Customer Profitability and Customer Relationship Management

1
Customer Profitability and Customer Relationship
Management at RBC Financial Group

• By
• Anthony Ayala Jorge Munoz
• Robert Heard

2
RBC Financial Group

• Headquartered in Toronto, Canada
• Considered one of Canadas few full-service,
  national and international financial
  establishments
• RBC Financial Group services 5 main areas of
  practice
• Personal and commercial retail banking (RBC
  Royal Bank)
• Insurance (RBC Insurance)
• Wealth management (RBC Investments)
• Corporate and investment banking (RBC Capital
  Markets)
• Transaction processing (RBC Global Services)

3
RBC Financial Group

• Considered Canadas largest bank when measured in
  terms of assets and market capitalization
• 270 Billion in assets
• 23 Million retail accounts
• 700 Products
• 58,000 Employees
• 10 Million personal, commercial, corporate, and
  public sector customers served in North America
  and much of the world
• RBC Royal Bank (personal and commercial retail
  banking) comprised of 1,300 branches, 4,800
  ABMs, 87,250 proprietary POS terminals, 900
  mobile sales staff, 1.4 million online banking
  customers and 2 million telephone banking
  customers with 300 offices in 30 countries

4
RBC Financial Group

• The personal banking department covered consumers
  and small business banking and loan, while larger
  companies earning 5 million to 25 million were
  covered by the commercial division
• RBC Royal Bank also provided credit card
  services, Visa credit and debit cards provided
  via RBC Centura and RBC Prism

5
History of RBC Financial Group

• Royal Bank began its expansion in 1946, with the
  philosophy in mind all things to all people
• Sought to expand both nationally and
  internationally, while developing new products
  and services in the process
• Due to changing market condition in the 1960s
  and 1970s RBC sought to supplemented their
  expansion by utilizing emerging ABM technologies
  and a decentralization strategy
• 1968 25 ABMs were utilized in domestic
  operations

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History of RBC Financial Group

• The 1980s changes to Bank Act of 1871
• 1980 Allowed foreign competitors limited
  access in the Canadian market
• 1986 and 1987 Deregulation of financial
  industry now allowed banks to participate in
  banking, trusts, securities and insurance
• Royal Banks response to these changes
• -Main strategy was to purchase companies to
  assist them in becoming a fully integrated
  financial service institution.
• 1989 Royal seized 50 of the mutual fund
  market as they entered into the securities
  market.
• 1990 they acquired 70 of Marcil Trust
  Company, this helped them enter the trust
  industry.
• 1992 First to offer group retirement products
  to customers.

7
Current Environment

• Throughout Canadas banking history there
  atmosphere was always one of friendly
  competition.
• In the 1990s with the emergence of Internet
  banking and continuous lowering of protections
  for domestic banks changed this oligopoly.
• The internet posed both opportunities and threats
  but it was the uprising of foreign banks and the
  minister of finances halt on two important
  mergers that showed Canada they should expect
  out-of-country competition, that could exceed
  their own resources.
• It was the internet that challenged the idea of
  being All things to all people.
• Kevin Purkiss, Senior manager, customer value
  analytics made public statements about the new
  competition. He mentioned TD Canada Trust being
  RBCs main competitor when talking about full
  service banks.
• He talked largely about ING and what they offer
  as well as the expansion they are making in the
  industry
• His last statement was about the customer and
  how in this industry at that time, How the
  financial entity focus on customer needs is the
  differentiation point.

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Developing a CRM Philosophy

• The ultimate goal was to bring together in one
  place a view of all contacts, transactions,
  accounts and interaction with each customer.
• A financial institutions fully integrated CRM
  system could allow its personal bankers (PBs) to
  assess a customers transaction history.

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The Ideal CRM system (when triggered by a
customer call or visit) would look as follows

• Address, age, and account balances
• All contacts the customer had at any company
  location, phone center, or Internet site
• What level of service the customer qualified for,
  based on current and future profitability
• What products the customer held at the time of
  the call
• What products the customer was targeted/approved
  for by sales and marketing
• How the customer responded to targeted direct
  marketing campaigns

10
Problems with CRM System

• Although extremely beneficial, CRM was expensive
  and difficult to deploy, especially on a large
  scale
• In 2001, a US industry journal found that while
  78 of respondents found CRM critical, only 35
  actually had implemented it.
• Various roadblocks such as budget constraints,
  lack of coordination/cooperation within
  companies, lack of management commitment made it
  very hard to penetrate the industry with CRM.
• Companies who were successful with CRM created
  ongoing repeat purchase relationships with their
  customers and had the resources and
  infrastructure to capture detailed data about the
  customers behavior when the customer purchased,
  used and repurchased their products and services

11
CRM at Royal Bank

• In 1997 Royal Bank underwent several marketing
  strategies.
• The Strategic Marketing Research and Analytics
  (SMRA) group conducted brand research,
  segmentation and predictive modeling using
  information from Royal Banks data mart
• The objective of this research was to determine
  the image perceptions of major financial
  institutions and identify the optimum positioning
  for RBC Royal Bank.
• Due to the push from competition Royal Bank was
  eager to use the information they had gathered
  about their customers in future interactions with
  
• them

12
The Burning platform

• A study conducted in 1997 of 2000 customers of
  the large Canada financial institutions asked
  What aspects of banking do you highly value.
• The results created the burning platform for
  CRM within the Bank.
• Customers said the most important value to them
  was intimacy, encompassing feelings of trust,
  reassurance, a feeling that the bank knows and
  understands them and their needs.
• Banks had been following the idea that
  convenience was key to their consumers, which is
  why banks offered 24-hour ATMs and call centers.
• This study showed a whole area of differentiation
  that Royal bank could explore
• Royal bank chose to deploy CRM in points of
  contact critical to the customer experience such
  as call centers, branches and
• direct mail

13
Reorganization around CRM

• Royal Banks Primary customer segments Key,
  Growth, Prime
• The structure reflected life stages and the
  different range of complexity within financial
  needs
• The groupings also reflected commonalities in
  service and product requirements.

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• KEY GROUP
• Comprises four sub-segments Youth, Nexus, Small
  Business, and Farming Lifestyle Agriculture.
• Low current value, potential to make high profits
  for bank
• GROWTH STAGE
• Clients in mid-life, and/or business that are
  still growing their assets and have high credit
  and financial advisory.
• Strategy Retain, grow, consolidate these
  relationships
• PRIME
• Consists of more mature customers in the
  accumulation and preservation phases with
  significant potential for full RBCFG offerings.
• Value proposition trusted service and referral
  to specialized resources

15

• Segment managers competed for resources alone
  with product managers and functional area
  managers.
• The friendly competition fostered close
  collaboration between these areas.
• There was resistance to the changes within the
  new customer and centered organization.
• Part of the problem was the inability to
  communicate how the new program would work, power
  shifts from product managers to customer managers
• Consolidation of regional sales and marketing
  groups meant that branches received compiled
  lists from sales and marketing offices in Toronto
  rather than regional offices.
• Royal bank created a small, specialized group
  that produced ad-hoc and follow-up leads as
  requested by the branches.
• The goal was to replace often-haphazard sales
  leads process at the local level with centralized
  and standardized sales leads
• Now the leads are generated centrally and
  everyone has direct access to them, they switched
  from paper based to being
• available electronically

16
Customer Profitability and Potential Measurement

• Aggregate Information vs. Actual Data
• 20 customers accounted for 100 profit
• A customers made the most profit
• B customers made some profit
• C customers broke even or lost money

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New Model

• NCR Value Analyzer
• Calculated Profitability faster
• High Processing Power
• More accurate spread of information
• Created a Better Understanding of Customers
• Help Determine Customer tolerance

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Future Profitability and Lifetime Value

• 1) Calculate Present Value of Profit
• Assuming profitability percentile of client
  remains constant
• 2)Factoring in Variables
• (Example Age, Tenure with Bank, , Number of
  Products Held, Acquisitions)
• Lifetime Value calculated individually
• Can be aggregated up to Segment Level

19
Using Customer Profitability for Customer
Decisioning

• Once profitability and lifetime was value
  determined, these measures were included when
  determining customer decisions. For RBC this
  meant
• Customized Marketing Campaign
• Establishing Service Levels
• Product Design Pricing

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Customized Marketing Campaign

• Customer profitability was a determinant used for
  segmenting and targeting
• Studies were done on customers likes, dislikes
  and types of products they would benefit from.
• Models were developed to determined theyre
  propensity to buy

21
Levels of Service

• RBC also determined a set of customer treatment
  strategies using the customer segment categories
• A customers category would determine the length
  of wait and type of customer service
  representative the customer talks to.

22
Product Design and Pricing

• The CRM system used customer profitability and
  future potential calculations to give pricing
  parameters to account managers to determine how
  to price products depending on the customer.

23
Packages vs. Fees

• Another use for customer profitability data was
  to inform in the debate over whether to change
  for services using a flat rate package or charge
  fees based on the amount and type of transaction
  the customer was generating with the bank.

24
Interest Revenue Value and Transfer Pricing

• The bank determined profits on asset products
  by subtracting transfer rates from actual
  interest income and for liability accounts by
  subtracting interest paid from the transfer rate
  on the money in the deposit account

25
Risk Calculation

• Factors such as Income, Service Debt Ratio, Cash
  Flows, and credit reports helped make an initial
  decision.
• Once loan granted, a risk score was given based
  on nature and frequency of transactions in the
  customers account.
• Score converted into cost driver
• All inputs were entered into software
• that calculates customer profitability