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Pilgrim Bank :

Customer Profitability –
Case Analysis

Abhijeet Mukherjee
Anoop Maheshwari
Kuldeep Kumar
Muralidhar S
Nikhil Gulhane
Piyush Vanjani
Vipul Sharma
Group 12 – Section B
Pilgrim Bank, operates in the Retail Banking Industry. The bank had various divisions, with Online
banking group being one of them. One of the major focus was in terms of online banking and
Internet Strategies for enhancing Customer experience and reduction in Bank’s opex. costs.
To generate a position statement, to justify my stand for customer transactions using low cost
channels and providing various avenues in order to enhance Customer profitability, by better
management of Customer relationships, thus ensuring customer retention & revenue growth.

• Managing Customer expectations & profitability to the customer as well as the bank was a
major challenge, since the relationship between balances and customer profitability was not a very
straight-forward situation. Obtaining accurate and reliable data on customer profitability was a big
challenge in retail banking.

• Profitability at the customer level was particularly important in retail banking because customer
transactions generated incremental costs but typically did not generate incremental revenue.

• Also, customer behaviour in terms of transactions was a critical component, for customer
profitability, especially in terms of using low cost channels, as this enhanced the operational cost
for the bank. For example two customers having the same accounts and balances, had a different
patterns, wherein the customer who used to interact with the bank less frequently was more

• Levying more charges on transactions in order to ensure profitability for customer, also had
failed based on historical data. For example, First Chicago’s decision to charge for teller visits, had
contributed to a loss of one-fifth of its customer base, which was a critical aspect.

• In fact, the history of banking services started off with the low cost channels around 30 years
back, starting with ATM’s, followed by 24 hours call centers, VRU’s and off-late the Internet
banking. Carefully analyzing, each channel had provided an opportunity to reduce cost per
transaction than the previous one. However with the low cost channels, the overall cost structure
increased, since customer transactions grew with addition of various low cost channels, rather than
one channel replacing another one.

• The main point ol discussion is whether online customers are better and would that actually
produce better customers. Actually balance level captured only one piece of information of overall
customer value to the bank. The focus on balances only will lead to missing important components
of revenue such as fees and ignoring the cost of serving individual customers.

• Variation in customer profitability was very high. Also retaining the highly profitable
customers was a very high challenge, as more number of avenues and facilities were supposed to be
provided at a lesser cost, with increase in volume transactions and hence the profitability.

• Another challenge that was perceived was that the number of bank’s branches grew in spite of a
larger presence of low cost channels such as ATM’s and Call Centers.
• The contributions of individual customers to bank earnings varied widely with a small
percentage of customers coss-subsidizing the profitability of the bulk of the customer base. Based
on the study, it was found out that half of Pilgrim’s 5 million customers were unprofitable. The
profitability analysis at the customer level in Pilgrim bank, showed that 10% of the customers
generated 70% of the profits.

Now,We need to identify if the online customers are indeed better customers and if the adoption of
the online channel actually produce better customers in terms of profitability.
Analysis required:
- Establish confidence intervals
- Check if there is significant difference in the profitability between online customers and
regular customers
- Study and report how age, income and geographic region affect the profitability of the
online customer
Confidence interval: Population size is large and hence we can perform z test to get confidence
interval for the average population profit. The confidence interval with 95% confidence:

Online vs Regular Customers:

Null hypothesis is that no significant difference in profitability and Alternate hypothesis would be
that significant difference exists

t test analysis of comparison between online and regular customers.

t-Test: Two-Sample Assuming Unequal Variances
Online customers Offline customers
Mean 110.79 116.67
Variance 73604.22 80465.63
Observations 27780.00 3854.00
Hypothesized Mean
Difference 0.00
Df 4882.00
t Stat -1.21
P(T<=t) two-tail 0.23
t Critical two-tail 1.96

t value is -1.21 which lies in the acceptance region of -1.96 to +1.96.Therefore null hypothesis is
accepted and we can conclude that there exists no significant difference in profitability of online
and regular customers.
Therefore there is no difference between profits of online customers and offline customers.
Effect of the various independent variables: Profitability is the dependent variable and online
usage, age, income, tenure and geographic area are independent variables. First regression run
showed that p-value for geographic region was as high as 0.42 and hence district is removed as
independent variable.
Regression Statistics
Multiple R 0.24
R Square 0.06
Adjusted R
Square 0.06
Standard Error 274.6
Observations 22812
1.77E+0 2.34E+0
Regression 6 1.06E+08 7 2 1.46E-291
Residual 22805 1.72E+09 4
Total 22811 1.83E+09
Coefficient Standard Upper
s Error t Stat P-value Lower 95% 95%
Intercept -99.34 8.05 -12.35 0.00 -115.11 -83.57
Online 17.46 5.51 3.17 0.00 6.66 28.26
Age 18.47 1.25 14.82 0.00 16.03 20.91
Inc 17.17 0.80 21.38 0.00 15.60 18.74
Tenure 4.03 0.24 17.09 0.00 3.57 4.49
District1100 -6.25 7.77 -0.80 0.42 -21.48 8.98
District1200 14.50 5.53 2.62 0.01 3.66 25.34

F value: 1.46E-291 – significant - model cannot be rejected.

R value: 0.24 – predictability of the model is low.

 For every increase in online usage, profitability increases by $17.46 – Therefore it is better
to bring more online customers. Current online usage is very low (0.122) and so online
usage must be promoted by providing it free of cost.

 For every increase in 10yrs of age, profitability increases by $18.47. This means that elderly
customers are more important to the bank.

 An increase in income category, profitability rises by $17.75 and so high income group
should be better targeted and attended to.

 One year increase in tenure boosts profitability by $4.03 and hence customer retention is
very important for the bank.
Age is the most important factor in online usage and it is negatively related. But elderly customers
are more profitable and hence we need to educate them to make use of the online services.