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 transactions, but it has a higher fixed cost structure. Mr. Green also finds that there is no clear correlation between balance amounts and customer profitability. Lastly, Alan learns about the initiatives Pilgrim Bank take to increase profitability and retain its most profitable customers. Data analysis of the customer database begins with the testing for sample bias. Customers are sorted from descending profitability and they are charted against percent cumulative profitability of the bank. Alan finds congruency between his findings and the one results presented by Jane Raines, thus finds reassurance that his sample is not biased. The results also confirm that roughly 10% of the customers constitute 70% of Pilgrim Bank’s profits. He then proceeds to summarize the statistics and finds that, on average, online users are more profitable than non users ($116.36 versus $110.79.) The summary of the statistics also include standard deviation. The mean and standard deviation is not calculated for geographic information since it is a nominal scale.
1.Customer revenue is generated from three sources: investment income from deposit balances, transaction fees, and loans. The revenue part of the investment income is the difference between the accrued interest payment on the deposit and the income made from investment activities like mortgage lending.
Retail banks deal with deviations in customer profitability by striving to retain its most profitable customers and giving opportunities for lower profit customers to become more lucrative. One way of achieving this goal is diverting more resources to more valuable customers. Banks also give incentive to customers to use lower cost channels to increase their profitability. Moreover, customers are educated on the cost benefits, availability and convenience of the low cost channels. As more and more customers rely on ATM’s, telephone and online services, there is a decreased need for physical infrastructure,...
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