Marketing Challenges in Banks

 Marketing Challenges in Banks

Marketing is one of the most important functions of an origination. It is the art of creating genuine value to customers and a new reality for banks. The object of marketing in banks is to attract funds and convert them in to credit, its core function. In fact marketing is understanding customer’s response to the stimuli to which they are exposed.  

Impact of Development:

Technological developments, globalization, financial modernization, deregulation, opening of banks in the private sector, liberalisation of economy have not only affected operations of commercial banks but has opened floodgates of competition and challenges for the industry. Whereas, deregulation of interest rates has put banks on toes for aggressive marketing, automated banking has made the industry more complex.  

Technology has broadened customer’s vision, made them knowledgeable and has raised their expectations. It has helped banks in delivering end-to-end, round-the-clock services. With the help of Internet, mobile phone, blue tooth technology, customers can get more information about the products and services of different banks and can compare them for taking decision. Internet has opened “virtual" marketplace (“e-market”) where different products are offered through web (World Wide Web). E-market has adversely affected bank’s market share.

A customer, with the click of mouse can do lots of financial transactions through internet or with the help of his mobile phone sitting at any corner of the globe. He   need not visit a brick and mortar branch. Web banking services has lowered the operating cost, reduced footfall in the branches and has given ample time to staff members for marketing. With the help of internet banks can also ascertain the views; responses of customers and can improve services. Since customers desire instantaneous and efficient services, banks have to adopt proactive marketing approach for having proper relationship with customers.

Vide RBI circular number RBI/2007-2008/128 DBOD.No.Leg.BC.30 /09.07.005/2007-08 dated September 3, 2007, banks were advised to establish customer service committees at branch level for encouraging a formal channel of communication between the customers and the bank so that customer services could  be improved.

What is Market? :

Market is a place for exchange of goods/services for some consideration. Globalization and technological developments have widened the scope of market and have liberated it from the shackles of geographical boundaries. Since customer’s behavior is changing fast, banks have to understand that customers do not have common preferences. A product may not be of common utility to all; banks have therefore to understand customer’s aspirations so that better products and services could be provided.

Marketing is identification of demand of different types of customers and then chalking out strategies to meet them keeping in view demographic pattern, market trends, changes in consumption pattern and impact of cultural invasion. Banking needs depend on the age group, marital status, family, social background etc.

Financial needs of married couples with children would certainly be different from that of senior citizens. The young married couples may have lots of financial needs such as for buying a house or a car for which they may require funds.

Senior citizens are more interested in interest income from the funds saved and accumulated during their life time. They have different ethos and value systems. Senior citizens are paid .05% extra on term deposits.

It is not that the interest factor only matters, but the courteous service that matters.

Since bank’s capital base is not enough to do business, banking business depends on public funds. As banks purchase funds from customers, their expectations for returns on their funds are high. Therefore, survival of bank depends on focusing right markets and contacting customers to understand their needs.

Marketing through mass media like newspaper, magazine, radio, outdoor ads and TV commercials generally do not cater to the financial needs of a particular group of customers. If a particular product is preferred by a few, why market that product to all customers? Mass marketing does not give that result as data base marketing does.

Competition in Banking:

Due to deregulation of interest rates, opening of banks in the private sector, influx of foreign banks, banks in India have entered into a new era of hyper competition, which has resulted in to from age old products to an environment of quick strike products. Competition has made the going tough for banks. It is not only confined to resource mobilization but also to lending and other revenue generating areas.

Competition is a healthy sign as it gives an opportunity to improve; it is ‘survival of the fittest’. Some of the top private sector banks are disrupting competitive advantages. Competitive advantage is no longer sustainable over the long run. Customer service is the competition weapon. According to Phillip Kotler "The marketing concept holds that the key to achieving its organizational goals consists of the company being more effective than competitors in creating, delivering, and communicating customer value to its chosen target markets."

Success of Marketing:

The success of marketing depends on letting people know what bank can do for them. It is therefore necessary that the end user is kept apprised about various products and services. Banks have realised that it is the knowledge, awareness, quality of the product that results into constant demand. It is always better to have direct communication with customers. Keeping constant touch with customers is an excellent way of facing competition. Promotion of products and services depends on development and need identification. Even if a scheme is properly developed and designed to suit customer needs, it may not pick up, unless it is properly marketed at all levels. With the technological development, e-mail has become an instant and cheapest mode of communication.

While opening account banks adhere to ‘Know Your Customer (KYC) norms’ prescribed by RBI. Banks obtain detailed information about the account holder and obtain information about family, educational background, marital status, income, assets (both movable and non movable), profession, occupation, number of dependents etc. This can enable banks to do marketing of financial products on the basis of data. Customers are provided an ID which enables bank in judging profitability of a customer, and product turnover.

RBI vide circular number RBI/2014-15/70 DBOD.AML.BC.No.22/14.01.001/2014-15 dated July 1, 2014 on “Know Your Customer (KYC) norms / Anti-Money Laundering (AML) standards/Combating of Financing of Terrorism (CFT)/Obligation of banks under PMLA, 2002”has mentioned under the guidelines (2.1) that “Banks should keep in mind that the information collected from the customer for the purpose of opening of account is to be treated as confidential and details thereof are not to be divulged for cross selling or any other like purposes. Banks should, therefore, ensure that information sought from the customer is relevant to the perceived risk, is not intrusive, and is in conformity with the guidelines issued in this regard. Any other information from the customer should be sought separately with his/her consent and after opening the account”.

Innovation of Products:

Though product innovation improves business and helps in facing competition, however, there is hardly any product innovation in banks. To face growing competitions innovative know how must is. Innovation in banks mean ‘adds on’ to some special features of convenience to the existing products. For example giving a debit or credit card, providing accidental insurance cover or providing free remittance facility, auto sweep facility, net banking facility etc. ‘Adds on’ to a product may increase business, but certainly it is not innovation.

Generally launching of new service or product is based on the principle’ Copy Competitors’. Once a bank introduces a convenient feature to an existing product and makes it attractive, other banks follow the suit by adding some additional features to the product, and the bank launching a new product faces competition from similar products. Since there is no uniqueness in the products all banks face similar problems. There is no system of patenting banking services, concepts are copied from competitors.

Marketing and Selling:

The word marketing and selling are complimentary and supplementary to each other. Marketing and selling are continuous process. Selling is the end result of marketing. It is conversion of products into cash. Under selling concept, a seller sells what he has on his shelf or in his stock and by adopting various selling skills he persuades customers’ to buy.

According to Prof. Theodore Levitt ‘The difference between selling and marketing is more than semantic. “Selling merely concerns itself with the tricks and techniques of getting the customers to exchange their cash for the company’s products”.

Reputation of an organization including banks is linked with customer care and customer service. Saving reputation does not cost money but boosts business. Banks have realised that loosing reputation is worse than losing money in any particular quarter, hence maintenance of reputation is must for business growth. It is better for banks to take care about customers rather than concentrating on income. The main reason for increase in non-performing assets is that banks have been concentrating only on generating income by hook or crook ignoring other factors. “The true purpose of a business is to create and keep a customer, not to make you money.”(Theodore Levitt)

Till recently bankers were only selling age-old products with certain modifications retaining its original structure. Neither there was any element of innovation, nor was any emphasis given to marketing.

Marketing in Banking:

Marketing is demand management forecasting and projection of bank’s image. The main purpose of opening of branches at different geographical locations is to tap business in new and emerging market and enhance public awareness about various banking products, necessity for survival and meeting competitive challenges? Banks have also opened specialized branches for providing state of the art services to customers. Banks sell both assets and liability products and services (as mentioned in section 5(b) and 6 of BR Act, 1949) to different segments of society through its branches spread both in and outside the country.

RBI has deregulated the pricing mechanism for both asset and liability products. Many banks have adopted a competitive pricing policy. Every bank has its own ‘Benchmark Prime Lending Rate’ (BPLR). A bank may price its asset products for a given customer either above or below the BPLR. Price has direct impact on a product which affects customer retention. Customers do not mind paying a price for specific services.

Success of marketing depends on commitment of staff and on targeting the right people. In fact it is an attitude. Till recently marketing in banks was restricted to deposit mobilisation and no serious efforts were made to market other financial products. It is only during closing that efforts are made to mobilise deposits, otherwise banks rely on walk in business, and adopt lukewarm approach towards marketing. With the liberalisation of economy, banks realised that for meeting competitive challenges they need to have a ‘Marketing Philosophy’. Banks need to find out new ways of marketing. Banks have realised that to make their presence felt in the market and to face competition they need to market their assets and liabilities products aggressively. In the present time marketing has become aggressive and combative. Therefore for sustainable growth knowledge of technology and marketing is must.

While preparing annual performance budget, more weightage is given to deposit and advances. Banks can take clue of emerging markets from the “Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks” published by the Reserve Bank of India. This would certainly help banks in increasing ‘Market Share’. Banks can also work out market share at those places where they have branches and can make vigorous efforts to increase market share.

With the implementation of ‘Core Banking System’ banks have created a large database. Data is a valuable raw material for banks. Access of data is not an issue but getting value from it is. Banks can cull out information from their database and chalk out marketing strategies keeping in view various segments. Market segmentation helps banks in developing marketing messages for the target group and in adopting a pointed marketing approach. Bank can also identify potential and profitable customers from their data base and can contact them either personally or through e-mails for marketing products. Even customer meets can also help in building account holders loyalty.

Business of Banking:

Banking products are about the money in different forms. They can be classified into fund-based and fee-based. Fund-based products can further be sub-divided into asset and liability products. Whereas liability products include deposits, payment cards etc., Asset products include various kinds of credit products like trade finance, corporate finance, project finance, and term loans etc.

Deposits: Deposits is a pivot around which all banking activities rotate as it is vital resource and lifeblood of industry. Survival and development of banks are influenced by their ability to attract deposits from different segments of society.

Banks ‘purchase’ deposits and sells loans. Due to tough competition for deposits among banks, between banks and non-banking companies, deposit mobilisation has assumed a greater significance.  Banks have realised that they can no more depend on walk in business, hence they have to go for aggressive and combative deposit mobilisation.

Deposit cannot be mobilised only on the basis of interest factor, other factors do matter.Though RBI has deregulated interest on deposits, it has laid down minimum cap of 4% interest on savings bank deposits. Banks are free to quote even higher rate on interest on savings bank deposits without any discrimination. That is why some banks are quoting higher rate of interest on savings bank deposits.

Banks quote higher rate of interest by offering different rates for different periods on term deposits. Interest rates also depend on assets liability management, on demand and supply of funds and rates quoted by competitors. Banks do not offer interest on the balances held in current account. To obviate RBI guidelines banks have started ‘auto sweep’ facility both in current and savings account.

It would be observed from the following tables that the pattern of deposit differs from location to location. Term deposits are the most preferred deposits of people living in any geographical area. People living in rural, semi urban and urban, areas prefer to keep deposits either in savings account or in term deposits. The leaning towards current account is not much, whereas, people in Metro areas keep all types of deposits.  People in rural and semi urban areas either do not have enough capacity to save or banks have not done enough marketing and encouraged them to save.

                  : Share of Population Groups in Total Deposits in Percentage:

                                                      End March

Rural Deposits					Semi -urban Deposits
	Current	Savings	Term	Total	Current	Savings	Term	Total
2014	4.3	49.8	45.8	100	7.0	43.2	49.8	100
2013	4.7	50.1	45.2	100	7.4	43.9	48.7	100
2012	5.0	49.9	45.1	100	7.8	44.0	48.3	100
2011	5.3	50.6	44.1	100	8.3	45.3	46.4	100
Urban Deposits					Metro Deposits
	Current	Savings	Term	Total	Current	Savings	Term	Total
2014	9.0	30.4	60.6	100	10.4	16.2	73.5	100
2013	10.2	30.8	59.0	100	11.3	15.9	72.7	100
2012	9.9	31.5	58.6	100	12.8	16.2	71.1	100
2011	10.7	32.8	56.5	100	15.2	17.2	67.6	100
Source: Basic Statistical Returns

Advances:

Banks are the main source of credit supply to various sectors of the economy. Lending is determined by both demand and supply. Credit deposit ratio of a bank indicates its lending behaviour. Since over 70 percent of banks income is derived from lending operations, marketing of loans and advances has become a major activity. Though lending is a risk prone activity (Credit Risk) banks have launched multiple asset products for different set of people.

It would be observed from the table given below that by and large banks do not concentrate in marketing credit (Assets) products in rural and semi urban areas as they do in urban and metro areas. Lending in rural and semi urban areas is generally confined to achieving priority sector targets. Government, non-government organisations, district administration and other rural agencies ‘bridge knowledge gap’ of people living in rural and semi urban areas about various poverty alleviation programmes. ‘Bridging knowledge Gap’ acts as marketing for banks. In addition business establishments engaged in marketing of tractors, machinery, equipments etc., tie up with banks for financial assistance and indirectly do marketing for banks.

In urban and metro areas banks target prime customers who are in need of bank finance. In these areas there is a high demand of finance for housing, purchasing white goods, educational loans etc.

Deposits and Credit of Schedule Commercial Banks

According to Population Group in percentage

March

Year	Population	Rural	Semi Urban	Urban	Metropolitan
2014	Deposits	9.9	14.3	21.5	54.2
	Credit	8.4	10.6	16.0	65.1
2013	Deposits	9.6	14.0	21.3	55.1
	Credit	8.3	10.1	16.4	65.2
2012	Deposits	9.4	13.9	20.9	55.8
	Credit	7.9	9.6	16.3	66.2
2011	Deposits	9.2	13.3	20.6	56.9
	Credit	7.3	9.4	16.8	66.6

Casual Customers: Bank provides public utility services to their customers as well as non-customers. These services include remittances facilities (Demand Draft, Mail Transfer, Telegraphic Transfer, Banker’s cheque) lockers and safe custody, purchase and sale of foreign currency, travellers cheques etc.  No marketing for such services is done.   

Data base Marketing:

As mentioned earlier most of the banks in India have technologically upgraded their systems, procedures, functioning after implementing ‘Core Banking Solution’ and have established ‘Data Centres’. Data gives deep information in understanding trends and customer preferences. Data warehousing builds customer wise data by mapping it from various services and products used by the customers such as deposits, credits, foreign exchange, e-business, safe custody, lockers, bill collection, etc.

Bank has to find out which data is important as it helps in anticipating demand. Data enables banks in adopting a pointed marketing approach and helps in managing customer portfolio. By retrieving data from the data centre bank can chalk out marketing strategies, find out needs and preferences of customers in various segments and can match the appropriate products/services to match those needs. It also helps in penetration of market and cross selling of products.

Database helps in identification of segments and groups to whom the services can be marketed. Database marketing is an intelligent way of marketing. In fact Data base marketing is marketing on customer information. It helps in marketing right products to right customers. It helps in segmentation marketing (target marketing). Some banks rely on market research. Market research tells about present but does not predict future trend.  

As per Phillip Kotler “Marketing is becoming a battlefield more on information than on sale power visible" for that customer.

It is essential for a banker to have full knowledge  not only of its product but also of the products of competitors. For increasing cross selling ratio employees should have a broader perspective and complete knowledge of the entire range of products and services being offered by the bank. So that a banker could provide satisfactory answers to the queries of customers. Despite the fact that India is a developing market, the cross selling ratio of banks is very low.

Market Segmentation and Banks:

 Market segmentation is the technique of identification and bifurcating customers having common needs into various homogenous sub groups or segments. Segmentation helps banks in dealing with individuals, groups, corporate, having common preferences. It is an effective manner of marketing. Segmenting market helps in avoiding head to head competition and keeps the competitor low by putting up entry barriers around their products.

As the choices, preferences, perception, utility of a product or service differs from person to person; marketing a product may not satisfy the need of every one. Hence it is necessary to study the needs, wants, demands and requirement of people on the basis of demographic, psychographic, income and behavioural pattern and thereafter marketing various products and services to suit different section of society.

“Market segmentation is the process of dividing the total heterogeneous market for a product or service into several markets or segments, each of which tends to be homogenous in all significant aspects. Market segmentation is a customer –oriented philosophy.1

By analysing the market into individual segments bank would be able to know the profitable segment and can expand business to that particular segment. For example a bank can segment the market profession wise s viz. medical practitioners, architects, chartered accountants, advocates, consultants, fashion designers, engineers etc., and can accordingly target its products. Segmenting of market in to various sub groups helps in aggressive and combative marketing.

Basis of Segmentation:

Segmentation can be done on the basis of:

1. Demography: Demographic segmentation allows a bank in assessing on personal information submitted while opening an account. It enables a bank to develop products and services that suits customer’s need. Bank can bifurcate customers on the basis of age, occupation, income, religion etc.

2.Geography: Geographical segmentation is quantifying the market based on geographical location as requirement of customers differ from place to place. People in rural areas have different requirement than people living in urban or metro areas. There are products which are in demand only at a particular place or region.

3. Income: Market can also be segmented on the basis of income. Demand of a product depends on the earning capacity of customers. On the basis of income market can be segmented in different income group.

Marketing Plan in Banks

Increasing competition has forced banks to have a system of marketing. Marketing is teamwork. A banker should have thorough knowledge of the area of his operations such as attitudes of local people towards savings, borrowing, spending and traditions. This knowledge goes a long way in creating marketing strategies. Bank has to ensure that the price quoted is realistic and it acceptable to customers.

Instead of utilising the services of their employees, some banks engage marketing experts on contractual and commission basis who are given a target. The best way of marketing in banks is to create a bond of trust through efficient service and product delivery. 

Innovation in Marketing:

Tourists at the International airport of Mumbai would have observed how airport authorities are marketing tourism in India. The entire transit lounge reflects culture of our country, monuments etc. Tourists are attracted and when they go back to their country speak about the culture monuments etc. which ultimately boosts tourism. Even all state governments are advertising about tourist places in their state, which is boosting regional tourism.If banks take clue from “red ribbon expresses train”, an AIDS/HIV awareness campaign launched in India by the Indian Railways on ‘World AIDS Day’, December 1, 2007,
all banks can also launch  a knowledge gap campaign with the help of Indian railways, Ministry of Finance, Reserve Bank of India and Indian Bank’s Association. Where different banks can market their various products for farmers, professionals, industries and so on in separate bogies of train and the train can move to different geographical areas of the country. Even Reserve Bank and IBA can have a bogy depicting various stages of banking developments, various government sponsored programme and the present stage of mobile banking etc. 

Conclusion:

Marketing is a planned and organised effort to find today the opportunities in tomorrow’s market. In order to make decisions about the services to be offered, it is essential to have knowledge of population growth, nature of industrial and trading activities, agricultural development, wage structures, income pattern of potential customers and other relevant factors. The cultural environment in which the bank operates also has a bearing on marketing decisions. This includes attitude of local people about saving, borrowing and spending, and also their traditions and values. The schemes suited for urban sector would be different from those suited for rural sector.

Marketing is teamwork that demands commitment from one and all in the organization for converting new ideas into profit. A skilful marketer has to be a practical psychologist and sociologist, who can understand individual and group behaviour and can foresee changes in the society. He has to be innovative and creative. Banks require visionary leadership. Management skills are not enough. There is no point in managing people and product in wrong direction.

Marketing services are of great importance for banks. Recent developments in marketing of services such as internal marketing, network marketing, data base marketing and relationship marketing is becoming favorable for bankers. Successful marketing depends on precisely targeting audience. Market segmentation helps you achieve that precision. For facing competition, an integrated view of the data analysis is must. Customers’ desire personalised service and attention no matter which bank it is or of what size. He can no longer be taken for granted. Behaviour and approach of bank staff plays crucial role in marketing of various products. For increasing profit bank has to create new markets, increase market shares and to survive intense competition. The shifts in globalization and technology have brought fundamental changes in competition among banks across the boundaries of nation. Rapid technological changes, globalization, global alliance, falling geographical and industry boundries have resulted into hyper competition. Interactive computer networks and telecommunications have blurred the boundaries of banking industry. 

References:

1.  (William J. Stanton, “Fundamentals of Marketing”, McGraw Hill International Book Company, Tokyo, 1981,p.66)

For further reading:

1.“ The Marketing of Bank Services” The Institute of Bankers, London; 1971

2. Pezzulo, Mary Ann,” Marketing Financial Services”, American Banker Association, Washington, D.C, 1998

2. Kotler P.; Armstrong G.; Saunders J.; Wong V. Prentice Hall Europe, Harlow, Essex: 2001

3. Levitt Theodore,” Marketing Myopia, Harvard Business Review, July-August

    1960.

4. George M. Dupuy, William J. Kehoe, Robert F. Linneman, Raymond N. Davis and Jim D.Reed,”Bank Selection Decision and Market Segmentation” American Marketing Association, 1976