Has the e-commerce revolution really hit financial services?

Banks and insurance companies continue to make major investments in e-Commerce initiatives - but without focus and strategic context, this is a risky course of action warns an international report from business advisers Ernst & Young issued this month.

Technology in Financial Services, a survey of more than 100 financial services companies worldwide, suggests that with e-Commerce channels radically reshaping the retail financial services market the key to future success will be an understanding of how technology can help companies build customer value. Respondents predict that by 2002, 14 per cent of total technology spend will be on electronic commerce with 58 per cent stating that PC-Internet will be the most important area of technology spending for them, against one per cent for ATMs and 13 per cent for telephone service centres.

According to the Ernst & Young research, the growth of Internet and digital television as channels to market which empower the customer (offering unprecedented access to comparative information and competing products) will fundamentally change the financial services marketplace. Ownership of customer relationships will gain central importance and Customer Relationship Management has been seized upon by companies as a means of avoiding the consequences of commoditisation of financial services products - CRM spending in financial services increased by 31 per cent in 1998 as opposed to 1997.

The principal aim of e-Commerce initiatives according to 27 per cent of respondents is customer retention (42 per cent among US respondents), with participants predicting that by 2002 an average of 36 per cent of the discretionary technology spend will be focused on selling more to existing customers. So it is surprising that 77 per cent of respondents still collect delivery channel information via traditional methods (surveys, teller information, statement analysis) and 63 per cent have no means of measuring CRM systems` impact on the bottom line.

Jonathan Charley, Financial Services Partner at Ernst & Young, London, comments: "The danger for banks and insurance companies is that they might, inadvertently invest in the wrong customer segments. Identifying valuable customers and building lasting relationships with them will be the key to success - share of pocket will replace market share as the key industry driver.

"The fundamental issue facing banks and insurance companies is how they actually create value for their customers - what are they really good at? Only by understanding this source of competitive advantage and focusing their business around it can they build a sustainable, value creating business."

Ernst & Young`s report predicts a future where financial services are purchased in three ways:

• from proprietary integrated companies, which own the customer relationship and sell primarily their own products;

• from non-proprietary integrated companies, which own the customer gateway and offer a mix of their own and others` products;

• non-integrated, where the customer controls the gateway and picks the best product offerings.

The winning companies will be those who control the customer gateway and are capable of managing customer information, understanding the customers and meeting their needs efficiently, which implies effective CRM harnessed to an overall strategic vision. Among those companies poised to assume this role may be Internet content packagers as well as traditional financial services providers. Companies with particular competencies in product manufacturing and transaction processing will provide the other elements of the new financial services arena. Only very few players will be able to undertake all three of these roles, making focus on the key value creating competencies essential.

Driven by e-Commerce, we are seeing the rise of `Me Ltd` where the customer cuts out the middle man and buys products and services more cheaply direct from their producer. In financial services terms, companies wishing to avoid commodity prices for their products will have to add value, through information or efficiency, to attract and retain these customers.