MARKETING STRATEGIES FOR FINANCIAL PRODUCT OF A BANK

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WELINKGKAR INSTITUTE OF MANAGEMENT DEVELOPMENT & RESEARCH

May 2011

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MARKETING

STRATEGIES FOR FINANCIAL PRODUCTS

A BANK

INDEX

SR. NO.	TOPICS	PAGE NO.
1	INTRODUCTION	1-8
2	MARKETING FINANCIAL PRODUCTS	9
3	ORGANIZATION OF THE BOOK	10-12
4	PRODUCT MANAGEMENT	13-15
5	CORPORATE BANKING	16-29
6	RETAIL BANKING	30-32
7	FINANCIAL PRODUCTS	33-37
8	THE MAJOR TYPES OF FINANCIAL PRODUCTS	38-42
9	FINANCIAL PRODUCTS - BANK MARKETING STRATEGY	43-55
10	THE TEN BEST FINANCIAL PRODUCTS	56
11	FINANCIAL PRODUCTS IN INDIA	57-63
12	MARKETING STRATEGIES IN BANKING SECTOR	64-66
13	CONCLUSION	67-68
14	CASE #1: PRODUCT LINE STRATEGY	69-70
15	CASE #2: NEW PRODUCT SELECTION	71-72
	CASE #3: STAFF TRAINING	73

MARKETING STATEGIES FOR FINACIAL PRODUCT OF A BANK

INTRODUCTION:

Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage, which means defined as the strategic advantage one business entity has over its rival entities within its competitive industry. Achieving competitive advantage strengthens and positions a business better within the business environment.

A strategy that integrates an organization's marketing goals into a cohesive whole. Ideally drawn from market research, it focuses on the ideal product mix to achieve maximum profit potential. The marketing strategy is set out in a marketing plan.

Marketing strategies serve as the fundamental underpinning of marketing plans designed to fill market needs and reach marketing objectives.^[2] Plans and objectives are generally tested for measurable results. Commonly, marketing strategies are developed as multi-year plans, with a tactical plan detailing specific actions to be accomplished in the current year. Time horizons covered by the marketing plan vary by company, by industry, and by nation, however, time horizons are becoming shorter as the speed of change in the environment increases.^[3] Marketing strategies are dynamic and interactive. They are partially planned and partially unplanned. See strategy dynamics.

Marketing strategy involves careful scanning of the internal and external environments which are summarized in a SWOT analysis. Internal environmental factors include the marketing mix, plus performance analysis and strategic constraints.^[5] External environmental factors include customer analysis, competitor analysis, target market analysis, as well as evaluation of any elements of the technological, economic, cultural or political/legal environment likely to impact success. A key component of marketing strategy is often to keep marketing in line with a company's overarching mission statement. Besides SWOT analysis, portfolio analyses such as the GE/McKinsey matrix or COPE analysis^[ can be performed to determine the strategic focus.

Once a thorough environmental scan is complete, a strategic plan can be constructed to identify business alternatives, establish challenging goals, determine the optimal marketing mix to attain these goals, and detail implementation. A final step in developing a marketing strategy is to create a plan to monitor progress and a set of contingencies if problems arise in the implementation of the plan.

Marketing strategies may differ depending on the unique situation of the individual business. However there are a number of ways of categorizing some generic strategies. A brief description of the most common categorizing schemes is presented below:

Strategies based on market dominance - In this scheme, firms are classified based on their market share or dominance of an industry. Typically there are four types of market dominance strategies:

Leader
Challenger
Follower
Nicher

Porter generic strategies - strategy on the dimensions of strategic scope and strategic strength. Strategic scope refers to the market penetration while strategic strength refers to the firm’s sustainable competitive advantage. The generic strategy framework (porter 1984) comprises two alternatives each with two alternative scopes. These are Differentiation and low-cost leadership each with a dimension of Focus-broad or narrow.

Innovation strategies - This deals with the firm's rate of the new product development and business model innovation. It asks whether the company is on the cutting edge of technology and business innovation. There are three types:

Pioneers
Close followers
Late followers

Growth strategies - In this scheme we ask the question, “How should the firm grow?”. There are a number of different ways of answering that question, but the most common gives four answers:

A more detailed scheme uses the categories:

ü Prospector

ü Analyzer

ü Defender

ü Reactor

ü Marketing warfare strategies - This scheme draws parallels between marketing strategies and military strategies.

ü Real-life marketing primarily revolves around the application of a great deal of common-sense; dealing with a limited number of factors, in an environment of imperfect information and limited resources complicated by uncertainty and tight timescales. Use of classical marketing techniques, in these circumstances, is inevitably partial and uneven.

ü Thus, for example, many new products will emerge from irrational processes and the rational development process may be used (if at all) to screen out the worst non-runners. The design of the advertising, and the packaging, will be the output of the creative minds employed; which management will then screen, often by 'gut-reaction', to ensure that it is reasonable.

· For most of their time, marketing managers use intuition and experience to analyze and handle the complex, and unique, situations being faced; without easy reference to theory. This will often be 'flying by the seat of the pants', or 'gut-reaction'; where the overall strategy, coupled with the knowledge of the customer which has been absorbed almost by a process of osmosis, will determine the quality of the marketing employed. This, almost instinctive management, is what is sometimes called 'coarse marketing'; to distinguish it from the refined, aesthetically pleasing, form favored by the theorists.

Real-life marketing primarily revolves around the application of a great deal of common-sense; dealing with a limited number of factors, in an environment of imperfect information and limited resources complicated by uncertainty and tight timescales. Use of classical marketing techniques, in these circumstances, is inevitably partial and uneven.

Thus, for example, many new products will emerge from irrational processes and the rational development process may be used (if at all) to screen out the worst non-runners. The design of the advertising, and the packaging, will be the output of the creative minds employed; which management will then screen, often by 'gut-reaction', to ensure that it is reasonable.

For most of their time, marketing managers use intuition and experience to analyze and handle the complex, and unique, situations being faced; without easy reference to theory. This will often be 'flying by the seat of the pants', or 'gut-reaction'; where the overall strategy, coupled with the knowledge of the customer which has been absorbed almost by a process of osmosis, will determine the quality of the marketing employed. This, almost instinctive management, is what is sometimes called 'coarse marketing'; to distinguish it from the refined, aesthetically pleasing, form favored by the theorists.

MARKETING FINANCIAL PRODUCTS

“Change and growth are throwing up new opportunities and challenges for the Indian financial services sector... This (period of sustained growth) will be driven by continued urban consumer demand, expansion into rural markets, corporate investment in India and overseas, and leveraging of core competencies in international markets."

K V Kamath, managing director and CEO of ICICI Bank, in the Business world BW Banking Special 2006.

Ø Organizations, both existing players and potential entrants, are looking to aggressively compete in the growing banking, financial services, and insurance (BFSI) sector in India. Therefore, there is a lot of action on the marketing front. However, there are very few books that provide a balanced coverage on marketing financial products, either in the international context or in the Indian context. This lacuna is more pronounced in the context of the Indian business environment of the 21st century. This book aims to fill this gap by first addressing the conceptual issues relevant to marketing financial products, and then giving special coverage to each of the major categories of financial products and services in the Indian scenario.

ORGANIZATION OF THE BOOK

Ø The book is organized into three parts. We start with a macro-level picture of marketing financial products, then drill down into the details of different financial products, and finally switch back to the macro-view in terms of trends (in India) and international perspectives

Ø Part I:

In the first part, Marketing Financial Products: The Big Picture, we begin with an introduction to marketing financial products; this sets the context for the remaining chapters in the book. In the second chapter, we discuss consumer behavior, marketing strategy, marketing research, segmentation, targeting, positioning - especially organizational positioning, and the customer service imperative in the BFSI sector. In Chapter 3, we focus on two important determinants of success -- product management and customer relationship management (CRM), from the perspective of a financial product marketer

Ø Part II:

In the second part, Marketing Financial Products: A Closer Look, we take an in-depth look at the marketing aspects for each product category and/or customer segment. Chapters 4, 5, and 6 focus on corporate banking, retail banking, and credit cards respectively. Chapter 7 focuses on non-life insurance and Chapter 8 on life insurance. Marketers in other product categories cannot afford to ignore the competition from small savings and retirement planning products for a share of the consumer spending on financial products. In Chapter 9, we dwell on small savings and retirement planning. Chapter 10 discusses the products and marketing mix for mutual funds, along with the emerging trend of mutual banking. Chapter 11 is dedicated to the marketing of fee-based services -- both corporate and retail services.

Ø Part III:

The last part of the book, Trends and International Perspectives, consists of two chapters. Chapter 12 discusses the trends in India, in banking and insurance marketing. Chapter 13 takes a look at the global scenario in financial products marketing, with specific reference to the markets in the United States, the United Kingdom, and China.

USING THIS BOOK :

Ø As courseware for academic use: As a part of courseware, this book can be used as a basic text for an elective course on marketing financial products and services, in a post-graduate program in management, commerce, or business administration. For a focused one-year program or certificate program on the BFSI sector or on a specific segment of the BFSI sector, this book can be used in the final term.

Ø As a professional reference book: If you are a middle-level/senior manager in the BFSI sector, this book provides you with practical insights on the experiences of various financial product marketers.

ü If you are an executive engaged in sales/operations jobs in this sector, this book would be a useful reference to prepare yourself for upward career progression into middle management.

ü If you are a marketing professiona l from other product-based/service-based industries and wish to move laterally into the BFSI sector, this book would be a handy guide to understand the characteristics of financial products and their implications for marketing strategies and tactics.

Financial products are characterized by two-way communication and fiduciary responsibility, in addition to the standard set of four characteristics of services, that is, intangibility, inseparability, heterogeneity, and perishability. Certain types of financial instruments also have issues with respect to lack of transparency of performance, uncertainty of outcome, and poor comparability. The macro-environment of the financial products sector can be classified broadly into economic environment, socio-cultural environment, political and legal environment. The sector is regulated by various bodies at various levels in India, including the government, the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory & Development Authority (IRDA). The micro environment includes suppliers, customers, channel members or marketing intermediaries, competitors, and the society at large. The internal environment is within the control of the management; it includes the mission and objectives of the company, management structure, human resources, company image and reputation, and technology

In the liberalized era, competition between organizations and the resultant pressure to maintain profitability were two of the important factors that led to the marketing orientation. As a result, there was a shift in marketing practices, especially in product customization, technology adoption, and customer service.

CUSTOMER FOCUS

Ø Various factors influence consumer behavior in purchasing financial products. A situational approach can be adopted to understand buyer behavior. Specifically, Beckett's matrix classifies consumers of financial products on the basis of level of involvement and consumer confidence (which depends on the perceived uncertainty). Marketing has to be viewed from the perspective of three levels in an organization -- corporate level, business unit level, and functional level.

Ø Marketing research is an important function that contributes to the marketing of financial products in terms of market structure analysis, market potential, and demand forecasting. To satisfy the requirements of marketers, marketing research provides information on customers, markets, and the competition. Segmentation models can be broadly categorized into a priori and post hoc approaches. Various bases of segmentation are applicable for segmenting consumers. Financial marketers generally adopt one of the following targeting strategies -- undifferentiated marketing, differentiated marketing, and concentrated marketing.

Ø It should be noted that positioning in financial products marketing differs from that of other products and services in that organizational positioning is given more importance than product level positioning. The corporate brand can be positioned based on various factors such as price, relationship or service benefit, security benefit, user type, accessibility benefit, and perceived quality.

Ø Customer service is an important factor that differentiates the product offerings in the service industry. Service quality can be improved along the dimensions of tangibles, reliability, responsiveness, assurance, and empathy. Financial product marketers need to imbibe in them the philosophy of providing quality customer service in order to increase their profitability. Good customer service and proper handling of customer complaints pave the way for building lasting relationships.

PRODUCT MANAGEMENT :

· Financial product marketers need to manage their product portfolio in response to the changing environment and consumer needs, in addition to managing customer relationships effectively for achieving long-term profitability. The concept of a product can be understood in terms of the following four terms - actual product, expected product, augmented product, and potential product. For a financial product, the product strategy is greatly influenced by customers, competitors, technology, and government & legislation. Depending on these factors, the product mix strategy could be product mix expansion, product mix contraction, and product modification. Branding in financial services is done more at the corporate level than at the product level. Branding should start with a clear strategy for targeting and positioning. The brand image should be consistent with the marketing strategy. Advertising can be successful in building the brand only if the financial product caters to the requirements of the consumer and the entire service experience is consistent with the brand image that is communicated. In the financial product sector, brands can occur in three tiers -- master brand, core brands, and sub-core brands.

· When there are multiple tiers, the brands in all the tiers should convey the same organizational values. These values can be communicated through brand logos and taglines. CRM is a strategic tool for marketers to acquire customers, retain them, and maintain long-term profitable relationships with them. It uses information technology to achieve these objectives. Competitive pressures have led marketers to realize the necessity of customer retention to survive in a deregulated economy. CRM has enabled the shift in approach from being product-centric to being customer-centric. In addition to maximizing customer value, CRM helps marketers to cross-sell products, achieve long-term profitability, and build the brand.

· Relationship marketing is concerned with relationships that exist between any two stakeholders of a business. It involves relationship building with both external customers and internal customers. In an organization, relationship marketing can be at one of the following five levels -- basic, reactive, accountability, proactive, and partnership levels. One-to-one marketing essentially involves knowing about each and every possible need of the targeted customers and developing tailor-made solutions for them. To implement one-to-one marketing, the marketer needs to identify the target customers, differentiate them into groups, interact with each customer group, and provide customized products and solutions in a cost-effective manner. This can be done using the technique of mass customization.

· Customer knowledge, customer loyalty, and customer switching are three important concepts in CRM. The components of customer knowledge can be classified into three broad categories: knowledge about the customer, knowledge to support the customer, and knowledge from the customer. Customer loyalty can be either affirmative loyalty or reluctant loyalty. The level of affirmative loyalty is influenced not only by traditional factors, such as customers, product offerings, employees, and measurement systems, but also on emerging practices such as electronic customer care. Eight different reasons have been identified for customer switching. They include (a) core service failures, (b) service encounter failures, (c) price failures, (d) inconvenience, (e) employee response to service failures, (f) attraction by competitors, (g) ethical problems, and (h) involuntary switching. The first five reasons in this list can be addressed through the use of CRM techniques.

· Implementation of CRM includes customer knowledge management, technology adoption and implementation, and performance measurement. The customer knowledge management process (journey) is a cycle with four inter-related steps - developing a customer-focused strategy; developing the customer buying process; implementing actions, tactics, campaigns; and customer learning. Technology implementation has become the key to CRM implementation in an organization as huge volumes of customer data can be stored, managed, and retrieved using the latest technologies. CRM software tools can be categorized into operational CRM tools and analytical CRM tools.

· When the performance measurement of the CRM activities is done using a carefully defined basket of metrics, it helps in managing and controlling the CRM initiatives in the organization. In the future, large enterprises in India are expected to opt for CRM applications which have pre-built interfaces with standard ERP applications, while the small and medium business enterprises may still continue to use stand-alone CRM applications. The usage of CRM in India is expected to evolve from ensuring operational efficiency (in customer handling) to yielding strategic benefits -- through real-time customer segmentation, and co-creation of products with customers

CORPORATE BANKING

· The marketing of bank products to corporate customers is discussed in the chapter. On the basis of sales volume and/or capital employed, banks may classify corporate customers into three segments – large corporations, mid-size companies, and small and medium business enterprises (SMEs). Corporate customers may also be segmented into industry verticals, such as automobiles, aviation, tourism, etc. As part of their marketing efforts, banks develop long-term relationships with their corporate customers. Strong relationships help the banks improve profitability and retain customers in a competitive market. The interactions and relationships between the banks and their corporate customers are influenced by three groups of factors – the external environment, the atmosphere of the interactions, and the interaction process. The 'Partnership Relationship Lifecycle Model' describes the evolution of the bank-corporate customer relationship, beginning at an early stage where a 'customer' shows interest in the bank's offerings, and maturing to become a mutually beneficial 'partnership relationship' between the 'client' and the bank.

· Banking products are broadly classified into fund-based products and fee-based services. Fund-based products are further sub-divided into asset products and liability products. Liability products include salary accounts, current accounts, fixed deposits, and payment cards. Asset products include various kinds of credit products like trade finance, corporate finance, project finance, and term loans. New product development and innovation are considered vital for a bank's long term sustainability. Banks need to address the changing requirements of their clients through new product development. However, financial products can be easily copied. To maintain differentiation, banks also need to come up with innovations on how they deliver the new product.

· The pricing of banking products directly impacts customer retention and customer acquisition, in addition to profitability and long-term viability. For the marketer, price is a mechanism to cover the costs of operations which include production costs, distribution costs, promotion costs, and other operational expenses. The pricing decision is influenced by cost, competition, customers, and other constraints. With the advent of deregulation and the consequent increase in competition, many of the banks have adopted a competitive pricing strategy. RBI has deregulated the pricing mechanism for both asset and liability products. Every bank has to set its own Benchmark Prime Lending Rate (BPLR) to price its asset products. A bank may price its asset products (for a given customer either above or below the BPLR, depending on situational factors such as creditworthiness of the customer, stage of relationship, etc.

· Personal selling is the most important component of the promotional mix for corporate banking. As personal selling is a two-way interaction, it also plays an important role in the service delivery. To reduce the overall cost of personal selling, banks may use direct-response advertising or telemarketing to identify high potential customers, who are then approached through the personal selling option. Advertising is used to reach out to a vast audience in a cost-effective manner, as at the time of introducing a new product or service. Public Relations (PR) is used to provide publicity to the bank, to improve its public image, and to overcome a negative image (if any). PR tools include press releases, annual reports, seminars and speeches, cause-related marketing, in-house magazines & newsletters, corporate social responsibility (CSR) initiatives, and event sponsorships. As part of sales promotion, banks give employees incentives to achieve business targets such as volume of new business, extent of cross-selling, etc. Customer promotions (such as gifts) are less important as banks can decide the price (interest rate) for customers on a case-to-case basis.

· Corporate banking products are distributed mainly through bank branches and a direct sales force, supplemented by phone and Internet banking. Relationship officers are based at different branches; they make frequent client visits to nurture relationships and to develop new business opportunities. Banks attempt to develop an optimal distribution mix using personal/non-personal modes of delivery, in order to achieve multiple objectives such as superior customer service, operational efficiency, and profitability. Integrated banking software applications – usually referred to as Core Banking Solutions (CBS) -- are vital to the real-time synchronization of the transactions that happen through the different modes of distribution.

· The small and medium business enterprises (SME) sector is considered as the growth engine of the Indian economy; it generates employment for nearly 30 million people and contributes around 30 percent to the nation's GDP. However, corporate bankers neglected this segment for a long time due to the high incidence of Non-Performing Assets (NPA) and the lack of proper methods to assess the credit rating of the SMEs. This trend is changing and the SME segment is now one of the focus areas of growth for many banks. This shift has been influenced by the policy initiatives introduced by the Government and the RBI in favor of SMEs. With large enterprises getting access to cheaper funds from other channels, their bargaining power has increased with respect to the banks. This situation has also induced corporate bankers to look at SMEs as an avenue for profitable growth.

RETAIL BANKING:

· Liberalization, economic growth, changing demographics, and technological advancements have fueled the growth of retail banking in India. The product range in retail banking includes four broad categories: liability products, asset products, credit cards/debit cards, and investment products. Liability products include savings accounts, no-frills accounts, current accounts, fixed deposit/term deposits, and recurring deposits. Asset products include all kinds of retail loans, such as housing loans, personal loans, education loans, gold loans, loans to senior citizens, property and mortgage loans, vehicle loans, and agricultural loans. The investment products include investments in mutual funds, insurance policies, and pension plans. These are discussed in subsequent chapters. As the bargaining power of a retail customer is less than that of a corporate customer, banks tend to charge the same price/interest rate for all retail customers, with the exception of high-value segments (HNIs and NRIs). Banks set the price for liability products, without the interference of the RBI. Asset products are priced based on the prime lending rates set by banks for each asset category. Overt pricing and covert pricing are the two different approaches to pricing.

· The promotion of retail banking products is done through various avenues of promotion, such as advertising, sales promotion, personal selling, brand building, public relations, telemarketing, direct sales, and direct-response advertising.

· The common distribution channels in retail banking are branches, ATMs, the Internet, phone banking, and mobile banking, EFTPOS, direct selling agents (DSAs), call centers, and distribution network of alliance partners. There are some overlaps between the promotional avenues and distribution channels. For example, telemarketing and personal selling may be outsourced to DSAs.

· Cross-selling helps the banks to increase their sales by selling different products to existing clients. It helps improve customer retention, reduce the cost of customer acquisition, and enhance customer lifetime profitability. Cross-selling also helps the customers in terms of reduced prices, faster and easier processing, and customized products. However, excessive cross-selling would be viewed by the customer as harassment.

· Credit cards, charge cards, and debit cards facilitate cashless transactions. The credit card business is a low margin, high volume business. Branding is of immense significance in the credit card industry. Different types of branding strategies are used of which co-branding is the most commonly used approach. Co-branding involves the alliance of two brands for mutual benefit. Effective branding requires an understanding of brand metrics and the focus areas for effectiveness. The pricing of credit cards is a difficult task. The primary factors influencing pricing are the consumer price awareness and the price-quality cue. Annual percentage rates (APR) and fees are two important components in pricing. Risk-based pricing is a commonly followed pricing method where the pricing of credit cards is based on an assessment of the risk profile of the customer. The major components of pricing are the annual percentage rate (APR) and the different types of fees that are charged by credit card marketers. Credit card marketers make use of all the elements of the promotional mix. The advertising campaigns are created with certain advertising objectives

· The advertisements can have different types of appeals. The focus of the content also segregates ads into ads with soft value and ads with hard value. Promotional offers are the most prevalent approach to sales promotion. A thorough study of the market and the competitors is needed for devising an effective sales promotion strategy. Sales promotion techniques include introductory offers, cash back schemes, rewards programs, and cause-related marketing.

· Another element of the promotional mix is personal selling. Credit card marketers use direct sales personnel, direct selling agents, direct mail, and the Internet as personal selling tools. Credit card marketers also use public relations (PR) efforts as part of their promotional mix. The Reserve Bank of India has issued guidelines to curb unethical promotional practices.

· The kind and number of distribution channels, the sales force, and strengthening of the branch network are to be given emphasis as part of the channel decisions. The sales and distribution channels are common for most marketers. Bank branches are the predominant means of distribution. In addition, the advent of technology has led to the use of call centers, the Internet, and creation of terminals at merchant establishments.

· The various trends and issues in the credit card industry in India include -- ways to increase credit card usage by retail consumers and corporate customers, importance of CRM, technology in marketing, issues related to credit card fraud, aggressive selling, and privacy related issues.

· The common non-life insurance products targeted at individual (retail) customers are motor vehicle insurance, personal accident insurance, health insurance, and householder's insurance. Other retail products include baggage insurance, travel insurance, transit insurance, and pet insurance. The common non-life insurance products targeted at corporate (organizational) customers are group health insurance, cargo insurance and hull insurance, industrial insurance, and fire insurance. Other non-life insurance products include the shopkeeper's policy, fidelity insurance, jeweler's block insurance, liability insurance, cattle insurance, poultry insurance, aquaculture insurance, farmer's package, weather insurance, and patent insurance. With the deregulation of the sector and increasing competition, most private players are looking at new product development as a strategic imperative. Successful product development needs both a well-developed and clearly defined internal process and a receptive external environment. The private players have attempted to customize their offerings in order to attract customers. The basic product is made more suitable by adding riders.

· Riders are the extensions or the add-ons provided on a particular product for which the customer pays extra premium. In life insurance, the main factors used for determining the premium rates are mortality, expenses, and rate of interest. The factors considered when pricing non-life insurance products are claims cost, business acquisition cost, management expenses, margin for fluctuations in claims experience, and a reasonable profit. The factors affecting the pricing structure are broadly divided into portfolio level, case level, and other factors. The objectives that must be kept in mind when pricing insurance products are adequacy, reasonableness, fairness, and consistency & flexibility.

· The promotional mix in the non-life insurance industry is primarily centered on advertising. Two of the most common advertising appeals used by non-life insurance marketers are fear and humor. IRDA has taken steps to protect the interests of the consumer through the 'Insurance Advertising and Disclosure Act'of 2000. The Act requires that insurance marketers adhere to the code of conduct in the disclosure of information.

· Non-life insurance marketers use multiple distribution channels to reach their target customers. The traditional channels include direct mail and direct sales force, insurance agents, brokers, and agencies. The contemporary channels of distribution include call centers; tie-ups with corporate agents, NGOs, automobile distributors, etc.; worksite marketing; and bancassurance.

· The foreign players have been more successful in joint ventures in India, as compared to their experience in other Asian markets. Till December 2006, IRDA stipulated the limits of fixing premiums for various non-life insurance products. Detariffing has been implemented from January 2007 (except in third party liability cover for motor vehicles), with significant implications for the use of pricing strategy as an important component of the overall marketing strategy.

· The life insurance business differs from the non-life insurance business on several aspects that range from product nature, risk covers provided, and the agent's role. Life insurance products cater to the needs of the individual and groups of individuals. Generally, insurance products are categorized broadly under term life, whole life, endowment, money back, annuities and pensions, and unit linked schemes.

· New product development can play an important role and serve as a key differentiating factor for the insurance marketer. The new product development process consists of a series of steps. They are idea generation (from internal and external sources), idea screening, concept development and testing, business analysis, marketing mix development, test marketing, and commercial launch. Corporate branding is more common in life insurance than product branding. Brand communication is cautiously done by the insurer to project the right kind of image in the minds of the customer. Customer expectations form a key element of the brand strategy based on which a suitable brand positioning is evolved. The pricing of insurance products not only affects the sales volume and profitability but also influences the perceived quality in the minds of the consumers. There are several different methods for pricing insurance, based on the insurance marketer's corporate objectives. They are the survival approach, the sales maximization approach, and the profit maximization approach. To determine the insurance premium, marketers consider various factors such as mortality rate, investment earnings, and expenses, in addition to the individual risk profile based on age, health, etc., and the time period/ frequency of payment.

· The process of assessing the risk profile of the individual and then fixing the rate of premium is called risk classification or underwriting. In general, the risk can be classified into four categories -- preferred, standard, rated, and declined. The insurance rating methods used to assess the price to be paid by a buyer are -- class rating, merit rating, and judgment rating (more applicable for non-life insurance).

· In the promotional mix of life insurance products, where ad spending on the media is concerned, it is more on television than on print ads. The benefits associated with insurance advertising include -- reaching a wide range of population, communicating new product launches, and enhancing the brand image of the insurers and their products. Advertising in the insurance sector has to adhere to the norms set by the IRDA. Public Relations (PR) activities generally include seminars, awareness workshops, and social initiatives.

· Insurance marketers and agents are restricted from using traditional sales promotional tools like free gifts, coupons, contests etc. However, they may use riders, which are add-on features of an insurance policy, to customize the product for the customer. The inclusion of riders may provide a larger cover and other instant benefits in times of risk. Agents and the sales force play an important role in both the promotion and the distribution of life insurance products.

· The distribution system is composed of the traditional and the alternate channels. The fact that greater reliance is laid on the traditional channels of distribution is due to the nature of the life insurance products, which requires personal interaction. The direct distribution channels adopted are the direct sales force appointed by the company, insurance agents, and the branch network of the insurers. Cross-selling and bancassurance are alternate channels of distribution. Cross-selling is a mutual agreement between two companies to sell each other's products as a part of their distribution process. Bancassurance involves the selling of insurance products through banks. Bancassurance is suitable for the insurer if it can achieve cost effectiveness, avoid over-dependency on a single bank, increase the level of market penetration, and enhance the service quality of the marketer.

· Mutual funds in India have come of age to cater to the needs of investors. SEBI, which also controls the stock market operations, is the regulatory body of the Indian mutual fund industry. Mutual funds can be classified into open-ended funds, close-ended funds, and interval funds, based on the fund structure. Based on the investment objectives, they are divided into growth funds, income funds, balanced funds, and money-market funds. Based on the specific purpose of use, mutual funds are classified into tax savings schemes, index funds, and theme-based funds (including industry-specific or sectoral funds). Many fund marketers have come out with innovative and customer friendly products that aim at satisfying the investors'financial goals. Systematic Investment Plan (SIP) is an innovation in payment option for mutual fund investors. It is designed for those who are interested in gradually accumulating wealth in a disciplined manner over a long term. Mutual funds are priced based on their net asset value, which the fund houses declare on a daily basis. Investors can sell their units back to the fund at the prevailing NAV.

· Some funds attract entry and exit loads. Such loads are used to recover the costs spent on distribution and other marketing costs. Mutual funds are distributed through five channels of distribution, namely, direct channel, advice channel, retirement plan channel, fund supermarket channel, and institutional channel. Apart from these channels, mutual banking is also adopted, where cross-selling is used in association with banks to sell the fund schemes through the banks'branches.

· Further, the fund houses have started the process of overhauling their brand image to promote themselves more effectively to the customers. AMFI, the industry association, has been actively involved in public relations (PR), by promoting the mutual fund industry, both at the domestic level and in the international arena.

· Mutual fund marketers use advertising, sales promotions, brand communications, and public relations to attract investors and to increase their sales. Advertising includes print and electronic media, including the Internet. Fund marketers give away incentives and gifts to the investors for investing in their funds and such incentives and gifts may act as a catalyst for attracting more sales. They also give incentives (in cash or kind) to their trade partners and their representatives. The financial services segment has witnessed many trends in recent times and this chapter takes a comprehensive look at some of these trends. The technological changes in the financial services segment have been impressive. Though banking services are the major adopters of high-end technology, other financial services like insurance are also leveraging on technology for delighting customers and gaining a competitive edge. Kiosks are used as a cost-effective tool for product communication, customer management, and brand building. Stored Value Cards (SVC), also called electronic purses, eliminate the need to carry hard cash. Digital security is a technological endeavor that enables safe and secure digital transactions and has gained legal acceptance. Digital certificates will soon gain prominence with increasing focus on e-governance, online trading, and online transactions. Business intelligence is a widely implemented decision making tool. It includes OLAP, data warehousing, and data mining. Business intelligence systems help the marketer to analyze information and take suitable decisions. Enterprise-wide IT solutions, such as Core Banking Solutions, have helped financial product marketers in streamlining their internal operations and delivering greater value to the customers.

· The banking sector is going through a major transformation. Notable trends witnessed in the banking segment are bancasssurance, mutual banking, rural banking and technology inclusion, financial inclusion, increasing focus on Small and Medium Enterprises (SME), overseas and international banking, and universal banking. Micro-finance involves providing financial services to weaker sections of the society.

· Electronic Fund Transfer (EFT) and Electronic Clearance Service (ECS) schemes have been introduced by the Reserve Bank of India. EFT enables the quick transfer of funds on the same day or by the next day. ECS is used for both credit and debit clearing. M-commerce or mobile commerce is another emerging trend. Customers can send SMS messages to banks to get information. This service is available for viewing account balance and transaction details, requesting issue of new cheque books, etc.

· Banks can also opt for self-regulation, by voluntarily adopting a code of conduct that has been laid down by the Banking Codes and Standards Board of India (BCSBI), Post-liberalization, the insurance industry has seen a lot of changes. Insurance marketers have introduced new products. Micro-insurance, film insurance, health insurance, and specific insurance products for women, are some emerging avenues for insurance marketers.

· Financial products marketing across three different continents with specific focus on the US, the UK, and China. The section on marketing of financial products in the US focuses on banking, insurance, and credit cards. The banking system in the US has undergone a transformation over the years. The universal banking concept has matured. Some of the banks have done away with the terms ‘Bank'and ‘Branch'and expanded their business into other financial services. Many banks in the US are making a shift from a reliance on fund-based products to fee-based services. Pricing of credit cards has also evolved over the years with changes in pricing policies (based on risk) and computational methods. Ethnic groups in the US form a major customer segment for insurance marketers. The marketers have tailored the communication patterns to appeal to these groups and this approach has paid rich dividends. The trend of worksite marketing has also shown tremendous growth, especially for insurance products. Most financial products in the future will continue to be marketed through this channel. Among the three broad categories of pension plans, only about 20 percent of the workforce opts for individual retirement accounts.

· Mutual fund marketers make extensive use of online advertising. In the UK, the banking sector has adopted technologies (such as RFID) to monitor/ understand customer behavior. This would alert staff to the customer needs and also help devise methods to improve delivery of services. In life insurance pricing, lifestyle-linked obesity risk has begun to play a major role in premium determination. However, the preferred lives concept has not been very successful due to operational difficulties.

· The IFAs (Independent Financial Advisors) have gained prominence as a new channel of distribution for a majority of financial products like life insurance, pension, and mutual funds. The emergence of fund supermarkets is a recent development in the UK. These are like grocery stores where a wide variety of funds are available for the customers at one place. The fees levied are lower compared to dealing directly with a fund house due to the large number of mutual fund products that the fund house sells.

· The Chinese financial services industry is a major target destination for global financial players. The magnitude of foreign investments in the Chinese banking sector is huge, especially in retail banking and vehicle financing. The consumer credit market, which includes credit cards, loans, and mortgages, is another attractive segment for global players.

· Global scenario for financial products marketing across three different continents with specific focus on the US, the UK, and China. The section on marketing of financial products in the US focuses on banking, insurance, and credit cards. The banking system in the US has undergone a transformation over the years. The universal banking concept has matured. Some of the banks have done away with the terms ‘Bank'and ‘Branch'and expanded their business into other financial services. Many banks in the US are making a shift from a reliance on fund-based products to fee-based services. Pricing of credit cards has also evolved over the years with changes in pricing policies (based on risk) and computational methods. Ethnic groups in the US form a major customer segment for insurance marketers. The marketers have tailored the communication patterns to appeal to these groups and this approach has paid rich dividends. The trend of worksite marketing has also shown tremendous growth, especially for insurance products. Most financial products in the future will continue to be marketed through this channel. Among the three broad categories of pension plans, only about 20 percent of the workforce opts for individual retirement accounts.

FINANCIAL PRODUCTS

· Financial products refer to those instruments that help you save, invest, get insurance or get a mortgage. These are issued by various banks, financial institutions, stock brokerages, insurance providers, credit card agencies and government sponsored entities. Financial products are categorised in terms of their type or underlying asset class, volatility, risk and return.

FINANCIAL PRODUCTS: TYPES

THE MAJOR TYPES OF FINANCIAL PRODUCTS ARE:

Shares: These represent ownership of a company. While shares are initially issued by corporations to finance their business needs, they are subsequently bought and sold by individuals in the share market. They are associated with high risk and high returns. Returns on shares can be in the form of dividend payouts by the company or profits on the sale of shares in the stockmarket. Shares, stocks, equities and securities are words that are generally used interchangeably.

Bonds: These are issued by companies to finance their business operations and by governments to fund expenses like infrastructure and social programs. Bonds have a fixed interest rate, making the risk associated with them lower than that with shares. The principal or face value of bonds is recovered at the time of maturity.

Treasury Bills: These are instruments issued by the government for financing its short term needs. They are issued at adiscount to the face value. The profit earned by the investor is the difference between the face or maturity value and the price at which the Treasury Bill was issued.

Options: Options are rights to buy and sell shares. An option holder does not actually purchase shares. Instead, he purchases the rights on the shares.

Mutual Funds: These are professionally managed financial instruments that involve the diversification of investment into a number of financial products, such as shares, bonds and government securities. This helps to reduce an investor’s risk exposure, while increasing the profit potential.

Certificate of Deposit: Certificates of deposit (or CDs) are issued by banks, thrift institutions and credit unions.They usually have a fixed term and fixed interest rate.

Annuities: These are contracts between investors and insurance companies, wherein the latter makes periodic payments in exchange for financial protection in the event of an unfortunate incident.

COMPLEX FINANCIAL PRODUCTS

There are certain financial products that are highly complex in nature. Among these are:

1. Credit Default Swaps (CDS): Credit default swaps are highly leveraged contracts that are privately negotiated between two parties. These swaps insure against losses on securities in case of a default. Since the government does not regulate CDS related activities, there is no specific central reporting mechanism that determines the value of these contracts.

2. Collateralized Debt Obligations (CDO): These are securities that are created by collateralizing various similar debt obligations such as bonds and loans. CDOs can be bought and sold. The buyer gains the right to a part of the debt pool’s principal and interest income.

CDS and CDO products have played a major role in the Financial Crisis of 2008 onwards. During these troubled times, CDO ratings reflected incorrect information on the credit worthiness of borrowers, concealing the underlying risk in mortgage investments. Meanwhile, the size of the CDS market far exceeded that of the mortgage market in mid-2007. Thus, when the defaults began to unfold during the Financial Crisis, the banks were not in a position to bear the losses.

One of the most significant factors to consider while choosing financial products is your risk appetite. Risky investments are usually associated with higher returns than are safe ones. According to empirical data, shares usually outperform all other investments over the long term. However, in the short term, stocks can be extremely risky.

FINANCIAL PRODUCTS

BANK MARKETING STRATEGY

Seven Steps to Reduce Offline and Online Bank Product Purchase Abandonment

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According to Forrester Research, the number of consumers using the Web to research, buy and manage their financial products has grown steadily. In 2009, 63% of US online adults who researched a financial product did so online, with the number increasing over the past two years. Virtually all products were researched, from mortgages and student loans to savings and checking accounts. Interestingly, more than a third who researched products did so exclusively online.

The Web provides inherent advantages when researching and applying, including the convenience of being able to research whenever the user wants, the ease of comparing providers, and in some cases the ability to open the product or service in real time. While the use of the Web is correlated to age categories (with Gen Y using the Internet more frequently), all age groups are increasing their use of online and mobile channels to evaluate options before purchasing financial services.

Online purchase of financial services varies significantly by product type, with complexity and locational considerations driving the sales process. For instance, while almost half of online adults applied for a credit card online, a far lower percentage purchased a checking account online since convenience is a primary consideration, making the ability to walk into a branch to open an account more feasible.

Building awareness and even consideration online, however, does not guarantee the prospect will apply for or open their relationship online. According to a recent Forrester Research study entitled, Injecting Next-Generation Thinking Into Your Financial Services Acquisition Website, almost 40% of online households who researched a financial product online used another channel to complete the sale. This cross-channel selling behavior provides both opportunities and challenges for banks.

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Source: Forrester Research 2011

In the example above, a customer may gain awareness through mass media or even direct or online channels, only to further research the service online, over the phone or in person, with the actual purchase of the product or service culminating either online or in a branch office. Each of these steps in the buying process (or sales funnel) can lead to abandonment of the process by the prospect due to complexity, competitive considerations, other prospect priorities or poor sales inquiry follow-up at the bank.

While research indicates that the success rate of moving a prospect from the awareness to consideration to purchase stage varies significantly depending on the product, the research channel, and the ultimate sales channel, the opportunity diminishment can be 80% or higher. In fact, with lending products where there are numerous steps between the awareness stage and loan closing, close rates can be as low as 10% of the shopping universe.

This sales inefficiency provides many opportunities for banks at a time when the cost of new customer acquisition has never been higher and the competition for customer share of wallet is extreme. Some of the ways to improve conversion of awareness to sales include:

· Provide online information from alternative perspectives: Some people will shop for a specific product (credit card), while others research to solve a specific problem (debt consolidation), while still others may inquire from a lifestage perspective (student). A bank website and search engine strategies need to be built with this interplay in mind, providing alternative paths to reach the best solution.

· Leverage dynamic and customized content: Whether the Web, the phone channel or in the branch system, dynamic and customized content needs to be developed to assist in moving a prospect from the awareness to the purchase stage. Understanding segments, purchase intent and competitive position in the marketplace can greatly improve results both online and offline.

· Capture prospect insight from all channels: Surprisingly, some of the newest channels (online) have the best refinement of insight capture through digital tracking and jump page data collection. Alternatively, far fewer banks capture insight from prospects who indicate potential purchase intent by phone, in the branch or through direct mail. Without a formal method of capturing information on how to follow-up on inquiries, we greatly reduce the potential for sales success.

· Develop a multichannel follow-up strategy: In the same way that prospects leverage many channels in their consideration process, it is important to follow-up on all leads using multiple channels. Dependent on the level of insight capture done when the prospect initially inquired about your product or service, quick and consistent follow-up on leads using all channels possible will improve chances for success.

· Monitor the sales funnel: As important as a strong follow-up strategy, the monitoring of each prospect in the sales funnel is needed to better understand the paths prospects take to purchase different products and the success of your follow-up efforts in generating a strong close ratio. Similar to online navigational pattern monitoring, internal monitoring of prospects allows for the development of a sales waterfall that can assist in the identification of service and communication gaps that depress sales results.

· Develop metrics for improved results: Focusing only on the beginning and end of the sales funnel oversimplifies the opportunity cost of lost sales. By better monitoring each stage of the sales process from awareness to consideration to final sale allows for the potential improvement of ROI. For many banks, an improvement of 5-10% in the consideration stage and similar improvement in the closing stage of the process can improve results by more than 100%.

· Online and offline retargeting can provide big returns: Sending an email, making a call or delivering a piece of direct mail to a person who has abandoned a shopping cart has been found to be the most efficient online strategy for all categories of online merchants. While banks don't have online shopping carts per se, they do have abandoned purchase processes for a number of reasons. Retargeting allows you to show your ads to visitors that left your website (or other channel) as they surf elsewhere on the web. These potential customers can get highly targeted ads that are designated to entice them to return to your website and convert their visit into a completed action. Many studies have found that the open rate on these emails exceeds 50%, while the conversion rate can exceed 20%.

· In a content-driven world, with the number of messages consumers receive on a daily basis continuing to increase, making follow-up communication personalized and pertainent is extremely important. Therefore, any form of sales communication (even if the prospect indicated interest) needs to respect the prospect's time and privacy.

· In addition, the timing of the communication should reflect the channel that the prospect used to shop for a service. In the first 24 hours following an online abandonment, 54 percent of returning customers who make a purchase will do so within the first few hours according to research from the remarketing firm See Why. In other words, more than half of customers will abandon the cart for good if not remarketed within 24 hours of the abandonment. Alternatively, if a prospect is shopping for rates or asking questions about a checking account fee schedule via phone, a person should reconnect within 24-48 hours to answer any follow-up questions.

· How many channels can a prospect use to investigate one of your services? Do you capture insight from the shopper and follow-up in a timely manner to determine if any other questions can be answered? Do you measure the effectiveness of these efforts and maintain a waterfall illustrating where improvements can be made? Do you know the cost of lost potential sales if effective management of the sales funnel does not occur?

THE TEN BEST FINANCIAL PRODUCTS

Simple things are what we want. Fools -- court jesters -- have always been seen as simple creatures on the surface, but with a hidden cunning. Motley Fools would do well to learn from this. Simple financial products are the best.

So I could easily fill this list with the most basic of products. I don't want to do that though, because it's boring, so here are some of the more interesting ones that even Fools should consider.

1. CASH ISAS

If you have savings and you still don't have a cash ISA, there's a good chance you're not optimising your finances. You can save up to £3,000 a year in a cash ISA, and this will go up to £3,600 from April next year.

Any interest you earn is tax-free. With a decent savings account you might get around 6% at present, but after tax this means 4.8% for a basic-rate taxpayer and 3.6% for a higher-rate payer. However, you can get cash ISAs paying around 5.5%. With no tax deducted, you'll have more pounds at the end of the year.

2. SHARES ISAS

If you want to invest in shares, doing so using a share ISA wrapper is the most tax-efficient way to do it. You can invest up to £7,000 a year. (This goes up to £7,200 from April next year.) No matter how big your pot grows, you won't pay any capital gains tax either, which is usually 40%, nor will you pay any income tax.

3. INDEX TRACKERS

The phrase 'index trackers' fills me with a warm glow. I like these things. They are so average. And when it comes to investing in the stock market, average is good!

Index trackers follow the stock market. They are very cheap, because there are no fund managers. Instead, computers buy the shares for you.

Over the long term, shares have performed better than cash that's earning interest. Consider the stock market's performance over the past 130 years. In the 131 rolling five-year periods from 1869 to 2004, shares have beaten cash 76% of the time. Over the same period there are 126 rolling ten-year periods. Out of these, a whopping 93% of the time shares have beaten cash.

Furthermore, index trackers beat funds managed by humans an incredible 8 or 9 times out of ten. Stupid humans!

4. EXCHANGE TRADED FUNDS

If I try to explain how these work it'll come across as very complicated. Because it is. But the important bits are simple. Exchange Traded Funds (ETFs) are all index trackers. Whoopee! However, instead of giving your money to a fund, ETFs are listed on the stock market, so you buy them directly, just like shares. They easily work out as cheaply as index trackers, and often even cheaper. Plus, you can avoid paying stamp duty on shares when you buy.

5. LIFETIME BALANCE-TRANSFER CREDIT CARDS

I'm very wary about suggesting that a credit card is a top financial product. Credit cards cause so much debt misery through misuse and nasty small print. They are not good products for so many millions. However, used wisely they can be a good friend.

A lifetime balance-transfer card is a great way for many people to borrow. Constantly switching your debts between 0% cards is seen as the cheapest way to borrow, and usually this is correct. However, that's a lot of hassle, so, instead of constantly applying for credit cards, you could just get one with an excellent rate of interest.

6. FAMILY INCOME BENEFIT

· If you have a partner or children who depend on you, you'll probably want some sort of protection in place if you were to die early. Most people usually get some form of life insurance.

· Life insurance pays out a lump sum when you die. However, will your dependants need a whopping great lump sum? In fact, will they even know how to invest it so that it lasts as long as it's needed?

· One alternative is family income benefit (FIB). This pays out an agreed, tax-free monthly income to your dependants for a fixed period of time. What's more, it's usually a great deal cheaper than life insurance! So, when you're getting a quote for life insurance, consider family income benefit instead.

7. HEALTHCARE CASH PLANS

· Rather than buying full blown medical insurance (otherwise known as 'health insurance'), you can meet the cost of everyday healthcare expenses with a much cheaper product: the healthcare cash plan.

· Comprehensive medical insurance policies can add more and more cover, as new procedures and cures are discovered. However, this also means higher premiums. On the other hand, healthcare cash plans keep your cover to the basics, such as physiotherapy and chiropractic treatment, sight tests, dietary advice and even cover for some critical illnesses.

· We really should have written about these plans in more detail, but it seems to have slipped the net recently. I'll try to write an article on them soon.

8. CURRENT ACCOUNT MORTGAGES

The Fool has often suggested you keep things simple by buying all your products separately. By doing this, in almost every case, you will save money. However, the current account mortgage can be a useful exception. These mortgages tie together your current account, savings, personal borrowings and your mortgage. Effectively, you have a current account with one massive, mortgage-sized overdraft.

Sounds frightening, doesn't it? But consider that, with these accounts, every time money goes in it pays off some of your mortgage. Instead of earning interest in your current and savings accounts, you reduce the amount of interest you're paying. This usually works out well.

If, for example, you were previously earning a good 6% interest in your savings account, after tax this would be 4.8% for basic-rate taxpayers and 3.6% for higher-rate taxpayers. However, if you're paying mortgage interest of around 6%, you will reduce your mortgage at this rate and there's no tax to pay, leaving you better off.

9. INCOME PROTECTION INSURANCE

We criticise payment protection insurance again and again, and we're not massive fans of critical illness insurance either, but there is an alternative that is suitable for many people (depending on circumstances). This is income protection insurance. It is designed to pay out whatever the reason that you're unable to continue working.

10. THE BORING STUFF

Those nine products were all quite exciting and novel, but exciting is not usually a word you associate with good financial products. Generally, the more boring and simple the better. So, for number ten, here's a short list of some of the boring products that are effective for most people:

A current account paying a competitive rate of interest. Today, the rate should be more than 5.25% on the first couple of thousand pounds. Or, for people living in, or close, to their overdrafts, a current account with an interest-free overdraft, or, at worst, try a account that charges low interest when you're in overdraft.
An instant access savings account paying a good rate of interest. Again, look for more than 5.25% and, in the next few months, you might even expect over 6% as interest rates are likely to rise.
An unsecured personal loan with a fixed rate of interest. These are particularly good for people with no discipline, because, unlike credit cards, you can't easily borrow more with them. A good rate at present is around 6-8%.
As I said in The Worst Ten Financial Products, in simple terms there are two mortgage products: expensive mortgages, where you pay the lender's standard variable rate (SVR), and the other kind: The Deal. Ensure you have some kind of deal with your mortgage company.

FINANCIAL PRODUCTS IN INDIA

Financial products act as an investment avenue and provide the required financial security to the investors based on the risk-return profile of the financial products. In the past, traditional financial products were offered in India through government initiatives by Public Sector Banks (PSBs) (deposit account, credit account), Life Insurance Corporation (LIC), and postal department (recurring deposit, National Saving Certificate, KisanVikasPatra). However, in recent years with the advent of liberalization of financial services industry, diverse financial products have been introduced through participation of private and foreign entities in addition to the public sector enterprises. These include products such as debit and credit cards by banks, open-end and closed-end mutual fund schemes (Exchange Traded Funds (ETFs), Index Funds, Systematic Investment Plans (SIP), sector funds, etc.), life and non-life insurance schemes (Unit Linked Investment Plans (ULIPs), pension plans, children education plans, etc.).

It further includes shares and debt securities offered by various entities, investments in which are mainly facilitated by the brokerage houses. This has led to rising competition through introduction of innovative and attractive products, regulatory initiatives and growth in the investor base along with increased marketing activities in the financial sector. The increased activities in the financial sector could be reflected in the growth in the aggregate deposits with banks, which has increased from 16% in FY03 to 24% in FY07. The capital markets are also on the growth trajectory where volumes and market capitalization, both have registered growth. The market capitalization1 to GDP ratio has increased from 22% in FY 03 to 82% in FY07 and the turnover (NSE) has registered a CAGR of 26% from FY03 to FY 07. Similarly, activities in the mutual funds have also reflected growth with the Assets Under Management (AUM) increasing at a CAGR of 33% during the same time period. The number of new mutual fund schemes introduced has risen from 41 in FY01 to a staggering 414 in FY072. Further, in the insurance sector, total life insurance premium collected by all the life insurance companies has grown at

CAGR of 23% from FY03 to FY07. Also, the number of new life insurance policies introduced in FY07 stood at 208 as compared to merely 20 in FY013.

The introduction of varied products has increased the scope of the financial sector to a very large extent.

Even though these products have been targeted towards urban markets as well as rural markets in India, the rural markets have remained largely untapped (See Exhibit 1). This is mainly due to the concentrated distribution activities by some players in the urban markets.

1 National Stock Exchange (NSE)

2 Association of Mutual Funds in India (AMFI)

3 Insurance Regulatory and Development Authority (IRDA)

Exhibit I: DISTRIBUTION OF HOUSEHOLDS BY TYPE OF INVESTMENTS4

Rural households mainly invest in products such as bank deposits, post office savings and LIC policies that involve fewer risks as compared to the relatively risky investments such as mutual funds and bonds as shown in Exhibit 1. Further, the investments in these products have been propelled by higher penetration of these products in rural areas that has been facilitated by growing network of the banks, post offices and LIC branches mostly driven by regulatory policies. The factors responsible for limited distribution networks of other investment products could include lack of willingness from the service

providers as well as lack of awareness of the rural households, which is further explained in the note.

The concerted efforts of the market players to tap the urban market could have led to saturation of the urban markets. Thus, there could be a requirement to look at the rural markets by the financial service providers in order to maintain the growth in their revenues and increase their market share. This could be supported by the survey of Indian investors published in the Securities Exchange Board of India (SEBI)’s Handbook of Statistics, 2006. According to this survey5, the proportion of rural investor households has increased from 3.28% in 1998-99 to 4.22% in 2000-01, whereas the proportion of urban investor households has relatively decreased from 18.34% to 15.2% in the same time period. Moreover, with the rising income levels of the semi-urban and rural population in India and the rapid semi-urbanization observed in rural areas, there exists a strong business case for many financial product vendors to focus on these markets for expanding their market share and customer base. However, the players will have to tackle obstacles for enhancing their penetration levels in the rural market. Such issues are further 4 Data sourced from SEBI-NCAER Survey of Indian Investors, June 2000.

5 Data sourced from SEBI-NCAER Survey of Indian Investors, June 2000.

Explored in section II of this note. A significant presence of financial products offered by banks and insurance companies has been largely observed in urban and rural markets in India. This presence is mostly driven by certain marketing strategies adopted by these entities which are explained in section III.

The regulators (RBI, IRDA, SEBI) also play an important role in directing the distribution process of financial products. Section IV reflects such policy initiatives undertaken by these regulators. Section V reflects innovative marketing strategies that could be adopted by the financial service providers and regulators to reach out to the rural markets and section VI concludes with the implications of the study.

II. ISSUES AND CONCERNS WITH DISTRIBUTION IN THE RURAL MARKET

There are several issues and concerns related to distributing financial products in rural areas due to which financial service providers have been hesitant towards providing financial services. These issues are examined below:

1. COMPETITION:

The competition among various financial product players is getting fierce over the years through the influx of new financial service providers/vendors in the industry. These providers are under continuous pressure to maintain growth in their top lines as well as bottom lines. This has led these companies to concentrate more on the urban areas than the semi-urban and rural areas since semi-urban/rural areas would require either setting up new branches resulting in high capital outlay or setting advanced technologies for providing non-branching facilities as well as providing educational facilities to the rural population.

2. SCALE OF INVESTMENT:

The funds available for investments among rural households are observed to be lower than the urban household due to lower incomes. According to a survey conducted by NCAER and MAX New York Life in 2005, the average income levels of urban households in India are 85% higher than that of the rural household. Further, rural households could avoid huge investments in risky financial products for longer time period since rural consumption of goods and services are subjected to income irregularities (See “5. Irregularity in payments” in the current section).

3. CUSTOMERS SCATTERED OVER WIDE AREAS:

The investors in the rural areas are scattered over a wide geographic area thus creating

accessibility problems for the financial service providers/vendors. The providers would have to incur huge costs on setting the required infrastructure (branches and non-branches) for providing financial products among large number of dispersed rural households. Also, the rural investors may not prefer traveling long distances to avail the financial services due to lack of accessibility, awareness, willingness, etc. which are further explored in the note.

4. RURAL INFRASTRUCTURE:

Many villages in India lack infrastructural facilities like roads, electricity, telecommunications and Internet networks. This creates operational hurdles for players to enter into these markets further discouraging the rural households to reap the benefits provided by the players.

5. IRREGULARITY IN PAYMENTS:

Most financial products require regular investments at defined time intervals by the investors. For example, an insurance policy holder has to make a regular premium payment to the insurance company in order to keep the policy active. A majority of rural households are involved in agricultural activities who occasionally fail to make such regular investments since their incomes are largely dependent on vagaries of monsoon.

6. OPERATIONAL CHALLENGES:

Companies may face operational challenges such as obtaining relevant documents for

verification. Some of the most commonly required documents include a PAN card, ration card, birth certificate, etc. (SEBI)

7. CULTURAL DIVERSITY:

Financial service providers find it difficult to penetrate into the rural areas due to the cultural diversity observed in India. Promotion of financial products thus becomes difficult as the sales and marketing personnel are required to understand the local customs, culture and language.

Financial service providers/vendors aim at targeting distribution of financial products in rural markets despite several concerns/issues summarized earlier. The providers thus need to identify specific strategies to promote and distribute financial products to the semi-urban and rural households. These strategies are discussed in the following section.

III. MARKETING APPROACH ADOPTED BY MAJOR FINANCIAL SERVICE PROVIDERS/INTERMEDIARIES

Marketing strategies play a very important role in determining the growth of the financial services industry. Various marketing strategies adopted by the major financial service providers like banks and insurance companies are discussed below.

Banks The marketing and distribution strategies of banks are different in urban and rural areas due to diverse demographic and socio-economic nature of these markets. Private banks are mostly concentrated in urban areas due to higher income, better infrastructure, higher investor base and concentration of commercial activities in the urban areas of the country. The distribution channels used by such banks include bank branches, ATMs, internet banking, phone banking, direct selling agents, call centres, etc.

The distribution networks developed by public banks in urban as well as rural areas are a result of policy measures due to which the number of public sector bank branches is higher as compared to private or foreign banks. Private sector banks are also penetrating into the rural areas by using the non-branch delivery systems like the Business Facilitator (BF) model or Business Correspondent (BC) model proposed by RBI in 2006 (See Exhibit 2). Under the BF model, banks utilize the network of intermediaries such as the NGOs, post offices for banking services such as creating awareness and educating on the

financial products, collecting and processing information of borrowers, selling banking products and financial services to rural households, etc. The activities in a Business Correspondent model include all those of the BF model and further include disbursing small value credit, etc. Intermediaries under these models have knowledge about the local population and provide feedback about the requirements of the local population (See Exhibit 2). As the local population has trust in these intermediaries it is possible to cross-sell various products. Cross-selling helps in customer retention, reduces customer acquisition costs. It also benefits the customer through fair prices for the products, easier processing and customized products. The usage of such non branching delivery channels has been very less. However, with rising incomes in the semi urban and rural areas, there is further scope for private banks to adopt such non branching delivery models.

In addition to the branch and non-branch delivery systems adopted respectively by public and private sector banks, banks also use simple-to-use cash dispensing and collecting machines similar to ATMs which have operating instructions in vernacular languages too.

Banks have also initiated “credit plus” services such as setting up of rural training centres for small enterprises, farmers clubs, knowledge centres, credit counseling centres for educating the semi-urban and rural population with respect to minimizing yield risk and price risk in agriculture. This, further, leads to lower lending rates and lower credit risk.

EXHIBIT 2: DISTRIBUTION CHANNELS - BANKS

INSURANCE

The insurance sector can be classified into life insurance companies and non-life insurance companies. Non-life insurance companies utilize distribution channels such as direct mail, direct sales force, insurance agents, agreements with the corporates, banks, real-estate companies, etc. However, in lifeinsurance companies; distribution is mainly through agents, as the personal interaction is necessary for persuading the customer. As on March 31, 2006, there are approximately 20,000 Urban Career Agents and 47,000 Rural Career Agents in LIC. However, the insurance sector remains highly untapped in the rural market. According to the World Bank-NCAER Rural Finance Access Survey 2003, over 82% of the rural households in India had no insurance cover. Nevertheless, most of the players have realized the potential of the rural market and have taken proactive initiatives to tap the market. Some of the initiatives taken by the insurance companies are as below:

1. Insurance companies are offering small premium term insurance products to the rural sector to increase sale of insurance policies in rural areas.

2. Most of the life insurance companies are selling group insurance schemes to meet their social sector obligations and cover maximum lives under the social sector.

3. Micro Finance Institutions (MFIs) are an important distribution channel for many insurance companies. MFIs lend to Self Help Groups (SHGs) in the rural areas. Many insurance companies are selling group term insurance policy to the members of the SHG who have collectively taken credit from the MFI. The SHGs willingly buy such insurance policies because it acts as cost effective collateral for them to avail credit from the MFIs or other financial institutions.

4. The private players are also tying up with public sector banks, co-operative bank and the Regional Rural Banks (RRBs) to penetrate into the rural market. The large rural customer base and wide branch network of these banks offer an effective distribution channel to the insurance companies, thereby promoting bancassurance.

5. A few insurance companies have also tied up with consumer goods companies like HLL, ITC, etc. which have a well set-up distribution network. For example, ICICI has entered into an agreement with e-choupals, the web based marketing platform of ITC, to market and distribute its insurance products to the rural households.

Along with the major financial services providers, regulators also have an important role in promoting financial products in rural areas.

IV. Initiatives taken by the regulators

Indian financial sector is mainly regulated by three regulators – the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and the Insurance Regulatory & Development Authority (IRDA). These regulators have initiated certain policy and regulations to facilitate smooth distribution of financial products and services through financial service providers/ vendors (public, private and foreign companies) in rural areas. These regulations aim at creating awareness of specific financial products in

rural areas as well as the overall development of the financial services industry.

1. LIFE INSURANCE POLICIES AND INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (IRDA)

The IRDA initiated reforms in the insurance sector in 2000-01 that included allowing private and foreign insurance companies to participate in the urban and rural areas along with the public sector institutions.

Social sector includes economically vulnerable sections of the population, such as agricultural labourers, road construction workers, fishermen, artisans and physically challenged self-employed individuals.

2. BUILDING BANK NETWORKS IN RURAL AREAS

RBI has undertaken several initiatives to increase bank networks in rural areas which are summarized below:

1. From 2006 onwards, RBI approved setting new branches condition to 50% of such branches being opened in unbanked areas.

2. In 2006, Rural Regional Banks (RRBs) were allowed to market mutual fund units based on the approval from their Board of Directors. These RRBs, can enter into distribution agreements with private or foreign mutual fund houses for marketing their schemes based on the terms and conditions specified by the RBI.

3. MINIMAL CREDIT/DEPOSIT FACILITIES THROUGH FINANCIAL

INCLUSION IN RURAL AREAS

Financial inclusion is a process of providing basic banking services at an affordable cost to the vast sections of deprived and low income groups. According to a study provided to the World Bank and OECD, access to financial services can lead to favorable economic growth (Claessens, 2005). However, access to these services is subjected to factors such as financial literacy, income levels and financial assets held among urban and rural households, which are inconsistent especially across rural households. In India, with approximately less than half of the population (48%) having access to financial services (Sri Lanka – 59%, Malaysia – 60%, Korea – 63%) it becomes necessary to prioritize financial inclusion to promote economic growth.

In 1998, RBI promoted financial inclusion through the introduction of Kisan Credit Cards (KCCs) provided by the PSBs. However, in recent years, the process of financial inclusion has been gradually extended by RBI wherein all banks are advised to align their policies and strategies accordingly. Some of the initiatives undertaken by RBI for promoting financial inclusion include:

1. Introduction of a No Frills Basic Bank Account

2. Simplified general purpose credit card with a revolving credit limit of Rs.25000 for rural households

3. In 2006, RBI made it mandatory to open at least half of new branches in unbanked areas.

4. Under the Union Budget for 2007-08, the finance minister has also announced creation of Financial Inclusion Fund and Financial Inclusion Technology Development Fund for managing the costs of development, promotional and technology interventions.

4. Promoting financial literacy in rural areas

Literacy rates in rural areas are comparatively lower than urban areas. According to Census 2001, all India literacy rate is 64.8% of which the literacy rate among urban population is 79.9% whereas for the rural population it is 58.7%. The demand for financial products mainly depends upon the investor awareness which further depends upon the literacy levels of the rural investors. Financial literacy enables investors to make an informed investment decision. In India, financial literacy gains even more importance as the literacy rate in the country is low and a large section of population is out of reach of formal financial set-up. Regulators thus play an important role to create awareness among investors through financial literacy. This also includes providing awareness among the investors about the financial products. Regulators’ initiatives include the following:

1) In the Mid-tem review of the Annual Policy for the year 2007-08, RBI proposed a scheme for Financial Literacy and Counseling Centres (FLCC). The objective of the scheme is to provide free financial literacy and credit counseling in rural and urban areas.

2) RBI has also launched a financial information web-site in Hindi, English and 12 regional languages that aims at teaching basics of banking, central banking and finance.

3) Public sector banks could act as an important channel through which financial literacy could be generated in rural areas as they possess network and reach in the areas.

V. Way forward

In order to tap the rural and the semi-urban markets for distributing financial products certain steps have to be taken by both, the players and the regulators.

1. Creating awareness about different financial products

Regulators like RBI and IRDA have taken steps to promote financial literacy but further efforts are required from both the regulators and players in the financial industry to increase awareness among the rural investors. Financial education for the rural investors should focus on their financial needs and the products catering to such needs. For example, the population involved in agricultural activities should be educated about insurance of agricultural implements, crop insurance, etc. This would not only increase the depth of the market for the financial products but also facilitate the financial inclusion in India.

2. Customize/repackage the financial products

The marketing/promotion approach to be taken for rural population should be different as compared to their urban counterparts. This is due to the major differences in perception of financial products of the rural population. For example, rural households prefer saving-oriented life insurance policies which could fulfill their long term goals like the costs of a daughter’s marriage as opposed to their urban counterparts for whom tax consideration is a major influential factor for purchasing a life insurance policy. Thus there is need to understand the perception of the rural households and design innovative products to cater to their needs.

3. Explore new distribution channels

Financial service providers should explore new distribution channels or tie up with intermediaries like the MFIs or other social groups. They can bank on the network and established operations of these institutions as against opening up of new branches that involve higher infrastructure costs, staff expenses, etc. The development of the MFI model in India would be critical for the distribution of financial products.

4. Credit bureaus

Risk assessment of the households in the semi-urban and rural areas is one of the major hurdles for companies offering financial products in the rural areas. Credit bureaus or credit information companies could be instrumental in filling this information gap and would help small investors to access various financial products at fair prices. This step would also boost the confidence of the players who are looking at the semi-urban and rural households as their potential customers.

5. Obligatory targets

Regulators in the financial market can impose targets on players in the industry to achieve certain level of penetration in the rural areas. For example, a mutual fund should be required to spend certain amount of its profits on generating financial literacy or investor education campaigns. This would boost the efforts on the part of the financial players to initiate financial education campaigns and develop or design products for the rural households.

6. Leveraging on technology

A well developed technological system in financial services companies could reduce cost of transactions and processing of applications. The companies distributing financial products by using MFI network in rural areas can control their own operations by leveraging on advanced technological devices like the smart card readers. Through the use of technology, one-time development of a database of customers can be facilitated, which can help adding products in the same database and promoting distribution of all

financial products under one roof. Other benefits of technology include growth and sustenance of customers, enhancement in productivity levels of the employees. Financial inclusion in India would lead to enormous volumes and enhanced customer base which requires a robust technology.

VI. Conclusion

Variety of financial products like mutual funds, insurance, shares, debentures, derivative instruments, etc are available in India. However, the reach of these products is very limited and the features of many of these products are very basic in nature. Further development and innovation in these products would be faster if they are accessed by all classes of investors in urban as well as rural areas. The thrust lies mainly on the distribution of financial products to deepen the market for such products and improvements in the product design itself. The responsibility of ensuring these improvements vests with all the stakeholders in the financial services industry.

MARKETING STRATEGIES

IN BANKING SECTOR

INTRODUCTION:

Today’s savvy clients have come to showcase a sense of Value for Time with regard to their banking choices. More so, Clients have grown intolerant of the volume and irrelevant information with regard to content of marketing methods. Mass advertising encourages churn not loyalty. There is a greater demand for a packaged one-stop solution for their varied banking needs, including both tangible and intangible products from a single or a reduced number of banking partners. While this desire speaks of possible limitation with regard to fewer customers overall, the potential revenue gains that banks can realize from these finite relationships have never been greater.

At the same time, however, the financial implications related to a shrinking and shifting client pool means banks have much to lose if they fail to modify their methods for growing new and retaining existing relationships. This speaks of an integrated approach for development of sales personnel, marketing program support, customer relations, market performance, and contribution to profits. To win their trust and business, banks need to move from traditional methods of communications to a more informative, integrated-product based approach. This also includes exploring the online webspace for establishing a more personal relationship with its customers.

Banks need to shift away from a product-centric culture toward a customer centric model to better position them to maintain client loyalty and grow their bottom lines. Furthermore, with availability of several different products at a single institution customers are much less likely to switch banks. For customers of today, communicating about their commoditized products, banks can create unique value. For example, Wells Fargo, a leading bank in US shifted from product-centric marketing toward customer-centric tactics. Strategies include using more personal-communication methods such as e-mails with relevant content to respond to their customers’ increasing need for on-demand strategic business intelligence.

CASE STUDIES

CITIBANK DIRECT PROVES A HUGE HIT WITH US CONSUMERS – DIRECT BANKING

Citibank’s new direct banking operation, launched just two months ago, has proved to be a huge success for the US financial giant. Citibank Direct has raised some $3 billion in deposits over the first eight weeks, two-thirds of which is new money. Citibank Direct forms part of a growth oriented restructuring of Citigroup’s operations, which includes expanding its branch and electronic distribution networks, significantly growing its international business and concentrating on cross-selling through better divisional integration and more efficient marketing. Customers who sign up to Citibank Direct must have both a deposit and a transactional account with Citibank already. Citibank Direct account holders are able to access their account at Citibank’s near 1,000 branches and over 3,000 ATMs. It was ranked last month by comScore as the US online bank with the best cross-sell ratio. Some 40 percent of customers who open accounts via their website live outside of the bank’s branch network areas. Through its new internet bank, the bank said, it hopes to reach many more customers.

UK CONSUMERS RETURN TO TRADITIONAL FINANCIAL SERVICE PROVIDERS – DIRECT BANKING

Online financial service providers in the UK are losing ground in the savings market, according to research conducted by market research group GfK NOP. For the first time in five years, more online savings accounts were opened with traditional providers (69 percent) than purely online providers (31 percent) during 2005.GfK NOP’s findings suggest that a narrowing of price differences has resulted in consumers taking comfort in the benefits of the multichannel approach – reinforcing the trend for the massive branch building programmes many banks are now undertaking. Additionally, the research revealed that 39 percent of the 3 million consumers who conduct their financial services online say that the internet is not their preferred method, but that they tolerate an online service in order to receive a cheaper product. An additional 500,000 people are even more skeptical, stating that while they actively bank online, they are unhappy doing so. GfK NOP asserts that these savings market trends provide lessons for the rest of the financial services market. Its findings suggest that consumers who are less willing to engage in online financial services are prepared to overcome their resistance to the channel if it means a better return on their money.

MERCHANDISING CAMPAIGN

One leading regional player in the United States launched a merchandising campaign on the facades of its branches to draw customers into them for a “five-minute financial checkup” and an opportunity to win a prize. Customers and non-customers took a “swipe and win” leaflet from a merchandising display or a member of the staff and then swiped it at a terminal inside the branch. Only after completing a brief interactive financial review on the terminal did they learn whether they had won. The campaign was highly successful, leading, on average, to a 10 percent increase in current-account openings across all participating branches (and an almost 20 percent increase at the highest-traffic locations).

SELF SERVICE CHANNELS

One major European bank, which had grown by acquiring many smaller community institutions, set out simultaneously to increase the migration of customers to self-service channels and to step up it’s cross-selling to existing customers. In the branches, the bank deployed a digital-marketing platform (using interactive screens) with content that included not only standard product information but also migration tips, community news, generic sports and weather information, and online customer satisfaction surveys. Customers were encouraged to interact with the staff for more information. The impact was significant: more than 80 percent of branch visitors noticed the screens, almost 50 percent followed the messages, and around 3 percent asked for more information. The initiative generated roughly 100 leads (requests for information) a month, which the bank deemed an excellent return on its investment.

WORD-OF-MOUTH MARKETING

TD bank in Umpqua, Canada provided 10$ initial capital for children of small-business owners for 2100 lemonade stands. The message conveyed was “No business is too small for the bank”. The output was creation of 1000 new customers, 2331 new accounts and 113 mn$ new deposits. The same bank (TD Bank) also created a lot of buzz in Portland, when they tied up with Paulie Pizzeria for free pizza to customers in TD bank branded boxes. They ended up delivering 20000 free pizzas. The idea behind this campaign was to generate Word of mouth publicity through one-to-one flow of information as well communication channels like blogs and networking sites rather than the traditional marketing tools.

ICICI INNOVATION IN MARKETING

The Kamdhenu campaign was launched with the aim of generating awareness about loans for cattle purchase and cattle insurance in rural areas. A short film was screened, which ran for 150 days across 5 states touching 10000 potential customers. Another successful innovation was Harry Potter Initiative by ICICI Prudential: Children going to watch Harry Potter movie were invited to don Potter-like caps and pose before cameras installed by ICICI Prudential Life Insurance Company. A similar exercise was also conducted in schools across eight metros. A few weeks later, customized mailers with the child's photograph were sent to 4,500 homes informing their parents about ICICI Prudential's Smart-Kid education insurance plan. The response to this marketing initiative was unprecedented. Usually reluctant to meet with insurance agents, over 75 per cent of the 4,500 parents who received the mailers agreed to meet the company's representative and find out more about the Smart-Kid plan. Of these, nearly 10 per cent of the people actually took the insurance policy, compared with 1-2 per cent that usually responds to general marketing campaign. A marketing initiative that cost just Rs 2 lakh had generated business in double-digit multiples for ICICI Prudential.

SBI TINY – RURAL CAMPAIGN

SBI started a rural campaign by introducing SBI Tiny accounts, which are no frills saving accounts where account-holders can maintain zero balance and start with a deposit of Rs. 5. The idea is to build a relationship with villagers and then create assets by providing credit and other products like insurance. They are tying up with some companies to create such rural specific products. The biometric identification enabled Tiny cards are also being seen as the bank’s answer to the challenge of financial inclusion of 100000 villages in the country. SBI has already rolled out 3 million Tiny cards and planning to roll out another 3 million by the end of this year. Among other benefits, the cards are currently being used as a means of payment of government benefits directly to the poor persons, such as pension payments and wages under the rural employment guarantee programme.

Insight: Customer – Centric Approach

In the process of devising a proper marketing strategy, it becomes important that the banking institution understands their customers and channelize their resources to devise products to meet the various banking demands of their customers.

Methodology: Positioning yourself

For devising a successful marketing strategy, it becomes important for us to understand the following factors.

Size of the bank is no more the key winning criteria, online and Tele-banking has given a big completion to branch based banking.
Marketing through credentials doesn’t stand out (Size, age and experience)
Banks should focus and integrate non-banking products in the package they offer.
Measuring Marketing Initiatives is always important and crucial for any marketing strategy.

UNDERSTANDING THE CUSTOMERS

The key is a successful strategy is to positively forecast the needs of the clients and devise products accordingly. The following few aspects needs to be studied for a better strategy:

Banks should look for new insights from the existing customer data. Most financial-services companies either don’t mine their data enough or don’t do it in a way that allows the information to reach product development (Psychographic Segmentation, Conjoint Analysis)

It is important to understand the evolving needs and attitude of customers. Knowledge and demands of customers are constantly evolving along with their sources of income and their financial complexities. It becomes important that we as a bank, need to understand their attitude and their economic patterns to offer the most suited banking solution.

Priority Listing of Customers is an essential ingredient for the right strategy mix. Since we are talking about establishing a more client specific business relationship, it is always important to understand how to make the choice in regard to spacing their demands in regard to our business perspective.

INNOVATION : CUSTOMER SERVICE

Innovation is a key for Banking: Focus on innovations doesn’t matter how small they are, every small innovation is a liftoff for a bank.

Ø Offering based innovation: Addressing one real need, no matter how small, we have lift-off. For example, Octopus which enables users to ride public transportation without having to buy tickets or swipe a turnstile is a big hit.

Ø Customer Service Based Innovation: Citibank linked its customer service performance to sales success. They created an incredible incentive to address clients’ concern — and then to sell, it can also give the bank’s marketers greater insight into consumer needs than they ever had before

Ø Innovation in Senior Management Approach: Best practices from across the industry in customer care and satisfaction can go long way in making your customer happy. Most offerings of the banks are too complex for the average consumer to understand. If you look at some consumer products where there is a complexity dimension, such as washing machine. Typically the company will have a sales force to explain the different features. Banks’ products are currently more like washing machines — really hard to sell. But banks have no sales forces to deal with customers. We need to educate consumers.

Ø Marketing Based Innovation: Bring customers in by offering a special on CDs, one day only, where customers who bring in $1000 for deposit in a 12 month period CD get an extra 0.5%. Furthermore, it would get the staff excited and working towards a goal. This would work in many ways. ING has a great referral program, where current customers get $10 for emailing their friends to sign up, and their friend gets $25.

Ø Product specific Innovation: The systems and procedures need to be geared towards speedy delivery of service to customers. For example, banks send out credit cards to customers automatically when their old ones have expired.

THINK DIFFERENT

1) Don't just focus on building smart products, but Build smart business models, new ways to create, deliver, and capture value.

2) Think in terms of platforms and pipelines and not as a single product. A platform based products can be re-launched with modifications – leading to faster turnaround time and economical product launches.

3) Take a portfolio approach, i.e. decide on a bunch of products for a category and not a standalone product.

CRM SYSTEMS IMPLEMENTATION :

Build small, usable databases. Systematic but simple checks should be implemented on the database to identify omissions and errors early on. This does not take a long time and has been implemented even in 2 weeks by some companies.

Start pushing pilot campaigns quickly testing different hypotheses quickly like 8-10 campaigns in first 2-3 months.

Setup a call center to roll out and inform about successful campaigns.

Every campaign, whether successful or not, needs to be analyzed thoroughly for continuous improvements in the process.

EVALUATION: MONITORING AND REVIEW

Effective evaluation methodology to monitor and review performance of a strategy is essential. Banks should supplement their traditional sales- and transaction-oriented metrics by increasing their use of activity-based branch-level metrics, such as the number of visits, the purpose of those visits (for instance, service or sales), the flow of customers within branches, and rates of conversion into leads or sales sessions.

ADVANTAGES

The marketing strategy should consider the product mix suited for the Customer needs on the above points discussed. Customer centric approach speaks of various possible advantages. Following are few of them.

Customer Loyalty: Establishing the institution as a one stop shop for all banking needs, it becomes easy to gain customer loyalty. With the possibility of having a single banking partner for his/her banking clients, customers will be more willing to share their needs, thus helping the bank to better modify their services.

Word-of-mouth Marketing: Loyalty of Customers and customer focus initiatives will create a greater sphere of marketing space through existing customers.

Lesser lead time with advanced planning and immediate product delivery – A consequence of better customer understanding will cut down the lead time and help us on immediate product delivery. For example, approval for loans, credit card services etc.

With better understanding of customers, partnerships with other institutions for product design become easy and also mutually beneficial. Creating new products and offering non-banking services for customers will see tap on potential industrial clients.

Lesser Cost of Operation: Better understanding of clients and a more reliable forecasting methods will result in less management overhead, lower capital requirements, and potentially quicker timelines.

POSSIBLE CHALLENGES

Any Marketing Strategy is not without challenges. Few of the possible challenges are discussed as follows:

Reach: As service is extended to additional areas, devising a marketing strategy for a larger and more complicated organization from an administrative and resource standpoint is a challenge that will continue to grow. This also includes achieving profitability in all areas of operations through the marketing strategy will pose a challenge.

Technology Support: Choosing the appropriate technology to suit the product need and client’s ease of operation is another challenge. It might be possible that we have to strike a tradeoff between these factors to optimize our performance, resulting in growth with utilization constraints.

Cost Effective Methods: Switching costs associated with the introduction of new technology. As new and better technologies are available in the market, it becomes crucial to reach out and introduce services through the same. There are tradeoffs to consider given costs associated with adopting new standards and products as well as the timing of adoption.

It becomes important to develop communication solutions for easier sharing of knowledge about products to enable greater client interaction and participation.

Overcoming the scarcity of skilled labor with the appropriate skills and knowledge (often requiring relocation of qualified candidates)

CONCLUSION

Employing innovative marketing strategies promises to improve on the business volumes for any banking institution. With considerable percentage of population enjoying a greater purchasing power, and lesser time for conventional banking methods, it becomes important for banking institutions to adapt to their needs. Banks would have to adopt a planned and focused approach to ensure timely roll-out of best in class products coupled with an informed insights about various needs and demands of customers. In conclusion, customer centric approach coupled with effective use of technology and resources speaks of encouraging signs for the growth in this sector. Banks will have to ensure efficient execution and co-ordinate their actions in order to deliver on their promise.

Financial Institutions offer various products to its customers such as personal loans, home loans, savings account, credit cards and so on. It is very essential for a financial company to know, which user to target for what product and when. The goal of data analytics and data mining department is to arrive at accurate answers to these 3 questions, (Which User, What Product, When), trust me it is a rewarding exercise for the bank, users and definitely the analytics manager.

The problem is very simple. A customer may have purchased a single product or multiple products from a bank. The company would ideally like if all its customers bought all of its products. This possibility however does not exist, therefore without any targeting model; the company would be wasting money, time and resources by randomly targeting customers for its products. Using a little sophistication of data mining techniques, we would be able to build a targeting model or a response model on customer base. A response model is a predictive model which estimates the future behavior of a given customer even before it occurs. Even with a fair amount of accuracy it can be very useful for company in saving majority of costs in various departments/channels. There are various types of data available for analysis like demographic, behavioral, psychographic / attitudinal. The above data can be very useful in data mining methods, however the cost, usefulness and expertise to store / retrieve data has to be assessed and judged. Giving an example: A customer has savings account in a bank, based on the information given to the bank along with account status and history, we could target her as a prospect for a personal loan product based on a logic / algorithm. The logic / algorithm could be as simple as if a customer from metro with account balance of Rs 1,00,000 or more for over 6 months should be a prospect for home loans Rs 20,00,000 or personal loans over Rs 3,00,000. This is a simple example; however it could be a complicated neural network or logistic regression model.

Cross Sell Models: A customer of a product A, is a likely prospect for product B if his account activity positively predicts likelihood of purchase. Target model has to predict purchase of product B.

Up Sell Models: A customer can be targeted for higher segment product in the same category based on his account status and demographics. Normal saving accounts customers can be sold for Premium segments customers, if his account balance is over a period of time.

Deep Sell Models: A customer can be sold more of same product based on his need. Target model has to predict his need.

These target models are also called response models that only predict the purchase behavior of a customer for a given product. This model is ineffective as the cost of randomly targeting a customer for product is LESS THAN cost of targeting using predictive response model.

The main reason is because of below limitations of traditional response model

A) All customers behave in two ways: Purchase or DO NOT Purchase

B) Behavior of customers during absence of any marketing activity.

C) Maximum lifetime value to be derived from customer is unknown, this will result in underselling or selling lower value products when higher products could have been sold.

IF these issues are taken care of by strong statistical modeling then loss making response model can be made profitable.

CASE #1:

PRODUCT LINE STRATEGY

SITUATION

A major U.S. bank faced declining growth and increased competition in its residential mortgage business. The challenge was to determine product strategies to return the bank to its position of strength.

RESEARCH RECAP

Sawtooth Technologies conducted research into consumer preferences regarding mortgage product lines, modeled preferences for client and competitive products, and recommended an unexpected product strategy.

STEPS:

1. Created a computer-based interview using conjoint analysis to allow consumers to express their trade-offs between attributes such as interest rates, type and name of institution, service offered, and other features.

2. Calculated utilities that represented the decision-making weightings for each interviewee.

3. Built a model of the market, featuring both a demand side (utility values) and supply side (available products).

4. Predicted the likely appeal of the bank’s product line as it was currently configured and tested a variety of scenarios:

Added, changed and deleted items from the product line and compared the resulting outcomes
Predicted competitive responses to the bank’s actions and modeled these actions, comparing outcomes under varying competitive situations

RESEARCH RESULTS

The initial expectation—the client’s and ours—was that we would propose changes to the existing set of over a dozen products, but we were all surprised to see that the client’s share held up as products were removed from their line. We recommended a streamlined set of mortgages, cutting the product line in half, that the model predicted would strengthen the client’s market position.

OUTCOME

Operational costs decreased because there was a smaller set of products to support.
Marketing and advertising messages became significantly clearer with a smaller “grid” of products to promote.
The mortgage market share increased dramatically after rollout of the new product line.

CASE #2:

NEW PRODUCT SELECTION

SITUATION

A leading foreign financial institution sought to capitalize on its high-value client base by offering additional products and services.

RESEARCH RECAP

Sawtooth Technologies researched a variety of new products to determine which were most likely to succeed and which matched the client’s image/positioning.

STEPS:

1. Conducted brainstorming sessions and focus groups to develop a lengthy list of possible new products.

2. Narrowed the list to those that best capitalized on the infrastructure and image.
Employed a computer-based interview to allow consumers to indicate the products/services of greatest interest; used a conjoint module to test the value of various features of the new products; asked consumers to indicate their likelihood of trying the new products/services as described by attributes and levels.

3. Built a model to predict the likelihood of trial of each new product or service under a wide variety of configurations.

As we varied the levels offered, we could assess and compare the desirability of the product. We could also determine which segments of the population found each product most desirable. This information enabled the client to introduce products/services based on their appeal to highly profitable customer segments to deepen customer loyalty.

RESEARCH RESULTS

A new set of products and services was selected based on market needs and values.

OUTCOME

The institution selected new products and services for introduction that deepened their relationship with highly valued customers, increasing overall profitability. The research and market modeling eliminated guesswork and allowed the institution to move quickly from brainstorming to a successful launch of new offerings.

CASE #3:

STAFF TRAINING

ASSIGNMENT

Train the research staff of a small kitchen appliances manufacturer how to execute a conjoint study that determined the product line mix the company should offer through a national retailer.

TEACHING POINTS

Saw tooth Technologies trained the staff on:

How to frame conjoint-related business issues
What focus group input was needed to prepare for a conjoint study
How to construct sets of attributes and levels that will achieve the study objectives
How to choose the appropriate form of conjoint for data collection
How to design, create, deploy and monitor an online conjoint survey
What the sample size considerations and requirements are for conjoint studies
How to choose the most appropriate way to compute utilities from the data and how to identify and profile market segments based on groupings of buyers with similar preferences.
How to set up and run a market simulation model that predicts buyer purchase behavior
How to run the model to determine the product mix
How to interpret the model results and use them as input to product development decisions

OUTCOMES :

The client successfully executed a conjoint study in-house, saving time on this study and money on future studies. The study results showed that the client’s market was divided into three distinct segments, and the model was used to configure and price a line of three products, one for each segment, that maximized overall share. The results also led the client to switch emphasis from a new feature they were planning to promote to an existing feature that was a far stronger driver of purchase choice.

Pages

VIBRATION ANALYSIS OF CYLINDRICAL THIN SHELL

Sunday 3 July 2011

MARKETING

THE TEN BEST FINANCIAL PRODUCTS

1. CASH ISAS

2. SHARES ISAS

3. INDEX TRACKERS

4. EXCHANGE TRADED FUNDS

5. LIFETIME BALANCE-TRANSFER CREDIT CARDS

6. FAMILY INCOME BENEFIT

7. HEALTHCARE CASH PLANS

8. CURRENT ACCOUNT MORTGAGES

9. INCOME PROTECTION INSURANCE

10. THE BORING STUFF

MARKETING STRATEGIES

IN BANKING SECTOR

CASE STUDIES

CITIBANK DIRECT PROVES A HUGE HIT WITH US CONSUMERS – DIRECT BANKING

UK CONSUMERS RETURN TO TRADITIONAL FINANCIAL SERVICE PROVIDERS – DIRECT BANKING

MERCHANDISING CAMPAIGN

SELF SERVICE CHANNELS

WORD-OF-MOUTH MARKETING

ICICI INNOVATION IN MARKETING

SBI TINY – RURAL CAMPAIGN

Insight: Customer – Centric Approach

Methodology: Positioning yourself

UNDERSTANDING THE CUSTOMERS

INNOVATION : CUSTOMER SERVICE

THINK DIFFERENT

CRM SYSTEMS IMPLEMENTATION :

EVALUATION: MONITORING AND REVIEW

ADVANTAGES

POSSIBLE CHALLENGES

CONCLUSION

SITUATION

RESEARCH RECAP

RESEARCH RESULTS

OUTCOME

CASE #2:

NEW PRODUCT SELECTION

SITUATION

RESEARCH RECAP

RESEARCH RESULTS

OUTCOME

CASE #3:

STAFF TRAINING

ASSIGNMENT

TEACHING POINTS

OUTCOMES :

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