Customer Profitability and CRM at RBC

Financial Group (Abridged)

Group 14
Feroze Sheriff
Likhit Pamarti
Ramprakash R
Shankar R
Yashwanth Venkat

1. RBCs Strategy

RBC sought to be all things to all people

5 main lines of business

Personal and commercial banking

Insurance
Wealth management
Corporate and investment banking
Transaction processing

In line with the 4 pillars

Banking
Trust
Securities
Insurance

1960s and 70s

Increased commitment to technology and decentralization
Customer-oriented philosophy to gain a competitive edge
New possibilities for specialization in improving service to customers

1997 Seeds of CRM at Royal Bank sown

RBC had: $270 bn in assets, 23 million retail accounts, 700 products, 58,000
employees and 10 mn customers world-wide

1. RBCs Organizational Structure

Royal Bank traditionally had product and functional silos in its organization
Reorganized itself around CRM
3 primary customer segments
Key: Low current value with a potential for high profits
Growth: Growing assets; high credit and financial advisory needs
Prime: mature customers with potential for full RBC Financial Group offerings

Competition amongst segment managers, product managers and functional area

managers for resources
Close collaboration among managers and centres of expertise (marketing, CRM,
SMR&A)
Local-level lead generation replaced by centralized and standardized sales leads
Sales force was given a customer profitability ranking 3 bucket (A,B, and C)
system

1. Competing with Niche Operators

Niche operators focus on customers needs

Virtual banks

Royal Bank realized the need to move towards greater customer-centricity

Offer specialized products

Incur low costs because of absence of physical infrastructure to maintain
Attractive rates on deposit accounts
Higher convenience but also higher risk

Full suite of services

Customers valued intimacy
Shift of power from product managers towards customer managers
Discover a way to communicate the full value of its offerings to customers
Current and potential profitability

Royal Bank is well equipped to compete with niche operators through efficient
CRM for handling the needs of its various customers better
Aiding customer acquisition, cross-selling and up-selling

2.a. Customer Lifetime Value

The lifetime value approach helps in identifying potentially profitable segments

and sub-segments, such as the Small Business sub-segment within the Key group,
which can be targeted with an aim to strengthen the relationship with Royal Bank
This approach will also help identify currently loss-making customers who might
turn profitable in the future (how far, for how long, and by how much? can be
answered by CRM) might otherwise be eliminated from the marketing
departments focus
Can help check complacency with respect to currently profitable customers
Undue focus on catering to such customers might impede the organizations profitability

Can help concentrate on a steady long-term view w.r.t. each customer

2.b. CLV at Segment or Individual Level

The case says that lifetime value was calculated individually and could be
aggregated up to segment level
Strategy formulation
Aggregated at the segment-level
Helps in creating campaigns, determining loyalty benefits, fixing credit limits, etc.
However, the ultimate aim is: one-to-one marketing

Strategy execution
At the level of each individual
Since, at each moment-of-truth (customer contact-point), an individuals information is
most appropriate for decision-making
For instance a customers lifetime value can be one of the key criteria for determining
the level of service enjoyed
Thus, branch personnel focus on the customer and not the category or segment

3. Information Available to Front-line Employees

Sales leads inserted into customers file

Royal Bank client card information available to an account manager

Age and address

Products held by customer
Products targeted at the customer
Financial situation of customer

Guides manager through interaction with the client

Efficient process that eliminates a lot of stress for the customer
Segment information should not be passed on to branch personnel
Interaction must focus on customer, and not category
Difficult to interpret complex group-level data during the short interaction with the
client; decision-making might be hindered
The customer intimacy objective can be catered to via basic personal information
Helps rely on information from customers instead of information about customers

4. Car Loan for the Niece

Niece

Recent MBA but currently unemployed; 6 years tenure with Royal Bank
Hoping for a job in a Toronto advertising firm; Net worth: $ 5,000
Falls within the Youth sub-segment of the Key segment
Aunt belongs to the Prime segment
Historically low balance in savings and checking accounts
Not a Royal Bank credit card holder

Bank had a more flexible loan program than dealership

Dealerships offer and Nieces demand from Royal Bank
PLR (Prime Lending Rate) + 2.5 %

Bank
Standard rate: PLR + 5 %
With rate discretion: PLR + 4 %
After convincing manager: PLR + 3 % (possibly); any lower would need more convincing

4. Car Loan for the Niece Contd.

CAR LOAN @ PLR + 2.5 %: No

Aunt holds several of Royal Banks products including two mortgages, and a retirement
account
Unlikely to lose her business if Niece is not granted a car loan by the bank

Other young customers / prospects might ask for similar rates possibility of loss for the
bank
Challenging for Reich to convince his manager

CAR LOAN @ PLR + 2.5 %: Yes

Probability of Niece being a profitable customer in the long-term is high
Possibility of purchasing other products e.g. credit card in the short run
Lower rate generated by the system: Annual income figure of $ 23,000 will change
radically when the Niece lands a job Average annual salary of an MBA in the US is
roughly $ 80,000
Mutual Benefit, Trust, Understanding and Reciprocity (Exhibit 1 in the case)
important to both Aunt and Niece; Aunt will possibly act as a guarantor reduced risk

Verdict: The possible increase in Nieces CLV justifies granting her a car loan at PLR
+ 2.5 %

5. Unprofitable Customers

Exhibit 7 shows that for bill payment, the IVR (interactive voice recognition) and
the Internet/Web channels are the most cost effective ones, at $ 0.30 and $ 0.18
per call respectively, as against roughly $ 2.30 for ABMs and $21.36 per transaction
for retail branches
Hence, Royal Bank should
Promote, educate clients about, and aid in the usage of IVR and Internet/Web banking
channels better interest rates or service levels in future
A flat fee structure, or other means, can be imposed on less profitable customers who
insist on sticking to costly channels
Execute a planned phase out of costly channels
Possible usage of white labeling to aid in customer convenience
NOTE: Exhibit 1 in the case states that convenient hours, ATM access, etc. are not as
important to customers as customer intimacy Royal Banks CRM-centric system could
help in being able to differentiate between the truly unprofitable customers from those
who can become profitable in the future

6. Customer Profitability at RBC vs. Pilgrim Bank

RBC
Activity based costing: product, call
or transaction based
Future profitability and CLV
considered for taking customer
decisions (Value Analyzer)
Assumption: Constant current
profitability percentile to be used to
calculate the present value of a
customers profits
Age, tenure with the Bank, no. of
products held, acquisition and
attrition, of products, etc.

20 % of the customers accounted for

100 % of the profits
3 buckets of customer profitability
were considered

Pilgrim Bank
Cost of service was spread uniformly
over the customer base
CLV and future potential for
profitability not considered
10% of the customers accounted for
70 % of the profits
Customer behaviour was sought to
be anticipated, however, there was
no demarcation in terms of
profitability no provision for risk
assessment

7. CLV: 2 Methods

Constant customer profitability percentile

Pluses
Simplicity of calculation
Can be carried out by branch personnel with access to limited information
Can be easily scaled to include any number of products

Minuses
Doesnt consider the possibility of the customer moving between various segments
Gives undue importance to customers who are already profitable at the cost of those
customers who can grant better profits in the future

Factors
Pluses
Gives importance not just to profitable but also to potentially profitable customers
Better alignment between the banks and the customers objectives

Minuses
Difficult to calculate centralized information needed
Hard to implement for a larger number of products

7. 20 Products; 5 Years

Carrying out the calculations for profit potential over 20 products using the second
method would be quite difficult
Hard to estimate the probabilities of holding new products (acquisition) and product
attrition in the future
Considerable intervention from centralized sources would be required especially if we
consider that Royal Bank has close to 10 million customers (possibly holding multiple
accounts) worldwide

Royal Bank computes CLV over 5 years because

In banking, the potential products a customer may choose over a period of time (say 5
years) can changes quite drastically depending upon variations in income sources,
education qualification, economic scenario, age of self and relatives, etc.
There is also a high probability that customers may shift across different segments (Key,
Growth, Prime) after 5 years
A shorter duration would also improve the reliability of factors like interest rate, etc.

Thank You