Personal Financial Services: A Question of Channels

Five key trends need to be recognized Success will rest on knowing what customers really want Personal financial services are in the midst of a transition. Once, competition was largely defined by regulation and geography; now, the industry is starting to be organized around consumer needs and around the underlying economics of products and their delivery. As in other deregulating industries, margins are declining, though so far the impact of this decline has been masked by favorable interest rates. But make no mistake: PFS companies still have ample opportunities to prosper, both during the transition and beyond it. The trick for them is to figure out how to exploit what is likely to be a lengthy transition while simultaneously preparing themselves to compete in the more distant future. We believe that focusing on distribution channels and developing a deep understanding of consumer buying behavior are the way to accomplish this difficult task. Channels have always been important in PFS. Indeed, distribution channels account for over half the cost structure of most traditional players. But in the current environment, channels have become the premier battleground for the $120-billion-plus profits available each year in PFS. Consumer product preferences have reallocated assets and liabilities among providers: from 1993 to 1995, for example, consumer balances in securities (largely sold by brokerage firms) rose by $782 billion, while balances in bank-dominated traditional deposit products rose by a mere $84 billion. As a result, large traditional players, such as commercial banks and insurance companies, have steadily lost market share to new entrants. In fact, between 1992 and 1996, the proportion of consumers that viewed their bank as their primary financial institution fell from 59 to 49 percent. But today, managing channels means much more than simply mastering individual channels like ATMs, branches, telephone, on line, or direct mail. It means understanding what PFS consumers want and creating new ways to meet their needs profitably. In this critical transitional period, a host of new channel opportunities are emerging. In the articles that follow this overview, we sketch out three of them: bancassurance, a combination of banking and insurance; the creation of an integrated provider for residential real estate closings; and the sale of PFS products in the workplace. Each of these opportunities bundles existing financial (and sometimes nonfinancial) products and delivers them in a new and potentially powerful way. Each is anchored in the economics of product delivery and in a practical understanding of consumer needs based on extensive consumer research into all aspects of PFS. Moreover, each is closely tied to the trends driving the transformation of PFS, and thus points the way for large traditional players to thrive in a rapidly changing environment. There are five such trends: Trend 1: Growing use of remote channels. The volume of sales and service transactions conducted through lower-cost remote channels is growing dramatically. In many sectors of PFS, remote channels are already widely used. In 1996, for example, 65 percent of consumers claimed to have used their bank's telephone service, and 1,000 banks had Web sites, up from only 20 in 1994. Roughly 1.2 million households currently use PC banking. While agent-based insurers still dominate property and casualty insurance with nearly 90 percent of the market, direct insurers are providing formidable competition. Foremost among them is Warren Buffet's GEICO, a telephone-based insurer that has grown at twice the industry average over the past decade. In 1995, 11 percent of auto loans in the United States were purchased through remote channels. In the United Kingdom, the direct marketing company Direct Line has become the market leader in automobile insurance, increasing its market share from 2 to 22 percent in just four years. …