Marketing concepts for banking in the new millennium.

Bexley, James B. ; James, Joe ; Maniam, Balasundram 等

INTRODUCTION

With the beginning of the new millennium, there is a need to focus on the fact that banking has changed and is changing at a very rapid pace. In fact, the industry has undergone more changes in the previous five years than all of the prior 50 years combined. It is also important to realize that this rapid change is not just limited to the banking industry--it touches every phase of American life as the computer, competition, and the Internet change the way products and services are delivered. How can banks position themselves to be competitive?

Some key questions that need to be asked about marketing bank products in the new millennium are:

 What will banking look like in the future?
 Will bank asset size determine success or failure?
 What will banks have to do to insure success?
 How will the "new competition" impact the individual bank?
 Can all of the banks make the "cut"? If so,
 Will banks have a rising investment value?
 Will the banks be relevant to their customer/prospect
 base?

What has changed in banking since 1980? Interstate banking has become a reality. The firewalls between commercial banking and investment banking have been eliminated by the repeal of the Glass-Steagall Act, Bank consolidation has been extensive, with big banks replaced by giant banks. Nonbanks and secondary markets have taken a major role in retail lending. Most loan funding has become almost totally interest rate sensitive. Thrifts have lost any status that they previously held and historic reason for being. The desire to reduce costs has resulted in automation has transformed backroom and delivery systems, and technology has changed in geometric proportions.

What has not changed since 1980? Banks and thrifts are highly profitable and growing. Branches are still the primary focus of banking. Customers prefer small institutions to large ones. Deposit insurance continues to have a major impact on customer money placement. Small business lending remains highly specialized. Quality service continues to be critical to bank customers.

FACTORS IMPACTING FINANCIAL INSTITUTIONS

Looking at the net impact on banking since the 1980s, large banks are in a race for size and national marketshare. Mid-sized banks and stock thrifts are doing well but face the greatest likelihood of having their markets erode and their organizations being acquired. Small banks and thrifts are doing very well, but the future contains a large number of unknowns.

As banking enter the 21st century, they must consider several pertinent factors. Some 43 million households own personal computers. Conservative estimates predict that 60% of the households in our country will be online by the end of the year 2000. Computers are providing more processing power for less money. For example, in the early 1970s, Bank of the Southwest in Houston purchased the first third generation computer mainframe used to process a bank. They paid $1.3 million for that computer. Today, most laptop computers costing some two or three thousand dollars are more powerful than that 70s state-of-the-art computer!

This is the information age. The improvements in connectivity through fiber optic cable had over 10 million households with DSL (digital) technology in 1998. The Internet with its worldwide web has changed and is changing the way Americans conduct their business. With these changes there has been a cultural shift in American living and in the assumptions financial institutions make. The customer expects to get things done instantly, efficiently, and without human mediation. Perception of reality in terms of distance, hours, etc. no longer exists.

When it comes to technology and banking, the market paradigm has been transformed. Today, banks have computer banking, unattended telephone balance response, and automatic bill payment. Banking is evolving with its existing customer bases looking at new and larger arrays of products and financial competitors that they must compete with. Bank consolidation has become a reality with an industry high of 14,500 banks declining below the 9,500 level this past year (FDIC). If banks are going to succeed, they must get over the denial, self-pity, and anger about change, and set a course that will allow competing effectively in the entire financial arena.

FUTURE MARKETING ISSUES

Jeanne Althouse, Director, Future of Money Program for The Institute for the Future located in Menlo Park, California presented a program to the recent Independent Bankers Convention in San Francisco. She said the 21st Century Customer will be:

1 College educated majority, which will increase to 70%.

2 Currently averaging $40,000 family income per year, which should increase to $50,000 annually by 2005.

3 On-line computer user, with 46% owning PCs.

4 Seeking control, better information, interaction, and convenience as opposed to the traditional customer who is seeking price, accessibility, convenience, and quality.

5 Educated customers have more financial accounts. 20% of new consumers and 42% of college graduates have 4 or more financial accounts.

6 Like electronic payments (with 18% using them).

7 High information comparison seekers with over 40% using 3 or more sources.

While it is frightening to see how rapidly customers demands are changing, one thing that has not changed is the need to give the customer the services they want and deliver them in such a way that it will be difficult for the competition to take the customer away from the bank. Community banks have a distinct advantage over the large regional or multi-national banks in that they generally know their customers by name and give them personalized service. That is what sets the community bank apart from the competition and insures their place in the market.

ADDRESSING MARKET ISSUES

Turning to some specifics concerning what banks are facing in the new millennium, it is not all gloom and doom, but it is sobering and demands the undivided attention of those banks wishing to be competitive. Banking as it exists now will have to move to the concept of the financial services firm. A financial services firm is a business that supplies financial products and services. The general categories of these products and services include transaction accounts (checking), portfolio accounts (loans and time-related deposits), insurance, investment banking (securities underwriting and broker/dealer transactions), fiduciary services (trust and estate management), financial planning, and data management/processing.

Just months ago, Congress eliminated the Glass-Steagall Act, which since 1933 had provided the "firewalls" that separated investment banking from commercial banking. Congress felt that there would be a rush by aggressive banks to offer the investment banking services, insurance services, and other services that were not allowed under present laws. However, their expectations have been slow to develop as banks cautiously take a conservative wait-and-see attitude. Eventually, it is inevitable that investment banking and commercial banking will be locked in competition for the "total customer".

Another issue that must be addressed by the Congress is who may own a bank, which will have a major impact on marketing and product delivery. Currently, the Federal Reserve has a long list of permissible activities for bank holding companies. Should a non-bank entity such as J. C. Penney desire to own a bank (as defined by law as an organization that both accepts deposits and makes loans) it would have to divest itself of all activities not permitted by the Fed. Likewise, under current law, if a bank holding company wanted to conduct an activity such as manufacture telephones it would have to dispose of its bank.

Assuming that Congress "modernizes" its laws relating to banking, the financial services industry will be made up of all firms that provide financial services and products. As such it will be an amalgamation of traditional firms such as banks, thrifts, securities, insurance, real estate, credit union, and finance companies. Additionally, it will include those firms not traditionally known primarily for the delivery of financial services such as General Electric, Ford, General Motors, Sears, Daimler-Chrysler, J. C. Penney, AT&T, and others.

Consolidation within banking and the financial services industry is on-going at a rapid pace and will continue to be a factor well into the 21st century. All one has to do is look at Citicorp and Travelers, who were so anxious to consolidate and get an advantage over the competition that they consolidated or merged without formal regulatory approval. In fact, if the Glass-Steagall Act had not been repealed and specific legislation had not been passed, they would have had to reverse the consolidation or merger within three years! Additionally, the largest banking organization was created by the merger of Nations Bank and BankAmerica. Another blockbuster merger was BankOne and First Chicago. Lost in the merger of these giants were thousands of mergers and consolidations of smaller banking organizations across the entire nation. All of the above will have a substantial impact on how banks market and deliver services.

As pointed out earlier, there will continue to be mergers and acquisitions both on the national scene and local scene, but with all of the merger activity, the big national and regional banks will not eliminate the community banks, if they do what they do best. What most bankers don't realize is that the large banks are probably more concerned with takeover (and justifiably so) than the community bank. Many of the larger banks have designed elaborate anti-takeover plans to keep some of their peers and other financial industry giants from merging with or acquiring them. Being consumed with take-over, could cause some major banks to fail to come to speed with their marketing effort.

Another major issue facing a changing banking industry is the concern that product expansion will create more risk, which might jeopardize bank safety. The public is not ready to give up its Federal Deposit Insurance Corporation insurance. Congress has already shown that it is unwilling to extend the insurance safety net to cover non-traditional banking products. This could create a major dilemma.

Often, management in banks and other organizations are fearful of introducing new products. As banks move toward a highly competitive financial services industry approach, they must step up and deliver products that will meet the public's needs and make banks more competitive. With the changing technology in banking, there has never been a time like the present when the public was demanding so many new services and products. At the same time, competition should cause the bank's management to look for new products and services to retain existing customers and attract new bank customers. The status quo approach will not allow banks to be competitive in today's environment.

SERVICE QUALITY AS A MARKETING DRIVER

It is becoming more obvious that the delivery of quality service is the single most important element for banks to be successful. Unfortunately, quality is much like the weather, everyone talks about it but very few people do anything about it. Recall, if you will, shortly after World War II the radios and other products coming out of Japan. They were cheap, unreliable and not competitive in the American marketplace. To compete, the Japanese dedicated themselves to a quality discipline that now has them at the forefront of quality. If banks are going to be equal to the challenge, they can accept nothing less than 100% accuracy. Why? Because most banks and companies are willing to accept errors and mistakes in the range of from 1 to 5 percent! Some banks and businesses regard a nominal error rate as routine.

Here is why even 99.9 percent isn't good enough. Jeff Dewar, a researcher for Q.C.I. International, a quality improvement training firm, clearly proves why 99.9 percent isn't good enough. Dewar stated in USA Today , "As we face the future, 100 percent performance will become the predominant philosophy." To prove his philosophy, here is what Dewar says would be the result if things were done right "ONLY" 99.9 percent of the time:

A Two unsafe landings at Chicago O'Haire Airport every day!

B 16,000 lost pieces of mail per hour!

C 20,000 incorrectly filled drug prescriptions per year!

D 500 incorrect surgical procedures performed each week!

E 22,000 checks debited from wrong accounts per hour!

Should you be one of the lucky 99.9% this would be fine, but should you be among the "unlucky one-tenth of one percent" in the above examples, the error affects you 100 percent. It is rather obvious why banks cannot accept "nominal errors".

SUMMARY

To be competitive in the 21st century, banks must create a climate for success. This climate consists of obtaining, training, and keeping good people. People are banks' most important asset. To involve their people, banks need to build group effectiveness, which cannot be ordered or "willed". Instead, it is a climate that exists in which the employees feel that their ideas are valued, and that they are a part of the group--not outsiders. Further, they need to feel that they have management's support to try new things without fear that they will be second-guessed. They need encouragement to keep going against the challenges that face them. Successful employees need to be rewarded for their successes, and at the same time, those that weren't quite so successful need to be encouraged to try again.

In conclusion, there are many challenges to banking in the future, but there are also many opportunities for those financial organizations flexible enough to adapt their marketing approaches to meet the demands brought about the changing banking scene.

REFERENCES

Althouse, Jeanne, (1999). Director, Future of Money Program for The Institute for the Future, Menlo Park, CA, Presentation to the Independent Community Bankers Annual Convention, San Francisco, March.

Bexley, James B. (1998). Directors' Duties & Responsibilities in Financial Institutions, Huntsville, TX: Sam Houston Press, Huntsville.

Federal Deposit Insurance Corporation, (1998) Annual Statistical Data.

Hempel, George H. & D. Simonson. (1999). Bank Management-Text and Cases, 5th Ed., New York: John Wiley & Sons, Inc.

Koch, Timothy W. (1999). Bank Management, 4th Ed., Fort Worth: The Dryden Press.

Rose, Peter S. (1999). Commercial Bank Management, 4th Ed., Boston: Irwin/McGraw-Hill.

Sinkey, Jr., Joseph F. (1998), Commercial Bank Financial Management, 5th Ed., Englewood Cliffs: Prentice-Hall.

James B. Bexley, Sam Houston State University

Joe James, Sam Houston State University

Balasundram Maniam, Sam Houston State University