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TQM IN BANKING

by Rene T. Domingo (email comments to rtd@aim.edu)

Most bankers would like to believe that banks are in the finance industry, and not in the service industry. Thus they tend to compete in terms of financial prowess rather than service quality. People, resources, time, and systems are devoted more to managing assets and cash rather than managing customers and service. In fact most bank systems are designed to control customers rather than satisfy customers. Products and procedures are set up for the convenience of the bank rather than that of the customer. A big bank may have as many as three vice presidents responsible for guarding its assets, but no one to take care of customer service and complaints. Banks usually give customer service and satisfaction very low priority, and accordingly assign it to a low level, if not lowly-paid, manager. Few or none of the bank's elaborate systems and structures are designed to monitor and maintain customer loyalty.

The lifeblood of any business is its customers. Profit comes from sales minus cost. Sales must be realized first before cost becomes relevant. Customers decide sales based on their perception of product and service quality. In short, quality determines profits, and customers alone define and determines what that quality is and should be.

Fast-food chains, airlines, hotels, supermarkets and other service sectors have started to embrace quality as their raison detre, following the success of the quality movement, known as Total Quality Management (TQM) in the manufacturing sector. Banks and other financial institutions, like insurance companies and investment houses, are relatively slow in shifting into this customer-first paradigm. Historically, banks were conceived as sophisticated control systems since it does business with the most liquid of assets: cash. Banks have to maintain image, reputation, and credibility in order to do their job as custodians of other people's money. But over the years, the complex systems and bureaucracy were set up and added in the name of control while sacrificing and neglecting customer service in the process.

Total Quality Management (TQM), which is about total customer service and continuous customer satisfaction, is applicable not only in the manufacturing industry but in the service sector as well, where the customer is just as important. In fact, customers in the service industry are more sensitive to service quality and service delivery than in manufacturing because they are always in contact with front-line service personnel, which is not the case with factory workers. These points-of-purchase contact or "moments of truth" decide whether the customer will come back or shift to the next door competitor.

The banking industry, often the biggest service industry in any country stand to benefit from TQM. For one basic reason: banks depend on customer satisfaction and loyalty for their survival, but ironically, very few really pay much attention to the plight of their clients - before, during, and after sales.

Many banks are managed by finance people, with little or no training in customer service. Good service does not happen naturally or by accident. Good service is planned and managed. Without planning, bad service is the natural state of affairs. As the quality guru, Dr. W. Edwards Deming put it, to improve service quality, one has to have profound knowledge of the service delivery system. Bankers tend to think that money - not the customer - matters. They find it hard to accept that banks are in the service industry in the same league as McDonalds, Singapore Airlines, Federal Express, Domino Pizza, and Marks & Spencer. Because of this antiquated paradigm, banks could not appreciate the excellent and valuable lessons in customer service and people management which these world-class service institutions could offer for free. Customer service will not improve if banks just learn and copy from other banks: the world class bank in terms of service does not exist yet.

In general, the bigger the bank, the more inferior the service because of complacency and bureaucracy which stifle both innovation and efficiency in customer service. The big bank can lose customers because of bad or slow service but can easily replace them with new and even bigger customers,thus hiding the service problem.

Presently banks are ranked, benchmarked, and judged of their success by sheer size, financial resources, and other quantitative measures which hardly indicate customer service quality: asset base, number of ATM's (automated teller machines), number of transactions, number of depositors, amount of loans released, etc. Bank executives are mainly involved in asset management (the bigger the better), cash flow management, spread management (the wider the better), asset/liability management, and financial ratio analysis.

According to John A. Young, President & CEO, Hewlett - Packard, "Our one major goal is to create satisfied customers. Hence, all systems, objectives, and measurements are designed to improve customer satisfaction." A bank applying TQM should track as goals and benchmarks those that matter to the customer:

  • processing times of key products and services, like loans, new accounts, ATM cards, credit cards, check encashment;
  • waiting times like downtime and queuing time;
  • customer complaints, written or verbal;
  • friendliness and efficiency of staff;
  • accuracy and timeliness of statements of accounts and records;
  • effective interest rates, inclusive of all service and hidden charges;
  • promptness in responding to customer inquiries such as in answering the phone, the number of rings before phone is picked up, and number of transfers before the caller talks to the right person.
  • lost customers and accounts

These service indices should then be audited as regularly and as conscientiously as the bank internal auditors audit cash flows, transactions, and balances. McDonald's inspectors, equipped with standards and stopwatches, regularly check branch performance in terms of quality, service, cleanliness, and value. They make sure all branches have the same consistency in product and service quality. In other words, the customers will not have any "surprises". Contrast this to banks, whose service quality differs by branch, location, and branch managers. To aggravate the problem, head office rates and promotes branch managers based on the sheer business the branch generates: loans released, interest earned, and deposits generated; they are seldom evaluated on customers satisfaction, service, and complaints, No wonder branch managers do not pay attention to customer service since it does not affect their performance evaluation. Most banks therefore do not have a system to handle errors or customer complaints, verbal or written, .

Electronic network companies which serve the banking industry's ATM needs often proudly compare themselves through print media in terms of number and amount of transactions, number of machines installed, and number of member banks. But they are silent on what is important to the ATM customer: machine and network downtime and breakdown, which often cause a lot of inconvenience and frustration. User-friendliness is another thing they forgot. One ATM I have used was not programmed to accept deposits, only withdrawals - a mysterious decision with a confused sense of business priorities. One of the networks was designed without the customer in mind. You key in your PIN security code and then it prompts you to painstakingly enter all information necessary for the transaction. After waiting for a few anxious seconds, the machine tells you that the network is down or your bank is not connected to the network! After entering his security code, the machine should have told the customer immediately that his transaction could not be processed, rather than waste his time answering questions unnecessarily. Indeed, customer service is too important to be left in the hands of finance managers and/or software engineers and programmers. There are many other anti-customer systems and policies that banks employ knowingly and unknowingly.

Friendliness is just as important as efficiency to customers. Many banks have neglected the basics in salesmanship and service: no Greetings when meeting customers, no Thank You's after any and every transaction, no Eye Contact with the customer, no Apologies for having kept you waiting. In Japanese banks, tellers are trained to thank the customer all the time even if he withdraws money, and to apologize if he was kept waiting longer than the standard time. Depositors, borrowers, inquirers, in fact, anybody who enters the bank are all treated as customers with immediate and thorough attention. In contrast, the first to welcome customers in many banks in Asia are heavily armed security guards. Managment thinks that the only way to intimidate thieves is to intimidate everybody else, including their own customers. The banking industry has probably the largest training budget in the private sector, next to the airline; with so much to be desired in customer service quality, these huge sums are obviously wasted in training the wrong people in the wrong things.

What are the consequences of bad service? According to the TARP report on Consumer Affairs submitted to the White House:

  • 96% of unhappy customers never complain about rude or discourteous treatment
  • 90% or more who are dissatisfied with the service they receive will not buy again or come back
  • each of those unhappy customers will tell his or her story to at least nine other people
  • 13% of those unhappy former customers will tell their stories to more than 20 people.

The financial consequences of slow service and processing could also be staggering. In manufacturing, the quality cost, or the cost of not doing the right things right the first time, is estimated at 15%-35% of sales of any company. One major international credit card company I have studied in Indonesia was having a negative ROI or -7% because of system inefficiency in processing foreign billings and invoices. It took the company 3 months from time it pays the member-merchants to the time it collects the money from the foreign card issuer. Analysis showed that if they could streamline operations, and cut this time to one week, the company could have a potential ROI of 112% ! Indeed, there is money in efficiency. But few banks realized that if they continuously cut all processing times, it becomes a WIN-WIN situation - customers are happier, and the banks make more money.

TQM starts with leadership committed to quality. I have yet to see a bank CEO who could come down from his executive suite at least once a year and stay in the ground floor for one whole day observing and noting how customers are being served. Top executives could regularly pose as customers, tellers, or security guards to get a feel of the situation. If top management can perform this feat and institute meaningful changes and systems based on its observation and hands-on experience, then the bank is on its way to becoming a truly world-class bank -a bank of service excellence.


 

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