Problem:
In 2001, Alan Green was able to finish his first month in the online banking group in the Pilgrim Bank as an analyst. His boss, Ravi Raman, told him that Pilgrim Bank will hold a meeting with the senior management team in regards to the internet strategy at the end of the week. The meeting is going to held as a result of considerable conflict within the group as to whether or not they should implement charging fee on the consumers that use of online banking channel or they could implement policies where in they will offer incentives to the consumers such as lower charges for services and refund in order to promote the greater utilization of the of the online banking channel. The debate is about as to whether the consumers that uses online banking are better customers for the Pilgrim Bank, and if the adoption of the policy for the online strategy would actually make better customers for the Pilgrim Bank.
The Pilgrim Bank was established in 1911 in Texas as the First Guaranty State Bank of Pittsburg with an overall asset amounting 83 thousand USD. In 1925, it became the first state bank and in the next year was purchased by the first National Bank of Newsome. The Pilgrim Bank have experience the crash of the stock market, the Great Depression, and the First World War and have survived in all of these events. The Pilgrim Bank remained strong at $360 thousand worth of the total assets by 1939. As decades have passed, the Pilgrim Bank has successfully established their famous 3 storey building in Mt. Pleasant in 1998 which became the headquarters of the 16 branch of the Pilgrim Bank. In 2008, the Netex Bank Corporation joint venture with the bank and became the Pilgrim Bancorporation. The Pilgrim Bank carries on to travel the path with honesty and integrity (Pilgrim Bank 2006).
Answers:
Green opened the file about the data of the profitability in the year end 1999. Green organized the profitability among the consumers. He organized the consumers by classifying them from most profitable to least profitable, and he also drawn charts and tables for the huge preponderance of profit that were accumulated from the comparatively small numbers of consumer versus the percentage of the accumulated profitability. Green conducted a calculating summary of the data for the profitability of the year end 1999; the result of the calculations is that the average profitability of consumer for the year 1999 accounts for $111.50. In addition, the finding shows that an average of the profitability of consumers that have said to use the online banking was $116.67 compared to those consumers that do not use online banking which accounts for $110.79. Green was not surprised by the outcome of the sample data of the profitability of the year end 1999 in which the profitability of the consumers that uses online banking is much higher compare to those who do not use online banking. Despite the finding that suggests that the profitability is much higher in online compare to the offline form of banking, Green does not know how he will conclude the average profitability of the consumers about online banking. Green takes in account the demographics such as the geographical region, income, and age of the participants. Green could conclude the average customer profitability for Pilgrim Bank’s entire customer population is $111. 50 in which the customer that uses the online banking is accounts for $116.67 and for the offline customers is $110.79. The method that was used is the Z-test in determining the set of data that is represents the entire population and determining the 95 percent of the interval of confidence. The 95 percent of interval of confidence depends in the 108.496 <Profit Mean <114. 509, and the variation that was derived from the mean of the summary statistics in the Pilgrim Bank’s customers profitability case study is (+ - 3.01) and therefore Alan Green could draw a conclusion stating the set of data represents the entire population. The value of Z for this case study was (1.96), hence we could say that it is greater than .05, we could agree that the null hypothesis for this case study is that there is no much of a difference between the profitability of the customers that do not use the online banking to that of the customers that use online banking. Hence, the data for the profitability for the online user customers and offline user customers are similar. In addition, the reason as to why there is a substantial numbers of customers that uses the online banking channel is because of the convenience of the transaction. But then again, there are substantial numbers that still prefer to use the offline form of banking despite the several different kinds of policies and incentives that encourage the customers to use online banking (Kulshrestha, n.d)
There is no large between the customers that use online banking and those that do not use online banking. So who are the profitable customers of the Pilgrim Bank? According to the research findings that were conducted by Green suggest that preponderance of the profits of the bank depend in the less than $100 to $200. It shows that unexpectedly that around 10 percent of the customers of the Pilgrim Bank in the year end 1999 have generated around 70 percent of the overall profit of the bank. Few more than 50 percent of the customers of the Pilgrim Bank were suggested to be profitable and around 20 percent are accounted for the entire profits. Thus, it becomes more significant to maintain the highly profitable customers and this type of customers are above 300 USD of profitability, hence should be considered by the Pilgrim Bank as their prime customers. The average tenure of the highly profitable customers is 13. 72 years. Based on the data of the average profitability of the customer, it shows that there is n much of a massive difference between the profitability of the customers that uses online banking and those customers that do not use online banking. The standard deviation for the profitability of the customer is 272. According to the results of the summary statistics the income bucket is 6 ($50,000 to $74, 999) and Age bucket is 3 (25 to 34 years). The Pilgrim Bank identify the profitability of the customer is profitability – (Balance in Deposit Accounts) * (Net Interest Spread) + (Fees) + (Interest from Loans) – (Cost to Serve) (Kulshrestha, n.d).
The retail banks commonly respond to the unusual variation in regards to the profitability of the customer despite the variety of method, all of the methods have common objective of upholding the migrating customers and profitable relationship from lower to a higher profits. The feed, cross-sell, and pricing strategy programs of the retailer banks is used to convert the customers that are considered to be unprofitable to a profitable one. The retail banks change the price of their products and service in order to encourage the customers to use the lower cost banking channel. Implementing charge fees for particular services in order to motivate the customers to migrate their transaction from high cost channel to a lower cost such as ATM and online banking channel. Pilgrim Bank should perform a linear regression where in the independent variable is the online flag and the dependent variable is the linear regression as the dependent variable in order to check the online banking channel in regards to the profitability. According to the summary statistics that there is a very low of the adjusted R-square which is close to 0 that reveals that the model is surprising at all and we need to take in account the other factors to the regression. The importance of the F is relatively high and therefore we should completely reject the model. The factors that affect the profitability are income, age, and tenure and not the location. The use of the income, online usage, tenure, age, and location as the independent variables and analysis of regression with profit as the dependent variable shows that the high p-value is for district means and the p-values are for each independent variable. The customer profitability of the Pilgrim Bank in 1999 has nothing to do with the customers that use online banking but rather the Pilgrim Bank should center on the factors that affects the profitability which is the demographic variable such as the age, income, and tenure. The pricing strategies are that the available infrastructure that supports the fraction of the customers total and improve the capability of the infrastructure that could entail increase of cost. Therefore, the Pilgrim Bank should center on offering the customers with free online service and gradually transforms the bank into bank that offers complete free online services in the future. Given that there is need for high installation cost for the online channel, therefore we should impose charge fee to the customers of the Pilgrim Bank for the channel simply because there is no substantial causal relation that it drives the profitability of the bank. It is significant to note that promoting online banking channel has its advantages, it may be small; however, the online banking channel affects the profitability in the regression model. Recently, the online customer makes up 12 percent and thus we should promote refund and other incentives to promote the use of online services – the young customers that are under the age bucket 3 and the new customers of the Pilgrim Bank should be given free subscriptions and rebate for few years until these customers become profitable to the bank, the customers with a tenure of more than ten years should be provided with online services for free in order to reward them for their loyalty to the bank, and those prime customers or highly profitable customer should be given the best services the Pilgrim has to offer (Kulshrestha, n.d).
References
Kulshrestha, R. (n.d). Pilgrim Bank Customer Profitability Analysis [PPT Document]. Retrieved
Study#scribd
Pilgrim Bank. (2006). About Us: Pilgrim Bank. Retrieved from:
https://www.pilgrimbank.com/about/about-us
