First Direct competes in the financial services market in the UK.
Financial services offered range from traditional retail banking to mortgages, life insurance and investments.Market GrowthDirect banking is growing at a tremendous rate, particularly as the traditional banking institutions adopt the service in an effort to realise cost savings by reducing overhead-laden retail activities. First Direct is adding approximately 75,000 new customers per annum (excluding acquisitions).Key TrendsThroughout the 1980's, the entire UK retail banking sector suffered poor reputations for service. With the market offering two extremes - retail banking that had become stagnant in a supply-driven business, and private banking that offered exceptional services but at a price - the market was exposed for the introduction of a new service that lay somewhere between the two, and took advantage of rapid technological developments and changing consumer preferences. Thus, direct banking via the telephone was born.
Market Structure* Competitive Rivalry is very high. Customers are both more able and more likely to choose their service based on price and quality of service. Technology such as direct banking means that banking is no longer localised.* Barriers to Entry are significantly lower than two decades ago. New technology, deregulisation and a reduction in physical banking activity has allowed smaller entrants to succeed in the market, and grow rapidly at the expense of established players.
* Supplier Power is medium - while the market is a long way from the supply driven market of the 1970's & 80's, the traditional banking institutions nevertheless exert a significant market presence.* Buyer Power is increasing as new entrants offer low cost alternatives.* Threat of Substitutes remains low.Competitive AnalysisFirst direct was not the first organization to offer 'branchless banking', but since 1988 has set the industry standard for delivery of the product. Almost every banking institution in the UK now offers telephone banking services to some extent.
The most aggressive direct competitors for First direct are Royal Bank of Scotland's Direct Line, Citibank Direct & Bank of Scotland's Banking Direct. Traditional branch based institutions remain competitive despite dramatically lower service levels, particularly for customers for whom direct banking appears daunting. Private banks are traditionally a substitute for retail banking operations, as they offer personalised service, although First Direct does attempt to match this through their CRM systems.Customer Buying PatternsMarket segmentationDirect banking has been embraced by the 25-34 year old age group (29% of industry). Indeed, the 21 - 44 age bracket accounts for 53% of customers. In the case of first direct, 72% of customers are aged between 21 ; 44 years.
While direct banking as a market is skewed towards individuals earning less than 17.5K annually, First Direct has deliberately targeted affluent clients, with 50% earning greater than 25.5K per year.Of note, 73% of First Direct's customers formally conducted their banking through one of the four 'High Street' Banks.Competitive StrategyFirst Direct employs a differentiation strategy, emphasising high quality service as its distinguishing feature.
This strategy effectively capitalised on consumer dissatisfaction with what was effective a supply led market up until the late 1980s.Positioning StatementUnlike the majority of direct banking services, which are complementary to branch based services, First Direct essentially positions itself as a substitute to the more traditional model. It aims to attract and service affluent clients appreciate the benefits of private banking but without the associated cost.Sourcees of competitive advantage* Lower operating costs are achieved in not having physical branches - these savings are used by First Direct to improve the quality of service, employ leading edge CRM technology and spend more on targeted promotional activities.* Back office procedures are handled by parent company Midlands, allowing First Direct to focus on its core competence of high quality direct banking.
* Customer screening during application means that 50% of its customers are affluent, earning 25.5K annually. Additionally, 86% are homeowners. First Direct essentially runs its chequing & saving accounts as loss leaders, and makes its money from offering higher end investment services to these relatively high net worth clients.
The Marketing MixFirst Direct aims to offer a similar product range to branch-based banks. Its basic service is the chequing account, held by over 95% of customers, which acts as a base for other investment and financial service offerings. Over 29% of new customers to First Direct have been recommended by friends or family.While First Direct pursues a differentiation strategy, there are also elements of cost leadership in its pricing. The bank strives to offer a private bank level of service without the associated cost.
Place is the key component of the marketing mix for First Direct. Branchless banking is clearly the way of the future, whether it be via telephone, internet and physcal ATMS. Direct banking allows First Direct to avoid overheads associated with maintaining branches, in addition to allowing them to service the entire country from 2 call centres in Leeds. Furthermore, this distribution channel is attractive to younger, affluent customers who are looking to save time and expect a greater quality of service.First direct focuses on producing witty, trendy advertisements in print & television, supported by direct mail activities that enable easy account application.
Over 26% of new customers are sourced from direct mail. Up to date technology and data mining drive First Direct's promotion to existing customers, with call centre operators trained to recognise situations where products may assist customers.A reversed organisational chart is also a key component of First Direct. Well over half of the employees deal directly with customers, and all have been through a seven week training program. Prior banking experience is not required to join the call centre team, but rather a proven ability in customer service is valued.Financial SituationAs a subsidiary of Midlands Bank, First Direct has access to considerable capital which enables the company to make acquisitions, such as the purchase of Britain's Forward Trust in 1997, which introduced B2B services to the organizations product mix.
Although specific financial results are not available publicly, First Direct is both profitable and geared towards long-term success.SWOT* Strengthso Strong brand, associated with high quality service;o Distribution model is highly attractive to young, affluent people;o Back office activities conducted through Midlands, allowing First Direct to concentrate on its core competencies;* Weaknesseso No longer a novelty - almost every financial services organization offers Direct banking to some extent;o Call centre capacity is straining;* Opportunitieso Create new market channels through B2B activity;o Internet banking;* Threatso Other FS companies have already introduced internet banking - looks like it will explode in popularity in a similar fashion to telephone banking a decade before;o Increased concerns of customers about security associated with banking over the phone and net.The critical marketing issue facing First Direct is maintaining quality of service while still targeting rapid growh.As First Direct's customer base grows, distribution of its services is the key element of its marketing mix.
The company must look at either extending its existing distribution channels, or finding new channels in which to service customers.Ideally, the new distribution element should include any increase in cost to First Direct or the customer, and indeed ideally represent substantial cost savings. As with telephone banking, there should effectively be no limits as to where and how the customer can access the products.
