POSITION STATEMENT FOR PILGRIM BANK CASE STUDY

Objective: To generate a position statement, to justify my stand for customer

transactions using low cost channels and providing various avenues in order to
enhance Customer profitability, by better management of Customer relationships,
thus ensuring customer retention & revenue growth.

Background:

Pilgrim Bank, operates in the Retail Banking Industry. The bank had various
divisions, with Online banking group being one of them. One of the major focus
was in terms of online banking and Internet Strategies for enhancing Customer
experience and reduction in Bank’s opex. costs.

Critical Problems Identified:

Based on the evaluation of the case study, the following critical problems were
identified:

• Managing Customer expectations & profitability to the customer as well as

the bank was a major challenge, since the relationship betewen balances and
customer profitability was not a very straight-forward situation. Obtaining
accurate and reliable data on customer profitability was a big challenge in retail
banking.

• Profitability at the customer level was particularly important in retail banking

because customer transactions generated incremental costs but typically did not
generate incremental revenue.
 • Also, customer behaviour in terms of transactions was a critical component,
for customer profitability, especially in terms of using low cost channels, as this
enhanced the operational cost for the bank. For example two customers having
the same accounts and balances, had a different patterns, wherein the customer
who used to interact with the bank less frequently was more profitable.

• Levying more charges on transactions in order to ensure profitability for

customer, also had failed based on historical data. For example, First Chicago’s
decision to charge for teller visits, had contributed to a loss of one-fifth of its
customer base, which was a critical aspect.

• Infact, the history of banking services started off with the low cost channels
around 30 years back, starting with ATM’s, followed by 24 hourrs call centers,
VRU’s and off-late the Internet banking. Carefully analyzing, each channel had
proided an opportunity to reduce cost per transaction than the previous one.
However with the low cost channels, the overall cost structure increased, since
customer transactions grew with addition of various low cost channels, rather
than one channel replacing another one.

• The main point ol discussion is whether online customers are better and
would that actually produce better customers. Actually balance level captured
only one piece of information of overall customer value to the bank. The focus on
balances only will lead to missing important components of revenue such as fees
and ignoring the cost of serving individual customers.

• Variation in customer profitability was very high. Also retainment of highly

profitable customers was a very high challenge, as more number of avenues and
facilities were supposed to be provided at a lesser cost, with increase in volume
transactions and hence the profitability.

• Another challenge that was perceived was that the number of bank’s
branches grew inspite of a larger presence of low cost channels such as ATM’s
and Call Centers.
 • The contributions of individual customers to bank earnings varied widely with
a small percentage of customers coss-subsidizing the profitability of the bulk of
the customer base. Based on the study, it was found out that half of Pilgrim’s 5
million customers were unprofitable. The profitability analysis at the customer
level in Pilgrim bank, showed that 10% of the customers generated 70% of the
profits.

Pilgrim Bank, felt that lot of things needed to be in place and hence an analysis
was required in order to come up with an appropriate win-win solution for both
the customer and the bank.

Recommendation & My Position:

It was visualized that encouraging transaction migration to lower cost channels

actually was one of the ways for banks to improve customer profitability.

Profitability tiers were to be developed to reallocate customer service resources

away from customers in lower profit tiers to higher ones and retain them.
Profitable customers were to be offered with various incentives such as fee-
waivers and rate-breaks, lifetime profitability measures, discounts on mortgage
rates or higher interest rates on certificates of deposit and route their telephone
calls to specially trained personnel in the call center. This was actually aimed at
increasing customer experience and retainment of profitable customers.

The retail banks also had to use pricing initiatives, fees and cross-sell programs
to convert un-profitable customers in to profitable customers. Re-pricing products
and services was intended to motivate customers to use low cost channels.
Many banks actually offered customer incentives, who trancacted heavily using
low cost channels.
Further as the process of investigation, a sample data of around 30,000
customers were analyzed and found that only half the customers as per the
sample data were profitable, and a vast majority of the profits were derived from
a small number of customers. It was also evident that the average customer
profitability for 1999 was USD $ 111.50 and those who used online banking was
around USD $ 116.7 and USD $ 110.79, for those who did not. This actually
proved that online customers were more profitable compared to offline
customers.

Actually customer accounts generated 3 types of revenue:

Investment income from deposit balances: Every customer investment generated

income. This was represented by net interest margin, the difference between the
rate a bank paid on a deposit account to the rate at which it was able to invest
that deposit; Fee income: fees were variously assessed for checking accounts,
late payments, overdrafts etc., due to the recent declines in revenue on the net
interest margins & Loan interest base lending rates which were a primary
revenue source to the bank.

This was a win-win situation to both the End Customer and the Bank

The setting is a retail bank and the decision making relates to the bank's policy
toward online banking. The management team is evaluating whether the bank
should charge for access to online banking, provide incentives to use the service,
or devise some other policy altogether. With thousands of customers already
using the online site, the bank is well positioned to assess the impact of the
service on customer profitability and retention before making final policy
decisions. Told from the perspective of a recent MBA graduate who was charged
with performing the necessary data analysis and ultimately coming up with policy
recommendations.

How does Pilgrim Bank make money from their customers? How much variation
in profitability is observed across customers and how could Pilgrim best deal with
this variability?

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Based on the information contained in the sample of customers for 1999, how
confident can Green be that the information is similar to that in the population of
Pilgrim Bank's customers?
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Does customer profitability differ as a function of being online or offline? Is the

difference meaningful? What is the role of demographics?
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Can cause and effect be established between online usage and customer
profitability?