BUSINESS

In Banking, Customers Lead the Way to Higher Branch Profits

Apr. 19, 2006

In Europe and the U.S., retail banks are re-thinking the way they generate profits. Instead of focusing on fees and lending, banks are now turning their attention toward customer service. According to a recent study by Financial Insights magazine, customer service dominates the CEO agenda in Europe. And U.S. banks point to customer loyalty as their top concern because of the "long-term impact on expanding the business."¹

Better customer service presents a strategic opportunity to improve the bottom line. But it means more than providing longer banking hours, prizes, and incentives to get people in the door. Retail banks have to invest in every aspect of the consumer experience and offer relevant products, says The McKinsey Quarterly.²

Branches still important

Throughout the 90s, banks invested heavily in ATMs, telephone, and internet banking: technologies that let customers conduct everyday transactions almost anywhere except their branch. But 90 percent of customer relationships are still won and lost at the branch level,³ where people can secure mortgages, mutual funds, and perform other complex transactions in person. "For today's consumer banks, reinventing local branches as a hub to attract and retain customers is essential to profit and growth," says research firm Booz Allen Hamilton. To do that, they have to deliver what consumers want: choice, convenience, and customization.⁴

Banks can potentially deliver better customer value and make branch banking more profitable. The question is: How do they determine what consumers want? Many are turning to business intelligence for the answers.

The value of customer information

CRM, ERP, and other transaction systems present a goldmine of customer data – buying patterns, purchase history, satisfaction levels, demographics, and so on. BI leverages this information to help banks better understand their customers and tailor services to their individual needs.

For example: detailed customer profiles identify who is most likely to buy which products and why. Banks can then slice and dice this information to offer customized packages and services targeted to different customers – whether it's an education loan for a 20-year-old student, or a mortgage and investment plan for a 40-year-old high-income earner. And instead of seeing so many meaningless products, customers perceive the services as being relevant to them.

The Bank of Ireland, for example, uses Cognos BI to aggregate customer data across multiple touch points such as deposits, mortgages, and credit cards. With this insight, the institution can segment its customer base for more effective selling. "Understanding what drives customer profitability is the Holy Grail in retail banking," says Eugene McCarthy, Head of Profitability Measurement in the Bank's retail division.⁵

Customer retention and marketing

Identifying profitable new customers is essential. But existing clients, too, offer long-term value. Analysis can uncover the most profitable customers or an individual's history with the institution, including purchases and changes in buying patterns. Armed with the information, staff can respond accordingly: by waiving a customer fee or cross-selling additional products. "If any customer's rate of purchasing declines, we can rapidly approach them with targeted offers," says Johan Nordin, Head of IT at Volvofinans.⁶ The company uses Cognos to leverage customer data to better target sales.

Across branches, banks can identify where sales are highest and where they are flat. This may engender additional product offerings, services, or marketing campaigns.

Loyalty programs

Profiles can also provide the baseline for incentives or loyalty programs to keep long-term customers on board. "Retail bankers need to be more creative if loyalty between the customer and the bank is to be a cornerstone of a strong, profitable relationship," says Kathleen Khirallah of the Tower Group.⁷ She suggests focusing loyalty programs on the total client relationship, rather than a single product or service. And a broad array of rewards is needed to ensure each customer perceives value.

Summary

"It's only by taking advantage of business intelligence technologies that you can differentiate your bank by sincerely knowing your customers and appropriately responding to their needs," says Jill Barnes at IndyMac Bank.⁸

The customer relationship may be the "Holy Grail" that drives up profitability. But to ensure positive outcomes, banks have to know and respond to what consumers want. Deeper customer insight is the touchstone that can benefit both sides. The bank effectively targets and sells more products with less effort. The customer feels the bank is looking out for his or her interests. And over the long term, satisfied customers will likely invest more of their assets as their needs evolve.

Find Out More

Sources

¹Bill Bradway. Performance Management Drives Improvement at European Banks. Financial Insights. June 2005; Performance Management Drives Improvement at U.S. Banks. Financial Insights. December 2005.

²Marc Beaujean, Dirk Reiche, and Charles Roxburgh. How Europe's Banks Can Win in Tougher Times. The McKinsey Quarterly. June 2005.

³Paul Kocourek, Aditya Bhasin, Paul Hyde. A Better Way to Make Branch Banking Pay. strategy + business eNews. Booz Allen Hamilton. February 2004.

⁴ibid.

⁵Bank of Ireland Implements Customer Profitability Solution. Cognos News Release. April 26, 2004.

⁶Volvofinans Uses Cognos BI to Drive Sales Operations. Cognos News Release. September 20, 2005.

⁷Kathleen Khirallah. Customer Loyalty in Retail Banks: Time to Move Beyond Simple Programs or a Product Orientation. ViewPoint Issue 127. TowerGroup. February 2005.

⁸Peggy Bresnick Kendler. Bank Systems & Technology Online. January 3, 2006.