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CUSTOMER RETENTION STRATEGIES

FOR

THE BANKING SECTOR IN INDIA

AUTHOR: MRS. PREETI BAJAJ

Co Author: Ashwith Shetty & Neha Salian


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CONTENTS

1. Abstract 32. Introduction 33. Literature Review 43.1 Importance of Customer Retention 5

3.2 Why retain customers? 6

3.3 Reasons for Customers Switching to Other banks 10

4. Findings- Customer retention strategies 114.1 Factors influencing customer retention 11

4.2 Factors influencing customer retention for new customer 11

4.3 Factors influencing customer retention for existing customers 12

4.4 Customer retention strategies- Different Areas of Banking 13

4.4.1 Retail banking 13

4.4.2 E-banking 14

4.4.3 Loyalty program 16

4.4.4 Micro finance 18

4.4.5 Mobile banking 20

4.4.6 Rural Banking 23

4.4.7 Other strategies for customer retention 25

5.

Conclusion 27

6. Bibliography 28


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CUSTOMER RETENTION STRATEGIES FOR THE BANKING SECTOR

IN INDIA

1. ABSTRACTGlobalization, internationalization, technical innovations, law deregulations, and market

saturation have acted as 'the tipping point' for transformation of banking sector. It has prompted

many financial institutions (like HDFC and ICICI) and non-financial institutions (NEAR

BANKS) enter the banking arena. With the entry of private players into retail banking and with

multi-nationals focusing on the individual consumer in a big way, the banking system has

undergone a phenomenal change. Multi-channel banking has gained prominence. For the first

time consumers have got the choice of conducting transactions either the traditional way

(through the bank branch), through ATMs, the telephone or through the Net.

With the opening up of the banking sector the need of the hour is to look much beyond just

providing a multi-channel service platform for its customers. One, amongst the most pressing

issues that banks top management need to address is- Customer Retention. This is needed in

order to chalk-out a roadmap for the future. With the entry of new players and multiple channels,

customers have become more discerning and less 'loyal' to banks. Given the various options, it is

now possible to open a new account within minutes. Or for that matter shift accounts within a

couple of hours. This makes it imperative that banks provide best levels of service to ensure

customer satisfaction.

Banking service organizations should recover strong customer retention if they want to stay

competitive in the business. Customer retention is vital and dominant key to business

competitiveness and profitability. Several studies have emphasized the significance of customer

retention in the banking industry. However, there has been little effort to investigate factors that

might lead to customer retention. This paper examines the impact of several retention-relevant

constructs that influence consumers decisions to stay with or leave their banks in India.

2. INTRODUCTIONThe Indian Banking Industry which was operating in a bureaucratic style prior to 1991 had to

undergo large scale transformation with the opening up of the economy. The Sector has been

facing unprecedented challenges with the wave of liberalization, privatization and globalization

of Indian Economy. IT revolution has made it possible to provide ease and flexibility in

operations to customers. Rapid strides in information technology have, in fact, redefined the role


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and structure of banking in India. Banks in India are under intense pressure in todays volatile

market place. Steep competition, globalization, growing customer demand and exposure to

higher credit risks are forcing the banks to find new ways of improving profitability. On the

other hand, cost-cutting measures have forced banks to manage operations with few Customers

Relationship Managers and Product Specialists. Industry consolidation also poses fresh

challenges to this sector.

With the entry of new players and multiple channels the top concern in the mind of every bank's

CEO is increasing or at least maintaining the market share in every line of business. This makes

it imperative that banks provide best possible products and services to ensure customer

satisfaction. To address the challenge of retention of customers, there has to be active efforts in

the banking circles. Bank management must identify and improve upon factors that can limit

customer churn rate. These include employee performance and professionalism, willingness to

solve problems, friendliness, and level of knowledge, communication skills, and selling skills,

among others. Furthermore, customer defection can also be reduced through adjustments in abanks rates, policies and branch locations (Leeds, 1992).

Most bank product developments are easy to duplicate and when banks provide nearly identical

services, they can only distinguish themselves on the basis of price and quality. Therefore,

customer retention is potentially an effective tool that banks can use to gain a strategic advantage

and survive in todays ever-increasing banking competitive environment. Much of teaching and

research has focused on acquiring new customers by developing products to satisfy specific

needs of the customers, however relative cost of customer retention and acquisition has resulted

in growing interest in issue surrounding the building and maintaining of long term customer

relationship as a key to improve profitability. This paper examines the factors influencingcustomer retention in the banking sector in India focusing primarily on retail banking, micro

financc, mobile banking, rural banking and e- banking.

3. LITERATURE REVIEWCustomer Retention is the activity that a selling organization undertakes in order to reduce

customer defections. Successful customer retention starts with the first contact an organization

has with a customer and continues throughout the entire lifetime of a relationship. A companys

ability to attract and retain new customers, is not only related to its product or services, butstrongly related to the way it services its existing customers and the reputation it creates within

and across the marketplace.

Customer retention is more than giving the customer what they expect; its about exceeding their

expectations so that they become loyal advocates for your brand. A variety of factors have been

identified as potentially increasing or improving customer retention rates. These factors include

senior management commitment, customer-focused cultures, a clearly targeted marketing


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campaign and the identification of switching barriers (Clark and Paine, 1993). The motivations

and behavior of the customer contact staff may be of particular reliance to retention. In

discussing the hidden advantages of customer retention Reichheld and Kenny (1990) stress the

importance of employee satisfaction. Employees who are more satisfied with their job will

typically deliver a better quality of service. These employees will tend to remain with the

organization for longer periods of time and are then better placed to build long-term, personal

relationships with customers. Customers will be more satisfied because they receive a better

service, and enhanced customer satisfaction will tend to result in enhanced employee satisfaction

thus creating a virtuous circle. Internal marketing plays an important role in developing this

self reinforcing relationship(Gronrioos,1990). An effective internal marketing strategy helps to

create and maintain a customer-oreinted service.

3.1IMPORTANCE OF CUSTOMER RETENTIONWhy are customers more profitable for service firms over a period of time? There are a number

of reasons for this. To begin with, to acquire a customer a company incurs promotional costs like

advertising, sales promotion etc. It is said that it costs five times more to attract a new

customer than retaining one. The operating cost decreases when a customer stays. Services

being rich in experience and credence qualities, it takes some time for customers to get

accustomed to it and once they are used to the service and are satisfied with the service provider

,they tend to purchase more over a period of time.

As they remain satisfied with a service provider, they spread a positive word of mouth,

which is very effective in case of services for attracting new customers. Longer the customerstays with an organization, more the organization knows about him, which enables it to offer

customized services which make it difficult for the customer to defect. This may even provide

opportunities to the organization to charge price premium by offering individualized services

which may be difficult for the competitors to offer.

Considering the importance of retaining customers in service business, Reichheld & Sasser

coined a term Zero Defection. They highlighted that companies can boost profits by almost

100% by retaining just 5% more of their customers. Customer lifetime value (CLV), is

the present value of the future cash flows attributed to the customer relationship. Use of customer

lifetime value as a marketing metric tends to place greater emphasis on customer service andlong-term customer satisfaction, rather than on maximizing short-term sales. For established

banks the edge they have left is competitive pricing and it would appear that the prefer long term

source of competitive differentiation for a bank can only be in its ability to better serve

customers and prospects. In light of this, industry experts have been alerting banks to a

noticeable atmosphere of change in the banking industry that suggest that customer loyalty is

shifting and banks that take this for granted do so at their risk.


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The strategic importance of managing customer relations is not new by any stretch of the

imagination. What is new is the customer centricity focus that CRM brings to a company. This

new focus is the direct result of the electronic world. The World Wide Web is the perfect place

to get to know and cultivate the client on a one-to-one basis. It offers an unparalleled opportunity

to personalize services, provide multiple choices for customer support, track customer

satisfaction and deliver loyalty programs.

The implementation of CRM goes beyond automating functions. It entails a fundamental change

in the culture and operations of an organization. It also means addressing the infrastructure

requirements for its implementation on the web.

In India the Retail banking scenario portrays 5% of the customers who are involved in seeking

the information on internet banking and among these 1.8% customers are actually involved in

banking through the internet. (Business and economy edition August 5, 2010). Online banking

acceptance has gained special attention in academic studies during the Past five years as banking

journals have devoted special issues on the topic (Mukherjee and Nath, 2003). Online banking

offers many benefits to banks as well as to customers.

In an article entitled "Next-Generation Retail Banking" (Compaq, 2001), the business drivers for

internet banking included:

1. Additional transaction revenues: Banks can derive revenues over and above theiroffline revenues by charging for online services and value-added services, such as

providing a portal for financial services linked to short-and long-term insurers, links to

stock brokers, and links to foreign banks.

2. Savings from reduced transactional costs: On the internet, customers serve themselves,negating the need for frontline staff. Savings are gained from Reductions in staff,

reduction in branch sizes, and reduction in consumable costs: such as paper, inkcartridges, and other stationery.

3. Opportunities for acquiring new customers: Customers looking for the flexibility andconvenience offered by internet banking will be attracted to banks providing the best

services. Existing customers can be sold products that they do not have in their portfolio

such as a second credit card, life insurance, and home loans among others.

4. Improved ability to retain customers: Customer relationship management (CRM) canbe facilitated by the data acquired and captured on the corporate database. Products and

services can be customized to suit the needs of the customer or groups of customers, thus

facilitating customer loyalty.

3.2 WHY RETAIN CUSTOMERS?

1. RETAINING THE CURRENT CUSTOMER BASE IS KEY:The reason is that the cost of acquiring new customers is high, but the probability that they

stay is quite low. New customers who are acquired at the margin are quite likely to be

switches. They will eventually switch to a better offer. Or as Reichheld puts it: In many


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businesses, the customers most likely to sign on are precisely the worst customers you could

possibly find.

Cost of acquiring new customer high, profitability of retain them is low, Source- Staelin, 2005

Retention

Probability

Marginal Acquisition Cost

2. SATISFACTION TRANSLATES INTO LOYALTY:More than two-thirds of the customers who are delighted with their bank say they will not

switch to another provider. Quite the contrary: they consider buying other products from thesame provider, and will even recommend them to others. By contrast, almost three-quarters

of dissatisfied customers say they will switch their financial institution.


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Source- A.T. Kearney, 2004Will

3. ONLINE BANKING USERS ARE LESS LIKELY TO LEAVE THEIR BANKS:Online banking appears to be the retail channel that is especially promising in cultivating

customer loyalty: online banking users are less likely to switch their checking account

provider than their offline counterparts. According to a study only 4 per cent of online

households say they are likely or very likely to switch their provider. The corresponding

figure for offline households is twice as high (8 per cent).

0

10

20

30

40

50

60

70

80 75

56

32

40

75

46

26

20

70

54

44

26

Will consider

repurchase or

other

products

Will

recommend

Wont switch


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Online banking users are less likely to leave their banks

4. ONLINE BANKERS MORE INVOLVED IN THEIR FINANCIAL LIVES:They are better informed and more actively involved in their financial affairs than online

households that do not use their banks website. This is the result of studies conducted in the

United States. Online banking households use websites to gather information and shop

around. They also prefer to make their financial decisions on their own.

Online bankers more involved in their financial lives

Source- Forrester, 2004

0

20

40

60

8075

56

3240

75

46

2620

Onlinebanking

customer

Non onlinebankingcustomer

0

10

20

30

40

50

60

70

37 40

58

23

51

4249

69

30

57

Don't use

bank's

website

Use bank's

website


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5. Online customer retention is worth the effort, because keeping online customers increasesa banks profitability. Online customers are often assumed to be more profitable than

offline customers, because they are better educated and earn higher incomes. Still, a study

controlling for this self-selection bias shows that the internet channel alone increases a

customers profitability to the bank by impressive 4 percent.

6. Banks should therefore convince more of their customers to go online. Of those offlinecustomers who are interested in online banking, almost 90% find a security guarantee

crucial. A well-known offline brand and relatively cheaper fees are also considered very

important. Surprisingly enough, only 29% find a broad selection of financial services

important in this context.

3.3 REASONS FOR CONSUMER SWITCHING TO OTHER BANKS

yInconvenience - Waiting timing in queue, Locations

y Core service Failure - Manual Mistakes.y Service Encounter failure Unresponsivey Response to service failure No responsey Ethical Problem Hard Selling, Cheating.

Complexity of online banking sites may also turn customers away. A startling 92.6 percent of

German internet users regularly abort their visits to bank websites according to an Emnid survey.

The top reason for aborting is that they cannot find the information they are looking for because

it is hidden or not available.

TOP REASONS FOR ABORTING

Source -Emnid2005

22.4

19.117.3

12

0

5

10

15

20

25

Information

hidden

Information not

available

Security reasons Financialexperts


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4.0 FINDINGS

4.1 FACTORS INFLUENCING CUSTOMER RETENTION

Customer retention can be divided into two parts:

Source www.ranasingh.org

4.2 FACTORS INFLUENCING CUSTOMER RETENTION IN NEW

CUSTOMERS

y Customer BoardingCustomer on boarding is the processes were the customer is embedded into the organization and

ensures that their personal data is correct, that they understand the products they have purchased

and how to quickly contact the organization. It is has proven time and again that customers that

are properly on boarded will stay with the company longer and spend more money than other

customers.y Data integrity management

A special data processing system, or part of a data processing system, which aids in the storage,

manipulation, reporting, management, and control of data which increases the quality of thebank's data and the efficiency in which credit is analyzed and decisions are made.

y Cross-sell leads managementSelling of banks products or services to an already existing customeris the broad

explanation of what cross sell means. It can be selling an existing checking account customer a

Customer Retention

New Customer Existing Customer


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credit card or selling an existing credit card customer a mortgage. Banks have been using cross

sell as a marketing approach to expand their footprint and also increase their customer base.

y Product benefit educationIt will make the customer to accept the product & it will also help the banks to easy dell

their products.

y Product activationCustomer would like it to have "Product Activation" feature to minimize casual threats

from internet. After every sale the customer would be provided a unique serial number. He

would then need to procure an activation code based on the serial number and perhaps his

machine's Host ID.

y Payment automation optimizationIt will improve responsiveness through better business visibility. It will enhance to

building greater agility into business operations through higher levels of automation. Also , help

in reducing operational cost, risk, and complexity by integrating business and IT services across

the enterprise.

4.3 FACTORS INFLUENCING CUSTOMER RETENTION EXISTING

CUSTOMERS

The best bank customer retention strategy for existing customers is to classify each type

of customer i.e. silent attrition, ideal and unhappy and create appropriate initiatives to change

their behavior.

For instance customers in silent attrition are those that have reduced or stopped using a product

but where the account is still open. Examples for instance are credit card accounts with little or

no spending. For these customers we must determine why they are no longer using our product

(are you are their "back of wallet" card) and create initiatives to change their behavior.

Existing customer management programs includes-

y Active customer complaints managementEmpathy and trust are a platform for effective understanding, communication and relationships

and are essential to develop solutions, win and retain business, and avoiding or diffusing conflict.

They are essential for handling complaints and retaining customers.


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y Cross-sell leads managementSelling the other products or services from the existing one which is customers are using.

y IVR Messaging OffersUsers interaction with the database is predetermined by what the IVR system will allow

the user access from any medium such as Iphone etc.y Leveraging sponsorships

Sponsorship is growing at more than twice the rate of traditional advertising and has done so for

more than 20 years.

y Leveraging affinity marketingAffinity marketing is a power way of reaching prospective customers quickly, easily and

cheaply. The more precisely targeted the marketing is on existing customers who already have

affinity towards your business, the more profitable it will be.

4.4.0 CUSTOMER RETENTION STRATEGIES DIFFERENT AREAS OF

BANKING

4.4.1 RETAIL BANKING

Retail banking customers are slowly becoming knowledgeable and more demanding and

as result they are increasingly intolerant of poor responses from their co-operative banks.

According to IBM, by 2015 technology will make it even easier for customer to research for

compare form and break relations with financial institutions while demanding greater advocacy

and control over their transactions.

Retail banking in today is getting redefined and re-engineered with use of IT and it is sure

that the future of banking will offer more sophisticated services to the customers with thecontinuous product and process innovations with the change from conventional banking to

convenience banking and mass banking to class banking. The penetration of foreign banks in

Indian market is slim structured but they heavily use the technology and multi channel facilities

to reach out to a large section of customers. It refers to the electronic services that are made

available to the customers through phone, personal computer, television and the internet.


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Clearly technology has became the unique selling proposition (USP) of many players in

the banking industry as it facilitates innovations in all functional management activities-

accounting, and finance, production and designing, marketing and customer and customer

management. All these innovations will help to provide seamless, cost effective and world class

services to Indian consumers.

4.4.2 E-BANKING

In simple terms, it does not involve any physical exchange of money, but it all done

through electronically through internet.

4.4.2 (I) FACTORS AFFECTING CONSUMER ADOPTION IN INTERNET

BANKING

A generic theoretical framework, Figure shows that a bank must first attract banking consumerattention to the internet banking service before the consumer will consider internet banking.

However, unless the consumer has a high level of internet accessibility at home or at work, they

are unlikely to consider using internet banking. The four factors of accessibility, self-efficacy,

convenience and usability are interrelated.

Source- Dr. Nasim Z. Hosein Shantou University, Shantou, China

Internet

Banking

Adoption

Awareness

Accessibility

Trust andSecurity

InternetExperience

Internetusage

Knowledge

Convenience


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4.4.2 (II) CUSTOMER RETENTION STRATEGIES IN E BANKING

1. In order to reap the benefits of having loyal customers and gaining a competitiveadvantage online, companies need to develop a thorough understanding of the

antecedents of loyalty on the World Wide Web (e-loyalty), such as business factors or

personal characteristics. This holds especially true for those industries which already

depend heavily on their reputations and long-lasting relationships in the offline world,

as is the case with the financial sector.

2. The widespread adoption of online banking services calls for research investigatingthose factors which are responsible for keeping customers loyal.

3. In relationship marketing research the concept of customer loyalty plays a central role.The preeminent importance of retaining customers is supported by several studies,

confirming the relevance of customers' loyalty to a firm's profitability.

4. New forms of online communication offer a host of new and promising opportunitiesfor customer retention on the World Wide Web, while at the same time intensifyingcompetition. In particular, this applies to company-controlled communication, giving

companies the ability to customize information with regard to the individual needs of a

particular customer and to optimize the customer's feedback opportunities.

5. Trust is an important consideration in the development and fostering of e-Commercerelationships in the context of the knowledge-based economy. Lowering perceived

risks associated with online transactions as well as maintaining transaction trust is vital

in attracting and retaining customers.6. Individualization of Messages A mere transformation of transaction offers into web applications will not satisfy

customers. Numerous competitors will do better and due to the comparatively low

customer retention a loss of customers will be most likely. Comfortable internet

banking guaranteeing high security levels is already very common and does not allow

differentiation. User do not regard the design of order sheets as important, but quick

connections, automatic transactions, fast completion and immediate reporting of

bank statements. Moreover, account access and configuration of ports to common

software tools, e.g. Quicken or MS Money may be taken into consideration, since

more and more customers use these programs to increase personal banking comfort.

The typical web user wants to be respected as communication partner, and he wantshis information needs to be satisfied individually (Bruhn 1997, p. 823), no matter whoinitiated the communication process. Financial service providers should not only offer

relevant information to become an often visited site. Before responding to any

internet offer customers walk through an intense search process in order to inform

about objects and compare offers.

Since pull communication is initiated by the customers login to the banks web page object

search by various search items has to be supported. Incomplete, difficult to understand or


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difficult to find product information may annoy the customer and cause unwillingness to proceed

and complete transactions.

4.4.3 LOYALTY PROGRAM

CRM is often justified by citing references to reports like those of Bain & Company,

which maintain that companies can boost customer net present value by as much as 95 percent if

they can retain only 5 percent more of their customers. Numbers like these have often been used

to persuade management that a CRM package could pay for itself very rapidly. The assertion that

growth in net present value results from increased retention is central to Frederick Reichhelds

excellent bookThe Loyalty Effect. As the table shown in below.

4.4.3 (I) EFFECT OF LOYALTY PROGRAM ON CUSTOMER

RETENTION

Loyalty Program New customer First year Second year

Retention rate 54% 59%

Customers 130,000 70,200 76,700

Average revenue $2,900 $2,900 $2,900

Total revenue $377,000,000 $203,580,000 $222,430,000

Acquisition/retention $192 $-- $36

Commission $959 $769 $769

Total $1,151 $769 $805

Total cost $149,630,000 $99,970,000 $104,650,000

Net revenue percustomer

$1,749 $1,476 $1,536

Net revenue in total $227,370,000 $103,610,000 $117,780,000

(Source - www.dbmarketing.com.) (Reichheld)


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Reichheld suggest that the 5 percent increase can be brought through the Loyalty Programmes.

They have some very ingenious and valid ideas such as follows:-

Improve employee loyalty by increasing the employee retention rate (since retained employees

help to retain customers).

Recruit the right sort of customers to begin with (some customers are inherently loyal, and

others are inherently disloyal).

Change the commission system to reward retention as much as or more than acquisition.

4.4.3 (II) STRATEGIES TO IMPROVE LOYALTY PROGRAMMES IN

BANKS

1. Loyalty programmes become far more sophisticatedAlthough consumers generally need to be given simple options and rules to follow, the

technology behind loyalty programmes will develop (largely using complex rules-based

engines) to help marketers offer different sets of options to the right customers at the

right times.

2. Multi-territory loyalty programmes should be develop

As international boundaries are lowered and domestic travel cheapens, there is increasingscope of multi-territory loyalty programmes. Credit card-based reward programmes are

also taking loyalty across the border.

3. Loyalty programmes should turn multi-channelOther than providing loyal customers with greater convenience, the big advantage is the

comprehensive data that comes from all customer touch points for segmentation and

profiling.

4. The rise of mobile loyalty management technologyThe mobile phone presents a quick, cheap, and ever-present channel of communication in

almost real-time. It can replace any number of loyalty cards simultaneously, and the

advent of NFC (near field communication) chips allows them to be used for contactless

payments, promotions, coupons, opt-in advertising, and even consumer-to-consumer viral


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marketing. In markets where mobile phones are ubiquitous, we can expect to see the

gradual phasing out of plastic cards and key fobs.

5. Renewed growth in loyalty-based EMV cardsAn increasing number of EMV-based smart credit cards are being issued with electronic

purse facilities, and some already have space allocated on the chip for loyalty

programmes. The charge was led by American Express (Express Pay), MasterCard (Pay

Pass) and Visa (Visa Contactless), in conjunction with numerous banks, and POS and

card technology providers (such as VeriFone, OTI, and ViVOtech)

6. Globalization will make customer loyalty harder to developAs the markets of the already developed countries become increasingly saturated,

businesses will turn to the developing markets. They may well find less infrastructurethan they are used to at home. This could pave the way for smart card-based programmes

because they can operate effectively without the reliable and regular up-loading and

down-loading of data. It could also stimulate imagination in the development of small,

inexpensive, but still desirable rewards

4.4.4 MICRO FINANCE

Micro finance has become one of the most discussed subjects in the last two decades all

over the world. Today micro finance programs and institutions have become increasingly

important components of strategies to reduce poverty or promote micro and small enterprisedevelopment.

Source-MIT India Reading Group Kaustuv De Biswas , Sept 24, 2009


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It is estimated that 350 million people live Below Poverty Line in India. That translates to

approximately 75 million households. Annual credit demand by the poor in the country is

estimated to be about Rs. 60,000 crores. But only about 5 % of rural poor have access to

microfinance. There is considerable gap between demand and supply for all financial services in

Indian Market. About 56 % of the poor still borrow from informal sources i.e. unorganized way

and 70 % of the rural poor do not have a deposit account, 87 % have no access to credit from

formal sources.

4.4.4 (I) NEED FOR MICRO FINANCE

Micro finance aims at assisting communities of the economically excluded to achieve

greater levels of asset creation and income security at the household and community level.

Access to financial services and the subsequent transfer of financial resources to poor women

enable them to become economic agents of change. Women become economically self-reliant,

contribute directly to the well being of their families, play a more active role in decision makingand are able to confront systematic gender inequalities. Access to credit has long been

considered a major poverty alleviation strategy in India. Micro credit has given women in India

an opportunity to become agents of change. Poor women, who are in the forefront micro credit

movement in the country use small loans to jump, start a long chain of economic activity.

It estimated that annual growth rate of about 20 % during the next five years. 75 % of the total

poor households of 80 million (i.e. about 60 million will be reached in the next five years. The

loan outstanding will consequently grow from the present level of about 1600 crores to about

42000 crores.


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4.4.4(II) CUSTOMER RETENTION STRATEGIES FROM MICRO

FINANCE

y Providing the loans for those who are economically disadvantaged and to start the freshbusiness by microfinance for generating income source activities.

y Distribution of loans can be done on 10kms radius cover aging each urban and rural areacustomer.

y It will provide loans for specifically addressed to customer needs such as employment,education and basic infrastructure.

4.4.5 MOBILE BANKING

Mobile banking (also known as M-Banking, m-banking, SMS Banking etc.) is a term

used for performing balance checks, account transactions, payments etc. via a mobile device

such as a mobile phone or Personal Digital Assistant (PDA). Mobile banking today (2007) ismost often performed via SMS or the Mobile Internet but can also use special programs, called

clients, downloaded to the mobile device.

In India, Smart phones are growing at a CAGR of 21%. Sales of smart phones to Indian

consumers represented 23% of all wireless handset sales in the 4th quarter 2009 compared to just

12% for the same period last year. It is projected that nearly, 66% of smart phones will run on

3G networks in 2012 compared to 23% 2010.

Source-4ps Magazine Projected growth of smartphones till 2012

0

0

23%

66%

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

1 2 3 4

Smart Phones on

3G

Smart Phones


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4.4.5 (I)MOBILE BANKING BUSINESS MODELS

A wide spectrum of Mobile/branchless banking models is evolving. However, no matter

what business model, if mobile banking is being used to attract low-income populations in often

rural locations, the business model will depend on banking agents, i.e., retail or postal outlets that

process financial transactions on behalf telcos or banks. The banking agent is an important partof the mobile banking business model since customer care, service quality, and cash

management will depend on them. Many telcos will work through their local airtime resellers.

Bank-led model

The bank-led model offers a distinct alternative to conventional branch-based banking in

that customer conducts financial transactions at a whole range of retail agents (or through mobile

phone) instead of at bank branches or through bank employees. This model promises the

potential to substantially increase the financial services outreach by using a different delivery

channel (retailers/ mobile phones), a different trade partner (telco / chain store) having

experience and target market distinct from traditional banks, and may be significantly cheaper

than the bank-based alternatives. The bank-led model may be implemented by either using

correspondent arrangements or by creating a JV between Bank and Telco/non-bank. In this

model customer account relationship rests with the bank.

Mobile technology, coupled with increasing internet penetration, either through computers or

mobile phones, has helped increase the percentage of electronic payments as compared to paper

payments as per a recent report by the Reserve Bank of India. Though in terms of volume

Electronic payments still lag their paper counterparts with electronic payments only accounting

for 35.3% in 2009-10, the country has definitely seen a rise in that percentage from 27.1% in

2007-08. As figure shown below in the graph.

Source- RBI


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According to this model Mobile Banking can be said to consist of three inter-related concepts:

y Mobile Accountingy Mobile Brokeragey Mobile Financial Information Services

Most services in the categories designated AccountingandBrokerage are transaction-based. The

non-transaction-based services of an informational nature are however essential for conducting

transactions - for instance, balance inquiries might be needed before committing a money

remittance. The accounting and brokerage services are therefore offered invariably in

combination with information services. Information services, on the other hand, may be offered

as an independent module.

4.4.5 (II) CUSTOMER RETENTION STRATEGIES - MOBILE BANKING

y Improve customer retention through rewards programWhile financial institutions nationwide are developing new mobile programs to allow

customers to check their accounts, transfer funds and pay bills right on their smart

phones, a new iPhone application could improve customer loyalty in banking by

rewarding members when they shop.

y Adopt advertising transparency rules to protect customer loyalty in bankingy Banks can test mobile payments to improve customer loyalty in banking

4.4.6 RURAL BANKINGPrior to nationalization of banks in 1969, the rural areas were virtually without banking

facility. At that time unorganized sector was dominating in the rural finance. After

nationalization of banks in 1969 branches of the banks were started gradually in the rural

areas also. Today more than 50 percent branches of the banks are found in the rural areas.

However, the distribution of banks in the rural areas is highly uneven.

In different state the extent of rural banking is different. Though some of the states have goodperformance in the rural banking but in spite of that unorganized sector is still dominating

in the rural banking. It means here the nature of competition is different. Here banks have

to face competition with the unorganized sector. Moreover the rural banking is highly

regularized activity by the Government in India. Lending as well as interest rate is regularized.

Thus under such environment different marketing approach is required. For effective rural

marketing product development, promotion and communication is important. All these


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parameters banks have to balance with socio-economic factors prevailing in the rural areas. Here

bank need to innovate product that could attract the depositors.

CRM through customer services in rural areas is different from that of urban areas. Here

personalized banking is the success mantra for banks. Because of high level of illiteracy people

prefer to undertake banking transaction themselves.

4.4.7 (I) CHANGING SCENARIO OF RURAL BANKING

The way rural markets are growing, it wont be long before they start contributing substantially

to profits of companies. A proactive tool is the best available tool. Rural India now accounts for

around 50% of the half trillion dollar strong Indian economy. Already, 54% of FMCG, 59% of

durables, 100% agri inputs and between 10-50% of 4 wheelers and 2-wheelers are sold in Rural

Indian market. The situation is similar in banking nearly 185 million people are having bank

account as per the World Bank study. There are 5 million womens micro-finance groups in

existence and by the year 2011 the number of such groups is expected to jump to 15million.

By 2012, it is expected that every will be connected by an all-weathered roads, will have internet

and almost every home will have electricity and possess the mobile phone. Companies are not

anticipating this boom and many will be taken by surprise when it happens.

Bank should make a smart move to retain the new customers in rural market through their

existing and new technology, using the scheme of Micro-finance and E-banking for rural

customers.

Source: - As per NDTV Profit (Money Mantra-Episode Rural Market) (Figures are in

Millions) 2009-10

0%

10%

20%

30%

40%

50%

60%

70%

Total Bankablepeople Non-banking people

60%

18%

42%40%36%

4%

Rural

Urban


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4.4.8 (II) CUSTOMER RETENTION STRATEGIES FOR RURAL

BANKING

y For loans and advances products which are suitable to farmers, small traders, small scaleagro based rural industries are already in existence. Banks need to see that how valueaddition can be made to these existing schemes to retain the existing customers.

y Various loan schemes that are suitable for them for getting funds at right time and alsothey find convenient to repay. For instance traditional saving bank account may be given

a fixed deposit concept that once a particular limit of balance is reached the funds from

saving account is automatically converted into fixed deposit attracting higher interest

rate.

y Bank should have staff with right soft skill like concern for customers problem, positiveattitude, good communication and negotiation skill.

y At every level of dealing with the customer bank need to educate them for bankingactivities and processes.

y To attract the customers from the unorganized sector most important factor is to providethe borrower the required finance of right amount and at right time.

y In the same way giving more liquidity status to fixed deposit account.y The success of E-Choupal which is an initiative of ITC Limited, can be one of the boon

to access to rural consumer through the internet access.

y The banks should create the setup into rural area on 15 kms radius to provide the loansand other facilities to rural consumer consumer.

y Bank with the help of e-choupal like server can place the spot transactions and supportservices to futures exchange to customers.

y Progammes in rural market with the help of Traditional mode such as Haats, melas andjatras will help to retain rural customers or access the customers.

4.4.9 OTHER STRATEGIES FOR CUSTOMER RETENTION

(A) Complaint Management System

Any worthwhile complaints management system has to have following basic features:

a) Visibility: Customer should know where to complain.b) Accessibility: Customer should know how to complain. As a rule of thumb, the more

formal the system for lodging complaints, the less accessible it is to customers.

c) Responsiveness: Complaints need to be dealt quickly. The quicker the complaints aredealt with, the higher the customer satisfaction.

d) Customer-focused approach: A service provider who adopts customer-focusedapproach, invites complaints and indicates commitment of resolving complaints by its

words and actions in all fairness.


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e) Accountability: Someone in the organization has to take responsibility for complainthandling.

f) Continuous Improvement: This is about looking at the root causes and fixing them.A good complaint management system must ensure that that complainant is kept informed, the

staff understands the complaint processes, complaints are taken seriously and employees are

empowered to deal with situations.

(B) Service Recovery Strategies

It is very important for service companies to have service recovery strategies which can be

applied in case of service failure. The following steps are useful in an effective service recovery

system.

1. Measure the costs of effective service recovery. It should include the indirect cost also,when a customer departs unhappily.2. Break customer silence and listen closely for complaints.

3. Act fast.4. Train and empower employees. The front line people must be trained and empowered by

the organization.

5. Close the customer feedback loop.(C) Managing Customer Waiting

Sometimes, it is not possible to match demand & capacity, and hence waiting by customers

becomes inevitable. While reducing waiting time is important for a marketer, it is equally if notmore, important to reduce the customers perceived waiting time. If a customers perceived

waiting time is less, he will be more satisfied with the service.

Various ways of managing customer waiting are as follows:

1. The organization should analyze its operational processes in order to identify and removeinefficiencies or bottlenecks, if any.

2. In case waiting cannot be avoided, a reservation system can be used.3. Since unoccupied time feels longer than occupied time, keep customer occupied by

installing distractions that entertain and physically involve them. For example, TV sets,

magazines reading material can be provided in waiting area.

4. Provide waiting duration information i.e. information about the expected length of waitand/or queuing information i.e. a customers position in queue with continuous update.

5. If unexpected delays occur, explanation should be given to the customer. This helps inreducing uncertainty and customer irritation. The key is to impress upon the customer

that he has not been forgotten. Simple things like providing a glass of water or a cup of

tea to the waiting customer can do wonders.


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6. Keep resources not serving customer out of sight. This can be done by keeping idleemployees out of view and conducting activities that do not involve customer interactions

out of customers sight.

7. Try to reduce pre-service waiting time by transferring some of the pre-service waiting tothe service encounter phase.

8. A smiling service person who knows his job well can be very helpful in overcomingmany negative effects of waiting. Therefore, training and incentive/ rewards for

providing good service should be made.

5.0CONCLUSIONTodays customers are becoming harder to please. They are smarter, more price conscious, more

demanding, less forgiving and they are approached by many more competitors with equal or

better offers. With the wave of liberalization, privatization and globalization of Indian Economy

the Indian Banking Industry had to undergo large scale transformation to find new ways of

improving profitability. The challenge is not to produce satisfied customers; several competitors

can do this. The challenge is to produce delighted and loyal customers. If these customers are

retained with the organization, they become really profitable by way of increase in purchasing,

reduced operating costs, price premiums and through referrals. Companies can boost profits by

almost 100% by retaining just 5% more of their customers. Hence it is very important to retain

the exiting customers. Inconveniences, core service failure, service encounter failure, response to

service failure, ethical problem are some major reasons for customer switching.

Bank management must identify and improve upon factors that can limit customer churn rate. Too many

companies suffer from customer churn i.e. high customer defection. It is like adding water to a

leaking bucket Customer retention is potentially an effective tool that banks can use to gain a strategic

advantage and survive in todays ever-increasing banking competitive environment. New players and


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multiple channels are making it imperative for the banks to provide best possible products and services to

ensure customer satisfaction.

Online banking offers many benefits to banks as well as to customers. Retention in e-banking

can be achieved by additional transaction revenues, savings from reduced transactional costs

opportunities for acquiring new customers, improved ability to retain customers.

This paper mainly focuses on the factors influencing the customer retention, both existing and

new and the strategies for maintaining the same under various areas of banking like retail

banking, e-banking, loyalty program, micro finance, rural banking and mobile banking which is

the most upcoming sector. Various other strategies such as measuring customer life time value,

efficient complaint management system and service recovery strategies, managing customer

waiting can be really helpful in retaining customers.

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