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Chapter 7 Bank of America Base Study This chapter provides an overview of the marketing activities of Bank of America (BofA), a $250 billion dollar asset bank with headquarters in San Francisco, California. BofA was extremely generous in providing general information about its marketing approach to small businesses and its relationship marketing strategies for medium-sized businesses. In addition, the Bank provided great detail on the marketing of the Alpha/Prima consumer product, which illustrates the way that BofA undertakes a product launch, whether for business or for consumers. Due to the proprietary nature of its marketing plans, BofA was naturally reluctant to provide detailed information about current banking products. However, the Alpha/Prima product roll-out, although it occurred in the 19SOs, gives a clear picture of the type of effort which BofA puts behind a major product launch In the highly competitive environment of _ ~ ~ _ the financialservices industry, BofA has ~ r mace a name foritselfasanimportant - lender to small businesses. In an effort to reach a strategic goal of lending $10.6 ; billion to this sector, BofA has implemented a number of new products and services targeted specifically to the small business customer. BofA has promoted these products and services using print media, press releases, and in-branch literature. In a particularly aggressive move, BofA also has marketed heavily on the Internet and even offers a number of direct on-line banking services to these customers as well. ,.,:i~.,,,' I;'. i''. :.,, 'i it 'i :..,.', !. .~ . ,. ', '.: C ~;.,~ I '.' ,¢ . . i ;. ~ ,'. '.. . i i; .~ ~.i.. BofA also has focused organizational resources to market services to medium- sized businesses, particularly in nearby Silicon Valley. A key innovation stemming from this medium-sized business practice has been the "Relationship Team." By using a team instead of an individual account manager for each business customer, BofA is able to offer a one-stop shopping experience for almost all financial services. New business needs also are identified far more quickly through the Relationship Team structure than through the traditional market research avenues, since a needs-identiOcation process is a part of the Relationship Team experience. P8gll 7-]
B~kof Am0nca eat Although BofA is currently one of the largest banks in the United States, it faced slightly declining market share during the 1980s. In an attempt to counter this decline, BofA undertook a major effort to develop and promote a new consolidated account, called the Alpha/Prima account. First, BofA undertook market research to understand what its own trends were versus competitive trends in banking accounts. In order to better understand its weaknesses, BofA also surveyed the customers lost to competitors. After this initial research, BofA developed the Alpha/Prima account, and completed a marketing plan for this product. The marketing plan stated the goals of stemming the flow of customers to other financial institutions and to establish a competitive and aggressive position in interest-bearing checking accounts. The plan specified the actual dollar goals in terms of total Alpha/Prima balances and incremental balances over a four-year period. The plan also specified pricing policy for the accounts, financial considerations, cannibalization issues with existing accounts, and implementation issues. More market research was conducted to assist in the design of product features and pricing considerations. This research indicated that customers especially appreciated the simplicity of the consolidated account. The actual implementation of the Alpha/Prima account was a large project. Bank support systems, including computer, accounting, and telephone service capabilities, had to be improved. Personnel had to be trained at all levels of the organization. Overall, the implementation costs of $ ~ ~ .2 million dollars exceeded plans by $4 million dollars. Fortunately, the benefits of the plan were also greater than what was projected. Although the resources and the size of BofA are much larger than typical transit agencies, lessons still can be learned from observing BofA's marketing approach. A key lesson from BofA's experience is the Bank's drive to malce its products and services more convenient to use. Also important is BofA's use of market research data from lost customers to inform on-going and future marketing efforts. Finally, BofA's use of technology (both in terms of the Internet for small business banking and internal networks for implementation of tile Alpha/Prima account) is exemplary, and is certainly analogous to transit's use of AVL (Automatic Vehicle Location) systems to provide customers with better information and real-time schedules. = In ~ 904, Peter Giannini founded the Bank of Italy, which later became the Bank of America. Giannini is well known for managing BofA into several multi- billion dollar companies and for heroics abler a natural disaster. During the famous San Francisco earthquake of 1906, Giannini rescued $80,000 in cash before the Bank building burned by hiding it in a wagon full of oranges and bringing it to his house for safekeeping. With this money he reopened his bank days before any other bank and began making loans from a plank-and-barre] PB90 7-2
Bank of Am01ica Cam SWAY counter on the waterfront, urging demoralized San Franciscans to rebuild. Gianinini also financed construction of the Golden Gate bridge when few other banks would contribute money toward the project. By 1929, BofA passed the $l billion mark in assets, in large part due to Giannini's innovation: branch banking. A year later, Giannini consolidated what were by this time two banking systems and handed operating control over to his other, equally successful company, Transamerica. The Bank continued its streak of success until the early l 980s, when liquidity problems from Third World debt led the Bank toward bankruptcy. BankAmerica is now on more solid footing and enjoying a stronger market share in the retail and commercial banking sectors. Tile Bank, still based in San Francisco, California, is the nation's third largest bank holding company and manages assets of over $250 billion. Bank of America serves customers through more than 1,900 offices in the Western United States and in 37 other countries.~45 In line with the company's strategic vision, BofA has made a concerted effort to target the small business customer. The following section reviews BofA's broader organizational plan for developing this market, as well as the firm's innovations to target this business segment. Strategic Marketing and [onI-Term goals BofA's strategic vision and long-term goals generally revolve around financial objectives. While there are several goals for the company as a whole, each BofA division - from retail banking or commercial banking to Merchant Services - also develops its own specific objectives. As part of the Bank's retail and commercial banking vision for the 2Ist century, BofA has targeted small businesses. BofA claims that small business owners comprise 98 percent of the American business market and are also the primary engine of newjob growth. ~ ~ 5 In 1996, the company announced a plan to significantly increase the number of loans made to small business owners. Since making a three-year, ten-state small business lending commitment of $! 0.6 billion last April, BofA has loaned $6.6 billion to small companies in ten western states. During the same period, the Bank loaned more than $3.9 billion to small businesses in California, approaching its three-year $4.5 billion commitment to this particular state. Paq87
Woof Am~t8~S~y . Product and Marketing Plans Each of BofA's divisions or groups is encouraged to develop its own product and marketing plans. In fact, each division has a product development specialist on staff. All groups use the BofA Guide to Writing a Marketing Plan (see Chapter 7 Supplement, Appendix B) when developing and documenting marketing efforts. The guide encourages divisions to develop a plan to "help you decide which products offer the greatest growth and profit potential. Then you can prioritize them in terms of the efforts and dollars you are willing to invest in developing the business." Ideas for new products are often culled frown market research of customers and businesses. Databases of names and addresses are developed from existing accounts and, as will be discussed later, from persons or businesses who respond to a Web page Personal Profile. New Product Development for Small Business Much of BofA's success in the small business market can be directly attributed to the company's ability to develop new products specifically geared to the needs of the small business owner. In a few short years, BofA has augmented its small business product lines with expedited processing (including express loan approval) and new services (such as payroll services for small businesses). Figure 7-! lists some of the products for small business. Following is a chronology of the product innovations and promotions aimed at small businesses. From 1994-1995, BofA introduced a series of innovations that make it easier for small companies to obtain credit. In 1996, BofA introduced a "simple, one-page application for its Advantage Business Credit (ABC) loans and dirges of credit of $2,500 to $100,000. The Bank also began express processing for loans and lines of credit up to $50,000, meaning most business owners do not have to provide tax returns, financial statements or other documents to apply." A direct result of these efforts has been extraordinary growth in the ABC loans and lines of credit. As reported by BofA, 'CIn 1995. . . BofA made $450 million in ABC loans and lines in California; in 1996, that figure more than doubled to over $1 billion."~7 Page 7-4
B"ofAm~ea ease S~ Figure 7-~: Bank of Amerita's Products for Small Businesses R8f~ - Includes a Working Smarter series with articles on How You Can Develop a Marketing Plan, Writing a Winning Business Plan, Alternative Worksweek Series, and Getting the Financing Your Business Needs. References also include articles by small business experts Paul and Sarah Edwards and Jane Applegate. _! Y0l~ 0wn Bake F-he 0 th hi - Customers decide which bank features they prefer - from checking account options to investment products - and thereby "design" their personalized banking service. To begin the process on-line on the Internet, a customer must first complete a Personal Profile. This personal and business information is then downloaded to a database and eventually used to test-market new retail or commercial products. 4~ica~s- On the BofA Web page, customers can "click" on the screen and see (or print) applications for a Visa BankCard application, ABC Loan or Line of Credit, or HomeBanking Business, or request the Merchant Services Information Request Form or the Business Connect Request Form for processing purposes. Willing customers also can participate in market research efforts by completing a Supplier Diversity Questionnaire. AN f01' mB N_ 0f Smog The Business Checking Account, Business Interest Checking, Specialized(Business Checking Accounts (for businesses with high transaction volumes and for businesses that need consolidation of multiple accounts or locations in a particular state), and Business Overdraft Protection. BUN SNAG ~ bll0Sb~ _ - The Business Savings Account (for an account that can be opened with a small amount of funds), Business Money Market (for a higher earnings potential with safety and limited access by check), Interest Maximizer (for highest money market deposit yields with FDIC safety), or Investment CDs (for the security of a fixed rate and fixed term). Ill~ls £ Id" 0f Cleat - Lines of Credit, Loans, Commercial Vehicle Loans, Commercial Real Estate Loans, and Letters of Credit. B~4 - Homebankingfor Businesses as well as Business Connect Basic and Deluxe. P8 - So- Services are provided by Automatic Data Processing (ADP), the nation's largest payroll services company. ADP provides payroll and human services, including issuing checks. calculating tax deductions, preparing tax reports. T81 P8Yll~lt SKIS wffll I~TIll - Offers the option of arranging payment of business taxes from any touch tone phone or PC (ostensibly in less than two minutes). Once businesses inform BofA of the date, tax type and amount due the Bank will debit available fiends from the specified account. Proof of transaction is forwarded by mail or by fax. Subscription to the Bar~kAmeriTax service is projected to increase substantially as the IRS continues to mandate that many businesses pay taxes electronically. Pales
B~kofAmerealaoS~ Bank of AmerIca sponsored a speelal ALL Web sIte for small business owners which provided information on suecessfu' marketing, swung up a home offles. and producing winning direst mall. On May 2, 1997 BofA announced the introduction of a special AOL site for small business owners: "Small business owners who want to find out how to market successfully, set up a home office, or produce winning direct mad! can log on to BofA's site on America Online (AOL) during May, which is Small Business Month. Special columns targeting the small business owner will focus on topics including public relations and marketing, online advertising, direct ~nail, setting up a home office, and working at home. An "Ask the Experts" column will answer questions from AOL users. And BofA will send anyone whose question is published online a free, autographed book, 'Strategies for Small Business Success' by syndicated small business columnist Jane Applegate. In addition, Applegate and direct mail marketing expert David Garfinke! will be hosting live chats throughout the month." On May 5, 1997, BofA announced the roll-out of the Business Mcocir,~izer, a flexible credit product that offers small businesses a revolving line of credit and up to three loans in one package. As described in the press release, "the revolving credit line of $] 00,000 to $250,000 provides financing for businesses to purchase inventory, finance receivables, and manage cash flow. Then, when businesses need long-term financing for a fixed asset purchase or permanent working capital, they can set up a term loan with funds from their credit line."''9 BofA introduced or expanded advertising of older products during May of 1997, which BofA labeled "Small Business Month." Promotions about the month and about BofA's specialized smalI-business products appeared in branches, on BofA's Web page, and in local newspapers. The Bank also has introduced a tolI-free telephone application service, an option it is now in the process of expanding. "Small business owners in the 10 western states BofA serves can now call a toll-free number to apply for business loans and lines of credit over the phone, seven days a week." During Small Business Month, BofA also featured several special promotions. Businesses received a 50 percent discount on set-up fees for ABC loans and lines, as well as special deals on payroll processing services and merchant services electronic processing.420 Finally, in celebration of Small Business Month, BofA promoted a "$25,000 for Your Thoughts" contest. As explained in BofA's press release, "any customer who has an Advantage Business Credit ~ (ABC) loan or line with BofA in California as of June 30, 1997, can enter the "$25,000 for Your Thoughts" contest by answering the following question in 200 words or less: Bank of America has committed to lend $! 0.6 billion to small businesses over three years. Why do you think it's important for BofA to support your business?" The essay contest winner is slated to receive $25,000, and five second-prize winners will receive $2,500 each. . . P8187~
B - of Am~*atao Sib Summary of Bank of Amerioa's Small Business Marketine oneepts As the above lists of products and promotions suggest, BofA aggressively has sought the small business market. Its marketing approach has been to provide information useful to small businesses, both through publications and through the Internet. It also has developed products for small businesses to make borrowing and use of bank services more convenient and less bureaucratic. It has promoted these services to small businesses using the print media, press releases, literature at its various branches, and with the Internet, via its Web page and America On-Line. In 1994, BofA introduced a new concept specifically geared toward the medium- sized business customer ($5 to $200 million in revenues). BofA's Middle Market banking is a more than $300 million business which provides a "full range of financial products and services, primarily in the West and the Midwest. Middle Market Banking's net income for 1996 increased $28 million, or 9 percent, from 1995. This increase was primarily attributable to a reduction in the provision for credit losses, reflecting an improvement in credit quality."] 15 The new service is called the Relationship Team. The Relationship Team consists of a Relationship Manager, who serves as the business' primary BofA contact, and several representatives from BofA's various banking divisions. The Relationship Manager targets businesses by word of mouth, by following industry trade journals, and by seeking contacts at business functions. In California, for example, Relationship Managers have targeted Silicon Valley as a source of mid-sized companies with significant potential for future growth. At an introductory meeting, the Relationship Manager and representatives from selected divisions (i.e., BofA's Domestic Lending, Cash Management, Private Placements, Risk Management, Asset Securitization, and Loan Syndication departments) review BofA's "competitive position" and emphasize the benefits of the Relationship Team in meeting the client's fixture needs. If the client agrees to use BofA as its primary financial institution, follow-up reviews are completed by the Relationship Manager and key division representatives at the very least once a year, but oftentimes every other quarter. The key advantage of Relationship Teams is retaining the client by meeting a range of financial needs. If, for example, a business becomes interested in expanding into a foreign market, the Relationship Manager can coordinate meetings with BofA's Foreign Exchange and Trade Finance Divisions. The result is a client who feels well cared for and therefore interested in continuing a financial relationship with BofA. Relation$hip Teams retain the client by meeting a range of finanelal seeds. Page 7-7
Bank of Amp Cam S=Y Relationship Teams also have spawned new products. While consumer market research remains BofA's engine for generating new products, Relationship Managers can sometimes pinpoint new product opportunities. In October of last year, for example, a Silicon Valley high-tech company expressed interest in insurance packages for their employees. At the time, BofA did not sell such packages to businesses. However, the Relationship Manager responded to the client's request by talking to the Middle Market Banking Vice President. BofA is now in the process of designing a new insurance package, which it intends to sell as a part of its package of services to mid-sized companies. i~llll~ll~klllllH]llel~llmTr]~lRdllllll - BofA shared information on a product launched in 1988-1990, to illustrate the marketing process it follows for consumers and businesses alike. This new product, technically referred to as the Integrated Transaction Product, was initiated in late ~ 986. The account name was first named the Alpha Account, and then finally changed to the Prima Account in 199 ~ . When first introduced in California in ~ 98S, the account represented a new way of providing customer banking services by combining checking, savings, and overdraft protection into one package that integrated price, servicing, and delivery. Market Assessment Since ~ 98 i, BofA had experienced a steady decline in its share of checking households, accounts, and balances. Some of this decline was due in part to the in-roads made by savings and loans and credits unions in capturing a greater share of the checking market and of "main bank" households. Since 1981, BofA lost market share in checking households, checking accounts, and checking balances. Table 7- ~ shows this result. Table 7-~: Bank of Im0riea Market Share 10/8' 10/87 Checking Households 32.9% 25.4% Checking Balances 29.6% 13.3% Checking Accounts 24.7% 21.5% "BofA checking account closures exceeded account openings since early 1984. Account closures exceeded openings by ~ ~ percent in 1985, 28.6 percent in 1986 P8gB 7~
~nkofAma*ae - Sol and 21.8 percent through June of 1987. Net account openings were positive during the third quarter of 1987, but closures exceeded openings for the full year 1987 by 4.2 percent." A Closed Account Survey conducted in 1987 suggested the following: · BofA was losing disproportionate numbers of customers under age 35. Forty percent of the respondents were under 35 years of age. This compared to only 28 percent of BofA checking customers falling in this age range. Account closures among higher income checking households were disproportionately high. Thirty percent of closed account respondents reported households incomes over $50,000, compared with 23 percent of the total checking customers base in 1987. · BofA closed account customers were most likely to move their account to a savings anti loan (21 percent), a credit union (14 percent), or a bank other than one ofthe major banks (12 percent). Savings and loan institutions and credit unions received authorization to offer interest-bearing transaction accounts in December ~ 980. These institutions, along with independent banks, reaped the benefit of major bank share losses. These institutions were particularly successful in building market share because they offered higher deposit interest rates and more attractive account fees while maintaining better quality of service perceptions with customers. Also, industrywide ATM sharing helped to mitigate major bank advantages in time and place convenience. Finally, parity in core consumer product lines made it difficult for BofA (or any other bank, for that matter) to present a differentiated product to customers. As reported by BofA executives in the late ~ 980s, the in-roads made by non- banks in the retail banking market were most dramatically illustrated by reviewing trends in main bank share, as shown in Table 7-2. Table 7-2: changes in Main Bank Share |0/~' 4/87 Bank of America 22.7% 21.1% Savings & Loans 8.5% 19.3% Credit Unions 6.7% 1 1.3% 3 Major Banks 28.3% 25.3% (Source: Market Share Audit) While BofA's share of main bank households declined slightly during this time period, it is important to note that the S&L and credit union segment were fragmented, with no one thrift holding greater than a 2.6 percent share of main Pasted
Bank of Althea [ase Sat . Bankcard Only 1.1 22% Checking Only 0.9 18% Savings Only 0.6 13% Total 2.6 53°/O bank households. BofA's major bank competitors also experienced market square declines, though not as pronounced. More than half of all BofA households maintained only one account relationship with the Bank. The core services of BankCard, checking and savings represented 2.6 million single service households. The 1987 breakdown is shown in Table 7-3: Table 7-3: Breakdown of Bank of Ameriea customers Number of Hews - ds b Mi Hens Pereent of BofA Househdis These single service households represented an obvious cross-sell opportunity for BofA. However, they were also particularly vulnerable to alternatives offered by other service providers. This was especially true to the 1.5 million households with either checking-only or savings-only relationships. The Alpha/Prima Marketing Plan The comprehensive marketing plan developed for the Alpha/Prima Account includes an Executive Summary, a Business Analysis, a Financial Analysis, and an Implementation Overview. Following are some of the topics covered. The Goals for the Alpha/Frima AGCOUI' The Alpha/Prima Account is a product development response to the above described adverse trends for BofA in the retail banking marketplace. By the mid-19SOs, the California Banking Group designed a preliminary Alpha/Prima product. Figure 7-2 provides the features of the Alpha/Prima account. lags 7-10
Bat of A_1ca C" SAY Figure 7-2: Features of the Alpha/Prima Aeeount A checking account with unlimited check-writing, no per-check charges, and no minimum balance requirement. Clients were allowed to choose between interest-bearing and non-interest-bearing checking accounts. · A choice of "liquids' savings accounts - including ones that earned interest at short-term CD rates - with no separate monthly or quarterly service charges and no minimum opening deposit requirement. · A line of credit for overdraft protection and ready cash. The line of credit featured a variable interest rate lower than most credit cards without separate annual fees. Customers could access the credit line directly through the Automated Teller Machine. · A combined statement providing a monthly summary of checking, savings, and credit line balances and activity. Up to 25 deposit accounts could be included on one statement. · One monthly fee for the entire package. Or, customers could eliminate that fee entirely when the combined balance of a linked checking or savings accounts exceeded a minimum level. · An automated teller machine card offering access to the account at ATMs, and at participating merchant locations. · The fee on the account depended on the type of checking account a customer chose. If someone selected a non-interest-bearing checking account, then he/she could waive the $5 monthly fee by keeping a combined balance of $1,500 in the accounts. If someone selected an interest-bearing checking account, then he/she could waive the $7 monthly fee by keeping a combined balance of $2,500. The Alpha/Prima Account was designed to address several general business objectives for BofA. In addition to stemming the flow of customers and account balances to other financial institutions offering consolidated products, the Alpha/Prima account was intended to strengthen and deepen BofA's base of main-bank households. In banking terminology "main bank" households utilize BofA as their "main bank" instead of maintaining a savings account at one institution, a checking account at another facility, and an investment portfolio with yet another financial manager. BofA, in general, and the retail banking group, in particular, were very interested in "establishing a competitive and aggressive posture in the Interest Bearing Checking marketing place." ~ he retail group foresaw this edge as more than just a financial boon to the group, but also as an opportunity to leverage higher balance and to introduce customers to savings and/or investment products. The ability to sell other BofA products is often referred to as "cross-sell ratios," and was yet another goal of the Alpha/Prima product. Finally, BofA saw the Alpha/Prima account as an opportunity to prompt a renewed confidence in BofA as an institution, particularly as a bank at the forefront of"innovative, competitive ideas and services." As mentioned earlier, BofA had faced near bankruptcy due to a portfolio filet of bad third-worId debt. In the late 1980s, BofA faced the Pag07-n
Bank of America ease Sit challenge of improving its image and instilling confidence in customers that were generally leery of the Bank's financial stealth and stability. The California Group went further than outlining general objectives for the Alpha/Prima product. As is required of all new marketing products, the BofA division quantified the above-mentioned objectives into specific financial goals, including balances in the Alpha/Prima accounts and incremental change in balances due to the account. Table 7-4 shows the specific goals. Table 7-4: Goals for the Alpha/Prima Aeeount . . . ... . Average Balances he SMe ions of Dollars fIll 1818 1980 llll TOTAL Incremental Deposits 629.3 856.3 1,394.6 1,995.8 63.0 324.9 52 1.2 73 1.9 Prom the "AlphalPrima Account Positioning Study," February 1988 Product Pricing BofA's pricing strategy for the AlphafPrima Account was based initially on several qualitative objectives. These objectives were then translated into quantitative goals and suggested policy changes. The strategy for pricing the Alpha/Prima Account addressed the following points: · Pricing had to reward the customer for having a deeper relationship. · Pricing had to reflect the added-value of the Alpha/Prima Account, which is simplicity. Pricing had to be easy to understand. · Pricing had to be advantageous versus major bank competitors. · Pricing had to improve the marketability of interest-bearing checking, a category in which BofA had historically under-performed. Pricing could not present a barrier to entry for existing customers if the Alpha/Prima Account was to aid in "closing the back door" (i.e., encouraging customers to retain one bank for all accounts and financial services). The Alpl~alPrima Account allowed for relationship pricing - a single monthly fee or combined balance level for the entire service bundle. In addition, the account design allowed for the capability to price Alpha/Prima Account interest- bearing checking and Maximizer account interest rates to be more attractive when compared to the standard, "unbundled" product line. Paw 7-~E
Bank of llmerica Ga811 Sb~ To ensure the capture of new checking account customers and to provide incentives to existing customers to consolidate their relationships at BofA, the California Banking Group recommend the following introductory, incentive pricing: a fixed interest rate of 7 percent on all Alpha Savings Maximizer accounts through October 3 I, 1988. While this incentive tested less positively than waiving service charges for three months, it did represent a better incentive for motivating consolidation behavior. The foregone revenue of $300,000 per $]00 million from "cannibalized" funds was viewed as a promotional expense. The California Banking Group proposed other pricing changes that were later incorporated. At tile time, BofA offered Combined Balance Service to checking account customers. This allowed customers to link only regular savings accounts for the purpose of waiving service charges. In response, the California Banking Group proposed de-marketing another product, Combiner! Balance Service, and instead, "grandfathering" for existing users (4 percent of total checking customers) while soliciting that croup for the AlDha/Prima Account In the late 1980s, bank policy did not allow employees to have an Alpha/Prima Account free of charge. The Group proposed revising the policy to allow bank employees to have a non-interest-bearing account or one Alpha/Prima Account with non-interest checking free of charge. This became "a significant internal marketing plus." Financial Analysis The methodology and assumptions underlying the projected profitability ofthe Alpha/Prima Account were all reviewed by CBG Financial Analysts, an outside consulting firm. Their review found the financial analysis for the Alpha/Prima account to be "generally conservative." In the base case, the Alpha/Prima Account was expected to return in excess of 33 percent to BofA. On an initial investment of $ ~ ~ .2 million, the Alpha/Prima Account was expected to return $33. ~ million in cumulative net revenue to the Bank by 1991. Net revenue was projected to be $.9 million in 1988 and $15.3 million by 1991. The payback period from the date of introduction was 2 ~/z years. Incremental outstanding liability balances for the Alpha/Prima Account were expected to average $63.0 million in 1988 and increase to an average of $73 l.9 ~nili~cn by 1991. Credit balances there expected to be $19.S million in ~ 988 and to increase to $ ~ 05. ~ million by ~ 99 ~ . Revenue Sources The three primary sources of revenue for the Alpha/Prima Account were derived from increased account acquisition, deepening existing customer relationship, and introducing the overdraft protection/revolving line of credit. Increased account acquisition was projected to generate $] ~ .9 million in interest income Pat
B"ofAm~cala~0S~ and $7.4 million in fee revenue by 1991. Deepening existing customer relationships would primarily result in new liquid savings accounts (I,SAs) for the Bank. These new LSAs were expected to generate $5.0 million in interest income by ~ 991 . Finally, the overdraft protection/revolving line of credit would result in additional revenue of $.4 million in 1988, increasing to $7.3 million by 1991. These estimates were based on 65 percent of the Alpha account holders using the line of credit as an overdraft feature, ~ 5 percent of the account holders utilizing the account as a line of credit, and the remaining 20 percent never using the line of credit. "Cannibalization" issues "Cannibalization" of fee income represented one of the biggest risks to the procluct's financial success. Four types of fees were expected to be cannibalized: monthly service charges, bankcard and other interest, insufficient funds fees, and instant cash fees. Cannibalized fee income was estimated to be $2.0 million in the first year and was projected to reach $] 8.5 million by ~ 991 . Monthly service charges represented over 90 percent of all the fees lost to the Bank. Bank customers with checking and savings accounts who transferred to the AlphaJPrima Account and consolidated their balances would no longer generate fee revenue. However, bankcard revenue would not be affected materially by the Alpha/Prima Account because of the small relative size of Alpha/Prima Account heavy users when compared to Bankcard holders. Start-Up Cost' Total start-up costs associated with the Alpha/Prima Account were projected to be $7.2 million. Of these, system costs of $4.7 million represent the single biggest item. An additional $3.0 million was dedicated to advertising and marketing. Minimal branch expenses were expected and actualized. Future ongoing operational costs were expected to be less than $~.0 million per year through 1991 for ongoing line of credit processing costs and telephone servicing. Sensitivity Inaly~' The relative profitability of the Alpha product was expected to be sensitive to variations in average account balances, internal and external account volumes, fees collected and overdraft line usage. The product had an upside potential of having an internal rate of return of 167 percent. In a worst case scenario, the product had a downside potential of having an internal rate of return of 3.0 percent. Table 7-5 shows this analysis. . Page 7-14
But - So Table 7-5: Sensitivity Analysis for the Alpha/Prima Aeeount . . . O,ffm~sib case Base ease Pes~enk~b case Internal Rate of Return Net Present Value at 20% Payback period (in Years) 1.5 1 67.0% 33.4% 3.0% $64.7MM $3.2MM $3.3MM 2.5 NA Market Research Findings Quantitative research using personal interviews was fielded in February, 1988, to determine the appeal and effectiveness of what is called "alternative positioning" for the Alpha/Prima Account and to identify the greatest opportunities within target segments. These findings indicated an extremely positive response to the Alpha/Prima Account concept, proposed pricing, and; planned positioning. The market research found the following: · alpha was It from what others offer - The majority of respondents saw the account, as described, as completely or somewhat different from what other institutions offer. PrimBry poSi~' - Research tested four possible positioning for the Alpha/Prima Account: "higher rates," "works harder," "saves money," and "simplicity." The simplicity positioning was the preferred positioning across all age groups. In addition to rating highest by a majority of respondents (40 percent), concepts of simplicity an eases showed up throughout the research as leading reasons for liking the account or wanting to open it. . B - fi~thatbest~acoount percent) "Gives you all your basic banking in one package of services" (74 "Gives you access to extra cash when you need it" (67 percent) "Simplifies your record keeping" (65 percent) "Prevents bounced checks" (65 percent) "Offers three separate, but linked accounts" (64 percent) "Makes it easier to manage your finances" (57 percent) . Most enchant Cadres ~ ins whiner or not to open ~ account Having unlimited check writing with no per-check charges (79 percent) lal0 7-15
B - of Althea lass IBM Having one combined monthly statement for all your accounts (69 percent) Having no monthly service charge when your combined checking and savings balance meets a required minimum (65 percent) Having a savings account which earns interest at short-term CD rates (65 percent) · Purchase Ment -There was a high degree of interest across all groups in converting to this account if it were offered at the respondent's checking institution. Sixty-eight percent of the BofA customers who were sampled indicated that they would be interested in converting their account if it were offered by BofA. Conversely, 65 percent of non-BofA customers said they would not open this account if offered by BofA. This latter point is in line with "would switch" measures tracked in other parts of the survey instrument. Roughly ~ in 4 BofA customers indicated that they would be interested in opening this account at one of the other major California banks or at Citicorp Savings (21 percent), which at the time offered the similar Citi-one product. · bust vs. non-~rest checkbeo preferene0$ -The interest-bearing version of the account was far and away the more attractive. Eighty-three percent claimed that they would open an interest checking account. · Name maeffons -The vast majority of respondents (80+ percent) were either positive or neutral about the name. Those who were positive associated it with the top of lists, first, first rate, new or new beginning, or simply said it sounds smart or sounds good. This indicates that Alpha/Prima Account was a good name choice with ample opportunities to develop an image for the product that would be unique to BofA. · D~es/negathes {)ther than the low intent to purchase BofA by non-BofA customers, the negatives were minimal. Only ~ ~ percent found anything confusing about the account, and this confusion had to do with perceiving too many options and rules. Eighty-five percent of those who preferred the simplicity positioning thought it described the account well. The biggest reasons those rejecting the account gave for saying they would not open the account, even if it were at their own institution, were that they were satisfied with what they already had, or that they needed more information. Implementation issues The Alpha/Prima Account launch was the primary focus for the California Banking Group during the third quarter of 1988. The launch was simultaneously supported by aggressive marketing and promotional campaigns. Internal P8gB 7-16
Bank of A~ll~iBa GB80 SHIM . "marketing" was equally aggressive, and centered on the Bank's first use of live, video conferencing. This medium - which allows interaction between the presenter and audience - provided an opportunity to reach a large number of retail and commercial bank employees in a single day. In addition to the external and internal marketing efforts, the bank also made changes to its internal systems to accommodate the new product. Alpha/Prima product implementation included several components: systems development to improve the company's computer and accounting capabilities, improvements to the telephone or "teleservicing" support, a new "Alpha Credit Line Center" to support credit application processing, and new credit policy for all BofA customers. BofA's accounting and computer network systems were reconfigured, and, in same places, new networks installed. These system enhancements were completed and/or installed by late June. Branch sales began on June 5, 1988, and full-scale external promotions began on July 18, 1998. Table 7-6 shows start-up costs planned and as actually experienced. As can be seen, the start-up costs were underestimated. Table 7-6: Planned Versus Actual Start-up costs IS Mlronsl Propose Startup AGblal Start-Up change eos~sofl886 eostsallll Plan . Systems $4.2 $5.9 $~.7 Development Product Introduction $3.0 $5. ~$2. ~ Operational Set-Up - $0.2 $0.2 Total Start-Up Costs $7.2 $] I.2 $4.0 It should be noted that the majority of systems development costs were opportunity costs and were incurred in 1987. The original product introduction budget (completed in 1985) was seriously underestimated. Training In addition, BofA unrolled a new training program for bank employees related to the Alpha/Prima account. Comprehensive sales and operational training programs were established for all affected areas of the Bank. Particular attention was given to developing sales tools which would result in more effective cross selling. These tools included pamphlets, stickers, and branch posters to entice customers and to assist tellers in the sale of the product. Statewide video conferencing was used to reach the majority of branch employees. Target Page 7-0
Bar. of Amf rhea C830 STY audiences for this training included branch managers, ~nanagers of branch operations, and new accounts representatives. In addition to the training strategy, BofA developed Teller ant! Platform O~cer's Guides to the Prima Account. The Teller's Guicle offered detailed information about the account as well ideas for promoting the product with clients (see Chapter 7 Supplement, Appendix B). The Platfor~n O~cer's Guicle provided more detailed information about processing such an account and excluded information about selling the product, since BofA assumed that "selling" the product was primarily the responsibility of the teller. Marketing The marketing strategies for the sale of the Alpha/Prima project were first developed by the California Group and then revised by what was then the California marketing group. The following marketing-related issues were addressed: · Target Aulienee- Market research (discussed earlier) suggested fairly broad appeal for the Alpha/Prima Account concept. The Younger Mass and Younger Midscale segments represent the greatest potential. These two segments - at the time defined as 21-44 years old with incomes ranging from $20,000 to $45,000 - were attracted to the overall simplicity of the package, the reduction in fees, and the unlimited check-writing option. Opportunities also existed among older households, particularly those with $]0,000 or more in "liquid" savings, mostly by advertising higher savings rates as a reward for consolidating relationships. · P0li~b' - The same market research effort indicated a strong preference for positioning the AlphalPrima Account as a way "to simplify your life by making banking easier." Consolidation of services was the single most important reason among acceptors of the concept for being interested in opening the account. This was mentioned bv SS percent ofthat croup. -~^ ~ - - - 1 ~--I · UU~CI 1118B-l his effort focused on BofA's own customer base to generate additional relationships. Approximately ~ million mailings, promoting the Alpha/Prima Account and offering a prescreened credit line. were mailed to the following targets: households having what was called a "Liquid Savings Account," households with a BofA consumer loan, and households with no other relationship. · Media - Advertising began on or about July ~ 8, ~ 98S, and was designed to build general awareness of the Alpha/Prima Account and to stimulate what BofA calls "incremental branch traffic." Television spots on local stations, concurrent radio advertisements, advertisements in local California rass7-s
Bank of Am0rI88 Cat Seedy newspapers, and outdoor media (primarily on billboards) also were utilized during program roll-out. Hbrchand~bg- Special emphasis was given to in-branch merchandising and sales promotion for the Alpha/Prima Account. This encompassed collateral materials (such as posters, banners, and brochures) to motivate employees. The Alpha/Prima Account was viewed by BofA as an opportunity to view the branch as a media venue and to maximize the number of impressions on walk-in traffic. Stickers, statement inserts, card package inserts, lobby posters, and mini posters all were developed to advertise the Alpha/Prima Account. Pubs Relations - A strategy for public relations support of the Alpha/Prima Account was drafted by the Bank's Marketing Public Relations department. TlmelIne The following timeline identified the key target dates and milestones for successful implementation of the Alpha/Prima Account. D~vembb Target Dam 131881 Pricing Committee Approval RSVP/AMG Manager Presentation Statewide Video Teleconference Procedures Documents to Branches install System Enhancements Media Advertising Begins Direct Mail Begins to Drop Campaign Ends March 25 March 25 early June June 10 June 24 - 26 July 18 August ~ September 30 Ouicome The financial case pivoted on four key variables: average account balances, account volumes, fees collected, and overdraft line usage. The analysis demonstrated that the Alpha/Prima Account offered BofA a range of outcomes that presented a significant upside potential with a very limited downside. The actual profitability was expected to be mid-range between the base case and the .. Page 7-~
"kofAm~cala~Sh~ optimistic case. In reality, the Alpha/Prima account was extremely successful and far exceeded even the more optimistic projections. BofA conducted follow-up market research to confirm the Alpha/Prima account positioning. The Bank recognized the need to develop a competitive service package for high balance accounts. In the Fall of 1989, a series of focus groups was conducted by Merrill Research in order to assess the needs and priorities of high balance account holders. The market research included a total of 300 checking account holders interviewed and a mall-intercept survey. The criterion for interviews was having $10,000 or more in a single savings account. Findings were that the "Value" positioning was the most relevant for Alpha/Prima. Value was characterized by "with this account, you get the most for your money, because while your money earns a competitive rate of interest, you get the banking services you need at no charge." The appeal of "Value" positioning stems from the perception that this account would reduce fees and pay interest. About four in ten preferred "Value," compared to one-fourth who preferred the second place position, "Simpler.'' This finding represented a change in the market opinion from earlier research, showing the need to update the marketing approach to this market. =3]G Although BofA is much larger and has more resources than transit agencies, there are still lessons that can be learned by close observation of BofA's marketing approach. Also, not all methodologies used by BofA are expensive. Consider the following: · BofA is making full use of the Internet as a marketing too! and as a technology too] to gather information on customers and to allow customers to sign themselves up for banking services. To the extent that information helpful to small business can draw customers to the BofA sites, the Internet can be an inexpensive way to market. While few transit agencies are actually using the Internet to sell passes, many agencies are providing schedule information via Web locations. The APTA Web site, for example, now has links to hundreds of Web sites from transit agency members. BofA is appealing to small businesses by making its service convenient to use. It has eliminated red tape in applying for loans, and also is offering multiple services to small business customers. Analogous to this is that some transit programs are being marketed to businesses, including the transit voucher program. The objective of the voucher program is to make it simple and equitable for companies to provide transit service subsidies to employees. · BofA is appealing to medium-sized businesses by providing a "Relationship Team" and a variety of different services and products designed to meet the particular needs of that business. While few transit agencies can afford to P8gB 7-20
Ba. of Am0lica C8S0 SWAY have a "Relationship Team," the concept of slaving one sales representative assigned to particular companies is more common. Likewise, enterprising transit agencies, such as Pace and King County Metro, are providing businesses with a menu of products from which to choose. · With the Alpha/Prima account, BofA spent some time analyzing what is happening with its market and, in particular, surveying those customers who closed accounts. Some transit agencies also undertake market research of their users and non-users to better understand their respective characteristics, and to identify which markets segments are most promising for increasing ridership. · BofA developed a detailed marketing plan for the Alpha/Prima account, which specified expected financial results as well as costs. A marketing plan is useful for making explicit the goals of a new service or product, as well as providing detail for the marketing techniques to be employed. · The marketing techniques used for the Alpha/Prima account included internal marketing of the program. This is a critical lesson for transit, since internal attitudes can support or kill new marketing and service initiatives. · BofA effectively made use of press releases as part of its approach to getting out the word on small business products, as well as the Alpha/Prima launch. Press releases can provide free advertising if the release is well-written, clear, interesting, and well timed enough to entice the press. · The Alpha/Prima product development was significant, in that it required BofA to change internal computer and accounting systems, and to provide training to employees on a wide scale. There are analogous situations in transit, particularly where the use of new technologies is envisioned to greatly improve service. For example, a transit system employing new technologies such as Advanced Vehicle Location (AVL) systems can provide better information to passengers on real-time schedule adherence and, in fact, can improve schedule adherence, if systems and training within the agency are adequate. Page 7-~
