Banks Become Customer-Centric

M.Jayadev The post-liberalized banking sector in India has been witnessing spectacular changes; one among them is banks foray in to retail banking. Retail banking has emerged as core function of select commercial banks. It is the fastest changing area in commercial

banking. The following reasons can be attributable for this Cchange.

Competition: The Reserve Bank of India (RBI) prime regulator of financial sector has removed several artificial barriers and which made the banks and non bank companies to penetrate in to wide range of financial services. The line dividing the banking, insurance and capital market services is disappearing and the commercial banks are offering these services under one umbrella. Banks and Non bank companies are offering similar retail financial services, for example car loans, similarly primary dealers like PNB Gilts are offering GOI securities which are complimentary to Bank Deposits.

Consolidation: Consolidation is in progress, the huge monolithic organization ICICI is merged with ICICI Bank Ltd. The two public sector entities IDBI and IFCI are on the way. Some time back Twentieth Century Finance Company, a non banking company is merged with Centurion bank. Public sector giants like Punjab National Bank is spreading its tentacles, its intention acquire Nedugundi Bank is in process.

Computers and Information Technology: Traditionally retail banking is built on the foundation of physical branch network. Now, the technology has emerged as a perfect and, effective substitute to physical branches through ATMs, Call centers, Home banking and Internet banking. Several parallel distribution systems have emerged for delivery of services.

Customer Centric: Due to increased financial market products like Commercial paper and variety of financial instruments big corporate clientele of several commercial banks

Published in Professional Banker, January 2003,Vol.III No.1 pp-58-62. Dr. M.Jayadev is Associate Professor, Indian Institute of Management, Lucknow.

have shifted their loyalty and have been raising resources from the market directly and commercial banks have become more retail customer centric by offering wide range of services. Banks have identified new customer segments like students, working women, and rich net worth individuals.

Customer Relationship Profitability: Regulated era has given assured profits to banks, but in the post deregulation period as margins are falling down substantially banks are concentrating on customer relationships.

This paper presents a frame work of retail banking and discusses strategies to improve profitability.

Retail banking has coverage of both asset and liability side products. Banks can devise suitable strategies of segmentation, delivery channels and pricing by understanding the frame work of retail banking. Banking services can be divided in to three categories from the dimension of retail banking. Core service, facilitating service, and supporting service. Core service is reason for being in the market, facilitating services are needed so that the core service can be used, and supporting services exactly discriminates the service package from the services of competitors.

Figure 1: Categorization of Retail Bank Services Core Services Payment Services Facilitating Services Cash Foreign Currency requirements Traveler cheques DD/Bankers Cheque TT EFT ATM Card Standing instructions from customers for making payments Inter branch /inter bank transfer of funds Safety vault Supporting Services Making payments door step Internet Banking Telephone Banking

at

Current Account and Savings Account

Loan Products: Consumer Loans Personal Loans, Housing Loans, Educational Loans

Current Account Saving Account Time Deposit a/c

Credit cards Debit cards Services to senior citizens Telephone Banking Internet Banking Conversion of excess balance to Time Deposit. Delivery of loan at promised time period Interest rate option: fixed/ floating Flexibility in prepayment of loan Counseling on Real estate markets Legal Services for documentation ECS for payment of Loan installments. Additional insurance facility for family members Counseling on post retirement savings.

Insurance Products: Life Insurance, Pension Schemes

Current A/c Savings A/c Time Deposit Safety Vaults

Market Segmentation: The success of retail banking lies on market segmentation, innovation, and pricing of products or services. Banks have to focus on market segmentation to identify differences between groups of potential customers and to decide which products can be served to which groups. McKinsey has identified four principal segments combining personal attitudes to finance and demographic data (see Figure 2). This segmentation is suitable to all emerging Asian Markets. The ICICI bank in India ha adopted Life Stage Segmentation Strategy. This approach aims to minimize overlaps between two segments by categorizing customers in to various segments based on the stage of life they have reached. The Banks philosophy is to have a product ideal for every stage of an individuals life from child hood to retirement and the bank has a wide product range. ICICI bank is also adopting a strategy of creating a liability based produced along with an Asset based product and vice versa. The potential segments which many banks have not explored so far are self employed people and House wives. Self employed people due to lack of proper identity (i.e. either salary certificate or PNR Number) are still borrowing at a higher rate and banks are not assessing the credit risk premiums properly. Similarly a suitable banking product is required, which makes the house wife to feel liberated and empowered. The survey of NCAER shows that rural India is gradually possessing

variety of consumer durables and electronic goods. Banks have to design suitable products to meet the requirements of rural rich and rural poor. Census of 2001 shows that India has 423 towns (Eight Metros, 19 Mini Metros, 396 Towns), Financial

products are very rare for urban poor and low salaried persons. Innovation: The scope for innovation in financial services is unlimited. Although banks have introduced variety of deposit and loan products , the basic features of all these products are almost one and same. Among the delivery channels, ATMs have emerged as

ubiquitous money centers, almost all banks have established there ATMs. In 1997 India

had only 400 ATMs, which increased to 3600 by the end of 2001. Out of this 881 ATMs have Swadhan connectivity. It is projected that the number of ATMs will reach to 35000 by the end of 2005. The question arises is, are they cash cows? The answer is certainly not. For most of the banks the overhead costs on these ATMs are far higher than the revenue generated by them. ATM operation costs are largely fixed in nature the cost of the machine, its maintenance, replenishment of currency, and the satellite (network) connection. There should be minimum number of transactions to cover these costs. Banks have to innovate wide range of services in addition to cash withdrawals. ATMs should allow customers to buy postal and revenue stamps, payment of bills, event tickets, sports tickets etc. Banks can offer ATM screens for slide show advertising also. However, the advantage of the ATM has always been speed and convenience, probably on introduction of these new services; customer has to spend more time at a point. ATMs can guide the customer also. For example if a customer account balance has reached to bare minimum the ATM can give a helpful suggestion that we notice your balance is low, can we help with a loan?

ATMs can be either with in the premises of branch or at remote place. On premises ATMs are highly immune to competition, but branches can reduce the staff, on replacing ATM. The scope for wider services through off-premises ATMs is very high; it

provides great opportunity for fee revenue. The cost of maintenance of off premises ATMs is higher in terms of replenishment, cash couriers, armed security etc.. In the US approximately 23% of ATMs are offering sale of postage stamps. It is the right time for banks to question them selves whether ATM is a service channel? Sales channel? or branding opportunity? The future of retail banking lies more in mobile banking. Mobile telephone market is penetrating, and mobile phones are ideal to utilize internet banking services without customer accesses to PC. By a tacit acceptance India has around 3 million mobile phone users and this number is expected to reach to 8 million by 2003.

Smart card revolution will further change the face of retail banking. Smart cards can store information; carry out local processing on the data stored and can perform complex calculations also. At present India has around 3.4 million smart card users and it is estimated that by the end of 2004 it will reach to 14.7 million.

Price bundling: Price bundling is a selling arrangement where several different products are explicitly marketed together to a price that is dependent on the offer. As banks are multi product firms this strategy is more applicable to retail banking. Price bundling offers several economic and strategic benefits to a bank. It offers economies of, utilization of existing capacities and reaching the wider population of customers. Bank can get the benefits of information and transacting. In the process of extending variety of services, banks are acquiring enormous amount of customer information. If this information is

systematically stored, banks can efficiently utilize this information in order to explore new segments and to cross sell new services to these segments. Cross selling

opportunities and larger customer base can also be the motive for merger against usually stated advantage of cost savings Price bundling can be used in order to lengthen the relationship with a customer it will reduce the need of resources to be put on acquiring new customers and saves time of the bank. Among the strategic benefits, price bundling may cause less aggressive competition; it differentiates its products compared to rivals in the same market where the products are sold individually or in other kinds of bundles.

Retail Banks offer many services and it gives an opportunity to the bank to combine different services in different kinds of bundles. In many cases demand for one service affects the demand for another service, for example current or savings a/c and payment services are highly related, and here price bundling is a better alternative than individual selling. Banks have to analyze the customer segment, bundle products, bundling form before applying the pricing strategies.

The first step in price bundling decision is to select the customer segment the bundle is targeted to and to choose a strategic objective. If there are two products (A and B) that are considered to be bundled together the comprehensive strategic objectives for the different customer segments are; (a)Cross selling to customers that only buy one of the products (b) Retaining customers that already buy both of the products.(c) Acquiring new customers when they buy neither product for the time being.

Product A

YES Retain Customers

NO Cross Sell to Existing Customers YES PRODUCT B

Cross Sell to Existing Customers

Acquire New Customers NO

Figure 3: Strategic objectives for price bundling in order to enhance demand.

Profits from Relationship

Customer relationship is the base on which the structure of retail banking will evolve. The cost to develop customer relationship is always higher than the revenue, but when the relationship grows new demands will appear and then the incremental revenue would be higher than incremental cost (see Figure 4). The costs associated with building up of relationship are huge. They are, advertising costs, price incentives, setup costs for

accounts, information and service costs etc.

The reality of retail banking is large fixed costs, customer driven costs, high relationship origination costs and considerable cost differences in serving the customers through the different distribution channels.

Customer service delivery is pivotal for success of retail banking. This is not possible alone through technology. Process consistency within and across service channels is paramount. Banks are increasingly making investment in a single type of process, rather investing in a set of processes that improves customer service to a consistent level. Improving process consistency also depends on human resource policies. Sales and service culture to be developed against the pure service culture. Banks have to note that, the internet will not replace the other channels of interaction with the customer, just like VCRs did not replace the experience of going to the movies. Alignment of technology, human resource management and strategy are very essential for success of retail banking.

Figure 2: Segmentation for Asian Markets:

Self Directed Planners (22%): Well educated, slightly above average income Seek Financial information from variety of sources and retain control of financial matters; Frequently use financial products: open to Borrowing; Accept reasonable risk Fickle Shoppers (23%) Average Income, predominantly non working female Do not seek financial advice; use fewer, more basic products; open to borrowing, Particularly on credit cards Accept reasonable risk; not so sensitive to price Prefer remote channels- specifically ATM or telephone banking

Simplifiers Advice seekers Fickle Shoppers Self Directed Planners

Simplifiers (21%): Less Educated, less affluent, older Do not seek financial advice often; Use fewer, more basic Products; Prefer local banks; least open to borrowing Tolerate low risk only Not sensitive to Price Prefer face to face contact

Advice seekers (34%): Well educated, affluent, Predominantly male Seek Financial Advice, Heavy users of financial products; high transaction frequency Tolerate higher risk, very sensitive to price Prefer face to face contact

(Source: The McKinsey Quarterly, Number 2, 2002, page 57)

Figure 4: A Relationship Profitability Model

A Relationship Profitability Model Service Quality Customer Commitment Perceived Alternatives Patronage Concentration Relationship Revenue

Perceived Value

Customer Satisfaction

Relationship Strength

Relationship Longevity

Customer Relationship Profitability

Perceived Sacrifice

Bonds

Critical Episodes

Episode Configuration

Relationship Costs

(Source: Storbacka, Strandvik and Gronroos Managing Customer Relationship for Profit: The Dynamics of Relationship Quality, International Journal of Service Industry Management, Vol 5. No.5 pp.23)

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