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March 1999


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Customer First ?
Adapt or Die





STRAYING into the red at his bank, wrote Robert Morley, an actor born in 1908, usually led to being "admonished in the tone of voice usually used to those whose flies are undone". Relations between banks and their customers in Britain have become more cordial since then, but not much. Most people dislike banks, because of what they perceive to be arrogance, unfair charges, errors and poor service.

But perhaps things are changing. Bowing to pressure from irate customers at Nat-West, its parent, Royal Bank of Scotland, is hiring 6,000 more staff so that people will no longer have to deal with an answering machine. HBOS, the result of a merger between Halifaz and Bank of Scotland, won 350,000 new customers last year by offering an interest rate of up to 4% on current accounts, significantly more than its larger rivals, who pay roughly 0.1%.

British banks have no option these days but to woo their customers. For years, they made handsome profits by buying each other and ruthlessly cutting costs. But when the Department of Trade and Industry ruled against the proposed takeover of Abbey National by Lloyds TSB last year, it signaled an end to large-scale consolidation.

When big banks come together, they typically attempt to crunch incompatible computer systems together and to make savings by cutting staff and branches. They underestimate the effect this has on staff morale and on customer service. Management focuses on the biggest clients and the most sophisticated products, on the assumption that everyone else will stick around. They do not.

Organic growth, rather than cost-cutting, is the banks' new mantra. They hope to achieve it by selling more products to their existing customers. But cross-selling, as it is known in bankers' jargon, is an elusive beast. A small handful of banks around the world has achieved significantly higher cross-sell rates than its competitors. But most manage to sell, on average, less than two products to each client.

For a while, bank chief executives hoped that the answer was "Customer Relationship Management" (CRM). Banks have devoted much time to this. If the bank notices a mortgage payment going through a current account for the first time. For instance, it might try to promote some home-contents insurance. But in many cases CRM has turned out to be the opposite of what its name suggests. According to Gartner Group, over three-fifths of such projects have failed to meet expectations. The reason is that CRM is being used to sell products rather than to improve service. It is controlled from banks' head offices, not from branches, and this often gives an inconsistent impression. "You might get a gushing letter trying to sell a personal loan but then a cold reception in the branch," says Andrew National.

It is that frosty treatment which puts people off banks. In the last ten years or so, banks' senior managers have taken operations out of branches in order to reduce the cost of their networks. The people who deal with customers are left with little power to do anything, and many enquiries are passed straight to head office. Customers who try to telephone someone in their local bank branch are told to ring a call centre instead. Morale among branch staff, after years of watching colleagues being made redundant, is low. Unsurprisingly, these people are not proving to be whizzes at cross-selling financial products.

Mark Weil, a consultant at Oliver, Wyman & Company, thinks that banks need to restore a sense of entrepreneurship to the people who run their branches. Some bank branches have been "internally franchised", meaning that managers' pay depends on the profit performance of their branch, rather than on centrally decreed sales targets. Other banks are watching the experiment sceptically. One of their fears is that customer service could suffer in the hands of local branch chiefs bent solely on short-term profits. This is just what many people feel already about banks.

Adapted from The Economist - February 2002

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