INDUSTRY: Banking
SERVICE: Checking Accounts & Loans
COMPANY/BRAND: Commerce Bank
SOURCE: HBS Premier Case Collection
WRITTEN BY: Frances X. Frei,
Corey Hajim
PUBLICATION
DATE: Dec 02, 2002
Reader's comments would be much appreciated and replied to!!!
Analyze Commerce Bank's service delivery system prior to ‘Retailtainment’. Base your analysis on the following heads:
Service Offering
Funding Mechanism
Employee Management System
Customer Management System
ANALYSIS:
Commerce Bank’s Service Delivery System
Commerce
Bank’s entire banking and operational philosophy is designed around creating a
retail experience for the customer. This
was unusual for the entire banking industry and thus a great source of
differentiation from both the operational standpoint and from the service
delivery design perspective. This meant that the entire value proposition from
the customers’ standpoint depended on the design of the service environment/theater
including the 3 service marketing mix variables
This can be seen from
employee comments and facts in the case about these variables
- Product: “We believe the value of a bank is not its loan base but rather the deposit base” – Vernon Hill (Chairman & CEO)
- Price: “We are generally the lowest ratepayers in every market” – Vernon Hill (Chairman & CEO)
- Place: ‘...deciding where to put a branch was just as important as what the building looked like..’
- Promotion: ‘Commerce spent $500,000/branch in NYC on promotion…’ and ‘Red and blue painted Commerce vans with an emblazoned logo’
- People: “This is not a job for someone who ‘s interested in being cool or indifferent” - John Manning (Employee Trainer)
- Process: “the way we look at credit and credit quality is a lot tougher…” - Falese
- Physical Evidence: “They i.e. customers know what the deal is whenever they visit one of our banks” – John Cunningham (CMO)
The Chairman and CEO,
Vernon Hill has been able to do this by understanding 2 very important aspects
or critical success factors of the banking business
- Understanding the Nature of the Servicescape: Despite trends (cross selling & non-interest revenue) in the banking industry moving towards the more remote delivery mode (Pg. 3: Most banks actively encouraged customers to move their transactions from full-service channels to self-service channels…monetary penalties for using the more expensive channels…charging $3 to visit the teller), he understood that because banking as a service depended so heavily on the service attributes of searchability, experience and credence and the nature of the servicescape was in essence that of an Elaborate- Interpersonal type
- Reducing the Listening Gap (from Gap Model of Service Quality): In comparison to other banks in the industry which competed on keeping a low-interest ratio, he rightly understood the customers’ real need by competing instead on service, convenience and other intangible service differentiators (Pg. 6: …the competition is beating on the 3% i.e. customers wanting a higher interest rate; we decided to compete on the 62% i.e. customers wanting convenience)
Keeping
this in mind we can now look at the 4 dimensions its Service Delivery system
prior to ‘Retailainment’
Service Offering
Here
we can see that the service offering in itself is split into
- CORE OFFERING: This is not very different from what other banks in the industry offer. However, from an execution standpoint their focus was different, because their strategic intent for both operations and growth was that Bank Value is ‘Deposit Base’ NOT ‘Loan Base’. Their core offering i.e. banking services included
- Deposits or Checking accounts (first 3 years no monthly service fees and free 1st order of checks)
Sr. No.
|
Type
|
Minimum Balance
|
Details
|
1
|
Standard Checking
|
$100
|
No monthly service fees
|
2
|
Interest Checking
|
$1000
|
No monthly service fees, Unlimited check writing,
Interest
|
3
|
50 Plus Club
|
$100
|
No account maintenance charge for checking account with
interest, free checks, money orders, notary service and travelers’ checks
|
4
|
Consumer Checking
|
None
|
No per check charge for first 8
checks/month for $3 monthly fee
|
- Loans: Commerce’s value is not in its loan base but in its deposit base. So for Commerce, loans are not given out as easily as other banks in the industry which believe that growth is in loans since deposit growth can occur only with the lowest interest rate. However, credit quality checks for loan approval is very stringent
- ATMs: Withdrawals were available at any ATM and purchases anywhere Visa was accepted. Transactions were immediately reflected in accounts and statements
- Cash Reserve Line: All accounts could be combines with a Cash Reserve Line to ensure protection from overdrafts
- SUPPLEMENTARY SERVICE: Commerce has 8 supplementary services (4 facilitators and 4 differentiators) which allow for superior customer service:
FACILITATORS
|
DIFFERENTIATORS
|
Information
Commerce decided to use Live agents over the phone
instead of Voice Response Unit (VRU)to talk to customers
|
Consultation
Branch
manager (also the Loan officer) consults/advises loan applicants and helps to
manage both loans & deposits
|
Order Taking
(Banking context: Cash withdrawal & loan
application process)
·
Loans were assigned to service branch instead of Head office for easy
access for customer
·
Weekend banking facilities were provided to allow customers to bank
on Saturdays & Sundays
|
Hospitality
·
Helpline phones at ATMs
·
Employee escorts with umbrellas during rains
·
Lollipops and dog biscuits at
drive through banking windows
·
Coffee and newspapers in waiting lobbies
|
Billing
(Banking context: Loan approval and monthly
statement generation process)
·
Loan applicant had to personally sign-off by on loan papers at
service branch
·
Online Monthly statements
|
Safe Keeping
(Banking context: Peace of mind about account
balances and check deposits)
· Immediate updating of ATM
withdrawals in online statements
·
A ‘Check View’ feature on Commerce’s website
|
Payment
(Banking context: Loan repayment process)
·
Payment is easier for customer and assured for bank, since loan
customer also has a deposit at service branch
|
Exception
handling
(Banking context: Coin currency & Irregular
hours )
·
‘Penny arcades’ to handle coins
·
Midnight timing at busy locations
·
10 minute rule to increase banking hours by 20 minutes in a day’
operation
|
As
a result of this unique service offering design, Commerce has produced above
average results in its undifferentiated core offering:
Comparison Parameter
|
Commerce’s Value
|
Industry or Competitor Value
|
Deposit Growth
(1996-2001)
|
30%
|
US Banking Industry-20%
(98-01)
|
Deposit Growth
(2001)
|
40%
|
US Banking industry
– 5%
|
Online Usage
|
34%
|
Wells Fargo – much
lower
|
Net Income growth (1998-2001)
|
200% (Double)
|
US Banking industry – 20%
|
Funding Mechanism
Commerce’s funding
mechanism can be looked at from 2 perspectives
- Commerce’s own startup and growth strategy (how it funded it’s own growth)
- Commerce’s banking and lending operations (how it functions as a bank)
Startup and Growth Strategy
- Founded in 1973 with $ 1.5 million as startup capital (assumed to be seed capital not VC funding)
- Chairman & CEO, Vernon Hill did not believe in M&As as a growth strategy but as a cost-cutting measure
- Started operations as a community bank in southern New Jersey
- Used the retail franchise expansion model (without acquisitions) to grow
- Expanded into branches in Pennsylvania, Delaware and New York
- Concentrated on seeing customer as a revenue-generator (not cost center). However, cross-selling was not encouraged since main revenue stream was considered as deposits
- Expansion into New York was done organically (Branches were wholly owned and run by Commerce and promoted heavily (Spends - $500,000 per branch)
- By 2001, Commerce had $ 1 billion in core deposits
Banking and Lending Operations
Commerce’s 2 basic product categories were: Deposits (Debits) and Loans (Credits). Its operations as compared to the Industry can be analyzed as below:
Product
Category
↓
|
Commerce’s
Philosophy:
|
Industry Trend:
|
Deposits
|
|
|
Loans
|
|
|
RESULT
→
|
Deposit Growth
(2001) - 40%
Online Usage - 34%
Net Income growth
(1998-2001) - 200%
|
Loan & Deposit
growth (1998-2001) – 20%
Deposit Growth
(2001) - 5%
Non-interest income
growth – 27%
Interest Income
growth – 11%
Customer attrition – 1/3rd of customer base
|
Employee Management System
Commerce’s Employee
Management System can be broken up into
- Hiring
- Training
- Work Autonomy
- Workplace involvement
- Rewards
- Appraisal or Performance Measurement
HIRING
|
|
TRAINING
|
|
WORK AUTONOMY
|
|
WORKPLACE
INVOLVEMENT
|
|
REWARDS
|
|
APPRAISAL
OR
PERFORMANCE
MEASUREMENT
|
|
Customer Management Systems
Commerce’s Customer Management Systems or customer-centric programs can
be divided into:
- Customer Acquisition Programs
- Customer Retention Programs
Both these have some customer ‘delight’ features which are called as
such because they are against industry norms and unexpected by customers
Acquisition
Industry Norm
- Employees were encouraged to cross-sell products (deposit account and loan products)
- Employees’ key performance measures were volume of calls handled and number of transactions processed rather than customer satisfaction or repeat customers
- Customers were seen as cost centers and in order to keep a low-expense ratio were pushed to use the electronic channels (full-service to self-service)
- Also, customers using the conventional personal (teller) banking channel were penalized through extra fees
- This savings in the marginal cost was then used to give a higher interest rate which banks felt was the only way to attract new customers.
These are the result not understanding why customers selected their
banks in the first place. In addition to proximity, customers chose banks based
on service. Vernon Hill, CEO & Chairman, Commerce Bank understood this and
built it into Commerce’s Customer Management System
Commerce’s customer acquisition
methodology
- Branches located close to competitors branches
- Branches are designed to be inviting, open windows (Note: this is a visual ‘Cue’ designed into the physical evidence variable. It shows honesty and transparency) and ample parking
- Red & blue painted commerce vans helped create free advertising opportunities
- Building designs across all branches were consistent (Note: This gives a consistent message to the customer – Integrated marketing communication)
- Very high promotional spends for every new branch in the form of direct mailings, subway ads, phone kiosks and free food (like 10,000 hot dogs in Commerce napkins)
- First time customer is given 4 simple checking account options (See Table 1) and
- First time customer is given a free gift for opening an account
- Employees treat customers with outgoing friendly service and do not try to cross-sell products or push customers out of the store after they finish their transactions
- Loan applicants were encouraged to open deposit accounts first
Retention
Industry Norm
All banks provided the
same ease-of-use electronic banking features along with their extensive branch
networks. Also, existing Customers were expected to be comfortable in a
different environment and deal with a different culture when banks merged.
In spite of this, even the best retail banks
lost 15% customers/yr as the following table shows:
Sr. No.
|
Reason for leaving
|
% of customer base
|
1.
|
Dissatisfaction with steep fees and fee surprises, poor
service and errors
|
34
|
2.
|
Outside of reach of current branch locations
|
34
|
3.
|
Availability of more convenience such as longer hours in
other banks
|
15
|
Commerce’s customer retention methodology
Analyzing the facts of
the case, it can be clearly seen that Commerce’s customer retention program
targeted exactly those pain points (See Table 6) which caused customers to
switch banks.
Convenience
- Extended banking hours (10 minute rule allowed for 20 minutes of extra banking everyday)
- Busy locations were open till midnight (12:10 am)
- Weekend banking (Saturdays & Sundays) which started in Jersey shore were extended to all branches
- Exactly same environment across all branches (Note: This feature was lost after ‘‘Retailainment’ program was launched)
- Phones in ATMs reach helplines
- Live agents instead of VRUs
Boundary-spanning Roles and Interface
- Employee conduct monitored by mystery shoppers for friendliness (handshakes), consistency in greeting and other procedural details when dealing with customers
- Employee appraisals and salary increases linked to branch performance (which is linked to service quality) and not volume of transactions handled
- Live agents dress codes stricter than other call center settings
Personal attention
- Guidance to manage deposit accounts by branch managers
- Loan accounts handled by local customer service branches and not central headquarters
- Guidance to manage loan accounts by loan officers (who also happened to be branch managers)
Customer delight features
- No fees for ATM and check cards
- Non-interest income (ATM charges/fees for using other bank’s ATMs) returned to customers
- Employee escorts with umbrellas to cars during rains
- ‘Penny Arcade’ program to handle coins with no charge either customers or non-customers (Note: This might have even helped customer acquisition)
- Gifts (pens and lollipops) at drive-through banking windows
|
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