Entry No.45f

IT Writers Awards

Standfirst BankDirect's infectious brand of low cost, convenient financial services has struck a chord with New Zealand customers of late. And while direct competition from mainstream banks is emerging the direct bank is confident customers won't desert it. Cameron Tomes reports.

Rugby union jealousies aside, there's hard evidence to suggest that Australia's cross-Tasman adversaries have got what it takes to forge financial services innovation in a market that some observers would argue has been slow to meet customer expectations.

While market forces, such as deregulation of the financial services sector in the mid 80's, have served to inject much needed competition into the local market and hence better service for customers, few organisations could claim to have had an impact as marked as ASB Bank subsidiary, BankDirect.

Since its inception in 1997, following around four years of strategic planning, BankDirect has effectively tapped into the financial services psyche of New Zealanders to deliver a niche service that mirrors growing customer desire for technology-enabled convenience banking.

While its mainstream rivals have adopted a blinkered approach to financial services by relying on their branch networks and little else, BankDirect poured over customer interaction studies to discover that branches were pretty much the last place they wanted to do their banking.

According to James Mitchell, BankDirect's general manager, customer perceptions of direct banks have altered in the last couple of years primarily as a result of Internet and PC penetration in the home. While many observers would have argued strongly against any success of a direct banking venture, Mitchell said ASB was very keen to take advantage of a distinct lack of direct banking access in New Zealand.

"Home PC penetration has certainly accelerated in the last 12 months, although when BankDirect launched the Internet was not big at all in customers' minds," he said. Such market potential spurred BankDirect and its "technologically savvy" parent, ASB to drive home its point of technology differentiation. As Mitchell recalled, customers couldn't get enough of this New Age method of only banking online and over the phone. 

"We anticipated that direct banking uptake would be strong and I think the community recognised its tremendous potential once the opportunity was made available," Mitchell said. "We recognised that virtually all of the major New Zealand banks had a significant number of customers on their books who had no direct relationship with any branch and did most of their banking over the phone and through ATM terminals. 

"So clearly there was a segment of the population that would be amenable to new ideas and a fresh banking perspective," Mitchell added.

Like its Australian direct banking counterpart, ING Direct, BankDirect has built a "significant television advertising presence" which, according to Mitchell, has delivered high levels of consumer cut-through. 

"Our agency even told us that they are proud to preach that we have the most cost effective brand expenditure in the financial services market," Mitchell trumpeted.

Even though BankDirect policy forbids the release of figures relating to its customer base and product sales there is plenty of evidence to suggest that the organisation's initial objective to capture a niche customer base may need to be upgraded somewhat. 

According to Mitchell, while BankDirect is still in its infancy early growth figures indicate that customers are prepared to embrace its philosophy of providing low cost, convenient banking services.

"Our customer growth rate is roughly 35% annually while product sales growth ranges from 35% to 70% annually depending on the product," Mitchell revealed.

He also cited internal research that indicates BankDirect's perception as the main bank of choice among its customers has risen to 69%, up from 63% last year. 

"However, it's the nature of the beast for people to want growth to be faster and stronger." Mitchell was also quick to confirm that ASB plays no role in BankDirect's promotional and advertising activities, believing that both organisations must maintain close ties with their respective customer bases.

"Our association with ASB is well known, but from a marketing perspective the ties are non-existent and they play very little part in our strategy to attract customers. "When BankDirect launched we had serious concerns about moving a proportion of ASB's customer base to BankDirect, and as such we have been extremely cautious not to cannibalise their customer base and ours," Mitchell said.

"It's a nonsense to talk about the growth of Internet banking customer bases in New Zealand and Australia. The figures are almost always inflated and don't reflect the true picture."

According to Mitchell, the only way to gain the trust of any financial services customer is not to brag about the size of your customer base. Rather it is essential to recognise that many retail customers are "technically savvy" and demand top class service.

"Customer service competition has been pretty vigorous of late in New Zealand. Because we have no immediate direct banking competitors we compete with every financial institution on this issue.

"However, our perception is that most banks in Australia and New Zealand have quite poor customer service ratings," Mitchell argued.

"If you've ever contacted the customer service centre of a large organisation it is always frustrating when you are transferred to multiple operators who constantly ask you to re-explain your inquiry.

"In contrast, customer feedback shows that our direct banking model is receiving quite high service ratings."

Interest in BankDirect services is so concentrated that clogged email-based inquiry queues were causing some concern. However, Mitchell explained that a separate email holding queue has now been established to clear any backlog within two hours, allowing customer service staff to concentrate on handling phone-based inquiries.

"Our staff are empowered to make decisions at the front end so it's crucial that we constantly update and combine customer inquiries into one record," he said. To that end BankDirect recently deployed a CRM solution from Onyx, which was part of an enterprise-wide rollout also undertaken by ASB bank.

So if the customer service arena is so hotly contested, when can New Zealand customers expect to see competition spring up to tackle BankDirect? 

According to Mitchell, the current dearth of direct competition is neither a help nor a hindrance simply because retail customers are continuously on the lookout for better, more efficient service.

"The fact that there may not be another direct bank is of little meaning to us because there is competition coming from all sides. Whether it's from traditional financial services players or non-traditional entities is irrelevant.

"Many banks in the region have been consumed with mergers and radical cost-centred restructuring exercises and we are seeing that pressure start to flow through from Australia. "However, the number of New Zealand customers who actually change banks compared with those who would like to is actually quite small. So clearly changing banks is not that easy and you have to provide a point of differentiation for customers to justify making a move." 

Mitchell observed that branch banking might be making a resurgence in New Zealand as the rate of branch closures has dropped significantly in recent times. But while accepting the branch as "another channel," he remains confident that customers would still be attracted to BankDirect's differentiator of low cost financial services. 

"ASB bank was already offering Internet banking capabilities when BankDirect launched and it wasn't until the last quarter of last year that a major New Zealand bank followed suit," Mitchell claimed. "They have been very late to market when it comes to Internet banking. Almost everyone has embraced phone banking now, but that is no longer a differentiating service." He predicted that New Zealand's mortgage lending market is a potential hot spot and expects plenty of competition from new online mortgage brokers and established players, such as AMP.

On the services front, BankDirect offers a standard range of cheque and savings accounts, credit cards, home loans, term investments and general insurance. Mitchell said this philosophy of full-service banking ensures that BankDirect doesn't limit its attraction to certain niche customer markets. 

"Our plan was always to launch BankDirect as a full service organisation that could manage complex customer relationships in the same manner as ASB.

"We anticipated that if we could maximise our position early on by leveraging sales of our mortgage product then it would help our cross-selling cause," Mitchell added. And while BankDirect doesn't directly compete with ING Direct, Mitchell suggested the latter's regulated product rollout strategy may have some limitations. "It's not a foreign concept in financial services that share of wallet is key to profitability. Therefore it's much harder for a direct bank to gain that share of wallet if it only offers a small number of products," he suggested. 

One of the biggest question marks hovering over the heads of direct banks is profitability. It's well known that direct banks can afford to offer high savings account interest rates and other incentive-based services because they lack the costly and unwieldy branch networks of their mainstream counterparts. Yet little is known about their profitability.

Mitchell recognises that profitability and return on investment are two murky issues, however he suggested that a direct bank can survive comfortably if it has the right technology infrastructure and the backing of an established parent. In BankDirect's case its parent is ASB while ING Direct has the ING Bank and Mercantile Banks to call upon.

"We develop and maintain the front end to our systems, but hosting and management issues are handled by ASB bank in order to reduce our direct costs," Mitchell said. "We do charge fees on all accounts, but they are very competitive in comparison with the major banks. You need to charge some fees to cover the costs of establishing an Internet infrastructure.

"Yet we don't employ anyone who writes code because the aim of the game to take the human element out of the equation as much as possible," Mitchell argued. J

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