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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.

V. G.

Narayanan Brem

Lisa

(}) Wlio are our mmt important customers'? (2) How do we put them in

charge of our Company'? - Screen saver on the computer of Kevin Ptirkiss, senior manager. Customer Value Analytics.
There is no such, thing as an unprofitable customer. O n e of RBC

Copyright ' 2002 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800545-7685, 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, photocopying, recording, or otherwise-without the permission of Harvard Business School.

Financial Croup's company mottoes.

INTRODUCTION

It was Jttne 1998 and Richard McLatighlin, vice president of CALStomer Relatiotiship Marketing and Information Management for RB(^ Royal Bank, looked again at the latest ctistomer profitability reports. The new data mining capability the Bank bad pioneered was astonishing. Tbe good news was tbat customer, ctistotner segment, and piodnct profitability tumibers were more coniprebensive and accurate than with tbe Bank's old ptofitability model. Tbe bad news was tbal tbose precise numbers clearly showed major losses in tbe Bank's personal cbecking accounts. McLaugblin knew tbe Bank was also struggling witb it's seventb out 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 RBCA Corporate Snapshot Masterbrand RBC Financial Group


Corporate and PUtfomis Plalfotm brands Canada InvfxtiTiFnl B d n k i n ^ RBC Capital Markets Investment Banking Corporate Banking Equrty Research, Sales. Trading and Derivatives Foreign Encfiange Fined-lncame Sales and Trading W e ^ l i h Managnnt^nt RBC Investments Action Direct Financial Planning Mutual Funds RBCDS Private Counsel/Private Banking Personal Trust Global Asset Management Rac Global Services Cash Management Payments and Trade Institutianal and Inrestor Services RBC Centura Personal Banking Business Banking RBC Prism Residential Mortgages RBC Insurance Reinsurance Global Private Insurance RBC Builder Finance Builder Financing Travei insurance RBC Liberty Insurance Life Insurance Health Insurance . Full-Service Insurance Administration Transaction Processing RBC Global Services Casti Management. Payments and Trade Institutional and Investor Services PeiBoiul and C o n i m e r d a l Banking RBG Royal Bank Personal Bankinc Business Bank in nsurance =<BC Insurance Lite Insurance Health Insurance Annuities Home and Auto Insurance Travel Insurance

Platform brands United States

HBC Capital Markets Investment Banking Corporate Banking Equity Research, Sales. Trading and Derivatives Foreign Eictiange and Money Markets Equity Capital Markets Filed Income Capital

RBC Dam Rausctier Full-service Brokerage Mulual Funds Correspondent Services Investment Management FiKed Income Capital Markets

Othei International Markets

Markets RBC Capital Markets

RBC Investments Global Pnvate Banking Investment Management Trust & Custody

R8C Global Services Gash Managemen! Payments and Trade Institutional and Investor Services

RBC Royal Bank

RBC Royal Bank of Canada

RBC insurance Reinsurance Globai Pnvate insurance

Soune: (kitnpatiy ixTinds.

internal value for money stLidy. The Canadian public increasingly wanted value and personal service from its banks. Competition among Canada's leading financial institutions was fierce as the indiistiT responded to deregulation and new niche-market entrants. McLaiighlin thoughts tunied to how he would present this information to the Bank's segment and product managei^s, and questioned how tlie Bank should respond: Now we have real customer piofitabilily mmiIx'rs and, thioiigh our ciistonicr relationship management {CRM) tools, we know an awful lot about custonuT preferences and needs. Ilie question is, what do \\v do wilh ibis information? How can tbe Bank derive value from CRM and customer probtability? How can we turn nnprofitable < iistomeis and products into profitable ones? Is there a way to enliance the Bank's value in the eyes of the banking public? How can we put the whole pictme together and make decisions tbat work for botb tbe Bank and onr customers?
RBC FINANCIAL GROUP

With Canada's finance industi"y in fhtx from changes in banking regulations, tiiany smaller banks were acquired or changed their focus away from retail banking. In the early part of the new centuiy, RB(- etnerged as one of Canada's few full-senice, national, atid internatiotial financial institutions. RB(- Financial Group, headquartered in Toronto, had five main lines of business (see Exhibit 1): personal and commercial (tetail) banking (RBC Royal Bank), insurance (RBC Insurance), wealth management (RBC Investments), corporate and investment banking (RBC Capital Markets), and tratisaction processing (RBC Global Services). Canada's largest bank 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 personal, cotnmercial, corporate, and ptiblic sector

RBC Finaticial Group entered the tumultuous twenty-first ceniuiy as Canada's leading bank.
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"' Canadian population was eslimated ai 30.75 million in 2(H)(), with fhc largest concentration of people in Ontario, Quebec, and British (Columbia, Average income after taxes for two peopJe or more in the same hoiisehoid avtTaged CAN $49,fi2fi in 1998 (statistics provided hy: wwiv.staican.ca; accessed August 27. ^001).

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customers in North America and around tbe world (see Exbibits 2-4). RBC's market capitalization as of September 2001 was C$30 billion. In 2000, RBC was ranked as first in Canadian bank market capitalization, tbirteentb in Nortb America, and Ibrty-tbird worldwide. RBC also provided tbe largest ntiniber of residential mortgages, loans, business financing and deposits in Canada. It was tbe second largest provider of credit cards. RBC Royal Bank {Royal Bank), wbicb accounted for 50% of RBC's casb net income, bad an extensive delivery network tbat included 1,300 branches, 4,800 automated banking macbines (ABMs), 87,250 proprietary point-of-sale terminals, over 900 mobile sales staff, 1.4 million online banking customers, and 2 million telepbone banking ctistomers. The Bank also boasted an international network tbat included 300 offices in over 30 cotintries (see Exbibits 5 and 6). Tbe personal banking division encompassed constimer and small btisiness banking and loans, wbile tbe commercial side served larger companies earning C$5 million to (^$25 million. Tbe multinational corporations were covered utider tbe corporate and investmentbanking business line atid were not a part of Royal Bank. Royal Bank also offered Card Services, wbicb provided Visa credit cards and debit cards; RBC Centura, a U.S. retail bank acquired in June 2001; and RBC Prism, a U.S. mortgage originator.

ternational focus." In 1869, the Bank, now named The Merchants' Bank of Halifax, obtained a federal cbarter.'* As communications and transportation to tbe west improved, tbe Bank's focus turned to Toronto and Montreal. In 1900, tbe Bank was renamed tbe Royal Bank of Canada to reflect tbe cbange in scope. In 1907, tbe Bank's bead office was relocated to Montreal and by 1918 it bad 488 branches in Canada and 60 internationally. The Bank remained stable and continued to grow through the two World Wars and tbe Creat Depres.sion. By tbe 1930s Royal Bank was tbe largest in Canada.' In tbe post-war era beginning in 1946, the Bank devised the philosophy of being "all tbings to all people." It began an expansion nationally and internationally tbat broadened its delivery network, wbile simtiltaneously developing new prodticts and services. In the 1960s and 1970s, the Bank increased its commitment to technology and decentralization in response to changing market conditions. In 1968, 25 automatic banking macbines were added to domestic operations.'^ During tbat time, the Royal Bank was already employing technology and a customer orientation philosophy to gain a competitive edge. As one history of tbe Bank cited:
Tbe 1971 Anntial Report provided an interesting account of how automated baek-rooni transactions improved both the cost and quality of operations . . . this also helped to free up front-line people to deliver the services that required a personal touch. New possibilities for specialization were directed toward improving service to the customer.^

HISTORY OF RBC FINANCIAL GROUP RBC Einancial Ciroup began in 1864 as the Merchants Bank, a Halifax-based private commercial bank founded by a grotip of eight merchants. The Merchants Bank joined several otber banks in the growing maritime area inchiding tbe Bank of Nova Scotia, tbe Halifax Banking Company, tbe People's Bank of Halifax, and tbe Union Bank of Halifax. Tbe MercbanLs Bank's early expansion followed trade routes east to Great Britain, New England, and the British West Indies, giving tbe Bank an inJOURNAL OF INTERACTIVE MARKETING

Tbe 1980s were ttirbulent times for Canadian banks, as cbanges to tbe Bank Act of 1871 allowed 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 engage only in banking. The Bank Act and charters were to be reviewed 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) Interest Income Loans Trading account securities Available for sale and held to maturity securities Assets purchased under reverse repurchase agreements Deposits with banks Interest Expense Deposits Other liabilities Subordinated debentures

2000

1999

1998

$11,538 1,435 1,083 1,078 975 16,109 9,057 1,429 344 10,830 5,279 691 4.588 1,810 1,540 756 684 528 420 104 (11) 849 6,680 4,695 570 664 695 1,004 7.628 3,640 1,412 2,228 20 $2,208 134 $2,074 606,389 $3.42 609,865 $3.40

$10,386 1,143

937
893 841 14,200 7,636 1,161 286 9,083 5,117 760 4,357 1,209 1,106 688 547 479 362 220 28 852 5,491 4,096 564 677 699 1,105 7,141 2,707 974 1,733 8 $1,725

$10,426 1,061 829 1,169 822 14.307 7,732 1,172 339 9.243 5,064 575 4,489 1,118 752 664 495 447 305 226 343 647 4.997 3,688 508 585 665 1,064 6,510 2,976 1,128 1,848 76 $1,772 145 $1,627 617,324 $2.64 633,626 $2.58

Net interest income Provision for credit losses Net interest income after provision for credit losses Non-Interest revenue Capital market fees Trading revenues Deposit and payment service charges Investment management and custodial fees Mutual fund revenues Card service revenues Securitization revenues Gain (loss) on sale of securities Other Non-interest expenses Human resources Occupancy Equipment Communications Other

Net income before income taxes Income taxes Net income before non-controlling interest Non-controlling interest in net income of subsidiaries Net income Preferred share dividends Net income available to common shareholders Average 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)

157
$1,568 626,158 $2.50 632,305 $2.48

Source: Adapted irom RBC Financial Ciioup, "Royal Bank of (^atiad;i 200U .-Viinual Report."

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O F INTE R A C T I V t

M A R K E T I N G

the Canadian market (1980), and deregulation of the financial indnstry (1986 and 1987). Deregulation allowed cro,s.so\er between the "four pillars"banking, trust,'' securities, and insurancewhich had been kept separate since the original Bank Act. Royal Bank respt)nded by ptirchasing companies that allowed it lo become a fully integrated financial service institution. By 1989 Royal had entered the securities market with a bang, capturing 50% of the mutual fund (offered through banks) market. In addition:
The 1990 acqttisition of 70% of Marcil Trust C^oinpany. .specialists in real estate, strengthened [Royal Bank's] base in the trtist industry. [. . .] Market-share received increased altendon dtuing the period because it vvas viewed both as a condition and a measure of success; size was important. The Royal did not intend to participate in domestic markets thai it cotild not domhiate. [. . .J [l]n . . . 1992, the Royal was the first to offer group retiiement products. The thrust was to develop relationships with different target markets by offering prodticts aud deliverv' mechanisms thai made ctistomer feel ct)mfortahle as they disctissed their personal financial affairs. Transactions at a teller's wicket were no longer the model. Now bankers had to listen.'"

tbe insurgence of foreign banks coupled with the minister of finance's halting of two important mergers was a warning call to Canada's banks that they would soon face competition from large out-of-cotmtry banks that could rival Ol exceed their own resources. While the big banks cast one waiy eye offshore, the other was trained on the small Internet upstarts that threatened to eat away at their bread and butter personal and small business accounts. Being "all things to all people" suddenly became a lot harder. One industiy report projected that:
The combination of big banks shifting direction and new FIs grabbing for online customers will disrupt today's stable financial services industry. By 200.^ [..-1 I-^ million C-anadiati householdsmore that 10% of the total populationwill move a portion of their assets away from their current banks. As financial players jockey to capture these shifting relationships, their collective movements will restrucitiie (Canada's financial seivices incltistry. "

CURRENT ENVIRONMENT Throughotit most of Canadian banking histoiy, the six largest (Canadian banks enjoyed a relatively undifferentiated and "friendly competition" indtistiy structure. By the late 1990s, howe\er, changes were on tlie horizon. The advent of Internet banking and the continued lowering of protections for domestic banks spelled an end to the banking oligopoly. While the Internet represented both opportunities and threats.

This report also predicted that by 2006 the ('anadian banking industi-y would split into two major groupings: constimei-facing financial institutions and transaction processing specialists. The major players in the consumer-facing FIs would be tnicrobanks, superbanks, or financial assemblers, with RBC Financial Group and TD Canada Trust being the two superbanks in Canada (see Exhibit 7).''' Kevin Purkiss, senior manager, cttstomer value analytics, stimmed up Royal Bank's perception of the competitive landscape:
We petceive Tl) (Canada Tittst as ottr nearest and most aggressive competitor at least as far as a ftill service bank is concerned. The rest of the large hanks have slightly differentiated strategies in line with their expertise. The Bank of Nova Scotia, for exatnple. has been redefining

' Canadian Triist.s were similar to U.S. Sa\ings and Loans. Thi-y were 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 specialized iiivestrneni sciviccs. Prior m dt.T(.'sn!ati<ni, TnisLs were the only fiiiaiicial entities allowed lo issue i ' " t l a n o t h , pp. 146-147.

"Jordan Kendall, with Bnice D. I'enikin, Kinily (las/ynski. and C.liiiilcs Kiiila), The Foneslci Repinl. (.<iri<uiii\ ll/g Hunks Civavet, May 2001, pp. (i-12. '" Ilml.

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RBC

FINANCIAL

GROUP

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 shares Balance at beginning of year Issued Redeemed for cancellation Issuance costs Translation adjustment on shares denominated in foreign currency Balance at end of year Common shares Balance at beginning of year Issued Purchased for cancellation Balance at end of year Retained earnings Balance at beginning of year Net income Preferred share dividends Common share dividends Premium paid on common shares purchased for cancellation Issuance costs Balance at end of year Accumulated other comprehensive income Unrealized gains and losses on available for sale securities, net of hedging activities and related income taxes Unrealized foreign currency translation gains and losses, net of hedging activities and related income taxes Shareholder's equity at end of year Other comprehensive income Net income Change in unrealized gains and losses on available for sale securities, net of hedging activities and related income taxes Change in unrealized foreign currency translation gains and losses, net of hedging activities and related income taxes Total other comprehensive income

2000

1999

1998

$1,973
28

$2,110
296

$1,757
300 (7)

(393)
(9)

2,001 3,063
109

(31) 1,973 2,923


192

60 2,110 2,905
18

(98) 3,074 7,495 2,208 (134} (689) (562)


(4)

(52) 3,063 6,803 1,725 (157) (588) (281) (7) 7,495 (85) (38) (123) $12,408 $1,725 (141)
(4)

2,923 5,719 1,772 (145) (543)


8,314 (56) (36) (92) $13,297 $2,208


29

6,803
56

(34)
22

$11,858 $1,772 (227)


(5)

2 $2,239

$1,580

$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 (Canadian Imperial Bank of Commerce), the second-largest bank in (>anada, is the largest bank credit card issuer and is also a close competitor in the Canadian mortgage market. Other types ol competitors pose different threats. What we think of as non-traditional competitors entered tlie market with specialized prt)ducLs and low costs. IN(i Bank of CanJOURNAL O f INTERACTIVE MARKETING

ada, for example, is a virtnal bank that offers a veiy attractive rate on deposit acconnts. In order to access tlie deposit account, the cnstomer mtist transfer money from their existing checking account (in a rival brick and mortar bank) to INC.'s electronic repository. INC can olfciliigh rates because it does not have the physical infrastructure that a bank like RBC Royal Bank has 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 $1,725

1998 $1,772 575 342 68 66 _ 95 (343) (65) 66 (15.637) 14,638 (11.037) (337) 7.426 (1.993) (4,634)

Cash flows from operating activities Net income Adjustments to determine net cash provided by (used in) operating activities Provision for credit losses Depreciation Restructuring Amortization of goodwili and other intangibies Gain on sale o( assets Change in accrued interest receivable and payable Net loss (gain) on sale of available for sale securities Changes in operating assets and liabilities Deferred income taxes Current income taxes payable Unrealized gains and amount receivable on derivative contracts Unrealized losses and amounts payable on derivative contracts Trading account securities Securities sold with recourse Obligations related to securities sold short Other Net cash provided by (used in) operating activities Cash flows from investing activities Change in loans Proceeds from the maturity of held to maturity securities Purchases of held to maturity securities Proceeds from sale of available for sale securities Proceeds from the maturity of available for sale securities Purchases of available for sale securities Change in interest-bearing deposits with other banks Net acquisitions of premises and equipment Net proceeds from sale of real estate Change in assets purchased under reverse repurchase agreements Net cash used in acquisition of subsidiaries Net cash used in investing activities Cash flows from financing activities Issue of RBC Trust Capital Securities (RBC TruCS) Increase in domestic deposits Increase in international deposits Issue of subordinated debentures Subordinated debentures matured Issue of preferred shares Preferred shares redeemed for cancellation Issuance costs Issue of common shares Common shares redeemed for cancellation Dividends paid Change in securities sold under repurchase agreements Change in liabilities of subsidiaries Net cash provided by financing activities Net change in cash and due from banks Cash and due from banks at beginning of year Cash and due from banks at end of year Supplemental disclosure of cash flow information Amount of interest paid in year Amount of income taxes paid in year Soune: Adapted fmin RBC Financial Group. "Royal Bank of (:ari;ida 'iOOO Annual Rcpnri.

$2,208

691 369 91 ( 4 ) 110 11


(206) (434) (4,183) 3,355 (11,078) (312) (5,867) 97 (15.152)

706 389 153 70


{95} (81) (28) (27) 487 15,262 (14,151) (5.700) (239) (1.748) 8.116 4,893

(11,728)

500
(114) 10,525 16.269 (23,640) 1.927 (293) 1.969 (323) (4,908)

1.077 411 (405) 5.163 10.428 (20.208) (6.596) (255) 815 (365) (129) (10,064) _ 5,773 2.119 700 (123) 287 (400) 17 (333) (735) (1.868) (215) 5,222 51 2,409 $2,460

(7,696) 885 (737) 4.446 11.478 (14,114) 5.406 (518)

(1,265 (7) (2,122) _ 93 5.964 500 (72) 293

650
8.818 9,405 1.200 (20)

( 4 ) 59
(660) (791) (391)

18
(662) 1,806 (315) 7,625 1.139 1.270 $2,409

281
18,547 (1.513) 2,460 J947

$10,698 S2,007

$8,989 $542

$9,163 $604

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E X H I B I T 5 RBC Financial Group Results by Business and Geographic Segments


Pf rsotul and Com mere idl Financial Seiv lies' Corporate and InvestmenI BdnkinK

Fot Ihe year ending Of lober 31, 2000 Net interest income on taxable equivalent basis Taxable equivalent adjustment Net interest income Provision for credit losses Net interest income after provision for credrt losses Non-interest revenue Non-interest expenses Net income before tnoome taxes Income taxes Non-controlling interest Net income Total average assets

Wealth Management

Tran^tion Other ToUl Canada Internatioiul

$4,789 7 4,782 649

$359

$43 21

$160

$(44)

$5,307 28 5,279 691

$4,796 28 4,768 703

$511 _ 511 (12)

359

22 91

160 (21)

(44) (27)

n)
360

4,133 1,729 3,857 2,005 782 5 $1,218 $131,900

(691 2,287 1,456 762 260 -$502 $131,900

181 514 459 236 102

(17) 12 10 (151 29 15

4,588 6,680 7,628 3,640 1,412 20 $2,208 $284,100

4,065 5,277 6,47D 2,872 1,311 15 SI,546 $200,100

523 1,403 1,158 768 101 5 $662 $84,000

2.138 1,846
652 239

$413 $8,000

$134 $1,600

$(59) $10,700

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 hiisiness segmenis of Personal Sc Coniniercial Finanrial Servires fiiiclutling tnsiuance[, Wealth Management, (Corporate & Iiivestinent Banking ;md Transaction 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 of funds sold or purchased, commissions, or charges and credits for services rendered are generally at market rates. For geographic reporting purposes. Catiadian-ba,sed acnvities of international money market uniis are included in hiternational.

a more complete product ottering incltiding mortgages and loans. Atiother emerging market is in "white labeling" or the use of bank senices by non-bank companies. For example, one of Canada's largest stiperinarkets, Loblaw's, recently partnered with a division ol (-IB(^ lo offer President's Choice Financial Semces, which inchidcs nofee banking and a di.scoiint on groceries to I.oblaw's customers, ('IB<" is providing the service, btit it is marketed as a Loblaw service atid physically located in the stipermarket. The connrion denominator in all these new products and markets is the customer. How a financial entity focuses on ctistomer needs is the differentiation point in our industiy right now.

DEVELOPING A CRM PHILOSOPHY "Focus on the citstoiner" wus not only the mantra for banking, but ibr a host of other indtistries. One possible key to understanding cusJOURNAL OF INTERACTIVE MARKETING

tomers was a combination of data mining and corporate philosophy loosely termed customer relationship management (CRM). CRM bad been a corporate buzzword since the early 1990s when enterprising companies began to enbance their direct marketing and customer loyalty programs with sophisticated database and infomiation technology systems. As comptiter hardware and software became more powerftil, companies could gather customer information at a very detailed level. Marketing programs shifted focus from mass marketing to segment marketing and customized marketing. 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 consultants proliferated, offering solutions for a range of applications from automated callcenters and sales force automation to enterprise-wide CRM systems. Companies looked to
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E X H I 8 I T 6 RBC Financial GroupBusiness Segment's Contribution to Cash Net Income (for nine months 2001)
RBC Global Services (Transaction Processing) 6% RBC Insurance 7%

RBC Investments (Wealth Management) 15%

RBC Royal Bank (Personal and Commercial Banking)

51%

RBC Capital Markets (Corporate and Investment Banking)

21% .Source: RBC Financial iiii) wfbsiu-; www,royalbank.cotn/inv(:-sti)rrflati(in. acressed Sepceiiih<T 14, ^(

CRM to solve a variety of problems such as how to make their marketing programs, sales efforts, and customer ser\ice function more effective and efficient. Some CRM proponents expected thai in the United States and Canada, customer profitability would increas-

ingly be in demand as part of financial reporting to analysts and investors.

'"'(irahaiii Hicktnati, unpublished NCR Ootporanoii itiarkcting pivseiitaiion, Deretnbcr 1999.

E X H I B I T 7 Attributes 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 Bank of Canada, Cititiank Canada Five Regional Acquisition Law-end AAs and GRQs Brokerage Resold Have lots of nonzontal partners to achieve channel and service breadth Toronto-Domini on Bank, Royal Bank Two International Loyalty and retention All segmentswill retain RBSs and NIs** Banking and brokerage Mostly proprietary Partner outside the industry but not with potential competitors Bank ot Nova Scotia. Bank of Montreai, Nationai Bank Thtee National Niches PCCs and RBBs Banking Propnetary and rebranded Acquire platforms from finance factories, work with channel partners to reach niclie customers

.Simffc; Adapicd (toiii Jotd.iu Kftuiall, Canada's liig Banks L'liiavt'l, Ihc Fin"i-sii'r Rt'|H)ii, May ^Otll. p. 14. " Forrester sef^ented onlirtr investors atcordiiig L n their net worth, frequency of trading, and risk toleniiite. The segmentation used factor and cluster analysis to deteiniine st-giiient membership. Tlie Aggffssive Affluent (A.\) are older investors who boast the hij^hest household incomes and the longest online teiuire of any segment. Retirement By The Book (RBB), a predominantly temale segitient. possessed the smallest amount ol' Net-managed funds and is the youngest and most pas.sive investnieTU group. Portfolio Cruise Contnil (PCC) is the older investor 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 together in one place a view of all contacts, transactions, acconnts, and interactions with each customer. A financial institution's fully integrated CRM system could allow its personal bankers (PBs) to access a customer's transaction history. For example, the ideal (^RM system could provide the following hiibrmation to PBs'* when triggered by a customer call or visit: address, age, and account balances, all contacts the customer had at any company location, phone center, or hiternet site, what level of senice the customer qualified for, based on current and future profitability, what products the customer held at the time of the call, what products the customer was targeted/ approved for by sales and marketing, how the customer responded to tatgeted diiect marketing campaigns. Although the henefits promised to be great, CRM was expensive and difficult to deploy, particularly on a large scale. One U.S. industiy journal suney reported in 2001 that "although the vast majority of respondents78%consider (^RM critical, just 3.5% have actually implemented it." * Costs could rim into the millions for enterprise-wide systems. Various roadblocks stymied successhil implementation, such as budget constraints, lack ot coordination and cooperation within companies, lack of management commitment, unsupportive cultural climate, and inadequate technological infrastructure. Companies most successful with CRM were those that created ongoing repeat purchase relationships with their customers and had the
17

1 esources and infrastructure to capture detailed data about the customer's behavior when the customer purchased, used, and repurchased their products and semces. Industries in which companies had made inroads to CRM included airlines, auto manufacturers, and financial services. CRM at Royal Bank. Tlie seeds of the CRM program at Royal Bank were planted in 1997 as the result of several marketing pr()jects wiihin the Bank. The Strategic Marketing Research and Analytics (SMR&A) group had been conducting brand research, as well as segmentation and predictive modeling using inibrmation lrom Royal Bank's data niart.'^ This research was conducted with the objective of determining the image perceptions of major financial in.stitutions and identifying the optinuiin positioning for RBC Royal Bank. In response to the competitive pressures nipping at its heels. Royal Bank wanted to actively use the information that it had been collecting on its customers to interact with them in a more informed way. One study conducted in 1997 asked 2,000 customers of the large Canadian financial institutions (FIs) what aspects of banking tliey most highly valued and juxtaposed those findings with an assessment of FI strengths (see Exhibit 8). 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 customer intimacy. It encompassed issues such as trust, reassviiatice, a fet-ling that the bank knows them, unrierstaiuls their needs, and recogiii/c who the}' are and values tlieir business. (:on\'{'rsfly, banks were gfxid at more concrete iliiii^s like niainiaining large branch and ATM neiwoiks, convenient hours and easy access to aecounLs.

' Royal Batik did not neci-ssaiiiy provide or want to provide this kind of infonnatiuii directly to the desklop due m client contidentiality atid privacy, "' Matio Apicclla and Tom Yager, "Solid CRM is DiHicult. btit tint Impossible," InfoWortH, April lf>, 2001, http://proqiiest.coni (accessed May ^, 2(KKl), p. 53. '^ Ibid.

Richard McLaughlin, vice president of CRM and information management, added:

"Thf data tiiait at Roval Bank used a hardware platlonn provided by W.'R called Terallata. whi( h housed the Bank's customer iiilormatioii Hies.

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B5

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E X H I B I T 8 RBC Financial Group 1996 Marketing Study Results Mutual Benefit Rcciprocil> Comfort

Trust Reassurance

Understanding

Importance to Client
Convenient Hours ,. ATM access Short Lines 1-800 Number 24x7 PC/lntcrnet ,, , . Banking Generic Mail

Low
Catiadian Financial Institutions' Proficiency at Delivering
records.

High

Conventional wisdom up until this point was that lhe key differentiating factor for banks was a 24/7 call center and a branch on every corner. This study identified a whole new area of dif'feretitiation that Royal could explore.

Differentiation among the leading Canadian hanks in the newly competitive environment was highly sought after. (>RM was pitched up the ranks from marketing to the head office of Royal Bank as a husiness philosophy crucial for developing an expertise in customer intimacy. Royal Bank chose to deploy CRM in points of contact critical to the customer experience such as call centers, branches, and direct mail.
Reorganization Around CRM

When James T. Rager, executive vice president for Personal Financial Services (PFS), took over the reins of retail banking in 1996, he made it dear to his managers that he would not be satisfied with single digit growth in the retail bank. He agreed with his marketing managers
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that CRM wouki stimulate growth and differentiate Royal's .seivices. In 1997, a new senior position, Vice President of Customer Relationship Marketing and Information Management, was created within marketing, which reported directly to the Senior Vice President of Marketing. Richard McLaughlin was hired in that position with the mandate to get the hall rolling on CRM. By 1999, McLaughlin's responsibility areas included CRM infrastructure, information management, alliance marketing, Internet banking, and privacy. The SMR&A group that started it all was expanded and given responsibility for customer profitability measurement; customer {-RM strategy development, decisioning, and reporting; segmentation and predictive modeling; and primary marketing research. A unique aspect of Royal Bank that made CRM easier to deploy was the strong integration of market re.search, analytics, and CRM client decisioning, all of which resided within the same team in the
VOLUME 16 / NUMBER 3 / SUMMER 2002

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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 Getting started stageYouth Life stage 1Nexus Small Business Farming & Lifestyle Agriculture

Growth
Life stage 2Building Business Agriculture

Prime
Life stage 3Accumulating Life stage 4Preserving

Source:

rfcords.

sales and marketing organization, and which also reported directly to the Senior Vice President of Marketing. Lefebvre explained that "the team's mandate within the organization was to transform data into information, knowledge, and more importantly, wisdomthe fulcrum of cnstomer insight." The larger organization was in for changes as well. Primary customer segments, Key, Growth, and Prime, were used to realign Royal Bank's husiness (see Exhihit 9). As Kevin Purkiss explained:
The segment structure reflects life stages and the complexity of iheir financial needs. The groupings also reflect commonalities in service and product requirements. The interesting part to note is that the current profiuibility between these groups is quite different. For example, the Key grotip compiises four suhsegmenls^Youih, Nexus, Small Business, and Fanning & Lifestyle Agriculttire. These suhsegments have low current value, hut many within these sub-segments have the potential to provide higher levels of profit for the Bank. The Growth stiige represents clients in midlife, and/or businesses that are still growing their asseis and have high credit and financial advisoiy needs. Our strategy is to retain, grow, and consolidate these relationships. The Prime grouping consists of more matme customers in the accumulation and presenation phases with significant potential for full RBCFG offerings. The value proposition for the Prime segment is trusted service and referral to specialized resources.

sibility for each segment. The nine segment managers reported to one of three vice presidents in charge of the performance for the grotiping of segments, who in tnrn reported to a senior vice president. This new organization was layered over the old, product-centered one, creating a matrix where pnifit and loss responsibilities are shared by both product and segment managers. Segment managers competed for resources along with product managers and fmiclional area managers. This "friendly competition" was designed to foster close collaboration between functional areas, product and segment managers, and centers of expertise (such as marketing, CRM, and SMR&A). For example, a marketing initiative that targeted a new product to the prime segment would have been closely monitored and influenced by the marketing staff, the product development staff and one of the prime segment managers. Similarly, if a segment manager saw the need for a retention campaign for his segment, he wotild reqtxest budgeting for the campaign, and work with marketing to design and implement it. (See Exhibit 10.) Kevin Purkiss, senior manager of customer value analytics, explained some of the reas<jns why Royal Bank was able to sustain this widespread change:
Although the old organization was aligned by product, the culture was always customer-centric. Once the Bank decided on GRM as its over-arching strategy, it was easy for us to change our structure to be more in line with serving the customer. It was a move that seemed intuitive. Also, the Bank's collaborative

By November 1999 managers were ptit in place who had primaiy profit and loss responJOURNAL OF INTERACTIVE MARKETING

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E X H I B I T I0 RBC Financial Group Personal and Commercial Division Organization Charts as of December 1999

.JIZ
S V P

EWProdiSs

SUP, Atlantic SUP,Ouet>ec EUP, Ontario SVP, Prairies "sVP,B.C,iYi*on

S V P

SVP Customer Management

VP Customer Management

Richard McLaughfm VP Customer Management

VP Customer Management

VP Strategic Markets

Customer Manager Youth Getting Started Customer Manager Nexus Customer Manager Small Business Customer Manager Small Agricuiture

Customer Manager Borrowers & Builders Customer Manager Business Customer Manager Agricutture

Customer Manager Wealth Preservers Customer Manager Wealth Accumulators

Soniif:

Ciirniiany 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 niaiuitifUR-nl. In 2(KI(), tie i r i i i r n o d I D his |iiii)ip 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 MiinasJemciil 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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approach allowed it to be more nimble, perhaps change faster, than many corporations its size. Collaboration, communication, and interpersonal skills were very highly prized within lhe organization. Tlie change, of course, was not entirely seamless. Richard McLaughlin recalled some of the resistance met by ihe new customer-centered oiganization: We had some ver\' tradiiional product and fimclional silos in this organization that had limiterl motivation for moving toward a more customer-centered framework. Part oi the problem was our inability lo fully communicate about how things would work. Our corporate processes were executed more from consensus and conversations tlian a clear road map, so when we started to insert new processes, we leceived .some response that it would slow people's decision making down. Another problem was the power shift. We were taking some power away from the product managers and putting it in the customer manager's realm. To make matters worse, customer managers tended to be marketing people, while product managers tended to be bankers. There was not a lot of understanding between the two groups about what each could bring to the table. While Royal Bank reorganized by segments, il also centralized some functions and created areas of expertise in order to become more efficient aud cost effective. In 1996, much of lhe back-office processes were centralized at the head office in Toronto. In 1999, the five regional sales and marketing groups were consolidated and moved to Toronto as well. The consolidation of the regional sales and marketing groups meant that instead of calling regional offices for lead lists, branches received lists irom the sales and marketing office in Toronto. Royal Bank also created a small, specialized group that produced ad-hoc or follow-up leads as requested by the branch. The goal was to replace the often-hap hazard sales lead process at the local level with centralized and standardized sales leads. Account Manager for Investments (AMI) Jamie Reich explained how the process of buildJOURNAL OF tNTERACTIVE MARKETING

ing and using sales leads had changed since the Bank adopted CRM: Before CRM, every branch had a different way lo generate sales leads and account managers were responsible for creating their own lists. One way to do this was to go lo lhe regional credit department and ask for a list of people age 25 to 45 who held al least three products, for example. After a while the department would generate a list based on your query, and you'd make calls off that list. The leads were based on how good a query you put in, and you got new lists depending on when you had time to slop by the credit department. It wasn't very consistent or accessible across all branches. Now, the leads are generated centrally and evenone has direct access lo them. The leads have gone from paper based to being available electronically. I also have seen the leads improve from rather generic to more customized. For example, I used to get a lot of leads for customers who might be interested in credit prodticts. These weren't very helpful to me since I deal mainly in invesiments. Lately, the lead lists sent to me have been much more focused on investments and products that are of real interest to my customers. Reich's job was to manage the accounts of customers that were chosen^^ for the Bank's relationship banking program. The program provided clients with a persotial contact al the Bank who cootdinaled all aspects of the client's business with the Bank, from issuing mortgages, to lines of credit, to investment accounts. Reich managed roughly 200 clients at RBC Royal Bank's tnain Toronto branch. In a typical week, Reich would speak to 20 of his customers on the phone and meet another ten in his office. CRM helped him and other account managers work more efficiently. As Reich explained: Account managers know their customers and know what their needs are, but these electronic lead lists help us to remember to call and offer products. They also save us time and are generating belter and belter leads for new clients.

''' (aiNtomt^rs were chosen for ihe AMI program based on their current and jxitcniial profitability.

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In addition to allowing the Bank to centralize sales lead generation, locating the sales and marketing grotips in Toronto also made it easier for them to interface with SMR&A, C.RM, and information management teams. One of the areas where these grotips collaborated was in using current and future customer profitability to determine targeted direct marketing campaigns, levels of customer service and other ctistomer-oriented decision-making.

CUSTOMER PROFITABILITY AND POTENTIAL MEASUREMENT AT ROYAL BANK Royal Bank had been experimenting with customer profitability measurement since the early 1990s. The marketing grotip deployed a model on the personal banking side in 1992 that used aggregate information other than actual data. The Bank analyzed its then customer base of approximately 8 million customers and distributed the ctistomer profit over deciles. The Bank learned that rotighly 20% of its ctistomers accounted for 100% of its profit. As Kevin Purkiss explained:
The model placed customers into three large "buckets": A, B, and C. The "A" customers made the most profit, the "B" customers made some, and the "C" customers broke even or lost money. This information was distributed to the field office. It helped align the sales force around customer profitability and planted the seeds for the new customer<entric organization. However, it wasn't refined enough for advanced channel optimization or relationship pricing. In addition, we realized later that in some instances, customers were treated witliont consideration of the potential business they could contribute.

packages that would fit the bill.'^*^ While none seemed to be exactly right, the Bank found that NCR was developing a package called Value Analyzer that looked promising. The Bank agreed to serve as a "beta site" for NCR, while tailoring Value Analyzer to its needs. The software promised to make profitability calculations more acctirately and much faster. The high voltime atid complexity of the Bank's accounts required high processing power. Since many groups depended on this information downstream, the raw data had to be processed within a few hours. The SMR&:A grotip was qtiite excited abotit the level of detail that this new model promised to deliver. As Purkiss explained: "The newmodel was to be a vast impiovement over the 1992 measurement system. We wotild be going from tising mtiskets to rifles, or from having a machete to a scalpel." Once Valtie Analyzer came on line, the Bank found that profitability rankings changed by at least two deciles for 70% of customers. More acctirate spread information, customer specific risk assessments, transaction-based fee and cost elements contributed to these changes. However, the Bank realized that customer profitability calculations were not enotigh. As Lefebvre explained:
We came to understand that customers can be both profitable and have the potential to be profitable, and that the bank needs both kinds of customers. One big "Aha" came when we realized we had very deep relationships with wealth preservers, but very weak relationships with younger segments. We needed to shift our approach. We became willing to invest in some snb-segments such as Nexus, in order to nurture our relationship with potentially profitable customers. The customer potential calculation enabled ns to determine on which customers we would be willing to take losses in the short term. SMR&A developed the notion

About the time Richard McLaughlin was hired to head the C ^ R M implementation, the Bank realized it needed a "more robust profitability meastirement." Tbe search was on for a better model. By 1998, marketing had developed a prototype of the model it wanted to employ. The group went shopping for .software
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"'" OlhtT companies markeiing (^RM softwarf at the lime were: ABC TecliTiologies. PeopleSolt, PM(; Systems. Oracle. Fi.sen' IPS/ ScTidcn*, HNC Financial Sokitiuns, and Metavante (Meridien Rrscartli, "Piittinjr ABC" into Customer Profiiability," Oislomrr Krimvtedge, vol. 4. no. 1, p, 10.)

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RBC F i N A N C I A L

GROUP

T A B L E I Old vs. C u s t o m e r Profitability M o d e l

Ittjnd

Old Model

New Model

Inlert'st Revenue (Funds tran.sfer pricing) Fees and Com missions liirett Expenses (event costing) Indirect Expenses (overhead) Risk Provision

Average revenue by product Average fee per product Average Aclivity-Based Costs Allocated across products Average risk per product

Actual net interest revenue by accoLint, using internal transfer pricing Actual fees by account Transaction level cost, rolled up to individual account and customer Allocated across products Expected 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 original reason for adopting CRM. Our new strateg}' was to look, at an individual's total holdings and ftgurc out how to deepen his or her lelaiionship with the bank if that petson had potential. For example, were we losing opportunities to sell ptodncts to those custotiiers? Are potentially profitable and ptofitable customers being lured away?

Calculating Customer Profitability Royal Bank fotitid that truly tisefttl ctistomer profitability models had to begiti with detailed, accurate, account or cttstomer level actixitybased costing itiformation. Without this iuftision of real data and accurate activity driver rates, ctistomer profitability was scattershot. Although the Bauk had been accumulating ABC data since 1978, it had not integrated it into a cttstomer profitability model at the customer level until 1999. lu fact, linking ABC data to ctistomer profitability models was a datinting task for even the largest and most resotirceful companies. According to one study of large, global financial institutions, less than 1% of 300 commercial banks inteniewed were in the advanced stages of such a litikage, while between 72% and 79% were doing nothing at all."' Royal Bauk tised three regional processing

centers in Canada (Eastern, Central, and Western) to collect information from the various delivery chatinels. This information was then fed itito the Bank's Toronto-based enterprise data warehouse (EDW) on a nightly, weekly, or monthly basis. The operational ctistomer information file, which the Bank began in the 1970s, matched customer identities to the accountlevel data in the EDW. As Table 1 illtistrates, although the same process was used iti the older profitability model, the new model required the ABC information to be much more precise. Activity-Based Costs, The Bank had been tracking ABC information for approximately 20 yeats. In the 1980s, it began to develop a system to calculate and update activity-based costs quarterly by transaction and product. The current system was implemented in 1991 and was enhanced dtiring the late 1990s to differentiate costs by delivery channels such as branch, Internet, telephone, and ABM. The cost system at Royal Bank started with tlie general ledger. Chitwant Kohli, vice president of costing and profitability, explained the ABC system:
As a semces company, we are most interested in tracking labor costs, which make tip over 60% of non-interest expenses. We extract expense data quarterly from the general ledger for each individual cost center. These cost cen VOLUME 16 / NUMBER 3 / SUMMER 2002

- Meridien Research, Ini., Puiiinjj .A.BC: into (.:ustomer Profitiibilify," (M.\tiim/T Knowti'dge. vol. 4. no. I, Seplenibt'r 21. 2000, p.

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ters are then grouped with like units based on products semces and aclKities performed by the unit. We refer lo this as the processing path. For example, domestic branches, which sell and semce the same product lines using the same processes, become a unit group. Similarly, call centers, business-banking centers, and service deliveiy units that perform the same product-specific activities become unique groups. Through grouping luiits by product line and processing path, channel xnews are created. Head Office grotips, regional offices and IT costs are also identified in separate buckets. Within the 30 lo 40 tmique luiit type groups, we establish total staff lime cotistnned by each activity based on unit time per activity multiplied hy volumes processed. This enables the proper allocation of the unit's salar)' cost to products and activities and also forms the basis for apporlioning premises and general operating costs. Once we have these drivers hy prodtict, activity and channel, we can aggregate costs across all units to arrive at both transaction and total product cost. These costs are then available Ibr tise in profitability models. For example, we can report the full end-toend product cost of residential mortgages including acquisition and renewal costs by cbannel, hack office processing, call center support, system costs. Head Office atid regional overheads. For eveiy customer we can then arrive at costs associated with "ownership" of each separate product in the cttstomer's portfolio, based on transaction tisage atid channel preference. The amotuit of time spent on each activity is updatec! as Tieedcd. We have also recently instituted the idea of "champion branches"a cross section of branches that provide activity times, volumes, and costs on an ongoing basis. While labor costs are allocated based on studies of actual time spent on activities, indirect costs and the cost of excess capacit)' are allocated proportionately across all pjoducts based on the level of direct expense attracted.

"spread" between the rate paid to depositors and that charged to borrowers. A profitable sptead is created and maintained thiottgh the tiiatching of loans (assets) and deposits (liabilities). Sttccess depends upon the successful marketing of both types of "prodticts.""'" Royal Bank detertnined profits on an asset product, sttch as a tnortgage, ttsing actttal interest income, less the transfer rate on the mortgage. Conversely, piofits for a liability prodtict, such as a savings account, were determined by the acttial interest paid ottt by the Bank, subtracting from the transfer rate on the money in the deposit accoitnt. Risk Calculation. Wheti a cttstomer sottght to pitrchase a loan ptodttct, the Bank determined whether to grant the loan, and at what price. The Batik used a ntimber of factors, such as income, debt service tatio, cash flow, and thirdparty-provided credit reports, to make this initial decision. Once the loan was granted, the Bank assigned a risk score (adjusted monthly) based on the nature and frequency of transactions in the ctistomer's accotints. The score was converted to a cost driver that was then ttsed to allocate the cost of expected credit losses to that customer. Once all the inputs were entered, the ctistomer profitability software calculated the customer proiitability. For example, one cttstomer may have two accotmts with the Bank, a home loan and a savings accotmt. Although one account was losing money, the other was qttite profitable. The cttstomer as a whole was making a profit for the Bank. (See Table 2.) In addition to calculating current profitability for ctistomers and customer segments, Royal Bank also began experimenting with ways to measttre fttttire profitability and lifetime value. The Bank looked at two ways to meastire lifetime valtie, (1) asstiming that the ctirrent profitabihty percentile of the customer would remain constant throughoitt his or her projected lifetime atid calctilating the presetit valtie of those profits, and (2) factoring in other variables sucb as: age, tenttre with the Bank, litim-

Interest Revenue and Transfer Pricing. Otie bank historian explained the dynamics of net interest tevenite: The major source of bank income is "net interest income," which is the
JOURNAL OF INTERACTIVE MARKETING

-^ Dan-ncli, p. 9,

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RBC r i NANCIAL

GROUP

T A B L E 2 Sample C u s t o m e r Profitability Calculation f o r

Customer John Doe, January 2001 Ho me


Ijxni

Savings ArrounI $ 2 $ 0

Net liileiesl Revenue Othci" Rcvfime Diifc t Expense Indirect Expense RJsk Provision Total Profitability per account
Source: Omipanv records.

.$()()

S 0 :^ S1 S 5 S51

S3 S1
$ 0 ($4)

keting effectiveness, courtesy overdraft, allocation of rate discretion, and differentiated service. The.se categories are a proxy for the Bank's objectives, while the segments (such as Nextis and Wealth Act tuntilators) are a proxy for the client's needs. We strongly believe that it is the alignment of the Bank's and customers" objectives, which will allow tis to differentiate ourselves in the marketplace. (See Exhibit 11.) Although the marketing department started working with ctistomer lifetime valtie and segmentation, the information given to tbe branches was limited to a profitability ranking that continued to use the three bucket (A, B, and C) system. Detailed information on segmentation was not disseminated to tbe branches. Customized Marketing Campaigns Ctistomer profitability was one of tbe primary determinants the Bank tised to segment its customers into grotipings aud sub-groupings in oider to target these grotips for tnarketing campaigns. SMR&A also condticted studies on customer segment goals, needs, likes and dislikes, the types of products froui which they wotild most likely benefit, and developed models to determine their propensity to buy. Using this information, SMR&rA taigeted customers within segments or sub-segments for certain products, offers, and marketing channels (such as direct mail, telephone solicitation, or an inpersou sales call). As one report explained: At the Royal Bank, the 9 million personal retail clieiUs are segmented into discrete segments based on attitudinal and beha\ioral factors, current and potential profitability, expected purchasing behavior, vulnerabilities, and channel preferences. Strategies are then developed, not only for each segment btit also for hundreds of micro-segmenLs within each segmentthe ultimate objective of this Cjuest being one-to-one marketing, hulixidual treatment strategies can be tested on small cells of clients to establish what works and what
VOLUME t6 / NUMBER 3 / SUMMER 2002

ber of products held, probability of acquisition (how likely to add products to portfolio), aud altiitiou (of products). Lifetime value was calcvUated iudividually and could be aggregated up to segment level.

USING CUSTOMER PROFITABILITY FOR CUSTOMER DECISIONING


Once tlie Bank determined cuslomer profitability aud lifetime value, it iucluded those measures when determining customer decisions. For Royal Bank, decisioning encompassed cu.stomized marketing campaigns, alignment of pricing discretion, and alignment of level of service based on depth (how many products held) and potential (lifetime value) of a relationship. As Gaetane Lefebvre explained: Customer decisioning relers to the ctistomer strategies that are built in our decision engine. This etigine contains a mtiltittide of category trees. One oJ the most significant trees leverages four strategic predictive models: profitability, client (credit) risk, client \iilnerability (how \Lilncrablc the Bank is to losing the client), and lifetime value. Depending on how peojjle r;ite, (high, meditim, or low) for each model, they ate placed iiUtt one of fourteen categories, for which the Bank will luue a primaiT oljjective: to retain, grow, manage client risk, or optimize costs. We can then u.se these categories (or grouping of categories) for marJOURNAL OF INTERACTIVE MARKETING

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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 continuing basis.^^

Rather than passing raw data on to the customer contact poitits, SMR&A inserted tbe sales leads into the customer's file. Ptirkiss described a typical scenario for a customer coming into a branch seeking to open a line of credit:
The customer enters the branch and gives the account manager her Royal Bank client card. Once it is swiped into the comptiter, the manager can access the client file, which incltides information on her age, address, and what products she holds. It also notes that she has been taigeted for a particular line of credit product. The manager uses that information to guide him through the interaction with the clieiu. He no longer lias to ;isk her for every detail about where she lives or what her financial situation is. He knows instanily thai she is eligible for a credit line and can qtiickly and

confidently answer her questions. This process is much more efficient and it eliminates a lot of stress for the customer. It also empowers the branches to make better, more informed decisions because they have good information at their fingertips. We don't pass on the specific customer categoiy or segment information to the branches. We waut our branch personnel to focus on the customer, not the category.

Levels of Service

The Bank also determined a set of ctistomer treatment strategiessuch as the decision to offer pre-approved credit for credit linesby the customer segment and categoiy. Lefebvre described one example of how the Bank planned to use present and future profitability to help determine levels of s
We are working on use the customer's category assigninent to determine the length of wait time and the t\pe of customer senice representative that the customer talks to at our telephone-banking center. We want our most valuable customers to have the shortest wait time
VOLUME 16 / NUMBER 3 / SUMMER 2002

'' NCR Case Study. 'Royiil R;ink Finds Micro Markets mlh NCR Tool," Imp://www.NCR.com (accfsscd April '^^t, 20(11). p. ."i.

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94

RBC

FINANCIAL

GROUP

X H I

B I T

I2

C l i e n t Profiles^ Niece

Aunt
68 8

Age Number of Products Held Type of Products Held

23

Signature Plus checking account; Calculator Plus savings account

Signature Plus checking account, Royal Money Maker 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

Tenure with Bank Annual Income Net Worth

6 years C$23,000 C$5,000

" .\ll iiilinniaiion in ilij.s

and the most senior customer service people available. We always want to ensure thai our ven' best clients, in terms of profitability and liietime value, get the veiy best service. That's how we retain good customers. Richard McLaugblin explained the importance of profitability meastuement in deriving these strategies: We reach a decision in the central office, based on our hiformation and analysis, about how valuable the customer is or will be. We then inform the sales person who works directly with the cusU)mer. This process eliminates the need for a salesperson to captine and process customer information. Product Design and Pricitig Reich's Decision. The (^RM system tised cti.stomer profitability and future poteutial calculations to give pricing parameters to account managers like Jaime Reich. (^RM and customer profitability was being used more and more by account managers to make difficult decisions on which customers to ctildvate, how to treat existing customers, what products to offer, and what pricing levels were appropriate. Reich described his interactions with clients:
JOURNAL OF INTERACTIVE MARKETING

in the early part of the relationship, customers tend to negotiate pricing. In general, products are priced appropriately and we do not need to give special deals, since the sales leads on our computer aheady have discretionary pricing built in. Once clients realize that the Bank's rates ;ue competitive, they starl to trust me and negotiate less. For the vast majority of clients, the pricing on our products is sufficient to make them happy. It is quite rare for me to seek approval for a better price from my manager. Those rare instances tisually came about because of some uew piece of information unknown to tbe CRM system. Oue example of such a decision was an instance when oue of his clients, a long-term and important customer of the Bank, introduced him to her niece, a 23year-old MBA who recently graduated from btisiuess school and who was not in the AMI program. The niece was hoping to get a position witb a Toronto advertising firm, but was currently unemployed. She had accompanied her aunt to Reich's office in order to request a car loan. She wanted to get a loan with tbe Bank, the niece explained, because the Bank bad a more flexible loan program than the dealership. Although Reich did uot ordinarily work with Bank ctistomers that were uot in the AMT program,
VOLUME 16 / NUMBER 3 / SUMMER 2002

95

JOURNAL

OF I N T E R A C T I V E

MARKETING

E X H I B I T I3 Royal BankAverage Unit Costs by Channel^


Chdiinels ABMs1 Activities Open Products approved (credit check) RD (telephone banking) Enrollment Business Development (New Business/Growth) Business Development (Retention) Fulfillment Renewal Withdrawal Deposit Transfer Bill Payment Inquiry Maintenance Cfose
_ _ -

Telephone 1Banking'' Cash Counter Retail Bidnch BBC Agenl IVR' Internet/Web Mortgage Reps

Full Fane Ii on

$104 03
_

$365 72

SI58 36 14 89

197 15

$194 35

$983 15

67.44 9.29 19.14 32.18 3.80 2.87 21.36 2.68 9.19 28.49

90.36 12 S8 17 IB 20 00 3 84 7 IB 47 93

4 26 4 26 8 39 ai5 8 52 10 75

_ _

_ -

0.40 0.97 2.26 0.90 0.31 --

50.65

2.36

0 30 0 30 0 30
-

0 18

~
0,54

o.ia
0.19 -

.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 Royal Direct 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's profile on the Bank's customer relationship management (CRM) system. The system, which calculated the rate discretion Ior a customer based on their potential and profit, allowed her a maximum of a 1% discount. The standard rate for the niece was prime plus 5%. The problem was that the niece wanted Reich to match what the dealership was offeringprime plus 2'/^%. Reich knew that niakiiig the niece a loan at prime plus 2'/^ would be extremely difficult. He would have to go to his manager and argue the case that the Bank should make an exception for this customer, and even then it was doubtful he would get more thau a 1% additional discount. Although Reich did not ha\c access to the actual profit and potential information on this customer, he did know that she held a savings and a checking account with the Bank and had historically low balances in both (see Exhibit 12). To complicate matters Ixnther, the niece had told Reich that although she had a competitor's credit card, she currently did not hold one of the Bank's credit cards. Reich knew that there was a very high likelihood that the system would eventually prompt a peiJOURNAL OF INTERACTIVE MARKETING .

sonal banking representative to attempt to sell her a credit card. In order to provide this customer with the loan rate she wanted, Reich would have to persuade his manager that doing so was a good move for the Bank. The questions in Reich's mind as he mulled his decision were: was this really the best use of the Bank's funds? Would she take the credit card if he did not give her the rate she wanted on her car loan? Packages versus Fees: McLaughlin's Decision. Another way the Bank used customer profitability data was to inform the debate over whether to charge for services using flat rate packages or to charge fees based on the amoiuit and type of transactions the customer was generating with the Bank. By 1998, with the new customer profitability model in place, the Bank became aware that many of its personal accounts were losing mt)ney. Looking more deeply into the data, the Bank found that the delivery channel producing the biggest drain on profits was the prat tice oi customers using ABMs to pay their bills. This practice was widely in use in Canada by the late 1990s. While customers viewed this service as
VOLUME 16 / NUMBER 3 / SUMMER 2002

96

RBC F I K A K C U L

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 other FIs Flat Fet' Options

Signature Plus Checking 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 Withdrawal
Fee

Cuhuliilui Plus Savings Account 2/montlilv cycle and I/payroll eiedit $1.35 $1.35 $1.35 $0.50 S0.50 0.30

Royal Money Maker Plus Savings Account 2/nionthly cycle and 1/pavroll credit S1..S5 SI.35 SI .35 S0.50 $0.50 $0.30

15 full-senice debits lor $5/month 15 self-Sfnice debits lor $3/montli

None

None

25 sclt-scnice debits for


$5/ni(nnh Overdraft Protection Option Accounl rccoid $2/month or overdialt interest, wliich ever is greater Free St:itement with cheeks retunietl, or IVee bankbook. Statement L'pdates in Branch S-50, at Account Updaters Sl-OO, at PTB Machines, 5)0.50 (niinistateiiieiit).

con\enietit, it was extremely costly for tlie Bank (see Exhibit 13). These higher costs led to negative customer profitability, particularly for customers who did not carr)' high balances, sttch as those itl the Key/Nexus segment. Recovering those costs cotild be tricky, since marketing studies showed that customer vahied predictability, fairness, and simplicity in their banking relationships, atul that they felt "nickel and dimed" by the transaction fees charged by some banks. Many at the Bank felt that flat rate packages were t)tie way to cover costs without sttl> jecting customers to pages of fees on their bank statements. The Bank's levels of pricing and their corresponditig set'vices for peisotial accotttiLs are listed in Table 3. In addition to how to move CRM and customer ptofitability forward, the question for the Bank wlieu ttying to piice ptodutts in the current (]RM envitotiment was: how to recover
JOURNAL OF INTERACTIVE MARKETING

costs and make a profit while pt()\ iding the type of service its customers wottld value and keeping customers that tbe Bank vahied? Richard McLaughlin knew that valtte for money was a particularly thorny issue for the Bank. The Bank was tanked seventh out of eight financial institutions in the Bank's intertial value for tnoney rankitig. McLattghlin pondet ed how the Bank could boost the perception among its cttstomet s tbat they gained significant valtie for their money and guard against cotnpetitor eticroacbment, while simultaneously stetnmitig the tide of red ink spilling from its personal accounts? Future Plans Using profitability and futttte profitability tneasurement for ctistomer decisioning was still in its infancy at Royal Bank. Lefebvre and McLatiglilin wete etivisioning initiatives that would take the Bank even further dowti the
VOLUME 16 / NUMBER 3 / SUMMER 2002

97

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