The Profit Picture

Facing aggressive competition from securities firms and online financial service providers, banks have seized on customer relationship management as the way to win new customers, keep current ones loyal and increase revenues.

Although matching customers with appropriate products, incentives and rewards might work for the airlines, its effectiveness for banks hinges on their ability to distinguish high-value from break-even or unprofitable clients. "Without understanding customer profitability, they don't really know how to target appropriate sales, marketing and service opportunities," said Kimberly Collins, an analyst at GartnerGroup. Yet Cap Gemini Ernst & Young found that of the 125 financial institutions it surveyed for its 1999 e-commerce report, 68% did not know whether customer profitability had increased or decreased since implementing CRM.

Large commercial banks at least seem sold on the concept of measuring customer value. So far, they've spent more on customer profitability solutions than has any other industry, with an estimated compound annual growth rate of 20% through 2005, according to a Meridien Research report. When Gartner surveyed 241 banks in 1999, it found that three-quarters of those with more than $4 billion in deposits were calculating customer profitability by the end of that year, and that almost all planned to do so by year-end 2000; only 46% of the banks with deposits between $250 million and $4 billion measured it, but an additional 36% intended to by year-end 2000.

Banks said they used their findings mainly to develop new products, determine new prices, identify customers to move to other products or delivery channels and to establish customer categories. But when asked to rate how well their profitability analyses supported each application, less than half the banks rated their efforts as effective.

"Banks don't think they're doing a splendid job of getting that information out to the touchpoints and having it used effectively," said Collins. "There's still a lot of room for improvement in the overall accuracy and effectiveness of the calculations they're doing."

CALCULATED CHANGES

Banks have typically analyzed customer profitability through allocated costs based on averages. But experts believe usage or activity-based costs associated with individual transactions reveal far more about customer and product profitability. "Allocated costs mask the fact that customers have very different buying and servicing behaviors, and those different behaviors have different costs," said Dallas-based Robert Hall, chief strategy officer at Xchange, a CRM software and consulting firm that recently bought CustomerAnalytics, Hall's former company. Activity-based costing, Hall said, distinguishes between the customer who performs a transaction at an ATM versus over the Web or face-to-face in a branch. "It's the only technique a large institution has to sort out how one customer uses the bank's resources versus another to do the same business," said Tom Richards, research director at Meridien.

Royal Bank of Canada, Toronto, had collected client data since 1978, and in 1992 built a proprietary profitability calculation system that relied on averaged costs. "We started down the CRM path and that old profitability calculation just wasn't going to cut it for us," said Margaret Vermeersh, manager of marketing and sales systems at Royal Bank. "Averages hide behavior...and the impact of premiums and discounts, which can really shift some of your clients who you thought were quite profitable. And those who looked liked low contributors under the old model can appear quite differently."

Several software vendors have fixed their focus on developing customer profitability applications for the financial industry, some of which calculate or integrate activity-based values. NCR, for example, teamed with Royal Bank, which had been using its Teradata database for three years, to create its Value Analyzer computational engine. Operating on a Unix platform, Value Analyzer performs multiple aggregations of detailed profitability data.

NCR has since sold the system to Barclays; Sainsbury's Bank, a Bank of Scotland subsidiary; Dao Heng, Japan; and SouthTrust, Birmingham, Ala. "Value Analyzer created a whole new world of information that we could begin to analyze to increase knowledge about customer behaviors in a very dynamic way. When you've got multiple channels within which customers make bill payments and you don't understand what channels they're using and the costs associated with each, you can make very bad decisions for the business," said Cathy Burrows, a former senior manager in client relationship marketing at Royal Bank, who's now with NCR.

As a result of what Value Analyzer revealed about its customers, Royal Bank changed the profitability ratings for 75% of its 10 million retail clients and redesigned its Royal Bank Certified Service, along with other offerings, to include telephone and Web banking, for which it had previously charged. Last July, the bank made service pricing changes on many of its products, promising to contact its clients whenever it discovered a better-priced package. "We may take a hit in the short term on some revenue," said Vermeersh. "But over the long term it will be good for us as well-our research shows that clients in packages stay longer with organizations."

It might have already paid off. The bank's CRM program, said Vermeersh, pushed revenues 27% over 1999 projections, and, aside from CRM, Value Analyzer has stirred interest in the risk management and credit card divisions, as well as with Royal Bank's small-business banking clients.

Fleet Financial Group, before its merger with BankBoston, licensed software that analyzes customer as well as product and organizational profitability from PMG Systems, West Chester, Pa. PMG's TruABC application, part of its TruProfit suite of products, uses time wand and bar code technology to track activity-based costs, which then feed into TruCustomer and TruProduct/org.

Fleet originally purchased TruCustomer for retail banking, but due to a major reorganization of its data warehouse in the wake of its mergers with BankBoston and, more recently, Summit Bank, has held off implementing it there, said Kathie Andrade, senior business manager at Fleet. It recently began testing the technology on the commercial and corporate side, and is developing activity-based costing. "You have to be 100% accurate when you look at profitability at the customer level," said Andrade. "It will drive a lot of our strategic and tactical initiatives in how we deal with our customers."

Other PMG bank clients include Canadian Imperial Bank of Commerce, Bank of Ireland and PNC. PMG will soon integrate its TruProfit products with Siebel's financial industry e-business applications.

Huntington Bancshares, Columbus, Ohio, licensed the Oracle Financial Suite last November, and is working on getting it into production.

The system will let Huntington track income from various loans and lines of business across the bank or branch. "We will now know where people bank, not just where they open their accounts," said Jeffry Wagner, senior vice president and director of profitability at Huntington. "That will give us an opportunity to see what offices are really making money."

Huntington will also use PMG's TruABC for activity-based costing, which will feed into Oracle's Performance Analyzer. Wagner said the profitability tools will be used in marketing, finance, by product managers and in commercial lending, in addition to CRM. "We can set up very targeted marketing campaigns and relationship management campaigns within the Oracle suite, and know the response rates, acceptance rates, decline rates and how often we've been in touch with customers."

MAKING IT WORK

Despite these initiatives, Meridien's Richards doesn't see banks moving quickly toward activity-based costing. "Many are using allocated costs. Some use hybrids of both. Some will use activity-based costing from a study they did 12 years ago, and things change. It's all over the board," he said. The main challenge, according to Meridien's report, remains integrating the data for millions of customers.

"There are some elegant pictures of how to do activity-based costing, but implementing these pictures is extremely difficult," said Jim Scurlock, a senior manager in Cap Gemini Ernst & Young's financial services practice.

"Databases are not integrated, and there's often no integration between the general ledger, the budget, pricing systems, activity-based costing and external resources. A lot of institutions either have not found it's worth the payback or don't have the resources to do it."