U.S. Industry in 2000 Studies in Competitive Performance (1999) / Chapter Skim
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8 Retail Banking
8 Retail Banking
Pages 179-214
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From page 179... ...
The key to efficiency in this industry appears to be the alignment of technology, human resources management, and capital investments with an appropriate production "technology." To achieve this alignment, banks need to invest in a cadre of "organizational architects" that are capable of integrating these varied pieces together to form a coherent structure. The biggest challenge facing retail banks with respect to efficient and effective innovation lies in the management of the "New Age Industrial Engineers" iThis research was supported by the Wharton Financial Institutions Center through a grant from the Sloan Foundation and the National Science Foundation's Transformation to Quality Organizations, Grant SBR-9514886.
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From page 180... ...
Given the increasing competition in the financial services industry and rapid technological evolution, how do retail consumer banks innovate to meet these challenges? This chapter attempts to answer this question by considering general trends in retail banking and by describing a detailed field study at a major U.S.
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From page 181... ...
Regulatory Change and Consolidation As shown in Table 1, the retail banking industry is undergoing a period of rapid consolidation as well as expansion into non-traditional banking products and services. Between 1979 and 1994, approximately 5000 banking organizations were taken over by other depository institutions.
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From page 182... ...
Banking Industry 1979-1994 Item 1979 1989 1994 Total national banking assets (%) legally accessible from a typical U.S.
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From page 183... ...
At present, the evidence is quite mixed in terms of both cost reduction and profit efficiency.4 In terms of shareholder value, recent research suggests that these mergers have tended to destroy, not enhance, value as shown in Figure 2. One major explanation for retail banking's consolidation is the desire to have sufficient size to exploit scale economies in transaction processing and scope economies in cross-selling multiple financial products to a household.
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From page 184... ...
What then drives the consolidation of the industry? When questioned on their strategic response to increased competition, bank directors stated that acquisitions were the most important method for overcoming competitive threats and positioning themselves for the future (see Figure 3~.
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From page 185... ...
Neither of these services is captured as higher banking output at the macroeconomic level. While hard-and-fast data are not yet available, many believe that financial services are at the brink of major performance improvements due to technology.
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From page 186... ...
The primary revenue-enhancing innovations occurring today are in platform automation, i.e., the automation of the functions performed by front-line employees, for branch and phone center employees, and in the newest distribution channel, PC banking. While these innovations have aspects in common, they serve different needs in the distribution strategy of retail banks.
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From page 187... ...
The Changing Consumer The final, and perhaps the most important, force of change in the banking industry is the rapid evolution of consumer wants and desires. Consumers are demanding anytime-anywhere delivery of financial services, along with an increased variety in deposit and investment products.
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From page 188... ...
In addition, consumers are moving away from the use of checks to other financial products, albeit slowly (see Figure 4~. Consumers are also demanding variety of delivery channels available for their use (Table 3~.
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From page 189... ...
households using various numbers of delivery channels. Source: Kennickell and Kwast (1997)
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From page 190... ...
Both technical and organizational innovation are crucial to retail banks. A Product Innovation: PC Banking Pushed by growing consumer demand and the fear of losing market share, banks are investing heavily in PC banking technology (Frei and Kalakota, 1997~.
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From page 191... ...
Banking software must have the capability to facilitate these tasks. Home Banking Using Bank's Proprietary Software On-line banking was introduced in the early 1980s when at least four major banks (Citibank, Chase Manhattan, Chemical, and Manufacturers Hanover)
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From page 192... ...
, transfer funds among checking and savings accounts, and best of all make electronic payments to some 17,000 merchants. In addition to home banking, users could obtain stock quotations for an additional per-minute charge.
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From page 193... ...
However, it is important to point out that the new Direct Access represents the first major improvement in proprietary software home banking in 15 years, which is demonstrated by their explosive growth from 40,000 subscribers to 190,000 in 1996. Banking with the PC Using Dial-Up Software The main companies that are working to develop home-banking software are Intuit, the maker of Quicken; Microsoft, the maker of Microsoft Money; Bank of America and NationsBank, who acquired Meca's Managing Your Money software from H&R Block; and ADP, which acquired Peachtree Software.
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From page 194... ...
Banking with On-Line Services Although personal finance software allows people to manage their money, it only represents half of the equation. No matter which software package is used to manage accounts, information is managed twice: once by the consumer and once by the bank.
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From page 195... ...
An Organizational Innovation: Re-Creating a Bank National Bank,6 one of the larger U.S. commercial banks, with branches in many states, has a retail banking arm that is in many respects typical of the industry.
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From page 196... ...
Effective innovation therefore required the participation of virtually all the functional areas within the bank, from information systems to marketing to human resources, with each of these areas represented on the implementation team. Anchoring the redesign was the streamlining of branch processes and the relocation of many of the administrative tasks and routine servicing of accounts to central locations outside the branch.
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From page 197... ...
The retail bank branch would be turned into a sales-focused financial store. Challenges in the IT area were heightened by the legacies of existing technologies and the requirement that customer service continue to be provided accurately and without interruption; customers are not patient with errors or delayed access to their own money.
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From page 198... ...
Most critically, the innovations relied upon significant changes in key jobs in the branch systems, on the human resource practices that supported these jobs, and on employees' reactions to these changes. In order to reinforce the idea of standardization across the branch system, and to focus efforts toward sales and efficient delivery of services more clearly, the implementation team recommended that the redesign eliminate the position of local branch manager.
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From page 199... ...
Third, while most customers adjusted to the new arrangements quickly, and the new processes that were accompanied by supportive technology worked effectively, turning the retail bank branch into a sales-focused financial store proved more difficult. Financial specialists found it difficult to move from the idea of reacting to the sales opportunities that routine servicing occasionally provided to the more pro-active role that the redesign called for.
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From page 200... ...
The implementation team, while sympathetic to these claims, generally resisted the pressure to adapt but recognized a further difficulty. To argue that the redesigned model must be strictly adhered to was to admit that no further learning
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From page 201... ...
Heaping yet more change onto these locations will be especially difficult. A second challenge facing the implementation team stems from the current decentralized approach to management of the retail bank.
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From page 202... ...
The Process of Innovation in a Bank The two examples given above highlight the complex organizational design issues involved in the innovation processes in retail banking. Simply put, most retail banks do not have something called an R&D group.
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From page 203... ...
consider the overall impact of information technology on productivity in the retail banking industry in the United States. Using a Cobb-Douglas production function, Prasad and Harker estimate the following equation with a combination of publicly available and proprietary data: where Q = output of the firm, C = IT capital investment, Q= e~OC~K~2S~3LA4 7For details on mbanx, see the following Web address: http://www.mbanx.com/.
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From page 204... ...
; . IT investment contribution to output is positive after deducting depreciation and labor expenses (that is, the net marginal product is positive)
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IT labor presents a very different picture than does IT capital. IT labor contributes significantly to output; its marginal product is at least 10 times as much as that of non-IT labor.
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From page 206... ...
, again in the manufacturing context: "The transition also requires a massive change in the skills of American labor, requiring investments in human capital beyond the capital of any individual firm." The evidence also suggests that the effects of managing IT are being felt more broadly in a retail bank. Consider the inclusive model for managing branches.
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From page 207... ...
Further, IT labor is the most profitable of all four types of investment IT and non-IT capital and labor available to the bank. Accordingly, the biggest challenge facing banks with respect to efficient and effective innovation lies in the management of the "New Age Industrial Engineers" that must combine technological knowledge with process design in order to create the delivery systems of the future.
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From page 208... ...
At National Bank, this systems integration role is played by an in-house re-engineering team in conjunction with their external consultant (see Figure 1 1~. Ultimately, it is this systems integration function that will make or break innovation efforts.
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From page 209... ...
In fact, several leading financial services firms have realized the need for such talents and are investing heavily in senior managers from outside the industry most notably, from manufacturing enterprises to drive this alignment of technology, human resources management, and strategy. The challenge, therefore, is not to undertake any one set of practices but rather to develop senior management talent that is capable of this alignment of practices.
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From page 210... ...
Such movement to disintegrate financial services is already under way in most banking organizations; business units such as credit cards and trust divisions are now being run as completely separate operations. The bottom line of this analysis is that service industries such as banking must develop a new generation of management talent to play the role of systems architect one who can blend technical knowledge with complex organizational design issues to drive innovation through their firms.
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From page 211... ...
retail banking," Working Paper 97-09, Financial Institutions Center, The Wharton School, University of Pennsylvania. Philadelphia; available at http://wrdsenet.wharton.upenn.edu/fic/wfic/papers.html Pine, B.J.
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From page 212... ...
. "Learning to acquire: knowledge accumulation mechanisms and the evolution of post-acquisition integration strategies," Working Paper 97-1OB, Financial Institutions Center, The Wharton School, University of Pennsylvania.
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From page 213... ...
in the United States at the beginning of 1994. Merger activity, and the fact that a number of BHCs had no retail banking organization (defined as an entity that provides financial services to individual consumers)
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In late 1994, survey questionnaires were mailed to top executives of the 265 next largest BHCs and followed with a telephone call requesting the participation of one of their retail banking organizations. Sixty-four of these BHCs agreed to participate in the study, and four of these engaged the participation of two or more retail banks in the BHC, so that a total of 71 retail banks participated in the mailed survey.
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