JP/17/MP

JP/17/MP

How banks should secure 80 percent 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