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Getting to Know You

Integrated CRM technology assures banks attract and retain only the most profitable customers.

Although banks may seek intimacy with their best customers, it's getting harder to keep them home at night.

"The impediments for people moving from one institution to another are being reduced," said Richard Bell, an analyst at Meridien Research. "In a mature market segment, there's very little that distinguishes one institution from another-either you have a distinct competency that others do not, or you gain some knowledge about your customer that you can act upon and others cannot."

Since distinctive competencies are hard to find in financial services, banks traditionally employ personalization strategies to attract and retain consumers. For many, the key to this type of strategy is a customer relationship management (CRM) system.

Retail financial services institutions are expected to spend an estimated $6.8 billion this year on CRM projects, with a slated annual increase of 14% over the next several years, according to Meridien Research.

But the creation of a profitable relationship strategy involves more than spending money on the latest customer relationship management program. An examination of the activities at successful commercial, investment and private banks reveals CRM as not just software, but a mindset that has already reshaped the way in which financial institutions think about their customers.

On one level, CRM makes sure customers get the right message at the right time, keeping their secrets safe and respecting their wishes for privacy. But from a strategic standpoint, banks also use CRM to analyze patron profitability, and ultimately decide whether or not to go to extraordinary lengths to keep a customer around. After all, intimacy is wasted on one-night stands.


An example of the versatile nature of CRM is evident at First Federal Bank of California, which recently began implementing its relationship strategy. "The most important thing is to better understand our clients and better understand what their needs are," said Janice Lesin, senior vice president of information technology at First Federal, a 25-branch, $4.5 billion institution in Santa Monica, Calif. "We also want to make them feel more as valued clients of the bank."

But as part of its CRM strategy, First Federal will also redefine the criteria for V.I.P. treatment away from the crude yardstick of dollar amount of deposits. "It's going to come from a combination of factors which will include profitability of the client relationship and length of time that they've been a client," said Lesin.

Fiserv, Brookfield, Wis., supplies and hosts most of First Federal's systems, ranging from its core systems and data warehouse to its Customer Profitability System (CPS), from Fiserv business unit IPS-Sendero, based in Atlanta. "Of the non-Fiserv products that we owned, the majority of them have been purchased by Fiserv over the last five years," said Lesin. "We had 50%-50% Fiserv vs. non-Fiserv products, and now we're probably closer to 90%."

Multipurpose CRM systems form the cornerstone for larger banks as well. "I look at CRM as customer relationship management, not customer relationship management systems," said Robert Dutile, group manager and senior vice president of the enterprise architecture group at KeyCorp, Cleveland. "The value of any information system we have is the degree to which it helps us improve the relationship with the customer."

The relationship works both ways, which means that systems have to not only intuit consumer needs, but also communicate that information back to the channels. "On the consumer side especially, we have a very robust enterprise data warehouse that has allowed us to develop a lot of information about what consumers want," said Dutile. "All of our touchpoints are aware of the importance of that customer to this bank."

"If you walk into one branch or you walk into a branch 13 states away, you get the same service," he said. "Our CRM strategy was to make sure that we developed that single view of the customer, and to provide any product on any channel for all of our customers."

As part of its strategy, $87 billion Key is consolidating approximately 70 systems across the bank, ranging from marketing systems to teller platforms. "We had a number of applications out there, to some degree redundant because they were serving the same function-perhaps for a different market, sales process or servicing process," said Dutile. During the first half of this year, Key settled on its approach to consolidation, and numerous projects are currently underway.

Key's enterprise architecture group also manages R&D and long-term IT strategy and planning. "We're beginning to get a handle on what we spend on research and development," said Dutile. "A lot of it was diffuse throughout the organization, and we're centralizing that."

One of the measurable benefits from Key's R&D efforts has been the decision to move to the Java J2E WebSphere development environment. "We are moving everything over to WebSphere platforms for all of our Internet applications and intranet applications," said Dutile. "In June we completed 100 trainees on the new platform, and now we have 30 projects in flight."

Key also readjusted its portfolio to match its CRM strategy. "We're getting out of businesses where we've been transactionally focused," said Dutile. "We want to be providing financial services to people we have relationships with, not just participating in someone else's deal."


In contrast to Key's "give the customers what they want" approach, startup ING Direct is using alluring rates to entice customers away from their existing banking relationships into simple, no-strings transactions.

So far, over 225,000 people have responded to the U.S. launch of the ING Direct brand by depositing approximately $2.2 billion with ING Bank, a Wilmington, Del., subsidiary of ING Group, the $640 billion Dutch financial services firm. ING Direct already serves a total of 1.4 million customers in the U.S., Canada, Australia, France, Spain and Italy.

ING Direct only offers loans, CDs and basic loan products. (Plus coffee, snacks and branded merchandise at ING Cafe outlets in New York and Philadelphia.) "In many cases, less choice ends up being a much clearer proposition for a customer," said Arkadi Kuhlmann, president and CEO at ING Bank. "Being all things to all people does not necessarily work, at least not at the outset."

Instead of catering to customers' banking needs, ING Direct will offer low-priced commodity offerings, bucking the industry trend towards personalization. "We have managed to make every banking product so complicated, with so many choices and so many alternatives, that now we're having trouble actually trying to fit one puzzle to the next puzzle," said Kuhlmann. "Maybe the commoditization of the product is a way of sweeping those costs out the door."

For example, ING Direct offers two fixed-rate and one adjustable-rate mortgage products, which is a far cry from the Fannie Mae and Freddie Mac vision of infinitely customizable loans. "Look, they're only houses and it's only money," said Kuhlmann. "How much more complicated do we want to make it?"

ING Direct offers no credit cards. "It's really not for our brand positioning-the spreads are way too high," said Kuhlmann. The bank also avoids checking accounts. "Other people knew how to do that a lot better than we did." Subprime lending and stock trading are out as well.

Plus, without checking or DDA accounts, there's no need for a wire room. Instead, customers can have their savings accounts funded using regularly scheduled ACH transactions from existing checking accounts.

Finally, there's no "totally seamless, integrated, online, customer-centric CRM," nor the business case for ING Direct to buy or build it. "Not when running a big-volume, low-margin business," said Kuhlmann. "But if I'm running a full-service brokerage right now, it would be at the top of my priority list."


However, the analytics side of CRM is alive and well at ING Direct, with "embedded value" calculations estimating the lifetime value of each customer and activity-based costing helping to cut expenses.

Activity-based costing helps ING Direct determine how customers are using its scarce resources. "We took a look at all of the channels, all of the products, all of the relevant touchpoints, and then we broke that down into activities," said Joseph Prunty, president and CEO at CorePROFIT, a West Chester, Pa., consulting and software firm hired by ING Direct. "We measured the time that it takes to open an account over the Internet versus the call center versus the cafe."

CorePROFIT used the resulting information to create standard costs for each activity, which were then compared to "industry benchmarks"-third-party composites of resource consumption for similar activities at other banks. "We take their costs and bump them up against industry benchmarks to see where the process improvements come from," said Prunty.

"We found lots of process improvement opportunities within ING Direct," said Prunty. "We saved them significant money-just short of $1 million per year-because of what we did."

Analysts caution against skipping the initial step of carefully measuring the activities and resources used at one's own institution. While industry benchmarks may help to get started quickly, it's no substitute for a thorough breakdown of activities and actual resources consumed. "You can be seriously, seriously misled by adopting somebody else's cost structure and all of the assumptions underneath that," said Meridien analyst Tom Richards. "In terms of profitability and costing, no data is better than bad data."

Unlike activity-based costing, which accounts for profitability of a specific transaction, "lifetime value" calculations look at a single customer's expected contribution to enterprise value. Fundamentally, lifetime value is the net present value of future cash flows expected of a customer, in today's dollars. If and when that's determined, the usual project finance rules apply: invest only into endeavors where the total discounted cash flows exceed the cost of capital.

But banks shouldn't overlook currently unprofitable customers while there are still opportunities to reduce expenses. "Unprofitable customers aren't that way because there's anything inherently wrong with them, they just consume more resources than their revenue entitles them to," said Richards.

Furthermore, other banks are targeting high-NPV customers, said Richards. "Customers at the high end that generate all the profitability don't consume nearly enough resources commensurate with their value, which is to suggest that we may not be paying enough attention to them."


the BIG picture

The single view of a customer works on a large scale, too.

The post-merger J.P. Morgan Chase serves the increasingly rarefied world of large global corporations. "Eight years ago, AOL-Time Warner was 10 different companies that dealt with 40 different financial institutions," said Richard Thompson, senior vice president of corporate business services at Manhattan-based J.P. Morgan Chase. "Now they're one company dealing with four different financial institutions."

As a result, growth no longer comes from new client acquisition. "We need to know more about AOL-Time Warner than we ever did before," said Thompson. "We want to make sure we're always one of those four financial institutions that they're dealing with and we want to be able to speak to them knowing everything we do with that company, not just one aspect of it."

To keep track of the complex relationships between the big bank and its big customers, Chase had embarked on a comprehensive "business intelligence" project that has found even greater value in the combined J.P. Morgan Chase organization. Whether labeled business intelligence, knowledge management or customer relationship management, the system links legacy systems to data warehouses, data mining tools and sales management software in order to give everyone at the bank an idea of where profits can be found.

Currently, the system uses Siebel for the sales and customer management functions traditionally associated with CRM. Oracle provides the database and the online analytical processing tools, through a CORBA middleware layer. The whole thing runs on a Sun platform using EMC disk arrays. "We carefully chose different pieces of the architecture-the presentation layer, data layer and the middleware components-so that we can exit any one of these vendors at any point in time," said Charles DeFelice, director of technology for corporate business services.

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