CHAPTER 1 INTRODUCTION 1.1 BACKGROUND Private banking is a business segment extension in banking industry which specifically provides banking service to the wealth or premium customer segment Lassar et. Al (2000), Tilmes (2002) and Howald (2007). Private banking customer capable to influence sustainability to other business line by their social status and economic power (Heikki. et al 2003), and also give client referrals and share of benefit to other main business line such as retail banking, investment banking, and commercial asset management. Bank Indonesia (2010) stated from last five years that commonly 15% up to 22% customer have significant share of bank non credit asset from 75% in bank portfolio. According to Kumar (2010), this customer type in relationship marketing side can be recognized as high shared of unused wallet (SUW) and future value potency to the bank which contribute income from customer AUM (Asset under Management) and bank need to maintain this customers AUM (Asset under Management) portfolio wisely to keep stability of bank portfolio and profitability performance. Private banking manages profitability trough effort in customer retention and also manages health churn rate level using database marketing by: 1
2 - Pull strategy to keep customer stay with customer satisfaction and customer loyalty with some value quality especially reward recognition for profitable customer. - Push strategy with increasing stickiness by increase product volume or variance of product item holding and service time by relationship marketing activity using cross selling and up selling. Relationship marketing strategy can use CLV (Customer Lifetime Value) to control and managing effective and efficient ways during sales and service activity meet to customer business needs. Implementing CLV relationship marketing in private banking branch model actually important because branch is an important channel as central key point of service meet to bank s customers needs (McKinsey, 2010) and also one of biggest fixed asset allocation and cost spending. Main considerations to implement CLV relationship approach to private banking branch model are described below: Private banking branch is premium extension development from retail banking branch (Banking from International Settlement, 2010), and private banking branch makes higher cost than regular branch because wealth customers demanding superior service quality. Private banking branch model are more focus to manage customer retention rather than costly customer acquisition and win back, relationship marketing in focus to make more profit with manage AUM
3 from wealth customer to be a cash cow and niche market to the bank (PWC, 2007). Customer retention with deliver highest satisfaction and strong loyalty through more value creation in branch to make rich customer experiences is also expensive to the bank because must reinvested profit which become new cost must to manage properly. Previous description showing that private CLV relationship approach in private banking branch model is important, in other hand, bankers also realizes that more value offered is potential to create cost; this condition push a branch office must focus to serve profitable or potential private banking customer in order to create positive ROE (Return of Equity). Value can be delivering to customer follow CLV segment profile through systematic and effective ways. According to relationship marketing definition by Kumar (2010) explain that nowadays commonly company using conventional model of relationship marketing activity which start from product innovation leads acquisition, acquisition with rich experience leads to satisfaction, satisfaction lead to loyalty and customer retention, and loyalty/retention leads to profitability, this conventional model create not efficient and effective condition because company must to invest their money to non profitable and non potential customers, past learn of satisfaction and loyalty cannot be able to predict value for potential customer and then Kumar (2010) also explain that these approaches can more
4 effective and efficient especially for a mature company with significant size of customer base can put customer profitability segmentation in the front and make a cross selling and up selling as customer maintenance parallel with enhancing revenue and give customer experience for loyal customers, this model of retention of profitable and potential customers can using same profile as acquisition or win back of profitable and potential customers. Using Kumar (2010) suggestion to implementing new path of profitability with classified private banking customer by SUW (share of unused wallet) and CLV (customer lifetime value) by three segments (low, medium, and high) as approach to identified profitable and potential customers. Implementation of new relationships marketing technique to private banking branch model by upgrading low CLV to medium CLV by cross sell and up sell, and then upgrade medium CLV to High CLV by augmented customer value, and the last is maintain high CLV by defend relationship. Figure 1.1 Relationship Marketing Model with SUW and CLV (Kumar, 2010)
5 Considering high net worth customer profile as big potential SUW is scattered in major cities in Indonesia but biggest significant share is in DKI Jakarta because this city have double function as central of economic and government activity in Indonesia, and private banking main player in Indonesia which also have a wide branch network because their role as deposit bank in the middle to making relationship activity to the customer (Orlow. et al 1996) is concentrate in DKI Jakarta. Indonesia geographic requires private banking with relationship marketing by franchise branch model which easy to implement. Pioneers of private banking business service in Indonesia is PT. Bank BCA Tbk company and their premium customers is start from 500 million rupiah as BCA Prioritas, and start 2 billion rupiah as wealth management customer (BCA Solitaire). Research will focus to take DKI Jakarta city as research area in Indonesia because: - Representative of wealth high customer profile. - Highest contribution of gross net domestic product. PT. Bank BCA Tbk also taken as research object because recognize as one of the biggest private commercial bank in Indonesia and suitable as representative of banks which run private banking business because BCA prioritas is pioneers concept including the outlet in Indonesia is follow by other banks which have same concern in premium customers. PT. Bank BCA Tbk profile is high
6 transaction banking model through their branches relationship marketing model, but also paramount relationship marketing as their major strategy. 1.2 PT. BANK BCA COMPANY PROFILE PT. BANK BCA consistently in past ten years become three greatest Bank in Indonesia sort by asset with branch network up to ± 900 branches around Indonesia and 135 branches with BCA Prioritas Outlet (BCA Investor, 2011), this bank also have miscellaneous electronic channel such as ATM with ±7.460 unit, EDC (Electronic Data Capture), IB (Internet Banking), MB (Mobile Banking), and SMS (Short Message Service) Banking which all rich features to support customer banking transaction. PT. Bank BCA have earlier attention to ATM and branch network since twenty years left and also a pioneer of electronic channel development get famous with www.klickbca.com. PT. Bank BCA is consistently having a blue print to one of the best bank which has been establishing relationship marketing through channels. PT. Bank BCA have 55 years long for operation service time in Indonesia, and since 2012 become more customer centric with establishing new marketing strategy to pursue Enhanced Relationship and Quality Growth under corporate slogan Your Right Financial Solution Demand accompanies anniversary theme Always in Your Side. PT. Bank BCA also established private banking using BCA Prioritas more than five
7 years ago as marketing brand and put outlet several strategic locations scattered in Indonesia as described below: Table 1.1 - BCA Prioritas Outlet (BCA Investor Relation, 2011) No Area / City Number of Outlet 1 DKI Jakarta 60 2 Bali 2 3 Bangka Belitung 1 4 Banten 4 5 DIY Yogyakarta 1 6 Jambi 1 7 West Java 17 8 Central Java 9 9 East Java 20 10 Borneo 5 11 Lampung 1 12 Maluku 1 13 NTB 1 14 Papua 1 15 Riau 2 16 Makassar 2 17 Manado 1 18 Padang 1 19 Palembang 1 20 Medan 2
8 Relationships marketing in private banking branch can observe by branch service establishment in certain prime locations. BCA private banking service can describe below which commonly also owned by others banks in Indonesia which run Private Banking Business. Table 1.2 - BCA Private Banking Services (BCA Investor Relation, 2011) Regular Service Special Service Physical Facilities Non Physical Facilities Product Services BCA Prioritas Card, Personal Bankers Wealth Management & Financial Plan Special offers 135Outlet BCA Prioritas, 32 Executive Airport Lounge, free office room in certain locations Retention Program, Acquisition Program Regular Product, Investment Product, Transaction Product, Protection Product, Loan Product Officers, E-Channel, HALO BCA, Medical Service, Prioritas Magazine, Safe Deposit Box, Check-in and baggage handling, one stop service of banking service PT. Bank BCA also has a good financial performance and consistently gets rank Sangat Baik / very good is several criteria. BCA loan volume and deposit volume is growth and particularly has a good financial performance figure although PT. Bank BCA has a lot of branch network in Indonesia. PT. Bank BCA was held many of private banking relationship marketing programs to wealth customer with special invitations and special discount such as gathering, exhibitions, seminar, and social charity programs. Some of special example
9 program which held are Overseas Student Package, Bazaar Art Jakarta, and Jazz Gunung. Table 1.3 - BCA Balance Sheet & Income Statement (Published Quarterly Report, Q3-2012) Financial ratio analyses of PT. Bank BCA also show strong financial performance and make this bank can use as reference as a model to implement detail expansion strategy related to customer relationship marketing especially by CLV relationship strategy, figure of financial ratio can show below:
10 Table 1.4 - BCA Financial Ratio (Published Quarterly Report, Q3-2012) Main ratio show that PT. Bank BCA is a stable and sustainable growth bank with asset and profit, power of capital owned can manage risk of credit, market, and operational properly, and PT. Bank BCA is big but efficient and manageable as non government bank without special support compare to the others, this company also known as leading of marketing relationship program and product innovation which suitable with Indonesian market and culture. 1.3 RESEARCH PROBLEM IDENTIFICATION In this era, there are several concerns in bank run private banking: Rise of expenditure every year make cost pressure to bank make pricing suppressed and decrease revenue margin.
11 Private banking services become fragmented with lot of competitors makes branch must to be creative for their existence. Customer loyalty is brittle, need strong relationship activity. Private banking customer containing high risk profile in the bank customer basket and the churn rate is directly affected to liquidity and revenue of a bank. Number of non active customer means low CLV is predict is still in a major big number but their retention cost is still increase annually. PT. Bank BCA branches with BCA Prioritas in DKI Jakarta become research model because: - PT. Bank BCA Tbk has held intensive relationship marketing activity but cost to income ratio is in good performance in last ten years. Run private banking as BCA Prioritas as business extension and have mature branch distribution channels. Have a complete AUM (Asset under Management) product structure and offer wealth management product and service.
12 Historically coming from local based with world class company standard with consistently generating good financial performance more than five years. BCA is consistently generating complete and interactive marketing activity and premier facilities such as: o Offers extraordinary private banking service at certain branch with executive lounge in several strategic locations. o Establish skill full dedicated private banking sales forces o Held special community and loyalty program DKI Jakarta is major representative city and meeting point of all wealth and high net worth customer profile activity, and high net worth people outside DKI Jakarta commonly also have account in BCA and investment in DKI Jakarta. Availability and privilege data access (for questioner and interview). One of bank in Indonesia with most loyal customers. One of bank in Indonesia with
13 1.4 RESEARCH OBJECTIVES Based on the review above, the research objectives can be notified such as: 1. To understand the CLV status potency of the Bank and get CLV improvement opportunity in private banking branch network model. 2. To know what kind of CLV relationship activity approach can increase customer loyalty, CLV, and branch efficiency in private banking branch network model. Figure 1.2 Thesis Objectives 1.5 SCOPE OF RESEARCH Limitation of this research is forbidden to publish hard private customer data and bank because protect by the law and government policy. Only take PT. Bank BCA as sample because has a large branch network and proven as good example of quality, profitability and efficiency. DKI Jakarta as research location expect as major share of Indonesian customer representatives and some difference variance of customer
14 profile, result, behavior, and level of expensive index in other area become not focus of this research. Relationship marketing is focused to customer retention strategy not to acquisition strategy. All theory was been used will focus to CLV, relationship marketing, and private banking branch network. 1.6 THESIS STRUCTURES OUTLINE This thesis structure describe as follows: 1 Chapter 1: Introduction This part of paper is define background of the thesis, company profile, modeling, problem definition, purposes and scope of the research as synthesis which been retrieved from introduction. 2 Chapter 2: Theoretical Foundation : Literature Review This part of paper is explaining the literature as theory foundation and theories as research reference method. 3 Chapter 3: Research Methodology
15 This part of paper is contain research model, method to be use, specifies the samples from the population, including data sample collection method and technique. Conduct research variables, and set up data material resources with questioner to private banking customers, questioner to the branch manager, in depth interview with management in company as research model. 4 Chapter 4: Data Analysis and Findings This part of paper is to develop data analysis, simulation, and get findings to get insight using appropriate research and formulation method to this research case with data have been collected and processed. 5 Chapter 5: Summary and Recommendations This part of paper is will define summary, conclusion, and recommendation by research final result.