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Customer and practice

Although the UK life and pension industry has been in existence for over 200 years, there are many indicators that it is far from a mature industry.

More than 100 companies trade in the life and pension market but even the biggest of these has a market share barely into double figures. Despite accelerating merger and acquisition activity, in 1999, there were more than 80 companies with a market share below 2 per cent.

Another indication of the industry&#39s immaturity is that although the long-term retail savings industry controls over £1trn, the average level of savings, family protection and pension provision is frequently far below the optimum.

It is rare to find other long-established industries whose participants have such small percentages of the overall market. The car industry offers interesting parallels. The early years of the industry were characterised by numerous small companies which either disappeared or were absorbed into the national and, latterly, international automotive organisations. Thus, in the UK today, three companies control 80 per cent of the market.

A significant corollary of such evolution is how industry dynamics also change. As smaller automobile manufacturers were absorbed by bigger companies, so the manufacturing and distribution elements of the value chain were realigned. Specialist parts suppliers grew up around car manufacturing plants. Car makers began to share components and floor plans, so the final product is now often distinguished stylistically rather than structurally.

This has left companies with more time and resources to concentrate on the real battleground of marketing, sales and distribution, where differentiation of value is made more easily in customers&#39 minds. While gains can always be achieved in improved manufacturing efficiency, companies have realised that it is in identifying, anticipating and satisfying the needs of the customer that the key to improved profitability is to be found.

While this willingness to scrutinise the value chain has been widespread for many years in other industries, it has been much less common in retail financial services. Here, the arrival of bancassurers, such as National Westminster Life in early 1993, marked a questioning of how best to reinterpret the whole manufacturing and distribution issue.

For a moment, it seemed there could be a revolution in the structure of the UK life, pension and retail investment industry along similar lines to other European countries. The logic of controlling the entire design, build and sale of products seemed sufficiently compelling to convince the boards of the major clearing banks. There was confidence that bancassurers could design, make and market insurance products that were reasonably competitive but which could be sold profitably on the margin of existing customer relationships.

The reality has fallen short of these ambitions. This has led to strategic re-evaluation of what banks should expect from their bancassurance ventures and fresh perspectives on the nature of the bancassurance business model. More important, it has prompted questions around what customers relationships should look like.

There has been renewed attention on the bancassurance value chain. For example, what should be the balance between internal manufacturing and outsourcing, should the bank consider itself to be a retailer or designer of products and, crucially, what is the best way to present and define the customer value proposition?

Reluctance on the part of the customer to be owned by one institution strikes at the heart of the original bancassurance model – selling life, pensions and retail investment products to captive and essentially passive bank customers.

In the face of such developments, what are the options available to bancassurers in 2001? A key issue is whether or not bancassurers have profitable options in the face of the impending 1 per cent world, where charging structures and product design are prescribed rather than being elective.

The first impression might be that the bancassurers are well placed to gain in a commoditised market where access to low-cost distribution is paramount. However, faced with such commoditisation, the challenge for bancassurers is to persuade the customer of the advantages of a supply of products from the bank rather than being dependent on the inertia of the customer in an otherwise passive relationship.

It may be safest to assume that the customer will be more likely to go elsewhere than merely wait as an obliging recipient of whatever products the bank happens to offer to him or her.

Despite the critical nature of customer relationships, it might seem that bancassurers currently expect the future to lie more in the area of greater manufacturing efficiency and overall management of the cost model than in customer management. However, while it is natural for a business to concentrate on optimum financial management – and this will be a natural focus for shareholders – this may raise questions from the customer&#39s perspective.

For example, if the bank is to deliver a seamless service of personal financial advice, sales and service, does an outsourced relationship for products mark the best way forward? This begs the question of whether or not outsourcing and excellent customer service can be delivered together. Customer service may only be as strong as the weakest link in the outsourced relationship and, while common in other sectors, running such outsourced relationships is new and difficult territory for many financial services companies.

It is behind the latest structural changes in the industry that the real challenge lies for bancassurers. The real and sustainable source of future competitive advantage will lie in the expert management of customer relationships, not in the internal focus on company structure or cost reduction for their own sakes.

It is once this is understood that the real leap forwards for bancassurance could take place and lead to revolution in the structure of retail financial services in this country.

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