Tuned in or turned off?

by LIMRA'S MarketFacts Quarterly

Recent advances in technology are not only allowing companies to
operate differently -- they are forcing them to. With the emergence of
new technology into the marketplace, companies must objectively assess
which technologies to support and which to reject. In LIMRA Europe's
annual survey A View from the Top, the CEOs of various European
companies responded to a series of questions, some of them about
company decisions regarding technology. This article incorporates an
overview of their responses with an additional focus on
company-customer interaction.

WILL INTERNET DISTRIBUTION BECOME STRONGER? The first point of
clarification is: What do we mean by distribution? Are we referring to
a distribution channel that takes the customer all the way through to
purchasing a product, or a channel that is providing decisive
information? Alternatively, do we mean something in between? Whatever
the answer, it seems that companies do believe that Internet
distribution will become stronger in their markets. The respondents
also stated their general belief that telemarketing and retail
distribution channels will become stronger. This may indicate that
more traditional channels have reached their peak in many markets, and
that companies are now looking at alternative methods of distribution.

Presently, the Internet is much more of an information provider than a
sales channel; yet, as the barriers to Internet purchasing disappear,
the rise of Internet-based purchasing will continue apace as companies
continue to use the Internet as a cheaper way to distribute their
products. To date, companies have indeed been quite successful at
selling simple products like homeowners or automobile insurance over
the Internet. However, the same cannot be said for more complex
products, such as pension or investment products. There is a tendency
to argue that financial services products are different, and to an
extent this is true. Yet, there are also many factors that seem to
contradict this perception. When thinking in terms of financial
services as a whole, the overall successful adoption of new
technologies is clearly evident: Call centers, telephone banking,
Internet banking, and a whole raft of information providers on the
Internet are just a few examples.

While the barriers for more-complex product offerings may take some
time to overcome, it seems likely that we are seeing a gradual "creep"
along the product complexity spectrum. In financial services, the
current trend is to use the Internet as a means of gathering
information on more-- complex products prior to making a decision to
purchase.

Will this always be the case? The answer depends upon consumer
attitudes toward purchasing complex products online. It is fair to say
that consumer behavior in this area is changing rapidly.

IN FIVE YEARS, WILL CONSUMERS PREFER TO BUY OVER THE INTERNET OR
PHONE? There are many studies predicting that both methods of
purchasing and consumer purchasing behavior will change in the future;
indeed, this is already being confirmed. Whether this means that
people are satisfied with the changes is another matter entirely.
Consumer research conducted by Swiss Re looked at the potential
purchasing behavior of adults in the UK. Strikingly, the results
indicate a preference for face-- to-face purchasing either at home, at
the bank, or through a financial advisor. If what we are seeing is a
natural preference for face-to-face purchasing, then it may pose
problems for companies that have evolved a strategy aimed at
impersonal channels such as the phone, Internet, and digital TV
However, if this reflects general perceptions about what is currently
possible and what will be available in the future, then the concern
may be lessened somewhat.

According to a recent report by Datamonitor, Europeans still prefer
branch-based banking to Internet banking. The research involved 6,000
Internet banking users in the UK, Germany, Sweden, France, Spain, and
Italy. The results show:

* Overall usage of online banking is increasing across Europe

* 79 percent of respondents prefer to sort out their finances at a bank branch

* 11 percent prefer to use the telephone to sort out their finances

* 4 percent prefer to use the Internet

These results seem to indicate that consumers are still fairly tied to
traditional methods of contact with companies. In many ways, walking
into the local branch is more convenient than using the phone or the
Internet. Similarly, Internet or phone-based banking cuts into leisure
time. If these issues are pertinent to Internet banking, they are
equally important - if not more so - for the financial services
industry as a whole. In the market of financial services, banks have
been relatively proactive in offering such services to customers. It
is only recently that insurance companies and other organizations are
catching up. There are several considerations that may be affecting
the situation:

* Infrastructure At present, infrastructure might be seen as a barrier
to phone and Internet banking. Telephone banking is very impersonal;
the only time one might speak to a real person is for complex
transactions or when an error has been made. As for the Internet,
there is also a feeling of customer isolation, along with problems
connecting to the Internet service. People also have to pay for the
time they spend on the Internet. Therefore, having to unplug your
phone to use the Internet, a lack of supporting documents (especially
for phone-- based banking), and the requirement of setting these
services up yourself (why aren't you issued the service
automatically?) are all inconveniences that may tend to put people
off.

What might change this? If two phone lines in the home became
standard, or if the phone and the PC could run off one connection
simultaneously, would people change their view? What if the picture
changes altogether when digital TV takes over? Imagine if you could
stop the evening's TV schedule and access the Internet via the TV. You
could then click your bank's icon and carry out some transactions,
including downloading money via your mobile phone. As an afterthought,
you might also order your groceries from your supermarket for home
delivery the next day; in fact, you might just get your interactive
fridge to do it for you automatically, based on what it knows you
need.

Having finished your transactions, you could then return to the
program you were watching - which will obviously restart from where it
left off. Put simply, whereas in the past using such a service would
have been relatively disruptive, in the future the only disruption
will be the time that you spend, as everything else will readjust.
This may sound implausible, yet these services already exist. What
hasn't yet happened is that these technologies are widespread, but
they will be -- and soon.

* Security considerations Security considerations are frequently cited
as a hindrance to the phone and the Internet as sales channels.
Although the actual dangers are not nearly as significant as the hype
would have you believe, in terms of actual problems with security,
there is a case to answer. One of the more common issues is credit
card fraud. For example, card fraud cost the UK 292.6 million in 2000
- an increase of 55 percent on 1999s figure of 188.4 million. Certain
types of credit card fraud are growing rapidly, especially
counterfeiting, which grew by 104 percent last year, and card--
not-present fraud (committed using the telephone, mail order, or
Internet), which increased by 94 percent. Although these statistics
might sound alarming, to put it into perspective one must consider
that card usage and the numbers of cards issued continues to surge in
the United Kingdom. As a result, fraud losses against turnover - at
0.145 percent in 2000 -- are still less than half the 1991 peak level
of 0.33 percent.

Therefore, it may take new security technologies and some favorable
media coverage to make people more at ease with new payment methods.
However, in part, this perception is not founded solely on "security"
but also on brand image. Customers like brands - not just for product
guarantees, but also for reassurance about the company. As Internet
businesses grow, customers will become more accustomed to dealing with
them.

In response to widespread concerns about secure financial
transactions,companies are developing new technologies to counter
fraud. Recently, the UK company Egg announced the development of a new
means of securing credit-card transactions. Each time the card is
used, a unique card number is generated for that transaction and for
the specified amount. The card number cannot be used for any other
transaction, nor for any different amount. Similar developments are
being made all the time. While it is unlikely that online fraud will
be completely erased, it is likely that it will be hindered
considerably. With seemingly secure technologies that are now
appearing, consumers will presumably become more confident in their
transactions.

* Market conditions Despite the fear of the unknown as a possible
hindrance to the uptake of new channels, there are also other, less
obvious barriers to the popularity of new technologies. For example,
there is clearly a trade-off between personal service and convenience:
Traditional channels offer the personal service customers expect but
lack the convenience of newer channels. Traditional channels are the
known entity, whereas newer channels are \seen as uncertain or
impersonal. Traditional channels offer a tailored service; newer
channels offer an overwhelming amount of choices. The situation
becomes increasingly more complex when you introduce price
considerations - something that has not been at the forefront of
financial services.

So, what about price? At the moment, price is driving competition
between companies, and price considerations are also driving the
channels that companies want to see grow in the future. (Internet and
contact centers are cheaper transactional channels than, say, a sales
force.) Yet, companies have generally avoided having the price of
products depend on which channels they are sold through. If this were
to happen, the same product sold in a face-to-face transaction would
cost more than when sold through a contact center or via the Internet.
Retailers may only have one or two channels to worry about, whereas in
financial services the picture is somewhat different. In an extreme
case, a company may have an array of channels.

The current rationale of integrated distribution is that customers
should be able to contact you in any way they like, when they like,
and about whatever they like. In terms of customer relationship
management (CRM), this is a good strategy; however, companies must
also take into account the relative costs of different channels. Thus,
companies try to encourage customers to use cheaper channels. In view
of their lack of control over customer contact (and the difficulty of
achieving this control), companies are perhaps understandably
reluctant in their efforts to start driving customers through channels
by differential pricing. However, companies do not have the monopoly
on the channel decision. What will happen when a customer demands a
lower price for dealing with you direct, as opposed to through your
sales force? This becomes even more significant if customers still
expect to be able to deal with you through any channel they wish.

WILL TALEMARKETING DISTRIBUTION BECOME STRONGER? There is general
agreement among the companies interviewed that telemarketing will
become stronger in specific markets, despite the fact that in the year
2000 there was a dip in the level of agreement. Perhaps companies have
been through the process of setting up a call center and have now
moved on to new projects.

Companies can recognize the positive benefits of using telephone
technology to improve customer service, so it is likely that they will
try to push consumers down this route. The results of a survey by the
American Productivity and Quality Center indicate that from the
companies' point of view, one of the major ways they have been able to
improve customer service has been the decreased time of contact with
the customer! This does sound counterintuitive - although shorter
contact time means companies can deal with more customers and reduce
backlogs. Many of the other improvements relate to ways in which
technology has improved customer service by allowing the customer to
speak to the correct person first.

This is one area in which financial services as an industry maintains
a relatively poor performance. The fact that products are complex
means that customers may not fully understand the products. The
industry requires detailed information that the customer does not
necessarily have available (policy numbers, claim numbers, etc.), and
many companies store data on a product basis rather than on a customer
basis. Agents trained on certain products or administration staff who
can only access certain database functions all conspire to make
customer servicing extremely difficult.

WILL DISTRIBUTION THROUGH NONFINANCIAL RETAIL OUTLETS BECOME STRONGER?
Consistently, survey participants have agreed that distribution
through nonfinancial retail outlets will become stronger in their
markets, and it is evident that there will be growing interest in the
financial services market from new entrants in the future. Thus far,
entrants have tended to be companies with respectable data on
customers and excellent existing contact with customers - namely
retailers. In fact, the various loyalty cards run by many companies
that now serve to increase customer loyalty also give these
organizations more accessible and useful information that many
traditional insurers are unable to receive.

What has not yet happened, but is likely to occur in the near future,
is for other organizations with equally good customer data to make the
leap into the market. These new entrants will likely be drawn from the
media - companies that have an enormous amount of information on their
market. At present, such companies are only testing the waters,
forming joint ventures with financial services companies and providing
them with means by which to contact customers and process
transactions.

DO THE MAJORITY OF COST-EFFECTIVE COMPANIES HAVE HIGHLY DEVELOPED IT
SYSTEMS? The general consensus among survey participants reflects a
strong agreement that cost-effective companies have highly developed
information technology (IT) systems. Yet, it appears that there has
been a certain reassessment of this opinion in recent years, perhaps
because of the enormous amounts of money that companies have spent on
IT.

Certainly, when looking at transaction costs, there are serious cost
reductions to be achieved using channels that demand investment in IT
At the same time, the start-up costs of these channels are enormous.
The way companies allocate these costs may affect how they view the
return on the investment. New companies that have set up from scratch
and invested heavily in IT certainly claim to be much more cost--
effective. There are statistics that prove technology- based
transactions to be much cheaper than traditional transactions. But
while the choice of channel is largely about cost to the company, we
must remember it is also about convenience to the consumer.

Expense ratios are a reasonable measure of how efficiently a company
transacts business: Companies that have invested in IT do have better
expense ratios in comparison with companies that have not invested.
However, it is important to bear in mind that these companies are also
more likely to implement other initiatives to reduce expenses.

IS INVESTMENT IN IT ESSENTIAL TO IMPROVING CUSTOMER SERVICE? Companies
participating in the survey strongly agree that investment in IT is
necessary to improve customer service. The prevailing belief is that
IT helps to improve the resolution of customer problems by getting
customers to the right person the first time and giving that person
all the information he or she needs. As a result, companies feel that
they are providing better customer service, and that internal
communications are improving as well.

However, there are the usual "horror stories" that go along with IT
investment. Companies that have only reached the halfway point with
their IT investments will probably fail to see the benefits of the
money they have spent. Implementing a call center but relying on
paper-based internal workflow processes is a typical example of this;
another example is accepting policy applications online and then
printing them off so someone can enter them onto the database
manually. Properly implemented IT can help companies, but this is only
part of a much bigger picture - can companies really expect to "buy" a
CRM solution?

CUSTOMERS IN THE 21ST CENTURY Before starting to examine the effects
that technology is having on the financial services market, it is
essential to talk about the customer. The reason for this is simple:
Whatever technological innovations are introduced, the customers, not
the producers or companies, determine whether they succeed. Perhaps
one of the most important market trends points to the rise of the
independent, informed consumer.

As consumers are becoming more inclined to make their own decisions,
they are becoming less receptive to some forms of influence (perhaps
traditional authority figures) and more receptive to others (friends
and work colleagues). While consumers might have once respected the
bank manager, now they are perhaps somewhat distrustful of his or her
intentions. Consumers may have at one time accepted unquestioningly
what a salesperson told them; now they are increasingly likely (and
able) to cross-check what they are told with friends, family, and the
Internet.

Consumers have certainly become more empowered, and the hesitation to
confront sellers or providers seems to be a thing of the past. In
part, this is due to consumer backlash resulting from a failure in
various industries (particularly financial services) to provide
adequate customer service. Because industry experts have proven to be
fallible, consumers are less reluctant to complain and more inclined
to believe they are in the right.

Just as consumers have become more independent, they have also become
increasingly knowledgeable about their purchases. In turn, those
selling the products must be more knowledgeable still. The informed
consumer is not simply a result of the Internet's giving ready access
to information; the media in general have become information providers
and not just entertainment providers. For instance, in many countries,
companies try to outdo competitors with ever-more-complex products.
These companies then discover that in order to sell their incredibly
complex "fridge with a built-in oven and dishwasher," they must
educate consumers on how the product works and why it is imperative to
buy.

Many companies' business practices seem to presuppose uninformed
consumers. This general assumption of a lack of consumer knowledge
works well only when consumers lack the time, tools, or inclination to
comparison shop. The financial services industry is full of examples
of long-term relationships driven by inertia, as opposed to value.
Consider bank accounts (we divorce more often than we change banks),
mortgages (held for 20 to 25 y\ears), and pensions (often we pay into
a plan and purchase an annuity from the same company on retirement).
Consumers also seem to spend lots of time researching their purchases
and telling others about what they have bought and why. Perhaps it is
because the range of available choices is so baffling. As product
features become increasingly extensive, consumers feel the need to
either inform themselves or seek advice, information, or reassurance
from others.

It seems that information flows are coming from all quarters, and
information is increasingly within the grasp of the willing consumer.
As the consumer grows more aware, uncompetitive and non-
consumer-friendly behavior will fade as a result.

COMPANY MARKETING ACTIVITIES Financial services products have
traditionally been low in terms of consumer priorities. In recent
years, there has been a considerable increase in advertising from
financial services companies, which has come about in part because of
fierce competition for customers in the market.

The virtual nature of new technologies has enabled companies to
present themselves to consumers in many ways that they might not have
been able to do in the past. Prior to this "virtualization," companies
were judged on physical attributes - number of employees, a large
prestigious head office, and so on. Now, a company can use virtual
technology to present this image, while in reality it may not
necessarily represent the truth. Companies can appear as big as their
rivals - whatever their real size is.

New technology is also forcing companies to implement new ways of
marketing at a faster rate than ever before. In the past, companies
might have been able to afford to wait and see if a technology was
successful before deciding whether to invest. Today, companies need to
decide very quickly -- even anticipate - what technologies will be
introduced and how they will respond to them. Companies can no longer
rely on old strategies to bring them success; advances in technology
have meant that products no longer provide the marketing edge that
they used to. A consequence of this is that companies must possess
technological capabilities similar to their competitors just to stay
in the game.

The much-heralded convergence of the banking and insurance industry is
bringing in new competitors, and this convergence is only part of a
much larger technological fusion. As telecommunications and computing
unite, players from outside the financial services industry are
starting to take an interest in the market. The question to consider
is not who your competitors are today, but rather who they will be
tomorrow.

CONSUMER ACTIVITIES Consumers are becoming increasingly proactive in
their dealings with companies. This is perhaps symptomatic of
societies where information and knowledge is no longer the domain of a
few experts. There are many reasons why information is no longer the
preserve of the few. One of the main reasons is that new information--
sharing technology has become widely available over the past few
decades, particularly via the Internet.

There are countless other reasons for the changes in consumer behavior
- most notably, increasing affluence. Whatever the causes of recent
consumer "proactivity, there is no doubt that new technology is
supporting this capability; the fact that the major changes in society
in recent years tie in nicely with the availability of these
technologies is probably not a coincidence.

As consumers become more aware, and industries traditionally viewed as
separate converge, consumers become more demanding. Consumers now base
their service expectations not on what your competitors offer, but on
what companies in other industries offer. If United Parcel Service can
track a parcel online and give customers access to this information,
why can't customers see the progress of their claims online? Companies
need to look for examples of good practice, not just within the
industry but outside it also.

GATHERING INFORMATION AND SEEKING ADVICE In the past, a consumer might
consider advertising, friends and family, or experts as reliable
sources of information about certain products. Now, the Internet is
considered a major information-- gathering tool for consumers. The
range of Internet accessibility continues to expand, and as the speed
of access also increases, so the trend toward the empowered, informed
consumer will grow.

For instance, consider what has happened with electric motors.
Originally, it was an invention; now it is a component. The electric
motor has become ubiquitous in nature - it is presently a part of
every household electric item. Likewise, we currently use the
Internet, access the Internet, connect to the Internet and so on. Soon
this phraseology will become redundant, and the Internet will become
the component, incorporated into other more useful inventions.

As access to information becomes easier and the consumer gains more
confidence in the buyer-seller interaction process, companies may feel
they are no longer selling but facilitating. Not only companies will
feel this change. As the consumer becomes more knowledgeable, the
intermediary will also move from a sales role to more of a
facilitating role, confirming consumers' decisions rather than selling
them solutions.

Similarly, as customers become more aware of financial services
products, the advice element will become less and less a part of the
sales process, and more a part of the information-gathering process.
In the past, the company promoted its products to the broker and the
customer, and the customer sought to discuss these products with the
company or its representatives, as the products were complex and the
customer had little information to go on. The company held all the
information and knowledge.

Recently, companies are seeking to promote their name or brand, hoping
to entice customers into buying their products. In a market where the
products offered are wide-- ranging, and customer knowledge is
comparatively low, this has been a relatively popular strategy.
Increasingly, customers look into the different products offered,
discuss these with friends and family, and then choose a company from
which to buy the product. If anything, the company or its
representatives serve only to confirm that the choice made was
correct.

Taking this a step further, if the purpose of any interaction with the
company is merely to confirm that a reasonable choice has been made,
why should this be done face-to-face at all? If the products are easy
enough for consumers to understand, why offer advice? An interesting
development in recent years has been the attempt to shift face-to-face
interaction onto the Internet. Doubtless, face-to-face is possible
over the Internet, but is it practical today? First, the PC must be
able to provide real-time pictures and real-time sound through video
and audio streaming - which indeed is already available. Some
companies have implemented software that allows for virtual
face-to-face discussion over the Internet. Other companies have
enabled real-time conversations with their customers. Such companies
are certainly introducing new technology, but are they meeting
customers' needs?

The level of technology that companies are capable of implementing is
usually far more advanced than the level of technology their customers
are using. It is certainly nice to say that you can use your Web cam
(a PC camera) to see the person you are talking to while you are
online, but how many consumers are actually able to do this? Equally,
companies may have the benefit of high-speed Internet connections but
many consumers do not. Web sites will often take much longer to
download at a customer's home than they do in the company office.
System testing needs to consider this, as it seems a futile effort to
build a complex site if it does not download quickly for your
customers.

BRINGING IT ALL TOGETHER The objective of any company is ultimately to
make a sale, and the easier this is for purchasers, the more likely it
is that they will buy from one company rather than another. So, what
makes a purchase easy for the consumer?

First, given that consumers are increasingly demanding information, it
would make sense to offer a wealth of information. However, the
information you provide has to meet the demands of a varied audience.
Some will want a concise summary of your product; others might expect
in-depth information about the type of product and the overall product
aims. In essence, information will need to be available appropriate to
the level or type of information required.

Another thing that consumers want is convenience. To be convenient,
you need to be open for business when they want to use you, and you
need to be accessible to them. Thus, in order to attract consumers, a
company must offer consumers several choices, not just what the
company wants. The financial services industry is attempting to adjust
working practices to consumer demands. Certain companies are trying to
promote themselves as lifestyle portals - notably, many of these
companies have links with retailers or new market entrants. There has
been much discussion regarding 24-hour banking and the ability to
access your finances at the touch of a button. Many companies are
trying to sell simple products in the hope of cross selling more
valuable products later, while other companies are starting to offer
cost reductions if customers hold more than one product with them. The
latest developments point toward account aggregators and their ability
to hold all financial dealings on one site.

AGGREGATE TO ACCUMULATE Account aggregation has been practiced for
several years, but is only just starting to become a reality in most
markets. The idea of account aggregation is simple: Rather than going
to various Web sites to deal with your financial or household affairs,
why not put them all on one site?

Customers may have a bank ac\count with one provider, a loan with
another provider, a credit card with yet another, and a pension
somewhere else entirely. Each of these products may have online access
and password security. To look at the balance of their current
accounts or to pay their credit card bills, customers are required to
visit each site separately. However, when signing up with an account
aggregator, consumers can give all their passwords to the aggregator,
allowing them access to all their information at once from an
aggregated account. Things such as a change of address can be done one
time for all aggregated accounts, and it becomes more logical to visit
the aggregated site rather than the individual providers' sites.

There are two types of aggregation: screen-scraping and permissive
aggregation. Screen scraping is currently how the majority of
aggregation is carried out, but is extremely cumbersome in terms of
the technology and programming required. If a Web site format is
changed by the third-- party financial institution, the aggregator
must reprogram its scraping so that the information can still be
collected. Thus, institutions can frustrate aggregators by regularly
changing their Web sites. Screen-scraping is expected to disappear
when permissive aggregation becomes standard. Permissive aggregation
works by the third party developing data feeds of account information
for aggregators to use. This is a much more cooperative model and can
be compared with accessing money through ATMs, where the ATM may not
necessarily be provided by your bank, but perhaps a competitor.

As the interest in account aggregation is high, there is an underlying
threat that a company will lose its customers to an aggregator - which
is perhaps why so many organizations are moving to offer their own
aggregation services. By allowing permissive aggregation with
competitors, companies can reap many benefits - including being able
to have an overall view of a client's financial activity. A Web site
offering aggregation services is also more likely to be used by
customers on a regular basis - the "stickiness" that Web sites always
look for.

CONSUMER PURCHASING The purchasing process has changed subtly over the
years, but the shift has been consistently directed toward the
consumer having more knowledge and control. With the current emphasis
on the seller facilitating rather than controlling the purchase, what
consumers are looking for is confirmation that their decision is
correct. This is presently one area where face-to-face advice seems to
have an edge over less personal means of purchasing, such as the
Internet or call centers. During a face-- to-face sale, any questions
or problems can usually be dealt with immediately; when someone calls
into a contact center or is viewing information online, the process is
less straightforward.

Far from shortening the sales process, the use of the Internet (and to
a lesser extent, contact centers) has actually increased the length of
time necessary to make a purchase. Traditionally, someone might fill
out a form while an advisor is with him or her. The advisor would post
the form while someone else inputs the data and sends out documents.
Thus, in the past, delays came after the sale, with policy issue and
administration. Today, delays are more likely to occur prior to the
purchase. Individuals take the time to contemplate potential decisions
because they are not in a face-- to- face situation, and consequently
an advisor cannot answer their questions.

Perhaps because of the stop-start nature of purchasing online or over
the phone, the picture emerging is of a sales process that is truly
multichannel. Information gathering and queries are completed using
the phone or online, and the sale is made face-to-face. Companies are
beginning to acknowledge the idea that sales channels should be
integrated and supportive of one another, not treated as separate
purchasing routes. The logical end would be to try to ensure that
customers can access your company in any way that they like. The
battle is to encourage customers to access them in the way that is
financially cheapest for the company.

INCENTIVES FOR LOYALTY There used to be a time when people believed
that once they secured a job, it was theirs for life. In many
countries, this is no longer the case; employees frequently change
jobs, and will quite often change industries as well Loyalty to one
particular employer and the employer's loyalty to its employees are
outdated concepts.

Just as the employee-employer relationship has changed, so has the
relationship between the provider and the customer. Customer loyalty
is no longer something that companies can take for granted. There is
another side to the equation - it's called customer inertia. Do
companies retain good customer loyalty, or do they simply have
customers with no incentive to leave?

As companies strive harder than ever to attract customers, their
strategies for taking customers from other companies improve. What is
developing is an increased ease on the ability of the customer to
switch companies. For example, with many banks it is now as simple as
stating an agreement to the switch between your new and existing
providers, and the new provider transfers all your accounts, details
of any regular bill payments, and so on. Could it be that companies
would do well to concentrate as much attention on customer retention
as they do on customer acquisition? If this is the case, a small
effort to retain customers who might be tempted to leave may be a much
better investment than trying to attract new customers.

Is it not possible then, that customer inertia will be overcome by
companies offering such hassle-free services? Well, in part the answer
is probably yes. However, one must keep in mind that as companies
develop these capabilities, they are doing so in the context of a
changing industry. The product offerings are virtually identical,
pricing is almost identical, and the only distinguishing factors are
brand and service. If the market reaches a stage where all companies
are offering essentially the same product at the same price,
individuals will only switch if they have a valid reason to do so.
Therefore, customer inertia can only be overcome by incentives.

LOCATION, LOCATION, LOCATION The idea that a successful company is
equated with having prestigious, international offices has been
completely shattered. Location is now less important than ever. This
is not just as a result of the Internet, but also of the growing use
of call centers and virtualization of companies.

Increasingly, companies are putting offices where the costs and
benefits are optimized, and they are able to have various parts of the
organization in different locations. For instance, a call center would
be optimally placed where there is a large source of flexible cheap
labor, whereas a specialist department - perhaps actuarial - would
need to locate in a city, in order to find a sufficient pool of
actuarial staff. Thus, companies are now literally splitting into
their component parts - not just nationwide, but globally as well.

Customers are also increasingly dictating companies' working hours.
With the introduction of the Internet and contact centers, companies
are discovering the advantages to remaining open 24 hours a day. As
time becomes irrelevant to these channels, it is likely to affect
other channels also. So, why not offer investment products that are
actively managed during these hours? How would the performance
implications for these products be affected? A sign that companies are
already moving in this direction is within the banking industry, where
many companies now offer "account sweeping." This ensures that your
savings will earn the best rate of interest by "sweeping" money into
higher interest rate accounts when you don't need it, and allowing you
access to it when you do.

If the global marketplace is open 24 hours a day, shouldn't everyone
be? As globalization of financial services increases and markets stay
open all hours, the pressure is on others in the industry to emulate
the practice. Companies can now be open virtually anywhere - and it is
likely that they will have to be. As globalization of the industry
increases, larger companies will move to become players in every
market, while smaller niche players will have to try to survive
through better knowledge of their niche, and through strategic
alliances.

THE COMPANY OF THE FUTURE As technology enables more intense
competition, companies may need to change how they do business.
Currently, the model of an insurer is normally perceived as
manufacturer, marketer, and distributor. Compare this model with
examples in other industries: Do supermarkets managers act as farmers?
Do car manufacturers sell cars? Do mining companies make jewelry? In
most industries, the manufacturer-marketer-distributor chain has
broken: Companies are concentrating on specific areas of industrial
production that highlight their best skills.

There are clear signs that the chain is being broken in the financial
services industry also. Products are being manufactured for
"white-labeling," whereby other companies will sell them under their
own brand Some companies are acting as both marketer and distributor
(Tesco), while others are setting up separate distribution mechanisms
for each of their target markets, allowing separate channels to
concentrate on marketing and distribution (Swiss Life). This is
perhaps due to the fact that companies now accept the fact that they
cannot offer the best product for every need: If they don't make "best
of breed" products available, they will lose customers. Thus, the only
way to provide more competitive products is to source them from other
companies.

If this is to be the new model of the future, the other likely
occurrence is that financial services will incorporate an increasingly
wide range of organizations that tra\ditionally have not been involved
in the market. In this sense, banking will become an integral part of
the broader picture, as will supermarket chains, television companies,
and perhaps even Internet service providers - all because of their
excellent knowledge of customers. These new partners (or competitors,
depending on your view) will bring innovative operations into the
financial services market.

CONCLUSIONS Technology affects the way that we live and work and is an
integral part of everything we do. If we fail to grasp the new
opportunities that technology provides us, we might as well withdraw
from the game. It is evident that companies recognize the importance
of technology and the benefits it can bring. However, the industry as
a whole may be a long way behind other industries.

Consumers do not perceive the differences between industries in the
same way as the providers within a particular industry. Although the
financial services industry plays a significant role in an
increasingly consumer-oriented culture, the service itself is the
overriding goal - and the industry becomes irrelevant. The growth of
account aggregation services and of organizations (such as utility
companies) that are stretching their brands into the financial
services market lends support to this point.

Consumers will continue to expect in many other industries what they
see as good practice or good service in another. Thus, companies need
to be aware of threats and opportunities both from within and from
outside the financial services industry. The profile of the
traditional consumer, including his or her purchasing process, is
changing also, as is the way companies look at the nature of their
relationships with their customers. Companies may find their influence
on the decision-making process wanes as consumers have increased
access to information and advice from other sources.

New financial products are taking advantage of advances in software
and computing power. With the Internet, the gulf between the big
corporation and the small local company is diminished. Brand is likely
to become a more distinguishing factor for many consumers as they see
a proliferation of providers all offering similar services. Companies
can now be virtual organizations, open all hours and accessible from
any location. Business need not be conducted face-to-face or even in
the office; the way people manage their lives has meant companies need
to be available anytime and anywhere. Ultimately, companies will have
to decide whether these and other changes are going to affect the way
in which they operate - with the end result offering excellent service
to the customer.

Europeans still prefer branch-based banking to Internet banking

The most important market trends point to the rise of the independent,
informed consumer.

By allowing permissive aggregation with competitors, companies can
reap many benefits.

The use of the Internet has actually increased the length of time
necessary to make a purchase.

By Andrew Pirnie

Business Analyst. LIMRA Europe

Copyright LIMRA International Winter 2003