UK Retail Banking Sector - Essay Example

UK Retail Banking Sector To analyze the retail sector in a service industry, we will look at the retail sector of the banking industry in UK. Bankingindustry in UK Retail banking sector is an important segment of the UK’s economy. The main retail banks together provide over 125m accounts in UK (economicshelp 2008). The banks provide banking services to 95% of UK’s population (economicshelp 2008). Thus, the retail banking sector has a huge market in the British economy. This can be seen from the fact that “banks and financial services sector together provide 25% of the total corporation tax to the British government” (economicshelp 2008). The sector contributes 6.8% of the total output of the GDP. However, the banking industry is concentrated around the top ten large banks. These form 90% of the total market share of the industry. HSBC takes the top position with assets worth $1,267,777 million. The major groups within which this sector can be divided are the big banks, also called High Street banks, the Building Societies and the Direct Banks. The High Street banks are the normal banks which provide accounts and loans to customers and businesses. They also have branches which can be accessed by customers. “Building societies are mutual societies, which are owned by their members for the benefit of members i.e. of both savers and borrowers alike.” (Davidmann 2006). These societies were earlier catering to the mortgage market only but have now started providing deposit and accounts to the customers very much like the normal banks. Direct Banks do not have any branches but reach the customer through internet and other electronic sources. Many High Street banks like HSBC and Barclays also provide direct banking solutions for the convenience of the consumers but unlike Direct Banks, they have their branches for other activities like product sale etc. Tesco Personal Finance, First Direct and Egg are some examples of Direct Banks in UK. As stated earlier, HSBC holds the top position by market value also at 122.29 pounds (mortgageguideuk 2010). Building societies are not listed but Nationwide building society is one of the main financial institutes. These societies have now started working more or less like banks. We will concentrate our discussion around the retail operations of High Street Banks. Current Marketing environment The retail banking sector provides loans for various needs and attract deposits from customers to partly finance these loans. The transactions are mostly small in value but high in volume (Buckle and Thompson 2004). As this sector earns through volumes, it is very important to attract customers by providing product differentiation. This is provided by most of the banks by using highly complex Information Technology networks. The first of these is the use of ATMs. Most of the banks have a huge network of ATMs to provide cash withdrawal facility to the customers. This service helps in attracting customers as it enables them to access cash or drop cheques for payments at a nearby ATM center without going to a branch which may not be close by. Telephone and internet banking services also provide this differentiation as customers would prefer a bank which can be accessed from the ease of his home or office. Thus we can see that retail banking is not only a segment with multiple products but also one which has multiple channels like internet, ATMs and branches to work with. For service sector, like the retail banking, brand management is an important factor in determining the market penetration. For industries serving tangible products, the functional value of the brand provides a reassurance to the customers that the service promised by the brand will be delivered. However, for service industry, the emotional elements of the brand are considered to be more important as the product is intangible (Vinten 2005). In case of financial services, especially retail banking, where product differentiation is becoming more and more difficult, the emotional value associated with the brand is more sustainable than the functional value (Vinten 2005). Thus, where all banks are providing internet banking facilities to the customer, the bank which is able to establish emotional loyalty in the customers (by appropriate branding of its services) will be able to sustain in the market (Vinten 2005). This sector is highly dependent on human or personal interaction with the customer as these decide the consumer’s perception of service quality. Thus, relationship marketing is an important component of this industry. Most of the banks provide personalized relationship managers to high net worth account holders or corporate clients. For example, HSBC has recently launched family office services for its customers for clients with net worth more than $500 million (vrl-financial-news 2010) The other trend seen in UK retail banking sector is cross-selling. This is an important development as gaining new clients is becoming more and more difficult especially after the financial crisis. The situation is further precipitated by the fact that some of the banks had suffered huge financial losses on account of the 2007 crisis and hence have to use the scarce resources they are left with to expand business. Advertising and marketing budgets have to be curtailed. As the saving rate in UK is increasing along with preference for low leverage, there will always be an intense competition for market share increase. Those banks which have managed to keep their balance sheets strong have a great opportunity to expand through mergers and acquisitions. Opportunities and Threats Opportunities UK financial market has matured to a great extent as this country was a pioneer among the other European economies like France, Italy and Germany to have deregulated the financial system. This leaves very little room to explore new customer base or product lines to increase business. However, concepts like internal marketing (IM) provide a great opportunity for this sector to increase reach. Internal customers, i.e. the employees, are an important source of selling new products to existing customers. Employees need to be developed to provide quality service to the customers and motivated to strive to exceed customer expectations to enhance customer loyalty. Thus, IM involves training and development of the employees and linking rewards to exhibition of exemplary service quality by them (Papasolomou and Vrontis (2006). Exploring new markets, especially India, China and Latin American countries, which have a huge unexplored population base, can provide this segment great opportunity to increase business. The various segments which are growing at a fast pace in these economies are – automobiles, infrastructure and housing. Thus, among the various retail products auto loans, mortgages and corporate loans are a huge opportunity for retail banking sector in the emerging economies. Improving internal process to reduce customer complaints and increasing transparency of product sales to customers can help in building confidence in the customers and hence an opportunity to increase market share. Implementing policies which provide customers with confidence of being treated fairly is a huge chance to gain loyalty and growth. Technological platforms provide a great prospect for retail banks to provide improved customer service and hence expand business. Through the use of internet and other technological platforms banks can keep improving the levels of service and the quality of service they are providing to their customers. With the advent of mobile technology i.e. 3G and 4G, banks can get more opportunities to explore better avenues to reach out to the customers with new products and services. Electronic banking today is a huge growth window for any service company especially in the UK market as it has huge internet penetration rate. Threats Major threat that this sector or group of High Street Banks faces is that of regulatory tightening post the financial crisis. The financial crisis led the government to tighten capital adequacy norms for the banks. This has resulted in lower return on capital for them as their funds are kept locked in the central bank. Many big banks like the Royal Bank of Scotland and Barclays have been saved by the government which has a major stake in them. They do not have complete decision making opportunities. Their hands are tied as they have to take the government concerns into consideration before taking any strategic decisions. These concerns are not always guided by pure profits. Liquidity crunch is still a major factor for retail bankers, though there has been an improvement in situation over the 2007-2008 period. Low consumer confidence on account of fiscal tightening measures being announced by the UK government is another threat to the retail finance sector. This sector depends mostly on high consumer spending. However, as expectations of increase in taxes are resulting in higher savings by consumers, the sales of commodities is reducing which is leading to lower spending on credit cards etc. hitting retail banking products’ sales. The complete crash of property prices as a result of financial crisis has resulted in the shrinking of the mortgage loans market. Thus, mortgage loan off take has been hit and is not expected to take off very fast in the very near future. "Businesses are increasingly and substantially scaling back their investment in the face of sharply weakening demand, rising levels of spare capacity, worsening cash flows and very tight credit conditions, deteriorating profitability, and serious concerns about the potential length and depth of the recession." (Posser, 2009). This has resulted in lower demand from businesses in UK again impacting the retail banking sales. This sector has always been subjected to strict regulatory laws with regards to transparency in dealing with customers with respect to retail banking products and services. As this sector affects a huge proportion of the economy, various regulatory bodies like Office of Fair Trading, the Competition Commission and Financial Services Authority are always on a look out for ways of improving the transparency and financial processes of the banking system (nVision 2007). Thus, various directives are passed every now and then which impact the way business in conducted in this sector. “UK retail banking remains a highly competitive sector and is regarded as one of the most competitive in the whole of the financial services industry” (nVision 2007). It has seen a spate of mergers and acquisitions over the last few decades and has consolidated to some extent. However, the choice of products and services and the customer awareness with maturing markets in UK has led to increased competition among the players. This sector is highly prone to ups and downs in business cycles. Thus, it is hit hardest in times of economic downturn but is the first to recover during upbeat economic scenario. Summary of services marketing strategies of the Big 5 retail banks in UK The marketing scenario for retail bankers in UK has changed considerably. This is mainly because of the changes in the regulatory mechanism and the increasing awareness levels of the customers. They are now trying to understand ways of meeting customer expectations while keeping in tune with the regulations and at the same time increasing profitability. Retail bankers try to reach mass audience through the various means of communication including web-based modes. All of them place their quality statement logos at prominent places in their branches to drive a message to the customers regarding their focus on quality standards. “Sales promotions are usually price-based or product based, featuring generic products and using branch promotional literature.” (Gilmore 2003). Most of the publicity and sponsorship is made around national or local events and also associated with sports events. The banks usually focus on two types of marketing – transaction type marketing and relationship type marketing. The first one is to capture new customer segments and the second is to cross sell new products to the existing customers. Most of the High Street banks in UK resort or generic marketing. They have not been able to provide a differentiated or unique brand positioning (Vinten 2005). They have mostly been stressing on their size and age (experience) which is more of a credential based branding. This kind of branding does not create a distinctive image in the minds of the consumers. For example if a bank suggests that it has been serving customer for over 100 years, it does instill a sense of confidence in the minds of the consumers regarding its credibility. However, all the other banks are equally old in the system as the UK banking industry is one of the oldest. Hence, it does not create a brand differentiation from the others. The intense competition in this sector has led to major retail banks in UK to resort to internal marketing (Kelemen 2003). The banks consider their employees as internal customers. They feel that if their staff is satisfied then they will be in a better position to satisfy the external customers. To help them understand the level of satisfaction of the internal customers, they conduct periodic surveys and encourage their employees to provide feedback. They also provide adequate trainings to them to ensure requisite skill set development. Another important way of involving employees as internal customers is to sell bank’s products to them. If this happens the employees will be able to convince the external customer with much more conviction. Many of the big banks encourage their employees to do so also with the aim of increasing the employees’ product knowledge. The banks are now focusing on reducing their branch networks and increasing and using internet and phone banking as channels for banking as well as marketing. Post the financial crisis most of the big banks including NatWest, Barclays and Nationwide are embarking on a strategy by which they are emphasizing to the domestic customers that they can provide them with additional advisory services as well as products to help them sail through the turbulent times. HSBC however is using its globalization image to show to the local population how it can help British customers to enhance business in emerging markets like India because they understand their local culture so well. Thus, it is banking on its brand image of “World’s local bank” to attract customers (Brownsell 2009). Many banks including HSBC have entered into a sub-branding strategy where they floated separate internet based companies to gain access to new customers. There are others who are using their own brand name to float internet based services as they feel that the customers will have more confidence in them if they know that their internet transactions are backed by a well established brand. An interesting feature of retail bankers in UK is their commitment to understanding the consumer needs to the point where they can provide them with products that are suited to them. In the Lloyds Bank and TSB merger case, customer database of both the companies was used to see the usage of various channels by them. Thus, customer segmentation was done based on service channels they used which were ATMs, branch, telephone or automated (standing order instructions) (Peppard 2000). Thus, we can clearly see that banks are using the data mining techniques to carry out market segmentation and focusing their service marketing efforts accordingly. Service marketing strategies and issues at HSBC HSBC’s marketing strategy has been to project itself as “the world’s local bank”. Thus it is driving the message that where ever it operates, it understands the local needs and caters to the local population much better than their local bank or financial services provider. This means that they need to have double marketing strategy - one for the brand as a whole and the other for the local market of the region where they are operating in. This would be a very conflicting situation and convincing staff to work in this double framework would be a difficult task. They are currently focusing on a centralized marketing strategy for the retail segment of business. The major problem in this strategy is to push the marketing personnel to promote the company’s global products and services alongside their local ones. For this the company has also gone into a deal with an agency WPP to service its huge client base globally. However, this can lead to customer service issues as a third-party involvement in client relationship means more complex relationship with the end user. A good CRM (which is an inherent aspect of any service organization) requires high degree of motivation at the employee level which can only come through designing appropriate reward structure for them and creating commitment for the organization within them (Peppard 2000). It also involves adequate training for the employees. Relying on a third party to achieve this level of commitment can lead to major service related issues at a later stage. The company has also invested heavily on internet based services marketing strategy. This is in line with the fact that today technology, especially in the form of e-service is playing a vital role in the survival of businesses. This is specifically true for service industry like retail banking. E-service orientation encompasses concepts of Customer Relationship Management (CRM), relationship marketing, one-to-one marketing and customer care (Rust and Kannan 2003). E-servicing provides value addition at the customer level. “An e-service orientation implies a firm’s strategic opportunities are best viewed in terms of firm’s opportunities to improve the drivers of its customer equity” (Rust and Kannan 2003). Thus, customer is viewed as an equity which provides returns over a life time. However, an important aspect of internet marketing and e-servicing is the management of privacy and security risk. This service channel requires that the customer’s data is completely secure and privacy is maintained. Identity frauds are not new to the banking industry and assume far reaching consequences when there is a high dependency on internet based transactions. Besides the data security aspect, privacy is an important issue. A major complaint of customers is uncalled for disturbance from telemarketing callers as well as huge amount of unnecessary mails that pile up in their email accounts and mail boxes. “Security and privacy concerns have a critical impact on the consumer’s perceived control in online situations, which in turn determines the consumer’s perceived e-service quality” (Rust and Kannan 2003). Thus we can see that though the bank is trying to use technology to improve its quality perception in the minds of the customers, it is actually putting itself in a risky position if the security issues are not thought through. The bank has been faced with such security issues in the past on account of data theft. Such issues not only bring in a bad name at the time they are being publicized, but also tarnish the image for a long time to come. The customers lose faith in the brand and instead of reaping benefits of customer equity over the long run, a single such episode leads to major loss of consumer confidence and eventually business. In one such security lapse case a former employee of HSBC who had worked in the IT department stole data of 15,000 British clients of the bank. This was not the only incidence of data theft. Data of another 9000 customers got leaked from the bank’s database. All these clients were at risk of being questioned by the income tax authorities (uk.news.yahoo). This was not all. Cardiff University researchers undertook a project to look into the security aspects of the online banking systems of some banks. They found that HSBC’s security system had major flaws. This actually exposed 3.1 million UK customers to major security risk (Johnson and Cobain 2006). This shows that the company has been facing issues from the technological aspect of service marketing. The importance of security aspect in internet banking has been highlighted by various researchers as one of the newly added dimensions that determines the customer’s perception of the service quality in retail banking. In fact, studies have suggested that the security aspect is a major source of dissatisfaction unlike dimensions like responsiveness, ease of use and access which are a source of satisfaction (Jun and Cai 2001). Thus the importance of this characteristic lies in the fact that its presence is expected as a mandatory aspect by the customers. However, the absence of this dimension has a major negative impact on the customer and s/he might switch loyalty to another brand. Looking at the other dimensions which add to the satisfaction level of the customer’s experience, s/he may not switch to the brands on absence of these dimensions. Other dimensions like lower cost or better product differentiation might play a role in continuing his/her loyalty. Hence, the company needs to work on the security aspect of e-service as it is highly dependent on technology for its global operations. As their main branding position suggests that they can cater to local as well as global population, it becomes imperative that they ensure a secure and well integrated communication network which enables customers at various geographical locations to access their services. 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