Banks want to be customer-centric? Mistakes to avoid
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It is a fact that players in the manufacturing sector are continuously striving to reduce inventory levels to improve working capital ratios. Indeed, inventory is a non productive asset, and therefore must be minimized as possible. It is also a fact that a focus on reducing inventory levels without keeping a wider eye on the overall business results can end into undesired collateral effects. I recently read on Bloomberg Businessweek (issue May2, 2010) the quite enlightening story of John Deere, one of the largest agricultural and construction equipment manufacturers in the world. In recent years, Deere has been working to become a build-to-order company. By producing only on client orders the company keeps smaller stocks on hand which positively impact its working capital needs. But production cuts and the tightest inventories in the industry have led to a shortage of equipment now that the farming economy is strengthening. Fewer products have big implications for the company’s dealers: they are simply losing market share because they don’t have enough inventory to meet customer demand, and, more worsening, products are shipped late. The result? Traditionally loyal Deere customers are turning their backs to the constructor and go to competition. Turning the paradigm to the banking sector, financial institutions still keep corporate lending low because returns are, using the manufacturing jargon, simply not productive at current interest values. So they rather lend to “risk free” corporate clients and avoid extending their funds elsewhere. My analysis is that, just like it happens in the heavy duty equipment business this approach will run into the same trap: a declining customer loyalty. Just as with short items in stock Deere clients move to alternative suppliers, corporations- especially the smaller ones- are moving to alternative sources of funding (e.g., lending portals; supply chain finance). Bottom line: Being customer-centric means for banks to radically reshape their business model. Corporate customer loyalty and wallet share comes, at times, at the expense of reducing current marginal interest. Corporate clients expect their banking partners to be “entrepreneurial”. That is, to proactively offer services that don’t necessarily have a price tag attached: Their objective is to attract client usage and generate transactions for which added-value (and priced) services can be applied. One example for all: electronic invoicing.