Retail Banking’s Hard Sell

By Robbie Shell

What’s in it for you? More importantly, what’s in it for them? Professor Chip Hunter looks at productivity in the highly competitive banking industry.

Chip Hunter recently went to his local bank with a request to move money from his checking account into a Certificate of Deposit (CD). “The bank knows me. They have my money. How hard can this be?” he remembers thinking.

“I sat there with the banking rep for 40 minutes. It was an incredibly slow process,” Hunter says. “Some parts of the system are automated; others aren’t. Some systems weren’t talking to each other, others were. The rep had to get up and go collect information from other areas of the bank. It was astonishing.”

Hunter, W’84, assistant professor of management at Wharton since 1994, then went to his office, fired up his data set and found that the mean time to move money from a checking account to a CD was 39.7 minutes. “My bank,” he concluded, “was no worse than the average.”

While most consumers can probably relate a frustrating experience or two with their local banks, few have spent close to five years studying productivity in the retail banking industry.

It’s not exactly an academic question. Banks, says Hunter, whose experience is mainly in the human resources area, are well aware that advances in technology coupled with changes in today’s financial marketplace have ramped up the competitive environment for everyone. Which retail banks survive depends largely on how they manage a set of different and often conflicting goals over the next decade.

Hunter’s ongoing research includes not just analysis of individual bank branches but also a study of call centers (which focus on servicing inbound calls as opposed to telemarketing, which refers to salespeople making outbound calls, usually at dinner time). Hunter is looking specifically at the increasingly large role these call centers play in industries ranging from financial services to computer software to telecommunications.

Depending on your point of view, he notes, call centers are either “dark satanic mills” staffed by unskilled workers in low-paying dead-end jobs, or they provide employees with an opportunity to be part of the new high-tech information-based economy. In many ways, Hunter says, “call centers represent the jobs of the future.”

Tellers vs. ATMs

Hunter, who earned his PhD from MIT and his MA from Oxford, has always been interested in workplace and job-related issues. His research tends to focus on the relationship between human resource management and organizational performance, especially in the service sector.

His exploration of the retail banking industry began in 1994 — with funding from the Sloan Foundation through the Wharton Financial Institutions Center — to analyze why some banks operate more productively and/or efficiently than others. In collecting their data, Hunter and colleagues Patrick Harker, interim and deputy dean of Wharton and UPS Transportation Professor for the Private Sector, and Frances Frei, now an assistant professor at Harvard, were somewhat hampered by the fact that different banks use different metrics to measure such functions as sales growth, productivity and the cross sell rate (i.e., the rate at which customers who already have one financial product, such as a savings account, are successfully sold additional products, such as a mortgage or mutual fund).

For example, in measuring productivity, Hunter says, “some banks look at number of transactions in a particular branch; others look at number of customers, others at number of accounts. So at times we felt like we were trying to compare apples and oranges.”

Even so, the researchers were able to draw several conclusions about the organizational structure within branches. “We focused in part on how important it is to align technology and human resources towards a particular set of goals,” Hunter says. “In many cases, banks that were trying hard to increase sales had technology systems that supported efficiency but not sales growth. So each function ended up suffering.

“We also looked at job design. Several of the banks had strict job design criteria that resulted in the specialization of individual employees in ways that weren’t in line with overall goals. For example, an employee who has been trained to move a customer through the line quickly in some cases wasn’t able or willing to focus on what the customer might need beyond the original transaction.

“Many theories of management talk about the importance of job rotation and having interchangeable parts,” Hunter says. “Our research here takes a different spin on that. It suggests that if you have interchangeable parts, you want to make sure the jobs are designed simply and employee discretion is limited.

“If you have more focused design, however, then you want more employee discretion within the job. Either approach contributes to sales and productivity but mismatches can be harmful.”

In the summer of 1996, Hunter and Harker received a grant from the National Science Foundation to partner with one single bank that was in the process of revamping its entire retail delivery system. “The advantage of working with one bank is that you know what the metrics mean,” Hunter says. “Sales measures across all branches, for example, are the same. And if they tell you this branch is doing well and that one isn’t, you believe them.”

So far, Hunter and colleagues have been able to identify which branches have the most satisfied customers, which ones are experiencing faster sales growth, which ones are processing more transactions and so forth. The trick is to understand why.

Hunter is looking at the human resource practices, the technology systems and the process design of individual branches. And he is focusing on four specific goals, or outcomes, that each branch is trying to achieve. The first two are customer satisfaction and increased sales.

“Some people might be irritated when the bank tries to sell them additional products or services,” Hunter says. “Yet there are branches in this bank where the customers are happy and where sales are up. You can imagine why that would be true. If the customers are satisfied, then they are more inclined to listen to what the bank’s salespeople are offering.”

Another goal of retail banks these days is migration to new technologies, i.e., encouraging customers to conduct their banking transactions more efficiently, such as choosing the ATM rather than standing in line for a teller. “One very rough measure of migration is to look at what proportion of deposits — mainly checks — at the branch are fed into the ATM rather than taken through the teller line,” Hunter says. “It’s usually under 50 percent and can easily be as low as 25 percent. Some people just don’t trust machines.

“Banks are also very interested in ratcheting up their telephone call center capabilities,” Hunter adds. Again, they don’t want customers to stand in line and ask someone to check their balance. “It’s much more efficient for requests to go through the call centers where hundreds of employees have been hired specifically to answer these kinds of questions.”

At times, Hunter says, goals can appear to conflict with each other. For example, while banks want to encourage migration to ATMs and call centers, it is also true that “person-to-person contact in a bank branch does increase customer service opportunities and therefore sales opportunities. So you want to have technology that supports a whole range of services and make sure employees understand how to use the technology correctly, plus have job designs and job incentives that encourage them to do this.”

A fourth goal of the bank branch is to achieve the first three goals while keeping costs as low as possible. “It’s easy to have customer satisfaction when there are 20 knowledgeable, well-trained employees working in a bank branch,” Hunter says. “But that may not be cost effective.”

In analyzing the data on 200 bank branches collected over a two-year period, Hunter and Harker have identified several branches — about 10 percent of the total studied — where performance was high and where growth had been achieved in the four target areas. “In the rest of the branches we found predictable kinds of tradeoffs being made between these outcomes,” Hunter says.

Selling the Right Products to the Right People

So what is it about the top 10 percent that makes them so successful? “It’s very important that all employees in a particular branch have a positive attitude about the alignment of goals and objectives,” Hunter says. “People need to think that yes, the phone center is an effective way to serve customers, and yes, customers ought to be putting deposits in the ATM, and yes, customers who do come into the bank represent a sales opportunity. Yet this kind of attitude is quite rare. In most branches you have employees who think the phone is an annoyance or that customers should conduct very little business at the branch. So personnel need to have a coherent view of how the whole approach fits together. Instead, you see a lot of variation across branches.”

Achieving that positive attitude, Hunter adds, depends on consistent messages from management combined with the selection of employees who are comfortable with the new environment. “Frequently that means excluding employees who are more attached to an old type of banking environment where the focus wasn’t so much on sales.”

Interestingly, performance doesn’t seem to depend on the kind of local market in which the branch operates. “We are finding high-performing and low-performing branches in all kinds of areas — suburban, urban, distressed and so forth. It’s not like branch employees are helpless in the face of particular types of customers.

“Of course it’s also important to recognize that different markets or locations are going to have different requirements. The clever banks will figure out how to make all their product lines potentially profitable and will get their employees to direct the right products into the hands of customers in their local markets. For example, in an area with lots of students, employees should promote credit cards and fee-based accounts; in an area with lots of home owners branches should be promoting mortgages and home equity loans. The point is that employees in a big organization should focus on one set of products in one area and on a different set in another area. You don’t necessarily promote mutual funds in every branch in every city.”

An Incentive Plan for Some

Hunter’s research also finds that for this bank, the branches need to function as teams, but not teams with interchangeable parts. Rather, these branches have several different types of jobs, and they don’t overlap, nor are they expected to.

One category is sales people, whose job is to encourage customers to buy mutual funds and other investment products, take out home equity or auto loans, etc. “These people don’t need a strong commitment to the bank or their co-workers. They need to like selling and they need to like money. They’re on the incentive plan,” Hunter says.

Another category is the tellers, who need to identify with the particular branch they work in, cultivate a sense of teamwork and “feel like part of a family.”

Two very different job functions. “It’s when people are hitting those functions and are comfortable with them that you have successful bank branches,” Hunter says.

Also, many places emphasize an incentive-based approach, i.e., get all employees on the incentive plan and everything will work out fine, Hunter says.

“In our first study, we couldn’t identify any positive effects of incentive plans. What we discovered in our second study was that it’s more complicated than that. The incentive plan is important for sellers, but less so for others. In the case of a customer relations manager it makes sense to choose people who are likely to stay in the local area, who will therefore be inclined to develop loyalty and commitment to the local branch and who are less upwardly ambitious. It’s a job you could imagine someone enjoying for 15 years.”

In addition to his studies of bank performance, Hunter has researched the issue of job quality in banks and banking services. “Banking employees in general have to reorient their expectations about what a career means,” Hunter says. “Their organizations are becoming much flatter. In the old days someone could start out as a bank teller and climb his or her way to the top. That’s increasingly difficult. Even in sales, which tends to hire college graduates who are comfortable with technology and with the sales environment, there is a much flatter setup. Employees are given a nice office and good salary and are expected to sell, sell, sell.”

Telephone: Up Close and Personal

As for consumers, how will the changes taking place in retail banking affect them? Not positively, Hunter says, at least in the short-term. “Banks are going to experience a number of starts and stops in their efforts to make their customers do certain things,” he says. “Consider the attempt to encourage the use of Web-based banking, which banks are promoting as much more convenient than traditional banking. But then the banks start charging for it. Consumers might have liked the idea initially, but for $15 a month in extra charges some will give it up.

“Basically banks are struggling mightily with a number of initiatives even as investors are angry because sales aren’t going up and costs aren’t going down. The efficiencies aren’t happening as quickly as investors would like.”

The same sorts of fits and starts are occurring in banks’ call centers as well, Hunter says. “Consumers can expect banks to pressure them — through fees or by closing branches — to do their transactions on the phone. The problem is banks don’t yet have a good handle on which channels are best for sales, or for retaining customers or for providing routine services. Again, it’s all a series of experiments that are difficult to evaluate because the environment is moving so fast.”

Meanwhile, Hunter says, “it turns out, to banks’ great annoyance, that customers like to add channels of communication, not subtract them. People keep going to the branches even as they use the call centers and bank on the Web. These are all ways to interact and they are all convenient. I’m walking past the branch; I’ll stop in. I’m home at midnight and can’t get to sleep; I’ll log on. I feel like talking to someone; I’ll ring up the call center to check my balance because eventually a person will answer. Just as there is a whole percentage of people who won’t use ATMs, there is also a whole percentage of people who pretend they have a rotary phone.

“Consumers keep piling up ways of interacting and banks keep concocting ways to try and make these interactions more efficient.”

Call Centers at a Crossroad

Concerns about the workforce — including job quality, training opportunities, mobility and compensation — have led Hunter and colleagues Steffanie Wilk, assistant professor of management at Wharton, and Rose Batt, an assistant professor at Cornell, into a third project, a grant earlier this year from the Russell Sage and Rockefeller Foundation to study call centers.

Given the widely different images that people have of call centers, Hunter is looking at what exactly determines the mix and quality of job opportunities in this industry. “Why are some of these jobs lousy and some good? For the lousy jobs, are there particular strategies, management structures or policies that could enable people to build up their skills and move out of the worst environments into better ones? What does mobility in call centers even mean?”

At one bank Hunter studied, employees could move from simple retail transactions — like telling customers whether they are overdrawn — to conducting research on potential customers to making calls to business clients and so forth, all of which demand increasingly complex skills and allow employees the opportunity to move up a career ladder.

Of course before one can study call centers, it helps to know how many people work in this field and where. The answer is not so easily found. The U.S. Department of Labor, for example, counts jobs by occupation, such as teller, service worker or salesperson, but doesn’t break out what proportion of service and sales workers are in the call centers vs. in the branch vs. on the road, says Hunter. “Some people have estimated that there are millions of people in these jobs but it’s hard to know which figures are credible.”

Labor, for example, counts jobs by occupation, such as teller, service worker or salesperson, but doesn’t break out what proportion of service and sales workers are in the call centers vs. in the branch vs. on the road, says Hunter. “Some people have estimated that there are millions of people in these jobs but it’s hard to know which figures are credible.”

What Hunter does feel certain about is that “we are at a fairly critical choice point for these kinds of jobs. They have the potential to be structured so that they provide reasonable amounts of opportunity and earnings for workers with a variety of skill levels, from people with high school diplomas and reasonable literacy skills on up to those with college degrees.

“At the same time, I think it is entirely possible that management will use the technology that is out there to tightly constrain a big chunk of these jobs and make them boring and dead-end. One reason they would act this way of course is because it lowers labor costs and because customers aren’t willing to pay for better service. And one reason management is relatively unconstrained in making these choices is because, from a policy point of view, there are no unions in banks. Unions won’t let you set up these low-paying, dead-end jobs. Their role is to negotiate with the employers and win higher wages for their members. If you are paying someone $13 an hour you will figure out how to get $13 worth of work out of them. If you are paying them $5.25 an hour, it’s different.”

Interestingly, Hunter says, one place employers are “getting bitten” is in the tight labor market. Managers will set up a call center in one area that they have selected for certain reasons, including the availability of cheap labor, and then other companies will follow. Pretty soon companies are stealing employees from each other and bidding up the hourly wage. In places like Tampa and San Antonio, starting wages have recently spiraled up to $11 or $12 an hour.

“So the original employers may have built these centers premised on cost efficiency and yet they now have no idea how to get efficiency out of employees at $12 an hour.”

Looking Ahead

Banks, of course, are not only vying with other banks for market share but also with non-bank competitors, such as brokerages and mutual funds. And the expectation is that regulatory barriers to banking will continue to fall, thereby increasing the pressure to operate ever more efficiently.

Meanwhile, there are all the other challenges involved in running a bank, Hunter says. “Managers still have to make intelligent lending and pricing decisions, respond to M&A possibilities, decide long-term strategy, watch the global markets and so forth. And I think that they do all this well. They are really good at what we typically think of as ‘banking.’

“But they are struggling with how to use human resources and technology to get their products and services to customers conveniently and efficiently.

“It’s these kinds of issues that interest me,” Hunter says, noting that he and his colleagues are continuing to analyze their data on the retail banking industry and are just starting their study of call centers. “We are sorting through a huge amount of information,” he adds. “Our end goal is to know why management is making the kinds of choices it does, and what the implications of these choices are for employers, consumers and employees.”

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