Insights into Accenture''s Financial Services Customer Index
Why a Customer Index? Consumer sophistication and power have correspondingly increased. With just a click of the mouse, today's customer can become tomorrow's ex-customer. As a result, the financial services world has focused significant time and energy on discussing how to make business interactions more customer-driven. Yet curiously, critical management decisions in financial services are still based on aggregate numbers at the industry and firm levels rather than on consumer-centric data. Whether a company is contemplating adding a new distribution channel, acquiring another business, or designing a more consumer-attractive product portfolio, the analysis must be performed at the customer level. Aggregate data can hide critical information, such as inept management, weak infrastructure or unprofitable customers. Global numbers cannot zero in on individual customers and cannot address key questions, such as: How many new customers will we get from adding a channel, and what will it cost per customer? Is a specific acquisition target truly an industry leader, and how much will it cost to acquire, serve and develop its customers on a per-customer basis? Will a new product we are planning to introduce deliver more revenue from our customers?
Measuring at the Customer Level
Recognizing that today's strategic business decisions must be based on a common denominator — consumer-centric data — Accenture has developed a benchmarking tool for the financial services industry. Called the "Customer Index," this tool reliably and informatively assesses industry and sector performance along a vital metric — how much revenue, cost and profit are firms recording per customer?
The idea behind the Customer Index is simple: Senior executives involved in the transformation of the financial services industry have a strategic need to know how much it costs to serve individual customers and what amount of revenues and profits customers generate by line of business.
The Index is a baseline that any consumer-oriented financial services company can use as an evaluative tool. To be effective, it should be incorporated into management thinking, discussions and even systems. As a fundamental standard of measurement, the Index is intended to serve as a wake-up call for financial services companies to use consumer orientation not just as a marketing tool, but also as a means of gauging their financial results. Because targeting results on a per-customer basis is an appropriate and effective method for determining the success or failure of a company initiative, the Customer Index can serve as a tracking mechanism that rationalizes the decision-making process and holds key managers accountable.
Analyzing data at the aggregate level, as is typically done today, ignores the central role consumers play in business dynamics. For instance, a traditional assessment of whether to merge with another company might conclude that savings can be achieved through back-office realignment, partial elimination of overhead, and the integration of systems. The problem with this analysis is that it ignores the specific consumer impact. Instead, a customer-driven company should be asking: "What effect will the merger have on a per-customer basis?" The Customer Index provides the framework to answer this and other related questions.
Gaining Strategic Perspective
Executives must be able to measure the true economic impact of each customer. Traditional standards of measurement, however, are not compatible across all sectors of the financial services industry.
Banks, for instance, collect data on a per-household basis — and one household might include five individuals, each with a very different consumer profile. Brokerages, on the other hand, use assets or trades per account as a benchmark. Thus, it is very difficult for a bank that is contemplating buying a brokerage to reliably mesh household data with account data. By pegging decisions to a constant unit of measurement — the customer — the Index enables organizations to analyze transactions far more easily than they can with accounts or other yardsticks.
It is also helpful for firms to see where they are positioned relative to others within their industry sector. For example, if a mid-sized bank's unit costs are well below those of larger banks on average, the bank might determine that it does not have a relative competitive cost disadvantage and that, on a profit-per-customer basis, it is sufficiently competitive with larger banks. The Index gives the bank the basis for making that judgment.
CEOs can also use the Index to gain strategic perspective, helping them see the "big picture" of their industry and how it is changing at the customer level. As banks, insurers, brokerage houses, Internet start-ups and other players move across industry sectors, they must increasingly be viewed as each other's competitors. Therefore, it is important for an executive to know the profitability of another company's customers and how much that company spends to acquire and retain them. The Index provides insights into these queries. For instance, if a mutual fund company wants to explore entering the credit card business, the Index enables the company to identify peer-to-peer benchmarks of the firms it might buy.
While not meant to answer all of a company's specific strategic questions, the Customer Index does provide a suitable framework within which CEOs can deal with the critical issues affecting their firms and the industry at large.
Executive Summary
Banks
Almost the entire banking industry — small banks being the exception — experienced a marked increase in profitability per customer in 1998. Riding the wave of a strong economy and a low interest rate environment, banks enjoyed sizeable net interest margins and were successful in their fee-based business.
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Economies of scale in the banking industry proved elusive, however. In theory, consolidation among banks should have yielded greater efficiencies — resulting in lower costs and higher profit margins for the survivors. Yet size appears to make little difference. The Customer Index reveals that costs per customer among large banks and super-large banks continued to closely track each other over the past year. Among the reasons the biggest banks find it difficult to achieve scale: they remain saddled with large, retail physical infrastructures and the expense of enhancing customer service at call centers and Web sites.
Brokerage
The competitive pressures exerted by self-service brokerage began to take a financial toll on full-service brokerage in 1998. Full-service brokers experienced slower revenue growth per customer than in previous years — the slowest rate of increase among all specialist firms measured in the Index. Full-service brokers' per-customer costs continued to rise, far outpacing spending by self-service brokers. While full-service brokers' profits per customer declined, profits for self-service brokers soared 25 percent. The chasm in revenues and costs per customer remained wide between full-service and self-service brokers, but the gap in profits narrowed dramatically. Credit Card
On a per-customer basis, credit card firms' revenues, costs and profits all increased about nine percent in 1998. The strong economy helped keep write-offs in check. But the credit card industry has matured, posting the lowest per-customer profits of all specialist firms. Despite their intensive marketing and selling activities, credit card companies seem to have few remaining growth opportunities on a per-customer basis.
Segment Breakdown
1)Super-Large Banks
Revenues per customer grew among most of the super-large banks during 1998. On average, revenues totaled about $380 per customer, an increase of about 10 percent from the previous year. Most of the banks were able to raise revenues through increased non-interest income, such as credit card and deposit account fees.
Costs per customer remained relatively flat, increasing at a lower rate (three percent) than revenues per customer. Two of the banks in the sample group — Bank of America and First Union — succeeded in driving down their per-customer costs.
Profits were one of the surprise stories of 1998. Average profits per customer, which had been relatively flat over the preceding three years, increased by 29 percent a substantial gain likely due to reduced capacity and strong cost discipline. Additionally, consolidation within the industry has produced modest cross-selling advantages among the major players. Interestingly, the three worst performing banks in the group have proportionately larger credit card portfolios relative to their total retail franchises than do the other banks in the group. Since credit-card customers — who generate lower profits per customer relative to customers in other business lines — represent such a large portion of these institutions' customer base, the overall profits per customer from these institutions were correspondingly lower.
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Following two years of decline, aggregate revenues per customer increased by 16 percent in 1998. All but two of the seven firms in our sample had higher revenues per customer. Several banks increased their customer base through acquisitions and mergers during the year, generating both additional revenues and costs. PNC Bank boosted per-customer revenues another way: by selling its credit card business, which led to a substantial loss of customers.
With the uptake in revenues, costs per customer also rose — yet at a rate half that of revenues per customer. For example, US Bancorp significantly lowered its costs per customer through efficiencies gained from acquiring another bank, and Mellon Bank realized cost savings per customer after divesting its credit card portfolio.
After losing ground the previous year, large banks' profits per customer soared 37 percent, on average, in 1998. There was striking variance within the group, however. For instance, three banks experienced growth of less than 3 percent, while three others enjoyed per-customer profit growth of more than 45 percent.
3) Medium Banks
Medium banks continued to have the highest average revenues per customer among multi-line banks during 1998. This is likely due to the fact that medium banks generally have the deepest customer relationships in terms of number of products per customer — and this is reflected on both the revenue and cost sides. After being relatively flat for the past three years, these banks' average revenues per customer reached almost $500 in 1998, an increase of 16 percent over the previous year's figures. The range of revenues varied greatly among this group; some experienced significant revenue growth due to the strong mortgage market, while others experienced flat to slightly declining per-customer revenue growth.
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Medium banks' per-customer costs continued to slightly outpace those of their larger brethren. As with revenues, there were wide differences among the group in managing costs. Thus, a few banks had substantial cost increases, but most experienced flat to declining per-customer costs.
Medium banks led the way among multi-line banks in profits per customer during 1998. Profits spiked significantly, due in part to the healthy mortgage market. Revenues per customer increased at a faster rate than costs per customer — 16 percent versus 8 percent.
4) Small Banks
Small banks swam against the trend in 1998. Among all banks, only small banks experienced a decline in average revenues per customer. The 15 percent decline halted the upward trend of small-bank revenues over the previous three years. As consumers increasingly look toward institutions that can offer them broader solutions, small banks — with their limited product set and relative inability to cross-sell to customers — might be unable to achieve significant revenues per customer.
The good news for small banks is that they were the only bank category to experience a dip in per-customer costs in 1998. By reducing per customer costs 20 percent, small banks continued a four-year trend of having the lowest costs per customer.
Overall, however, small-bank profitability took a slight hit in 1998, dropping six percent. Significantly, small banks lost ground to their larger brethren. Small banks moved from having the highest average profits per customer in 1997 to having the lowest average per-customer profits the next year. Unlike larger banks, small banks probably did not reap many benefits from the strong demand for mortgage refinancing in 1998 and were less able to sell a larger number of products to their customers.
5) Full-Service Brokerage
Full-service brokers continued to lead the specialist firms category in revenues per customer ($1,000) during 1998, but their revenue growth-- an increase of 5 percent over the previous year's figures — was the lowest of all the specialist firms. The revenue growth rate of the full-service brokers' customer base also slowed from previous years.
Full-service brokers had the highest costs per customer among specialist firms. With per-customer costs at $834 — a 9 percent increase from 1997 figures — full-service firms far outspent self-service brokerages, whose per-customer costs averaged about $350. Compensation and benefits are the largest expense for full-service brokers — typically ranging from 65 to 80 percent of operating expenses. Substantial increases in broker compensation (due to aggressive expansion by other financial services players into the brokerage industry) and Y2K spending helped drive up costs.
Feeling the heat of competition from self-service brokerage companies, full-service firms experienced a decline in profits per customer. After trending up for the prior three years, profits sunk 9 percent in 1998. In a commissioned broker model, per-customer profits move in tandem with broker productivity, which in turn, is driven by market growth. With growth in market share relatively stagnant, profits suffered.
6) Self-Service Brokerage
1998 was a banner year for self-service brokers. After growing revenues per customer by five percent between 1995 and 1997, self-service firms enjoyed 15 percent revenue growth in 1998. Total revenue growth was driven by a substantial increase in the number of new customers as well as by the trend toward higher volumes of transactions per customer, which offset the move toward lower per-trade commissions.
As self-service firms ramped up advertising and marketing budgets in efforts to rapidly grow their customer bases, it was not surprising that costs per customer increased. Still, costs edged up at a lower rate than revenues per customer. Additionally, self-service brokers kept per-customer costs well below those of their full-service competitors, who continue to be saddled with greater overhead expenses. So far, Schwab and other more-established discounters enjoy substantially lower per-customer costs than do some of the emerging electronic players. It will be interesting to see whether this differential will diminish as the emerging players grow their customer bases.
Strong revenue growth combined with relatively modest cost increases led to a continued upswing in profits. Among specialist companies, self-service brokers enjoyed the second-best growth in per-customer profit — 26 percent — in 1998. As the profits of self-service firms climbed and those of full-service brokers declined, the profitability gap between the two narrowed.
7) Mutual Fund Firms
Revenues per customer soared 19 percent during 1998 as more investors sought to take advantage of a rising stock market by pouring their savings into mutual funds. Revenues increased at a higher rate than the previous year's five percent because equity funds — the preferred vehicle of mutual fund investors — tend to be more profitable. Generally, differences in mutual fund firms' revenues result from three factors: asset mix, fees, and assets under management.
Aggregate costs per customer rose at a higher rate — 22 percent — than did per-customer revenues. In part, this growth in costs is attributable to stiffer marketplace competition, which forced mutual fund companies to spend more heavily to establish greater brand awareness and differentiation for their respective funds.
Mutual fund companies have grown profitability consistently in the late 1990's, and 1998 was no exception. All the firms in the category were profitable, with profits per customer climbing by 12 percent on average. Typical of this group was Janus, which had only a slight increase in new customers but benefited from targeted marketing efforts and the introduction of new products.
8) Credit Card Firms
Despite per-customer revenue increases of nine percent in 1998, credit card companies remained firmly at the bottom of the revenue barrel among specialist firms. While most of the credit card firms were able to push up revenues through higher fees and better segment pricing, long-term structural problems loom. Operating in a very mature market, credit card firms have tried to introduce new value propositions but have thus far had difficulty generating additional revenues.
Costs per customer, which rose at the same nine percent rate as revenues, were the lowest among specialist firms. Non-bank credit card issuers, such as Capital One, Household and MBNA, generally had lower costs-to-serve than bank issuers did. Net charge-offs as a percentage of average card loans slightly decreased or remained flat among all card issuers.
Credit card profits per customer increased slightly, although at a much lower rate than per-customer profits at self-service brokerages and mortgage firms. Profitability notched up on the strength of the economy, which in turn helped to slightly reduce write-offs.
9) Mortgage Firms
Riding the wave of a vibrant economic cycle, mortgage firms had a banner year in 1998. Continued low interest rates led to a steady demand for refinancing and new mortgages, which generated substantial origination fees. With a 36 percent increase in revenues per customer, mortgage firms achieved the largest revenue upswing of all the specialist firms. Mid-sized bank mortgage lenders and non-bank lenders continued to have higher revenues per customer than the largest bank mortgage firms such as Bank of America, Chase and Fleet.
Costs per customer rose dramatically in 1998 to meet the strong mortgage-origination demand, thereby reversing the trend of declining costs in the preceding two years.
Mortgage firm's per-customer profits soared 39 percent in 1998 — far greater than the 10 percent and 13 percent increases in 1997 and 1996, respectively — reflecting the strong economy, low interest rates and the demand for housing. The per-customer profits of nearly $400 far outpaced the rest of the specialist firm category.
Forecast
The Customer Index offers a dynamic view of benchmark performance levels for different financial services segments. By charting the ups and downs of various businesses, it also helps provide some insights into future industry trends. Here is an overview of what we expect to occur in 2000 and beyond:
- Multi-line Banks. Given the limited economies of scale that size brings, few if any super-large bank mergers are expected. As first-tier bank institutions launch their dot-com operations, it will be interesting to see whether one approach emerges as a market winner. Some firms, like Bank of America, are taking an integrative approach in which the new Internet channel is co-managed with other channels, creating a common customer experience across all channels. Others, such as Bank One's Wingspan on-line operation, are betting on full functionality on the Web, while giving up the notion of integrating with the traditional bank.
- Brokerage. Buffeted by the emerging self-service model, the brokerage industry will continue to experience change, including convergence between the full-service and self-service brokerages. Full-service brokers will be increasingly forced to compete on price to stem the loss of customers who defect to the cheaper, more convenient self-service model, and self-service brokers will increasingly go "upscale" by adding high-service components. The battle will be joined over quality, the winners will posses the most knowledge and provide the best advice.
- Credit Card. The credit card industry will continue struggling to leverage its core product into a vehicle for other customer relationships. If the business cannot be made more profitable and fails to be a platform for cross-selling, companies might reevaluate their credit-card business.
- E-Banks. Despite being new players in the financial services industry, Internet banks have quickly generated revenues to rival those of more-established firms. In fact, on a per-customer basis, revenues for some Internet banks exceeded those of the online brokers and small banks measured by the Customer Index in 1998. Some Internet banks have also posted significant profits per customer, despite high customer-acquisition costs; in fact, customer acquisition will remain the critical issue for emerging Internet banks. If they proceed wisely, these banks can achieve higher per-customer profitability. Those who do not have an established brand name, however, might have to spend huge amounts to establish brand and convince consumers of their reliability.
About Our Research
The Customer Index compares 1998 financial results for various retail financial services categories, with a focus on average revenues and costs per customer. The index values represent a customer-weighted average of seven or more firms in each category (with the exception of "Emerging Internet Banks"). Revenues include net interest income and non-interest income. Costs include non-interest expenses and loan loss provisions (where applicable), excluding depreciation, amortization, and restructuring charges. Profits are pre-tax.
Customer numbers are either estimated by the firms or calculated using derived conversion ratios applied to households, accounts or assets under management, or cards issued. As mergers occur, we include their effect in the year the merger is complete.
Banks
The bank categories represent a combined view of all retail and small business divisions (including deposits, installment loans, credit cards, mortgage, investments, trust, indirect auto lending and insurance). Bank categories are defined by total assets:
Super large banks (more than $80 billion in assets); Large banks ($35 - $80 billion in assets); Medium banks ($10 - $35 billion in assets); and Small banks (less than $10 billion in assets).
Specialist Firms
Specialist Firms fall into five categories:
Full-service brokerage; Self-service brokerage; Mutual funds; Credit card; and Mortgage. Each is described in more detail below:
- Full-service brokerage: Firms involved primarily in traditional retail brokerage services. Financial data excludes proprietary trading, investment banking and other non-retail activities.
- Self-service brokerage: Firms primarily providing discount brokerage and on-line investment services to facilitate self-directed investing. Financial data exclude proprietary trading, investment banking and other non-retail activities.
- Mutual Funds: Mutual funds include firms primarily engaged in the management, distribution and servicing of retail investment mutual funds. This category includes retail and 401(k) businesses.
- Credit Card: Credit card firms include bank and
non-bank issuers (including results from securitization).
- Mortgage: Mortgage firms include bank and non-bank mortgage companies that originate and service mortgage portfolios. Mortgage revenues, costs and profits include originating and servicing operations, excluding amortization of mortgage servicing rights and the gain or loss on sales of mortgage servicing rights.
