al non-credit services. However, of the 19 per cent of companies which intended to add a bank, nearly a third were doing this because of a rapid increase in the demand for overseas merger and acquisition advice.
Product life cycles in international banking non-credit services tend to be relatively short unless electronically based, and it is important for banks to stay up with the level of service offerings if they intend to compete fully in this sector. In particular the growth of systems based services is seen as a major area for development over the next decade, especially by those large commercial banks seeking to continue to differentiate themselves. Some banks see this area of activity opening up a range of data processing, information management and communication services which provide an opportunity to enter areas of high growth substantially outside the existing bounds of conventional banking.
Electronic banking services will be of great importance in both corporate and retail banking. Once established via intelligent terminals, plastic cards or home banking terminals, electronic banking provides a new delivery system which allows the bank to offer an ever-increasing array of services via this conduit. In the corporate market therefore cash management products are becoming a necessity for corporate treasurers, offering the opportunity to centralize corporate funds and improve the efficient use of liquid funds, net foreign exchange exposures and the like. New products coming on stream will permit global account interrogation, multicurrency transactions, forward funds forecasting and similar services. In the future, such intelligent terminals can be expected to link to a wide variety of economic and credit data bases and securities data and to permit off-site securities trading. Similarly in retail banking, apart from the widespread use of automated teller machines increasingly in off-bank site locations, electronic systems will be used for direct debit at point of sale, automated bill payments, brokerage dealing, electronic shopping, automatic credit lines and the like. By the mid-1990s electronic banking, both corporate and retail, will become a major delivery system posing a severe threat to conventional branch banking. Further, the strategy for successful electronic banking will open up the financial service market to new competitors from outside the industry and potentially change the entire balance of competitive advantage.
Unfortunately the banking industry has traditionally been extremely lax in managing costs, on the grounds that so many bank services share joint facilities and resources that it is impossible to differentiate the costs of specific services.
This argument is usually false. As the industry comes under a greater level of competition from both other banks and new industrial and commercial competitors, strict control over service costs will be much more important than in the past.
In addition, it is often argued that banking services are very price-sensitive.
This argument too is false. For many services higher product quality can justify higher prices. Careful analysis of service offerings, however, will probably reveal that some services will be highly profitable and relatively price-insensi¬
tive while others may be very marginal or even negative in rate of return. As a result, some system for reviewing products or services is required which attempts to optimize the contribution from successful services and terminates inessential loss-makers. One major bank has ranked all its main services using a series of criteria including the following:
1. Operational services which are essential to or closely related to the bank’s basic business and which interrelate with other services are desirable.
Services unrelated to the bank’s business are less desirable.
2. Profitable services are best.
3. Services generating credit and operating risks are less desirable than those that don’t.
4. Labour-intensive services are less desirable than automated ones.
5. Float generating services are undesirable.
6. Unique/distinctive services are desirable.
Services within the bank were ranked using such criteria and recognizing that some services might be essential even though they were loss-makers.
Each criterion was also weighted to reflect its relative performance and positioned in a two-dimensional matrix such as that in Figure 7.1. The expected future position of the service was also predicted and resource allocation in terms of system/service development made according to its matrix position.
The importance of service quality is becoming increasingly recognized by Japanese banks, who are utilizing techniques developed in manufacturing industry, notably ‘quality control circles’, to improve this and customer orientation. In one bank 2400 such quality control circles were created, with the groups taking initiative for their own work and looking at how services provided might be better conducted. As a result of these circles, plus other systematic attempts to better understand customer needs, a separate corporate quality control function has been created. The idea of quality control circles is relatively new in Western companies but many manufacturing firms have begun to use the technique with considerable success in Europe and the USA.
High
>s
JD O
Desirable services - poorly received
Desirable services- well received
0) Undesirable Undersirable o> services - services-
o
> poorly well received
0)
CO
Low
received
Low High Competitive position
Figure 7.1 Quality/desirability matrix In designing new financial services, remember:
1. Most new products and services fail as shown in Figure 7.2.
2. The closer you get to actually introducing a new product or service the higher the costs will be, as shown in Figure 7.3.
Cumulative time
Figure 7.2 Most new products or services fail. Source: Booz Allen
Cumulative time
Figure 7.3 Cumulative development expenses rise rapidly approaching commer¬
cialization
3. Ruthlessly screen new product and service development with a view to eliminating or amending any doubtful ones before launch and before they have consumed financial and non-financial resources.
4. Phase new service introductions to prevent customer/operations/line management overload. Be especially careful of systems products, which are expensive in cost/time/people and can cause serious loss of customer goodwill if they don’t work.