Customer Profitability and Customer Relationship Management at RBC Financial Group

By: Hyderabad 1• Kunal Chowdhury• Ravikumar Katepally• Surender Dhagey• Rangan Majumder• Sudeep Sengupta• Anil Kumar Guntupalli

RBC Financial Group Headquartered in Toronto, Canada Considered one of Canada’s 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)

RBC Financial Group Considered Canada’s largest bank when measured in terms of

assets and market capitalization$270 Billion in assets23 Million retail accounts700 Products58,000 Employees10 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 ABM’s, 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

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

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 1960’s and 1970’s RBC sought to supplemented their expansion by utilizing emerging ABM technologies and a decentralization strategy 1968 – 25 ABM’s were utilized in domestic operations

History of RBC Financial Group The 1980’s changes to “Bank Act of 1871”

1980 – Allowed foreign competitors limited access in the Canadian market1986 and 1987 – Deregulation of financial industry now allowed banks to participate in banking, trusts, securities and insurance

Royal Bank’s 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.

Current EnvironmentThroughout Canada’s banking history there atmosphere was always one of “friendly competition.”In the 1990’s 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 RBC’s 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.”

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 institution’s fully integrated CRM system could allow its personal bankers (PBs) to assess a customer’s transaction history.

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

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

CRM at Royal Bank In 1997 Royal Bank underwent several marketing

strategies. The Strategic Marketing Research and Analytics

(SMR&A) group conducted brand research, segmentation and predictive modeling using information from Royal Bank’s 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

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

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.

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

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

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

New Model NCR – Value Analyzer

Calculated Profitability fasterHigh Processing PowerMore accurate spread of informationCreated a Better Understanding of

CustomersHelp Determine Customer tolerance

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

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

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 they’re propensity to buy

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.

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.

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.

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

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