Marketing concepts

Marketing a product can be thought of as the process undertaken by a firm to identify, anticipate, and satisfy customer demand profitably. This makes it distinct from the sales process itself, but one can see how the two interact and also have some elements of cross‐over in the middle. (Selling a current account or even a credit card may involve less pure marketing, but closing a syndicated loan transaction may well have required an involved marketing process before the lead manager ever mentioned a loan to the customer…).

The distinction from the sales process can be seen from the following considerations:

• Marketing is a management process. It should be something that senior managers undertake in the course of running the operations of the business on a day‐to‐day basis;
• The marketing process should identify or anticipate customer needs (or create them – see Apple above). This means knowing who one's customers are and understanding their requirements as it affects them personally; it also requires an intelligent proactive approach geared towards “knowing one's customers”, both current and future;
• Profitability concerns are a key part of the marketing process: the above must be undertaken in a way that fits in to ensuring business profitability.

In essence, the marketing process should be a customer‐focused one, and it is more concerned with knowing the customer base and everything about all one's customers than about actually selling to them. In a commoditised industry such as financial services, one could say it is as important as the balance sheet risk management side of banking, and equally as important as the shareholder return on capital angle.

Marketing mix

An age‐old topic on MBA courses is the concept of the “marketing mix”, which refers to the combination of activities used by a firm to achieve its objectives by marketing its products effectively to a target group of customers. It has traditionally been referred to as “the 4 Ps”, namely:

• Product;
• Price;
• Promotion;
• Place.

Subsequent to this articulation, which dates from the 1970s, three more Ps were added, these being People, Processes, and Physical evidence.

The marketing mix is the basic set of tools that marketers possess to carry out tactical level marketing. All the elements in the marketing mix need to be brought together and worked together effectively for the marketing campaign to succeed.

The three additional Ps are particularly relevant to the financial services industry because of the nature of the product – it is intangible. We have noted already that banking products are commoditised, and genuine differentiation is difficult, if not impossible – one bank's current account or credit card will if not necessarily “look” at least certainly “act” in an identical manner. They will do more or less the same thing. So banks need to address the additional 3 Ps as part of an effort to differentiate themselves.

The “People” part is fairly self‐evident, and not unique to the banking industry. It refers to the firm's staff, particularly those that are customer facing or customer serving in any way. It also covers those who may not necessarily deal directly with customers but influence the customer service experience, such as middle and senior management.

“Process” refers to procedures, mechanisms, and activities that lead to an exchange of value; in other words, the experience of a product or service that allows a customer to feel that they have received value.

“Physical evidence” is connected with the material part of a service. As there are no actual physical characteristics of a service, in the banking industry this strand is concerned with related items, including (but not limited to) marketing collateral (brochures, leaflets, and the like), internet content, mobile app efficiency and reliability, customer communications (such as bank account statements), branch layout and design, uniforms, business cards, charity sponsorship, and so on.

Constraints in marketing banking services

The characteristics of banking products contribute to a general impression that marketing them is somewhat of a thankless task. This should not surprise anyone with even a limited experience of commerce.

In the first instance, financial services are, frankly, boring. One could not reasonably describe the product class as “exciting”. In marketing terms this compares unfavourably with physical products such as automobiles or luxury watches, or with services such as cinema or pop music. The challenge of the bank marketer is to package the product as a means to an end, rather than an end in itself; for example, one isn't selling a 25‐year package of amortising cash flows, but rather the ability to live in one's own home.

Secondly, there is a low level of accessibility. While the mathematics behind most financial products is little more than glorified arithmetic (and even the exotic structured stuff doesn't really employ genuinely complex mathematics), in terms of understanding by the general populace, banking services are not straightforward to follow. This is partly because of the way they are explained, as opposed to any real complexity, but attempts to “dumb down” finance also don't always work because they don't necessarily make the products easy to follow. The inaccessibility of financial products also makes them difficult to compare across different providers, which is another reason why banks often try to differentiate themselves using slick and/or entertaining advertising, or getting a well‐known personality such as a sports star or movie actor to front their advertising campaigns.

A third factor that makes marketing of banking services problematic is that it can be difficult to gauge the quality of the product, at least at the start. As an extreme example, consider a long‐term savings or investment plan. One would only know if it had realised the customer's savings objective (be it retirement, or education fees, and so on) towards the end of the product's life, at which point it's too late to do anything about it or take mitigating action. As a result, customers tend to ascertain product quality based not on the product itself but on the reputation of the bank, what its perceived standing in the business media or community is, and on the recommendation of friends or family. This is a primary reason why the reputation of a bank is a precious commodity that needs to be protected carefully over the long term.

Another factor is what is known as “market clustering”. Even within homogeneous groups, customer requirements vary greatly from one customer to another. Banks can only very rarely tailor their services to meet the needs of individual customers (even if they wanted to – the technology constraint is enormous), but one or more products a bank offers may be attractive to a specific group of customers and not able to penetrate the mass market. To get around this, banks need to recognise “market segmentation” and use the information they possess on all their customers to target them and help sell to them, in a similar manner to how the tech giants and social media platforms do.

A final factor is technology and so‐called “FinTech”. On the customer‐facing side, technology has made possible digital and mobile app banking. This makes the branch almost redundant for most (although not all) customer transactions, and the digital interface makes it harder for the bank to “know” its customers in a human sense. From a marketing standpoint, it makes it difficult again to differentiate, because most banks' digital customer offerings are fairly identical.

Advertising banking services

In industries where the product on offer is essentially commoditised, the principal way that competitors seek to differentiate themselves is by advertising. As well as the basic message, which often may not be about the product at all but concentrate instead on some human factor, lifestyle choice, or sense of well‐being, the choice of advertising medium is also important. An advert placed in a tabloid newspaper may not generate as much positive “vibe” as one placed in a glossy magazine. Ultimately, the objective with advertising the bank is to build brand awareness and reputation. This is why banks often pay large sums to hire celebrities or sports stars to represent their brand.¹

The main media that banks use to advertise their services are:

• Television: Generally the most expensive but potentially the largest audience;
• Cinema: Not commonly used but can be effective because the audience is forced to watch;
• Billboards: These are simple but sometimes effective for building brand awareness on the high street, metro, and so on. Among the author's favourites was one for a small regional bank in the EU, which stated simply “Buy a house you can call your own, with a bank you can call your own”;
• Press: Often the most commonly used medium due to lower prices, and placing in the business section generally targets an interested audience;
• Radio: Far less commonly used as bank products do not transfer as effectively to it;
• Internet and social media: New banks and smaller banks tend to concentrate on this medium, especially Facebook, Twitter, and LinkedIn, which is often a cheap but effective means to build brand awareness and a positive reputation.

Advertising in itself may not generate any increase in business. Of course, it is important to ensure the adverts are targeted, which means knowing exactly which types of customer one is wishing to attract and pitching to them using the medium they respond to. It is no coincidence that in the UK the digital‐only branchless banks used social media extensively in the period leading up to their launch of business operations.

Understanding good customer service

In general, any and all customers should expect the following from a bank:

1. The provision of products and services that meet the customer's needs;
2. The provision of the service that customers want, when they want it, and without operational errors;
3. The provision of satisfactory and consistent “aftercare”, which is consistent and ongoing backup and response to customer queries.

Incidentally, it is often on (3) that many banks fall down, particularly larger banks with a large number of customers and a mass‐market business model.

We noted earlier that banking products are essentially commoditised in nature. This being the case, the primary means to differentiate oneself from peer banks is through a reputation for good service and helpful, welcoming staff. While the product base of a bank is determined at the high or strategy level, even the most junior staff in a branch or call centre are in a position to influence the level of service. It is these employees who deal with customers on a daily basis, and so the way they greet customers, how efficiently and error‐free they process transactions and requests, and their face‐to‐face and telephone manner will influence heavily the public perception of the bank as a good place to take their financial services requirements. These are all ingredients of good customer service.

Service provision is an important part of banking and being a banker, among others for the following reasons:

• Good customer service leads to customer satisfaction, which results in retained customers;
• Generally, it is quicker to deal with a satisfied customer than an unhappy one or one making a complaint, so business volumes should increase as they are processed more efficiently;
• Satisfied customers are a good source of referral business.

Factors that help drive a good customer service experience include:

• Pleasant, helpful, and efficient staff;
• Staff who are interested in customers' needs but also possess the detailed product and process knowledge to be able to answer questions and supply solutions accessibly;
• Receiving the products or service that meet the customer's needs and do not experience operational or process errors during their lifetime;
• Modern, attractive, user‐friendly branches that may also include free Wi‐Fi, a mini business lounge, and so on.

The factors that may contribute to a negative customer service experience include:

• Staff responding to customer queries with a bureaucratic and/or patronising answer;
• Rude, unhelpful, bored staff;
• Unkempt branches;
• Waiting in a long queue (be it in a branch, on a call centre phone, or on the internet);
• Call centre staff who don't know anything about you;
• Staff trying to sell products that weren't asked for in order to meet sales targets;
• Mistakes in processing requests.

The above are just a small sample of the positive or negative factors that determine whether a customer has a good or bad experience. Readers would most likely be able to add items to both lists from their personal experience. From this list it is easy to see how important the approach and motivation of customer facing staff are in ensuring good service.

All of the issues we list can be addressed by increasing staff, resources, training, and bandwidth. So while addressing customer service costs money, it is unarguably money well spent in the long run. Ultimately, it is all about treating the customer with courtesy or, as the author prefers, treating people the way you would like to be treated by people.²

Follow‐up and aftercare

The automobile industry has a saying that the salesperson may be behind an initial sale, but it is the service department that ensures repeat business. This is applicable to banking as well. The initial loan approval, credit card issue, deposit facility, and so on are less likely to be followed by a long‐term relationship if there is no follow‐up service, or if there are errors in processing, issuing of statements, and so on.

In the first instance, the front office staff should follow up with a general call or email; for example, if a personal finance loan was taken out to purchase a car, the salesperson might enquire if this had been successful, what type of car it was, and if the customer was happy with it. Making this sort of follow‐up means that:

• The banker is demonstrating good customer service and a personal touch;
• If there has been a problem, the banker has demonstrated a proactive interest in the customer and moreover is in a position to fix it now;
• There is a higher chance of repeat business with this customer because of the positive impression made, and the customer perceives the banker has having an interest in the customer personally.

Regular, but not intrusive, follow‐up calls and efficiency in account settlement and operational processes are the key to good customer service.

Customer complaints

A complaint is any form of grievance that the customer has. In general, if a customer makes a complaint it reflects the fact that one or more aspects of the service or the bank itself has not met with the customer's expectations.

Customers make complaints for all manner of perceived problems or errors, or even slights. It may be a lack of satisfaction with the product, the level of service, the person the customer dealt with or the bank itself. The bank should have a straightforward and easy‐to‐follow process for dealing with complaints, but the important thing to remember is that a complaint is an opportunity to put things right, and so end in a positive outcome. For this reason, complaints should be viewed in a favourable light. Most unhappy customers don't complain, they simply take their business elsewhere (and this is easy to do with a commoditised product like banking services). So turning an unhappy customer into a happy one is actually another way to work towards retaining business.

Customer satisfaction

Any commercial enterprise should always concern itself with ensuring that its customers are “satisfied”. Good customer service is essential to long‐term viability of a business, and working towards ensuring customer loyalty and retention is as important as winning new customers. Across different industries, including banking, a number of businesses spend a lot of time and effort undertaking slick and glossy marketing to attract new customers, but then have a poor aftercare service such that the customer is left feeling like a number and not a name. This is a trap into which a bank must not fall.

Ascertaining customer satisfaction levels is not straightforward to determine. Satisfaction surveys are a common approach, and certainly worthwhile undertaking, but are sometimes viewed with annoyance by customers and completion levels can be variable. It is important to act on the results of satisfaction surveys, otherwise over time the completion rate for them will fall to a negligible level. Responding directly to a customer who has made comments or recommendations in a survey is also important (provided the customer has ticked the box indicating they are happy to be contacted. But if they have ticked this box, then the bank should contact them.)

Survey design is important as well: one should follow these general guidelines:

• Ensure the survey is quick and easy to complete;
• Ensure it asks the right questions;
• Ensure that the request for feedback is designed to generate responses that are capable of being acted upon.

Finally, a satisfaction survey conducted in the communications media of the customer's choice is also an opportunity to highlight any new services or initiatives.

The two main indicators of customer satisfaction are retention levels and number of complaints. It is true that in the financial services industry, customer apathy is high and often people do not switch provider, not necessarily because they are satisfied with the bank, but because moving is perceived as too much aggravation. That said, customers staying with the bank should still be viewed as something to pursue proactively.

Complaint levels should be monitored regularly and compared to the industry and peer group statistics. A rising number of complaints is a worrying trend; however, banking is a mass volume business and as business grows the absolute number of complaints may increase while its share of the business is steady (or declining). On the other hand, many dissatisfied customers may not complain at all, they may simply leave. So both this and the satisfaction statistics are important metrics for a bank to monitor, investigate, and follow up.

Factors influencing pricing

Setting rates for balance sheet products in banking is on the one hand “complicated” because of the myriad internal and external factors one must take into account, but on the other hand relatively straightforward because for many instruments the market, and one's peer group, have already set the price. As with other industries featuring commoditised products, often a low(er) cost base and efficiency in operations (settlements, customer aftercare, statements, and the like) are what makes a bank long‐term viable.

The factors that drive rates and fees in banking include:

• Market rates: The central bank base rate, the sovereign bond yield curve, and (where there is one) the interest‐rate swap curve will all be major influences on bank product pricing. Then again, a large bank with excess customer deposits may be able to price beneath these levels;
• Target rate of return: As dictated by orthodox corporate finance theory, each bank will have an estimated “cost of capital” and this cost must be covered after profit has been netted against all operating costs and taxes. So the set loan rate must in theory at least ensure that the return is higher than the cost of capital;³
• Covering costs: On the loan side, products may have a fee element as well as a set interest rate. How do these interplay when calculating overall return and ensuring costs are covered and target return is met? Loans that are repaid early may incur a cost for the bank provider, but the fee payable by the customer for doing so may not cover this cost. It is not straightforward to estimate the cost to the bank of this loan product optionality;
• Quality perception: High net worth or “premium” customers often are willing to pay more for what is to a large extent the same product, but with an element of personal service. The cost of this service drives a perception viewpoint, but needs to be sufficient to cover the bank's costs for service provision;
• Profit generator: The simple approach would be to say, “our target rate of return is 12%, so all loans must be charged at an interest rate that delivers this return net of costs and taxes”. Or ideally one would be able to say, “the cost of providing this mortgage is X so we must charge to return X + Y”, but the problem is that banking is both sides of the balance sheet, and loans and deposits are closely intertwined. It is difficult to determine the exact cost of providing one specific product. And the cost is not just the funding cost (see next), there are of course factors such as staff and branch networks to take into account;
• Funding cost: Even small relatively simple business model banks will have more than one deposit cost, and the larger the bank, the less straightforward it is to determine what the “funding cost” actually is. Of course, it must be covered when setting loan rates. And the deposit rate: what should that be? The peer group sets this to a large extent, but of course one's requirement for deposits and market presence will also influence this;
• Long‐dated tenor: As any FX trader will tell you, it is a “mug's game” attempting to forecast rates and market conditions out to even 12 months, so how do you set the rate for a 25‐year loan product such as a mortgage or a 5‐year fixed term deposit? The market will be a very different place after 5 years let alone 25 years, so this issue makes fixed‐rate pricing problematic. It is also why banks hedge their fixed‐rate risk as far as possible. Setting interest rates as “floating” addresses this problem to an extent, and in some countries there are no fixed‐rate products available, but fixed‐rate is exactly what the customer desires, so banks generally provide them.

One can see that setting loan and deposit rates is a function of a number of factors, many of which involve uncertainty, which is why the subject can be considered “complicated”. But as we noted at the start of this section, observing the market rates around you and knowing one's own cost base generally makes it fairly straightforward to set loan and deposit rates. Being an outlier on prices for either or both of these may cause reputational or customer perception issues.

Price setting process

As we alluded to above, price setting ideally will follow an established process. In the first instance, one will have a pricing objective; this is typically “obtain a rate of return after costs and taxes of X%”. On the other hand, a specific business line may be seeking to build market share and price below this required rate. Such a “loss leader” product would be subsidised by other business lines, but is not uncommon with certain products such as syndicated loans or small business deposits.