Pilgrim Bank

Part 1 Alan Green needs to answer the decision problem of whether charging fees for online banking use is more profitable for Pilgrim Bank than offering incentives to promote wider use of the online channel. To begin solving the problem, Mr. Green first must address the following research issues: how much more/less profit do online users generate; is this difference significant, what are the measures of customer profitability, what are the characteristic of the bank’s online users and profitable customers, what are the costs of operating the online banking channel, and finally what measures does the bank take to retain its most profitable members. The research design is two-part. The first is an informal qualitative meeting with analyst Jane Raines. The purpose of this research is to obtain any useful general knowledge on measures of profitability, customer behaviour, cost structure, profitability management and their relations with each other. The second part is an in-depth qualitative research based on statistical analyses on a database of customer profits, online usage, demographics (age, income, geographic), and tenure years. Data collection for the meeting is done by simply imputing key points with brief explanations in a word document. Collecting data for qualitative research is equally uncomplicated with Alan asking Erica Dorstamp to retrieve information from the system database of year-end 1999 and put it on a disk. Demographics of the sample are also given to Mr. Green. With the help of Ms. Dorstamp, Alan randomly selects 30,000 customers out of a total of about 5 million. Key findings in the meeting with Jane Raines are numerous. Alan ascertains that customer profitability is derived from multiplying balance in deposits by the interest spread, plus transaction fees plus interest from loans, and minus the cost of service. The total cost is further divided into variable costs and fixed costs. Variable costs are lower for online