The halcyon days are over for financial institutions as ‘macro forces’ rapidly reshape the industry. Report begins on page 27.
‘Macro forces’ spell tough times for industry
by PAULA TERRY
The gravy days are over in the Canadian financial services industry.
Tempestuous times face the industry as the financial landscape changes at enormous speed, driven largely by a number of ‘macro’ forces in Canada and throughout the world.
Advances in automation and computerization have affected the financial services market more than any other industry in terms of its ability to process information and service customers.
And money respects no geographical boundaries today, flowing to where it will make the highest return. This has caused the Big Six Canadian-owned Schedule One banks to pull out of less profitable geographical areas and focus on North American markets in which they can offer more obvious, value-added advantages.
As well, the deregulation movement stated by the federal government in 1985 has effectively shaken the four pillars of the financial industry – banks, insurance companies, trust companies and securities dealers – and has blurred their operational demarcation lines, galvanizing a frenzied free-for-all on the great money merry-go-round.
“People used to come
to the banks, now
bankers are coming
to the people.”
Added to these changes are ‘micro’ forces which further stir the industry.
The consumer, more highly educated about financial goods and services than ever before, is becoming less loyal to any particular financial institution, instead shopping around, grocery-style, for the best deals and the greatest value for money.
This has led financial institutions to become more competitive and to segment and actively market the products they offer. Banks, traditional bastions of decorum, historically have not needed to market themselves to their captive audiences.
But today there is a plethora of activity across the board as financial institutions of all kinds scramble to gain competitive advantages and to attract and keep customers in the deregulated 1990s. And it is still the man on the street who represents the lion’s share of revenue to be derived by financial institutions.
‘Just as people used to come to the banks, now bankers are coming to the people,’ says Hugh Brown, a financial analyst with Burns Fry Ltd. ‘And it’s a trend pervading the whole industry.’
In an effort to reverse its conservative and masculine image, the Toronto-based Canadian Bankers’ Association, the banking industry’s lobby group, recently appointed a 38-year old woman, Helen Sinclair, as its president.
The appointment of Sinclair – lauded for her outstanding communications skills and marketing orientation – is seen as a smart and progressive move on the CBA’s part, and one likely to win friends and influence people by creating a positive and upbeat image for an industry that, until recently, consumers loved to hate.
Many individual financial players are responding to the current tumultuous times in similar ways.
After decades of relative inertia, they are actively marketing their goods and services the way packaged goods companies and some retailers have been doing for years. And when one looks at consumer promotions some of the banks and trust companies have recently been involved in, one thinks more of Big Macs than big money.
Last spring a branch of the National Bank of Canada, one of the Big Six, began making ‘happy birthday’ phone calls to customers in the interest of improving consumer relations.
The CIBC, another Big Sixer, is running an on-pack cross-promotion with General Foods for a cut-rate, six-month mortgage. Earlier in the year the staff of a Toronto branch donned Hawaiian shirts and straw hats to encourage depositors to take part in a vacation cruise contest promotion, designed to encourage customers to pay household bills via automatic teller machines.
Royal Trust, with only 135 outlets nationwide, is staging a cross-promotion with Canadian Airlines International and its Frequent Flyer program, swapping travel points for higher interest rates on RRSP investments.
‘It’s very innovative because it rebates travel points,’ says Charles MacFarland, Royal Trust’s managing partner, personal financial services. ‘But more than that, it’s a strategic alliance that’s enabled us to extend our distribution systems to all the members of the airline’s Frequent Flyer program without our opening a single store.’
‘Because we’re small from a distribution point of view we have a disadvantage in terms of public awareness and our selling capability. But we have a huge advantage from a cost perspective because we don’t have all those expensive stores to carry,’ he says. ‘So we’ve focused very specifically on exploring alternative channels of distribution for our products.’
Although MacFarland sees the trust companies very much at the vanguard of the innovative marketing movement, he acknowledges that other financial institutions are starting to use multi-distribution vehicles, including telemarketing, direct marketing and the use of agents in smaller urban or rural communities.
As financial institutions begin to think like retailers, there has been a growing emphasis on traditional marketing disciplines such as the use of research, a focus on market share, and product innovation – the conventional domain of the packaged goods marketer.
And in order to bring the necessary strategic expertise into the industry to devise and execute these kinds of sophisticated promotions, the financial services sector during the 1980s has been luring seasoned packaged goods and retail marketers into the fold.
Says David Blick, a Toronto headhunter and former international area manager with Procter & Gamble: ‘By 1995, every company operating in a complex marketplace will apply fast-moving consumer goods’ methodology, or something approximating it.’
‘The fundamental point in the financial services market, or any other market, is that you have to understand what makes the consumer tick – what motivates the people who buy the products or services you offer and what makes them buy from you and not the next guy,’ Blick says.
‘These basic concepts are even more important in 1989 than they were when the fundamentals of current-day packaged goods marketing theory were developed by P&G back in the ‘30s.’
Blick cites American Express as a classic example of a company which has recruited packaged goods marketers steadily for years, developing a dazzling array of marketing programs for its travellers’ cheques, credit cards, loans, and theatre and airline tickets, as well as a whole host of merchandising vehicles.
And because Amex and Merrill Lynch have recently applied for banking licences in Canada, the prospect of competing with such well-established giants in the banking sector has caused many of its potential rivals to start sharpening their spears.
The increase in competitive activity has led to companies positioning themselves in the market-place as superior deliverers of quality service.
Says Neil Logan, vice-president of retail marketing for the Bank of Nova Scotia: ‘Because our product – money – is basically an undifferentiated commodity, how you package and present it, and the services you provide with it, effectively become your point of difference.’
‘How you sell things is as important as what you sell in any service industry,’ Logan says.
‘It’s not going to get any easier in the years ahead, especially with the zero population growth projections for this country,’ he says. ‘If you’re going to win position, you’re effectively going to do it at the expense of your competitors. Statistically most people have the experience of at least two banks and the more money people have, the more likely they are to spread it around.’
Logan says Scotiabank is trying to encourage customers to consolidate their business. ‘If people enjoy coming to our branch, and if they enjoy dealing with the people there, they’re far more likely to stay,’ he says. ‘But if the customer is not well treated then the next time he has an option, he’ll move his business to a competitor, based on his perception of that company at the time.’
Charles MacFarland agrees. ‘We’ve come to the conclusion that in a commodity industry it’s very difficult to differentiate yourself in any lasting sort of way around product,’ he says. ‘You can be innovative, but very easy to imitate. We have positioned ourselves around delivery of product, and more specifically, around the provision of advice.’
Securities firms are also taking active steps to woo and keep their clients. At Prudential-Bache Securities Canada, marketing efforts include seminars and forums, often using high-profile guest speakers in an attempt to educate potential investors.
The better educated a consumer is, the more sense we feel we make to him in terms of the services we offer,’ says Ron Sakkal, Pru-Bache vice-president and branch manager.
‘Although Canada has only 4% of the world’s financial markets, what happens in Hong Kong today or Tokyo last night has more and more of an impact on what happens here,’ Sakkal says. ‘So we draw on our international resources from around the world and basically stage educational events aimed at specific, identifiable target groups,’ he says. ‘It used to be that investing was the domain of only a very small group of already-wealthy people. Now, with the technological advancements in communication, it’s really possible for and available to large numbers of people.’
Another trend among banks and trust companies is the attempt to increase the percentage of gross revenue that comes from fee income – one-time or annual charges (depending on the type of product) versus the ‘spread’ income generated by deposit of lending-type instruments.
Because fees are a more stable and often more profitable source of income, free from the fluctuations caused by interest-rate changes, there is a growing emphasis on fee products, such as T-bills and bonds.
Another area of innovation is the more intelligent and careful approach on the part of financial institutions in deciding where to locate branches. ‘We’re starting to see the kind of analysis that goes on in the more sophisticated retail chains,’ says MacFarland.
“How you sell is as
important as what
you sell in any
No less important is the costly and time-consuming redevelopment of individual corporate philosophies which entails changing attitudes among employees in the new era of service. For example, internally at CIBC, branches are now called ‘stores’ in recognition of employees as proactive salespeople, not simply order-takers.
Even smaller institutions are finding they can win at this game. Says Tom Niles, director of corporate affairs at Citibank Canada: ‘Even though we have a comparatively very small retail branch banking system in Canada, for people who live or work close to one of our branches, our message is a very high service one. While we recognize that convenience is one of the most important concerns in choosing a bank, because we’re part of a shared ATM network our customers can access their accounts at any time from any one of over 1,500 machines in North America. So despite our small number of outlets, we feel the extremely high quality of our service really sets us apart.’
In terms of the looming spectre of further deregulation which has the banks pitched against brokers and agents for the right to sell insurance, contrary to popular perception at least one of the big insurance companies is not at all fazed.
‘Our view is very clear,’ says John Martin, vice-president of marketing services at Canada Life Assurance, the fifth-biggest insurance company in the country.
‘Firstly, we don’t see a demand among consumers for one-stop-shopping in the financial services industry,’ Martin says.
‘Qualitative research tells us that consumers regard the selling of insurance as a very specialist function,’ he says. ‘They go to accountants, lawyers, banks and insurance companies for very specific, unrelated needs. But more importantly, we are not concerned at all with the banks coming into this industry, provided that we’re dealing with fair competition. If banks begin the practice of tied selling, which would make a consumer’s ability to purchase one product dependent on purchasing another, then we would certainly have some concerns.’
‘We spend a tremendous amount of time and resources training and educating our people – and it’s an ongoing commitment,’ John Martin says. ‘And as often as the tax act changes, we have to make sure our people can be instigators and advise clients on all the implications. So we feel we’re really experts in our field much more than a generalist bank could ever be.’
Despite the high-pitched activity there is substantial optimism, as the four separate financial pillars gradually merge.
As Ron Sakkal says: ‘Any change that gives the consumer a greater number of opportunities to seek different people providing the same service is very healthy. The financial services industry is becoming one arena.’
While the potential to lose has never seemed so great, it will be rich pickings indeed for the industry winners of the 1990s.