Success in Financial Services Marketing - Research Proposal Example

Marketing of Financial Services: A Case Study 2007 Word Count: 2262 Introduction Channel delivery is one of the most important, if not the key, factor for success in financial services marketing. Particularly with the development of technology, that is internet, mobile and digital television, there are now far more delivery channels for banking products that there was perhaps a decade ago. Internet banking has changed the familiar business model of retail banking and the nature of channel partner relationships, emphasizing on customer-centric services as well as a greater focus on efficiencies. Internet banking enables the customer to access their account round the clock, 365 days a year whichever part of the world they are located. While the facility provides convenience to the customer, it allows the bank to save costs. At the same time, new challenges have emerged with the disintermediation of branches, virtual customer relationships in which the customer is in the controlling position and different forms of eCommerce and eServices (globalbusinessinsights.com). However, the shift in retail banking from a personalized format to internet and web-enabled format may not be a simple exercise. While there are attitudinal issues on the part of the customer to adopt a new technology, there could also be severe security and marketing issues that the bank needs to take care of. Hence, the bank needs to undertake a SWOT (strength, analysis, weakness and threat analysis) of the existing scenario as well as a detailed study of the environment factors, a comprehensive market research of customer needs and apprehensions. In this report, I will attempt at marketing audit and a SWOT analysis of HSBC’s internet banking format in the United Kingdom and create a roadmap for growing the internet banking business so that targets may be laid down, ways to reach the target may be specified and performance measured against the targets without inter-departmental confusion coming in the way of success. For the purpose, I will first undertake a literature survey on the diffusion of innovation in internet banking in various countries. Literature Review Product decisions Furs, Lang and Nolle (2002, cited in Frame and White, 2002) found in a survey in the United States in 1999 that a commercial bank’s decision to adopt Internet banking was related to its holding affiliation, location (urban or rural), size of fixed expenses and that of non-interest income. In another study, Sullivan (2000 cited in Frame and White, 2002), it was found that commercial banks that launched transactional web sites were the ones that catered to the education population in the age group of 18 to 64 and had higher non-interest income and expenses. Frame, Srinivasan and Woosley (2001 cited in Frame and White, 2002) found that commercial banks that had more subsidiary banks were less likely to adopt this innovation while those that had more branches were more likely. Electronic bill payment services are positively related to age and income and are more likely to be used by women (Mantel, 2000 cited Frame and White, 2002). Diffusion of Innovation The diffusion of innovation was first theorized by Rogers (1962). He defined innovation as a product, service or idea perceived as new by the customer. The innovation is adopted on the basis of relative advantage, compatibility, observability, trialability and complexity. While adoption is positively relative to the first four factors, the last factor has a negative impact. The innovation is adopted by consumers in five specific phases – by the early innovators who are a small group of people who initiate the innovation, the early adoptors, who are the initial purchasers, early majority and late majority when more customers take to the innovation and laggards who enter into the market at a late stage. Rogers (1995) found that customer behaviour in general formed a bell-shaped curve in adoption and diffusion of innovation. The Sequence & Proportion of Adopter Categories Source: Rogers (1983) Typically, innovators are younger, have higher income, risk-prone and pass on information to others than the early or late adopters. Also, they usually experiment with alternate products (Wungwanitchakorn, 2002). According to Virtual Survey 2002, UK customers are still at the early adopters or early majority stage. Product growth/ share Fern (2004, cited in Archibald, 2006) has used the Boston Consulting Group (BCG) Matrix developed in the 1960s and Hammel and Prahlad’s (1989) theories to categorize product launches in terms of market share and strategic intent of the player. The BCG Matrix correlates market share with market growth and categorizes the product as successively the Problem Child, Star, Cash Cow and Dog. The BCG matrix is demonstrated in the following figure. Source: Archibald, 2006 Hammel and Prahlad (1989) categorizes the strategic intent as technological excellence (TE), operational excellence (OE) and customer intimacy (CI). Products are launched with high technological costs when it is done with TE. The margin requirements at this stage are extremely high to cover development costs. At the OE stage, reverse engineering is often taken resort to. Additional features may be provided at much lower costs. At the CI stage, customer requirements are incorporated into the technology. Combining both the theories, TC-PC stage produces products in fast growing emerging markets with little concern for customer requirements; at the S-TC stage, additional features are added to increase market share; CC-TE stage is one when cost reduction is attempted; D-TE stage is when business, processes or technologies of competitors are merged or acquired; at the PC-OE stage, competitors imitate product while also attempting operational innovations. In my opinion, the UK internet banking market is at the S-TC stage since the industry is still trying to achieve technological excellence by addressing concerns like security and the market is at a growing phase. Product risk assessment Source: Ansoff (1989) Launching a new product like Internet banking involves risks. The level of risk may be assessed by the Ansoff Matrix presented above. Risks are lowest when market penetration is attempted by present or existing players. Market development by a new player and product development by the existing player lies at the next levels of risks while diversification has the highest risks involved. Typically existing financial services players include internet banking as the product development strategies or new players attempt to enter into the market through this avenue by either tying up with an existing player or capitalizing on synergic products, it is a moderately risky business. However, when new players want to enter into internet banking as a diversification strategy, it involves high risks. Customer need and retention Abraham Maslow developed the hierarchy of needs as follows: 1) physiological needs, 2) safety needs, 3) needs for love, affection and belonging, 4) need for esteem and 5) need for self-actualization. Based on this, customer hierarchy of needs for an IT product may be laid out as 1) products that work, 2) rapid resolution of technical issues, 3) understanding and ability to increase profit, 4) recognition and expansion of horizons and 5) mutually beneficial partnerships (Phelon Group). In general, changing customer needs are reshaping the financial services industry the world over. For financial services, customer need hierarchy may be designed as 1) accessibility, 2) security, 3) return potential, 3) convenience, 4) cannibalisation of alternate products. For internet banking, the growing internet use in the UK means that there is greater accessibility. Although the return potential from internet banking is the same as through other forms of delivery, this channel provides the highest convenience and possibilities of offering alternate financial products. A study in Germany found that internet banking facilities increases customer loyalty since it provides more information about product offerings to customers. Although it is often an emotional decision to continue relationship with the main bank, the internet banking customer is also adept at more financial research online and may opt for the cheapest financial offering. Hence emotional bonding with the main bank may be negated by improper pricing of financial products (Deutsche Bank). Marketing Audit Self analysis: HSBC is the leading internet banking provider in the UK (accenture). It is headquartered in London and has a network of 1,670 branches. In addition to the branches, it operates through internet, mobile and television for its product offerings of current and deposit accounts, short and medium term lending, credit cards, foreign currency and travellers cheques, remittances and mortgages. The bank has 110 million customers in 79 countries, recording pre-tax profits of GBP 11.5 billion in 2006 (GBP 9.5 billion in 2005). L’Pest Analysis: PEST analysis, that is studying the political/legal, economic, social and technological environment, is concerned with analysing the business environment that a company faces (tutor2). The emerging political/ legal scenario in the United Kingdom involves a gradual shift from the traditional welfare system to a more market-driven one, with greater transparency in regulations, commoditization of financial products with more focus on costs, access and terms, higher impact of the euro resulting in more offshore products and a shift towards ecommerce and internet banking. The economic background is characterized by a low inflation level resulting in a greater focus to equities, movement away from salary pensions and higher income/asset inequalities resulting in individuals becoming more concerned with financial security, new entrants in the financial services business with cutting edge technology access. The social trends are characterized by an ageing population, changing lifestyles requiring a variety of products including mortgages and value-added financial planning services and higher periods of formal education implying that the pension funds tending towards cash crunch. The technological changes include higher and growing computer and internet access (Foresight). Macro analysis: In the United Kingdom, total internet banking customers as a proportion of retail banking customers grew from 5 percent in 2000 to 13 percent in 2004. The UK has one of the largest penetration of internet banking in Europe where the average figure rose from 3 percent to 9 percent over the period (globalinsight.com). This was despite the meltdown that occurred post the dotcom bust that took a hit on internet banking. In 2007, Forrester predicts that 24 percent of retail customers in the United States and Europe will use the Internet for their banking requirements. According to a Forrester survey, about 61 percent retail banking customers will be conduct their banking activities at the branches, 9 percent through mobiles, 3 percent at self-servicing terminals (ATMs) and 3 percent were indecisive. Datamonitor estimates that there will be a 9.1 percent growth in internet banking in Europe over 2003 to 2007 (Accenture). By the first half of 2006, there were 16.9 million customers, that is a third of the adult population of the UK, who used internet banking services, overtaking the number of telephone banking customers of 15.4 million that fell from 16 million the previous year. Further, one fifth of the account holders accessed their online account daily and two-third access once a week. As many as 58 percent of the users access other product offerings besides their main accounts, 90 percent shop online and 84 percent transfer funds and make payments online (apacs). According to some analysts, internet banking has brought about the largest change in the UK financial services market since the 17th century. Internet banking has lowered barriers to entry for financial services players and new entrants are threatening the existing players. Surveying 26 UK banks and other organizations, Feng Li, a professor at the University of Newcastle, Tyne, found that various organizations, either individually or in association with banks, are provided financial instruments, like savings. For example, Sainsbury Supermarket chain has teamed up with Bank of Scotland to offer internet banking solutions, Halifax has launched Intelligence Finance Halifax (Newcastle). In the United Kingdom, 22 percent of the population was between the age of 16 and 74 in 2004 (accenture). This is the target customer base for internet banking as the proportion of internet banking users grew from 13 percent in 2002 to 25 percent in 2006 (apacs). SWOT Analysis Strength: HSBC has a strong brand, being a 140 year old multinational bank. It operates in 79 countries and has a cosmopolitan client base. The Internet Banking facility provides the customers access to information about their accounts 24X7. Through the internet banking tool, the customer can retrieve information in alternate forms that would not be possible otherwise. Weakness: While HSBC has strong brand equity, it is a less entrant into an integrated marketing strategy across countries. The main hindrance of moving aggressively towards internet banking from personalized banking is the high initial costs of technology and the continuous changes in customer requirements leading to the need for successive technology upgradation. There might also be resistance from employees fearing loss of job if large-scale automation is undertaken. Opportunities So far, internet banking is typically accessed by retail bankers while limited use by corporate bankers. The most typical functions that are operated by internet banking are account balance monitoring, bill payments, modification of account details, fund transfers and remittances. Few customers really apply for loans, credit cards or mortgages. These and other services like updates on insurance policies, tax certificates etc are areas where the bank can venture into. The tool provides the bank the opportunity to cut costs and become more efficient in providing accurate services through an automated process. Threat: Consumers of internet banking are concerned over the security level and the interruptions while accessing the website. External and internal security attacks, viruses and phishing are threats that internet banking faces. Security levels can be increased by 128 bit encryption, digital signatures and efficient authentication procedures (by for example smart card or dynamic passwords). Other threats arise from technology threats from competitors as well as possible changes in the financial scenario. Since HSBC is a multinational bank, it is susceptible to changes in the financial markets in a host of countries. A disruption in any market may result in financial burden of the technology. Besides, there is also a possibility that internet banking is not accepted by customers in some regions resulting in prohibitive costs of maintaining both the technology as well as personalized services. Market Research The bank needs to do a detailed customer profiling survey in order to reach the targeted customer set. This requires a detailed demographic study, lifestyle patterns and purchase behaviour trends. This enables a closed-loop relationship with the customer that improves the mechanism to service the customer better thereby ensuring customer loyalty and new customer acquisition. Customer profiling is usually done with parameters like education, housing, income, race, shopping behaviour, telecommunication behaviour, internet use, financial service use, restaurant and automobile preferences, television viewership pattern and a host of other behavioural trends (Claritas). Profiling on these lines that provide information specific product usage, channel preferences, technology usage, media preferences will enable the bank to design products according to customer segments and supplement direct communication in addition to online communication. I have conducted a market research on a sample of 20 adults, randomly chosen across gender, professions and age who own computers at home. Out of the sample, 15 persons have access to the Internet and 10 persons have HSBC as the main bank. Although 8 persons do use Internet Banking, they do so mainly for checking account balance or for changing account details. All the persons surveyed said they are hesitant to shift to Internet Banking because of security concerns although they recognize it is more convenient than going to the branch for all transactions. The bank needs to undertake a wider sample survey addressing the following additional research questions: 1) How often do the customers shop online? 2) Do the customers shop online with credit cards or by committing cheque payments? 3) Do customers wish to view the status of cheques paid or deposited on the internet or are they willing to wait to find out on their next visit to the branch? 4) What are the alternate delivery mechanisms that customers prefer: a) branch b) telephone, c) ATM, d) internet 5) Would the customers be willing to handle critical transactions like payments if they are assured of security? 6) Are the customers willing to pay an additional fee for branch transactions rather than use Internet Banking? It is critical to select the sample across demographic groups, that is, cutting across gender, age, income classes, education and profession, in order to get a detailed customer profile. The hypothesis testing should be substantiated through a statistical analysis of confidence intervals of the results to be meaningful. Works Cited Global Business Insight, Next Generation Delivery of Retail Financial Services, http://www.globalbusinessinsights.com/content/rbfs0037m.pdf http://www.tutor2u.net/business/strategy/PEST_analysis.htm Accenture, Next Generation Mobile and Internet Banking (2005). November 25. Retrieved from http://www.fdih.net/media/66331/onlinebanking_accenture.pdf Frame, W S and L J White (2002). Empirical Studies of Financial Innovation: Lots of Talk and Little Action. Working Paper Series, Federal Reserve Bank of Atlanta. Rogers E M (1983). Diffusion of Innovations, 3rd Ed. New York: The Free Press. Newcastle (2002). Internet Banking causes biggest shake up in 400 years. Retrieved from http://www.ncl.ac.uk/press.office/press.release/content.phtml?ref=1031565182 Archibald, R D (2006). The Purpose and Method of Practical Project Categorization. PM World Today. Vol VIII Issue 10 Hamel, Gary & C. K. Prahalad (1989). Strategic Intent, Harvard Business Review, May-June Fern, Edward, “Strategic Categorization of Projects,” http://www.time-to-profit.com/TTPcategories.asp Apacs, Internet banking overtakes telephone in UK, http://www.finextra.com/fullstory.asp?id=16331 Ashby, Quentin (2002). Is Internet Banking in a Mid-life Crisis? Virtual Surveys Ansoff, I. (1989), Corporate Strategy, rev. edn, Penguin, Harmondsworth. The Phelon Group. A Critical Tool for New IT Enterprises: A Consumer Hierarchy of Needs. http://www.phelongroup.com/pdfs/CMO-Viewpoint-Hierarchy-of-Needs.pdf Deutsche Bank Research (2006). Retail Banking via internet: Banking online boosts customer loyalty. November. http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000203929.PDF Foresight. Personal and Consumer Finance Services in 2010. http://www.foresight.gov.uk/Previous_Rounds/Foresight_1999__2002/Financial_Services/Reports/The%20Future%20of%20Financial%20Services/personal.htm Claritas, Customer Profile for Targeted, Cost-effective acquisition plans, http://www.claritas.com/claritas/default.jsp?ci=2&pn=implement Read More