In much of financial services, a "perfect storm" of challenges is leading institutions to embrace new thinking. Heightened regulation, margin compression, declining use of branch networks, asymmetric competitors, and increasing commoditization -- to name just a few factors -- mean that there is real urgency to change. But where should financial institutions head?
New Markets believes that there is much room for growth in this industry. For instance:
- Few customers report being delighted with their retail bank, despite constant interaction with the institution
- In emerging markets, the data is even more stark: in India, for example, less than 2% of households have life insurance.
How can companies generate growth in under-penetrated market segments without taking undue risk, and how can they improve their position among the affluent? We believe the answer lies in creating a systematic approach to innovation. Too often, financial services firms have innovated within product silos and have been intolerant of experimentation. The siloed approach reflects how these firms are typically structured, and it is understandable that firms are reluctant to experiment with valuable brands and with products that may remain on their books for decades. However this is not how sustainably successful innovators act in other industries, and some firms show how a different approach can work in financial services.
In credit cards, for example, many successful issuers embrace a totally different model. Marketing will develop new propositions for tightly targeted consumers, and Risk will model how these people have behaved on other card products. Operations will coordinate a series of small solicitation campaigns – each one slightly distinct – and Marketing will carefully monitor success through each stage of the customer acquisition funnel. Risk will then track these customers month by month, assessing what their behavior versus benchmarks implies for their lifetime profitability. Based on this calibrated data, card issuers can judge within months which propositions are most likely to succeed or fail, and they can then gear up behind national launches of new products. The overall approach is cross-functional, scientific, and highly transparent to monitoring by senior management.
Sometimes firms need to stand back from their day-to-day business and think broadly about what their target customers are trying to get done. In South Africa, for instance, retail banking giant Absa (a unit of Barclays PLC) has created microlending centers that provide township entrepreneurs with communications facilities, matchmaking services, and other resources that earn clients’ loyalty and help ensure their commercial success. It has removed cash handling from these locations to open up their architecture and make them easily accessible. Through this kind of business model innovation, Absa has substantially grown its share in this profitable market.
New technologies can help open up consumption of financial products. New Markets’ Managing Director Steve Wunker created one of the world’s most successful mobile commerce firms, Celpay. The company targets African nations where electronic payments are scarcely penetrated. Rather than trying to compete with cash in B2C transactions (which would entail a long campaign to change engrained consumer behaviors), Celpay focuses on the B2B market, such as paying for a truckload of soda delivered to a bustling city market. Its systems encompass not only transaction processing, but also order placement and financial reconciliation. Through tackling a market under-addressed by banking incumbents, and through taking a holistic view of its clients’ needs, Celpay has come to transact over 5% of some of its host nations’ GDP through its systems. It also has the distinction of being one of the only profitable mobile commerce ventures in the world.
As much as they can benefit from new ideas to grow their markets, many financial service firms can also utilize a disciplined process that makes innovation reliable without extinguishing creative sparks. We strongly believe that innovation lends itself to rigorous approaches, as has been illustrated by leading firms such as Procter & Gamble. We understand how to transfer this kind of process to a financial services context.
We will be happy to share a presentation outlining our thinking if you complete our short form.