Strategic Business Management on First Direct

By SADIQ YUSUF YABO

Introduction

In only 7 years First Direct became the fastest growing bank in the Britain. It was the UK’s first
branchless bank and retail telephone banking service. The following report analyses the case of
First Direct: Branchless Banking, it attempts to explain the various factors employed which made
it such a success in an industry that was plagued with customer apathy. In the first section of the
report we give a brief history of the company; we then analyse the company’s current position
using the marketing audit (macro and micro analysis). We are then able to use SWOT to identify
the strategies used by First Direct between 1989 and 1996 which made it an innovative market
leader in an era of technological advancement. In Chapter 2 we give our recommendations of
strategies that could be employed by First Direct after 1996 based on our analysis results.
Chapter 3 is an updated company overview, outlining the strategies the company employed and
the company’s current position in the market (1996 onwards). In the conclusion we identified
the various factors that

Chapter 1: Analysis

1.1 Brief History

First Direct was set up as an independent division of Midland Bank, the fourth largest bank in the
UK. Market Research conducted by a team of executives lead by Mike Harris, found that a
substantial amount of customers did not use branches and the level of satisfaction of those that
did was relatively low. This can be supported by an MORI study in 1988. Consequently, First
Direct was launched on October 1, 1989. First Direct operated from a central location which
could be accessed by customers via telephone 24 hours a day, 7 days a week, and 365 days a
year. Customers were increasingly disillusioned with the traditional banking system. First
Direct could take of advantage of this situation as they were able to offer customers an efficient
service that was easily assessable. By the end of 1994, First Direct achieved break-even and
gained their first full year of profitability by the end of 1995. The highest net gain of UK
customers transferring their checking accounts was secured by First Direct from 1994 to 1995.
First Direct far extended the original aim of building a niche position in the market. First Direct
had attracted more than 650,000 check account customers since its conception (Key Note Report,
1997).

1.1.1 Overview of Performance and Strategies employed

The low cost of running the company and high customer satisfaction served the company well;
profits were higher than other financial organisations and the company was able to gain more
customers through advertising and recommendations from existing customers.

Exhibit: 2
First Direct: Estimated Account Data
Date Total number of Total number of Calls/day Staff
customers accounts
Apr-96 641,000 1,100,000 32,000 2,400
Dec-95 586,000 800,000 26,000 2,300
Dec-94 476,000 700,000 21,000 1,900
Dec-93 361,000 500,000 16,000 1,500
Dec-92 241,000 350,000 11,000 1,000
Dec-91 136,000 200,000 7,000 500
Dec-90 66,000 105,000 3,000 300
Dec-89 11,000 N/A N/A 250
Source:” First Direct: Branchless Banking” INSTEAD, Fontainebleau, France, 1997.

First Direct has a number of guiding principles which served to make them such a success.

• Brand differentiation - They built a brand customers could identify with.

• A proposition designed for the customer - they decided to build a bank for the customers and
not for the bank. They didn’t and still don’t talk about the process but rather the customers.

• An internal culture founded on clear core values, constant mining of customer information
and the relentless pursuit of alignment.
They made sure internally that their values and behaviours were consistent with the way they
wanted the brand to manifest itself to the customer. First Direct had six core values with which to
achieve this namely: responsiveness, openness, right first time, respect, contribution and kaizen.

1.2 Environmental Analysis

1.2.1 Macro-environment (PESTEL analysis)

• Economic-Subsidiary of Midland Bank and from 1992 part of HSBC – had economies of
scale due to HSBC resources. Meant less expenditure as it benefited from the development of
HSBC.

• Economic – The large number of branches opened by banks and building societies in the
early 1990’s had an adverse effect on the economy. This resulted in mergers and banks had
to be downsized and costs had to be cut to prevent a recession.

• Social Cultural – fast paced lifestyles. Professional Individuals who lived increasing fast-
paced lifestyles were enticed by speed, efficiency and convenience.

• Technological – The early 1990’s were rife with Technological advances in banking.
Automated Teller Machines were becoming increasingly popular and telephone banking was
widespread. There was a radical change in payment options during the early 1990’s and the
Plastic card (debit cards and smart time) were increasing used as a replacement for cash.
Home banking was launched in 1995 by Barclays bank which could be accessed from the
customers’ personal computer.

1.2.2 Micro-environment (PORTERS)

• When it launched First Direct had no direct competitors in the UK as it had an improved
speed and service for customers, attracting a niche market (affluent and regular depositors’).
There was increased competition by the mid 1990’s as most banking institutions offered
some form of direct access for their customers.
• The Likelihood of entering the market is high, this is due to the Banking act of 1979 which
allowed banks and building societies to offer a wide range of personal services and not much
investment, which made the market easier to enter. By 1996 the use of telephone banking
(see Exhibit 1) was widespread throughout the industry and many banks and building
societies have started to realize the benefit of telephone banking services. New organisations
like Virgin Direct were offering savings plans and low cost life insurance via the telephone.
Many companies were learning from First Direct’s example and following suit.

• Substitutions: Traditional banking A significant minority of First Direct customers had

spontaneously requested PC access to their accounts, although most banks and building
societies offered their customers some form of direct access

• Buying power of customer: The power of the customer is high. As described in the case
study one, 1 in 5 people could not distinguish between the services offered by different banks
and customers are usually unwilling to switch banks. Banks had to offer unprecedented
service and offers to lure potential customers from the competition.

• Power of suppliers: As banking is a service industry, there is a low supplier power.

Telephones and computer are obtained from the suppliers but the company probably has
many different suppliers from which these are sourced

1.2.3 SWOT

Strengths

• Easy Access
24 hour banking enabled customers to retrieve their bank information at any time. Customers
were not forced to go into the branches to make minor enquiries and transactions. Faster, simpler,
more efficient methods of banking attracted many customers.
• Customer Service
Business Representatives used a Customer Information System to have access to customers’
accounts and history; it also records every customer contact. Business Representatives could
handle 85% of all calls without transferring calls. Minimum company service objectives
required that 75% of all calls be answered in 20 seconds or less. Business Representatives could
record customer information gained during telephone conversations (such as customers’
vacations) on MIND and so allowing BR’s to comment on them in the future. Customers’ felt
valued and individual which gave First Direct a distinct advantage; customers’ could easily
differentiate between First Direct and other banks.
• People development

First Direct recruited individuals who were from social professions. Individuals who were fast
and efficient workers with empathy and able to work under pressure while maintaining warmth
and sincerity. Business Representatives had to undergo a 7 week intensive training course. BR’s
were required to pass a total of 54 internal accreditation tests within 9 months of employment.
With career development and performance bonuses (which could go as high as 5% of the annual
wage) employees were given incentives to remain with the company. Various team building
exercises were regular to maintain good team rapport. An open plan office environment ensured
a good working relationship between staff and managers.

• Low costs

First Direct offices were based in Arlington and Stourton in Leeds. The lower cost of wages and
rental rates were highly attractive to the fledgling company. The ‘hot desking’ approach was
used to be able to utilize all available space and keep costs low. First Direct made use of
efficient information systems; this was instrumental as the databases were used in every aspect of
the business. First Direct had only 2400 staff members in 1996 serving 641,000 customers. A
branch based bank would require almost 4000 employees to serve the equivalent number of
customers.

Weaknesses
• A culture built on innovation was difficult to maintain as the company needed to continue to
develop their technologies to be on the forefront of the financial services sector. If an easier
and faster means of banking was developed by another organization customers would be
drawn to them.
• Another potential obstacle would be maintaining that ‘innovative culture’ as the company
inevitably expanded to more than 10,000 employees spread over numerous sites.
• The company was growing at an incredible rate and they had to maintain the service and
price that made them a success.

Opportunities:
• Room for expansion while keeping costs low.
With profits from 1995 onwards, and growing number of customers due to word of mouth and
advertisements, there was ample room for expansion. Currently with over 640,000 customers
and objectives to increase customer base to 1 million customers by the year 2000. First Direct
could expand to more sites.

• Technological Investments
As an arm of HSBC, First Direct would be able to benefit from their technological
investments, keeping it at the forefront of technological innovation whilst keeping their costs
lower than other banking organizations.
• As the call centers were a hub for all communications, this forced service standards to be
higher than usual. Customer relationships were built and this would lead to more
opportunities to expand customer base due to word of mouth advertisement.
• Cross selling of various services
Databases which recorded customers personal details could be accessed by BR’s and
promoting services which they required, as well as sending them brochures of services at
times they might need them, would increase sales and profit for First Direct. Lower prices
for these services which ensure more customers were attracted by them. Also the higher wage
individuals whom First Direct targeted, most likely car owners, would be more than likely to
be attracted by the insurance, mortgages, credit cards, offered by First Direct.

Threats
• Increased competition from retailers as well as private companies i.e. Virgin Direct could
pose a problem in the future as many of these new organisations also offered the same
services and the market could become saturated.
• Increased use of electronic banking being offered by Nationwide, Bank of Scotland and
Clydesdale- If electronic banking were to become the norm and First Direct did not enter the
market, they would not have the advantage in the electronic age and would not be able to
maintain competitive advantage.
• Increased use of electronic banking also meant lower costs for other banks, if First Direct did
not enter the market, they would have to increase prices to maintain their outgoing costs and
would not have the competitive advantage in terms of pricing it currently has.

CHAPTER 2: RECOMMENDATIONS

This section will in essence capture concepts and deliver thorough recommendations as to where the
growth can be steered for First Direct for 1996 onwards in order to sustain and enhance market
position in what is an ever so growing sector.

Through our research of First Direct & the industry as a whole, we would propose and expand the
following four recommendations:

2.1 On-line home banking

One of the key elements of First Direct was innovation. They were leaders in telephone banking.
To be able to maintain their customer base they had to continuously be innovative to stay ahead
of the competition. If on-line banking took off, by not entering the market, First Direct could
forfeit many customers, wanting faster easier access to their accounts.

This graph, taken from a recent Gartner Group report shows a prediction of the number of
Internet users worldwide to 1998. Even in this limited timescale, the prediction varies between a
"conservative" 40 million and the "optimistic" forecast of some 160 million users. To set these
global statistics into a national context, a recent study by IDC suggests there are some 1.3 million
users in the UK in 1995 and forecasts this will grow to 7.7 million by the turn of the century.
Studies carried out by research organisations indicated that in 1996 there were 3.40 million
internet users the UK.

If these predictions were to be realized it would be a good investment for First Direct offer
online-banking to their customers. One of the key features of first direct was the high standard of
service quality which reduces prices and adds value to the customer. By going for an on-line
banking route, First Direct would have to ensure high service quality, easy access to accounts
and be able to transfer funds, transfer to third party and order cheque books a service that was
already offered by Clydesdale. By offering 24 hour on-line access to customers as well as the
telephone banking service, customers could clear up any transactional or account queries.

2.1.1 Implications of online home banking

• Low cost
By entering the on-line home banking market, would decrease costs. By being an arm of HSBC,
First Direct could make use of their technological investments. Customers using on-line banking
would reduce the number of calls made to the centre; more employees would not be needed if the
customer base were to increase, thus reducing costs to the company. These lower costs could be
then passed on to the customers
• Disappearance of one –on-one customer relationship
On-line banking would reduce the contacts between the customer and the Business
Representatives. This would limit First Direct’s opportunities. The aspect that set First Direct
apart was their customer service; they would lose this aspect with the onset of on-line banking.
First Direct would need to find other methods of delivering value to customers. By introducing
customer personalized websites- allowing customers to choose designs and ‘themes’ to
personalize their on-line account. Also when customers signed up for on-line banking they
would be asked a series of required questions relating to car ownership, amount of travel they
did, family details etc. Information could then be forwarded to them relating to various forms of
insurance, travelers cheques etc.

2.2 Business Banking

The culture structure through the generation of First Direct has been to accommodate the needs and
requirements of the individual, this being their core competence. First Direct have done extremely well to
implement and sustain their high levels of service, showing in the fact that they are currently attracting over
1,200 new customers every week. Using the Internet as a platform, they should now be thinking of
introducing Business Banking to cater for the needs of those in the corporate sector. They can offer lower,
more competitive rates and offer a 24/7 facility which no other bank is offering. We feel this move would be
advantageous for the growth of First Direct. (Example of services which could be offered- Appendix 3)

2.2.1 Implications
First Direct would need to set up a separate section focused only on businesses. This section would
comprise of Relationship managers who deal specifically with 1 or more businesses, offering personal
banking advice.

2.3 Expansion into Republic Of Ireland & Within UK

First Direct is enjoying a commandeering market position within the banking sector in the UK, in line with
the company’s aspirations to grow; we believe that their culture and ethics can see them grow organically,
with the Irish population of 3.6 million and an environment that is close to the UK. First Direct could have
first mover advantage by offering this branchless banking facility, their call centre, depending on the size of
the operation, could either be based in Ireland or integrated within sites in Yorkshire with the company rapidly
expanding; adding approximately 10,000 current account holders every month. First Direct would need to
expand. Their call centers are currently based on 2 sites in Leeds. In order to manage the influx of new
customers, First Direct would need to establish one or two more sites to house the staff required for the
expanding business. By having more sites, we think First Direct would need to re-organize their management
methods. In 1996, First Direct had restructured their business into 5 units. Each business could acquire
customers directly. We think that this structure would be effective for going forward, the art to sustainable
growth is to have key organizational skills.

2.4 Corporate Restructuring

At present, First Direct headed by Kevin Newman, who has positioned the structure of the company into
5 business units led by Richard Ruston, with six other directors jointly looking after different aspects of
the business. In order to sustain the culture of delivering to the individual needs and also a significant
growing client base (On average 10,000 new accounts per month, plus the added potential of increasing
Irish and Business Bankers). A sound recommendation may be to create individual areas for different
departments with allocated team leaders, for example; Personal Banking (UK & Irish)
/Savings/Investments alongside the Business Banking and Mortgages/Lending (Secured/Unsecured).
With expansion First Direct has to keep the ‘soft’ implications of their decisions in focus. A
business like First Direct whose operations are around the clock, 365 days a year relies heavily on the
customer service provided by its employees. They can motivate their staff by having team building
sessions in order to involve them and treat them as an integral part of the company. It can also provide
educational facilities so that all staff can practice all aspects of First Directs business e.g. In an event of
having to deal with multiple queries with the same customer if need be, but also if a high volume of calls
in any one department spilled over and the need to respond was exercised within the 20 second policy of
the company. This will also keep the employees in high motivation and retain them longer.

CHAPTER 3: FIRST DIRECT POST 1996

First Direct has maintained their customer loyalty from their inception in 1989. According to
MORI and NOP research, First Direct has been the most recommended bank in the UK for the
past 13 years and currently has over 1.2 million customers

3.1 Innovations
First Direct has remained innovative since 1996 offering customers easier, more efficient access
to their accounts via various channels; fitting in with increasingly faster paced lifestyles and
technological advances. These innovations have kept them ahead of competition and have
ensured First Direct’s success in the banking industry.
• On-line home banking
The bank began limited trials of Internet Banking in July 1997, launching the service fully in
1998. 880,000 of their customers currently use internet banking. Indeed, in an effort to reduce
costs, First Direct has implemented measures to divert customers to lower-cost channels. First
Direct managed to boost profits considerably by redirecting 80% of transactions online without
impacting satisfaction levels. In addition First Direct introduced web chat to their
online service allowing customers to receive immediate answers to queries about
their accounts.
• Text Banking
First Direct, the first company to do so, offers a truly innovative service where you can have free
weekly mini-statements sent to your mobile phone as a sms text message. You can also set up the
service to send you a message when your account gets above or below a certain balance, or when
your account is about to be overdrawn. Text Message banking works with savings, credit cards
and the First Direct current account.
• iPhone Banking
First direct is making use of the latest technologies to bring Internet Banking to the iPhone. They
enhanced their Internet Banking service to provide a seamless online experience for all iPhone
and iPod Touch users. iPhone and iPod touch users can access their online account, make
payments and apply for new products.

3.2 Expansion
First direct is based at two call centres in Stourton (Leeds) and Hamilton, South Lanarkshire,
Scotland. Hamilton is the larger of the two call centres however the Leeds call centre handles
risk assessment and some processing roles. First Direct did not extend outside the UK, showing
sustained growth. By managing their growth they were able to concentrate on customer service
as well as innovative technologies to keep existing customers and gain more customers within
the UK.

3.3 Offset Mortgages

Alongside looking after the needs of the customers, in 2001, First Direct introduced an offset
mortgage to its list of products on offer, which was to encourage some of its heavier depositors
who have their mortgage with First Direct to reduce the amount of interest payable on the debt
owing. This can be seen as a great product and cost saving to many mortgage holding customers.

3.4 Customer dissatisfaction with the Business Model

The company, First Direct enjoyed the business model of attracting affluent customers, who
frequently deposit money or keep a consistent balance in the account. This way of operating
worked for the company since birth in 1989, however the bank in November 2006 gave plans to
implement a statutory charge of £10 for those account holders having an average balance of less
than £1500. It was meant to encourage clients to keep their current account in such amount of
credit to enjoy the free banking. The idea may have seemed like a good from the company’s
perspective, i.e. keeping only the most affluent customers, who brought the company the most
profit and discouraging the less profitable ones. Unfortunately, it alienated a vast amount of its
client base as an article published by the Financial Times claimed that, within a month, almost
20,000 accounts had been closed down.
3.5 Environmental Awareness
First direct has become the first direct banking operation to go 'carbon neutral' and reduce
carbon dioxide (CO2) emissions to zero. First direct is achieving its goal by reducing energy
use, buying green electricity and then offsetting the remaining CO2 emissions in carbon
reduction projects. To go that one step further it has also introduced initiatives on its Leeds and
Hamilton sites to help expand its environmental
CONCLUSION

The main recommendation for First Direct is to control the levels of growth in and around the
company; they will need to ensure that the employees and customers are in tune with the targets
set and plans outlined. They will have to ensure that they continue to meet the needs of their
existing client base in order to platform this success onto new clients.

For the development of First Direct in the future, in order to sustain target driven growth they
will need to continue their cultural stance on being a leader of innovation and cutting edge
technology throughout the banking industry.

First Direct’s success is quite limited due to the fact that they only operate within the financial
sector. Due to this they do not have an exit strategy and in the current climate (credit crunch)
future success is unpredictable.