New Product

Development and
Product Management
in Banks
Banking Term Paper

Submitted by:
Urja Desai
PGP08-10
2008059
 T ABLE OF C ONTENTS
Introduction ............................................................................................................................................................ 3
What is a Product?.................................................................................................................................................. 3
PRODUCT LIFE CYCLE .............................................................................................................................................. 5
Introduction .................................................................................................................................................... 5
Growth ............................................................................................................................................................ 5
Maturity .......................................................................................................................................................... 5
Decline ............................................................................................................................................................ 6
NEW PRODUCT DEVELOPMENT ............................................................................................................................. 7
Type of new products: ........................................................................................................................................ 7
Modification of the existing products ............................................................................................................ 7
Diversification into new product categories ................................................................................................... 7
New product development stages ...................................................................................................................... 8
Product Screening ........................................................................................................................................... 8
Concept Testing .............................................................................................................................................. 9
Testing/Test Marketing .................................................................................................................................. 9
Product Failures .................................................................................................................................................. 9
Product Elimination ................................................................................................................................................ 9
Benefits of Product Elimination ........................................................................................................................ 10
Product Management ........................................................................................................................................... 11
References .......................................................................................................................................................... 12
I NTRODUCTION

The increasing competitiveness in the banking and financial services industry means that businesses must
manage products for optimum growth and differentiate their product propositions to succeed. To keep
ahead of the competition, it is important that new products are developed to meet new markets and
embrace new technology.

Products are the life blood of an organisation and without effective management and regeneration
organisations can wither and die. A structured approach to developing new products and managing the
existing product portfolio is the key to a successful strategy.

The paper looks at different aspects of product development in banks, the importance of new product
development in the banking industry and the various stages of a new product development. It also covers
the need for better management of the vast portfolio of products that private and public sector banks
nowadays offer.

W HAT IS A P RODU CT ?

As per Kotler, “A product is anything that can be offered to a market for attention, acquisition, use or
consumption that might satisfy a want or a need”. In a banking context, all banking services (including
checking and savings account, certificate of deposits, safekeeping services, lockbox operations, cash
management services and loans) are products.

A product has five different aspects:

 Core Product ( Benefit)

The essential benefit that the customer is buying; for ex- the convenience of being able to pay for
goods and services through cheques)

 Generic Product
The generic product provides that provides this core benefit. For the banking industry it’s the
funds, money, currency, greenbacks etc. whatever is the basic commodity. It makes all banks,
credit unions, mortgage companies and financial providers equal. It’s the entry point.

 Expected Product
It includes the product features that the customer assumes will be a part of the product; for ex.
Prompt and accurate clearance of checks, accurate monthly statements, and ability to access the
account through ATMs. Expected products define a bank but they do not serve to differentiate
one bank from another.
  Augmented Product
It includes all the specific features and benefits that help the marketer differentiate the product
from its competitors for ex. Package products link accounts and can provide benefits like non-
annual fee credit cards, loan discounts and bonus rates on CDs.
Banking products are augmented by the level and quality of service provided to the customers.
Services here are the differentiating factor where there is little product differentiation.

 Potential Product
It includes all the possible augmentations that you can add to the product to make it competitive
in the future. Offering potential products requires a thorough understanding of consumers in
order to figure out which attributes or features will be important to consumers in the future.
Some potential products are innovative twists on augmented products while others are complex,
granular, nearly unique bank products and services that break new boundaries. Image statements
are an example of potential product.

The four characteristics that separate a product from services are:

a) Tangibility
To tangibilize the services offered, banks go for attractive information giving brochures,
mascot/symbol
b) Inseparability
Service cannot be separated from the person who is selling the service. In banks, customer can open a
checking account (the core product) only by directly dealing with the service personal i.e. the teller or
the customer service representative. This is called inseparability which results in a banks consumer
banking services being sold only in markets where there is a retail outlet – i.e. a branch office.
c) Variability
No services business can have the same standard of service offered at every outlet at every moment as
it largely depends on the personnel offering the service. Because it’s difficult to standardize a banking
service from one branch to another, it’s all the more important for a bank to set measurable standards
for quality service and to pay particular attention to training and motivating its staff to meet and
exceed those standards.
d) Perishability
Unlike products, services cannot be stored to use it when demand is high supply is low. This is called
perishability. For ex. Hours when tellers are idle cannot be used to provide quicker service at noon on
Friday when queues are long.
 PRODUCT LIFE CYCLE

A product typically passes through four stages:

I N T R O D U CT I O N

Its a phase characterized by low growth in sales. The profit curve is characterized by a loss due to the
heavy expenses incurred in introducing a product. In addition to the R&D cost, there is a cost of
distribution as well as the advertising and promotional expenses.

In banking, significant costs are involved in developing the computer systems required to deliver a new
product that is different from the existing ones. These up-front expenses make it difficult for a bank to
test market the products the way consumer goods manufacturers do.

The length of the introductory phase depends on the rate at which consumers accept the product. For
ex. Internet banking had been in its introduction stage for quite a substantial period of time as it
involved changing the customers’ banking and bill-paying behavior. Debit card is another product that
has been in the introduction stage for many years. The marketing challenge for this product is not only
to overcome the consumer’s resistance to the loss of float on their funds, but to persuade shopping
outlets to install the relevant equipments and to agree to accept and promote debit cards.

G RO W T H

Its a stage that is characterized by rapid acceleration in sales and increased market awareness about
the product. This will attract more competition in the market but till the competition catches up, the
first firm has the advantage. Because of the profit potential of products that are in the growth stage,
competitive firms spend heavily on consumer research and marketing and developing new products.

An example of a growth product in banking is the home equity line of credit. This product was available
in some banks in 1980s. When the tax-deductible status of the interest on installment debt was
removed, the product saw a splurge in sales and rapid growth.

M AT UR I T Y

The Maturity Stage is, perhaps, the most common stage for all markets. it is in this stage that
competition is most intense as firms fight to maintain their market share. Here, both marketing and
finance become key activities. Marketing spend has to be monitored carefully, since any significant
moves are likely to be copied by competitors. The Maturity Stage is the time when most profit is earned
by the market as a whole. Any expenditure on research and development is likely to be restricted to
product modification and improvement and perhaps to improve production efficiency and quality.
Example of a mature product in banking industry is the credit cards. Auto loans also have hit maturity
because of indirect lenders being able to offer lower rates.

D E C LI N E

In the Decline Stage, the market is shrinking, reducing the overall amount of profit that can be shared
amongst the remaining competitors. At this stage, great care has to be taken to manage the product
carefully.

For ex. Cheque books. With introduction of products like credit and debit cards, e-transfer of funds,
internet banking, the use of chequebooks is becoming less and less and it might not be surprising if
the product becomes obsolete some years from now.

The above figure shows a typical product life cycle and its effect on sales and profits of a firm/bank. The
total market sales curve for a product is quite different from the total market profit curve the reasons
for which are several including banks not eliminating low margin products and thereby adversely
affecting performance of high margin products.
NEW PRODUCT DEVELOPMENT

The realities of the product life cycle underscore the importance of new products to a firm. Since
products tend to be most profitable in the growth stage, a firm should ideally have solid proportion of
its product mix in this stage at all times. Conversely, a firm that does not develop new products can
expect that eventually it will be totally dependent on the later (and theoretically less profitable) stages
of the product life cycle. While some banks may develop products that are new to it, others may choose
to develop products that are new to the market. These innovators tend to be large banks with
substantial R&D budgets.

T YP E O F N E W P R O DU C T S :
A product maybe new to the firm or new to the banking market. Most new products are new to the
bank but not to the banking market. Such products fall under the category:

M O D I F I C A T I O N O F TH E E X I S T I N G P R O D U C T S
The introduction of a ‘new certificate’ of deposit during a period of low interest rates is an example of
product modification. For example a bank may offer a 3 yr ‘rising rate’ certificate that gives the
customer an option of switching to a higher rate if rates increase or of maintaining the original rates if
rates fall. This new product is simply a three yr CD enhanced with a rate change option to meet a
current customer need.

EXTENSION OF A PRODUCT LINE

The development of a basic or ‘lifeline’ checking account for low-income customers is an example of a
new product being added to a banks checking product line.

DEVELOPMENT OF A BANKING RELA TED PRODUCT

Banks that have introduced the sale of annuities or mutual funds have added a new banking related
product line to their product mix. Such products are clearly new to the banks but not to the financial
services market.

D I V E R SI FI C AT I O N I N T O N E W P RO D U CT C A T E GO RI E S
Some bank holding companies have expanded into non-traditional banking services, such as insurance
products. Again this is a new service to the banking industry but not to the financial market.

How a bank approaches product development, generally depends on its size and structure. More than
any other area of bank marketing, product development has a considerable operational component. In
some banks the product development dept reports to the director of marketing. In others the
responsibility of product development lies with the relevant line function of the bank (retail,
commercial or trust). In still others a team approach is used, with representatives from systems and
programming, operations and other relevant line department coordinated and headed by the product
manager or marketing head. Wherever the responsibility lies, the business of developing a product to
be marketed involves coordinating the efforts of number of departments.

N EW PRODUCT DEVELOPME NT STAGES

Regardless of whether a product is new to the bank or new to the market, the foremost challenge is to
maximise new product development potential and avoid mistakes. Although there is no magic formula
a firm can go a long way towards generating new ideas and reducing risks by establishing formal
procedures for new product development. The market point of view should be built into the system
right from the start. One type of system for developing a new product is the eight stage product
development system. A new product idea must survive each phase of the development procedure.

E XP LO R AT I O N AN D I D E A G E N E R AT I O N

Banks interested in exploring new ideas and generating new products can go for a formal market
research. For banks, this kind of search may surface needs that are not satisfied by the current service
offerings in the market or the need for services that aren’t existing in the market in the first place. Idea
generation can be internal also. Nowadays banks and companies give incentives to employees who are
able to generate potential and innovative product ideas. Ideas may also come from customers, banks in
other parts of the countries or other competing banks. Also an idea for the new product occasionally
comes from the banking regulators. The money market deposit account is a result of idea generation
from this source.

P RO D U CT S CR E EN I N G

Not every new product idea can or should be pursued. Hence they need to be screened against
Product objectives, Product policies and company resources. A preliminary judgment must be made
whether the idea deserves further study or not. In an aggressive and imaginative bank, unusual ideas
that seem unworkable at first and not within the present regulatory constraints will not be screened
out until it’s evaluated in more detail.

The new product idea evaluation should also be made for the fact that it doesn’t take away business
from the existing products of the bank.

The development of the NOW account which existed before the interest bearing personal checking
account was spear headed by a small persistent bank in Maine. It found an ingenious way to evade a
regulatory ban on payment of interest on demand deposits by offering negotiable orders of
withdrawals (which works like checks) on savings account.
C O N C EP T T ES T I N G

Concept testing entails testing the new product concept on a focus group to explore their reaction to
the new concept and then extrapolate it to the entire customer base. Idea behind doing a concept test
is to get a measure of the desirability of the combinations of product and service attributes that the
bank plans to offer, in order to give the bank a better idea about the success of the new product idea to
be launched. This helps in further decision making.

T E ST I N G /T E ST M AR K ET I N G

After testing the concept of the new product with a focus group, banks go for test marketing the new
product to check its effectiveness before investing more behind it. For ex. Giving complimentary credit
cards to college students or big account holders when credit cards were introduced in the market was a
way of test marketing the product.

Only if the new product idea passes successfully through this stage, does the bank look at investing
further resources behind it.

P RODUCT F AILURES

New product failures are a common feature in any industry and banking is no exception. Some product
failures reflect a weakness in one or more of the elements of the marketing mix – such as pricing,
promotion or sales strategy. In addition to these there are some other underlying reasons that lead to a
new product failure and they are:

a) Failure to look at new product from the market point of view

b) Failure to research the needs of the target segment correctly and creatively
c) Failure to consider the degree of behavioral change required of the prospective consumer
d) Failure to communicate the new product benefits clearly

P RODUCT E LIMINATION
What happens when a product dies or when banks merge? What does one do with a product when its
profitability declines steadily and it cannot be revived. In such cases, products are eliminated
immediately or gradually phased out. Yet most companies including banks do not have a well planned
procedure to handle declining products. American industry has traditionally paid less attention to
establish formal procedures of eliminating a product and this holds true for the American banking
industry too.
B ENEFITS OF P RODUCT E LIMIN ATION

The most obvious benefit from having a formalized product elimination plan is the potential effect on
the banks’ profitability. This holds more relevance in case of a merger or acquisition of a bank when
there is generally a lot of product redundancy. Reducing the number of products offered streamlines
the new banks product line and can improve efficiency as well as profitability.

Sometimes a large portion of a banks product mix accounts for a small percentage of its total
sales/profits. This shows that some of these products might be unprofitable or having a low ROI.

Since weak products consume important company resources, eliminating them can spur overall sales by
freeing up resources for more promising uses. Also marginal products tie up sales personnel, advertising
and operational budgets and other resources to the same extent as strong products. They also tend to
require a disproportionate amount of management time. The more time and resources are wasted
behind such unprofitable products the more there is a delay in an aggressive search for more profitable
products.

When procedures are in place to identify circumstances in which a product should be dropped, it not
just helps a bank in analyzing the cause of that product’s failure but also helps in not repeating the
same mistakes again in future for other products. For ex. Coupon book holiday clubs are an example of
a deposit product that many banks have eliminated because the cost of administering them was far
greater compared to the relatively small average deposits they generated.

Regulatory changes are another factor that has led banks to eliminate products. Sometime back , most
banks offered two types of consumer checking accounts : one for people having demand for few checks
( with a low monthly maintenance charge and item charge) and another for heavier-volume check
writer ( usually with no charge provided a certain balance was maintained). That time, interest bearing
NOW accounts was allowed and several years later money market-rate super NOW accounts were also
allowed. Banks found themselves with four or more type of interest and noninterest bearing retail
demand accounts.

With the elimination of the all rate ceilings in 1986, many banks restructured their product lines by
reducing the number of transaction accounts to only two, one with and one without interest.

A similar pattern developed in the certificate of deposit product line as the number of allowable
maturities increased over the years.
P RODUCT M ANAGEMENT
One of the most important developments in banking has been the increased emphasis on marketing a
wide array of financial services. This emphasis has led to the adoption of the product management
system in one form or another by many large, full-service commercial banks. The transition to a product
management system has required banks to change how they organize and manage their operations.

The issues that a bank thus faces in managing a wide variety of product portfolio include the identification
of the product manager’s task responsibilities , the role of organizational support in facilitating product
management , the influence of organizational culture and the impact of power and conflict on product
managers and the product management system. Also how product managers assess their job
performance, work satisfaction, and the performance of the overall product management system in their
bank.

Product management entails giving individuals within the bank varying degrees of responsibility and
authority over specific product or product lines. This ensures better accountability, effective performance
and better customer management. For ex. Most of the commercial banks like ICICI and HDFC have
different divisions for their different products like ICICI PruLife for insurance, ICICI Securities, ICICI Home
Loans etc. Each division has separate product managers, product heads and sales staff. This also ensures
that products that have different growth cycles and industry dynamics do not end up competing against
each other.
REFERENCES:

Financial services marketing: an international guide to principles and practice by Christine

Ennew, Nigel Waite

Marketing and Financial Services by Marie Ann Pezzullo

Websites:

http://www.iba.org.in

http://www.banknetindia.com

http://www.thebanker.com

http://www.infosys.com

http://www.euromoneytraining.com

http://www.emeraldinsight.com