In the quest to boost efficiency for customers, differentiate themselves from competitors, and keep costs in check, many banks, airlines, hotels, and health care providers have raced to put as many service activities as possible online. Granting customers online access to anything and everything they can do in person provides greater freedom for customers while allowing the service providers to cut down on overhead costs at physical locations, the thinking goes.
Many banks, for instance, planned to reduce the number of employees at bank locations—or close physical branches entirely—by enticing customers to perform activities such as checking balances, conducting transactions, and even applying for loans through the virtual channels of phone and Internet. The approach is certainly logical: comfort with online transactions of all types has skyrocketed, as has access to the Internet. In addition, the marginal costs of adding customers in a virtual environment are quite small.
This reasoning, however, is flawed, finds Professor Elliot Rabinovich. Despite the fact that virtual services are a key aspect of today’s multi-channel service provider environment, customers do not actually prefer online and phone capabilities for all services, his new research shows.
Rabinovich has found that both the complexity and frequency of the service activity have an impact on customer preference for using virtual or physical service locations—and that geography matters too. A customer’s distance to a service provider’s physical location can impact their channel preference for some service activities. As a result, plans to close retail locations and expect customers to depend on the phone and the Internet for all service options may be shortsighted, he explains.
“Taking on the fixed costs of developing and maintaining virtual service channels for services that customers might not want to do virtually is counterproductive,” Rabinovich explains.
“Service providers can obtain great benefits by offering services online because they have small marginal costs, but these services also come with significant fixed costs—the up-front investment of developing virtual services, and then ongoing costs for maintenance and operations,” he adds. “So after that big push to have customers obtain more services online, many providers are now starting to question that move, asking themselves, ‘Do I need to provide the same services online as I provide offline? Do customers really care whether they can process mortgage applications online or is there a component that should not be offered via the Internet?’”
Breaking down the data
To answer these questions, Rabinovich and his colleagues, Rui Sousa from the Catholic University of Portugal and Marlene Amorim from the University of Aveiro also in Portugal, analyzed data collected in 2009 from individual retail bank account customers at a major multi-channel bank in the European Union. The bank’s 1.7 million customers access banking services via phone, Internet, and through its 740 branch locations. For each customer included in the sample, the researchers captured the number of times they performed certain activities through the Internet and phone channels during the calendar year of 2009. They also looked at how far each customer lived from a physical branch of the bank.
The researchers split the customers’ banking activities into three categories, along a continuum based on how frequently the activity was performed (volume) and the activity’s level of complexity. “Depending on how much volume and involvement each service requires, customers are going to be more willing to pursue one type of channel over the other,” Rabinovich explains.
The activities they deemed high-volume, low-complexity centered around information access—actions such as checking account balances or fiscal documents as well as obtaining general information about the bank’s products and services. These are the types of relatively simple activities that customers perform all the time. Financial transactions, such as account transfers and bill payments, as well as activities like changing account statement options were grouped as medium-volume, medium-complexity services. The last group of activities (high-complexity, low-volume) consisted of intricate financial activities that are performed fairly infrequently—things like applying for loans, opening a savings account, or modifying stock market assets.
As expected, Rabinovich and his colleagues found that customers’ channel preferences vary based upon the type of activity. Generally, customers preferred virtual channels for high-volume, low-complexity activities; were split between virtual and physical channels for medium-volume, medium-complexity services; and favored physical channels for high-complexity, low-volume actions. But the key contribution of the research is determining the role of distance as a mitigating factor.
“If you logically approach this issue, you assume that the farther customers live from a branch, the more they are going to use the online channel, regardless of the service—and that is simply not true,” Rabinovich says. That philosophy only bore out for services in the middle category, where customers see virtual channels and physical channels as equal. “What differentiates preferences in this category seems to be the distance to the physical channel,” Rabinovich notes. Customers who lived closer to a bank branch were more likely to go to that branch for those medium-volume, medium-complexity actions like bill payments or making changes to account preferences.
“But for services that have a lot of volume and little complexity, you can be next door to the branch and you would still prefer the virtual channel. Customers are not going to go to the branch to check their balance,” Rabinovich notes. “On the other extreme—for services that don’t have a lot of volume but have a great deal of involvement—customers are simply not going to prefer the virtual channel. Sensitivity about distance is going to be lower, as they will be more willing to drive to the branch and talk to somebody.”
Within the virtual channel, Rabinovich also found some interesting differences between when customers choose to obtain services via the phone versus the Internet. Again, complexity and volume play an important role. “Customers are more willing to use the web relative to the phone for services that have a lower level of complexity. As you move down to medium-volume, medium-complexity and low-volume, high-complexity, customers are going to prefer the phone,” he explains. “And for services that have a higher level of volume, there is also recognition that the Internet is more efficient than the phone.”
Allocate Resources Wisely
For Rabinovich, this research fits in well with his ongoing interest in how both service providers and retailers can continue to use virtual channels to bring greater efficiency to customers while also helping to escape the commoditization and price competition that have become so rampant in Internet-based supply chains.
And while this study focused on retail banking, Rabinovich believes the results have implications for many other service provider industries as well. The research challenges the overarching philosophy of “if you put it online, they will come,” showing instead that resources for virtual channels may be best conserved for the types of services best suited to that channel.
Airlines, for instance, have heavily pushed for customers to use web channels to make reservations, select seat assignments, and check-in for flights. While these virtual options are clearly popular with customers and help the airlines with much-needed internal cost reductions, they cannot be a substitute for phone or in-person service capabilities. “Complexity again plays a role in this scenario. If a customer is making a complex reservation, they are more likely to want to speak with a person,” Rabinovich explains.
The overarching lesson for service providers is the importance of aligning service design decisions with customer behavior. When designing multi-channel service delivery systems, Rabinovich notes, firms must consider both their fixed costs and marginal costs and be sure they are allocating resources with caution. “Going back to the service industry’s initial idea of pushing virtual channels as much as possible to save on costs—if you take it too far, you end up spending fixed costs on services that customers don’t want to do online,” he explains. “Or, a company may invest too heavily in their physical locations for services customers want to do online, even if they live next to the physical locations.”
The implications extend to hiring concerns as well, he adds. “There are fixed costs in hiring staff,” he notes. “Companies need to be careful not to spread hiring costs evenly across the channels because some channels are going to be less suitable for certain services than others.”