EDI and Electronic Commerce in Banking:
Extract: Whose Customer is it?
Extract's Table of Contents:
Historically, most industries have been dominated by the nature of their physical presence, which forms a barrier to entry,
 often because of business logistics (car manufacturing, housing construction), regulatory
protection (insurance is about the last bastion of this type of oligopoly; it is, however, falling) or advantages of customer comfort and trust. Clearly, the owner of the channel could consider the customer its own and could be fairly sure its competition were the owners of similar channels. This made the industry the natural unit of focus, with companies positioning themselves to attract customers through product differentiation, pricing, marketing and promotion.
Over time, these channels were complemented and extended by electronic alternatives, with bank ATMs the most obvious example and telephone shopping a more recent addition. The bank offers basically the same product to the same customer base, but with a new choice of channel. The industry then still controls the pace of change in this shift from physical presence to electronic service. ATMs and credit cards did not, for example, erode the identity of banking.
At some stage, however, it loses that control and the industry's product/channel/customer stability breaks open and a flood of new choices become available. Many of these are provided by new entrants, third-party competition from outside the traditional industry and from companies that aim to use their electronic channel capabilities as business franchises. Examples include USAA (insurance); Merrill Lynch, Fidelity Investments, Vanguard (securities); and Quicken (software).
This is typically viewed as disintermediation. It is, however, a different relationship where the choice of channel is the choice of relationship, self-definition of customer segmentation (as discussed in Chapter 8) and implicit statement of customer perception of value.
Essentially, this new range of channel options comes when IT replaces service at company point of event with service at moment of value. Telecommunications makes business more location-independent and time-independent, guaranteeing that electronic alternatives will gradually replace physical presence. This gradual change destabilises the tight product/channel/customer association that makes up an industry; however, moment of value choices can turn an industry upside down. Building a channel base to achieve moment of value means combining reach, range and responsiveness in the technology platform (see Chapter 9).
It is this fusion of business integration and technology integration that determine the winners and losers in these channel-centred relationships. There is no competitive edge to be gained from any one computer application or simple telecommunications-based service. If company A can buy a piece of software off the shelf and implement anew service in six months; company B can quickly copy it. When company A has an integrated technology infrastructure that took seven years to build, company B is locked out of responding quickly if it lacks that same infrastructure. Company A has anew channel for moment of value customer capture; Company B has a real problem.
This can be illustrated by a famous example that, although distinctive in its dramatic implications, is fairly typical of the main trends in business today:
- British Airways (BA), an airline, took away the international hotel chains' control of their own product by exploiting its ownership of a powerful electronic channel and, more importantly, the moment of value created for it.
Just about every major competitive move in the early to mid-1980s centred on using or having access to a computerized reservation system (CRS) - industry jargon for what had become the key to customer service, distribution, marketing, pricing, profit planning (yield management), choice of hubs and product innovation.
BA saw its future in travel-related services rather than just flying airplanes. One obvious opportunity was to add hotel and car rental reservations to flight reservations. At that time (the late 1980s), none of the international hotel chains had a CRS. They used telex and fax to inform hotels of guest reservations. BA offered to become their co-provider - for a fee. The commission was more than the hotel received from renting the room. BA realised that people did not make their hotel reservations before they made their flight reservations. The moment of value for BA was, therefore: "You are confirmed on flight ABC. Can I help you with a hotel?"
Passengers were very unlikely to refuse the offer on the grounds that to accept was unethical or that they had some moral responsibility to the hotel industry to go through the correct channel. BA took away control of the hotel chains' own product and made a lot of money. Whose customer was it in this situation - BA's or the hotel chains'?
What strategy could a hotel chain such as Marriott use to regain control of customer contact? It would take about seven years for it to build a comparable international technology platform. Instead, it worked with a consortium of other hotels and car rental chains to adapt American Airlines' industry-leading Sabre CRS system to their joint needs.
The project was called Confirm. It was highly touted as the new generation of CRS. It might well have been, had it worked. Instead, it fell badly behind schedule, went well over the original budget, and there were problems with project management such as specification changes. About two months before Confirm was due to be launched, it was discovered that the system contained a few bugs (99 percent debugged in the information systems trade means it does not work). Confirm did not work and was abandoned. The write-offs, legal penalties and court costs are estimated to be well over $300 million.
BA used its technology platform as a new channel and captured another industry's customer at the moment of value and at a low cost. IT is fundamentally about this link. It is not a channel issue but an issue of the customer in relation to the channel. In many cases, the channel becomes the organisational brand.
Predators, Channel Franchises and Channel Brands
To a large extent, companies are educating their own customers about how to go elsewhere. For example, ATMs made consumers comfortable with using "computers" and made more people sensitive to convenience as the key issue. The breaking away from the dominance of physical presence and the emerging opportunity of moment of value service at some point encourages three types of new product/channel/customer interaction:
- Predators: Predators are parties from outside the traditional industry that explicitly avoid competing on the old terms and use IT as their new, low-cost, strongly-branded competitive differentiator.
- Channel franchises: Include companies that have electronic delivery capabilities and want to add traffic to these channels - anybody's.
- Channel
brands: Companies that use IT among other resources to extend the strength of their organisational brand into someone else's territory - the channel is a brand in itself.
There are hundreds of examples of all of these new competitors, making "industry"an increasingly meaningless term. They show that the dynamics of change underlying them apply to all industries, the only issue is timing and rate of change. Some examples are given below.
Predators
Dell Computers is a classic predator, appearing suddenly and forcing its prey - in this case PC outlets - out of business. Its channel base simple: catalogues targeted at knowledgeable customers, exploitation of low cost 1-800 telephone numbers, customised assembly of components to order (instead of building finished goods inventory to sell) and use of couriers such as UPS.
Dell did not have a product advantage. In fact, in its early days of expansive growth, its advertisements showed two machines that looked identical (one from Compaq and one from Dell), stressing their similarity but highlighting the large price differential. It attracted a distinctive type of customer into its electronic channel, one that falls into the simple/sophisticated quadrant of the market and customer segmentation framework shown in Chapter 8. Dell did not have the overhead and capital costs tied up by physical presence and used this to price aggressively.
For decades, banks and telecommunications providers viewed home banking as a great opportunity. None of their efforts succeeded, however, and, by the early 1990s,home banking looked more like a fire sale than a blaze of fire. Then, First Direct in the UK showed that if a bank, in this case Midland, focused on ease of customer access at moment of value, which means 24-hour service, it could make telephone-based home banking a success, again with a distinct type of customer choosing the new channel.
First Line, an insurance service set up by a bank, captured 20 percent of the UK car insurance market in its first two years of operation by carefully focusing on a simple product in terms of knowledge demands.
Other predators include non-bank leaders in credit cards such as Sears and AT&T, which exploit business logistics links to banks and other organisations for services such as telecommunications processing and payments.
Although predators have been most prevalent in well-bounded industries that traditionally sell through bricks and mortar physical presence (most obviously financial services) there are plenty of other examples. A common pattern emerges: the relative value of occupancy and physical presence erode from core asset to expensive liability, with the predator having the advantage of not being tied down or not having its capital tied up by old infrastructures. Generally, the effective predator brings a distinctive new set of business logistics to the organisation of work and services. It uses electronic commerce without necessarily calling it that or without banking playing more than a commodity role.
In the mid-1980s, examples of predators were sufficiently infrequent for them to be singled out in books and articles. At that time, the concept of "industry" dominated academic thinking about competition, with Michael Porter's model of the
Five Forces of Industry Competition everywhere in business school
curricula.1 That model looks more and more naive in the world summarised by Brian Quinn, in which manufacturers make most of their money out of services and a company such as Nike manufactures shoes without ever making them by relying on a mix of outsourcing, electronic customer-supplier links and electronic business logistics to create what is increasingly called the virtual
company.2
Electronic commerce is now the main force driving the erosion of industry as the basic identity of competition; the channel has become the competition.
Channel Franchises
Any company that has a high level of reach through telecommunications will naturally look to add services to its network even if it is simply to fill capacity. Almost every leading cable television company is considering local telephone calls as extra traffic. Long-distance telephone service providers are equally considering news, local telephone calls and Internet gateway services - any service where bits can be turned into revenue.
When the electronic channel is the driver of a company's offerings rather than just a support to it, it can be called a channel franchise. Electronic commerce represents a major opportunity for channel franchises.
Examples include:
- CompuServe's entry into the car selling market;
- The ongoing jostling among telephone companies, media companies, cable television providers and many others to establish as strong a combination of channels (and products and services to deliver through these channels) as content providers, through alliances or by attracting other providers to use the branded franchise;
- Bell Atlantic, a leader in the piloting of interactive television, is targeting home shopping, financial services, education and entertainment through its Stargazer project; and
- Time Warner has been carrying out expensive trials of interactive television. A lot of money has been spent but, by 1996, it was still not at all clear that customers wanted video on demand, or would pay for premium services or the expensive set top boxes needed. In 1983, it was predicted that interactive television would generate $10 billion in profits by 1990; instead, losses of well over $1 billion were made.
The US senator, Everett Dirksen, left as an almost immortal comment on Federal government budgets the epigram
"A billion here, a billion there and pretty soon you're talking about real
money". The battles for the electronic channels of tomorrow can be summarised as "a billion here, a billion there and pretty soon you're talking about a real deal".
The acquisitions and alliances made by companies such as Disney, Viacom and AT&T in the US, or Bertelmann, British Telecom (BT) and News Corporation in Europe are just that - real deals. In interactive television, in the first two months of 1996 alone, orders were placed by companies such as Deutsche Telekom and Nethold for about $6 billion worth of set top boxes. Disney and Time Warner bought ABC, Turner Broadcasting and other large media players in deals that totalled about $40 billion.
The race to be the number one channel company is illustrated by MCI, the number two company in long-distance telecommunications, which has been positioning itself, since 1994, for the inevitable deregulation of telecommunications - which was finally signed into law in early 1996. MCI's investments and alliances look fairly typical of the general pattern that can be expected among the main national and international players. Its main fear is that local telephone companies will grab 10-15 percent of the long-distance market (MCI had about a 20 percent share in 1995). It is building fibre optics loops in major cities as the base for its MCI Metro network. Sales, in 1995, were $108 million.
In 1994, BT bought 20 percent of MCI. MCI used this capital infusion to buy 13.5 percent of Rupert Murdoch's (the publishing and broadcasting magnate) company, News Corp, for $2 billion. It also invested in a joint venture with News Corp, to launch a new DBS (direct broadcast satellite) service.
Within days of announcing this venture, MCI announced a deal in which it would be the primary distributor of Microsoft's online network services, including marketing them directly to consumers and businesses.
The same consortium bid $682 million in an auction for a satellite, twice the predicted price. The satellite was the last one available for direct broadcasting, which will be the main rival to terrestrial cable television.
MCI offers global networking services to large companies through the MCI-BT Concert and MCI-Mexico Avantel. It missed out on several major wireless communications acquisitions and alliances but successfully bought a cellular provider, Nextel. Its start up pager service gathered 500,000 customers in its first two years. It also bought a leading information systems integration company, SHL, that specialises in large-scale software and telecommunications development, for $1billion.
There are many people who are critical of MCI's diversification. The head of BT commented to
Business Week:3
"They're bloody fast. They can turn an idea into a product in a
month." The article went on to say that MCI's leaders must hope that it will take the local telephone companies (which are notoriously slow) longer to figure out the long-distance market than it will take MCI to work out its new ventures into satellite broadcasting, cellular, paging, corporate networking, systems integration and local telephone services.
This may appear to be a long way from the subject of electronic commerce in banking. It does, however, represent the emerging base for electronic commerce banking services. The following questions are important for banks:
- Which customers will choose the new channels, and why?
- What can banks offer to these customers, the content providers and the channel owners?
- What, for example, can they provide to all the players in the new car buying networks? and
- When?
Perhaps the most important question for them to consider is what is the "brand" in a world of electronic commerce and what is their own brand?
Channel Brands
The channel as a brand in itself is a feature of modern living. Think of shopping: IKEA, Victoria's Secret, Marks and Spencer are brands. Consumers may not know where their products are made and, in most cases, their decision to go to these stores dominates their decisions about which products they are looking for. The basic elements of an organisational brand today are service, convenience, price and trust.
Historically, branding has been in the product. Now, it is increasingly a component of organisational identity that can be transferred across products, and even across industries.
Consider recent developments in the UK. Marks and Spencer, a retailer, became a leader in personal pension funds. Its expertise is in quality control of suppliers. It has a strong reputation for quality and service; the Marks brand is one of the best in the world. It is a trusted household name. It transfers both that trust and brand to financial services and even to fresh food. It has used skills developed in managing the quality control of clothes manufacturers to manage the quality control of fresh food provision.
Tesco, the leading OK supermarket chain, and probably the best in the world in1996, similarly captured 20 percent of the UK forecourt gas station market in two years from start up. Its supermarket brand transferred to an entirely different market.
An interesting example of the power of a channel as a brand is Victoria's Secret, the lingerie retailer. Its goods are excellent and its prices very competitive. However, its products are made in China and are indistinguishable from goods sold by shops in the same shopping malls (also of excellent quality, good price and Chinese
manufacturer). Victoria's Secret has branded the shopping experience by emphasising attractive catalogues and store layout. It also makes it easy and comfortable for males to buy lingerie for their loved ones.
Banks need to think carefully about what is their own brand, their own channel strength, and their own product/channel/customer in the general context described above. What can they offer to the variety of players with so many strategies which are in the middle of what is clearly a revolution in just about every aspect of customer services and relationships? Success in electronic commerce depends on making a distinctive contribution to these players, not an incremental contribution to how they use EDI.
1 Porter, Michael, Competitive
Strategy, Free Press, 1980.
2 Quinn, Brian, The Intelligent
Enterprise, Free Press, 1992.
3 Business Week, February 19, 1996.
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