Banks should become proactive in sussing out their most profitable customers

1. Innovation
Think beyond
‘Customer is King’
Banks must measure customer life cycle value in order to offer
the desired level of service to their customers. There are ways in
doing this:
A
ll of us are familiar with the l
In the age of the social media the
mantra ‘Customer is the King’, customer’s influencing ability.
which conveys that we satisfy l
Note that CLV is ideally based on
the needs of all our customers. profitability and not revenue and
At first glance, this concept makes sense. requires the ability to have a single
After all, more the happy customers, view of the customer across all
more the profit, right? But is it possible relationships.
to make all our customers happy? Or is
it even necessary? It is a utopian thought MEASURING CUSTOMER COSTS
with no resource constraints and no To build the framework, banks first
shareholders to answer to. need to understand the costs incurred to
Where most banks go wrong is in service each customer. In my discussions
assuming that they can/should treat with banks, the absence of a cost capture
each customer like a king. In the era of framework has been observed time and
emperors, all kings had a clear hierarchy again. Customer costs flow through
of privileges. This differentiation needs various departments and cost centers
to be done as the emperors did not only across the bank though have yet to see
rely on the king’s current army strength a customer cost center, which captures
(in our case current relationship value), costs incurred on the customer across
but also on the kings’ ability to influence the bank. Banks could do well to start
other aligned and non-aligned kings Raja Debnath advises building a cost framework, as herein lies,
(ability of customers to be promoters) that banks in India need huge amounts of cost savings waiting to
and future earning/tax potential of the be released primarily through removal of
kings’ lands (future growth potential
to focus on juicing the CLV of duplication and process streamlining.
of customers’ wealth). Banks currently every customer it comes in Most banks have done some work on the
accord privileges to majority of king’s contact with current revenue framework but still rarely
customers primarily based on their at the customer level. These frameworks
current relationship value. It is far better are robust for the premium customers
to look at a long term picture. of CLV. These methods are satisfactory and can be extended across segments. The
in predicting the CLVs of the premium next milestone will then be in building a
MEASURING CLV customers, but fall woefully short while framework to capture potential revenues
Customer Lifecycle Value (CLV) is the predicting for the mid market customers and costs over the lifetime; a lifetime is
net present value of the current and who generally form the bulk of the generally defined as a cycle of 7 years. There
potential profits from the customer. customer base at most banks. are various intelligent IT tools, which can be
Without a strong theoretical framework, used as a base to customize this framework
it is difficult to link current revenues Current relationship value for each bank.
and costs to customers, and even more The CLV theoretical framework has 3
onerous to predict potential revenue components of profitability derived from: MEASURING INFLUENCERS
and costs. Currently majority of Indian l
Potential relationship value based And the last but not least job will be
banks primarily use heuristics based on attitudes/behavior/wealth/income of building the influencer profitability
current relationship value as an indicator over time model. Identifying and nurturing this
46 Banking Frontiers February 2012

2. N E W S
segment of customers is something accounts are highly profitable accounts,
which the banks need to learn from at their primary banks. BANK NEGARA MALAYSIA
other industries. For eg, Mattel, the toy CLV would be used to offer truly
manufacturer has a list of 400 blogger differentiated service to customers Malaysia, Thailand central
moms in the US, who the manufacturer across products. Imagine a high CLV banks sign MoU
actively engages with while designing customer with only a credit card Bank Negara Malaysia and the Bank of
and promoting their toys. The company relationship. When this customer goes to Thailand have signed a memorandum of
has shifted its promotion budgets from the bank to open a vanilla savings account understanding (MOU) to enter into a cross-
giving out free toys in stores to sharing he could be offered free platinum services border collateral arrangement mainly to
their toys with the blogger moms to get on his vanilla account for a look-in period facilitate a reciprocal operational arrangement
their buy-in. of say 6 months. He would be referred to aimed at enhancing liquidity facilities to
Many banks have customer contact other product groups depending on his financial institutions in both countries. The
programs where they engage with CLV matrix and if his promoter score is two central banks said the collaboration
customers and use their insights in high, the bank would engage with him would further support them in preserving
building/improving their products and on a different level. The probability of monetary and financial stability, as well as
services. But none of them know the building a stronger/wider relationship strengthen the cooperation between Malaysia
promoter scores of this set of customers with the bank is evident. The additional and Thailand in the area of domestic liquidity
management. Eligible financial institutions
and none flag these customers off cost spent on the customer over and
in Malaysia might obtain Malaysian ringgit
on their internal systems as an above his current entitlement is an issue,
liquidity from Bank Negara by pledging Thai
influencer who needs to be accorded which requires the cost framework to baht or Thai government and central bank
special privileges. incorporate an apportionment model debt securities with it. Similarly, eligible
across various potential verticals. financial institutions in Thailand may obtain
CUSTOMER SEGMENTATION Thai Baht liquidity from the Bank of Thailand
With a CLV deployment, banks will know BOTTOMLINE by pledging Malaysian Ringgit or Malaysian
the CLV of a customer on the day he is This kind of accounting necessitates government and central bank securities.
on-boarded. This is possible through banks to view themselves as a single
the use of tried and tested customer entity rather than as a federation of prod- Sops for regional players
frameworks. Just imagine, if we were to ucts, as banks currently do. CLV as a con- Bank Negara Malaysia will continue
know the profitability of our current and cept therefore needs buy-in and drive to introduce measures to broaden the
new customers on day one? Customers right from the C-suite. Businesses can participation of regional players in the
could then be accorded privileges based focus more on customers with high CLVs. domestic market through progressive
on CLV and not just their current Customers who increase the overall CLV liberalization of the foreign exchange
relationship value. Banks could define of the bank, rather than just of individual administration rules and the development
the overall customer CLV segmentation products, will be sought. Only with use, of cross-border settlement infrastructure.
that all departments should aim for, as will CLV models become more robust. Governor Dr Zeti Akhtar Aziz said the
the ultimate aim would be to meet CLV In the developed markets with already development will focus on new areas that
potential, driven through cross-sell. The high banking product penetrations, banks will further strengthen the competitiveness
CLV framework when combined with and insurance firms have deployed CLV. and efficiency of the financial sector and
its potential role in facilitating Malaysia’s
event based marketing (EVM) is a potent This is to optimize their operations and
ongoing economic transformation and
tool to increase cross sell revenues. improve profitability in a scenario where
strengthening linkages in the region.
Most customers have multiple fresh customer additions are low. We in
banking relationships but only 1 or 2 India do not have the same challenge.
primary bank(s). The secondary banks, CLV in India is important as, rather than
Car company’s plea
because of the low relationship value of only acquiring large customer numbers, Malaysia’s national car manufacturer Perodua,
this same customer, do not accord it the banks need to focus on juicing the CLV which produces affordable compact cars
for the masses, has asked Bank Negara
privileges that a customer of his stature of every customer who the bank comes in
Malaysia to ease up on tight loan conditions
(CLV) deserves. So this customer, used to contact with. The days of 30% dormant
for hire purchase of cars imposed effective
higher privileges at his primary bank, is accounts and low products per customer this year, saying they are affecting car sales.
never enticed to make one of his secondary would then be a matter of the past. Its managing director Datuk Aminar Rashid
banks as his primary. With older banks The author is senior manager, Business Salleh said registration of new cars in January
saddled with hundreds of thousands of Advisory Services, Ernst & Young. These are dipped by 15% to 20% while new orders fell
dormant/low value accounts, we will his personal views. He can be contacted on 5% owing to the tighter conditions.
never know how many of those dormant raja.debnath@in.ey.com
Banking Frontiers February 20112 47