Commercial Bank Service Delivery

Commerce Bank

INDUSTRY: Banking
SERVICE: Checking Accounts & Loans
COMPANY/BRAND: Commerce Bank
SOURCE: HBS Premier Case Collection
WRITTEN BY: Frances X. Frei, Corey Hajim
PUBLICATION DATE: Dec 02, 2002
PROD. #: 603080-PDF-ENG
Reader's comments would be much appreciated and replied to!!!
Analyze Commerce Bank's service delivery system prior to ‘Retailtainment’. Base your analysis on the following heads:

Service Offering Funding Mechanism Employee Management System Customer Management System

ANALYSIS:
Commerce Bank’s Service Delivery System
Commerce Bank’s entire banking and operational philosophy is designed around creating a retail experience for the customer. This was unusual for the entire banking industry and thus a great source of differentiation from both the operational standpoint and from the service delivery design perspective. This meant that the entire value proposition from the customers’ standpoint depended on the design of the service environment/theater including the 3 service marketing mix variables
This can be seen from employee comments and facts in the case about these variables

Product: “We believe the value of a bank is not its loan base but rather the deposit base” – Vernon Hill (Chairman & CEO) Price: “We are generally the lowest ratepayers in every market” – Vernon Hill (Chairman & CEO) Place: ‘...deciding where to put a branch was just as important as what the building looked like..’ Promotion: ‘Commerce spent $500,000/branch in NYC on promotion…’ and ‘Red and blue painted Commerce vans with an emblazoned logo’ People: “This is not a job for someone who ‘s interested in being cool or indifferent” - John Manning (Employee Trainer) Process: “the way we look at credit and credit quality is a lot tougher…” - Falese Physical Evidence: “They i.e. customers know what the deal is whenever they visit one of our banks” – John Cunningham (CMO)

The Chairman and CEO, Vernon Hill has been able to do this by understanding 2 very important aspects or critical success factors of the banking business

Understanding the Nature of the Servicescape: Despite trends (cross selling & non-interest revenue) in the banking industry moving towards the more remote delivery mode (Pg. 3: Most banks actively encouraged customers to move their transactions from full-service channels to self-service channels…monetary penalties for using the more expensive channels…charging $3 to visit the teller), he understood that because banking as a service depended so heavily on the service attributes of searchability, experience and credence and the nature of the servicescape was in essence that of an Elaborate- Interpersonal type Reducing the Listening Gap (from Gap Model of Service Quality): In comparison to other banks in the industry which competed on keeping a low-interest ratio, he rightly understood the customers’ real need by competing instead on service, convenience and other intangible service differentiators (Pg. 6: …the competition is beating on the 3% i.e. customers wanting a higher interest rate; we decided to compete on the 62% i.e. customers wanting convenience)

Keeping this in mind we can now look at the 4 dimensions its Service Delivery system prior to ‘Retailainment’
Service Offering
In light of this, the bank’s entire service offering can be visualized as in the figure below:

Here we can see that the service offering in itself is split into

CORE OFFERING: This is not very different from what other banks in the industry offer. However, from an execution standpoint their focus was different, because their strategic intent for both operations and growth was that Bank Value is ‘Deposit Base’ NOT ‘Loan Base’. Their core offering i.e. banking services included Deposits or Checking accounts (first 3 years no monthly service fees and free 1st order of checks)

Sr. No. Type Minimum Balance Details
1

Standard Checking $100 No monthly service fees
2

Interest Checking $1000 No monthly service fees, Unlimited check writing, Interest
3

50 Plus Club $100 No account maintenance charge for checking account with interest, free checks, money orders, notary service and travelers’ checks
4

Consumer Checking None No per check charge for first 8 checks/month for $3 monthly fee Table 1: Commerce Bank’s Deposit Product Line

Loans: Commerce’s value is not in its loan base but in its deposit base. So for Commerce, loans are not given out as easily as other banks in the industry which believe that growth is in loans since deposit growth can occur only with the lowest interest rate. However, credit quality checks for loan approval is very stringent ATMs: Withdrawals were available at any ATM and purchases anywhere Visa was accepted. Transactions were immediately reflected in accounts and statements Cash Reserve Line: All accounts could be combines with a Cash Reserve Line to ensure protection from overdrafts

SUPPLEMENTARY SERVICE: Commerce has 8 supplementary services (4 facilitators and 4 differentiators) which allow for superior customer service:

FACILITATORS DIFFERENTIATORS
Information
Commerce decided to use Live agents over the phone instead of Voice Response Unit (VRU)to talk to customers Consultation
Branch manager (also the Loan officer) consults/advises loan applicants and helps to manage both loans & deposits
Order Taking
(Banking context: Cash withdrawal & loan application process)
· Loans were assigned to service branch instead of Head office for easy access for customer
· Weekend banking facilities were provided to allow customers to bank on Saturdays & Sundays Hospitality
· Helpline phones at ATMs
· Employee escorts with umbrellas during rains
· Lollipops and dog biscuits at drive through banking windows
· Coffee and newspapers in waiting lobbies
Billing
(Banking context: Loan approval and monthly statement generation process)
· Loan applicant had to personally sign-off by on loan papers at service branch
· Online Monthly statements Safe Keeping
(Banking context: Peace of mind about account balances and check deposits)
· Immediate updating of ATM withdrawals in online statements
· A ‘Check View’ feature on Commerce’s website
Payment
(Banking context: Loan repayment process)
· Payment is easier for customer and assured for bank, since loan customer also has a deposit at service branch Exception handling
(Banking context: Coin currency & Irregular hours )
· ‘Penny arcades’ to handle coins
· Midnight timing at busy locations
· 10 minute rule to increase banking hours by 20 minutes in a day’ operation Table 2: Commerce Bank’s Supplementary Services mix
As a result of this unique service offering design, Commerce has produced above average results in its undifferentiated core offering:

Comparison Parameter Commerce’s Value Industry or Competitor Value
Deposit Growth (1996-2001) 30% US Banking Industry-20% (98-01)
Deposit Growth (2001) 40% US Banking industry – 5%
Online Usage 34% Wells Fargo – much lower
Net Income growth (1998-2001) 200% (Double) US Banking industry – 20% Table 3: Commerce Bank’s Performance Comparison
Funding Mechanism
Commerce’s funding mechanism can be looked at from 2 perspectives

Commerce’s own startup and growth strategy (how it funded it’s own growth) Commerce’s banking and lending operations (how it functions as a bank)

Startup and Growth Strategy

Founded in 1973 with $ 1.5 million as startup capital (assumed to be seed capital not VC funding) Chairman & CEO, Vernon Hill did not believe in M&As as a growth strategy but as a cost-cutting measure Started operations as a community bank in southern New Jersey Used the retail franchise expansion model (without acquisitions) to grow Expanded into branches in Pennsylvania, Delaware and New York Concentrated on seeing customer as a revenue-generator (not cost center). However, cross-selling was not encouraged since main revenue stream was considered as deposits Expansion into New York was done organically (Branches were wholly owned and run by Commerce and promoted heavily (Spends - $500,000 per branch) By 2001, Commerce had $ 1 billion in core deposits

Banking and Lending Operations
Commerce’s 2 basic product categories were: Deposits (Debits) and Loans (Credits). Its operations as compared to the Industry can be analyzed as below:

Product Category
↓

Commerce’s Philosophy:

Focus is consumer business (Deposits) Best value from both (conventional & electronic) channels Low-expense ratios are bad Outgoing friendly service

Industry Trend:

Cross-Selling products Preference to electronic channels Non-interest income revenue Pushing customers out of store(bank)

Deposits

Rates need not be the highest in the industry (only 3% want this) Longer operating hours allow for more time for customer service (62% want this) Non-interest income revenue (i.e. ATM charges) must be used as competitive advantage to grow and not simply be an addition to the bottom line

They are transaction-oriented and low growth Dozen or more types of checking accounts $5 monthly fee for Internet Banking facilities

Loans

Assigned to customer service branches that received credit for deposits Loan-deposit ratio low Stringent credit quality checks Customers mostly commercial real estate projects, mortgages and consumer loans Loan officer is also branch manager

Loan delivery is centralized leading to customer and loan officer disconnect Loans are 90% of deposit base (2001) Lower credit quality loans (i.e. sub-prime mortgages) get approved Loans not linked to deposits

RESULT
→

Deposit Growth (2001) - 40%
Online Usage - 34%
Net Income growth (1998-2001) - 200% Loan & Deposit growth (1998-2001) – 20%
Deposit Growth (2001) - 5%
Non-interest income growth – 27%
Interest Income growth – 11%
Customer attrition – 1/3rd of customer base Table 4: Commerce Bank’s Funding Mechanism Employee Management System
Commerce’s Employee Management System can be broken up into

Hiring Training Work Autonomy Workplace involvement Rewards Appraisal or Performance Measurement

HIRING

Policy emphasizes internal (among employees) and external (customers & employees) engagement Extensive interviews (2000 interviews for 40 positions in Manhattan branch) Experience about local and entrepreneurs given high importance Interviews used to know about competitors and their best performers

TRAINING

WOW program (process improvement) for all employees to be trained and integrated into the Commerce culture (‘Traditions’ class) Commerce University (full time education and training facility) Easy to remember framework for learning Commerce service deliver model: SMART (Say YES to customers, Make each customer feel special, Always keep customer promises, Recover, Think like a customer) Continued business education for senior executives

WORK AUTONOMY

‘Kill the stupid rule’ program to suggest improvements

WORKPLACE
INVOLVEMENT

All employees encouraged to hand out their visiting cards to recruit potential employees Redeemable WOW! Stickers WOW! Awards and Musical performances Red Fridays (Pictures taken of those employees who are wearing red) Mascots - Mr. C , Buzz and Dr. Wow

REWARDS

Glamorous prizes for top performers (like a leased Porsche Boxster for 1 year) $5000 reward for the staff of nearest Commerce branch where a competitor closed down $50 reward for suggesting improvement in the ‘Kill the rule’ program (mentioned above)

APPRAISAL
OR
PERFORMANCE
MEASUREMENT

All shops (branches) performance data on an internal database open to all branch managers Salary increases based on shopping (No. of deposits) results Mystery shoppers visited 14000 shops (branches) annually for evaluating employees, customer-service reps for compliance with greeting and other procedures Competition between branches in different regions in the form of Leagues (assuming this is like football or baseball leagues) to get the best service report

Table 5: Commerce Bank’s Employee Management System Customer Management Systems
Commerce’s Customer Management Systems or customer-centric programs can be divided into:

Customer Acquisition Programs Customer Retention Programs

Both these have some customer ‘delight’ features which are called as such because they are against industry norms and unexpected by customers

Acquisition

Industry Norm

Employees were encouraged to cross-sell products (deposit account and loan products) Employees’ key performance measures were volume of calls handled and number of transactions processed rather than customer satisfaction or repeat customers Customers were seen as cost centers and in order to keep a low-expense ratio were pushed to use the electronic channels (full-service to self-service) Also, customers using the conventional personal (teller) banking channel were penalized through extra fees This savings in the marginal cost was then used to give a higher interest rate which banks felt was the only way to attract new customers.

These are the result not understanding why customers selected their banks in the first place. In addition to proximity, customers chose banks based on service. Vernon Hill, CEO & Chairman, Commerce Bank understood this and built it into Commerce’s Customer Management System

Commerce’s customer acquisition methodology

Branches located close to competitors branches Branches are designed to be inviting, open windows (Note: this is a visual ‘Cue’ designed into the physical evidence variable. It shows honesty and transparency) and ample parking Red & blue painted commerce vans helped create free advertising opportunities Building designs across all branches were consistent (Note: This gives a consistent message to the customer – Integrated marketing communication) Very high promotional spends for every new branch in the form of direct mailings, subway ads, phone kiosks and free food (like 10,000 hot dogs in Commerce napkins) First time customer is given 4 simple checking account options (See Table 1) and First time customer is given a free gift for opening an account Employees treat customers with outgoing friendly service and do not try to cross-sell products or push customers out of the store after they finish their transactions Loan applicants were encouraged to open deposit accounts first

Retention Industry Norm
All banks provided the same ease-of-use electronic banking features along with their extensive branch networks. Also, existing Customers were expected to be comfortable in a different environment and deal with a different culture when banks merged.
In spite of this, even the best retail banks lost 15% customers/yr as the following table shows:

Sr. No. Reason for leaving % of customer base
1.

Dissatisfaction with steep fees and fee surprises, poor service and errors 34
2.

Outside of reach of current branch locations 34
3.

Availability of more convenience such as longer hours in other banks 15 Table 6: Customer attrition in the Banking Industry

Commerce’s customer retention methodology
Analyzing the facts of the case, it can be clearly seen that Commerce’s customer retention program targeted exactly those pain points (See Table 6) which caused customers to switch banks.
Convenience

Extended banking hours (10 minute rule allowed for 20 minutes of extra banking everyday) Busy locations were open till midnight (12:10 am) Weekend banking (Saturdays & Sundays) which started in Jersey shore were extended to all branches Exactly same environment across all branches (Note: This feature was lost after ‘‘Retailainment’ program was launched) Phones in ATMs reach helplines Live agents instead of VRUs

Boundary-spanning Roles and Interface

Employee conduct monitored by mystery shoppers for friendliness (handshakes), consistency in greeting and other procedural details when dealing with customers Employee appraisals and salary increases linked to branch performance (which is linked to service quality) and not volume of transactions handled Live agents dress codes stricter than other call center settings

Personal attention

Guidance to manage deposit accounts by branch managers Loan accounts handled by local customer service branches and not central headquarters Guidance to manage loan accounts by loan officers (who also happened to be branch managers)

Customer delight features

No fees for ATM and check cards Non-interest income (ATM charges/fees for using other bank’s ATMs) returned to customers Employee escorts with umbrellas to cars during rains ‘Penny Arcade’ program to handle coins with no charge either customers or non-customers (Note: This might have even helped customer acquisition) Gifts (pens and lollipops) at drive-through banking windows

All these helped drive the growth engine of Commerce Bank. It grew to $1 billion in deposits by 2001. While the net income for the industry stood at 20%, Commerce doubled its net income in the period 1998 -2001.