customer profitability & customer relationship management at rbc-full (1)
TRANSCRIPT
CUSTOMER PROFITABILITY
AND CUSTOMER RELATIONSHIP
MANAGEMENT AT RBC FINANCIAL
GROUP
Research Associate Lisa Brem
prepared this case under the
supervision of Professor V.G.
Narayanan, HBS cases are
developed solely as the basis for
class discussion. Cases are not
intended to serve as endorsements,
sources of primary data, or
iPlustrations of effective or
ineffective management.
Copyright ' 2002 President and
Fellows of Harvard College. To
order copies or request permission
to reproduce materials, call 1-800-
545-7685, write Harvard Business
School Publishing, Boston, MA
02163, or go to http://www.hbsp.
harvard.edu. No part of this
publication may be reproduced,
stored in a retrieval systenn, used in
a spreadsheet, or transmitted
in any for or by any means—
electronic, mechanical,
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otherwise—-without the permission
of Harvard Business School.
V . G . N a r a y a n a n
L i s a B r e m
(}) Wlio are our mmt important customers'? (2) How do we put them incharge of our Company'? - Screen saver on the computer of KevinPtirkiss, senior manager. Customer Value Analytics.
There is no such, thing as an unprofitable customer. — O n e of RBCFinancial Croup's company mottoes.
INTRODUCTION
It was Jttne 1998 and Richard McLatighlin, vice president ofCALStomer Relatiotiship Marketing and Information Managementfor RB( Royal Bank, looked again at the latest ctistomer profit-ability reports. The new data mining capability the Bank badpioneered was astonishing. Tbe good news was tbat customer,ctistotner segment, and piodnct profitability tumibers were moreconiprebensive and accurate than with tbe Bank's old ptofitabil-ity model. Tbe bad news was tbal tbose precise numbers clearlyshowed major losses in tbe Bank's personal cbecking accounts.McLaugblin knew tbe Bank was also struggling witb it's seventbout of eight ranking among financial institutions in tbe Bank's
© 2002 Wiley Periodicals. Inc. and
Direct Marketing Educational Foundation. Inc.
JOURNAL OF INTERACTIVE MARKETING
VOLUME 16 / NUMBER 3 / SUMMER 2002
froin h(t|)://v\'\viv.fiisT((jiripany.coni/honifp;igc.
RBC MNANCIAL GKOU P
E X H I B I T I
RBC—A Corporate Snapshot Masterbrand RBC Financial Group
PUt fomis
Plalfotm brands
Canada
Platform brandsUnited States
OtheiInternational
Markets
Corporate and
InvfxtiTiFnl Bdnkin^
RBC Capital Markets
• Investment Banking
• Corporate Banking• Equrty Research,
Sales. Trading and
Derivatives• Foreign Encfiange• Fined-lncame Sales
and Trading
HBC Capital Markets• Investment Banking
• Corporate Banking• Equity Research,
Sales. Trading andDerivatives
• Foreign Eictiangeand Money Markets
• Equity CapitalMarkets
• Filed Income Capital
MarketsRBC Capital Markets
We^ l ih Managnnt^nt
RBC Investments• Action Direct
• Financial Planning
• Mutual FundsRBCDS
• PrivateCounsel/Private
Banking. Personal Trust
• Global AssetManagement
RBC Dam Rausctier• Full-service
Brokerage
• Mulual FundsCorrespondent
Services• Investment
Management* FiKed Income Capital
Markets
RBC Investments• Global Pnvate
Banking• Investment
Management
Trust & Custody
Transaction Processing
RBC Global Services
• Casti Management.
Payments and Trade• Institutional and
Investor Services
Rac Global ServicesCash Management
Payments and Trade• Institutianal and
Inrestor Services
R8C Global Services• Gash Managemen!
Payments and Trade• Institutional and
Investor Services
PeiBoiul and Conimerdal Banking
RBG Royal Bank
• Personal Bankinc
• Business Bank in
RBC CenturaPersonal
Banking• Business
Banking
RBC Royal Bank
RBC Prism
• ResidentialMortgages
RBC BuilderFinance• Builder
Financing
RBC Royal Bank of
Canada
nsurance
=<BC InsuranceLite Insurance
Health Insurance
AnnuitiesHome and Auto Insurance
Travel Insurance
RBC Insurance RBC Liberty InsuranceReinsurance • Life InsuranceGlobal • Health Insurance
Private . Full-ServiceInsurance Insurance
Travei Administrationinsurance
RBC insuranceReinsuranceGlobai Pnvate insurance
Soune: (kitnpatiy ixTinds.
internal value for money stLidy. The Canadianpublic increasingly wanted value and personalservice from its banks. Competition among Can-ada's leading financial institutions was fierce asthe indiistiT responded to deregulation andnew niche-market entrants. McLaiighlin thoughtstunied to how he would present this informationto the Bank's segment and product managei^s,and questioned how tlie Bank should respond:
Now we have real customer piofitabilily mmi-Ix'rs and, thioiigh our ciistonicr relationshipmanagement {CRM) tools, we know an awfullot about custonuT preferences and needs. Iliequestion is, what do \\v do wilh ibis informa-tion? How can tbe Bank derive value fromCRM and customer probtability? How can weturn nnprofitable < iistomeis and products intoprofitable ones? Is there a way to enliance theBank's value in the eyes of the banking public?How can we put the whole pictme togetherand make decisions tbat work for botb tbeBank and onr customers?
RBC FINANCIAL GROUP
RBC Finaticial Group entered the tumultuoustwenty-first ceniuiy as Canada's leading bank.
With Canada's finance industi"y in fhtx fromchanges in banking regulations, tiiany smallerbanks were acquired or changed their focusaway from retail banking. In the early part ofthe new centuiy, RB(- etnerged as one of Can-ada's few full-senice, national, atid interna-tiotial financial institutions.
RB(- Financial Group, headquartered in To-ronto, had five main lines of business (see Ex-hibit 1): personal and commercial (tetail) bank-ing (RBC Royal Bank), insurance (RBCInsurance), wealth management (RBC Invest-ments), corporate and investment banking(RBC Capital Markets), and tratisaction pro-cessing (RBC Global Services). Canada's largestbank when measured by assets and market ca]>italization, RB(" owned C$27() billion in assets,had 23 million retail accounts," 700 products,58,000 employees and seiTed 10 tnillion per-sonal, cotnmercial, corporate, and ptiblic sector
"' Canadian population was eslimated ai 30.75 million in 2(H)(),with fhc largest concentration of people in Ontario, Quebec, andBritish (Columbia, Average income after taxes for two peopJe ormore in the same hoiisehoid avtTaged CAN $49,fi2fi in 1998(statistics provided hy: wwiv.staican.ca; accessed August 27. ^001).
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J O U R N A t O F I N T E R A C T I V E M A R K E T I N G
customers in North America and around tbeworld (see Exbibits 2-4).
RBC's market capitalization as of September2001 was C$30 billion. In 2000, RBC was rankedas first in Canadian bank market capitalization,tbirteentb in Nortb America, and Ibrty-tbirdworldwide. RBC also provided tbe largest ntini-ber of residential mortgages, loans, business fi-nancing and deposits in Canada. It was tbe sec-ond largest provider of credit cards.
RBC Royal Bank {Royal Bank), wbicb ac-counted for 50% of RBC's casb net income, badan extensive delivery network tbat included1,300 branches, 4,800 automated banking ma-cbines (ABMs), 87,250 proprietary point-of-saleterminals, over 900 mobile sales staff, 1.4 mil-lion online banking customers, and 2 milliontelepbone banking ctistomers. The Bank alsoboasted an international network tbat included300 offices in over 30 cotintries (see Exbibits 5and 6). Tbe personal banking division encom-passed constimer and small btisiness bankingand loans, wbile tbe commercial side servedlarger companies earning C$5 million to ( $25million. Tbe multinational corporations werecovered utider tbe corporate and investment-banking business line atid were not a part ofRoyal Bank. Royal Bank also offered Card Ser-vices, wbicb provided Visa credit cards anddebit cards; RBC Centura, a U.S. retail bankacquired in June 2001; and RBC Prism, a U.S.mortgage originator.
HISTORY OF RBC FINANCIAL GROUP
RBC Einancial Ciroup began in 1864 as the Mer-chants Bank, a Halifax-based private commer-cial bank founded by a grotip of eight mer-chants. The Merchants Bank joined severalotber banks in the growing maritime area in-chiding tbe Bank of Nova Scotia, tbe HalifaxBanking Company, tbe People's Bank of Hali-fax, and tbe Union Bank of Halifax. Tbe Mer-cbanLs Bank's early expansion followed traderoutes east to Great Britain, New England, andthe British West Indies, giving tbe Bank an in-
ternational focus." In 1869, the Bank, nownamed The Merchants' Bank of Halifax, ob-tained a federal cbarter.'*
As communications and transportation to tbewest improved, tbe Bank's focus turned to To-ronto and Montreal. In 1900, tbe Bank wasrenamed tbe Royal Bank of Canada to reflecttbe cbange in scope. In 1907, tbe Bank's beadoffice was relocated to Montreal and by 1918 itbad 488 branches in Canada and 60 interna-tionally. The Bank remained stable and contin-ued to grow through the two World Wars andtbe Creat Depres.sion. By tbe 1930s Royal Bankwas tbe largest in Canada.'
In tbe post-war era beginning in 1946, theBank devised the philosophy of being "all tbingsto all people." It began an expansion nationallyand internationally tbat broadened its deliverynetwork, wbile simtiltaneously developing newprodticts and services. In the 1960s and 1970s,the Bank increased its commitment to technol-ogy and decentralization in response to chang-ing market conditions. In 1968, 25 automaticbanking macbines were added to domestic op-erations.'^ During tbat time, the Royal Bank wasalready employing technology and a customerorientation philosophy to gain a competitiveedge. As one history of tbe Bank cited:
Tbe 1971 Anntial Report provided an interest-ing account of how automated baek-roonitransactions improved both the cost and qual-ity of operations . . . this also helped to free upfront-line people to deliver the services thatrequired a personal touch. New possibilities forspecialization were directed toward improvingservice to the customer.^
Tbe 1980s were ttirbulent times for Canadianbanks, as cbanges to tbe Bank Act of 1871allowed foreign competitors limited access in
\james [,. t^arroch, (Canadian Hanks and Global Competitiveness(McCill-Qiiecn's University Press, 1994).' htip://www.royalbank.com/history." l};inoch, p. 1S6." Ihid." Ibid,"The Bank Act of 1871 created chartered hanks that could en-gage only in banking. The Bank Act and charters were to bereviewed every 10 years (t^arroch, Appendix Two).
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RBC FINANCIAL GROUP
E X H I B I T 2
RBC Financial Group Consolidated Statement of Income
For the year ended October 31 (C$mUUons) 2000 1999 1998
Interest IncomeLoansTrading account securitiesAvailable for sale and held to maturity securitiesAssets purchased under reverse repurchase agreementsDeposits with banks
Interest ExpenseDepositsOther liabilitiesSubordinated debentures
Net interest incomeProvision for credit lossesNet interest income after provision for credit lossesNon-Interest revenue
Capital market feesTrading revenuesDeposit and payment service chargesInvestment management and custodial feesMutual fund revenuesCard service revenuesSecuritization revenuesGain (loss) on sale of securitiesOther
Non-interest expensesHuman resourcesOccupancyEquipmentCommunicationsOther
Net income before income taxesIncome taxesNet income before non-controlling interestNon-controlling interest in net income of subsidiariesNet incomePreferred share dividendsNet income available to common shareholdersAverage number of common shares (in thousands)Earnings per share (in dollars)Average number of fully diluted common shares (in thousands)Fully diluted earnings per share (in dollars)
Source: Adapted irom RBC Financial Ciioup, "Royal Bank of (^atiad;i 200U .-Viinual Report."
$11,5381,4351,0831,078975
16,109
9,0571,429344
10,830
5,279691
4.588
1,8101,540756684528420104(11)849
6,680
4,695570664695
1,0047.628
3,6401,4122,228
20$2,208
134$2,074
606,389$3.42
609,865$3.40
$10,3861,143937893841
14,200
7,6361,161286
9,083
5,117760
4,357
1,2091,10668854747936222028852
5,491
4,096564677699
1,1057,141
2,707974
1,7338
$1,725157
$1,568626,158
$2.50632,305
$2.48
$10,4261,061829
1,169822
14.307
7,7321,172339
9.243
5,064575
4,489
1,118752664495447305226343647
4.997
3,688508585665
1,0646,510
2,9761,1281,848
76$1,772
145$1,627
617,324$2.64
633,626$2.58
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O U R N A l O F I N T E R A C T I V t M A R K E T I N G
the Canadian market (1980), and deregulationof the financial indnstry (1986 and 1987). De-regulation allowed cro,s.so\er between the "fourpillars"—banking, trust,'' securities, and insur-ance—which had been kept separate since theoriginal Bank Act.
Royal Bank respt)nded by ptirchasing compa-nies that allowed it lo become a fully integratedfinancial service institution. By 1989 Royal hadentered the securities market with a bang, cap-turing 50% of the mutual fund (offeredthrough banks) market. In addition:
The 1990 acqttisition of 70% of Marcil TrustC^oinpany. .specialists in real estate, strength-ened [Royal Bank's] base in the trtist industry.[. . .] Market-share received increased alten-don dtuing the period because it vvas viewedboth as a condition and a measure of success;size was important. The Royal did not intend toparticipate in domestic markets thai it cotildnot domhiate. [. . .J
[l]n . . . 1992, the Royal was the first to offergroup retiiement products. The thrust was todevelop relationships with different target mar-kets by offering prodticts aud deliverv' mecha-nisms thai made ctistomer feel ct)mfortahle asthey disctissed their personal financial affairs.Transactions at a teller's wicket were no longerthe model. Now bankers had to listen.'"
CURRENT ENVIRONMENTThroughotit most of Canadian banking histoiy,the six largest (Canadian banks enjoyed a rela-tively undifferentiated and "friendly competi-tion" indtistiy structure. By the late 1990s, how-e\er, changes were on tlie horizon. The adventof Internet banking and the continued loweringof protections for domestic banks spelled anend to the banking oligopoly. While the Inter-net represented both opportunities and threats.
•' Canadian Triist.s were similar to U.S. Sa\ings and Loans. Thi-ywere typically smaller, regional companies that issued niortgafrcs,set up and administtTi-d deposit accounts, wills, trust accouius.and ftigktgc'd in fsuic planning. Soinc Trusts ofrcrcd specializediiivestrneni sciviccs. Prior m dt.T(.'sn!ati<ni, TnisLs were the onlyfiiiaiicial entities allowed lo issue i' " t l ano th , pp. 146-147.
tbe insurgence of foreign banks coupled withthe minister of finance's halting of two impor-tant mergers was a warning call to Canada'sbanks that they would soon face competitionfrom large out-of-cotmtry banks that could rivalOl exceed their own resources.
While the big banks cast one waiy eye off-shore, the other was trained on the small Inter-net upstarts that threatened to eat away at theirbread and butter personal and small businessaccounts. Being "all things to all people" sud-denly became a lot harder. One industiy reportprojected that:
The combination of big banks shifting direc-tion and new FIs grabbing for online custom-ers will disrupt today's stable financial ser-vices industry. By 200. [..-1 I-^ millionC-anadiati households—more that 10% of thetotal population—will move a portion oftheir assets away from their current banks. Asfinancial players jockey to capture these shift-ing relationships, their collective movementswill restrucitiie (Canada's financial seivicesincltistry. "
This report also predicted that by 2006 the('anadian banking industi-y would split into twomajor groupings: constimei-facing financial in-stitutions and transaction processing specialists.The major players in the consumer-facing FIswould be tnicrobanks, superbanks, or financialassemblers, with RBC Financial Group and TDCanada Trust being the two superbanks in Can-ada (see Exhibit 7).'''
Kevin Purkiss, senior manager, cttstomervalue analytics, stimmed up Royal Bank's per-ception of the competitive landscape:
We petceive Tl) (Canada Tittst as ottr nearestand most aggressive competitor at least as far asa ftill service bank is concerned. The rest of thelarge hanks have slightly differentiated strate-gies in line with their expertise. The Bank ofNova Scotia, for exatnple. has been redefining
"Jordan Kendall, with Bnice D. I'enikin, Kinily (las/ynski. andC.liiiilcs Kiiila), The Foneslci Repinl. (.<iri<uiii\ ll/g Hunks Civavet,May 2001, pp. (i-12.'" Ilml.
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R B C F I N A N C I A L G R O U P
2 0 0 0 1999 1998
E X H I B I T 3
RBC Financial Group Consolidated Statement of Changes in Shareholders' Equity
For the year ended October 31 {C$ millions)
Preferred sharesBalance at beginning of yearIssuedRedeemed for cancellationIssuance costsTranslation adjustment on shares denominated in foreign currency
Balance at end of year
Common sharesBalance at beginning of yearIssuedPurchased for cancellation
Balance at end of year
Retained earningsBalance at beginning of yearNet incomePreferred share dividendsCommon share dividendsPremium paid on common shares purchased for cancellationIssuance costs
Balance at end of year
Accumulated other comprehensive incomeUnrealized gains and losses on available for sale securities, net of
hedging activities and related income taxesUnrealized foreign currency translation gains and losses, net of
hedging activities and related income taxes
Shareholder's equity at end of year
Other comprehensive incomeNet incomeChange in unrealized gains and losses on available for sale
securities, net of hedging activities and related income taxesChange in unrealized foreign currency translation gains and losses,
net of hedging activities and related income taxesTotal other comprehensive income
$1,973———28
2,001
3,063109(98)
3,074
7,4952,208(134}(689)(562)
(4)8,314
(56)
(36)
(92)$13,297
$2,20829
2
$2,239
$2,110296
(393)(9)
(31)1,973
2,923192(52)
3,063
6,8031,725(157)(588)(281)
(7)7,495
(85)
(38)
(123)$12,408
$1,725(141)
(4)
$1,580
$1,757300
—(7)60
2,110
2,90518—
2,923
5,7191,772(145)(543)
——
6,803
56
(34)
22$11,858
$1,772(227)
(5)
$1,540
-iir/i': Adaplfd Ircnn RBC Financial (liuiip. "Ro>al Bank iif C.ui.ida 'HUH) Aiiiuial Rcpori."
itself as a retail multi-national bank. CIBO (Ca-nadian Imperial Bank of Commerce), the sec-ond-largest bank in (>anada, is the largest bankcredit card issuer and is also a close competitorin the Canadian mortgage market.
Other types ol competitors pose differentthreats. What we think of as non-traditionalcompetitors entered tlie market with special-ized prt)ducLs and low costs. IN(i Bank of Can-
ada, for example, is a virtnal bank that offers aveiy attractive rate on deposit acconnts. In or-der to access tlie deposit account, the cnstomermtist transfer money from their existing check-ing account (in a rival brick and mortar bank)to INC.'s electronic repository. INC can olfci-liigh rates because it does not have the physicalinfrastructure that a bank like RBC Royal Bankhas to maintain. INCi has since expanded into
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E X H I B I T 4
RBC Financial Group Consolidated Statement of Cash Flows
For the year ended October 31 <C$millionsl 2000 1999 1998
Cash flows from operating activitiesNet incomeAdjustments to determine net cash provided by (used in) operating activities
Provision for credit lossesDepreciationRestructuringAmortization of goodwili and other intangibiesGain on sale o( assetsChange in accrued interest receivable and payableNet loss (gain) on sale of available for sale securitiesChanges in operating assets and liabilities
Deferred income taxesCurrent income taxes payableUnrealized gains and amount receivable on derivative contractsUnrealized losses and amounts payable on derivative contractsTrading account securitiesSecurities sold with recourseObligations related to securities sold shortOther
Net cash provided by (used in) operating activities
Cash flows from investing activitiesChange in loansProceeds from the maturity of held to maturity securitiesPurchases of held to maturity securitiesProceeds from sale of available for sale securitiesProceeds from the maturity of available for sale securitiesPurchases of available for sale securitiesChange in interest-bearing deposits with other banksNet acquisitions of premises and equipmentNet proceeds from sale of real estateChange in assets purchased under reverse repurchase agreementsNet cash used in acquisition of subsidiaries
Net cash used in investing activities
Cash flows from financing activitiesIssue of RBC Trust Capital Securities (RBC TruCS)Increase in domestic depositsIncrease in international depositsIssue of subordinated debenturesSubordinated debentures maturedIssue of preferred sharesPreferred shares redeemed for cancellationIssuance costsIssue of common sharesCommon shares redeemed for cancellationDividends paidChange in securities sold under repurchase agreementsChange in liabilities of subsidiaries
Net cash provided by financing activities
Net change in cash and due from banksCash and due from banks at beginning of yearCash and due from banks at end of year
Supplemental disclosure of cash flow informationAmount of interest paid in yearAmount of income taxes paid in year
$2,208 $1,725 $1,772
691369—91(4)11011
(206)(434)
(4,183)3,355
(11,078)(312)
(5,867)97
(15.152)
(11,728)500
(114)10,52516.269
(23,640)1.927(293)—
1.969(323)
(4,908)
6508.8189,4051.200(20)——(4)59
(660)(791)(391)281
18,547
(1.513)2,460J947
$10,698S2,007
70638915370
{95}(81)(28)
(27)487
15,262(14,151)(5.700)(239)
(1.748)8.1164,893
1.077411
(405)5.16310.428
(20.208)(6.596)(255)815
(365)(129)
(10,064)
_
5,7732.119700
(123)287
(400)—17
(333)(735)
(1.868)(215)5,222
512,409
$2,460
$8,989$542
5753426866_95
(343)
(65)66
(15.637)14,638
(11.037)(337)7.426
(1.993)(4,634)
(7,696)885
(737)4.44611.478
(14,114)5.406(518)—
(1,265(7)
(2,122)
_
935.964500(72)293——18—
(662)1,806(315)7,625
1.1391.270
$2,409
$9,163$604
Soune: Adapted fmin RBC Financial Group. "Royal Bank of (:ari;ida 'iOOO Annual Rcpnri.
JOURNAL OF INTERACTIVE MARKETING • VOLUME 16 / NUMBER 3 / SUMMER 2002
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RBC FINANCIAL GROUP
E X H I B I T 5
RBC Financial Group Results by Business and Geographic Segments
Fot Ihe year endingOf lober 31, 2000
Net interest income ontaxable equivalent basis
Taxable equivalentadjustment
Net interest income
Provision for credit losses
Net interest income afterprovision for credrtlosses
Non-interest revenue
Non-interest expenses
Net income before tnoometaxes
Income taxes
Non-controlling interest
Net income
Total average assets
Pf rsotul andCom mere idl
FinancialSeiv l ies'
$4,789
7
4,782
649
4,133
1,729
3,857
2,005
782
5
$1,218
$131,900
WealthManagement
$359
359
n)
360
2.138
1,846
652
239
-
$413
$8,000
Corporate andInvestmenIBdnkinK
$43
21
22
91
(691
2,287
1,456
762
260
--
$502
$131,900
Tran^tion
$160
160
(21)
181
514
459
236
102
$134
$1,600
Other
$(44)
„
(44)
(27)
(17)
12
10
(151
29
15
$(59)
$10,700
ToUl
$5,307
28
5,279
691
4,588
6,680
7,628
3,640
1,412
20
$2,208
$284,100
Canada
$4,796
28
4,768
703
4,065
5,277
6,47D
2,872
1,311
15
SI,546
$200,100
Internatioiul
$511
_
511
(12)
523
1,403
1,158
768
101
5
$662
$84,000
Soiirre: Adapted frotii RBC Financial Group, "Royal Bank ol' Canada 20(){) Anmial Report."•' Fur management reporting piirpo,ses. the operations of [RBC Financial Group] are grouped [as of Ociober 'i()0()| inio the hiisinesssegmenis of Personal Sc Coniniercial Finanrial Servires fiiiclutling tnsiuance[, Wealth Management, (Corporate & Iiivestinent Banking ;mdTransaction Processing with the Other segment comprised mainly of CoqKtrate Treastiry, S\'stems 8c Terhnologv' and Real Estate Operations.The business segments operate on an arm's length basis with respect to the purchase and sale of intra-group services. Transfer pricing offunds sold or purchased, commissions, or charges and credits for services rendered are generally at market rates. For geographic reportingpurposes. Catiadian-ba,sed acnvities of international money market uniis are included in hiternational.
a more complete product ottering incltidingmortgages and loans.
Atiother emerging market is in "white label-ing" or the use of bank senices by non-bankcompanies. For example, one of Canada's larg-est stiperinarkets, Loblaw's, recently partneredwith a division ol (-IB(^ lo offer President'sChoice Financial Semces, which inchidcs no-fee banking and a di.scoiint on groceries toI.oblaw's customers, ('IB<" is providing the ser-vice, btit it is marketed as a Loblaw service atidphysically located in the stipermarket.
The connrion denominator in all these newproducts and markets is the customer. How afinancial entity focuses on ctistomer needs isthe differentiation point in our industiy rightnow.
DEVELOPING A CRM PHILOSOPHY
"Focus on the citstoiner" wus not only the man-tra for banking, but ibr a host of other indtis-tries. One possible key to understanding cus-
tomers was a combination of data mining andcorporate philosophy loosely termed customerrelationship management (CRM). CRM badbeen a corporate buzzword since the early1990s when enterprising companies began toenbance their direct marketing and customerloyalty programs with sophisticated databaseand infomiation technology systems. As com-ptiter hardware and software became morepowerftil, companies could gather customerinformation at a very detailed level. Market-ing programs shifted focus from mass market-ing to segment marketing and customizedmarketing.
In the booming economy of the late 1990s,companies jtimped on the C-RM bandwagon,hoping to capitalize on Internet marketing,information, and commerce. ( RM consult-ants proliferated, offering solutions for arange of applications from automated call-centers and sales force automation to enter-prise-wide CRM systems. Companies looked to
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E X H I 8 I T 6
RBC Financial Group—Business Segment's Contribution to Cash Net Income (for nine months 2001)
RBC Global Services(Transaction Processing)
6%
RBC Insurance7%
RBC Investments (WealthManagement)
15%
RBC Royal Bank(Personal and CommercialBanking)
51%
.Source: RBC Financial
RBC Capital Markets(Corporate and InvestmentBanking)
21%
iiii) wfbsiu-; www,royalbank.cotn/inv(:-sti)rrflati(in. acressed Sepceiiih<T 14, (
CRM to solve a variety of problems such ashow to make their marketing programs, salesefforts, and customer ser\ice function moreeffective and efficient. Some CRM propo-nents expected thai in the United States andCanada, customer profitability would increas-
ingly be in demand as part of financial report-ing to analysts and investors.
'"'(irahaiii Hicktnati, unpublished NCR Ootporanoii itiarkctingpivseiitaiion, Deretnbcr 1999.
E X H I B I T 7Attributes of Consumer-Facing Financial Institutions
SupfT banks
Leading institutions
Number of players
Geographic reach
Customer strategy
Key customers^
Anchor service
ProdJcts
Paiinership strategy
President s Choice Financial. Citizens Bankof Canada, Cititiank Canada
Five
Regional
Acquisition
Law-end AAs and GRQs
Brokerage
Resold
Have lots of nonzontal partners to achievechannel and service breadth
Toronto-Domini on Bank, Royal Bank
Two
International
Loyalty and retention
All segments—will retain RBSs and NIs**
Banking and brokerage
Mostly proprietary
Partner outside the industry but not withpotential competitors
Bank ot Nova Scotia. Bank of Montreai,
Nationai Bank
Thtee
National
Niches
PCCs and RBBs
Banking
Propnetary and rebrandedAcquire platforms from finance factories,
work with channel partners to reachniclie customers
.Simffc; Adapicd (toiii Jotd.iu Kftuiall, Canada's liig Banks L'liiavt'l, Ihc Fi»n"i-sii'r Rt'|H)ii, May ^Otll. p. 14." Forrester sef^ented onlirtr investors atcordiiig Ln their net worth, frequency of trading, and risk toleniiite. The segmentation used factorand cluster analysis to deteiniine st-giiient membership. Tlie Aggffssive Affluent (A.\) are older investors who boast the hij^hest householdincomes and the longest online teiuire of any segment. Retirement By The Book (RBB), a predominantly temale segitient. possessed thesmallest amount ol' Net-managed funds and is the youngest and most pas.sive investnieTU group. Portfolio Cruise Contnil (PCC) is the olderinvestor who has built formidable poitfolios from decades of saving. It is also the least likely to bank and trade online. Get Ricli Qiiiek (GRQ)is largely male, the least educated, and has the lowest average income. (Forresier Rcpoit Fndnotcs, p. 'H)).*• NI refers to non-investors.
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The ultimate goal of CRM was to bring to-gether in one place a view of all contacts, trans-actions, acconnts, and interactions with eachcustomer. A financial institution's fully inte-grated CRM system could allow its personalbankers (PBs) to access a customer's transac-tion history. For example, the ideal ( RM systemcould provide the following hiibrmation toPBs'* when triggered by a customer call or visit:
• address, age, and account balances,
• all contacts the customer had at any com-pany location, phone center, or hiternetsite,
• what level of senice the customer qualifiedfor, based on current and future profitabil-ity,
• what products the customer held at thetime of the call,
• what products the customer was targeted/approved for by sales and marketing,
• how the customer responded to tatgeteddiiect marketing campaigns.
Although the henefits promised to be great,CRM was expensive and difficult to deploy, par-ticularly on a large scale. One U.S. industiyjournal suney reported in 2001 that "althoughthe vast majority of respondents—78%—con-sider ( RM critical, just 3.5% have actually imple-mented it." ** Costs could rim into the millionsfor enterprise-wide systems. Various roadblocksstymied successhil implementation, such asbudget constraints, lack ot coordination andcooperation within companies, lack of manage-ment commitment, unsupportive cultural cli-mate, and inadequate technological infrastruc-
ture. 17
Companies most successful with CRM werethose that created ongoing repeat purchase re-lationships with their customers and had the
' Royal Batik did not neci-ssaiiiy provide or want to provide thiskind of infonnatiuii directly to the desklop due m client conti-dentiality atid privacy,"' Matio Apicclla and Tom Yager, "Solid CRM is DiHicult. btit tintImpossible," InfoWortH, April lf>, 2001, http://proqiiest.coni (ac-cessed May ^, 2(KKl), p. 53.'^ Ibid.
1 esources and infrastructure to capture detaileddata about the customer's behavior when thecustomer purchased, used, and repurchasedtheir products and semces. Industries in whichcompanies had made inroads to CRM includedairlines, auto manufacturers, and financial ser-vices.
CRM at Royal Bank. Tlie seeds of the CRMprogram at Royal Bank were planted in 1997 asthe result of several marketing pr()jects wiihinthe Bank. The Strategic Marketing Researchand Analytics (SMR&A) group had been con-ducting brand research, as well as segmentationand predictive modeling using inibrmationlrom Royal Bank's data niart.'^ This researchwas conducted with the objective of determin-ing the image perceptions of major financialin.stitutions and identifying the optinuiin posi-tioning for RBC Royal Bank. In response to thecompetitive pressures nipping at its heels. RoyalBank wanted to actively use the informationthat it had been collecting on its customers tointeract with them in a more informed way.
One study conducted in 1997 asked 2,000customers of the large Canadian financial insti-tutions (FIs) what aspects of banking tliey mosthighly valued and juxtaposed those findingswith an assessment of FI strengths (see Exhibit8). The results created the "burning platform"for CRM within the Bank. As Gaetane Lefebvre,vice president of SMR&A, explained:
What w;is important lo thf cLtstomei" was cus-tomer intimacy. It encompassed issues such astrust, reassviiatice, a fet-ling that the bankknows them, unrierstaiuls their needs, and rec-ogiii/c who the}' are and values tlieir business.(:on\'{'rsfly, banks were gfxid at more concreteiliiii^s like niainiaining large branch and ATMneiwoiks, convenient hours and easy access toaecounLs.
Richard McLaughlin, vice president of CRMand information management, added:
"Thf data tiiait at Roval Bank used a hardware platlonn pro-vided by W.'R called Terallata. whi( h housed the Bank's customeriiilormatioii Hies.
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l O U R N A L O F I N T E R A C T I V E M A R K E T I N G
E X H I B I T 8
RBC Financial Group 1996 Marketing Study Results
Importanceto Client
Mutual BenefitRcciprocil> Trust
Comfort Reassurance
Understanding
Convenient Hours 1-800 Number
, „ . 24x7 PC/lntcrnetATM access ,, , .
Banking
Short Lines Generic Mail
Low
Catiadian Financial Institutions'Proficiency at Delivering
High
records.
Conventional wisdom up until this point wasthat lhe key differentiating factor for banks wasa 24/7 call center and a branch on every cor-ner. This study identified a whole new area ofdif'feretitiation that Royal could explore.
Differentiation among the leading Canadianhanks in the newly competitive environmentwas highly sought after. (>RM was pitched upthe ranks from marketing to the head office ofRoyal Bank as a husiness philosophy crucial fordeveloping an expertise in customer intimacy.Royal Bank chose to deploy CRM in points ofcontact critical to the customer experience suchas call centers, branches, and direct mail.
Reorganization Around CRMWhen James T. Rager, executive vice presidentfor Personal Financial Services (PFS), took overthe reins of retail banking in 1996, he made itdear to his managers that he would not besatisfied with single digit growth in the retailbank. He agreed with his marketing managers
that CRM wouki stimulate growth and differen-tiate Royal's .seivices. In 1997, a new senior po-sition, Vice President of Customer RelationshipMarketing and Information Management, wascreated within marketing, which reported di-rectly to the Senior Vice President of Marketing.Richard McLaughlin was hired in that positionwith the mandate to get the hall rolling onCRM.
By 1999, McLaughlin's responsibility areas in-cluded CRM infrastructure, information man-agement, alliance marketing, Internet banking,and privacy. The SMR&A group that started itall was expanded and given responsibility forcustomer profitability measurement; customer{-RM strategy development, decisioning, and re-porting; segmentation and predictive modeling;and primary marketing research. A unique as-pect of Royal Bank that made CRM easier todeploy was the strong integration of marketre.search, analytics, and CRM client decisioning,all of which resided within the same team in the
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RBC FINANCIAL GROUP
E X H I B I T 9
Royal Bank Personal Business Line Major Customer Segments and Subsegments
Key Growth Prime
Getting started stage—YouthLife stage 1—NexusSmall BusinessFarming & Lifestyle Agriculture
Life stage 2—BuildingBusinessAgriculture
Life stage 3—AccumulatingLife stage 4—Preserving
Source: rfcords.
sales and marketing organization, and whichalso reported directly to the Senior Vice Presi-dent of Marketing.
Lefebvre explained that "the team's mandatewithin the organization was to transform datainto information, knowledge, and more impor-tantly, wisdom—the fulcrum of cnstomer in-sight." The larger organization was in forchanges as well. Primary customer segments,Key, Growth, and Prime, were used to realignRoyal Bank's husiness (see Exhihit 9). As KevinPurkiss explained:
The segment structure reflects life stages andthe complexity of iheir financial needs. Thegroupings also reflect commonalities in serviceand product requirements. The interestingpart to note is that the current profiuibilitybetween these groups is quite different. Forexample, the Key grotip compiises four suh-segmenls—^Youih, Nexus, Small Business, andFanning & Lifestyle Agriculttire. These suh-segments have low current value, hut manywithin these sub-segments have the potential toprovide higher levels of profit for the Bank.
The Growth stiige represents clients in mid-life, and/or businesses that are still growingtheir asseis and have high credit and financialadvisoiy needs. Our strategy is to retain, grow,and consolidate these relationships.
The Prime grouping consists of more ma-tme customers in the accumulation and pres-enation phases with significant potential forfull RBCFG offerings. The value propositionfor the Prime segment is trusted service andreferral to specialized resources.
By November 1999 managers were ptit inplace who had primaiy profit and loss respon-
sibility for each segment. The nine segmentmanagers reported to one of three vice presi-dents in charge of the performance for thegrotiping of segments, who in tnrn reported toa senior vice president. This new organizationwas layered over the old, product-centered one,creating a matrix where pnifit and loss respon-sibilities are shared by both product and seg-ment managers. Segment managers competedfor resources along with product managers andfmiclional area managers. This "friendly com-petition" was designed to foster close collabora-tion between functional areas, product and seg-ment managers, and centers of expertise (suchas marketing, CRM, and SMR&A).
For example, a marketing initiative that tar-geted a new product to the prime segmentwould have been closely monitored and influ-enced by the marketing staff, the product de-velopment staff and one of the prime segmentmanagers. Similarly, if a segment manager sawthe need for a retention campaign for his seg-ment, he wotild reqtxest budgeting for the cam-paign, and work with marketing to design andimplement it. (See Exhibit 10.)
Kevin Purkiss, senior manager of customervalue analytics, explained some of the reas<jnswhy Royal Bank was able to sustain this wide-spread change:
Although the old organization was aligned byproduct, the culture was always customer-cen-tric. Once the Bank decided on GRM as itsover-arching strategy, it was easy for us tochange our structure to be more in line withserving the customer. It was a move thatseemed intuitive. Also, the Bank's collaborative
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J O U R N A L O F I N T E R A C T I V E M A R K E T I N G
E X H I B I T I 0
RBC Financial Group Personal and Commercial Division Organization Charts as of December 1999
.JIZ
SVP
SVP
EWProdiSs 1SUP, Atlantic
SUP,Ouet>ec
EUP, Ontario
SVP, Prairies
"sVP,B.C,iYi*on
VPCustomer Management
SVPCustomer Management
Richard McLaughfmVP
Customer Management
Customer ManagerYouth Getting Started
Customer ManagerNexus
Customer ManagerSmall Business
Customer ManagerSmall Agricuiture
VPCustomer Management
Customer ManagerBorrowers & Builders
Customer ManagerBusiness
Customer ManagerAgricutture
VPStrategic Markets
Customer ManagerWealth Preservers
Customer ManagerWealth Accumulators
Soniif: Ci i rn i iany r e c o r d s .
"'Ill 1999, Rich;i[{i Mcl-kiiifrlilin s e m c e d as a \ i c c p i e s i d c i i l o f c i i s H i d i e r niaiuit ifUR-nl. In 2(KI(), tie i r i i i r n o d ID his |iiii)i-
p r e s i d e n t of C R M &• l i i r o n n i i i i o n MiinasJemcii l r f p r n l i n j ^ d i r c n i y i<) itu- S e n i o r Vice I ' l e s i d c n i ot Marki-Mrig.
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r I N A K C I A L G R O U P
approach allowed it to be more nimble, per-haps change faster, than many corporations itssize. Collaboration, communication, and inter-personal skills were very highly prized withinlhe organization.
Tlie change, of course, was not entirely seam-less. Richard McLaughlin recalled some of theresistance met by ihe new customer-centeredoiganization:
We had some ver\' tradiiional product andfimclional silos in this organization that hadlimiterl motivation for moving toward a morecustomer-centered framework. Part oi theproblem was our inability lo fully communicateabout how things would work. Our corporateprocesses were executed more from consensusand conversations tlian a clear road map, sowhen we started to insert new processes, weleceived .some response that it would slow peo-ple's decision making down. Another problemwas the power shift. We were taking somepower away from the product managers andputting it in the customer manager's realm. Tomake matters worse, customer managerstended to be marketing people, while productmanagers tended to be bankers. There was nota lot of understanding between the two groupsabout what each could bring to the table.
While Royal Bank reorganized by segments, ilalso centralized some functions and created ar-eas of expertise in order to become more effi-cient aud cost effective. In 1996, much of lheback-office processes were centralized at thehead office in Toronto. In 1999, the five re-gional sales and marketing groups were consol-idated and moved to Toronto as well.
The consolidation of the regional sales andmarketing groups meant that instead of callingregional offices for lead lists, branches receivedlists irom the sales and marketing office in To-ronto. Royal Bank also created a small, special-ized group that produced ad-hoc or follow-upleads as requested by the branch. The goal wasto replace the often-hap hazard sales lead pro-cess at the local level with centralized and stan-dardized sales leads.
Account Manager for Investments (AMI)Jamie Reich explained how the process of build-
ing and using sales leads had changed since theBank adopted CRM:
Before CRM, every branch had a different waylo generate sales leads and account managerswere responsible for creating their own lists.One way to do this was to go lo lhe regionalcredit department and ask for a list of peopleage 25 to 45 who held al least three products,for example. After a while the departmentwould generate a list based on your query, andyou'd make calls off that list. The leads werebased on how good a query you put in, and yougot new lists depending on when you had timeto slop by the credit department. It wasn't veryconsistent or accessible across all branches.
Now, the leads are generated centrally andevenone has direct access lo them. The leadshave gone from paper based to being availableelectronically. I also have seen the leads im-prove from rather generic to more customized.For example, I used to get a lot of leads forcustomers who might be interested in creditprodticts. These weren't very helpful to mesince I deal mainly in invesiments. Lately, thelead lists sent to me have been much morefocused on investments and products that areof real interest to my customers.
Reich's job was to manage the accounts ofcustomers that were chosen^^ for the Bank'srelationship banking program. The programprovided clients with a persotial contact al theBank who cootdinaled all aspects of the client'sbusiness with the Bank, from issuing mortgages,to lines of credit, to investment accounts. Reichmanaged roughly 200 clients at RBC RoyalBank's tnain Toronto branch. In a typical week,Reich would speak to 20 of his customers on thephone and meet another ten in his office. CRMhelped him and other account managers workmore efficiently. As Reich explained:
Account managers know their customers andknow what their needs are, but these electroniclead lists help us to remember to call and offerproducts. They also save us time and are gen-erating belter and belter leads for new clients.
''' (aiNtomt rs were chosen for ihe AMI program based on theircurrent and jxitcniial profitability.
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In addition to allowing the Bank to centralizesales lead generation, locating the sales andmarketing grotips in Toronto also made it eas-ier for them to interface with SMR&A, C.RM,and information management teams. One ofthe areas where these grotips collaborated wasin using current and future customer profitabil-ity to determine targeted direct marketing cam-paigns, levels of customer service and other ctis-tomer-oriented decision-making.
CUSTOMER PROFITABILITY ANDPOTENTIAL MEASUREMENT AT ROYALBANKRoyal Bank had been experimenting with cus-tomer profitability measurement since the early1990s. The marketing grotip deployed a modelon the personal banking side in 1992 that usedaggregate information other than actual data.The Bank analyzed its then customer base ofapproximately 8 million customers and distrib-uted the ctistomer profit over deciles. The Banklearned that rotighly 20% of its ctistomers ac-counted for 100% of its profit. As Kevin Purkissexplained:
The model placed customers into three large"buckets": A, B, and C. The "A" customersmade the most profit, the "B" customers madesome, and the "C" customers broke even or lostmoney. This information was distributed to thefield office. It helped align the sales forcearound customer profitability and planted theseeds for the new customer<entric organiza-tion. However, it wasn't refined enough foradvanced channel optimization or relationshippricing. In addition, we realized later that insome instances, customers were treated witli-ont consideration of the potential businessthey could contribute.
About the time Richard McLaughlin washired to head the CRM implementation, theBank realized it needed a "more robust profit-ability meastirement." Tbe search was on for abetter model. By 1998, marketing had devel-oped a prototype of the model it wanted toemploy. The group went shopping for .software
packages that would fit the bill.' * While noneseemed to be exactly right, the Bank found thatNCR was developing a package called ValueAnalyzer that looked promising. The Bankagreed to serve as a "beta site" for NCR, whiletailoring Value Analyzer to its needs. The soft-ware promised to make profitability calculationsmore acctirately and much faster. The high vol-time atid complexity of the Bank's accountsrequired high processing power. Since manygroups depended on this information down-stream, the raw data had to be processed withina few hours.
The SMR&:A grotip was qtiite excited abotitthe level of detail that this new model promisedto deliver. As Purkiss explained: "The new-model was to be a vast impiovement over the1992 measurement system. We wotild be goingfrom tising mtiskets to rifles, or from having amachete to a scalpel."
Once Valtie Analyzer came on line, the Bankfound that profitability rankings changed by atleast two deciles for 70% of customers. Moreacctirate spread information, customer specificrisk assessments, transaction-based fee and costelements contributed to these changes. How-ever, the Bank realized that customer profitabil-ity calculations were not enotigh. As Lefebvreexplained:
We came to understand that customers can beboth profitable and have the potential to beprofitable, and that the bank needs both kindsof customers. One big "Aha" came when werealized we had very deep relationships withwealth preservers, but very weak relationshipswith younger segments. We needed to shift ourapproach. We became willing to invest in somesnb-segments such as Nexus, in order to nur-ture our relationship with potentially profit-able customers. The customer potential calcu-lation enabled ns to determine on whichcustomers we would be willing to take losses inthe short term. SMR&A developed the notion
"'" OlhtT companies markeiing ( RM softwarf at the lime were:ABC TecliTiologies. PeopleSolt, PM(; Systems. Oracle. Fi.sen' IPS/ScTidcn*, HNC Financial Sokitiuns, and Metavante (MeridienRrscartli, "Piittinjr ABC" into Customer Profiiability," OislomrrKrimvtedge, vol. 4. no. 1, p, 10.)
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RBC F i N A N C I A L GROUP
T A B
Old vs.
L E I
Cus tomer Prof i tabi l i ty Model
Ittjnd Old Model New Model
Inlert'st Revenue (Fundstran.sfer pricing)
Fees and Com missionsliirett Expenses (event costing)
Indirect Expenses (overhead)Risk Provision
Average revenue by product
Average fee per productAverage Aclivity-Based Costs
Allocated across productsAverage risk per product
Actual net interest revenue by accoLint,using internal transfer pricing
Actual fees by accountTransaction level cost, rolled up to
individual account and customerAllocated across productsExpected risk score by account
Sourrf: Cdiiipany rftt>rds and adapird froni Meridien Rt'Sfarch. Inc., "Putting ABC iiilo Customer Profilability," Customer Knowledge, vol. 4,no. 1. SeplembtM- 27, 2000 and adapted IVom NCR Case Study. "Royal Bank Finds Micro Markets with \C,R Tool," htlp://www.ncr.com,accessed April 'J5, '2001, p. :i.
of potential in 1997. This was part of the orig-inal reason for adopting CRM.
Our new strateg}' was to look, at an individ-ual's total holdings and ftgurc out how todeepen his or her lelaiionship with the bank ifthat petson had potential. For example, werewe losing opportunities to sell ptodncts tothose custotiiers? Are potentially profitable andptofitable customers being lured away?
Calculating Customer ProfitabilityRoyal Bank fotitid that truly tisefttl ctistomerprofitability models had to begiti with detailed,accurate, account or cttstomer level actixity-based costing itiformation. Without this iufti-sion of real data and accurate activity driverrates, ctistomer profitability was scattershot. Al-though the Bauk had been accumulating ABCdata since 1978, it had not integrated it into acttstomer profitability model at the customerlevel until 1999. lu fact, linking ABC data toctistomer profitability models was a datintingtask for even the largest and most resotircefulcompanies. According to one study of large,global financial institutions, less than 1% of 300commercial banks inteniewed were in the ad-vanced stages of such a litikage, while between72% and 79% were doing nothing at all."'
Royal Bauk tised three regional processing
- Meridien Research, Ini., Puiiinjj .A.BC: into (.:ustomer Profit-iibilify," (M.\tiim/T Knowti'dge. vol. 4. no. I, Seplenibt'r 21. 2000, p.
centers in Canada (Eastern, Central, and West-ern) to collect information from the variousdelivery chatinels. This information was thenfed itito the Bank's Toronto-based enterprisedata warehouse (EDW) on a nightly, weekly, ormonthly basis. The operational ctistomer infor-mation file, which the Bank began in the 1970s,matched customer identities to the account-level data in the EDW.
As Table 1 illtistrates, although the same pro-cess was used iti the older profitability model,the new model required the ABC informationto be much more precise.
Activity-Based Costs, The Bank had beentracking ABC information for approximately 20yeats. In the 1980s, it began to develop a systemto calculate and update activity-based costsquarterly by transaction and product. The cur-rent system was implemented in 1991 and wasenhanced dtiring the late 1990s to differentiatecosts by delivery channels such as branch, Inter-net, telephone, and ABM.
The cost system at Royal Bank started withtlie general ledger. Chitwant Kohli, vice presi-dent of costing and profitability, explained theABC system:
As a semces company, we are most interestedin tracking labor costs, which make tip over60% of non-interest expenses. We extract ex-pense data quarterly from the general ledgerfor each individual cost center. These cost cen-
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ters are then grouped with like units based onproducts semces and aclKities performed bythe unit. We refer lo this as the processingpath.
For example, domestic branches, which selland semce the same product lines using thesame processes, become a unit group. Simi-larly, call centers, business-banking centers,and service deliveiy units that perform thesame product-specific activities become uniquegroups. Through grouping luiits by productline and processing path, channel xnews arecreated. Head Office grotips, regional officesand IT costs are also identified in separatebuckets.
Within the 30 lo 40 tmique luiit type groups,we establish total staff lime cotistnned by eachactivity based on unit time per activity multi-plied hy volumes processed. This enables theproper allocation of the unit's salar)' cost toproducts and activities and also forms the basisfor apporlioning premises and general operat-ing costs. Once we have these drivers hy prod-tict, activity and channel, we can aggregatecosts across all units to arrive at both transac-tion and total product cost. These costs arethen available Ibr tise in profitability models.
For example, we can report the full end-to-end product cost of residential mortgages in-cluding acquisition and renewal costs by cban-nel, hack office processing, call center support,system costs. Head Office atid regional over-heads. For eveiy customer we can then arrive atcosts associated with "ownership" of each sep-arate product in the cttstomer's portfolio,based on transaction tisage atid channel pref-erence.
The amotuit of time spent on each activity isupdatec! as Tieedcd. We have also recently in-stituted the idea of "champion branches"—across section of branches that provide activitytimes, volumes, and costs on an ongoing basis.
While labor costs are allocated based onstudies of actual time spent on activities, indi-rect costs and the cost of excess capacit)' areallocated proportionately across all pjoductsbased on the level of direct expense attracted.
Interest Revenue and Transfer Pricing. Otiebank historian explained the dynamics of netinterest tevenite: The major source of bank in-come is "net interest income," which is the
"spread" between the rate paid to depositorsand that charged to borrowers. A profitablesptead is created and maintained thiottgh thetiiatching of loans (assets) and deposits (liabili-ties). Sttccess depends upon the successful mar-keting of both types of "prodticts.""'"
Royal Bank detertnined profits on an assetproduct, sttch as a tnortgage, ttsing actttal inter-est income, less the transfer rate on the mort-gage. Conversely, piofits for a liability prodtict,such as a savings account, were determined bythe acttial interest paid ottt by the Bank, sub-tracting from the transfer rate on the money inthe deposit accoitnt.
Risk Calculation. Wheti a cttstomer sottght topitrchase a loan ptodttct, the Bank determinedwhether to grant the loan, and at what price.The Batik used a ntimber of factors, such asincome, debt service tatio, cash flow, and third-party-provided credit reports, to make this ini-tial decision. Once the loan was granted, theBank assigned a risk score (adjusted monthly)based on the nature and frequency of transac-tions in the ctistomer's accotints. The score wasconverted to a cost driver that was then ttsed toallocate the cost of expected credit losses to thatcustomer. Once all the inputs were entered, thectistomer profitability software calculated thecustomer proiitability. For example, one ctts-tomer may have two accotmts with the Bank, ahome loan and a savings accotmt. Although oneaccount was losing money, the other was qttiteprofitable. The cttstomer as a whole was makinga profit for the Bank. (See Table 2.)
In addition to calculating current profitabil-ity for ctistomers and customer segments, RoyalBank also began experimenting with ways tomeasttre fttttire profitability and lifetime value.The Bank looked at two ways to meastire life-time valtie, (1) asstiming that the ctirrent prof-itabihty percentile of the customer would re-main constant throughoitt his or her projectedlifetime atid calctilating the presetit valtie ofthose profits, and (2) factoring in other vari-ables sucb as: age, tenttre with the Bank, litim-
-^ Dan-ncli, p. 9,
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RBC r i NANCIAL GROUP
T A B L E 2
Sample Customer Profitability Calculation fo rCustomer John Doe, January 2001
Net liileiesl Revenue
Othci" Rcvfime
Diifc t Expense
Indirect Expense
RJsk Provision
Total Profitability per account
Source: Omipanv records.
Ho meIjxni
.$()()
S 0» :S 1S 5S51
SavingsArrounI
$ 2
$ 0
S 3S 1$ 0
($4)
ber of products held, probability of acquisition(how likely to add products to portfolio), audaltiitiou (of products). Lifetime value was cal-cvUated iudividually and could be aggregatedup to segment level.
USING CUSTOMER PROFITABILITY FORCUSTOMER DECISIONINGOnce tlie Bank determined cuslomer profitabil-ity aud lifetime value, it iucluded those mea-sures when determining customer decisions.For Royal Bank, decisioning encompassed cu.s-tomized marketing campaigns, alignment ofpricing discretion, and alignment of level ofservice based on depth (how many productsheld) and potential (lifetime value) of a rela-tionship.
As Gaetane Lefebvre explained:
Customer decisioning relers to the ctistomerstrategies that are built in our decision engine.This etigine contains a mtiltittide of categorytrees. One oJ the most significant trees lever-ages four strategic predictive models: profit-ability, client (credit) risk, client \iilnerability(how \Lilncrablc the Bank is to losing the cli-ent), and lifetime value. Depending on howpeojjle r;ite, (high, meditim, or low) for eachmodel, they ate placed iiUtt one of fourteencategories, for which the Bank will luue a pri-maiT oljjective: to retain, grow, manage clientrisk, or optimize costs. We can then u.se thesecategories (or grouping of categories) for mar-
keting effectiveness, courtesy overdraft, alloca-tion of rate discretion, and differentiated ser-vice. The.se categories are a proxy for theBank's objectives, while the segments (such asNextis and Wealth Act tuntilators) are a proxyfor the client's needs. We strongly believe thatit is the alignment of the Bank's and custom-ers" objectives, which will allow tis to differen-tiate ourselves in the marketplace. (See Exhibit11.)
Although the marketing department startedworking with ctistomer lifetime valtie and seg-mentation, the information given to tbebranches was limited to a profitability rankingthat continued to use the three bucket (A, B,and C) system. Detailed information on seg-mentation was not disseminated to tbebranches.
Customized Marketing Campaigns
Ctistomer profitability was one of tbe primarydeterminants the Bank tised to segment its cus-tomers into grotipings aud sub-groupings in oi-der to target these grotips for tnarketing cam-paigns. SMR&A also condticted studies oncustomer segment goals, needs, likes and dis-likes, the types of products froui which theywotild most likely benefit, and developed mod-els to determine their propensity to buy. Usingthis information, SMR&rA taigeted customerswithin segments or sub-segments for certainproducts, offers, and marketing channels (suchas direct mail, telephone solicitation, or an in-persou sales call).
As one report explained:
At the Royal Bank, the 9 million personal retailclieiUs are segmented into discrete segmentsbased on attitudinal and beha\ioral factors,current and potential profitability, expectedpurchasing behavior, vulnerabilities, and chan-nel preferences. Strategies are then developed,not only for each segment btit also for hun-dreds of micro-segmenLs within each seg-ment—the ultimate objective of this Cjuestbeing one-to-one marketing, hulixidual treat-ment strategies can be tested on small cells ofclients to establish what works and what
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J O U R N A L O F I N T E R A C T I V E M A R K E T I N G
E X H I B I T I I
Royal Bank CRM Initiatives
FEEDBA CK/RES UL TS
doesn't, and to test refinements on a continu-ing basis.^^
Rather than passing raw data on to the cus-tomer contact poitits, SMR&A inserted tbe salesleads into the customer's file. Ptirkiss describeda typical scenario for a customer coming into abranch seeking to open a line of credit:
The customer enters the branch and gives theaccount manager her Royal Bank client card.Once it is swiped into the comptiter, the man-ager can access the client file, which incltidesinformation on her age, address, and whatproducts she holds. It also notes that she hasbeen taigeted for a particular line of creditproduct. The manager uses that information toguide him through the interaction with theclieiu. He no longer lias to ;isk her for everydetail about where she lives or what her finan-cial situation is. He knows instanily thai she iseligible for a credit line and can qtiickly and
•'•' NCR Case Study. 'Royiil R;ink Finds Micro Markets mlh NCRTool," Imp://www.NCR.com (accfsscd April '^^t, 20(11). p. ."i.
confidently answer her questions. This processis much more efficient and it eliminates a lot ofstress for the customer. It also empowers thebranches to make better, more informed deci-sions because they have good information attheir fingertips. We don't pass on the specificcustomer categoiy or segment information tothe branches. We waut our branch personnelto focus on the customer, not the category.
Levels of Service
The Bank also determined a set of ctistomertreatment strategies—such as the decision tooffer pre-approved credit for credit lines—bythe customer segment and categoiy.
Lefebvre described one example of how theBank planned to use present and future profit-ability to help determine levels of s
We are working on use the customer's categoryassigninent to determine the length of waittime and the t\pe of customer senice represen-tative that the customer talks to at our tele-phone-banking center. We want our most valu-able customers to have the shortest wait time
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94
RBC F I N A N C I A L GROUP
E X H I B I T I 2
Cl ient Profiles^
Niece Aunt
Age
Number of Products Held
Type of Products Held
Tenure with Bank
Annual Income
Net Worth
23
Signature Plus checking account;Calculator Plus savings account
6 years
C$23,000
C$5,000
68
8
Signature Plus checking account, Royal MoneyMaker Plus savings account, mortgage on home,mortgage on second home, investment accounts,retirement account, line of credit, Visa.
50 years
C$240,000
C$2.8 million
" .\ll iiilinniaiion in ilij.s
and the most senior customer service peopleavailable. We always want to ensure thai ourven' best clients, in terms of profitability andliietime value, get the veiy best service. That'show we retain good customers.
Richard McLaugblin explained the impor-tance of profitability meastuement in derivingthese strategies:
We reach a decision in the central office, basedon our hiformation and analysis, about howvaluable the customer is or will be. We theninform the sales person who works directly withthe cusU)mer. This process eliminates the needfor a salesperson to captine and process cus-tomer information.
Product Design and Pricitig
Reich's Decision. The ( RM system tised cti.s-tomer profitability and future poteutial calcula-tions to give pricing parameters to accountmanagers like Jaime Reich. ( RM and customerprofitability was being used more and more byaccount managers to make difficult decisionson which customers to ctildvate, how to treatexisting customers, what products to offer, andwhat pricing levels were appropriate. Reich de-scribed his interactions with clients:
in the early part of the relationship,customers tend to negotiate pricing. In gen-eral, products are priced appropriately and wedo not need to give special deals, since the salesleads on our computer aheady have discretion-ary pricing built in. Once clients realize thatthe Bank's rates ;ue competitive, they starl totrust me and negotiate less. For the vast major-ity of clients, the pricing on our products issufficient to make them happy. It is quite rarefor me to seek approval for a better price frommy manager.
Those rare instances tisually came about be-cause of some uew piece of information un-known to tbe CRM system. Oue example ofsuch a decision was an instance when oue of hisclients, a long-term and important customer ofthe Bank, introduced him to her niece, a 23-year-old MBA who recently graduated frombtisiuess school and who was not in the AMIprogram.
The niece was hoping to get a position witb aToronto advertising firm, but was currently un-employed. She had accompanied her aunt toReich's office in order to request a car loan. Shewanted to get a loan with tbe Bank, the nieceexplained, because the Bank bad a more flexi-ble loan program than the dealership. Al-though Reich did uot ordinarily work with Bankctistomers that were uot in the AMT program,
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J O U R N A L O F I N T E R A C T I V E M A R K E T I N G
E X H I B I T I 3Royal Bank—Average Unit Costs by Channel^
Activities
OpenProducts approved (credit check)RD (telephone banking) Enrollment
Business Development (NewBusiness/Growth)
Business Development (Retention)
Fulfillment
Renewal
Withdrawal
Deposit
Transfer
Bill Payment
Inquiry
Maintenance
Cfose
ABMsFull
Fane Ii on
_
-
-
-
-
0.40
0.97
2.26
0.90
0.31
--
1
CashCounter
_
-
-
-
50.65-2.36
~0,54
-
RetailBidnch
$104 03
_
67.44
9.29
19.14
32.18
3.80
2.87
21.36
2.68
9.19
28.49
BBC
$365 72
90.36
12 S8
17 IB
20 00
-
-
3 84
-
7 IB
47 93
ChdiinelsTelephone 1
Agenl
SI58 36
14 89
4 26
4 26
-
-
-
-
8 39
a i 5
8 52
10 75
Banking''
IVR'
197 15
-
-
-
-
0 30
0 30
0 30
-
Internet/Web
$194 35
-
-
_
_
-
-
0 18
o.ia0.19
-
MortgageReps
$983 15
-
-
_
-
-
-
-
-
-
.Source: C'oinpuiiy records.^ All numbers in this exhibii have been disguised Tor conndcntialit^' piLrposcs.'' All costs are on a per rail biLsis as oppo.sed lo a per iransaLtiud basis. In addilioii. back ullLCe Dperaiiiui (sup])i)ri costs nuiside of RoyalDirect liii-ranhy) are included in tlie respective unil costs. All I\'R costs except for loan applicatiinis iiie based im tbe averaj;e time per call.' Interactive voice lecognition.
he went ahead and looked up the niece'sprofile on the Bank's customer relationshipmanagement (CRM) system. The system,which calculated the rate discretion Ior a cus-tomer based on their potential and profit,allowed her a maximum of a 1% discount.The standard rate for the niece was primeplus 5%. The problem was that the niecewanted Reich to match what the dealershipwas offering—prime plus 2'/^%.
Reich knew that niakiiig the niece a loan atprime plus 2'/^ would be extremely difficult. Hewould have to go to his manager and argue thecase that the Bank should make an exceptionfor this customer, and even then it was doubtfulhe would get more thau a 1% additional dis-count. Although Reich did not ha\c access tothe actual profit and potential information onthis customer, he did know that she held asavings and a checking account with the Bankand had historically low balances in both (seeExhibit 12). To complicate matters Ixnther, theniece had told Reich that although she had acompetitor's credit card, she currently did nothold one of the Bank's credit cards. Reich knewthat there was a very high likelihood that the
system would eventually prompt a pei-
sonal banking representative to attempt to sellher a credit card.
In order to provide this customer with theloan rate she wanted, Reich would have to per-suade his manager that doing so was a goodmove for the Bank. The questions in Reich'smind as he mulled his decision were: was thisreally the best use of the Bank's funds? Wouldshe take the credit card if he did not give herthe rate she wanted on her car loan?
Packages versus Fees: McLaughlin's Decision.Another way the Bank used customer profitabil-ity data was to inform the debate over whetherto charge for services using flat rate packages orto charge fees based on the amoiuit and type oftransactions the customer was generating withthe Bank.
By 1998, with the new customer profitabilitymodel in place, the Bank became aware thatmany of its personal accounts were losingmt)ney. Looking more deeply into the data, theBank found that the delivery channel produc-ing the biggest drain on profits was the prat ticeoi customers using ABMs to pay their bills. Thispractice was widely in use in Canada by the late1990s. While customers viewed this service as
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RBC F IKAKCUL GROUP
T A B L E 3
1996 Personal Account Pricing and Service Levels
Name of Sew ice
Free Debits
Per (^herk Fee
In-Biaiicli Withdrawals
PTB^ Withdrawals. Pavnifiits,Transfers
Tfifptioiie Banking Debits
PtVIntcinct DebiLs
IDP'' Purchases
ABM Withdrawals at otherFIs
Flat Fet' Options
Overdraft Protection Option
Accounl rccoid
Signature PlusChecking Arriiunt
2/monthly c\cle and 1/payroll ciedit
S0.60
.$0.60
S0.50
S0..")0
S0..-)0
S0.30
Si.25 plus PFB WithdrawalFee
15 full-senice debits lor$5/month
15 self-Sfnice debits lor$3/montli
25 sclt-scnice debits for$5/ni(nnh
Cuhuliilui PlusSavings Account
2/montlilv cycle andI/payroll eiedit
$1.35
$1.35
$1.35
$0.50
S0.50
£0.30
None
$2/month or overdialt interest, wliich ever is greater
Free St:itement with cheeksBranch S-50, at Accountstateiiieiit).
Royal Money MakerPlus Savings Account
2/nionthly cycle and1/pavroll credit
S1..S5
SI.35
SI .35
S0.50
$0.50
$0.30
None
retunietl, or IVee bankbook. Statement L'pdates inUpdaters Sl-OO, at PTB Machines, 5)0.50 (niini-
con\enietit, it was extremely costly for tlie Bank(see Exhibit 13). These higher costs led to neg-ative customer profitability, particularly for cus-tomers who did not carr)' high balances, sttch asthose itl the Key/Nexus segment. Recoveringthose costs cotild be tricky, since marketingstudies showed that customer vahied predict-ability, fairness, and simplicity in their bankingrelationships, atul that they felt "nickel anddimed" by the transaction fees charged by somebanks. Many at the Bank felt that flat rate pack-ages were t)tie way to cover costs without sttl>jecting customers to pages of fees on their bankstatements.
The Bank's levels of pricing and their corre-sponditig set'vices for peisotial accotttiLs arelisted in Table 3.
In addition to how to move CRM and cus-tomer ptofitability forward, the question for theBank wlieu ttying to piice ptodutts in the cur-rent (]RM envitotiment was: how to recover
costs and make a profit while pt()\ iding the typeof service its customers wottld value and keep-ing customers that tbe Bank vahied?
Richard McLaughlin knew that valtte formoney was a particularly thorny issue for theBank. The Bank was tanked seventh out of eightfinancial institutions in the Bank's intertialvalue for tnoney rankitig. McLattghlin pon-det ed how the Bank could boost the perceptionamong its cttstomet s tbat they gained significantvaltie for their money and guard against cotn-petitor eticroacbment, while simultaneouslystetnmitig the tide of red ink spilling from itspersonal accounts?
Future PlansUsing profitability and futttte profitability tnea-surement for ctistomer decisioning was still inits infancy at Royal Bank. Lefebvre andMcLatiglilin wete etivisioning initiatives thatwould take the Bank even further dowti the
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