Cherry pickers

Abbey National’s decision to close up to half its 3,500 customer service counters was not meant to discourage unprofitable customers, the bank claims (MW June 17).

“Rather we want to turn them into profitable customers through cheaper distribution channels,” a spokesman says. The bank is encouraging people to use telephone banking and the Internet.

However, branch customers are often poorer than those who use direct banking facilities and the Internet. So for Abbey National, the counter closures may send out a signal to its less well-off customers that they are not particularly welcome at the bank.

A new wave of telephone and Internet banks, unencumbered by an expensive retail branch network, are entering the market and luring away many of the traditional banks’ most profitable customers with improved terms and conditions.

The entrants to this sector include Sainsbury’s Bank, Tesco Personal Finance and Goldfish, the Centrica-owned credit card and information guide operation.

Not only that, Prudential’s direct banking arm, Egg, recently announced new customers could only join over the Internet – thus targeting users who are generally more upmarket.

This strategy of cherry-picking the richest customers who generate the biggest profits, threatens to turn banking on its head.

The cherry-pickers risk upsetting the financial services apple cart, because the 20 per cent or so of the customer base they are targeting, generate about 80 per cent of the banks’ wealth and subsidise the rest of the customers.

Philip Evans, author of new book Blown to Bits and senior vice-president of Boston Consulting, says: “It would not be an exaggeration to say that [cherry-picking] will revolutionise the business world. It is only just starting to happen, but I believe it will have as big an impact on business as the car did on transportation.”

Banks make a loss on between 30 and 70 per cent of their customers, and these are subsidised by the wealthiest 20 per cent. If the top 20 per cent take their business elsewhere, the banks will have lost a key method of building their profits.

Evans says the effects of cherry-picking have yet to be felt beyond the financial services sector but he expects many major businesses to go bust or dramatically slim down as a result. When that happens, the range of sectors to which unprofitable customers will not be welcome could become significant, even stretching to basic utilities such as gas and electricity.

There is nothing new in companies targeting profitable customers. But the rise of the Internet, combined with increasingly sophisticated data-mining techniques and market liberalisation, has significantly increased the opportunity to cream off the richest.

Dr John Ginarlis, consultant at CSC Financial Services group and a member of the Government Technology Foresight panel, says: “Cherry-picking has become a really big issue in the past six months and is led by e-commerce, which enables customers to shop around for the best deal. As the Internet is still largely confined to the ABC1s, businesses operating over the Net have a guaranteed upmarket profile they can target.”

The traditional providers, in the financial services sector or otherwise, are destined to lose valuable market share to cherry-pickers, who are nonetheless obliged to cut costs and invest more in their most prized customers if they are to retain them, says Oliver Janice, senior consultant for database marketing at WWAV Rapp Collins.

The recent deregulation of gas and electricity has led traditional suppliers to accuse the new entrants of cherry-picking and resulted in them offering discounts of about 15 per cent to those desirable customers willing to pay bills by direct debit.

Meanwhile, Tesco is reported to be considering relaunching its Clubcard loyalty scheme, with a tiered approach favouring its most loyal customers. The chain denies this.

Abbey National’s decision to charge customers £5 to pay a bill at its retail network and NatWest’s £10 monthly charge for customers to have a “personalised relationship” with their bank manager have also been interpreted as cherry-picking – penalising customers who have hitherto been a drain on resources.

Other traditional players have joined the fray and moved into new areas with direct brands – Prudential with its savings arm Egg and Barclays with its investment operation B2.

Professor Steve Worthington, financial services specialist at Staffordshire University’s business school, says: “If you try forcing away what you think are your unprofitable customers, or try to make them more profitable, it affects the overall economics of the operation. They often make some sort of contribution and if you send out the wrong signals, you could end up losing the lot.”

Another observer adds: “If you are an established player, you can’t cherry-pick. The economics of the company are built around a broad range of services and it’s not easy to cut costs. If you shed 20 per cent of your customers, you cannot close 20 per cent of branches.”

The US is further down the road than the UK.

Evans says: “There are two software packages here – Microsoft Money and Quicken – which are unbundling the entire financial services sector. They effectively allow customers to hold an online auction between financial service providers by letting it be known that they are looking for a particular product, such as a loan.

“The software is used by 12 million of the 100 million households in the US – which account for 75 per cent of expenditure. This situation undermines the value of brands and will lead

traditional providers to lose the profitable bits of their business to specialists.”

Evans says traditional banks could potentially lose all their business this way, except for the one thing a retail branch can provide – the ability to take cash deposits from small businesses, a process yielding little income and effectively subsidised by the other operations.

A bank could not make a profit on this alone and Evans predicts that retailers will absorb this overhead and charge a premium.

This is one of the upshots of cherry-picking. There are the profitable people who are courted and the unprofitable people – such as the ones NatWest is now charging £10 a month – who find they are paying for the privilege. This is the beginning of the development of a two-tier system, punishing poorer customers and it could lead, according to some experts, to the demise of many traditional businesses.

Evans is convinced doom and gloom looms: “Mobility killed department stores in the US. Now people can travel easily, they don’t need everything in one store. They can go to several specialists and cheap discount stores which buy in bulk. The Internet is having a similar effect on many modern industries, which could go the way of the department store”.

But as Garth Holberg, author of All Consumers Are Not Created Equal, says: “I don’t think [cherry-picking] is going to lead to the death of traditional businesses or anything like that. Wherever gaps are created in business, they are filled and always have been.”

And, as financial services consultant Malcolm Oliver points out: “There is money to be made out of the traditionally unprofitable customers. It costs a little more, but there is still a market. These people still need goods and services.”


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