JP\/17\/MP<\/p>\n
How banks should secure 80 percent of their revenue<\/p>\n
Syafruddin Chan
\nContributor
\nJakarta<\/p>\n
For quite some years now banking services have been enhanced
\nby sophisticated technology, including the latest Information
\nTechnology (IT).<\/p>\n
Automated Teller Machines (ATMs), phone banking, Internet
\nbanking, credit cards, debit cards and E-wallets are but some of
\nthe services designed to make banking easier, less time-consuming
\nand more convenient for customers.<\/p>\n
The days of standing in line at a bank are now over. Physical
\nvisits to their premises are required only for certain matters.
\nATMs are available, not only for cash withdrawals, but a customer
\ncan check his savings or current account balance, transfer
\npayments for credit card, phone or electricity bills, top up his
\ncellular phone account, and so on.<\/p>\n
Likewise, a customer can carry out a variety of banking
\ntransactions, except cash withdrawals, via the Internet from the
\ncomfort of his home. Similarly, for those on the move, mobile
\nbanking is also conveniently available for the same purpose.<\/p>\n
The question is, are these expensive state-of-the-art
\ninnovations really helping the banks' business to grow? Reality
\nproves otherwise. Though banks have no option but to jump on the
\nbandwagon of technology innovations, it does not guarantee that
\nthey will win customers' hearts. Some of the innovations have
\nbeen suspended due to little or no response from customers.<\/p>\n
The answer lies more in focusing on customers and customizing
\nservices to their needs. To be competitive, technological
\ninnovations, product enhancements and aggressive promotion are
\nunavoidable. However, catering to each customer rather than
\ntreating customers like a large cluster without unique
\ndifferentiation is essential.<\/p>\n
Almost every company depends on 20 percent of its customers --
\noften referred to as relationship buyers -- for \"healthy\"
\nreturns, as this percentage provides 80 percent of the company's
\ntotal revenue. The rest, the 80 percent, called transactional
\nbuyers, though larger in figure, only contribute 20 percent to
\nthe company's coffers. Naturally, one cannot expect the company
\nto give a uniform service to both groups. The company, in this
\ncase, the bank, has to be very familiar with and deeply
\nunderstands the characteristics of each group.<\/p>\n
The term \"relationship buyers\" refers to customers that
\nprioritize value over price. They may well open an account in a
\ncompetitor bank that offers a BMW as a prize but they remain
\nloyal to their old bank because they may not enjoy the same level
\nof convenience and service at the new bank.<\/p>\n
Transactional buyers -- utterly disloyal -- are bargain
\nhunters ready to switch their deposit from one bank to another
\nsimply for the prize. They read newspapers and watch TV every day
\nas they are hungry for information about which bank is offering
\ngrander prizes. Unfortunately, their deposits are usually a
\nfraction of the relationship buyers'. Hence, profitwise, these
\ndeposits are a kind of administrative nuisance.<\/p>\n
Aside from classifying customers on the basis of their
\ntransaction habits and patterns, banks can also categorize their
\ncustomers on the basis of their individual profitability level.<\/p>\n
To be able to keep track of this profitability level, a bank
\nmust possess a marketing customer information file (MCIF) where
\nall cross-account transactions that customers make will be
\nrecorded. At the same time, the revenue and the costs arising
\nfrom these accounts will be calculated.<\/p>\n
The profitability level of an individual customer will be
\ncalculated by adding up the revenue from all the accounts of a
\ncustomer: a savings account, checking account, loans, deposits,
\ncredit cards, etc. Then the total costs, which include the cost
\nof funds, provision for losses, overhead costs and expenses
\narising from the use of bank services will be deducted from the
\ntotal revenue obtained. The next step is to find out the
\nsegmentation of customers by putting their accounts in this
\norder: from the most profitable to the least.<\/p>\n
After such a calculation is made, many banks will probably be
\nshocked to learn that a large portion of their customers belong
\nto the less profitable category and that these customers receive
\nthe same treatment as customers that bring in huge returns. Only
\nthen will it be realized that the marketers of the bank have
\nstruggled hard only to acquire and maintain a lot of low-net-
\nworth customers.<\/p>\n
In the United States, a number of banks have borrowed the
\nfrequent flyer program concept and applied it to the banking
\nbusiness. Under this scheme, a customer collects points from
\nvarious transactions. The more points a customer can collect, the
\nhigher will be his or her status on the customer tier. The higher
\nthe status, the more benefits this customer can enjoy from the
\nbank.<\/p>\n
These points may be accumulated on the basis of the average
\nbalance in a customer's saving account, the deposit amount level,
\nthe frequency of using banking services such as Internet banking,
\nphone banking and ATM, active responses to reward programs,
\nreferrals for new customers or even the profit that this
\nparticular customer contributes to the bank.<\/p>\n
Once the number of points that a customer accumulates has been
\ndetermined, it becomes easier for the bank to rank its customers.
\nCustomers with the highest number of points will be included in
\nthe Gold category. Next, in descending order, will be the Silver,
\nBronze and Iron categories. The next thing that the bank should
\ndo is to augment the number of customers in the Gold category,
\neither by acquiring new customers or encouraging Silver customers
\nto rise in rank. As for the customers in the Iron category, who
\nobviously incur losses to the company, they must be \"politely\"
\nremoved from the list of customers, for example by imposing a
\nhigh interest rate on their credit card facilities.<\/p>\n
When a bank has established this ranking, it may provide
\nsuperior services very selectively. The bank can tap its limited
\nresources to provide the best services and exclusive benefits to
\nits Gold customers. These are loyal customers and 80 percent of
\nthe bank's revenue comes from them. Then the remaining resources
\nmay be allocated to Silver or Bronze customers. The Iron
\ncustomers? Just ignore them.<\/p>\n
The \"20-80\" formula has been well accepted and acknowledged to
\nbe workable for most types of business. Why not then sit down and
\nsift through the customers and focus on the 20 percent? Remember,
\nthough smaller in number, they are a gold mine. Your company's
\nsurvival depends on them as they contribute no less than 80
\npercent of your total revenue.<\/p>\n
-- The writer is the author of \"Relationship Marketing:
\nMarketing Innovation that wins the hearts of customers<\/p>",
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