Nina Castro Owens of Cap Gemini Ernst & Young on the Electronic Financial Services Marketing Wars

MarketingSherpa spoke to CGE&Y to get further insight into the current offline vs. online marketing war being raged in the eFS (electronic financial services) space. Of the six areas of a recent CGEY special report, “Moving Mountains in the New Economy: The Quest for Shareholder Value Is On,” one entirely focused on branding eFS.

Q: M&A: How will the overall consolidation in the financial services industry affect the eFS space--with respect to online banking, e-brokerage, ECNs, and alternative investments/private equity market? Will new ownership by foreign institutions change the situation significantly?

Owens: We at CGE&Y interviewed leading global CEOs on how they will create value in the new economy. For these CEOs, attaining scale and achieving first-to-scale status matter more than ever in financial services. Today, massive financial services companies, with their existing scale, large number of accessed markets, significant investment capital, and in many cases recognized brand names, are making it increasingly difficult for smaller players to compete.

The eFS space requires scale, capital and speed, and in most cases brand as well. Of course there are any number of startup companies, in incubation and early growth, with patented ideas in the ECN, e-brokerage, and private equity arenas. However, the trend we see is for those companies to be bought by established players, who can provide the requisite scale and scope.

Domestic/foreign ownership per se may not have an immediate impact. However, if ownership has a stultifying effect on leadership and culture, eFS positioning, and ultimately shareholder value creation, will certainly suffer. CGE&Y also believes in the importance of developing a dynamic risk-tolerant corporate culture in order to retain the best talent and win in connected markets.

Q: Can niche players find a home on the Web? Will they survive in the face of mounting competition from BigBank.com?

Owens: Value creation in the eFS space begins with a defensible value proposition for the online business. Gone are the days when value was created in the stock market simply through being online.

We believe there are some basic primary models for value creation: customer owner, distributor, infomediary, product innovator. Taking the position of developing a relationship with wealthy customers via an online personal advisor would be an example of a customer owner. Facilitating trading transactions would be a transactor/distributor role. These are valid positions, but the question remains: what makes the online business value proposition defensible and sustainable?

And will it generate sustainable revenue and profit over time? Typically there are multiple streams of revenue e.g. advertising, customer interaction fees (transaction, subscription, etc). But there are also ongoing costs to consider; one of the most significant will be the role of non- Web customer interactions, and sometimes exorbitant fees to business partners, which typically are the most impactful on ultimate profitability.

Q: Budgets: Will conversion/adoption costs rise? Are eFS companies willing to spend these amounts to brand themselves and acquire customers as they did in the past?

Owens: It will be increasingly difficult for eFS companies to justify spending at the levels of the past two years to brand themselves and acquire customers. AND, there is very little room for conversion/adoption costs to rise. In 2000, new customer acquisition cost for an eFS company ranges between $100 and $400 per new customer, which far exceeds the annual profitability of a retail customer. Furthermore, VC firms are limiting access to capital for all internet companies, so eFS companies will not be able to spend as freely as before.

So, eFS companies need to find more effective ways to migrate financial services customers online. We believe one key tool is brand—-to build and leverage trust through aggressive branding. The key is to use an existing financial services brand online vs. create a new brand. If existing customers know a brand, they are more willing to take the next step and go online for that brand, And, they are willing to pay a premium online for that brand vs. one they do not know. EFS companies have not tapped into the potential of existing brands with existing customers yet.

Yet there are two basic client acquisition categories in the eFS space: assets and liabilities. It is much cheaper for an eFS to acquire liabilities—-issue credit cards, underwrite mortgages—-than it is to aggregate assets—-sell CDs, open securities accounts. Of course this mostly has to do with consumers’ willingness to get into debt, as well as the participating companies’ willingness to extend their offers of credit, as well as customer’s unwillingness or avoidance of parting with hard-earned assets, especially to an unknown eFS entity.

Q: Crash and burn: How will eFS fare in the present environment of market turmoil? If financial services continue to grow online, will some products eventually be phased out?

Owens: That is two separate questions, one around the economic cycle, and the other around financial services growth by products/services. One point that many traditional CEOs made to us last summer was that an economic downturn would slow the flow of assets into non-brick financial services institutions, because of the riskiness perceived by customers. So eFS will see a range of responses in the current environment. EFS companies which are "brick-and-click," affiliated with traditional and trusted strongholds of financial services, will fare well. "Pure-play" Internet financial institutions will face uncertain prospects, unless they have managed to establish trust with their customer base.

With regard to product, we believe that the trend is towards a total customer experience (TCE). So, rather than a customer buying a mortgage online, that customer will be buying a house. The customer will get the house, but as part of his total easy experience, he or she will also get the moving services, the decorator, the mortgage, as part of a facilitated process. Part of the limiting factor for online eFS growth, is that some products are much easier to transact online (e.g. credit cards, auto insurance). Some products, such as healthcare insurance, are more difficult, so have seen lower growth rates. The next wave of eFS will bundle financial services products into a total customer experience, and by eliminating the hassle for the customer, will increase the growth rate for eFS.

Nina Castro Owens is a Senior Manager in Cap Gemini Ernst & Young's eStrategies/Financial Services (FSI) Practice. Contact Owens at nina.owens@us.cgeyc.com.