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Inspection Copy Inspection Copy INSEAD First Direct: Branchless Banking INSPECTIONNot For Reproduction COPY 01/97-4660 This case was prepared by Delphine Parmenter, Research Associate, under the supervision of Jean- Claude Larréché, Alfred H. Heineken Professor of Marketing, and Christopher Lovelock, Visiting Professor, at INSEAD. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Copyright © 1997 INSEAD, Fontainebleau, France. INSPECTIONNot For Reproduction COPY INSEAD 1 4660 In October 1996, seven years after it first opened outside Leeds, England, First Direct was still attracting attention as an innovator that operated a bank with no branches. Intrigued by its success, financial service providers wanted to understand how unseen customers conducted business around the clock over the telephone. An article in the New York Times reported: Representatives from banks around the world are making the pilgrimage to this industrial city in the north of England for a glimpse of what might be their stagnant industry’s equivalent of a miraculous cure. For not only is First Direct the world’s leading telephone-only bank, it is the fastest growing bank in Britain. In just six years, it has signed up 2% of Britain’s notoriously set-in-their-ways banking subjects, who call its rows of bankers 24 hours a day, seven days a week, toNot pay bills, For buy Reproduction stock, and arrange mortgages. September 3, 1996 INSPECTIONSuccess not only put First Direct COPY in the media limelight but it also helped to maintain high levels of enthusiasm, pride, and motivation internally. Fearful that complacency might hinder the bank’s ability to uphold growth and success, CEO Kevin Newman never lost sight of the bank’s challenges in an increasingly competitive and deregulated environment: I believe that in going forward three things need to be developed. We have to be utterly low cost. We must be able to individualize the manufacturing process and recognize that all our customers are individuals. Thirdly, we must build a strong brand as people need to identify with institutions they can trust. “Kevin”, as everyone called the chief executive, sat among the telephone sales staff in First Direct’s headquarters on the outskirts of Leeds, 190 miles (300 km) north of London. Newman had installed the information systems that were instrumental in getting the new bank off the ground in 1989. Subsequently, he was promoted to operations director in 1990 and CEO in October 1991. Newman came to the bank from the mass-market retailer, Woolworth’s, after having worked at Mars, the candy and consumer goods manufacturer. Although Kevin Newman did not start his career as a banker he was, at 35 years of age, undoubtedly the youngest banking CEO in Britain. The Birth of the First Direct Concept In the mid-eighties, Midland Bank, the fourth largest bank in the UK with 2,000 branches, began looking at ways of attracting more affluent and up-market customers. As Peter Simpson, subsequently First Direct’s commercial director, remarked: If you are losing market share you can do two things: you can grow organically or inorganically. Midland Bank had limited capital, so there was nowhere to go inorganically; its reserves had been spent on the over-priced Crocker National Bank acquisition in North America and with Latin American debt. Organically, the retail banks in the United Kingdom were giving away current accounts for free, and sacrificing their profits in terms of customer value. Not For Reproduction Copyright © 1997 INSEAD, Fontainebleau, France INSPECTION COPY INSEAD 2 4660 Consequently, in June 1988 Midland drafted a team of executives on a project code-named “Raincloud”. Mike Harris, a former Midland executive, returned as a consultant to lead the top-secret investigation. An examination of consumers’ banking habits highlighted that there was a substantial niche of people whose banking transactions were not branch-based. According to a national market research study of British bank customers by MORI in 1988: • 20% of account holders had not visited their branch in the last month • 51% said they would rather visit their branch as little as possible • 48% had never met their branch manager • 38% said banking hours were inconvenient Not For Reproduction INSPECTION• 27% wished they were COPY able to conduct more business with the bank over the phone This was the beginning of an idea. Rather than reposition the branch network, the taskforce wondered what it would be like to have a bank with no branches. The team discovered that as early as 1981 a Dutch bank, Nederlanse Credietbank, had setup Direktbank with a small telephone staff to cater to the needs of an upscale segment. Since 1986, Bank of America offered an additional service that enabled branch customers to process transactions by pressing buttons on touch tone telephones in response to a voice-activated computer. And in France, several banks allowed customers to make account inquiries via the videotext Minitel screens linked to their home phones. The Midland team envisioned an entirely new type of bank that would operate from one center, 24 hours a day, 365 days a year. Employing the UK's 47 million telephones as a low cost delivery system, it would use human operators rather than a machine to perform all the functions of a traditional bank. Next, Harris’ team faced the difficult task of presenting to the Midland board of directors a proposal for a new concept that might compete with its own branch network. Although Midland Bank had successfully retained its customer base with a long list of innovative banking products, it had to acquire additional business to stay afloat. Working with experts in marketing, operations, human resources, and technology, Harris was named chief executive of the proposed stand-alone telephone bank. He was given one year to design and launch it. Developing Operational Systems and Initial Job Design Rather than incur the delay and expense of obtaining its own bank charter, First Direct was set up as a division of Midland Bank. Short on timeMidland anticipated another bank would introduce a similar telephone servicethe team proceeded secretly, working 18-hour days. After much brainstorming, the team baptized the new bank “First Direct” to reflect its pioneering concept of working directly with customers. As far as Midland was concerned, First Direct was a completely new brand and a completely new business. A black and white corporate identity symbolized the simple, economical nature of the new bank. The start-up staff of about 50 worked initially out of London while the operations team evaluated a variety of potential sites for First Direct’s one and only office. They were Not For Reproduction Copyright © 1997 INSEAD, Fontainebleau, France INSPECTION COPY INSEAD 3 4660 attracted to Leeds as the city offered moderate rental rates and a regional labor pool accustomed to lower salaries than in southern England. Additionally, the Yorkshire accent was recognized as easy to understand, warm, and friendly. First Direct leased a modern building in an industrial park outside Leeds that could be modified to suit the bank’s needs. Procedures had to be built from scratch so that any traditional branch transaction could be handled in one telephone call. The planners decided that customers could obtain cash through the Midland automatic teller machines (ATM) network and make deposits electronically, while transactions would be cleared and statements processed at one of Midland’s regional processing centers. First Direct would benefit from its parent’s massive technology investments of the late eighties; otherwise Midland played no managerial role. Next, Notthe team For turned Reproduction to new technology to deliver a portfolio of payment, savings, and INSPECTIONlending instruments over the phone.COPY A survey of the best call centers in the United States and Canada provided guidance in setting up the systems. First Direct improved upon existing technology to make all customer information accessible by any telephone operator. Furthermore, they integrated the screen and telephone systems so a call could be passed along without the customer having to repeat the entire conversation. Another group designed job descriptions to meet service standards and the use of high-tech work tools. It was obvious that the new bank’s telephone-based staff would have an assignment very different from a traditional bank teller who counted cash, filled out deposit slips, and looked for forged signatures. A visit to Federal Express’ Memphis hub provided insight as to how to recruit, train and motivate staff. Kevin Gavaghan, then marketing director of Midland Bank, remembered how the hiring criteria were determined: In hiring, First Direct were looking for people that were fast and efficient but more importantly people with warm and engaging personalities. The first flood of applicants showed the way; the first six months proved it. The qualities required were more often than not found in the social professions - teachers, nurses, even firefighters - frequently people working difficult hours under difficult circumstances. Empathy and responsiveness under pressure marked these types out from the traditional bank clerk whose reserve and process-orientation proved at times impossible to reverse. Initial recruitment advertising gave only sketchy details of employment opportunities in the financial services sector; there was no mention of Midland Bank. As early as May of 1989, First Direct began hiring telephone advisors who were called Banking Representatives (BRs). Training sought to improve the candidate's communication and listening skills so that they sounded friendly, mature, and well informed over the phone. By the time of launch, 200 BRs were prepared to answer inquiries and process customer transactions. Not For Reproduction Copyright © 1997 INSEAD, Fontainebleau, France INSPECTION COPY INSEAD 4 4660 Getting Off to a Slow Start First Direct inaugurated its service at midnight on Sunday, October 1, 1989, in a pointed reference to its seven days a week, 24-hour operation.
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