The Information Paradox

An article in one of the recent banking technology journals proclaimed that customer information management is banking’s new mantra. From data-mining applications that determine customer profitability to customer-centric sales and marketing efforts, the article claims, banks are embracing the principles of customer relationship management as never before. Despite all the laudatory rhetoric, questions remain about how serious some banks really are in addressing the realities of market competition in the new millennium and their commitment to transform mountains of data into true strategic assets. The cost of extracting data from multiple legacy systems and transforming it for competitive analytical use is hard, expensive work. However, the opportunity costs of a lack of information about customer and noncustomer populations alike make investment in information a competitive imperative.

Competitive intentions and market reality

Financial institutions in general and banks in particular are competing for customers not only against each other but against brokerage houses, independent credit card companies, insurers, and new consumer lending institutions like The Money Store. In the absence of robust market-based information, many organizations have attempted to expand market share through mergers and acquisitions, joint ventures, formal and informal collaborations, and the like. Unfortunately these paths have often compounded the fundamental marketing dilemma of today’s banking institution: how to find and keep profitable customers. While there are many institutions that claim some level of detailed marketing information about their customers, the timeliness, amount, and ultimate usage of this data remain marginal at best. Moreover, larger, global-oriented institutions face huge hurdles to integrating their customer data systems, their product offerings, and their policies across multiple business lines and platforms.

Vendor solutions versus business solutions

Yesterday’s product-focused business model no longer works in the increasingly sophisticated world of financial service competition. Like it or not, the proliferation of banking services are largely perceived as commodity products with little or no differentiable features. Market segments such as high-net-worth affluents, gray America, women in business, affinity groups, Internet users, and new money are among the categories utmost in the minds of executives throughout the industry. Paradoxically, judging from the results, research suggests that few organizations have demonstrated an understanding about using new decision-support and data-mining methods to capture these large and potentially lucrative markets. Worse yet, many of the best and brightest marketing strategists within them fail to achieve the executive level or budgetary stature necessary to evolve a more progressive and open-minded approach to the dissemination and use of information as an asset. All too frequently, these change agents are dismissed as irrelevant or become mired in the organizational and political morass bounded by the interests of executive management, IT, and marketing. Despite much lip service, true integration of people, processes, and technology remains a distant reality for many organizations.

Facts and fiction

In the newly deregulated world of financial services, few of the cardinal tenets still apply. No longer is a competitor regulated into profitability or protected from the ravages of free-market competition. While many banks continue to dwell on product orientations within proximity of their branch, supermarket, or regional locations, Charles Schwab and Fidelity have quietly persuaded some of the banks’ very best and most profitable customers to leave. Their strategy was and is driven by the assemblage of an astonishing level of business and marketing information, both primitive and derived. Furthermore, their executive management is committed to a regimen of detailed and unrelenting marketing research and analysis. In contrast, it is ironic that the very industry that touts 1998 expenditures of $1.13 billion in customer information applications has been slow to understand customer needs and profitability and has consistently underestimated competitors that did. In fact, according to industry sources, banking’s share of U.S. wealth fell from 36% in 1980 to 23% in 1996, and 8 out of 10 customers who remain are money losers. Widely touted per-share earnings

are illusory and have been driven by stock buybacks and share price anomaliesu00e2u20ac”not by improved market share. In fact, most new product sales are unprofitable, and numerous industry studies reveal a fairly typical 80% attrition rate among banks’ most profitable customers, which can cause revenue losses to grow by as much as 20% per year. In Canadian and European markets, similar trends prevail. In many cases, the typical retail bank customer tends to buy his or her higher-margin products (mutual funds and other investment instruments) elsewhere, turning to the traditional branch or telebanks for deposit services such as savings and checking. The seemingly ubiquitous nature of Internet and e-commerce activity will only exacerbate this phenomenon.

Examples abound

The financial services landscape is littered with ill-conceived datamart, warehouse, and related projects that were unsubstantiated, underresearched, or quite possibly “mandated” as pet projects with no basis in the competitive realities of today’s marketplace. For example, in the mid-to-late 1980s, telephone banking was going to revolutionize the industry. Presumably people were going to be conducting transactions on the phone rather than walking into the bank. The logic followed that bankers would be able to reduce branch staffing levels as well as the number of branches. The result? Consumers increased the number of transactions they were making while their behavior essentially remained the same.

Next came the automated teller machines with essentially the same results. Banks deployed hundreds of ATMs so their customers wouldn’t have to stand in lines. They planned to reduce staff and related fixed overhead. What happened? People did more transactions. Most recently, many of these very same institutions have headed to the Internet and are likely to repeat the cycle. We’ve even observed one institution whose Internet banking charges exceed those of its high-transaction-cost, paper-based checking account, providing, in effect, a disincentive to bank online or through the Net. There are doubtless numerous other examples of this mindset, and this situation is by no means unique to banking.

Metadata and warehousing

Integrated marketing strategy, one-to-one marketing, branding, or any of the other contemporaneous descriptions of what’s necessary to compete effectively represent enormous challenges. Few organizations can document the direct relationship between adding an access channel and the related cost structure within the physical distribution network. It becomes virtually impossible to compare the cost and effects of substitution in a way that relates to the market, the competition, or their own institution. In effect, they have consciously or unconsciously added incremental operating costs to their infrastructure without a corresponding increase in market share, gross revenue, or economic profit.

In spite of the apparent contradictions between their lofty pronouncements and day-to-day reality, some industry visionaries recognize the strategic importance of business information supported by the data warehousing initiative. While the levels of sophistication vary between and among various institutions, these individuals appreciate what it takes to effectively develop, build, and maintain a data warehouse or comparable information repository. Their challenges are uniformu00e2u20ac”all financial institutions face very significant information gaps when they start integrating complex, dense data sets from diverse production systems whose data was never structured or derived for marketing, competitive or strategic use.

At a time when more banks showed net losses in the fourth quarter and for 1998 as a whole than at any time since 1992, Schwab’s shares are trading at 88 times estimated earnings with a trailing 12-month earnings multiple of 126. Both measures are triple or quadruple the overall market’s. As industry practitioners, we can’t help but wonder when or if it will occur to banks where these customers went or how much incremental market share was lostu00e2u20ac”obviously mirrored by shareholder valuations and corresponding market prices. To that end, we can only hope this phenomenon will provide a wake-up call that challenges conventional wisdom regarding the use and application of business information.