OBJECTIVES OF CRM IN BANKS

CRM, the technology, along with human resources of the banks, enables the banks to analyze the behavior of customers and their value. The main areas of focus are as the name suggests: customer, relationship, and the management of relationship and the main objectives to implement CRM in the business strategy are:

To simplify marketing and sales process

To make call centers more efficient

To provide better customer service

To discover new customers and increase customer revenue

To cross sell products more effectively

  The CRM processes should fully support the basic steps of customer life cycle. The basic steps are:

      Attracting present and new customers

      Acquiring new customers

      Serving the customers

      Finally, retaining the customers

            In today's increasingly competitive environment, maximizing organic growth through sales momentum has become a priority for Banks and Financial institutions. To build this momentum banks are focusing on Customer relationship management initiatives to improve;

      Customer satisfaction and loyalty

      Customer insight/ 360º view of customer

      Speed to market for products and service

      Increase products-to-customer ratio

      Improve up sales and cross sales

      Capitalizing on New market opportunities

       

            The idea of CRM is that it helps businesses use technology and human resources gain insight into the behavior of customers and the value of those customers. If it works as hoped, a business can: provide better customer service, make call centers more efficient , cross sell products more effectively, help sales staff close deals faster, simplify marketing and sales processes, discover new customers, and increase customer revenues .It doesn't happen by simply buying software and installing it. For CRM to be truly effective, an organization must first decide what kind of customer information it is looking for and it must decide what it intends to do with that information.

            In CRM projects, following data should be collected to run process engine:

1) Responses to campaigns,

2) Shipping and fulfillment dates,

3) Sales and purchase data,

4) Account information,

 5) Web registration data,

 6) Service and support records,

 7) Demographic data,

 8) Web sales data.

3.4 CRM STRATEGIES

 Customer Behavior Patterns

            For example, in the financial sector, early beneficiaries of successful CRM strategies have been the banks. These organizations use data warehousing and data mining technologies to learn from the millions of transactions and interactions with their customers, and to anticipate their needs. The patterns of customer behavior and attitude derived from this information enable the banks to effectively segment customers on pre-determined criteria.

Detailed customer data can provide answers to the following questions:

Which communication channel do they prefer?

What would be the risk of leaving the bank to go to the competition?

What is the probability the customer will buy a service or product?

            This knowledge assists financial institutions with CRM solutions in place to develop marketing programs that respond to each customer segment, support cross-selling and customer retention programs and enables the staff to understand how to maximize the value of each customer’s interaction.

            CRM applications provide functionality to enhance customer interactions. Banks known for its high level of customer service might use this characteristic as a starting point for implementing a CRM application. Another company may be very good at targeting profitable customers. Each bank should seek a niche on which to develop its CRM strategy.

Customer Relationship Management (CRM)

CRM, or Customer relationship management, is a number of strategies and technologies that are used to build stronger relationships between companies and their customers. A company will store information that is related to their customers, and they will spend time analyzing it so that it can be used for this purpose. Some of the methods connected with CRM are automated, and the purpose of this is to create marketing strategies which are targeted towards specific customers. The strategies used will be dependent on the information that is contained within the system. Customer relationship management is commonly used by corporations, and they will focus on maintaining a strong relationship with their clients.

MEANING OF CRM

            Customer Relationship Management is the establishment, development, maintenance and optimization of long-term mutually valuable relationships between consumers and the organizations. Successful customer relationship management focuses on understanding the needs and desires of the customers and is achieved by placing these needs at the heart of the business by integrating them with the organization's strategy, people, technology and business processes.

            At the heart of a perfect CRM strategy is the creation of mutual value for all the parties involved in the business process. It is about creating a sustainable competitive advantage by being the best at understanding, communicating, and delivering, and developing existing customer relationships in addition to creating and keeping new customers.

GOALS OF CRM

1) Increase in Customer Service   :

            Establishing customer loyalty as one of your top CRM goals is absolutely fundamental to CRM successful implementation .For this task it is essential that the whole organization realize that they play a part in this goal. This objective cannot be achieved with the help of a few employees only. Customers need to feel that they have received excellent service. This ensures their continued patronage. This is by far one of the most essential goals of customer relationship management. Customer retention and brand loyalty is absolutely essential to ensure success. Undoubtedly it is far harder to gain a new customer than to actually keep one. Customer service is the pivotal point around which CRM revolves.

 2) Increasing Efficiency:

            One of the most important goals of CRM is the increase in organization efficiency and effectiveness. This is almost always adopted by every organization. It is necessitated by the fact that increase in efficiency is required to boost success. CRM achieves this through cost reduction and customer retention. Adequate CRM training achieves this goal.

 3) Lowering Operating Costs:

            CRM goals also include the reduction of costs of operation. This goal should be clearly established and conveyed to all those involved in the CRM implementation process. CRM manages to reduce operating costs through a workforce management system. This helps to maximize skills and thus reduce cost. These reduced costs enable an organization to achieve greater efficiency. If cost reduction is management's objective then the CRM implementation should be carried out in such a way that this is achieved. Throughout the process maximum reduction in costs should be adhered to in order to meet this particular CRM goal.

4) Aiding the Marketing Department:

            Another goal of CRM is generally aiding the marketing department in all its efforts. This includes marketing campaigns, sales promotions etc. If this is fixated as one of the goals of CRM, then it should be communicated to those involved. This goal is fundamental as it boosts sales indirectly thereby increasing the profitability.

Why are CRAs relevant?

• v  It is clear that some form of credit rating is needed for the efficient functioning of the market. What is not clear is how credit rating should be done. The current model has massive flaws and, in the aftermath of the financial crisis, we are still struggling to come up with an alternative.

• v  Some argue that regulation by the US Securities and Exchange Commission (SEC) and the Federal Reserve (Fed) has forced issuers to depend on the big three, creating an unholy oligopoly. Others blame EU regulation of doing the same. Still others argue that standardized assessments of credit risk as done primarily by S&P and Moody’s, two private US agencies, are part of an untenable model.

• v  The challenge for our times is the creation of a new CRA model. Do we need more agencies from many countries as new lenders emerge and markets develop in other parts of the world? Should we revert to the old model where the subscriber pays instead of the issuer? Or is the future some sort of a business model that is collaborative and transparent as the Wikirating experiment developed by the Austrian mathematician Dorian Credé and launched in October 2011? Answers to these and many other questions are likely to lead to a more robust CRA model going forward.

Credit Rating

Background

• v  A credit rating agency (CRA) is a company that is in the business of rating the credit worthiness of debt. It does so by rating issuers of debt obligations and also by rating the debt instruments themselves. Credit ratings are meant to provide easy-to-use measurements of relative credit risk so that investors can make informed choices. The idea is to facilitate transactions and lower costs for both borrowers and lenders.

• v  Three CRAs dominate the market - Standard & Poor's (S&P), Moody's Investor Service, and Fitch Ratings. Each of the first two has 40% market share while Fitch has a 14% market share, bringing the combined market share of the big three to 94% and making them a powerful oligopoly.

• v  Credit ratings are used by debt issuers such as governments and corporations to send a signal to the market, and by subscribers such as pension funds or other investment funds to make investments. The premise is that CRAs provide an independent verification of the issuer’s credit-worthiness and the resultant value of the instruments it issues. This means that lenders who buy debt do not have to engage in due diligence of every debtor and every debt instrument, and can make faster and more reliable decisions. CRAs exist to make the debt market more efficient.

• v  CRAs are in trouble these days because of their role in the global financial crisis. They assigned high ratings to both issuers and debt instruments that turned out to be in massive trouble. Instead of giving the market accurate reference points to make informed judgments, they acted like a malfunctioning instrument dial that fueled a bubble that eventually burst.

• v  There are three main criticisms of CRAs. First, that they are part of an oligopoly with too much power and have anti-competitive practices. Second, and more important, that they lack competence. They often do not understand more complicated debt instruments such as the fancy derivatives that were used in the height of the crisis. Third, CRAs suffer from a fundamental conflict of interest. They rely on an "issuer-pays" business model in which most of the revenue of the CRAs comes from fees paid by the issuers themselves. This means that they are obligated to the very people that they are supposed to judge independently.

Basel II - Capital Adequacy Framework

Capital adequacy is the key measure of the soundness and stability of banks. Basel II, introduced in June 2004 by the Basel Committee on Banking Supervision based in the Bank for International Settlements, Basel, Switzerland, is the current international standard framework for assessing capital adequacy of banks. This new framework replaces Basel I as the international capital adequacy norm for banks.

The key features of Basel II

The Basel II capital framework comprises three mutually reinforcing pillars, i.e.,

(1) Minimum capital requirements,

(2) Supervisory review process and

(3) Market discipline.

Pillar 1-The calculation of the minimum capital requirements: The Pillar I aim to align the minimum capital requirement on account of credit risk, market risk and operational risk, more closely with the bank’s actual degree of risk. The options for calculating the capital charge for credit risk are the standardized approach and internal ratings based approaches (IRB).

The standardized approach is based on external credit ratings while the IRB approach, heavily relies on banks’ internal assessment of the components that define the risk of a credit exposure. The IRB approach, in turn, comprises two different methodologies: the foundation and advanced IRB approaches, depending on the sophistication of risk management systems of the banks.

The three options for calculating operational risk, which is a new feature in Basel II, are the basic indicator approach, the standardized approach, and the advanced measurement approach. A similar structure applies for measurement of market risk.

Pillar 2-The supervisory review process, aims to give supervisors more responsibility to verify whether banks have taken account of their entire risk profile and maintain sufficient capital to cover their risks and allows to capture the risks not specifically covered under Pillar I. The additional risks that should be considered by the regulators under Pillar 2 are credit concentration risk, treatment of interest rate risk in the banking book, liquidity risk and strategic and reputation risks. Accordingly, the regulators have the option of prescribe additional capital to mitigate such additional risks.

Pillar 3-Market Discipline requires banks to publicly disclose key information regarding their risk exposure, risk appetite and performance with a view to promote market discipline. It is expected that enhanced disclosure and transparency, will allow market participants to better assess the safety and soundness of the respective banks and thus exert stronger market discipline.

Overall Benefits of Basel II

Basel II is a comprehensive framework that provides banking institutions stronger incentives to improve risk measurement and management and regulators to take measures to improve safety and soundness of banks by more closely linking regulatory capital requirements with banking risk.

The Basel II Framework promotes a more forward-looking approach to capital supervision, and encourages banks to identify the risks they may face, today and in the future, and to develop or improve their ability to manage those risks. The advanced approaches of Basel II also require banks to stress test their portfolios based on a number of likely future scenarios. These features shield banks from facing unanticipated problems and facilitate their smooth functioning.

Further, Basel II introduces the concept of market discipline whereby market participants (such as depositors and shareholders of banks) also receive the opportunity to exert discipline over banks and thus, contribute to improving the financial strength of banks. Enhancing transparency and accountability through publication of prudential ratios and other information regarding banks enables the public to make better decisions regarding the management and performance of the bank. As such, the market is in a position to reward a bank displaying greater financial strength by giving it more business and penalising those of poor quality by avoiding the conduct of business with such banks.

Implementation of Basel II in Sri Lanka

Regulators in most jurisdictions around the world have implemented the Basel II framework and the Central Bank of Sri Lanka also joined the global trend by implementing the Basel II, in January 2008. Accordingly, banks are required to apply the Standardized Approach for credit risk, the Standardized Measurement Method for market risk and the Basic Indicator Approach for operational risk, in computing the capital requirements.

The Central Bank has decided to move to more advanced approaches (IRB approaches) beginning 2013. Once the Central Bank is satisfied that the banks have the appropriate models and risk management systems capacities, the permission will be granted for them to precede with the IRB advanced approaches.