Tue, 16 Sep 2003

How banks should secure 80% of their revenue

Syafruddin Chan, Contributor, Jakarta

For quite some years now banking services have been enhanced by sophisticated technology, including the latest Information Technology (IT).

Automated Teller Machines (ATMs), phone banking, Internet banking, credit cards, debit cards and E-wallets are but some of the services designed to make banking easier, less time-consuming and more convenient for customers.

The days of standing in line at a bank are now over. Physical visits to their premises are required only for certain matters. ATMs are available, not only for cash withdrawals, but a customer can check his savings or current account balance, transfer payments for credit card, phone or electricity bills, top up his cellular phone account, and so on.

Likewise, a customer can carry out a variety of banking transactions, except cash withdrawals, via the Internet from the comfort of his home. Similarly, for those on the move, mobile banking is also conveniently available for the same purpose.

The question is, are these expensive state-of-the-art innovations really helping the banks' business to grow? Reality proves otherwise. Though banks have no option but to jump on the bandwagon of technology innovations, it does not guarantee that they will win customers' hearts. Some of the innovations have been suspended due to little or no response from customers.

The answer lies more in focusing on customers and customizing services to their needs. To be competitive, technological innovations, product enhancements and aggressive promotion are unavoidable. However, catering to each customer rather than treating customers like a large cluster without unique differentiation is essential.

Almost every company depends on 20 percent of its customers -- often referred to as relationship buyers -- for "healthy" returns, as this percentage provides 80 percent of the company's total revenue. The rest, the 80 percent, called transactional buyers, though larger in figure, only contribute 20 percent to the company's coffers. Naturally, one cannot expect the company to give a uniform service to both groups. The company, in this case, the bank, has to be very familiar with and deeply understands the characteristics of each group.

The term "relationship buyers" refers to customers that prioritize value over price. They may well open an account in a competitor bank that offers a BMW as a prize but they remain loyal to their old bank because they may not enjoy the same level of convenience and service at the new bank.

Transactional buyers -- utterly disloyal -- are bargain hunters ready to switch their deposit from one bank to another simply for the prize. They read newspapers and watch TV every day as they are hungry for information about which bank is offering grander prizes. Unfortunately, their deposits are usually a fraction of the relationship buyers'. Hence, profitwise, these deposits are a kind of administrative nuisance.

Aside from classifying customers on the basis of their transaction habits and patterns, banks can also categorize their customers on the basis of their individual profitability level.

To be able to keep track of this profitability level, a bank must possess a marketing customer information file (MCIF) where all cross-account transactions that customers make will be recorded. At the same time, the revenue and the costs arising from these accounts will be calculated.

The profitability level of an individual customer will be calculated by adding up the revenue from all the accounts of a customer: a savings account, checking account, loans, deposits, credit cards, etc. Then the total costs, which include the cost of funds, provision for losses, overhead costs and expenses arising from the use of bank services will be deducted from the total revenue obtained. The next step is to find out the segmentation of customers by putting their accounts in this order: from the most profitable to the least.

After such a calculation is made, many banks will probably be shocked to learn that a large portion of their customers belong to the less profitable category and that these customers receive the same treatment as customers that bring in huge returns. Only then will it be realized that the marketers of the bank have struggled hard only to acquire and maintain a lot of low-net- worth customers.

In the United States, a number of banks have borrowed the frequent flyer program concept and applied it to the banking business. Under this scheme, a customer collects points from various transactions. The more points a customer can collect, the higher will be his or her status on the customer tier. The higher the status, the more benefits this customer can enjoy from the bank.

These points may be accumulated on the basis of the average balance in a customer's saving account, the deposit amount level, the frequency of using banking services such as Internet banking, phone banking and ATM, active responses to reward programs, referrals for new customers or even the profit that this particular customer contributes to the bank.

Once the number of points that a customer accumulates has been determined, it becomes easier for the bank to rank its customers. Customers with the highest number of points will be included in the Gold category. Next, in descending order, will be the Silver, Bronze and Iron categories. The next thing that the bank should do is to augment the number of customers in the Gold category, either by acquiring new customers or encouraging Silver customers to rise in rank. As for the customers in the Iron category, who obviously incur losses to the company, they must be "politely" removed from the list of customers, for example by imposing a high interest rate on their credit card facilities.

When a bank has established this ranking, it may provide superior services very selectively. The bank can tap its limited resources to provide the best services and exclusive benefits to its Gold customers. These are loyal customers and 80 percent of the bank's revenue comes from them. Then the remaining resources may be allocated to Silver or Bronze customers. The Iron customers? Just ignore them.

The "20-80" formula has been well accepted and acknowledged to be workable for most types of business. Why not then sit down and sift through the customers and focus on the 20 percent? Remember, though smaller in number, they are a gold mine. Your company's survival depends on them as they contribute no less than 80 percent of your total revenue.

-- The writer is the author of "Relationship Marketing: Marketing Innovation that wins the hearts of customers