Customer Relationship Management for Retail Banking

Last Updated: 13 Jan 2021
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In the area of banking and finance, there has been a long-standing view that the more customers a bank has, the more profitable it could be. Built around this thinking, banks therefore embarked on a customer-recruitment scheme that sought to gather as much people as they could possibly get, and design their marketing and promotional activities around this particular way of thinking. On the one hand, it is good to have a large number of customers for a retail bank. But then, on the other hand, based on a common sense thinking, it would be better to have a handful of big customers who are loyal to the bank.

But these thoughts all fit into an overall framework of managing the relationship of the bank with its customers. Another line of thinking that supported this one is the notion that more customers will lead to a higher net profit for the bank. The problem is that these assumptions have been challenged by recent findings in the market. According to a study conducted by Cooper and Kaplan (1991, p. 130), 80% of the profits generated by retail banks come from an astonishing 20% of their customers. That is a far cry from the usual idea that retail bankers had.

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Even more surprising is that the largest customers of retail banks are the ones causing the big losses of these kinds of banks. This is because customers with large amounts of money in the banks demand for the best prices as well as for the best service while at the same manage to put the bank at a disadvantage from a profit point of view. Naturally, the findings of the above authors caused a stir in the banking community. As such, people started thinking about the kinds of customer that they have, the profits that they are making and what kinds of activities they should embark on in terms of their relationship with their clients.

In another study conducted by Uncles, Dowling and Hammond (2003, p. 302), they called for a better understanding of the links and correlations between the market share and the loyalty of customers with that of the profitability that can be derived from the customers. The findings of these authors have cast a large pall of doubt on the cherished thinking that if a bank has a large number of loyal customers, then profitability will follow. Through the studies mentioned above, it becomes necessary for retail banks to understand their clients better and enhance their services.

By understanding their clients and the factors affecting the profitability that can be derived from the customers, retail banks will be able to implement strategies in managing their relationships with their clients better. It is a daunting task truly but if banks would invest in achieving a good understanding of their customers and the forces affecting them, they can then formulate strategies in maximizing their profits while keeping their customers happy. This paper deals with retail banking and the way that they interface with their customers.

It looks at the nature of the customers and the different strategies and principles that banks can implement in order to better deal with their customers. It looks at the segmentation of the market, the profitability and the way in which these affect the retail banks’ net profits. Particularly, this essay seeks to generate recommendations and practices that can help banks deal with customers without compromising the level of their profitability. Retail Banking and Customer Relationship Management Customers are the lifeblood of any business operating in the market.

It is because of the customers that the businesses provide their services. Without the continuous support of the customers, the banks will lose profits and might eventually file for bankruptcy. Given this very simple principle, managing the way that customers relate with the banks is very important. Customer relationship management (CRM) was born as a result of the realization that customers need to be taken care of by the businesses. At first, customer relationship management was limited only to the technology side of relating with the customers.

Because customers were becoming savvy with technological applications and most of the customers need quick access to the services provided by the businesses that they contacted. Probably because businesses were enamored with the technological aspect of managing the relationship of businesses with their customers, a lot of these initiatives failed. Apparently, too much reliance on technology without due regard to the other needs and circumstances of customers are bound to fail (Rigby, Reichheld, & Schefter, 2002, p. 104). The CRM initiatives of any business can fall under several categories.

There are areas of the business that has direct contact with the customer. There are self-service kiosks where customers can go and they can accomplish what they want without the express assistance of anyone from the company. An effective organization also has a dedicated customer service department that can help customers with their concerns and issues that only the organization itself can resolve. There are also different departments within the organization coordinating with each other in order to deliver the services to the customers.

This usually involves back office operations and processing so that the service to the customer is smooth and without interruption (Bligh & Turk, 2004, p. 25). Within the organization, there are also people under departments that coordinate with other suppliers and vendors outside of the organization so that the operations of the business remain smooth and uninterrupted. There are also marketing professionals and analysts who are always on the lookout of new strategies to attract customers and keep those that may opt to move out of their relationship with the company.

There are also professionals dealing with the quality of service and process that the entire organization delivers. Through the managers and performance analysts, the management of the organization is given an accurate picture of the level of service being provided to the customers (Bligh & Turk, 2004, p. 27). The common pitfall, however, in thinking about and implementing CRM is an over-reliance on the technological aspect of this framework. Even before contracting a consultant or using a CRM software, a business entity should have a clear idea of what it wants to accomplish with its relationship with its customers.

A good understanding of its customers is therefore needed if it were to become effective. This kind of understanding, however, should not only come from perceptions or from opinions. Rather, there should be a deliberate move to seek the perspectives of customers and how retail banks can deal with customers. The following section deals with a kind of profiling of the customers of retail banking with special attention given to the different variables that do affect the nature of the relationship of retail banks with their customers. This way, a framework of CRM for retail banking will be arrived at. Retail Banking Customers in Focus

The retail banking industry entered the new millennium with a bang and with a gradually changing customer base. In the first place, banks have already realized the importance of marketing and dealing with their customers. More than that, given the increasing globalization in the area of finance and banking, banks are now more competitive and the marketplace has become even more fragmented. As such, retail banks are in competition with low cost brands or with banks that have established a highly recognized brand in the world (Durkin & Howcroft, 2003, p. 64). The customers of retail banks have also evolved.

They are now more adept in managing their finances and in looking for the most suitable banks around, thanks to the greater diffusion of knowledge through the Internet. The customers also have a lot of technology at their disposal in communicating with their banks—phones, internet, and fax among others. Given this two-pronged situation, banks need to manage their customer relationships better. Given this, banks need to use the Internet more as this has become one of the fastest and easiest ways by which customers could connect with their banks (Durkin & Howcroft, 2003, p. 67). The use of customers of the Internet is well and good.

However, this might also pertain to a segment of the customer base only and not to the entire spectrum. Although some customers may not use Internet technology, what cannot be denied is the ability of marketers to look at data and up to a certain degree, manipulate this so that the customers would have a better understanding of the nature of services that the banks are providing (Dibb, 2001, p. 13). The banks, however, also need to take into account other segments of their customer base that are not very savvy with technology. If they do not, then these customers may also be left out with the products and services that they provide.

If a customer becomes dissatisfied with the level of service that he receives from his retail banking provider, he may switch banks. Or if he is able to find a bank with a better deal, he may also switch banks. In addition to these difficulties, there are also customers who change their buying and consumption patterns depending on several factors. Banks, as well as every business in operation, know that retaining a customer is far easier than finding a new one. Because of this reason, customers embark on retaining their customers instead of losing them.

This is done through several strategies such as offering a rewards and benefits system or providing incentives to long-term customer. Based on this, it can be seen that banks are willing to spend their resources toward the retention of their customers (Coyles & Gokey, 2005, p. 103). Although there are customer retention programs in most banks, there are also those choose to change the patterns of their consumptions and buying. Given this scenario, it is now difficult to gauge the level of profitability derived from a customer based only on the satisfaction or the defection of a customer from any given bank.

Coyles and Gokey (2005, p. 101) have embarked on a two-year study focusing on the consumption patterns of customers and the customer relationship management strategies of banks. Based on the findings of their study, it turned out that a customer’s spending is not largely affected by fanfare and large activities geared toward winning them. Rather, it is the smaller changes in consumption patterns that matter in the longer run. Hence, for banks who wish to retain their customers, they should focus on these smaller changes rather than on the big ones.

Customer Segmentation and Stratification Not every customer is alike. There are differences among customers which can be discerned by a retail bank meaning to make the most out of every customer. More than just the profiles of the customers, retail banks also have to take into account the nature of their relationship with their customers. Given this, relationship marketing has been used by various banks in dealing with their customers. Hence, there is a call for greater understanding of what the customers give value to or how the retail bank values the customer. Customer Segmentation

In this regard, retail banks tend to evaluate the profitability of each customer that they deal with. Given this, economic value with a healthy sense of the risk is one of the better measures of a customer’s value to the organization. This economic value, however, is not without shortcomings. More than just the economic value, there should also be a reckoning of the relationship of the customer with the bank. Even though relationship is very difficult to quantify, the customer who is satisfied with the services of bank will more likely refer other customers to the bank.

As such, banks are encouraged to maximize their relationships with their customers (Ryals, 2002, p. 243) In the spirit of maximizing the relationship with customers, retail banks embark on gathering data that are pertinent to their customers. The larger the body of data that a retail bank collects regarding a certain segment of its customers, the better its understanding would be of the value of the customers to the profitability of the bank. There are already a number of tools and technological equipment that firms can use in mining data regarding their customers.

By carefully analyzing the segments where the banks’ customers belong to, there is a greater chance for them to tailor-fit their customer relationship management strategies according to the needs of each particular segment. A study conducted by Verhoef, Spring, Hoekstra, and Leeflang (2003, p. 476), they applied segmentation and predictive modeling in conducting a survey regarding the consumption patterns of customers. Based on their findings, they realized that there are different areas of concern highlighted by each segment of customers in the study.

The use of segmentation and positive modeling affects positively the relationship of companies with their customers. The database size of the company is also affected, the level of frequency that the customers get in touch with the business, as well as the channels of distribution that the customers get exposed to. Hence, through this process of segmentation and positive modeling, companies can better take a look at the way that their customers behave and how they can achieve better results with them. In a similar vein, Abbott, Stone, & Buttle (2001, p.

291) noted the importance of using a rich database for their customers. As part of its customer relationship management strategy, companies should have extensive customer database so that this body of data can be used to ensure that the particular situations and demands of customers are met. Although the level of implementation of this strategy may vary from industry to industry, the said authors called for the need to collect up-to-date data, which can be used for the segmentation of the customers and to ascertain the level of profitability that the company can derive from these customers.

This should not be forgotten by companies seeking to derive profitability from different segments of customers. Profitability Segmentation In seeking to maximize profitability in different segments of the market, companies may have to realign their internal processes as well as their relationship with external service providers in order to promote profitability among different segments of their customer base. Doing this, however, does not come in a one-size fits all approach. Rather, the company has to think about the nature of its business as well as the different needs and demands of its customers.

Although there may be a lot of differences among the segments of the customers, the company has to focus on the segments where it can derive a greater level of profitability. Campbell (2003, p. 373) has studied Canadian firms that sought to establish customer packages within its internal departments to maximize the service given to different segments of its customers while at the same time maximizing company resources. The process need not be extraordinarily complex since products and services can be given to different segments of the company’s customers.

What is important, however, is the way in which the companies gather important customer knowledge both within the organization as well as on the part of the customers so that they can best achieve profitability in the different customer segments that they are serving. Through this competence in customer knowledge, the firm can maximize its efforts in managing its customer relationship (Campbell, 2003, p. 375). Segmentation, however, is not easily attained. In this regard, the richness of the data that companies collect will dictate the kind of understanding that they will derive regarding their customers.

Depending on the sophistication and frameworks that the organization adheres to, the customers can then be grouped together in segments depending on their socio-economic status and their purchasing power, or perhaps through their behavior in buying or through their demographic settings. This multi-level segmentation works best for the individual banks as well as for the retail banking sector in general because this kind of customer understanding will yield the best possible result for the customer relationship management strategies that the company will implement.

This way, the strategic planning of the company will be greatly enhanced by the rich layer and level of data regarding the customers. This will also enhance the understanding of the banks regarding the profitability from the customer based on the matrices that can be derived from the different data generated. Customer Profitability Analysis Based on the segmentation derived by organizations regarding their customers, it would also be equally important to implement customer profitability analysis.

Through this kind of analysis, the banks can determine the level of profit contributed by a customer or a particular customer segment that the bank is serving. Implementing this kind of analysis maybe tasking, a little costly, and heavy on numerical analysis, yet the benefits that can be derived from it will help the company decide on the best course of action and strategy in managing its relationships with its customers (Raaij, Vernooij, & van Triest, 2003, p. 575). Whereas Raaij, Vernooij, and Van Triest (2003, p.

575) used the customer profitability analysis in the context of Customer profitability analysis in industrial settings, Jackman and Shanahan (2002, p. 125) used the same kind of analysis in the retail banking sector in New Zealand. Based on their research, a major retail bank in New Zealand managed to implement the customer profitability analysis rather effectively. In the course of time, however, there were some dissatisfaction with the system not because of the lack of accurate data.

Rather the system had some limitations and prevented the bank to use the information generated from the customer profitability analysis system to be integrated with the various marketing strategies that the bank had. As such, there were issues in the design that the bank management addressed. Even though the second generation system was still in the process of being tested, the management already provided feedback regarding the effective use of the system for an overall system for analyzing customer data and integrating such data for the marketing strategy (Jackman & Shanahan, 2002, p.

125). The important lesson in the case of this bank in New Zealand is the importance of a holistic approach in the implementation of customer relationship management strategies and framework. Too often, there is a disjointed approach to CRM. One area of interfacing with customers is implemented or a piece of technology is implemented without due regard to the full picture. As a result of this erroneous kind of approach, CRM strategy is not maximized and therefore entails more cost that it should.

As the experience above shows, there should always be an integration between the data derived from customer profitability analysis and the marketing approach of the company. A holistic approach also presupposes the need for a coordinated approach within the organization. This approach calls for a stronger management practice to be in place within the organization. With a coordinated approach, it also becomes necessary for the retail bank to undergo a strategic planning so that the information derived from profitability and segmentation analysis could be integrated into the overall CRM strategy of the organization.

Different Approaches in Customer Analysis In addition to the customer profitability analysis, there are also several strategies which retail banks can use in order to know their customers more deeply. These approaches, summarized by Veldore (2002, n. p. ) are presented in the following section. 1. Integrated Customer View. This is the most basic level of information and date gathering for the bank. Through this view, the account information of customers are kept in one place and each customer is associated with the kind of product that he has purchased from the bank.

2. Life Cycle and Segmentation of the Customer. At different points in the life of each customer, they are going to need different kinds of services from the bank. As such, by undertaking an analysis of the products that suits each customer in his or her lifecycle, the bank can have a better understanding of the needs of customers and their demands for the services of the bank. 3. Financial Portfolio of the Customer. The customer’s credit rating as well as his purchasing power can also be mapped through the help of internal and external sources of information.

In most countries, there are credit bureaus that compile the credit rating of customers and help banks in providing a complete profile of the customer. 4. Customer Profitability. This type of analysis helps the bank know which types of products should be offered to different kinds of customers. The contribution of the customer to the profit margin of the bank is taken into account into the analysis of the costs that go into marketing efforts for this. 4. Diversification Indicator.

The customer profitability needs to be compared with other types of indicators in the bank. As such, it would be necessary to look at the diversification indicator. This kind of measure looks at the different products that a particular customer or segment of customers avail of. In the long run, the customer that banks want to win are those with average profitability but with higher stability than those customers with high profitability but also with greater instability. 5. Product Profitability and Channel Profitability.

In relation to the customer profitability, the product profitability, of course, deals with the performance of the product based partly on the responses of customers. The focus, however, is on revenues and the costs generated. Likewise, the channels of distribution of the bank are also analyzed so that the firm will have an idea which among its channels is patronized by its customers more. 6. Events and marketing campaigns. There are also significant events that the bank launches or rides on in order to promote its products to its customers.

The impact of these kinds of events are also analyzed as this also has a bearing on the factors affecting the way that customers enjoy the products of a retail bank. Through these different levels of analysis, retail banks will have a more holistic understanding of their customers, their segmentation, as well as the different factors affecting these variables. In turn, they are able to gain an understanding of which products, channels, and strategies work best in deriving the maximum profitability from each individual or segment of customers.

Once retail banks understood the power that they have in analyzing their customers, they could start embarking on an overall customer relationship management framework that takes into account this enhanced holistic understanding of the customers. Customer relationship management of retail banks is very important in ensuring that the customers develop the loyalty and the experience to become enamored with the company. More than that, loyal customers can give added profitability to the bank if the banks have gained an adequate understanding of the role of each customer in the whole process.

With different kinds of analysis in place, the banks can therefore identify the different variables that could make a difference in the lives of their customers and in the profitability of the bank. The nature of the relationship, after all is one of mutuality. More than just the profitability, if the customers have a great time with the bank, they can also share their experience with other prospective customers and thus the retail bank can gain prominence. Customer Segmentation and Profitability in the Gulf Region

So far, this paper has looked into the different approaches that retail banks can take in analyzing the segmentation of their customers and the way in which these can be integrated into the customer profitability analysis and the overall customer relationship management of the firm. The experience of retail banks in the Gulf Region is also worth looking at in regards to implementing customer relationship management. The Gulf Region is already catching up in terms of the technology being used in their relationship with their customers.

Retail banks in the United Arab Emirates particularly are already utilizing several strategies in gathering important data regarding their customers. As part of their efforts to gather information, the banks are investigating the customer’s perception regarding the image of the bank, as well as the level of the service quality that they experience, the satisfaction and the overall retention of these customers in UAE retail banks. Mohd Kassim and Souiden (2007, p. 218) collected data regarding the customers of retail banking in the UAE.

Apparently, the customers are concerned about the service quality that they received as well as the satisfaction from the service that they received. What is lacking, however, is an attempt to take a look at the segmentation of the retail banking customers in the UAE. The study noted though that the retail banks are now drawing upon different methods of collecting information regarding the customers. The focus, however, is on retaining the current customers of these banks. Conclusion The importance of customers in the life of any business could not be discounted.

In recent years, the way that businesses understood customers has been challenged. Through the different advances in technology and in the frameworks of customer relationship management, the relationships of businesses with customers have been revolutionized. Although the customers are still at the center of the operations of businesses, the nature of the relationship and the focus has changed. There are now a number of strategies being thought of by thinkers and business strategists.

The bottom line, however, is that there has been an increasing awareness of the need to understand the customers and the nuances of their needs and their demands. Hence, it became increasingly important to look into the segmentation of customers and the way that these customers contribute to the profit of retail banks. The discovery of the segmentation and the gathering of information regarding the customers have become of utmost importance. Without a proper understanding of the customers, the retail banks are bound to strike out on strategies that have higher chances of failing.

In this regard, several strategies have been outlined in this paper regarding the segmentation and profitability of customers. Likewise, some of the trends in the United Arab Emirates have been looked into. Although there are good trends emerging in the UAE and in the Gulf Region in general, there are still a lot of things that the retail banks in the region can implement to fully manage and implement a holistic approach of customer relationship management. Reference Abbott, J. , Stone, M. , & Buttle, F. , 2001.

Integrating customer data into customer relationship management strategy: An empirical study, The Journal of Database Marketing, Vol 8, No. 4, pp. 289-300. Bligh, P. & Turk, D. , 2004, CRM unplugged – releasing CRM's strategic value. Hoboken: John Wiley ; Sons. Cooper, R. ; Kaplan, R. S. ,1991, Profit Priorities from Activity-Based Costing. Harvard Business Review, Vol. 69, No. 3, pp. 130-135. Coyles, S. ; Gokey, T. C. , 2005, Customer retention is not enough, Journal of Consumer Marketing, Vol. 22, No. 2, pp. 101-105. Durkin, M. G. ; Howcroft, B.

, 2003, Relationship marketing in the banking sector: the impact of new technologies, Marketing Intelligence ; Planning, Vol. 21, No. 1, pp. 61-71. Dibb, S. , 2001. Banks, customer relationship management and barriers to the segment of one, Journal of Financial Services Marketing, Vol. 6, No. 1, pp. 10-23. Jackman, S. ; Shanahan, Y. (2002). Customer Profitability Analysis: Frustration Leads to Evolution. New Zealand Journal of Applied Business Research, Vol. 1, No. 1, pp. 125-135 Mohd Kassim, N. , ; Souiden, N. (2007). Customer retention measurement in the UAE banking sector.

Journal of Financial Services Marketing, Vol. 11, No. 3, pp. 217-228. Raaij, E. M. , Vernooij, M. J. A. ; van Triest, S. , 2003, The implementation of customer profitability analysis: A case study, Industrial Marketing Management, vol. 32, No. 7, pp. 573-583. Rigby, D. K. , Reichheld, F. F. ; Schefter, P. 2002, Avoid the four perils of CRM. Harvard Business Review Vol. 80 No. 2, pp. 101-109. Ryals, L. , 2002. Are your customers worth more than money? , Journal of Retailing and Consumer Services, Vol 9, No. 5, pp. 241-251. Uncles, M. D. , Dowling, G. R. , ; Hammond, K. 2003, "Customer loyalty and customer

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