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Retail bankers cannot afford to ignore the growth of ecommerce. This report will provide the information you need to understand, recognise and action the strategic opportunities and avoid the dangers surrounding ecommmerce in all its forms.

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"You can gain a significant commercial advantage with ecommerce. You can lose without it."

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ten case studies

  • First-e
  • Netbanx
  • Citibank
  • Barclays
  • NatWest
  • First Direct
  • Royal Bank of Scotland
  • Co-operative Bank

Avoid the pitfalls - capitalise on your competitors' successes




E-Commerce in Retail Banking

Executive brief:

This report examines the impact of electronic commerce (e-commerce) on retail banks. Its 9 chapters and 11 case studies define e-commerce, analyse the legislative and technological developments that govern its future evolution, and assess the extent to which retail banks should adopt e-commerce strategies and how they should do so. The report includes several series of action points for readers with executive responsibilities.

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Fifteen conclusions summarise the key findings of this report for you and your organisation, as follows.

1. E-commerce is not achievable by technology alone. Priorities must include successful implementation of knowledge management, customer-relationship management and an overall reorientation of the enterprise towards the customer. In the already crowded ‘virtual high street’, retail banks must also defend and reinforce their brand identites, and cater for an e-customer base that will judge an institution by the performance of its technology as well as by how well it delivers its primary commercial proposition. E-commerce is a new method of achieving and servicing a customer relationship which may operate alongside or independently of traditional methods. It is new in that it is evolving, so that retail banks must remain open to new technologies and newly evolved best-practice models, and in that it imposes a need to understand and master complex delivery mechanisms that require abilities beyond conventional banking skills.

2. E-commerce delivers effective control of the point of transaction to the customer. E-commerce is characterised by an emphasis on achieving effective front-line systems to render customer contacts user-friendly. This is because e-commerce requires only the presence of the customer and the relevant enabling technology. The retail bank’s presence is not required. For example, a retail bank’s website appears on a screen in the living room, or perhaps even the bedroom, and operates whether or not the bank itself is open for business. Also, the retailer need not be aware of the transaction while it is happening. A smart-card transaction occurs between retail outlet and customer without reference to the bank and involves a customer-determined amount of value. Such a transaction does not require authorisation as it occurs because the required value has already been downloaded on to the card. The downside of engaging in any form of e-commerce, therefore, is that the retail bank effectively forgoes control of the point of transaction.

3. Every stage of an e-commerce interaction will impact upon the reputation of the providing bank. From the speed of downloading of images to the ‘tone of voice’ of the written material on a website, for example, the positive or negative experience of any e-commerce transaction is credited first to (or debited first from) the reputation of the providing institution. This means that the customer’s whole experience of a retail bank engaged in e-commerce is potentially contained in the single transaction-event. The customer can enjoy the transaction and like the bank, or pull the plug, all without interruption. The bank’s reputation with the individual customer can be influenced by defective technology as easily as by an unsatisfactory service provision.

4. An effective e-commerce strategy must be supported by the effective communication of the bank’s core values to the customer. The customer should come away from any e-commerce transaction or other contact with a sense of the bank’s character, purpose and identity (as these are intended to be perceived) as well as with, say, details of current accounts and interest rates. The baseline objective of any e-commerce strategy should be, therefore, to convey a package to the customer representing core values, in one or more easily accessible, user-friendly electronic formats. Due consideration should be given to supplying a personalised element (email, fax or postal confirmation of instructions represents an opportunity to add to the communication with the e-customer, for example), while providing a means to add value to the e-relationship.

5. Devising an effective e-commerce strategy requires careful analysis of the business case. Key drivers towards e-commerce are:
  • Customers are pressed for time and want to bank at hours convenient to them
  • Financial institutions want to reduce their brick-and-mortar premises to save costs, as well as meet customer demand
An e-commerce strategy should be designed around goals including:
  • Cost reduction
  • Switching customer behaviour from one channel to a lower-cost one
  • Increased customer retention
  • Acquisition of new customers and increased value-added transactions

Transacting via e-commerce should be easier than transacting by conventional means if these goals are to be achieved. This is a technology issue, in that training as well as investment is required, but it has a budgeting implication. E-commerce cuts long-term costs. However, the e-commerce spend should be targeted towards achieving transactional ease, and this may mean high start-up costs.

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6. E-commerce requires implementation of a change-management strategy.

E-commerce is at an early stage of evolution. Customers will become increasingly competent in their use of e-commerce delivery platforms. Although market penetration of some enabling technologies (personal computers with internet access, for example) is sufficient for e-commerce to occur, best practice is not yet established. New technologies will appear, and usage of established technologies will change. Legacy research on customer behaviour will be invalidated. E-commerce will also change the retail environment in which banks operate. Retail banks must therefore plan and implement strategies for change.

7. Accessibility matters more than technology.
An accessible online presence matters more than the means whereby it is effected. PCs are not necessary to e-commerce and nor are other specific, individual technologies. But e-customers must find the bank, whatever technology they use to conduct their search and whether they are looking for the bank or a generic financial service. The internet represents an electronic environment where banks may establish an accessible presence and enter into interactive relationships with their customer base. It is not necessarily D though in the short term it may remain D an environment where the main priorities are to devise a user-friendly website and to develop a policy for email communications. Websites, for example, become redundant if mobile telephones become the primary access mechanism for online information, because mobility limits screen size. It may be that, in future, internet service providers will be succeeded by cable broadcasters or telecommunication companies, and that e-commerce in retail banking will require TV-presenting talent rather than website-design skills. But the customer still needs account information.

8. Where e-commerce removes the personal element of retail banking, it does not achieve its full potential. If e-commerce is treated as part of the overall commercial proposition, with bank managers and counter staff (or other point-of-contact staff, however designated) also available, three customer-service objectives may be achieved:

‘Anytime, anywhere’ banking for consumers of any net worth

Direct relationship banking characterised by the consumer perception that it is controlled by the consumer

The ability to supply value-added services beyond core banking products, quickly and efficiently

E-commerce strategies cannot be operated in isolation from the overall commercial mix. Integration across the enterprise is a vital factor.

9. Due-diligence problems may be addressed by a combination of law and technology. The key questions relate to the enforceability of online contracts, the reliability of online signatures and the potential liabilities arising from remote interaction with e-customers. Current standards of encryption provide verification of the counterparty, while established practice in online contracting is such that enforceability will generally rest upon whether closure entailed an extended series of email exchanges. The bank must provide detailed acknowledgement of the terms of an online contract by email, and the customer must acknowledge receipt of the bank’s email. Only when this double acknowledgement is complete will an online contract be binding. Prudent retail bankers will tend to prefer PIN/password identification and paper verification until portability of electronic signatures (on smart cards, for example) is common practice, and until electronic signatures are intrinsic to the individual (as is the case with iris prints or fingerprints). It may be judged unusual for any signatory to a substantial e-contract to object to paper-based verification in most circumstances.

10. E-commerce may pose a threat to retail banks. The evolving pattern in e-commerce is for a ‘lead provider’ to issue the technology or the service, with ‘secondary providers’ supplying functionality beyond that provided by the lead provider. This may lead to a significant commercial disadvantage for secondary providers. For example, if a retail bank provides a smart card that can be used as a railway ticket (exchanging value for ‘ticket status’ rather than a separate ticket at a railway-station terminal), it follows that the bank will get credit for a pleasant journey. But if the railway company provides a card that can be used to go shopping and pay for lunch, the railway company gets the credit. This is why retail bankers should be alert to smart-card initiatives that are not led by the banking industry. The commercial priority is for retail banks to move towards lead-provider status in all their e-commerce initiatives.

11. The effect of e-commerce on customer expectation is that the primary product of any provider must be efficient delivery that goes beyond the core. Brand identity is significantly dependent on the effective operation of technology. Also, a best-practice standard is evolving for e-commerce whereby non-core added value is regarded as vital to ensure customer loyalty. A ‘good’ bank is one where the technology works quickly and efficiently, while an ‘e-competitive’ bank is one where the customer is provided with value-added reasons to tune in, visit the website, and/or use the smart card. In this context, a key characteristic of e-customers is that they are effectively connected to the bank even when their requirement is not for a banking service, because they visit the same outlet to satisfy banking and non-banking requirements. The bank has the opportunity to satisfy non-banking requirements and may gain increased customer loyalty by doing so.

12. Providing added value is necessary to prepare customers for future core provision.
A user of an online banking service will grasp the techniques necessary to view account information and issue transfer instructions but will not necessarily develop familiarity with other techniques that are not required for effective use of that service. Therefore, introducing further core products to the service (online brokerage, for example) will not meet with automatic take-up by existing online customers. The required IT literacy will not necessarily be there. Retail banks increasingly regard initiatives to improve their online customers’ familiarity with information technology as a key part of their e-commerce strategies. This should be achieved by a gradual increase in the functionality offered by the e-commerce service. For example, a bank might introduce an online electronic-purse scheme whereby a customer holds value online for spending in an online mall. This is added value in itself, but it also provides experience of using techniques that might subsequently be applied to management of an online brokerage account.

13. E-commerce requires effective customer-relationship management (CRM).
A retail bank must achieve presentation to the client of a ‘single picture’ of that client’s banking activity, from current-account balance to, say, mortgage-application status. This is not simply because e-customers prefer dealing with an institution that can conduct a whole relationship through any single point of contact, but because if a bank seems unable to see the whole of the single picture, this may cast doubt upon its internal administrative efficiency and customer-service standards. The key determinant in successful CRM is that the member of staff who is the point of contact with the customer should have access to all necessary information about that customer. Solutions to the difficulties in achieving CRM should focus on the orientation towards the customer that e-commerce necessitates.

14. E-commerce provision must be strongly branded. Brand protection in the context of e-commerce is the protection of a retail bank’s reputation and goodwill, in that these accrue from the provision of ‘good’ electronic products and services, whether these are provided by the bank or only accessed through a bank-branded outlet. Commercial pressures oblige retail banks to provide access to other retail institutions’ e-commerce provision through their outlets and, correspondingly, to secure access to their own provision through other outlets. The danger to the brand is the potential for confusion in the customer’s mind as to who provided any given product or service.

15. Existing customers are a valuable asset for e-commerce.
Loyalty to a retail-banking relationship increases over time and may be expected to lead to an increase in the amount and range of business accruing to the relationship. Therefore, existing customers should be regarded as the primary marketing target for a new e-commerce initiative. The message for existing customers should focus on the added value presented by the e-commerce service rather than describing it either as new or as an alternative to existing processes. Marketing beyond the existing customer base should take the opposite approach. Where an e-commerce initiative is sufficient to dislodge a banking relationship, its contributing characteristics will be its newness and its ability to offer an alternative to ‘boring, safe, conventional’ banking. In this context, the innovative use of IT is a key element. Inclusion in the small print of technical data regarding, for example, minimum system requirements may have a positive marketing effect.




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