Banks & Customer profitability!

It is interesting to see the Mobile phone services in India beginning their journey to increase profit per customer! During the last two years, profits and revenues of Indian telecom companies have suffered from a bruising price war that has cut call tariffs to less than one US cent a minute.

But looking at profits per customer does not come easily to most companies. Banks have done it well & so have some casino companies-Royal Bank of Canada & Harrah’s Casino come to mind here!

Also, the solution does not lie in “firing some of your customers”. Here is a lovely comment from the Vice Chairman, Royal Bank of Canada:

“There is no such thing as an unprofitable customer. If we can’t make money on the client, then it’s not the client’s fault – we have to change something in the way we operate. We can either charge the customer more because we have not got the price right or we need to take our costs down or we need to stop selling the product to them and find something more suitable to their need. We try to match up the package to the client so that they are only paying for what they need” Jim Rager, Vice Chairman, RBC Financial Group

I have seen a Bank in India, practice this strategy very effectively. I was the CMO of HDFC Bank & I saw how effectively customer profitability was baked into the bank strategy.Here are some observations:

  1. Start with a simple model of customer profitability or Customer value segmentation. Have different segments of customers; band them from least profitable to most profitable. Analytics can help here but try to keep measurement principles simple.
  2. Keep the measurement consistent –it need not be the most advanced analytic technique but important to hold it consistently over a 3 year period at least!
  3. Ensure you link management action to it. Look at why a customer is in the low profitability segment. If it is a bank, ask if the customer is doing too many cash transactions or has not been sold another product. This analysis can lead to clear management action.
  4. Review customer profitability metrics aggressively. Wouldn’t it be nice if you had a customer level P&L, too much to ask for?

 

 

Customer centricity-bringing customers in the boardroom!

Amazon aspires to be “Earth’s most customer-centric company.” Numerous mission statements are sprinkled with customer focus. But in reality it is hard to actually be customer centric. Many companies talk about it but only a few achieve the holy grail!

I loved the concept that Prof Ranajoy Gulati speaks about:  “In fact the big leap that companies need to make is to “not sell what they produce” but to “solve customer problems” & then suddenly “who produces the product is no longer important “because you start “owning the problem space”.

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Customer-centric companies tracked by Gulati between 2001 and 2007 delivered shareholder returns of 150 percent while the S&P 500 delivered 14 percent. While research like this looks great, one wonders why there are not too many companies who “really put the customer at the centre”. Only companies who are great at “disruption” seem to truly belong to the category of obsessively customer focused. A customer-centric organization’s business is built completely around the customer. This kind of company has a strong understanding of the customer’s value and what the customer represents to the business’s profitability. With this knowledge, a customer-centric company adapts everything it does – from R&D to Customer service – to deliver the best value at the right cost to their customer.

The old adage that customers are always correct may not always be right. Current breed of customers are spoilt for choice & empowered. E commerce industry in India is a classic example where consumers are getting pampered with discounts. But there is a difference between “customer friendliness” & “customer centricity”. Companies create value for customers but also have to capture value in their business to be sustainable.  So are companies like Amazon & Zappos the outliers? Zappos actually says that If a customer calls for a product and Zappos does not have the product in stock, they recommend a competitor who has it. While Zappos will lose the sale, in the long run it’s best for Zappos because the customer appreciates the help and tells their friends the story. It creates word of mouth.

Peter Fader, of HBS, has this interesting take: “Customer centricity is a strategy to fundamentally align a company’s products and services with the wants and needs of its most valuable customers. That strategy has a specific aim: more profits for the long term. This is a goal that every business would like to achieve… But you’ll only be able to get there and put customer centricity to use if you are willing to start thinking in new—and in some cases, truly radical—ways.”

So how should companies become more Customer centric:

  1. Sort customers into –who gives value & who does not?
  2. Operations-develop the ability to deliver different products & services to different customers-not easy! At first the operations folk will always say no!
  3. Creating a customer-centric culture where you don’t script every interaction. Therefore, employees need to be able to make the right judgment calls on their own when dealing with customers.
  4. Focus on customer satisfaction & retention over customer acquisition. In a 2013 Forrester survey of global CMOs, 63% listed acquiring new customers as their top priority, while just 22% said retaining current customers was their top goal. In India this is particularly hard because of low penetration of products & services.
  5. Customer-obsessed enterprises must migrate investment budgets from areas that traditionally created dominance — brand advertising, distribution, mergers for scale, and supplier relationships — and invest in Retention & customer experiences

Prof Niraj Dewar, Professor in marketing at the Ivey Business School has this interesting comment:  “Companies’ upstream activities, such as sourcing, production, and logistics are being commoditized or outsourced, while downstream activities aimed at shaping customers’ perception and reducing their costs and risks are emerging as the main sources of competitive advantage. To compete effectively, companies must shift their focus from upstream to downstream activities, emphasizing how they define their competitive set, influence customers’ purchase criteria, innovate to solve customer problems, and build advantage by accumulating customer data and harnessing network effect”.

I had written about this earlier as well. What does Customer centricity mean to you? I would love to have your feedback. Here is what I feel:

  1. Being loyal to customers & not the other way around (customers needing to be loyal to the company). This needs companies to have a longer term view of customer lifetime value & not a short term view of immediate profit. It needs an internal senior level stakeholder who champions the customer cause (CMO?)
  2. Become more accessible to customers & respond faster to their needs. This needs companies to move from “insight to action”. To act faster, companies need to break silos within their organisation to be able to respond to customers.
  3. Use information to make every interaction relevant & use customer data to more powerfully personalise company’s interactions with the customer. The Big data world is only producing more such information for marketers to leverage. This amounts to a mass customisation strategy where the CIO & CMO need to work very closely together to make meaningful changes in the company’s operating environment. And most critically, to do this keeping the customers sensitivity to privacy as paramount!
  4. Strategically think through what culture changes the enterprise needs to become more customer centric. Today technology & Big data based insights can help you accelerate this process.

For those of you in Mumbai, we at Cequity are doing this wonderful conference called Customer centricity world 2015 which has a keynote by Dr Bala Balachandran. Do join us for this conference & you can learn more here: http://www.customercentricityworld.com/#about

Banks & the new Amazon bank!

Newspapers are getting disrupted by online resources. These same web destinations are becoming less relevant as people simply lift and filter the information they want using RSS feeds. The music CD is being unbundled as customers buy individual tracks online.

Power has shifted to customers: it’s no longer about the products that marketers want to sell but about the content components that users want to consume & mash up together.

The new battlefield lies in the control of the user interface and the customer intelligence system that supports it. Companies that build highly equipped Customer intelligence units will win in the coming days.

The internet is disrupting retail & I am sure Retail banking is also waiting to be disrupted. According to Capgemini’s 2014 World Retail Banking Report, less than 40% of customers globally reported positive customer experiences with their financial institution. But banks still push products on their own terms. Take a term deposit for at least 6 months? Well, why can’t I have it due on April 24th, which happens to be my birthday?

Google is launching its own mortgage calculator, and imagine what an Amazon Bank would look like,wish they launch soon!

But who are the startups disrupting banking today?

Check out the infographic below from CBInsights to learn more about the startups that are disrupting every part of bank business models:

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Rajesh Kandaswamy of Gartner has this interesting take:

The checking account solves many of the needs of customers in personal finance –to keep money safe, to be able to pay others, and the need for a place to receive money on their behalf. It bundles a few things – a uniquely identifiable account, check writing, ATM privileges, interest payment (very less nowadays) and wire transfer to name a few. Product bundling made sense for these services as it makes it easier for the consumer, while offering economies of both scale & scope to the bank. Moreover, the marginal cost of bundling is low.

Now, internet and mobile make new services possible for some of these needs, either in isolation or bundling with others. For instance, the T-Mobile’s service offers an account, debit card, bill payment and a few other features, but it does not offer check writing privileges. Square Cash is a service only to send money to others. Internet and mobile make it easy to reach a larger market, while it reduces fixed costs need for costly branches. Such technologies are available for banks as well, but as incumbents, they have to worry about cannibalization.

So a lot of the banking disruption will really be about how banks adopt Digital & simplify processes for customers.In fact,in the new digital world, banking & creativity may not be oxymorons!Adaptive Path, a design and user experience consultancy has been acquired by Capitol One. And just before that Daniel Makoski, founder of Google’s modular Project Ara phone project joined Capital One.

New banks in India have a unique opportunity to embed “digital” in the fabric of how they do business. But banks are complex with structures that don’t allow for speed. In many cases, eBusiness teams own the mobile banking strategy, but few eBusiness teams have an exclusive mandate over their firm’s mobile banking initiatives. This division of responsibility creates silos and adds significant complexity to the coordination and optimization of Digital efforts.

As the infrastructure of digital technology — the chips, network connections, computing — becomes ever cheaper, they’re becoming commodities, and the value of tech products is shifting to the design and the user experience. But the real value starts to flow when companies orchestrate the User experience with Personalisation.

Personalization, it seems, is really about gathering exactly the data that’s needed in order to perform a particular task. Think about how Amazon asks users whether purchases were for themselves or as gifts, or how streaming services like Netflix and Pandora ask users to rate content. But personalization is a complex process involving multiple components & it takes a lot of effort to get it right.

Some areas to ponder about:

  • What do you think about the internet & mobile disrupting banks? Which areas can the banks defend and which are vulnerable to disruption?
  • What do banks need to do to modernise their architectures to compete against the new wave of startups?
  • What is the new age Customer intelligence unit that can be the nerve centre for competing in this landscape? How do they capture unique customer data & create a competitive differentiator by mapping the Customer DNA & building Digital analytics capability.
  • How will banks completely transform their digital experience? “Mobile apps will go beyond banking … and banks will offer different flavors,” says Jeanne Capachin, principal of Capachin Research. “For example, an app for people buying a home will have home prices, mortgage rates, and advise from specialists. It’s all about selling mortgages, but selling with an experience that offers advisory services – not just low rates.”