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Pilgrim Bank :

Customer Profitability Case Analysis

By,

Abhijeet Mukherjee

Anoop Maheshwari

Kuldeep Kumar

Muralidhar S

Nikhil Gulhane

Piyush Vanjani

Vipul Sharma

Group 12 Section B

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Background:

Pilgrim Bank, operates in the Retail Banking Industry. The bank had various divisions, with Online

banking group being one of them. One of the major focus was in terms of online banking andInternet Strategies for enhancing Customer experience and reduction in Banks opex. costs.

Objective:

To generate a position statement, to justify my stand for customer transactions using low costchannels and providing various avenues in order to enhance Customer profitability, by bettermanagement of Customer relationships, thus ensuring customer retention & revenue growth.

Problem:

Managing Customer expectations & profitability to the customer as well as the bank was a

major challenge, since the relationship between balances and customer profitability was not a verystraight-forward situation. Obtaining accurate and reliable data on customer profitability was a bigchallenge in retail banking.

Profitability at the customer level was particularly important in retail banking because customertransactions generated incremental costs but typically did not generate incremental revenue.

Also, customer behaviour in terms of transactions was a critical component, for customerprofitability, especially in terms of using low cost channels, as this enhanced the operational costfor the bank. For example two customers having the same accounts and balances, had a differentpatterns, wherein the customer who used to interact with the bank less frequently was more

profitable.

Levying more charges on transactions in order to ensure profitability for customer, also hadfailed based on historical data. For example, First Chicagos decision to charge for teller visits, hadcontributed to a loss of one-fifth of its customer base, which was a critical aspect.

In fact, the history of banking services started off with the low cost channels around 30 yearsback, starting with ATMs, followed by 24 hours call centers, VRUs and off-late the Internetbanking. Carefully analyzing, each channel had provided an opportunity to reduce cost pertransaction than the previous one. However with the low cost channels, the overall cost structure

increased, since customer transactions grew with addition of various low cost channels, rather thanone channel replacing another one.

The main point ol discussion is whether online customers are better and would that actuallyproduce better customers. Actually balance level captured only one piece of information of overallcustomer value to the bank. The focus on balances only will lead to missing important componentsof revenue such as fees and ignoring the cost of serving individual customers.

Variation in customer profitability was very high. Also retaining the highly profitablecustomers was a very high challenge, as more number of avenues and facilities were supposed to beprovided at a lesser cost, with increase in volume transactions and hence the profitability.

Another challenge that was perceived was that the number of banks branches grew in spite of alarger presence of low cost channels such as ATMs and Call Centers.

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The contributions of individual customers to bank earnings varied widely with a smallpercentage of customers coss-subsidizing the profitability of the bulk of the customer base. Basedon the study, it was found out that half of Pilgrims 5 million customers were unprofitable. Theprofitability analysis at the customer level in Pilgrim bank, showed that 10% of the customersgenerated 70% of the profits.

Now,We need to identify if the online customers are indeed better customers and if the adoption ofthe online channel actually produce better customers in terms of profitability.

Analysis required:

- Establish confidence intervals

- Check if there is significant difference in the profitability between online customers andregular customers

- Study and report how age, income and geographic region affect the profitability of theonline customer

Confidence interval: Population size is large and hence we can perform z test to get confidenceinterval for the average population profit. The confidence interval with 95% confidence:

Online vs Regular Customers:

Null hypothesis is that no significant difference in profitability and Alternate hypothesis would bethat significant difference exists

t test analysis of comparison between online and regular customers.

t-Test: Two-Sample Assuming Unequal Variances

Online customers Offline customers

Mean 110.79 116.67

Variance 73604.22 80465.63Observations 27780.00 3854.00Hypothesized MeanDifference 0.00Df 4882.00t Stat -1.21P(T

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Effect of the various independent variables: Profitability is the dependent variable and onlineusage, age, income, tenure and geographic area are independent variables. First regression runshowed that p-value for geographic region was as high as 0.42 and hence district is removed asindependent variable.

SUMMARY OUTPUT

Regression Statistics

Multiple R 0.24R Square 0.06Adjusted RSquare 0.06Standard Error 274.6Observations 22812

ANOVA

Df SS MS F Significance

F

Regression 6 1.06E+08

1.77E+0

7

2.34E+0

2 1.46E-291

Residual 22805 1.72E+097.54E+0

4Total 22811 1.83E+09

Coefficient

s

Standard

Error t Stat P-value Lower 95%

Upper

95%

Intercept -99.34 8.05 -12.35 0.00 -115.11 -83.57Online 17.46 5.51 3.17 0.00 6.66 28.26Age 18.47 1.25 14.82 0.00 16.03 20.91Inc 17.17 0.80 21.38 0.00 15.60 18.74Tenure 4.03 0.24 17.09 0.00 3.57 4.49

District1100 -6.25 7.77 -0.80 0.42 -21.48 8.98District1200 14.50 5.53 2.62 0.01 3.66 25.34

F value: 1.46E-291 significant - model cannot be rejected.

R value: 0.24 predictability of the model is low.

For every increase in online usage, profitability increases by $17.46 Therefore it is betterto bring more online customers. Current online usage is very low (0.122) and so onlineusage must be promoted by providing it free of cost.

For every increase in 10yrs of age, profitability increases by $18.47. This means that elderlycustomers are more important to the bank.

An increase in income category, profitability rises by $17.75 and so high income groupshould be better targeted and attended to.

One year increase in tenure boosts profitability by $4.03 and hence customer retention isvery important for the bank.

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Age is the most important factor in online usage and it is negatively related. But elderly customersare more profitable and hence we need to educate them to make use of the online services.