The Banking Industry is a unique service industry where customers are involved at both the initial and final stages of service delivery. Hence service delivery requires lot of effort from the companies part in ensuring customer expectations and needs are met to the fullest. When analysing the Indian banking industry, we observe that how it has evolved over the years with how customer expectations changed from traditional customers who visited branch to new age customers who want convince sitting at their homes. The various dimensions of service quality was also analysed to better understand the factors that would help fulfil customer expectations. The service blue print of the industry was mapped to better understand the points where customer interaction happened. The importance of physical servicescape and how the same can be used as to improve customer satisfaction was analyzed. Being in a very competitive industry, banks adopted various promotion tactics to lure customers with similar product offering across most banks and service being the only differentiating factor. The final section of the report was devoted to the industry analysis which helped understand how RBI regulations in the initial years helped develop a strong backbone for the Indian banking industry and how it would develop going forward and various opportunities which existed on account of the strong domestic demand in the Indian market.
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A sound Banking system forms the backbone of any country and India is no exception with banking industry contributing around 5% of India’s GDP as well as generating employment for over 4 million people. Bank represents a vital link between the economic policies of the government and the various economic factors within the country. In the era of market oriented-economics banks have become the most important financial intermediaries and act as a reflection of the performance of the economy as whole. The focus of the report will be on the Retail Banking segment.
The banking industry in India has undergone major changes right down from the pre liberalisation era when RBI (Reserve Bank of India) heavily regulated the industry to the post liberalisation phase where restrictions were eased and private as well as foreign banks played a much more significant role. The major trends that have been seen off late in the Banking Industry are:
Retail banking will continue to grow due to the strong domestic demand from the vast Indian demographic. Mortgages are expected to grow and cross Rs 40 trillion by 2020.
The new middle class consumer segment which is currently growing at a rapid pace will accentuate the demand for low cost banking solutions in the future.
Branches and ATMs are still growing in order to better serve the huge bankable population of India. Low cost branch network with smaller sized branches will be adopted for the same.
Mobile banking will come of age with increasing access of internet on the mobile phone. New generation customers prefer online banking instead of visiting the actual branches.
Banks will adopt CRM (Customer Relationship Management), data warehousing and Business Analytics in a major way to reduce customer acquisition costs and improve risk management.
Margins will see downward pressure both on retail and corporate banking due to increasing competition spurring banks to generate more fees and improve operating efficiency.
ROLE OF TECHNOLOGY
Despite the IT saga of the banking industry starting in the mid eighties with RBI forcing banks to automate services, it was only with the advent of private sector banks was technology truly leveraged. Technology has now become an integral part of any bank’s business strategy and is used as a tool for creating value and customer satisfaction. The major applications are in the areas of:
Improving Customer experience through services such as Internet and Mobile Banking.
Reducing costs and improving efficiency
Business Intelligence and Analytics in better targeting customers
Indian Banking industry can be classified as follows:
Public sector banks
These are government controlled banks and comprise of almost 90% of banks in the Indian banking industry. They further can be divided into: The State bank group (RBI owns the majority stake in this group comprising of State Bank of India (SBI) and its other associate banks), Nationalized banks (Punjab national bank, Indian overseas bank and oriental bank of commerce) and Regional rural banks (RRB’s). The state group and nationalized banks are collectively referred as public sector banks (PSB’s)
Private sector banks
These are non-incorporated banks where majority stake is held by private individuals or are traded in the market. ICICI bank, HDFC bank, Axis bank etc. fall under this category.
These are multinational banks headquartered in foreign countries which entered India post 1991 liberalisation. Citi bank, HSBC etc. fall under this category.
Apart from the ones mentioned above, there are cooperative banks, non-banking financial companies (NBFC’s), capital market intermediaries and state and central financial entities which fall under the broad spectrum of financial institutions in India.
The major competition Retail Banking industry may face is from the financial markets. Traditional customers used to be risk averse while the new age customers are more risk taking and hence invests a significant portion of their savings in the stock market expecting higher returns. In addition to stock markets small scale local investors may also take money directly from the people. Thus competition for the Retail banking industry is moderate to low.
INDUSTRY IN THE TABGIBILITY SPECTRUM
The tangibility spectrum of the industry is as shown below:
Figure : Tangibility Spectrum for Banking Industry
Banking falls under the category of being intangible dominant since the only physical aspect is that of the documents one gets for the services. Most transactions are done through electronic form with very little tangible components.
Typical service offering
The customer expectations of banking industry can be classified into 5 parts:
Figure : Customer Expectations
Simplified banking: Though banking has become sophisticated over the years it still needs to be simple in terms of process and services to enhance banking experience for the customer
Service accessibility: Easy and reliable access to the service
Data Privacy & security: Protecting the customers Identity and ensuring that their money and data is not miss used
Customer Serviceability: Developing a responsive, reliable and competent service model which will enhance customer satisfaction
Channel Amplification: Right mix of self service and assisted channel for the transactions is important for giving a rich and consistent banking experience for the customer
bundle of benefits
Banks generally attracts customers based on the bundle of services they offer like a person who starts a bank account would like to have an ATM card, DMAT account etc. from the same bank itself. The customer perception to this bundle thus plays a huge role in the success of the banks. The bundle sells well if the customer has the affordability as well as the perceived value. The importance of the same can be attributed to different income levels of the Indian population. Banks can no longer attract consumers with basic services such as subsidized overdraft fee, debit card etc. In order to attract new age customers, bank must focus on building lasting relationships that caters to all stages of the customer’s lifecycle. Banks need to deepen their understanding about the customers’ needs in order to survive in face of competition in order to survive in the long run.
Some of the common bundles in banking industry are:
In banks the main service is usually the savings or current account. A typical bundle will consist of other services like insurance, travel, credit facilities, online banking, mobile banking etc.
Loyalty points program as well as targeting customers with customized offers such as discounts at nearby restaurants when paid for using the bank’s debit cards etc. have become popular of late.
Figure : Life Cycle of Banking Products
service performance of firms in thE industry
Zeithaml, Parasuraman and Berry designed a model where they found five dimensions customers use when evaluating service quality. The same can be used to evaluate the service performance of firms in the industry. These dimensions include:
In the banking industry, having knowledgeable and polite personnel having the ability to win customers trust is of paramount importance in maintaining long term relationship with banks. Banks thus invest substantially in recruiting and training employees.
Banking industry is one where there can be no errors especially when dealing with customer’s money. The ability of the bank to perform the promised service dependably and accurately is thus of paramount importance in ensuring customers use the services provided by the bank.
When we analyse the tangible of the bank such as appearance of physical facilities, equipment, personnel, and communication materials, we see that new age banks are leading the public sector banks. But due to evolution of retail banking in such a way that customers rarely go to the bank nowadays as well as the perception of people that public sector banks are safer, PSU banks tend to have most of the savings of the customers.
The willingness to help customers and provide them prompt service is something which every bank gives priority to. Customer care centres have been created to handle any doubts or queries which customers may have in addition to the branches.
In order to build long lasting relationship with customers’ banks need to be give caring, individualized attention. Executives need to be trained so as to make customer s feel valued.
customer’s involvement in the service delivery
When analysing the involvement of customers in the service delivery, we see that customer involvement in the service delivery has been high over the years in the banking industry. But the customer’s involvement has evolved significantly during this period. In the last decade, we see that people used to be very conservative and risk averse and used to go the banks and stand in queues for the service while nowadays people avail the a wide range of services sitting at their homes and rarely visit the actual banks.
Few of the significant technologies which have increased customer involvement in the service delivery are:
ATM machines: ATM is a self service technology which helped significantly reduce the cost of branch operations by separating small transactions from the bigger ones. This has significantly improved customer experience by reducing the time taken in withdrawing cash.
Net Banking: With the advance of internet in India, most of the new generation customers switched to online banking which improved the customer’s service experience as well as helped the banks reduce cost and improve operational efficiency. Customers though initially feared the service citing safety reasons has now shifted to the online platform which provides a host of banking services.
Mobile Banking: Mobile Banking is still in its nascent stages but has shown great promise in improving the customer service experience by further simplifying the whole banking experience.
The diagram shown below depicts how customer involvement has evolved over the years and how customers are now becoming pioneers from paranoids.
Figure : Changing nature of Customer Involvement in the Banking Industry
The typical service blue print for a customer approaching a retail bank is as follows:
Figure : Service Blue Print of a typical service
The blueprint will have five components which include Physical Evidence, Contact Employee Actions, Customer Actions, Backstage Employee and Support Process.
value of blueprinting a service
Service blueprints provide the employees with an overview so that they can have understanding of the process followed. In the case of bank the physical evidence can be location of the customer desk or location of the cashier counter. It is important the design of place should be such that customer has maximum convenience. The line of interaction between external customer and employees illustrates the interaction which happens on this front. This line of visibility should be designed in such a way so as to facilitate the formation of a relationship.
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service encounters / moments of truth in this service
“Moments of truth” creates the most vibrant impression of the services when the customer interacts with the service firm. By these encounters the customers receive an idea about the service quality provided by the organization. Each point of contact of customer with employee decide the customer overall satisfaction will quality of service and their willingness to do business with the organization. Committing errors at initial stage are very precarious and they do have additive effect, because the failure at this point will result in greater dissatisfaction at subsequent levels.
In the case of bank the moment of truth is when customer interacts with the customer care centre; second moment of truth is when the customer interact with cashier. The way cashier interact with the customer becomes third moment of truth. The moment customer enter the bank and the time spend in bank interaction with the employee is moment of truth for bank. Any bad impression at any moment of truth can give a bad impression to the customer.
service marketer’s Learning
A services blueprint is an operational planning process which provides guideline on how to provide service, especially physical evidence, selection of staff, the support system, and the basic infrastructure needed to ensure smooth delivery of services by different channel. For example, to plan how you will loan devices to users, a service blueprint would help determine how this would happen at a service desk, what kinds of maintenance and support activities were needed behind the scenes, how users would learn about what’s available, how it would be checked in and out, and by what means users would be trained on how to use the device.
Services Blueprint help marketer how different channel be made to deliver the services and should be able to show physical evidence of the services. It also clearly defines the role of the frontline staff, the responsibility of backend staff and also of the support staff so as to provide efficient and reliable services. Blueprint helps in preparing roadmap and efficient way of understanding the operation sequence which will help provide service. Any fault can be identified when the blueprint is followed by iterative process and changes can be made so that there is no gap left in the service provided and expected level.
Role of Servicescape and influence in service delivery process
Servicescape plays an important role in how customers interact with the service. In the banking industry we all types of servicescape usage like for example ATMs (Self-service), Bank Branches (Interpersonal services) and Mobile Banking (Remote Service).
Figure : Framework to understand Servicescape of the Banking Industry
On mapping the banking servicescape with framework shown above, the key inferences are:
The importance of Physical environmental dimensions has decreased over the years with people rarely visiting banks.
The most important aspect is the internal response of employees in making the customers feeling valued and in creating a sense of confidence in them.
The behavioural aspects are also important in ensuring the bank is able to build a long term relationship with the customer.
servicescape as a source of competitive advantage
Looking at the banking industry, we believe servicescape can become a source of competitive advantage if leveraged with technology. In retail banking, the latest trends are towards developing virtual servicescape where customers experience the banking services through the internet or even through mobile platforms. Banks should thus invest in virtual servicescape which effectively lets the customers see tangible evidence of the service without actually being in the banks. This is in line with how customers have been evolving and will help banks reduce cost and improve operational efficiency.
Banks are recognizing that old fashioned promotion strategy in the current market condition is inadequate. Traditionally bank tried to reach every community people, but recent research shows that bank should aim at micro segments. The promotion role now is that they should aim at building long term relationship with customer by carefully selecting them. Financial institutions are realizing that their established promotion practices are inadequate for new market conditions as levels of customer defection in the sector grows. So banks are adopting new promotional strategies for their product and brand.
Elements of Promotional Strategy
Advertising is highly public mode of communication. In recent time role of advertising has gained dramatically to promote its product to both personal and corporate markets. Coupons, Discount, Interest rate, and insurance etc. are example of sales promotion. Trade promotions are also offered to customer when bank services such as financing of car loan etc. are provided through the third party or automobile industry. The bank provides incentives to their employees who offer superior performance. The main objective of promotion is to attract deal oriented customer rather than adding new customer. Direct marketing involves connecting to individual customer to gain both immediate response and have long lasting customer relationship. According to Ph. Kotler (Ph. Kotler, K.L. Keller, 2008), “direct marketing channels is the use of direct connection with consumers to address their customers and deliver goods and services without using the mediator of marketing. These channels are: direct mail offer, selling on the catalogs, telemarketing, interactive television, and computer sales presentations calling for public websites and mobile sites”. The channel includes direct mailing, catalogs, telemarketing, interactive TV, kiosks, websites, and mobile devices. This channel is now Main Avenue for service marketing. Now a day’s viral marketing has become vital for promotion. This includes paying people incentive to say positive about the bank product via emails, word of mouth and phones. Few banks have also used cross selling as promotion strategy to sell their product. When customer enters into relationship with the bank, the bank persuades the customer to buy their other financial product. The company uses data ware housing and data mining technique to effectively target their potential customer. Few promotional ads used by banks are shown in Exhibit 1.
When we analyse the Industry value chain, we see that banking industry is unique from the perspective that customers are involved in the starting as well as ending of the value chain.
Figure : Value chain Analysis of the Banking Industry
One of the key enablers of the banking industry is the human resource management where companies require highly skilled and capable employees to understand and cater to the needs of the customer.
Figure : Porter’s 5 force analysis of the Banking Industry
The Porter’s 5 force analysis reveals that the industry is overall unattractive due to high competition as well as value leakage across the value chain in terms of availability of substitutes.
Strengths & weakness of the industry
The strength of the industry is in terms of the regulations which the RBI has imposed on the industry which can be seen from how Indian banks fared well in comparison to western counter parts during the 2008 crisis. Though there are various regulations which a bank needs to satisfy in order to setup operations in India, these regulations have made the banks stronger in terms of handling adverse market situations. The banking industry has been growing at a healthy rate of 16.29% from 2011 – 2012. The weakness of the industry is in terms of the high supplier power (switching costs for customers is less, other suppliers like card processing gateway also have high power) and the high buyer power who tends to switch banks to get the best possible rates in the industry. The development of financial markets in the country has also affected the industry with new age customers more risk taking in comparison to traditional customers. Due to these factors, we see that it is unattractive for a new player to enter the industry since there is limited opportunity to make profit. The public sectors banks also tend to have a very strong foothold against which new players will struggle to compete.
Figure : Market share of banks in the Indian banking Industry
In terms of opportunities, India being a country where only 57% of population has access to a bank account (Source: Dun & Bradstreet India) there is still tremendous potential in serving the huge population especially the under privileged. We also see that banking industry is one where technological innovations are adopted much faster than other industries. With new services like Online Banking, Mobile Banking etc. customers are now offered a wider range of services than was offered previously. With the industry growing at 16%, and 43% of the Indian population still lacking access to financial services, it is evident that there is untapped potential in the industry which various players can exploit.
Future of the Industry
In order to understand how the future of the banking industry will play out, one needs to understand how the banking industry in India has evolved over the years. Looking at the past, we see that the banking industry was heavily regulated by the RBI with India being a developing nation lacking a stable currency. The post liberalisation era showed how RBI eased rules to allow private and foreign players to better express themselves in the market.
With the development of strong financial markets within the country, we believe the role of banks in the nation will change slowly. On analysing the banks in India with those of developed nations we see that Indian banks have more loans in comparison to western banks which hold more bonds. So the role of banks is more advisory in nature. We feel the same trend will happen in India once the bonds markets are developed and then banks would focus more on advisory income which is off balance sheet income. The figure below shows how proportion of other income has been increasing especially among the private banks. The focus on customers will thus increase even more in the future.
Figure : Increase in Advisory Income
On a concluding note, after careful analysis of the service components in the banking industry we see that banking is unique in way it involves customer at the beginning as well as ending stages of the value chain. With the current trends in banking industry as well evolution of banking industry on line with that of developed nations we see that the importance of customers and employees for banks have increased even more than traditional times. For a firm to compete, it is therefore important that it understands these aspects and offers services in a manner which helps build long term relationship with the customers.
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