Monday, October 28, 2013

Bank Product Proliferation: Too Much of a Good Thing

When someone walks into your bank or credit union branch or visits online to open a new account, how many options are available to choose from? More importantly, how many different legacy products exist that are no longer offered, but still need customized maintenance, specialized communication and integration with your new digital offerings?

Has our desire to provide the best products for everyone resulted in product clutter, complexity, confusion, and additional costs? Now, there's new evidence that customers will reward us for reducing choice and for helping them move to the right product.

Beyond just reducing the current number of products we promote, it is also important to close the books on outdated product portfolios, consolidating legacy products into a more refined, less complex set of offerings. By doing so, your institution will reduce costs, generate new revenue, simplify your customers' lives and provide the foundation for future growth.

In a recent research paper from A.T. Kearney entitled, Reducing Complexity in Retail Banking: Simple Wins Every Time, it was found that the origin of banking's product proliferation challenge is the industry’s product-centric view and the lack of a traditional product lifecycle. By remaining siloed and focusing on the impact of individual products, there had been little internal incentive to reduce complexity for the customer’s benefit.

And unlike other industries, where customers are proactively shifted to the next generation of products when a new product is introduced and an old product is retired (i.e. Apple), A.T. Kearney found that most financial institutions maintain retired product portfolios forever, avoiding the risks and challenges of product migration. As a result, they found that some of their clients had more than 500 products, with two-thirds representing outdated offerings.

"One of our clients had more than 15 different savings products, with just three accounting for 90 percent of new product sales," states Torsten Eistert, partner at A.T. Kearney and co-author of the report. "Some products were being used by no more than 200 customers."

Beyond ongoing new product introduction, the product proliferation challenge is amplified by the impact of mergers, short duration specialty products, multiple branding, etc. This doesn't even take into account the impact of different behind-the-scene pricing algorithms or customer level customization (waivers, bonus rates, etc.) that is commonplace in banking.

As an industry, we can no longer equate variety of offerings with customer centricity. While customers say they want a variety of products and services, recent research by Filene Research Institute entitled, The Psychology of Choice Overload: Implications for Retail Financial Services found that the assumption that consumers always benefit from more options does not always hold, and in some cases, the consumers (and the bank) benefits from fewer, rather than more, options.

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Simplicity Can Reduce Costs

Beyond the potential for improving sales, service and transparency with a simplified portfolio, reducing the number of legacy and current products can reduce costs. On the front line alone, broad product lines mean tellers and platform personnel need more training and time to understand (and explain to customers) a confusing array of alternatives. Each product has unique rules, regulations, rates, fees and transaction parameters that, even for a product no longer offered, may need to be referenced on an ongoing basis.

Imagine trying to know where to look for details about dozens or even hundreds of products on a moment's notice. Just because the technology supporting these products may be able to provide the answer in a relatively low cost doesn't mean the ultimate cost isn't significant.

According to the A.T. Kearney study, 75 percent of processing costs in branch-focused banks comes from the front office, where product confusion can also impact service and time available to sell. The cost that usually can't be calculated is the cost of a frustrated customer who expects flawless treatment. As mentioned in the Filene study, "When a vast array of confusing options are presented, a 'no decision' may be the sales outcome."

Obviously, complex product portfolios and legacy services also impact the back office, where maintaining an extensive portfolio for an undetermined period impacts personnel and IT costs. According to Eistert, "It is not uncommon for banks to keep certain legacy systems running because they host a large portfolio of legacy loans or deposits and they prefer not to have to contact clients in the event of system migration issues."

Simplicity Can Increase Revenues

As mentioned above, a simplified product line can positively impact the amount of time that can be dedicated to selling and can make it easier for a customer to make a decision. In addition, consumers often find it easier to deal with smaller assortments since they need to make fewer choices, leaving time to consider add-on services that may be valuable from a revenue perspective to the bank or credit union.

Interestingly, the revenue opportunity extends beyond current portfolio offerings into the vast legacy portfolio of products that have been mothballed but still held by the majority of an institution's customers. While a difficult endeavor, biting the bullet and migrating outdated product sets to a newer, narrower product line can increase sales, balances, share of wallet and customer satisfaction.

Several years ago, I was involved in a massive checking product migration project with CIBC in Canada. The goal of the project was to move every checking customer in the bank to a 'best fit' product line that included only 5 types of accounts. In other words, to proactively move more than 30 different legacy account types to 5 simpler options.

By evaluating historical balances, transaction volume, channel use and other behavioral data, the bank was able to determine the best product from the revised product line to place each customer. It was up to my firm to build the marketing plan to effectively communicate these changes to the customer with the least amount of disruption (as measured by negative branch impact and call center volume). 

The impact of the migration was far different than we anticipated at the time. Instead of a huge uptick in  call center volume with questions and complaints, the volume of calls remained relatively consistent with pre-conversion metrics. More interestingly, when measured over time, the balance in the accounts increased, ancillary product sales increased, revenue from both the new checking accounts and additional services opened increased and customer satisfaction scores improved. 

Over the years, the positive revenue impact of successful product line reduction efforts has been replicated by several institutions in the marketplace. A recent case study from Fifth Third Bank is included below.

Simplicity, Compliance, Risk and Transparency

New regulations require banks and credit unions to report on customer relationships at a much more granular level. The more types of products an institution has in their portfolio, the more variations that need to be included in risk management systems, CFPB reporting, etc. which impacts IT costs. In addition, with complaints being monitored more closely than ever by government units, a simplified product line can reduce the potential for compliance issues down the road.

Beyond regulatory issues, there is more and more focus on increasing the transparency of products to make them easier to understand and compare with competing services. Customers want uncomplicated offerings that can be compared and eventually used with no surprises. The focus on simplicity of offers can best be seen with new entrants such as Moven, Simple (naturally), Bluebird and GoBank that are mobile-first offerings with historically simple functionality.

Three Steps to Product Portfolio Simplification

Based on all of the reasons stated above (I am sure there are more), there is a greater need than ever to reduce the complexity of both legacy and current product portfolios. The three-step process recommended by A.T. Kearney includes:
      1. Clean out the attic: Much like trying to cure a hoarder of bad habits, financial institutions need to analyze products in light of customers impacted, revenue potential and costs to serve. Make deep cuts until it hurts. According to A.T. Kearney, reductions of less than 30 percent aren't enough.
      2. Build products like automakers build cars: Instead of each product being built from scratch, it is better to build with a modular design, where the platforms are similar, but the components can be assembled in a variety of ways to meet individual needs. This provides economies of scale, choice and potential for growth in the future. Examples of banks using this concept include Union Bank (Banking by Design) and BBVA Compass (ClearChoice Checking), where customers create an account that fits their needs, choosing only the features they want.

      3. Match products with customer preferences: While few would argue against banking moving from a product-centric to a customer-centric view, it is easier said than done, especially for existing product portfolios. Beyond matching existing products to a new product set, the process of product migration needs to include revenue optimization modeling as well as a deep analysis of customer balance, transaction and channel use history. And since customer financial behavior changes over time, a future perspective of where the customer is going financially is needed to determine the best new product to move the customer to.

Case Study: Fifth Third Product Line Simplification

In a recent presentation at the ABA Marketing Conference entitled, Using Multichannel Engagement to Effectively Convert CustomersBob Wojtowicz, vice president of 1:1 marketing for Fifth Third Bank illustrated the power of product line simplification. Saddled with a product line that included 25 checking accounts and 17 savings accounts, the bank's goals were to:
            • Increase value across segments
            • Increase the appeal of higher end products
            • Reinforce the 5/3 brand and value proposition
            • Grow total share of wallet

More specifically, the bank wanted to exit from Free Checking, which for years had been the backbone of aggressive acquisition efforts, become less reliant on overdraft and debit card interchange and provide incentives to customers for consolidated and expanded relationships.

From 42 to 8 Deposit Services

Rather than introducing a new set of products and 'grandfathering' the existing portfolio, Fifth Third migrated their entire customer base to a new checking and savings product line-up that reduced the number of checking accounts from 25 to 5 and the number of savings options from 17 to 3. As part of this migration, fee structures were simplified and made more transparent, making the entire conversion and future selling processes easier.

As with my CIBC example above, Fifth Third had the following concerns:
            • What happens if customers don't like the new products and leave?
            • Can the elimination of the traditional Free Checking create a PR problem?
            • Could the changes provide an advantage to the competition?
            • Are the revenue projections realistic?
            • How do we position the changes as a benefit to the customers?

According to Wojtowicz, the key to success was a ton of pre-planning, listening to customer concerns, leveraging all possible communication channels (frequently), developing an effective customer migration mapping analysis and providing the customer multiple ways to engage with the bank.

Also stressed was the importance of top management support, strong conversion team leadership and extensive customer, intradepartmental and strategic partner communication. 

Multichannel Communication

To facilitate the product migration process, customer segments were established based on the depth and current value of the customer relationship. Each segment had a different contact strategy as well as messaging theme based on the account they were migrating from and the potential impact of the migration. More importantly, each individual household was mapped to determine the best post-migration product.

While the change in account structure would be 'business as usual' for some households, others would need more personalized engagement to understand the impact and potential opportunity of the new accounts available. The channels used by Fifth Third prior to the conversion included:
      • Direct Mail: What's changing (and not changing), 'you have a choice' and how/when to respond (there were multiple direct mail touches with greater degrees of urgency as conversion approached)
      • Email: Multi-touch reinforcement of each direct mail touch with the ability to download a copy of the original letter and take action electronically
      • Online: Home page awareness banners and product page messaging with conversion landing page links to online wizard decisioning tools
      • Internet Banking: Interrupt screens and integrated messaging served as reminders to online banking customers
      • Social: Online monitoring of voice of customer (VOC) with active bank participation and response to negative sentiment
      • Outbound Calls: The majority of the consumer bank base was called to set up 1:1 branch interactions to discuss changes in person
      • ATM Messaging: Reminder communication on the screen, on facade banners and on receipts

Conversion Results

As a result of the exceptional pre-planning, effective mapping of household level communication, top management and employee support and ongoing monitoring of results on a daily basis, the impact of the massive conversion by Fifth Third was an unqualified success. Based on publicly shared results, the success of the product simplification process included:
            • Increased revenue per household
            • Increased cross-sell ratios
            • Increase in average checking balance
            • Increase in average savings balance
            • Decrease in single service households
            • Increase in new account generation

More specifically, Hendrix says Fifth Third has converted 2.1 million customers to its new products while, in the space of just one year, increasing deposits by almost $3 billion, and the cross-sell ratio to 5.2 products per-customer from 4.6.

For me, the most impressive numbers shared were that 40% of the customer base visited a branch office and sat down with a Fifth Third representative to discuss the best way to structure their bank relationship in the future. This provided the bank team the opportunity to not only make sure the customer was placed in the best product going forward, but also the opportunity to cross-sell additional services. In a conversation with Mark Hendrix, senior vice president and head of strategic marketing at Fifth Third, he says everything went so well, the branches want to find a way to connect with customers again.

When it comes to migrating new and existing product assortments, offering more variety is usually not the best option and may only perpetuate an historical paradox. Empirical research in the domain of retailing, consumer packaged goods and financial services shows that, in many cases, large assortments can lead to confusion, higher costs, lower revenue, lower purchase likelihood and a worse overall customer (and employee) experience. 

As we move quickly into the digital banking world, complexity is not rewarded. People want to make their live's easier and their financial institution choices will be based on which organizations serve their needs best. The best way for banks and credit unions to be prepared for this future is to clean out the product attic and move forward with a much cleaner slate. As in the case of Fifth Third Bank, this adjustment may also lead to more sales and an increased share of wallet.

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