We Need to Stop Selling Banking Products & Begin to Offer Solutions Instead

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Author:Michael Ruckman
Source: FutureBanking.ru

What was the purpose of founding Senteo? What unique methodology does it offer to banks?

M.R. I have worked in consulting for many years. In John Ryan, for instance, we were consulting in the area of banking transformation. In many ways it was consulting on “cosmetic” transformations; for instance, creation of a new brand, a new look, new branch design, and communications. Later, at PricewaterhouseCoopers, I worked in a team that participated in the process of internal transformations of banks, including operations, management model, staff development, cost optimization, risk management, etc. Basically, we took the old banking models and made them new. At the time, many Russian banks were undergoing some sort of transformation. But we could only make general recommendations. We could not go any further with our clients. These recommendations, were certainly useful in terms of contemporary best practices in banking, but many of our clients were anxious to receive specific recommendations and instructions; for example, how to implement their strategic plans.

Consultants are usually distinguished by the fact that they give a lot of paper and theory recommendations; and then they leave. I saw that there was a great demand for combining the cosmetic transformation with all the necessary changes that touch upon the internal functioning of the bank (e.g. operational efficiency, proper staff development and training, management model, and project management capabilities for implementation). So we decided to create a company that would solve our clients’ problems with a complex solution. A company that not only could establish strategic objectives for clients, but also to accompany them through the entire transformation process, step by step. It is impossible to take an old bank, and – oops! – get a new one in a week.

Almost my entire career has been associated with banking in developing countries. I’ve worked in almost 30 countries. One can easily trace the main stages of evolution of retail banks in emerging markets. Usually they start with a problem (goal) of attracting more new customers. The key at this stage is the efficiency of the sales team; the main task – to sell more banking products to maximize the bank’s customer base. Ten – twelve years ago, it happened in Russia. Banks there began to actively work with payroll projects, because it was a good way to immediately gain clientele. That led to an explosive growth in the customer base.

Then, there was a whole host of other problems: the problem of customer retention, the task of improving operational efficiency to reduce the cost of service, etc. Banks found that 80% of the acquired customer base does not generate a profit. Banks began to finally realize that their retail operations can be quite unprofitable.

Later, banks were faced with the fact that some of their customers would leave and go to a competitor. For instance, there is often a situation where customers receive their salaries in one bank but use someone else’s day-to-day banking services. Bankers began to feel that they ought to know their customers better. So, therefore, a lot of banks started to think about product personalization, customization, development of new offerings that meet the specific customer expectations, etc.

I would sum it all up in the following sequence, depicting the evolutionary development:

  • Customer acquisition, sales
  • Improving operational efficiency
  • Creating customer loyalty

We have developed a unique methodology, which is designed to help banks improve the relationship with their customers. There are many different methodologies for measuring the degree of satisfaction of bank customers. You probably already know about the Net Promoters Score methodology – one of the most popular today. The most important questions in their methodology are “Would you buy this product again?” and “Would you recommend this product to your friends?”. But in terms of measuring the relationship quality, this is not a relevant indicator, since we cannot sufficiently predict the future customer behavior. In fact, the NPS does not account for the fact that the customer can be easily susceptible to offers from other competitors. This index only reflects customer’s willingness to purchase a product today. Essentially, the NPS is a product-oriented methodology, and not necessarily a relationship-oriented one.

A good indicator for predicting the future customer behavior is the strength and quality of the relationship. As I said, there are three different cycles of evolution: attraction, retention, and relationship building. A bank customer does not dream about a car loan, he dreams of a new car. He does not need a credit card, he seeks the freedom to shop when he wants. At the first evolutionary stage the main objective is to create a reason why a customer would want to purchase a banking product. At the next stage the objective is to remove the reasons why a customer may want to leave. And, finally, at the last stage the objective is to establish a reason or reasons why that customer would want to stay with the bank and even become less sensitive to price because the value of the relationship outweighs the costs.

Following the logic in the relationship-building stage the task is to create a desire among customers to consolidate all their financial relationships in one place. The current trend in the world is that customers have ongoing relationships with multiple banks. Indeed, they can be loyal to one bank within a particular product category. For instance, one may have a credit card in one place, while the mortgage in another place, and then use another provides for a car loan, and so on. In this type of scenario, customers make their decisions primarily based on price comparison.

So, what we are trying to achieve, through improved customer relationships, is to lower the sensitivity of customers to the price of the product and encourage them to consolidate their entire financial “life” in one bank. This would represent a huge advantage to any bank. For example, a bank could get to know its customers much better, it could significantly lower risks and customer service costs, etc.

When talking about innovations in the retail banking industry, it basically comes down to two areas: a) product and channel innovation, and b) experiential innovation. During the last 10 to 15 years, innovation in this industry has been in products, channels of contact with customers, and technology (e.g. mobile banking – as a customer access channel).

However, there are very few examples of innovations that touch upon the emotional aspect of customer relationships. As it turns out only a few organizations in the banking sector are actually working on customer experience. At best, we are able to observe cases that raise a lot of questions about their actual effect. Let’s take Deutche Bank’s Q110 model, for instance. Very beautiful offices, design – superb. They even have a bowl with pet food and water for customers that may visit the bank with their pets. Other banks try to use scents and sounds in their branches. Even Sberbank, Russia’s largest retail bank, has opened a new model flagship on Tverskaya Street, featuring a giant TV-screen across the entire façade. I was passing by that branch one day and was pretty impressed. Certainly, that branch office had probably cost the bank millions of dollars. The bank used the most modern technology, but the question is whether these technologies add something to the quality of relationships with each client. I doubt it.

Innovation in products and channels is not enough. If you look at emerging markets, ten years ago it was easy to be the first with a new credit card with a grace period. In 2005, when we launched mobile banking at Alfa-Bank, it was something amazing, wow! Even in Europe and the United States people were surprised when I demonstrated how someone can make a transaction using a mobile phone.

In the first phase of market development such technological innovations generate a real advantage, but as soon as the rest of the market develops, everyone starts to copy your solutions. The rate of return on investments for technological innovations gets shorter. The period of time during which a bank may enjoy a price advantage or a competitive advantage, is significantly reduced. It becomes harder and harder to come up with something entirely new. After a while, it turns out that all the competitors in the top 10 are on the same level. So, therefore, companies mainly make only small and incremental improvements. Truly radical and disruptive innovations happen very rarely.

Innovation on an emotional level is a completely different type of innovation. And there are several stages – starting from individual contacts between the bank and the customer and leading to constant (regular) contacts that transform the customer’s life.

Let’s use the example of an MP3 player as a disruptive technology. When it first came out it instantly changed the music industry. Enter Apple. As one would probably agree, Apple has an emotional connection with its customer base. So, what did Apple do when it entered the MP3 player market? Apple made a few improvements to the MP3 player, known under its own brand as “iPod”, it changed the design of the device, added its own software, added the ability to download legal music through iTunes. But most importantly – Apple produced an integrated approach for combining these technological improvements with the relationship that links the Apple brand with its audience. To date, Apple has sold more than 300 million MP3 players, the share of Apple’s sales in that market is more than 70%. All this is despite the fact that the player itself was not invented Apple.

Another good example is Harley Davidson. Consumers have a very strong emotional bond with that brand. People who buy a Harley, do not buy a motorcycle, but a way of life. If you look rationally at the Harley Davidson motorcycle, hardly anyone would buy it based on rational arguments. These motorcycles consume a lot of gasoline, they are quite loud, and they may break down often. But all of that becomes secondary when a person becomes emotionally immersed in the Harley Davidson lifestyle. The typical Harley Davidson customer makes a decision to purchase the product based purely on the experience factor.

Well, isn’t it what they say – that bank products don’t generate such emotional interest?

M.R. Indeed, no bank product can cause as much consumer enthusiasm, as an iPod or a Harley. I have never seen anyone anxiously waiting for his bank to launch a car loan, or lining up outside at 6:30 in the morning just to have a chance to apply for that new mortgage.

Banking products are boring; they are uninteresting. They do not stimulate desire. What people really want is end goal that the banking products can help achieve. Bank is a just an instrument to get to the desired goal. Banks must accept that.

We must stop selling bank products. Instead, we need to sell solutions that help people to achieve certain results.

Let’s stop talking about the car loan, let’s talk about the solution that will help buying a new car. It doesn’t matter what is included in that solution; whether it is just a car loan or a car loan with a savings account, or a car loan with a savings account, plus insurance. Regardless what can be found in this package, it is important to that it offers a solution for a specific purpose. First, we should find out the customer needs and then start developing a plan for ways to achieve those goals. And I am not talking just about the goals that the customer has today, but those that he may have in six months, a year or two …

So, are you talking about personal finance management?

M.R. This is part of a new approach. If I come to any bank in Russia today and say that I want to buy a car in six months, I will probably be told to come back in six months. If I want to buy an apartment in a year, I would be told to come back in a year. Today, the banks’ business model is not set out to respond to customer needs that are not connected to the present day.

If a client comes in and says he wants to buy a new apartment in eight months, then I – as a banker – should be able to offer him a solution to this problem. For example, I could propose to make regular monthly payments into a savings account in the same amount as the future home loan. But the advantage for the customer is the fact that there will be six months of payment history which will enable the bank’s risk management to see the payment discipline and, therefore, offer certain discounts to the future loan itself. Moreover, if other banks told that customer to come back in six months while our hypothetical bank has positioned itself to be already helpful today, then the customer is more likely to be loyal to us. Let’s suppose we helped our customer to find a solution to buy a new car. Two-three months after the purchase, we can offer that customer to spend thirty minutes together to plan for future goals for the next year or two and design ways of achieving them.

Does anyone use that approach right now?

M.R. Perhaps only the credit unions in the US. They seem to be more relationship oriented. Credit unions are set up as non-profit organizations where shareholders are the customers themselves. Due to the strong influence credit union customers have on their management, credit unions are more focused on building customer relationships.

This type of approach requires a very big change in the bankers’ mentality. Currently bankers think about two things: how to sell a product and how to service it. In order to properly implement experiential innovation people need to think about other things as well. In other words, besides thinking about sales and service, you have to also think about establishing relevant contacts with customers that would be aimed at developing relationships. There should clear reasons for customer to have contact with the bank that are not related to sales and service.

When banks contact me, they send me text messages exclusively with loan and credit card offers. I am really fed up with that already.

M.R. I understand how you feel. Take a customer who bought a banking product, for instance. Let’s say he opened a savings account at some bank. Sometimes he would come into the branch office to add more funds to that account. It is all about sales and service. However, the bank should strive to stimulate additional customer contacts that are not associated with servicing of the products that customers have already purchased. The occasion for such contact must be relevant to the customer.

Sure, but you can’t use text message communications for that purpose, right? So one would have to come in to a bank branch?

T.M. It is not so much about the channel of contacts, or a technical gadget or some magic button. We are talking about the very idea of establishing contacts that are unrelated to sales or service.

M.R. There is a very simple way to establish such contacts – joint planning. For example, banks can offer it once a quarter to discuss needs and challenges and devise various options on how to solve them and achieve certain results. They can jointly plan a budget, as another idea. For the bank this action should not be too expensive, but it creates a much more intimate relationship with the customer. As a result, the customer would want to consolidate all of his financial needs in one place.

In recent years, bankers actively cut costs, reduced the number of branches, because maintaining those branches is quite expensive. In addition, the modern generation (Generation X and Y) mainly uses online services. Would you agree with that?

M.R. I see that as a very big risk. Suppose we close our branches and migrate all the account holders to the Internet, mobile banking, the ATM. After we do that, it would appear that all the banks will start to look alike. All IVR phone systems sound pretty much the same; ATMs may have a different color, type of font on the screen, but, in fact, they are identical in functionality. With internet and mobile banking – the same story. They are all similar.

As soon as the market matures to a certain degree, a certain standard is formed with the use of the same channels and products for everyone. Differentiating in that environment becomes harder and harder. And when all banks are similar, customers will go back to making their choice primarily based on the price.

On the other hand, emotional and relationship-centric innovations can be used to reduce the sensitivity to price. And, if you think about it, the cost of doing that is far less than the benefit gained from reducing that price sensitivity.

Banks that are aware of that and are making appropriate efforts today will have another wave of price advantage, which will be much more difficult to copy.

Going back to Sberbank for a second: it has invested millions of dollars in one branch to create customer experience. This that the right way?

M.R. Personally, I would not invest so much. In this case, it might make sense to do a customer survey and see whether they can say anything positive about how this concept has affected their quality of the relationship with the bank. Perhaps, they may say that this branch did not have any effect on their relationship.

Can you give an example of a bank that uses the approach that you mentioned in practice?

M.R. I can probably name Umpqua Bank as one example in banking. Plenty of xxamples can be found in other areas of business. But let’s make a small theoretical disclaimer.

If customers today are asked “what they want from their bank?” the answers are probably going to be within the lines of: low interest rates, a free service, etc… However, if you ask that question a bit differently, i.e. “what would they like to expect from the relationship with their current bank in the next five years,” the answers will be divided into three main categories.

  1. Help when a problem may arise.
  2. Assistance in managing personal finances and improving quality of life
  3. Help in achieving goals and objectives

Regardless of the country and the region, 90% of the responses of bank customers are distributed among these three categories. And yet, banking customers today do not see or feel that their banks are interested in their personal future. What does that say about the relationship?

T.M. When it comes to relationship-oriented innovations, there aren’t that many examples. Otherwise, it would not be considered innovative at all. But in order to do this, banks really need to look beyond their current activities, beyond the usual model where they are almost exclusively preoccupied with attracting new customers and servicing existing ones. Today, very few financial organizations are involved in relationship-building with their customers. Perhaps, just the private banks… In their field they can’t afford to ignore the importance of having strong customer relationships.

But in private banking the value assigned to a customer is on a whole different level, though. Isn’t it?

T.M. That is correct; that is how banks typically think. However, it is probably wrong to look at every customer purely from the cost perspective. Following the logic in your statement, then – if you have a million customers and you don’t wish to spend any money to develop relationships with these customers, then it means you don’t assign value to those customers. Well, if that is the case, then popular advertising slogans like “we are always with you” and “we are Your bank” – all of them are just a lie.

But, of course – it’s advertising…

T.M. Advertising it may be, but customers are sensitive to this. They can sense it when they have contact with you. So, false promises end up only damaging the reputation and reducing the likelihood that customers would consider having any long-term financial relationship with such banks. They will go back to being price-sensitive in making their choice of a provider.

Point well taken. And, yet – where are some examples? Who is using such relationship-centric approach in practice?

M.R. Basically, it is small banks like Umpqua. Umpqua has already implemented a lot of innovation in the relationships with customers. For instance, they are creating community centers in their branch offices. There are dozens of small banks that are taking steps in this direction.

A lot is being said about Umpqua, but can they show results?

M.R. Just look at their record. During the crisis, when many banks fell, Umpqua was buying other banks. They used the crisis to significantly expand their retail network at favorable conditions for them.

The reason why I am so persistent in asking this type of question is because many banking professionals consider such stories beautiful fairy tales. They want to know about the ROI. Sberbank has put up a giant screen as its façade – but what is the use of that?

M.R. I doubt that Sberbank will get the “ROI” from that screen. But in our methodology we calculate things like how much revenue will be generate from each dollar spent on building quality relationships with customers. We can show the calculation of income and profit from each customer. If the bank has a million customers, each of whom uses only one bank product, the cost of service for each customer is very high. Therefore, if the same one million customers will use three banking products, the bank’s profitability will be much higher, while the cost of service per customer – lower. Moreover, the effectiveness of the branch network will increase.

Our research in Russia confirms that customers, even customers with an income level at $600/month, use products and services from multiple banks. They can have up to 5 different products in multiple banks. If we were able to somehow consolidate all these problems in one place, we can surely generate more income and lower the risks. The benefits of doing that are many.

For large international banks deciding to implement experience-based and relationship-related innovations involves a difficult decision-making process. Their management structure is generally quite decentralized. Different people are responsible for different product lines. That’s how their KPIs are structured, too. There are many “heads” but no one is solely responsible for customer relationships. However, in the absence of that (someone internally who would take responsibility) it is difficult for the top management to influence the situation. They look at the bottom line, the total profit and loss, but they do not see their profitability per customer. I think if they saw that figure, it would make them change their attitude and begin to think differently.

Therefore, in our approach in working with various banks (our clients) we begin from looking at such figures as: revenue per customer, operating costs per customer, capital costs per customer, etc. Then, we divide that into all of the customer segments. It really opens their eyes. And after that they are ready to structure their business in a different way.

I have witnessed an evolution of bank management models over the years. Ten years ago, banks in Russia were really keen on having a balance sheet approach: there was an asset side and the liabilities side of the business. Then, the focus shifted to product-based orientation: there was a retail products division and a corporate division. Now, we are at the next stage that involves the customer. So, banks have a separation between “mass” customers and “VIP” customers. At the current development level of the market, banks are still somewhere in between the product-oriented and a customer-oriented approach. Regardless, the next stage of evolution is already upon us. The next step is relationship-centricity.

Have you read about GE Money Bank’s recently opened pilot branch with all the different colors?

M.R. Creating a new office design is easy. But it is equivalent to applying “lipstick on a pig,” unless the new design is accompanied with a serious internal transformation. The bank should know how to build, manage and measure the quality of the relationship with its customers.

As I said, the big banks are very hard to change, but there are other, non-banking organizations that are doing this.

There is a PFM service in the U.S. called Mint.com, for example. Look, I am a private banking customer at Wells Fargo here in the U.S. For almost five years they kept telling me that they could not put together for me an easy-to-use interface where I could see all of my finances the way I would prefer – i.e. all my money, investments, real estate, etc. in one place. They told me that their system doesn’t allow that. In Mint.com, I was able to do that in 15 minutes – and they charged no fees for that! On Mint.com I am able to see my entire financial life, including the current market value of my property and my car. Using their tools I created for myself a budget plan, and their system sends me a reminder if I spend too much money, or vice versa, if I saved this month. This system also detects how much I pay in commissions to other banks and offers me cheaper alternatives. In fact, they are a non-bank that represents a threat to the relationship between me and my bank because my bank is too big and clumsy, and it does not value the relationship with me.

There is a company called SmartyPig, which created a service that allows users to automatically put away each month a certain amount of savings towards certain goals. Please note – they take the money from my main bank account and send it to an account in another bank (their partner institution), where they sit until a certain target sum is accumulated. Is this a threat to my bank? Absolutely.

Do you think that services such as PayPal are also a threat to the banks?

M.R. If we consider the simple banking transaction as a business, then – yes. But the bank has many more opportunities for building relationships with customers, while supporting their financial lives and helping them to achieve their goals. I would even venture to say that banks have the potential to develop a closer relationship with customers than any other business. Banks can have almost daily contact with clients via the Internet, through a call center, etc. If only they showed a little more interest to customers.

It is easy to say that “the relationship with customers – is the priority number one,” as it is now fashionable to say. These slogans and promises can be seen everywhere, as in advertising. But to really fulfill that promise is difficult, mainly because of the fact that to date most banks around the world are not structured in a format that would allow them to build quality relationships with their customers.

And this is basically what we are trying to do. We help banks to invent, create, measure and manage the quality and healthy relationship with their retail customers, which at the same time generate a profit.


Senteo Inc. is an international company with offices in the U.S., Spain and Russia. Senteo Inc. specializes in transformational projects for retail organizations, business education and business ventures, using its own methodology and concepts.

The firm’s consulting division that works in transformation projects consists of experienced professionals with a diverse set of expertise. Senteo’s team completed more than 200 successful projects in 27 countries, including projects for the 16 banks from among the world’s top-100 banks.

Using its own and unique methodology that has evolved over the years and had been proven in practical implementation, Senteo has a clear understanding of the banking industry and the methods by which to create commercially successful and sustainable business models.

Interviewed by Anton Arnautov

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