reduce paper-based costs. This is typified by the present push to encourage
customers to use e-statements. Many sample informants expected paper-based
communications to be minimized going forward.
4.2.6 Web Agents

Web agents add a real-time human element to online bank interactions. Informants that had
experience with web agents explained that two distinct formats were currently employed by
banks. In the first format, web agents use a pop-up dialog box to communicate with
customers. One interviewee reported that ‘a skilled chat agent can handle four customer
queries at once,’ making it a particularly cost effective channel. The second form of web
agent is a Skype-style video agent. Bankinter recently introduced this tool to enable remote
financial advice, file sharing, and online support. As a result, Bankinter achieved 150%
growth on its sales success rate within the first 3 months of implementation (The Banker,
2008).
4.2.7 Social Media Banking

Two interviewees were currently trialling the idea of social media banking. Indeed,
approximately fifty banks and credit unions have developed Facebook pages (Bruene, 2008)
and a number of major US financial institutions have opened Twitter accounts (e.g. Bank of
America and Wachovia). Furthermore, informants reported that Wells Fargo has launched an
online role playing game and First Direct has formed its own online community that reviews
restaurants and holiday spots. However, at present social media bank is still very much in the
experimental stages of development. As one bank informant put it, ‘banks believe social
media is an important space to be in, but they aren’t really sure what exactly to do within this
space just yet.’ No convincing evidence was provided by the sample to confirm the link
between social media banking and significant positive financial performance improvements.
However, respondents were positive about future developments.
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4.2.8 Banking Field Agents

Four informants explained that banking field agents (also known as mobile bankers) were a
common distribution channel in Australia. Following the Australian model, field agent’s
travel directly to the homes of time poor customers to sell complex financial products, for
example mortgages. It was suggested by Australian informants that there was significant
potential to trial this model more widely in other regions. The same conclusion was reached
by Gemes et al. (2007:1). This channel appears to align with the benefits of the branch
channel by encouraging relationship building and a more convenient customer experience.
4.2.9 Distribution Partners

Informants noted that banks can piggyback off the distribution networks of other
organisations. Common types of bank partnerships were reported to exist between post
offices, supermarkets or other financial services firms. Of these partnerships, the most oft
mentioned form of partnership was the supermarket bank branch. From a bank perspective,
the success of such a partnership was deemed by sample members to be heavily dependent on
achieving strategic fit. According to Flur, Ledet and McCoy (1996), supermarket bank
branches appear to be less suited to banks pursuing strong relationship building strategies
(ibid). As a result, supermarket banks tend to be more suited to the sale of low margin
products, like checking accounts, personal loans and credit cards. Respondents stated that
partnership success varied case-by-case.
4.2.10 Mobile Banking

Mobile banking was most often cited across the sample as the biggest channel development
over the next five years. A number of different mobile banking formats were found to exist
including text, WAP and downloadable client applications. The general evolution of mobile
banking in developed markets was reported to be towards Smartphone banking. Smartphones
typically leverage rich user interfaces to provide an enhanced remote banking experience to
customers. However, currently most banks are still only in the early stages of mobile banking
development. In terms of functionality, mobile banking appears to be evolving from the
information-push stage to the transaction stage. As one informant explained, banks, ‘...are
only now really beginning to get into the payments phase’.
Those informants that had introduced Smartphone mobile banking, had seen promising
results. Typifying sample reports, one banking informant noted that in his bank, ‘transaction
numbers are growing very positively’, albeit from a low starting base. Another bank
informant commented that mobile banking cost his bank very little to implement. This is
because the bank pursued a strategy whereby the mobile offering ‘simply re-skinned the
online offering, switching on and off various bits that were suitable for the phone.’ Small and
medium sized banks from the sample further reported that they benefited from pursuing a
follower mobile banking strategy. Instead of pursuing a first mover strategy, these banks
found it more cost effective to allow larger banks to raise initial market awareness and absorb
the initial launch risk. The benefits of this follower strategy are corroborated by a Tower
Group investigation (Vyas, 2009) reporting that small and mid-tier banks in the US market
were adopting the same approach.
Outside the common trajectory of mobile banking innovation, informants also cited more
atypical innovations. Such innovations included the ability of USAA to allow customers to
deposit cheques remotely by taking pictures of their cheques with an I-phone. Respondents
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also identified National Australia Bank’s experimentation in the area of contactless mobile
payments as a best practice example. After a three month trial of the contactless system, 90%
of participants were ‘very’ or ‘extremely’ satisfied with the service and 78% of participants
rated the technology as better than cash (National Australia Bank, 2009). To sum up, it would
appear that there was widespread agreement amongst the sample that mobile banking is
positioned to be a key distribution channel in the future. However at present, its development
is typically only at the early payments stage and potential image capture or contactless
payment capabilities are relatively immature across the industry as a whole.
4.4 Emerging Channel Trends

An overarching theme emerging from interviewee descriptions of best practice innovations
across the channel mix was that best practice innovations focused heavily on improving the
customer experience, as opposed to explicitly seeking to reduce costs or improve backend
technologies. At the outset this seems like an obvious progression. Yet there was a strong
sentiment across the sample that banks do not currently sufficiently understand or address
customer needs. As one informant stated, ‘‘...banks need to ask, “what the best strategy is for
people?” Then the channels are just components of that. Coming at it from a typical banker
perspective, banks tend to analyse the individual channels and then drive the numbers from
there. You can’t start with a device or a particular channel and say that’s relevant to the
market. You need to work bottom up. You need to start by asking, ‘what do customers really
want? ...The fact of the matter is that most banks don’t understand what customers want.’
Thus, this study hypothesises that best practice channel innovations tend to be customer-
oriented in nature.
Analysing aggregated respondent comments that related to channel objectives and reported
evolutions, a number of emerging patterns were also found. Based on responses across the
sample it appears that the web banking channel is growing in strategic importance to meet
that of the branch channel. In fact, for the first time ever, this year American customers up to
the age of 55 were found to prefer online banking to any other banking channel (Kaplan,
2009). Web banking appears to be combining with Smartphone banking, web agents, and
social media banking to offer a more convenient online service to customers. While the latter
three channels have not yet been extensively tested for a prolonged period in the field,
informant responses were positive about long-term developments.
Informants were also positive about the strategic importance of the branch, asserting that it
was still the primary distribution channel for most banks. Field agents appear to represent a
promising import for many countries, acting as a mobile version of the branch channel.
Similarly, in-branch ATMs support in-branch staff by drawing customers into the bank, while
simultaneously freeing up teller time for the sale of complex products.
On the other hand, the long-term future of call centres, external ATMs and paper-based
channels was called into question by a number of informants. Finally, the success of
distribution partnerships varied depending on the type of partnership and the organisations
involved. Reviewing channel functions and expected channel evolutions, Figure 3.0 reveals
the rise of face-to-face and online channels.
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Face-to-face Face-to-face Objectives Key

Supportive Comments
Channels
In-branch Physical face-to-face relationship The mass market currently demands some degree of
staff building to sell complex products. face-to-face contact.
In-branch Can draw customers into the Additionally frees up teller time for the sale of
ATMs branch. complex products.
Physical face-to-face relationship Compliments in-branch staff by providing a mobile
Field Agents
building to sell complex products. version of the in-branch service.
Online Online Key
Supportive Objectives Comments
Channels
Web Convenient online service. Movement towards personalisation to avoid
Banking commoditization.
Support for convenient online Video agents could allow remote face-to-face
Web Agents
service. relationship building.
Smartphone Anytime, anywhere convenient Potential to be even more convenient than web
Banking online service. banking.
Social Media Combines online communities with Seeks to take advantage of the significant trend
Banking online banking. towards social media.
Declining Channel Key
Channels Objectives Comments
Supports other channels. Sells less Perceived as a cost centres. Preference as a
Call Centres
complex products. purchasing channel is decreasing.
External Convenient cash withdrawal. Slow global movement away from the use of cash.
ATMs Generally not seen as strong market differentiators.
Paper-based Attends to the needs of less tech- Paper communications decreasing due to costs.
channels savvy customers
Figure 3.0 – The Rise of Face-to-face and Online Channels
Figure 4.0 – Emerging Distribution Strategic Foci

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Across the sample, those channels with the least reported future strategic concerns were the
channels that directly supported online services or physical face-to-face relationship building.
Combing this trend with aggregate informant descriptions of the types of products and
services sold through individual channels, three potential strategic foci emerged (see figure
4.0). ‘Trusted financial advisors’ focus on the provision of complex, high value added
services through face-to-face channels like in-branch staff and field agents. ‘Personalised
remote service providers’ focus on the provision of less complex services through online
channels. This particular strategic focus facilitates the provision of highly customised, value-
adding online offerings, but avoids movement towards low cost service commoditization.
Finally, ‘all-things-to-all people’ banks represent the position that most banks are in at the
moment. While not online focused or branch focused, ‘all-things-to-all-people’ banks sit in
the middle hedging their bets. As one informant explained, ‘...banks are really struggling
with the idea of being all-things-to-all-people. Banks at the moment are marketing in a
universal way, as in, everyone wants to go into a branch or everybody wants to go online. If
you look at who is using the different channels, that’s simply not what’s happening.’ The
contemporary incarnation of the all-things-to-all people approach involves banks providing
services through a range of distribution channels in a largely unfocused manner. The current
approach largely markets channels to all customers equally and does not actively seek to
develop focused distribution strengths. Interviewee comments suggest that banks are moving
away from the current ‘all-things-to-all-people’ approach towards more focused multi-
channel strategy development. Thus, this study hypothesises that best practice multi-channel
strategy is moving away from the broad ‘all-things-to-all-people’ approach towards more
focused strategies.
5.0 Discussion
In summary, this study makes four core contributions. Firstly, best practice innovations
across each of the main distribution channels are brought to the surface for further considered
by bank management. Indeed, Tether (2003) emphasises the heterogeneous nature of
innovation both between and within service industry sectors. In line with movement away
from the traditional ‘one-size-fits-all’ understanding of services innovation (Tether, 2003),
this study does not deem it appropriate to be overly prescriptive about the suitability of
adopting specific channel innovations. Instead it is believed that the reader is in the best
position to determine suitability.
Secondly, this study shows that in the area of branch innovation banks are looking to other
retail industries for inspiration. Similarly, banks that indentified Mint.com as best practice
show evidence of sourcing innovation from non-bank organisations. This would seem to
suggest that banks are becoming more creative about their best practice benchmarking.
Moreover, this finding extends the findings of Roberts and Amit (2003) demonstrating that
banks not only scan foreign banking industries for importable innovations, but also
completely different industries outside the banking sector. Consequently, it may then be an
idea for banks to look further afield to other leading companies of relevance. For example,
banks could look to best-in-class consulting firms for inspiration on how to treat customers as
clients. Banks could look to Tesco for guidelines on consumer data mining. Insights from
Amazon.com’s experience could be used to develop better customer purchasing propensity
models. Indeed, Deloitte (2008) directs banks towards Best Buy as a best practice example of
3(2): 66 - 82 (2009)
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multi-channel integration. Banks seeking radical innovation might even benefit from
attending conferences that focus on cutting edge ideas, for example SXSW Interactive or the
TED conference.
Thirdly, this study found that the vast majority of reported channel innovations focused on
enhancing the customer experience. While this evolution may seem obvious, businesses do
not always adopt a customer-orientated approach. In fact, the customer perspective is
frequently ignored (Peters and Waterman, 2004). Peters and Waterman (2004) found that
excellent companies tended to be primarily guided by a customer-orientation as opposed to
cost reduction or technology enhancements. While bank success is clearly driven by both
technology enhancements and cost reduction as well, the overarching driver that emerged
from the interviews was customer-orientation. Similarly, project SAPPHO investigated over
120 measures of commercial innovation success, and discovered that a better understanding
of consumer needs was one of the top five determinants of project success (Rothwell,
Freeman, Horlsey, Jervis & Townsend, 1974). Again, SAPPHO suggests that innovations can
benefit from a customer-orientation. Focusing specifically on the retail banking sector,
Mckeon and Kandybin (2006:1) put forward the opinion that retail banking innovations are
more successful if they fulfil a real customer need. The findings of this investigation would
appear to empirically support such an assertion. As a result, this study hypothesises that best
practice channel innovations tend to be customer-oriented in nature.
Finally, this study hypothesises the emergence of three potential distribution strategic foci.
Moving away from the current incarnation of the ‘all-things-to-all-people’ approach this
study suggests banks could benefit from focusing innovation on core distribution strengths.
Indeed, by its very definition, a competitive advantage requires doing something different
from the competition. With most banks pursuing the unfocused ‘all-things-to-all-people’
approach, a differentiated strategy could offer a competitive advantage in a largely
homogenous marketplace. As Porter suggests, now could be the right time for banks to
challenge their imitative instinct and decide what not to do (Klinkerman, 1998). While
individual channel innovations are quickly imitated, continuous incremental innovation
within one of the foci could be more difficult for competitors to copy.
In the short-term banks will likely continue to employ a broad ‘all-things-to-all-people’

approach to cater to a diverse customer base with a wide range of channel needs. However,
banks may begin to amend this approach to focus marketing efforts more specifically on
particularly valuable customer groupings across the channel mix. Catering towards preferred
customer segments may require developing certain channels over others. Alternatively, banks
may seek to pursue the all-things-to-all-people approach at face value, but actually outsource
non-core channels behind the scenes. External ATMs and call centres seem prime candidates
for outsourcing, provided an appropriate service level agreement could be maintained. This
could allow banks to concentrate on developing core distribution strengths without
eliminating existing channels. Indeed, it would be difficult (and in some countries illegal) for
banks to completely remove existing distribution channels. The all-things-to-all-people
approach has the benefit of being a relatively low risk strategy since this is the approach that
most banks are currently pursuing. However in the long-term, sample responses suggest that
this strategy could be too unfocused. Moving closer toward the ‘personalised remote service
provider’ focus could be a viable option for some banks. Indeed, as one informant noted, ‘the
current economic environment will accelerate the use of direct channels because these
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channels tend to have lower transaction costs. And within those direct channels, there will be
more pressure on call centres to move transactions to the web.’ For banks in a weak financial
position, the current economic environment could provide the impetus to push for a strong
online focus. Yet an online focus has its disadvantages too. Banks that follow this path may
experience higher levels of competition from non-bank competitors due to the lower barriers
of entry associated with the internet. Clicks and mortar banks will experience competition
from online-only banks. Perhaps most importantly, the remote service provider focus could
begin a low cost race to the bottom turning bank services into commodities. On the other
hand, banks may consider becoming trusted financial advisors. Taking this path, clicks and
mortar banks could focus on fully developing their competitive advantage over online-only
banks. Moreover, based on sample responses, face-to-face communication was deemed to be
the best method for developing long-term customer relationships. Yet, moving towards this
strategic focus would likely require the expensive re-modernization of branches in the long-
term. Similarly, a branch build strategy can pose significant investment risks for banks. These
issues could make the branch focus a risky endeavour for banks in weak financial positions.
Banks pursuing the trusted financial advisor approach also risk being left behind if future
generations if customers become comfortable buying complex products online. Alternatively,
video agents could enable ‘remote service providers’ to move into the ‘trusted financial
advisor’ space.
Overall however, appropriate strategic focus will be contingent on each bank’s individual
operating context, and in particular the bank’s position in the marketplace relative to
competitors. Furthermore, while banks can choose specific consumer groups to cater towards,
ultimately consumer preferences will drive channel strategy. On a concluding note it should
also be acknowledged that banks may equally choose not to differentiate themselves from
competitors through their distribution channels. Instead banks may choose to focus
innovation efforts on other business areas such as financial product innovation or business
model innovation.
6.0 Recommendations for Future Research

Since this investigation collected data from a relatively small dataset, quantitative validation
is required to allow for large-scale generalisations to be confidently made. Thus, two
hypotheses have been generated for further testing:
H1: Best practice channel innovations tend to be customer-oriented in nature.
H2: Best practice multi-channel strategy is moving away from the broad ‘all-things-
to-all-people’ approach towards more focused strategies.
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International Journal of Arts and Sciences

Channel Innovation in the Retail Banking Sector: Best Practice

2.2 Distribution Channels

Informal, conversational-style, interviews were conducted with a panel of sixteen channel

Overall confidence in the sample selection increased as informants unknowingly indentified

(a) The main distribution channels identified by informants

Channel Main Sub-channels Descriptive Quotes from Expert Informants

4.2 Informant Perspectives on Channel Functions and Best Practice

4.2.1 The Branch

4.2.2 Web Banking

As a general innovation trend across the

4.2.3 Call Centres

4.2.4 Automatic Teller Machines

4.2.5 Direct Mail and In-branch Flyers

4.2.6 Web Agents

4.2.7 Social Media Banking

4.2.8 Banking Field Agents

4.2.9 Distribution Partners

4.2.10 Mobile Banking

4.4 Emerging Channel Trends

Face-to-face Face-to-face Objectives Key

Figure 4.0 – Emerging Distribution Strategic Foci

In the short-term banks will likely continue to employ a broad ‘all-things-to-all-people’

6.0 Recommendations for Future Research

H1: Best practice channel innovations tend to be customer-oriented in nature.

BearingPoint (2006). Banking Channel Optimization: Rationalizing the Customer

Deloitte (2008). Evolving Models of Retail Banking Distribution: Capitalizing on Changes in

Eisenhardt, K. (1989). Building Theories from Case Study Research. Academy of

Martin, A. (2003). What Drives the Configuration of Information Technology Projects?

Onufrey, S. & Moskowitz, H. (2008, October). Rethinking Segmentation. ABA Banking

Peppard, J. (2000). Customer Relationship Management (CRM) in the Financial Services.

Ramstrom, J. (2008). Inter-organizational Meets Inter-personal: An Exploratory Study of

Rogers, B. (2008). An Exploratory Study of the Make-or-buy Decisions in Pharmaceutical

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