Home Advanced Analytics Why Is Customer Profitability Measurement In Banking Today So Badly Flawed, Grossly Misleading and Virtually Worthless?

Why Is Customer Profitability Measurement In Banking Today So Badly Flawed, Grossly Misleading and Virtually Worthless?

by Shailendra Kumar


It’s very simple. The Model currently in use is all wrong. It’s badly flawed because it is incomplete and a fraud! A 20th Century Technology Model trying to do business in the new higher intelligence enabled 21st Century!

All current MCIF, Data Warehousing, Data Mart and Database Marketing Technologies that have for years, prided themselves and touted their software on the benefits of Customer Profitability Measurement are badly flawed and invalid; and materially misleading and fraudulent in their representations that lead one to believe that there is soundness to the model when, in reality, there is not! They attempt to disguise and hide the fact that an entire technology has gone far astray and bet a fortune on an out of date, obsolete 20th Century model that is woefully short on measurement content and in the end, produces meaningless results re: the profitability of any subject customer under measurement. In short, all current profitability measurement methodologies employed by current MCIF, data base marketing software and CRM technologies simply leave out the most important customer relationships, the most important profit enhancing customer behavioral disciplines and the customer’s lifetime relationship value (past and future) so essential to the accurate calculation of customer profitability!

In other words, these costly, out of date and fast fading technologies are woefully wrong and invalid in that they take into consideration in the measurement of customer profitability, only those traditional banking relationships that relate to loan and deposit spreads and current account balances in relation to cost of funds, and a few consider other fee driven relationships. And the resulting distorted picture reflects net spread profitability only at the moment of the photo, and tells one nothing about past and future profitability and lifetime value of that customer! And, only a seasoned banker can even interpret the spread information. Not something that means anything to a teller or secondary line person in the bank in interacting with the customer.

Here’s the problem. What’s the real contribution to profitability of a home loan or a home equity loan or a jumbo CD if the home loan and the home equity loan gets refinanced by a competitor and moved to another financial service provider? And the CD customer moves to another investment source for a higher rate? And what effect does the balance of these loans and investment products have on anything if the bank has no real and permanent means of retaining these products and a long-term relationship with the customer?

So what are the most commonly omitted relationships that are worth more than all of the common elements of measurement used by most current day profitability measurement technologies? Well try these for starters! The cumulative value of lifetime Customer Referrals (Selling for you); the Customer Influence Value of the Seniors Club relationship; the Cumulative Lifetime Value of the number of years a customer has invested in your bank; the Retention Power and Lifetime Value of share ownership in the company; plus the Cumulative Lifetime Value of the insurance relationships, the brokerage relationships; the Lifetime Value of Positive Behavioral Disciplines of direct deposit relationships including payroll and pension and retirement direct deposit relationships: and even the value added fee producing relationships?

If the customer sells for you for a lifetime (referrals); lends his influence to your bank through a Seniors Club Membership; invests many years of his life with you (loyalty) to provide Lifetime Retention of all relationships; owns a piece of your company; banks “your way” by using your efficiency disciplines to reduce your service costs and enhance your retention control over the overall relationship; and uses the services of your insurance and brokerage affiliates as well, I submit that all of this is worth far more than any high-balance home equity loan that will soon be refinanced and moved elsewhere sometime soon!

A new customer-driven, customer-engaged marketing system is preparing to enter the marketplace to correct all of these missing elements and rectify the shortcomings of the current and woefully misguided “customer profitability model” in use in the marketplace, and render all of these technologies obsolete very soon. It’s called Loyalty Banking and it engages the customer in a Marketing System, supported by current day technology to correct all of these here-to-fore wrongs in customer profitability measurement. And replace it all with a truly reliable and meaningful new intelligence that delivers real customer lifetime value measurement, and does it much more cost efficiently and without the current level of technology overkill.

And if the current customer profitability model employed by the banking industry is a fraud, where do you think this leaves similar technology used in other industries?

— Shailendra Kumar

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