Understanding Suncorp’s US marketplace model

  • By Elizabeth Fry

The stakes have been raised for Suncorp Group's bold new marketplace stategy as operating expenditure is increasing and costs are rising, forcing mangement to carry out yet another "business efficency" plan.

The Queensland financial services group had planned to roll out its marketplace strategy over three years, so the recent decision to up the spend this year by $100 million was unpopular with shareholders who wiped nearly $1.2 billion from Suncorp’s market capitalization on the news.

“But like it or not, the marketplace is coming,” argued Morgan Stanley analyst Daniel Toohey, in a note to clients about the US insurance-banking company USAA which illustrates what Suncorp chief Michael Cameron’s is trying to achieve.

“USAA shows it can be done. USAA's experience shows the potential of Suncorp’s marketplace strategy although there is significant execution challenge” Toohey said, explaining that USAA is a customer-owned, US$30 billion bank and insurer based in Texas whose membership is made up of US military and their families.

“USAA has among the highest net promoter score of any US company and its customer retention is 98 per cent,” Toohey claimed.
 

Bold ambitions

Building a digital platform with a single view of the member (across banking or insurance) and guiding them through "life events" in partnership with other parties was the first key step to USAA developing the marketplace, launched in 2010. But Toohey stressed that the USAA model is somewhat unique because of its military community.

“The cost of acquisition is zero. Trust levels are high, with 81 per cent of customers believing USAA works for them not the bottom line. Profit is US$150 per member versus Suncorp’s $110 per customer.”

Moreover, he added, about one-third of staff are ex-military (or spouse thereof)), 97 per cent are proud to work at USAA and it ranked as the "Best Workplace in US Financial Services 2017".

In Toohey's view, Suncorp’s ambitions seem bold given the model demands high levels of trust, particularly as the marketplace solution implies the best deal, as determined by Suncorp.

“Building an 'ecosystem' demands high interactivity and engagement, which is not your typical insurance customer," he wrote.
 

Leap of faith

The analyst added that execution demands a leap of faith with no insight from any pilots or customer research, no target return on investment or profit and loss of accountability for delivery.

“The USAA model highlights the major value driver is not cross sell, but higher retention with a marketplace built on discounting.”

Toohey also pointed out to clients that the digital platform was supposed to be self-funded from earlier simplification efforts with a "flat cost base" of $2.7 billion targeted for the two years to 2018.

Yet, since 2010, while Suncorp’s cost out programs have targeted almost $1 billion of savings, underlying costs have grown by $830 million. The cost programs since 2010 include "Building Blocks", "Simplification", "Optimisation", "New Operating Model" and the current "Business Efficiency".

Now, it seems that with operating expenditure trends deteriorating, Suncorp has been forced to commit to yet another business efficiency program.

“With discounting failing to drive growth and scale benefits, cost initiatives were a necessity," said Toohey. “To us, the implied simplification benefits had largely been exhausted. The latest program aims to keep group opex flat at current levels.”