Case Study: The Case Of The Classy Mass Banker, Pg 2

CASE STUDY
The Case Of The Classy Mass Banker
Continued..

THE DISCUSSION

''Any company wishing to focus its brand on a larger customer-segment needs to prepare for a change in brand-character'' RAMESH VENKAT
Executive Director, Centurion Bank

Where did Everest India err? After all, the bank began by correctly deciding that growth could result only from an organic strategy; acquisitions and portfolio buy-outs could only provide occasional spurts in the growth-cycle. But organic growth, especially of the magnitude Everest sought, has several pre-requisites, and CEO Ed Jones could have faltered in all these areas:

ORGANISATION BUILDING. Until 1997, Everest India had been a successful bank. Ergo, it must have possessed an organisational structure that worked. But, before setting out on its growth-path, it should have re-examined its structure. Not all structures can support rapid growth. One that will needs to ensure product-development, facilitate rapid decision-making, and enable continuous improvement and customisation.

NEW PRODUCT DEVELOPMENT. Growth of the magnitude desired by Everest can happen only if the organisation is totally focused on the retail segment. This, in turn, requires depth in terms of both the products and services the bank has to offer, and the segments in which it desires to operate.

DISTRIBUTION CHANNELS. One of the keenest debates in banking today concerns the future of brick-and-mortar branches. In India, though, it is accepted that any bank that desires growth must seek ways to rapidly increase its presence. It is important, however, to appreciate the changing concept of a physical branch; it is a distribution outlet, not a processing-centre.

A branch will, therefore, be lean on staff, be well-supported technologically, and have distribution capabilities backed by remote processing support. Everest should have enhanced its distribution-power by developing alternative channels, such as ATMs, remote terminals at customer-sites, and direct sales agencies.

PROCESSING CAPABILITIES. Until 1997, Everest used to cater to the high net worth individual niche. The focus on the mass end of the market changed that. So, the same systems that served the bank so well when it was catering to a limited number of customers could have come under tremendous strain in trying to cope with a rapid rise in the number of transactions. And, in the process, response-times and retrieval-capabilities-both key to retaining high-value customers-may have suffered.

SKILLS DEVELOPMENT. By far the most challenging task for any company re-orienting its business is to identify the skills its employees need to possess to meet the new organisational objectives. This calls for gap analysis, and continuous training.

BALANCING SHORT- AND LONG-TERM GOALS. No growth strategy should lose sight of the ultimate goal: profit-maximisation, and the consequent enhancement of shareholder value. Everest's short-term objective of gaining marketshare should have led to its long-term objective of profitability. All its short-term actions should have been linked to a long-term objective. Did Everest mismanage its cross-subsidisation? Was there a divergence of thought between the company's senior managers and its field operatives?

In the long run, organic growth must be supplemented by acquisitions and portfolio buyouts. This requires constant environmental scanning, and the ability to quickly evaluate opportunities. Acquisitions, however, bring other issues to the fore including business-, people-, and technology-integration. Typically, they take up a large amount of management time, especially at the senior levels. And, this, in turn, reduces the time spent on business development. It is, therefore, critical to ensure that a large acquisition does not result in a loss of direction and a consequent slowdown in organic growth.

Although several of its managers articulated it, I do not think Everest tackled the issue of its brand equity. Any company that wishes to focus its brand on a larger customer-segment needs to prepare for a change in brand-character. Everest should have focused on building on its existing brand strengths, and moving towards a new brand image that is in sync with its product-range and market depth instead of spending time and energy on worrying about diluting it.

Another problem that Everest must have encountered while going downmarket is related to the organisational culture and mindset of its staff. Up-market banking breeds a certain attitudinal system that is incompatible with mass banking. To change the mindset of its employees, Everest should have clearly communicated its new strategy, identified the objectives, and clarified what the change meant to each and every one of its employees.

''When you own the market, you can sell any product. But when you own the product, it limits your ability to leverage it'' GANTI SUBRAHMANYAM
Director, National Institute of Bank Management

That Everest's profits would decline was known. The bank set itself ambitious targets. Such growth comes at a price: margins are certain to decline and costs will shoot-up. Retail banking is, essentially, a high-cost business because of the sheer number of low-value transactions it involves. But where could the numbers Everest's team sought have come from?

The size of our population is expected to hit 1 billion by 2000 ad. Of this, 25 per cent is expected to be below the poverty-line, and is outside the purview of any banking network. Another 35 per cent is accounted for by lower-income groups, which require only standard services and standard products. Of the remaining 400 million, close to 200 million are adults. It is this segment, comprising the upper-middle class and high-income groups, which constitutes the catchment area for any bank that decides to focus aggressively on growth. And it was this segment that Jones and his team tried to focus on.

Ideally, this group can be targeted in the following ways:

NEW PRODUCTS. The development of new products is a function of the market-context at that point of time. Everest should have looked at products like, say, Interest Buy-Down. A customer opens an account for a pre-determined period at 8 per cent interest. The bank pays all her routine bills-utilities, groceries, and rent-and reduces the interest by 0.25 per cent or 0.5 per cent for each transaction. Another new product that could have been considered is Compensation Balance, wherein, for each service provided, the account-holder is expected to enhance his balance by a pre-determined amount, Rs 500 or Rs 1,000. Double-income households belonging to the middle- and upper-income segments in urban areas are ideal targets for such offerings.

LIFE-CYCLE BANKING. This centres around the life-cycle theory of savings, wherein a career professional goes through various phases: more expenditure than income between the age-group of 25 and 35; more income than expenditure in the 35-50 age-group; a significant cash-outflow in the 50-60 age-group for marriages and education; and living off the nest-egg after 60. The requirements of customers are different in each of these phases. A study of the credit-requirements in each phase would throw up the gaps in customer needs. To develop the market, Everest should have examined these gaps, and structured its offerings accordingly.

VALUE ADDITION. By offering customised products with minor innovations, Everest could have increased its customer-base manifold, and also increased its fee-based income. It can still do so. A recent study in the US showed that innovative schemes-like deposit-linked housing loans-not only help banks increase their fee-income, and cut the cost of providing standard products and services, but also improve the national savings rate by several percentage points. Everest could have tapped the opportunities that abound for such value-added schemes in this country.

DATABASE MARKETING. This is a strength that Everest, with its formidable management information systems, should have used to its advantage. Commercial banks in the US and Europe derive a large part of their incomes from marketing their databases to non-banking companies. There is no risk of dilution of business focus because it is only a secondary source of revenue.

Everest's top management team seems to have been apprehensive about the risk of diluting brand equity. Such fears are unfounded. Companies should try to own the market, not the product. When you own the market, you can sell any product from your stable. But when you own the product-something that happens when you are focused too strongly on brand-building-it limits your ability to leverage it. That is the problem here.

''The first task before Everest should have been gaining local knowledge, and exploring a strategic alliance with a local bank'' ASHVIN PAREKH
Executive Director, PricewaterhouseCoopers

The move towards mass banking is universal. As margins shrink, banks have to go for numbers to keep their profits up. This poses a challenge to global banks like Everest India. How can they deliver their global product-quality service-to underdeveloped markets like India? That is the question. The main advantages transnational banks have are their global expertise, effective systems, and cutting-edge software. The main disadvantage: inadequate knowledge of the local market.

One of the main problems transnationals face is the lack of a reliable market. All too often, companies have got it wrong as they have misread, or been misinformed about customer preferences. The first task before Everest, therefore, should have been to gain local knowledge. The mode: extensive market research, or an analysis of competitive strategies. Everest could have also explored a strategic partnership with a local bank. This could have given it some distribution clout. This is what GE did by tying up with the State Bank of India for its credit-cards business.

In the second stage, Everest should have taken decisions related to its choice of product- and market-segments, and followed that up by deciding how it could cater to them in the most cost-effective manner. It is at this stage that companies face problems related to the infrastructure, as Everest seems to have done.

Countries like India have a primitive telecom network. So, decisions relating to technology tend to involve a long-term plan on evolving the appropriate framework. Plans to grow a volumes-driven business like credit cards must take into account the available communication link-ups in, say, smaller towns. Similarly, the payments system must allow transactions to be executed across the country. This will, inevitably, mean heavy initial investments in technology. However, being the first to build such an architecture will give any company that is willing to invest this money a headstart in delivering related products in future. The challenge is to choose the appropriate mix of products and technology, and to deliver them at a reasonable cost.

As in other under-developed markets, Everest is paying the price for playing a developmental role in expanding the market. The problem faced by companies in the consumer-finance business is, most often, the inadequate verification of the credit quality of the borrower. Since post-facto solutions are difficult, the only option is prevention through a meticulous system of credit-screening. Again, bank personnel need to be trained in the skills of assessing-not just the ability to pay, but also the willingness to meet debt-repayment schedules. While there is no foolproof way to do this, many use a simple mechanism of preferring salaried individuals, and more rigorous clearances for self-employed individuals, whose risk-profile is perceived to be higher.

The risks in pursuing mass banking are many. No one can expect to get everything right when dealing with such a large number of customer accounts. But, putting rigorous systems in place, even now, can ensure that Everest's brand equity is not diluted. There is no easy way to do this, and a continuous process of refinement will be necessary before this is fully in place. Everest should, if it has not already done so, pick the right people for the job, and invest in training them to its global standards of performance.

''Eager-to-please managers often borrow authority from the HQ, and cite a phirang directive to announce unreasonable targets'' NIREN HIRO
Director (Marketing), MTV India

Something that I see all too often in the Indian branches of the regional offices of transnational corporations is that eager-to-please senior managers often borrow authority from the HQ, and cite a phirang directive to announce unreasonably stiff targets. Only some, like Everest, go to the extent of calling it a vision statement which, in its case, is an obvious misnomer. It is a plain-vanilla marketshare target.

Everest decided that it wanted 1 out of 7 people to bank with it by 2010. This may look like a 14 per cent share. Look closer. If 30 per cent are poor, you lose about 2 customers in 7. You lose another 2 because they are under 18. If you want 1 customer out of the remaining 3 people, you actually want 33 per cent marketshare! The HQ determined that the world-wide growth from 60 million to 1 billion accounts (amounting to 30 per cent growth every year for a decade) would come from the developing countries. So, India, a high hope market, probably needs to deliver close to 50 per cent annual growth in the number of account-holders.

While it is a good thing that the initial losses from the heavy costs of expansion are okay with the bank's bosses, these targets still seem ludicrous. The vision statement gift-wrapping is actually an internal pressure-tactic by the top management. A few areas need to be built into sustainable competitive advantages for Everest to be able to achieve its ambitions:

CUSTOMER-PROFILE DATA. Through efficient data-management, research, and corporate integration, Everest can track and target the lifetime customer. Exit interviews with migrating customers-and there seem to be a few of them-will help the bank stay ahead of what its-or the competitor's-customer wants next.

BRAND. Everest's managers repeatedly raised the issue of the dilution in the brand's equity. If the brand's image is classy, that gives you a headstart. One strategy I have seen a consumer-electronics manufacturer use is to intensely promote a hi-tech, hi-price, hi-fi system housed in palatial surroundings. The intention is not only to lure the filthy rich, but to attract the masses to the brand so that if your personal budget is low, you will at least pick up the cheaper two-in-one made by the same company. Why shouldn't the same apply to a banking service?

DISTRIBUTION. Acquisitions or alliances that happen today will have a long-term impact on the bank's success. Everest needs to handle this issue with care.

TRAINING. Train! Train! Train! Especially when you are spreading out, and lending your brandname to affiliate bankers, you want to make sure that your system delivers best-in-class sales and service. I love the idea of setting employee goals around customer delight.

The key factors in choosing a bank are trustworthiness (brand), convenience (distribution), short queues (service), a choice of products, and good rates (deals). Traditionally, though, high net worth clients (say, 20 per cent of the total) account for 80 per cent of deposits (and, hence, profits). Any bank that wishes to cater to this segment, probably, needs a separate battalion of customer-representatives focusing on it. They are also ideal targets for Net banking.

Before buying retail branch networks or forging alliances, Everest should run an analysis of its branches to identify-and, probably, shut down--the dogs and the duds, and promote traffic to the stars through local advertising. While more traffic to the same branch should result in lower costs per visitor and per transaction in the short run, investments in technology should help manage costs in the medium- to long-term. And credit cards may actually be the quickest route to convert customers into banking with Everest.