The Financial Services Blog

Yesterday the American Banker reported that the mini boom in mortgage refinancing that began in December and continued in January hit a wall in February as long term interest rates started to rise again.  Fannie Mae and Freddie Mac had also raised loan to value and credit score requirements and these factors reduced the number of potential refi customers.

Ironically it has been hard for some mortgage companies to handle the uptick in refi applications because of cuts they had made as a reaction to the housing market slowdown.  These capacity problems could be eased by Xerox Mortgage Services which speeds up mortgage processing by enabling lenders and others to share and work with mortgage documents electronically.

As the Fed. continues to reduce interest rates over the coming months I expect there will be another increase in refis provided that long term rates also come down.  These lower rates may also start to free up the logjam in unsold houses and kick-start new loan applications although I suspect that will take more time.

News emerged yesterday of a $7.2Billion loss at Societe Generale, caused by a single derivatives trader.  There can be no greater reminder that security in financial services is vital.  Sadly most security breaches are not caused by outsiders trying to break in but by a company’s own employees.  They may be disgruntled or paid by an unscrupulous competitor but this huge loss shows that internal security is a company’s first line of defense.

In the example at Societe Generale it has been reported that the trader involved had access to passwords as a result of a previous role in the back office.  Shouldn’t internal procedures have forced those passwords to be updated when a staff member changed jobs?  In financial services companies it is essential to study every aspect of IT systems security and ensure that any gaps are closed.  It is important to look at potential breaches from both external and internal sources.  This is a subject that Xerox has thought about a lot.  Take a look and give us your feedback.

Record high oil prices, falling stock markets around the world and fears of a recession in the US and a slowdown in Europe do not paint a pretty picture as we start the new year.

Financial services companies have suffered from the credit market problems and many balance sheets as well as share prices have been badly dented.  But I am a glass half-full person and I believe that 2008 is going to be a year of recovery and returning growth for the financial services industry.

The recipe for success is well known, focus on the customer, keep costs under control and invest for growth in areas of strength and financial services companies will rebound.

One sure way to control costs is outsourcing.  I expect the financial services industry to consider outsourcing functions and even complete business processes that in the past they have viewed as something that could only be managed in-house.  Outsourcing not only has the benefit of reducing costs but it can also change a fixed cost into a variable cost.  For example if a mortgage company outsourced part or all of the mortgage origination process they would just pay the outsourcer for each loan processed so if loan originations fall, the mortgage company’s costs would also fall.

By the end of 2008 I predict that financial services companies will be enjoying an upswing in revenue and profits - a happy new year I’m sure you’d agree.

The most important time to build loyalty and cross sell new products and services to a customer is in the first 90 days of their relationship with the bank.  In fact nearly three quarters of all cross selling happens in those crucial first three months.

The number of products a customer has correlates with the loyalty of that customer and the most important factor to increase cross selling is to sell the products that best fit the customer’s needs.  It is also important to introduce a customer on-boarding process that welcomes new customers and contacts them two or three times during the first 90 days.  The first contact could be a phone call to make sure that everything is going smoothly, for example did the new checks arrive, and is there anything else that the customer needs.  Follow up communications could be by mail, email or again by phone, in fact through whatever channel the customer prefers.  If those communications are personalized and relevant the chances of cross selling go up and the loyalty of that new customer will also increase.

The Banker has just published an article in this month’s supplement called “Personalise or Perish“.  It’s based on research that was sponsored by Xerox and published in a report called “The Future of Communications in Retail Banking“.

The essence of the report is that bank customers want their banks to market to them in a much more personal way, sending offers and promotions that are relevant and timely.  The banks understand this desire (about 88% wanted to deliver more personalised messages) but are constrained by technology and a lack of good customer data.

The conclusion of the article is that few banks have been able to achieve the goal of personalising customer communications but I have worked with a number of insurance companies and investment firms who are making good progress and the way they began was to start small and grow.  For example one insurance company chose a new product launch and promoted the new product using personalised communications.  They now have over 100 personalised marketing pieces available in multiple languages.  An investment firm wanted to use personalised communication to attract high net worth clients and they started using the technique to invite clients to just one type of promotional event.  They now use it with dozens of different communications and are incorporating smart document technologies to automatically respond to their clients.  Please share your experience in this area by giving us your comments.

Improving customer loyalty is a priority for all financial services companies and there are many factors that affect loyalty such as the right product at the right price, quality of service and convenience.  But I’d like to talk about an important factor that may be very difficult to address - how well does the financial services provider know what the customer wants and then how do they deliver that to the customer. 

If the financial services provider knows what the customer wants then they can market and sell to them more effectively and provide them with a better customer experience.  So of course many financial services companies do tremendous amounts of analysis of their customer base to understand what makes a customer loyal and what makes a customer profitable.  This analysis could provide information about what combination of products makes a customer profitable and how customer loyalty increases with the number of products they have.  The analysis can also help to identify the product that a client is most likely to buy based on the products they already have.

But if you have done this analysis, how do you use it to drive up loyalty and profitability of your customers?  You develop marketing and selling campaigns that show your customers that you understand what they want and shows how your products and services satisfy that demand. But who do you target?  How do you construct your marketing to be most effective and to break through the clutter?  How do you segment your customer base?

I’ll be addressing some of these questions over the next couple of weeks but I’d love to hear your thoughts, please make a suggestion or a comment.

Is the worst of the credit crunch behind us?  The LIBOR or London Interbank Offered Rate has fallen from recent highs as confidence seems to be slowly returning to the credit markets.  LIBOR is the interest rate that banks charge each other for loans and it rose sharply as they became nervous about the quality of other banks balance sheets.  This interest rate is a key benchmark for the wholesale market and it can ultimately impact rates charged for mortgages and other consumer loans.

The Federal Reserve meets today to decide if US interest rates will come down from 5.25% where they have stood for more than a year and if they decide on a cut, as the market expects, then credit concerns may ease further.  However it will be many months and perhaps many more interest rate cuts before the US housing market picks up momentum again.

In the meantime mortgage companies are increasingly focusing on cutting costs and streamlining their business processes such as loan origination, as they manage the downturn and prepare for the next housing boom!