MMPB-005

Marketing of Financial
Indira Gandhi
Services

BLOCK 1
Financial Services in India 5

BLOCK 2
Marketing of Banking and Other Services 71

BLOCK 3
Merchant Banking and Allied Services 193
BLOCK 4
Sector Specific Marketing Strategies 219
BLOCK 5
Emerging Issues 261
COURSE DESIGN AND PREPARATION TEAM
Prof. K. Ravi Sankar, Mr. Gautam Bhardwaj*
SOMS, IGNOU, New Delhi Invest India Economic Foundation
Pvt. Ltd., Mumbai

Dr. Satish Pai * Mr. Prithvi Haidea*

Chief Praxis Consultancy & Information Service
BSES Management Institute, Mumbai Private Limited, New Delhi

Dr. G. Balakrishnan * Dr. Satish Pai, Chief*

Advisor, Gujarat Spinner India Ltd. BSES, Management Institute, Mumbai
Mumbai

Mr. Y Bhalerao* Mr. Rajat Prasad *

Management Consultant R.R. Financial Consultant Limited
Pune New Delhi

Mr. J.M. Iyer* Mr. Hemant Rastogi*

Director Business Development & Marketing
Sytec Associates Mumbai
Mumbai

Prof. Madhulika Kaushik* Mr. R.H. Sharma*

SOMS, IGNOU, New Delhi Chief Executive Officer
The Indian Institute of Bankers, Mumbai

Prof. OP Wali Mr. Amrish Sehgal *

Indian Institute of Foreign Trade Management Consultant
New Delhi New Delhi
Prof. Kamal Vagrecha Prof. Anjali C. Ramteke
(Course Coordinator) SOMS, IGNOU
SOMS, IGNOU, New Delhi
New Delhi

Acknowledgement: Parts of this course is adapted from the earlier MS-423: Marketing of
Financial Services course and the persons marked with (*) were the original contributors and
the profiles are as it was on the date of initial print.

PRINT PRODUCTION
Mr.Tilak Raj
Assistant Registrar
MPDD, IGNOU, New Delhi
April, 2023
© Indira Gandhi National Open University, 2023
ISBN:
All rights reserved. No part of this work may be reproduced in any form, by mimeograph or
any other means, without permission in writing from the Indira Gandhi National Open
University. Further information on the Indira Gandhi National Open University courses may
be obtained from the University’s office at Maidan Garhi, New Delhi-110 068.
Printed and published on behalf of the Indira Gandhi National Open University, New
Delhi, by the Registrar, MPDD, IGNOU.
Laser typeset by Tessa Media & Computers, C-206, A.F.E-II, Jamia Nagar, New Delhi-
110025
 CONTENT

BLOCK 1 FINANCIAL SERVICES IN INDIA 5

Unit 1 Financial Services Markets: An Overview 7
Unit 2 Marketing of Financial Services: Issues and 27
Concept
Unit 3 Consumer Behaviour in Relation to Financial 50
Services
BLOCK 2 MARKETING OF BANKING AND 71
OTHER SERVICES
Unit 4 Banking Products and Services 73
Unit 5 Non Banking Financial Services 110
Unit 6 Distribution, Pricing and Promotions Strategy 124
for Banking Services
Unit 7 Attracting and Retaining Bank Customers 163
BLOCK 3 MERCHANT BANKING AND ALLIED 193
SERVICES
Unit 8 Issue Management and Underwriting Services 195
Unit 9 Stock Broking Services 208
BLOCK 4 SECTOR SPECIFIC MARKETING 219
STRATEGIES
Unit 10 Marketing of Insurance Services 221
Unit 11 marketing of Mutual Funds 238
Unit 12 Marketing of Pension Funds 248
BLOCK 5 EMERGING ISSUES 261
Unit 13 Technology and Digital Marketing 263
Unit 14 CRM and Role of Analytics 283
Unit 15 Future Directions 292
COURSE INTRODUCTION: MMPB 005
MARKETING OF FINANCIAL SERVICES

As the income level of the population is increasing with corresponding rise in

disposable income financial services are gaining prominence in the financial
landscape. In addition growing economy has requirement for additional credit
which is again provided by financial services providers.

Block 1 of this course on financial services in India aims at providing you

with a general overview of financial markets in India. Further in Unit 2 we
discuss the conceptual framework for marketing of financial services, where
we discuss marketing both as concept and practice and dwell upon
characteristics of services. In the last part of the block in unit 3 we discuss
consumer behaviour which is about perception, beliefs and attitudes which
are important contributors in buying decisions
Block 2 Marketing of Banking and other services aims to provide you with
an overview of how the major financial services are marketed. The first two
units deal with banking products and non banking financial services. Banking
sector is already an established sector, whereas NBFC are developing as
financial service providers and coming up with innovative products specially
for the population which is unbanked and under banked.

Block 3 deals with Merchant Banking and Allied services where we discuss
about issue management and under writing services and stock broking
services. Both of these services are going to be of importance due to the role
of capital markets in raising of funds for corporate sector and subsequent
liquidity of listed instruments
Block 4 deals with sector specific marketing strategies for insurance, mutual
funds and pension funds.All these three services are growing and in light of
changing demographics these services have immense potential to grow at
even higher pace

Block 5 deals with emerging issues where we discuss the application of

technology in marketing and how CRM is being transformed using analytics.
In the last part we discuss the future trends and their likely impact on
financial services providers
 BLOCK 1
FINANCIAL SERVICES IN INDIA
BLOCK 1 FINANCIAL SERVICES IN INDIA

This, the first block on the Course on Financial Services Marketing in India,
aims at providing you with a general overview of the financial services
markets in India, the main issues and concerns in these markets today and the
conceptual understanding of the underlying consumer behaviour in relation to
financial services. The block also provides the concepts of services marketing
as applied to financial services in general, which would need to be applied by
you in building up your understanding of the entire course. The block
consists of four units covering the above mentioned concepts and inputs.
UNIT 1 FINANCIAL SERVICES MARKETS: Financial Services
Markets: An
AN OVERVIEW Overview

Objectives

After going through this Unit you should be able to:

• Get an overview of the financial services market in India.

• Discuss the historical perspective of recent development in these market
• Comment upon the various organised financial markets in the country
• Describe the depository system for Indian Stock Market
• Explain the role of the payments and settlements systems in India

Structure

1.1 Introduction
12 Types of Financial Markets in India
1.3 A Brief Historical Perspective of Development in Financial Markets
14 Money Market
15 Foreign Exchange Market
1.6 Components of the Corporate Securities Market
1.7 Private Placement Market in India
1.8 Mutual Funds Market in India
1.9 Foreign Institutional Investors (FIIS)
1.10 Stock Exchanges - Operations
1.11 Depository Systems for Indian Stock Exchange
1.12 Debt Market
1.13 Government Securities Market
1.14 The Role of Payment and Settlement System in India
1.15 Treasury Bills
1.16 Housing Finance Market
1.17 Summary
1.18 Self Assessment Questions

1.1 INTRODUCTION
Financial markets exercise enormous influence over modern life as they are
the main channels through which savings are channelized to the investment in
the economy. This unit explains the purposes different financial markets
serve and clarifies the way they work. The main role of financial markets is:
7
Financial Services
• In the mobilisation and allocation of saving in the economy
in India
• In transmitting signals for policy specially during financial crisis and
period of high inflation
• In facilitating liquidity management that is consistent with overall short-
and medium-term policy objectives
• Providing future income streams by way of investments

Financial firms match the available funds of savers and investors with
borrowers and others seeking to raise funds in exchange for future payments.
The products, instruments, and markets used to facilitate this matching are
numerous each having its own risk and return characteristics.

The financial system is divided into banking, insurance, and securities

markets. Financial markets in India comprise in the main, the credit market,
the money market, the foreign exchange market, the debt market , leasing and
hire purchase market and the capital market along with the derivatives market,
Over the Counter Market (OTC) and exchange traded market. Majority of
financial services in India are provided by banks either by themselves or by
the subsidiaries of the bank. The components of financial system are:

• Financial Assets
• Financial Intermediaries/Financial Institutions
• Financial Markets
• Financial Rates of Return
• Financial Instruments and
• . Financial Services

The interaction between these various components gives rise to financial

services. Financial services are provided by financial institutions and
delivered through financial markets in form of various financial instruments
like mutual funds , fixed deposits, insurance policy etc.

The important function of financial services is:

• Provision of liquidity
• Mobilization of savings
• Size transformation/Capital formation
• Maturity transformation
• Risk transformation
• Lowering of cost of transaction
• Payment mechanism
• Assisting new projects
• Meet short and long term financial needs
8
• Provide necessary finance to the Government Financial Services
Markets: An
• Accelerate the process of economic growth of the country Overview

Financial services markets play a main and a prominent role in mobilisation

of savings from all quarters of economy and deployment of savings in
projects and instruments.

In the economy, financial services facilitate:

• payment systems for exchange of goods and services.

• pooling of funds for deployment in large scale projects
• mechanism for spatial and temporal transfer of resources,
• mechanism for managing uncertainty and control of risk,
• information generation
• addressing problem of information asymmetry.

1.2 TYPES OF FINANCIAL MARKETS IN INDIA

The main organised financial markets in India are:

i) The Credit Market which is dominated by commercial banks.

ii) The Money Market with call/notice money forming a sizeable proportion.
iii) The Equity and Term lending Market consisting of Primary. Secondary
and Term lending segments.
iv) The Corporate Debt Market comprising Public Sector Unit bonds and
corporate debentures.
V) The Gilt-edged Market for Government securities,
vi) The Housing Finance Market.
vii) The Hire Purchase and Leasing Finance Market wherein the non-bank
financial companies (NBFCs) predominate.
viii) The Insurance Market the main players being insurance companies and
the new entrants like HDFC, SBI Reliance and ICICI
ix) The Foreign Exchange Market. The main players being Authorised
Dealers mentioned in the Exchange Control manual.
x) In addition, there is an Informal Finance Market, on which information is
limited and not easily ascertainable.

Activity 1

1. Looking at the financial service markets given above which do you think
are the most dynamic markets in India and why?
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9
Financial Services
2. Do you think you can identify financial service markets other than those
in India
listed above? List these.
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1.3 A BRIEF HISTORICAL PERSPECTIVE OF

DEVELOPMENT IN FINANCIAL MARKETS
India financial services market has evolved over a period. Uphill the early
part of the nineteenth century the only form of financial service was provided
by the local money lenders, but as the economy grew the level of financial of
financial intermediation also grew resulting into the formation of banking and
insurance companies apart from Bombay Stock Exchange. Even before the
setting up of the Reserve Bank of India in 1935, the country had money,
Government securities and foreign exchange markets. The markets were,
however, characterised by paucity of instruments, limited number of players
and lacked depth, partly because the Indian financial system was primarily a
bank-based system.. At the time of Independence in 1947, India had a fairly
well developed banking system. The adoption of bank dominated financial
development strategy was aimed at meeting the sectoral credit needs,
particularly of agriculture and industry. Specialized development financial
institutions (DFIs) such as the IDBI, NABARD, NHB and SIDBI, etc., with
majority ownership of the Reserve Bank were set up to meet the long-term
financing requirements of industry and agriculture. . Up until 1990 there was
significant institutional development, the environment in the financial sector
up to the 1990s was not particularly conducive for the development of deep
and wide financial markets. In fact, it had resulted in segmented and under-
developed markets characterised by paucity of instruments, and limited
number of participants. Banks and financial institutions functioned in a
highly regulated environment, characterised by an administered interest rate
structure, quantitative restrictions on credit flows, fairly high reserve
requirements and pre-emption of significant proportion of lendable resources
for the priority and Government sectors. After the balance of payments crisis
of 1991, a comprehensive structural and financial sector reform process was
initiated in India as recommended by the Committee on the Financial System
(Chairman: M. Narasimham, 1991). Some of the major structural changes in
the financial sector comprised removal of barriers to entry, introduction of
free pricing of financial assets in most of the segments, relaxation of
quantitative restrictions, new methods of floatation/ issuance of securities,
increase in the number of instruments, enlarged participation, improvement in
trading, clearing and settlement practices, improvement in the informational
10
flows, transparency and disclosure practices. Financial Services
Markets: An
Overview
Government opened up the financial system and markets for private players.
It attracted private investors to some existing DFIs like IFCI and IDBI.

Two sectors that need their due credit are Insurance and Mutual fund and, the
post-1991 period was especially good for these sectors. Various national and
foreign entities beginning to participate in the Mutual fund sector and lead to
the diversification of the sector. Under the regulatory purview of IRDA, the
insurance sector has become a much more disciplined and dynamic sector
with the participation of national and foreign players. This sector with a
highly diversified product portfolio with a much wider inclusion of customers
has also strengthened the financial system in India.

The post-1991 era transformed the Indian Financial System with a newer type
of organizational infrastructure like Credit Rating Agencies, Technical
Consultancies, Custodian Service Providers, portfolio managers, Foreign
Institutional Investors brought much needed dynamism in the economy.

Though the sanctions of the All-India Financial Institutions (AIFIS) declined,

disbursement recorded a modest growth.

The Government and regulatory authority’s viz.the Reserve Bank and the
Securities and Exchange Board of India (SEBI) continued to strengthen the
financial infrastructure in terms of prudential regulations, improvements in
payments and settlement system, adoption of communication technology and
widening and deepening of various segments of the market.

1.4 MONEY MARKET

Money market constitutes a very important segment of the Indian financial
system, performing the role of providing an equilibrating mechanism to even
out short- term liquidity and in the process, facilitating the conduct of
monetary policy.

The central bank's (that is the Reserve Bank of India) interventions in the
money market to influence liquidity serve as a signaling device for other
segments of the financial system.

The money market instruments comprise

• Call (overnight)
• Short Notice (up to fourteen days) money,
• Term Money
• Commercial Paper (CPS)
• Certificates of Deposit (CDs)
• Money Market Mutual Funds
• Commercial Bills
11
Financial Services
• Treasury Bills
in India
• Inter-Corporate Funds.

Of these, call and short notice market and Treasury Bills form the most
important segment of the Indian money market and banks, financial
institutions and Primary Dealers (PDs) are major players in the money market.

Call/Notice Money Market

There was significant softening of call rates in the nineties on account of the
strong improvement in liquidity. The RBI intervened regularly through repo
operations so that the money market rates do not dip to unreasonably low
levels on a prolonged basis.

The rates for other money market instruments also exhibited a downtrend,
given the improved liquidity situation. Not surprisingly, the banks' reliance
on relatively high-cost funds declined.

Easy liquidity conditions gave a boost to the issue of commercial paper (CP)
at lower costs.

Term Money Borrowings by Financial Institutions

The outstanding amount of term money borrowings of financial institutions

increased sharply. The interest rate on term money borrowings came down.
The maturity period for term deposits in case of five financial institutions viz.,
IDBI, ICICI, IFCI. EXIM Bank and SIDBI were prescribed at 1 to 5 years'
instead of 3 years and over' stipulated earlier.

Activity 2

Can you name three money market instruments? Please take any one of the
three and research in detail.
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Activity 3
Talk to some users in the money market and discuss with them to find the
reasons why the money market mutual funds in India have not met with the
expected degree of success.
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12 …………………………………………………………………………………
1.5 FOREIGN EXCHANGE MARKET Financial Services
Markets: An
Overview
The Indian Foreign exchange market is where you may buy and sell other
countries' currencies. The exchange rate of a currency is determined by the
demand and supply of currencies and global macro economic factors.
Foreign Exchange Market, is a decentralized global marketplace for foreign
currency trading. The FOREX market is an OTC (over-the-counter) market

Types Of Foreign Exchange Market in India:

Spot Market
In this market, transactions immediate delivery is to be done by seller and
payment by the buyer at the prevailing exchange rate. There is a very small
difference between buying and selling price.
Futures Market
Future market transactions, , require future payment and distribution at a
previously negotiated exchange rate, also known as the future rate. These
agreements and transactions are formal., This method is usually employed by
exporters and importers to hedge their position.
Forward Market
Forward market deals are identical to future market transactions. The main
difference is that in a forward market, the parties will negotiate the terms.
With the introduction of currency derivatives in the Indian Markets, the
volume in Foreign currency market has gone up significantly.
A notable development in this market has been its gradual integration with
the money market as reflected in softening of forward premium in the wake
of significant moderation in short term interest rates and sustained stability in
exchange rates.

1.6 COMPONENTS OF THE CORPORATE

SECURITIES MARKET
Capital markets are divided into:

1. Primary,

2. Secondary

Primary market covers Public, Corporate, Existing stock holders, other

entities.

It handles instruments like Stock and Shares, Debentures, Units, Bonds,

Warrants, Collective investment instruments. Venture capital funds, Global
depository receipts. Foreign currency convertible bonds.

Its intermediaries are:

1. Merchant Bankers
13
Financial Services
2. Underwriters,
in India
3. Portfolio managers,
4. Debenture trustees,
5. Bankers to an issue,
6. Registrar to an issue,
7. Share Transfer agents,
8. Rating Agencies.

Secondary Market

This covers recognised stock exchanges and Spot market.

Its instruments are:

1. Stock and shares

2. Units, Bonds
3. Debentures,
4. Futures and Options,
5. Derivatives.
Its intermediaries are:
1. Stock Brokers
2. Sub-brokers.

Others associated with Intermediaries for Primary and Secondary

markets are:

1. Security depositories,
2. Custodian of securities, and
3. SRO (Self Regulating Organisations)-Association of Mutual Funds,
(AMFI), Association of Merchant Bankers (AMBI), Association of
Custodial Agencies of India (ACAI) and Registrars Association (RAIN)
Sources of Funds for both Primary and Secondary markets:
1. Individuals
2. Businesses.
3. Public Sector entities.
Mechanism for rising further capital include
• Existing share holders are offered additional securities on pre-emptive
basis in primary markets situations.
• In secondary markets, outstanding securities are traded.
• Recently SEBI has proposed trading in Futures and Options (as Capital
market derivatives.) (This will mean SCRA will be amended.)
14
• SEBI, as an autonomous regulatory body, overseas, supervises and Financial Services
Markets: An
controls control intermediaries like Mutual Funds, Merchant Bankers, Overview
Under-writers, Port-folio managers, Debenture trustees, Bankers,
Registrars to issue(s). Share transfer agents. Stock Brokers, Sub-brokers
etc. Foreign institutional investors, Plantation companies schemes
including that of Rating Agencies. SEBI also prohibits trading
To augment the capital markets there is need for regulations to regulate
Intermediaries:
• to help solve liquidity problems,
• to monitor and strengthen financial soundness.
• to broadening of scope of business,
• to promoting of competitiveness.
• to increasing the transparency, efficiency, faimess honesty and
accountability.
Investors:
• to educate and provide proper guidelines to investors in securities.
• to develop increase in long term savings:
• to protect investor interests.
Markets:
• to develop and create market integrity by augmenting efficiency in
clearing and
• settlement system;
• to improve transparency and efficiency.
• to encourage further market development.
• to encourage level playing.
General common objectives
• There should be timely, proper, adequate, complete, fair, reasonable
transparent information with a bearing upon the companies working:
• Trading/dealings should reflect fairness and high transparency:
• There should be honest and competent service;
• Market integrity should be maintained;
• Market quality should be cost efficient, price continuity, price discovery
and quality of paper should be investor further friendly lest one loses
him/her,
• High level of innovativeness;
• Effective economic efficiency for the benefit of the investor should be
created 15
Financial Services
in India
New Issues Market

The aggregate new capital issues floated by the government companies, non-
government public limited companies (private sector), public sector
undertakings and banks and financial institutions (in public sector) through
prospectus and rights is decreasing as corporate are increasingly making use
of private placement.

In recent years 'private placement has emerged as an important vehicle of

raising resources by banks, financial institutions and public and private sector
companies.

The amount raised through, in past 2 years was Rs.59, 939 through 40 issues
in the year 2022 and Rs.1, 19.882 crores through 63 issues

1.7 PRIVATE PLACEMENT MARKET IN INDIA

With the introduction of major reforms since mid-1991, capital market has
become an important source of meeting the growing long-term financial
requirements of corporates both in private and public sectors. In recent years,
in addition to the traditional methods of raising resources through public
issues and rights issues, private placement has alto gained ground wherein,
resources are raised through arrangers (merchant banking intermediaries)
who place securities with a small number of financial institutions, corporates
and high net-worth individuals. There are several inherent advantages for
tapping private placement market.

• First, it is a cost- and time-effective method of raising funds.

• Secondly, it can be structured to meet the needs of the entrepreneurs.

Moreover, private placement does not require detailed compliance of

formalities as required in public or rights issues. Interestingly, the public
sector has become a major user of private placements.

In terms of instruments, debt has been the most preferred mode under this
arrangement. It may also be noted that the private placement market has been
witnessing the introduction of several innovative debt instruments such as
step-down/step-up. Notwithstanding its rapid stride, healthy development of
the private placement market called for regulatory norms and standards
especially because it is a highly informal market. These included disclosure
requirements in the memorandum of information. protection of investors'
interests, transparency in the event of retailing private placement issues etc.

The secondary market for privately placed issues has remained more or less
illiquid, which may also require policy intervention.

16
Activity 4 Financial Services
Markets: An
What is the recent trend in Private Placements? Overview

Can you name one sector which has raised funds extensively with this
instrument?
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1.8 MUTUAL FUNDS MARKET IN INDIA

Mutual Funds (MF) were conceived as institutions for providing small
investors with avenues of investment in the capital market. Small investors
generally do not have adequate time, knowledge, experience and resources
for directly accessing the capital market and as such, they can rely on an
investment intermediary which undertakes judicious investment decisions
and provides the consequential benefit of professional expertise

The Unit Trust of India (UTI) set up in 1964 under an Act of Parliament, was
the first mutual fund in India

During 1987-1992, seven new mutual funds were established in the public
sector. A change in the Government policy in 1993 led to the entry of private
corporates and foreign institutional investors etc. into the mutual fund
segment taking the tally of mutual funds to 32 by end-March 1997 and
subsequently as of March 2023; 44 Mutual funds are operating in India

The total assets under the management of all the mutual funds as of March
2023 are estimated at about Rs.40,04,638 crore.

Activity 5
Make a comparison of all the schemes of any two mutual funds.
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17
Financial Services
in India
Key Players in a Mutual Fund

Four key players are involved in the setting up of a mutual fund viz.,

• a sponsor
• a trustee
• an asset management company (AMC)
• a custodian.

Mutual funds operate either open-ended or close-ended schemes which can

be classified further as income scheme, growth scheme, tax saving scheme,
balanced funds sector specific funds etc.

Generally speaking, such schemes are listed on the stock exchanges for
dealings in the secondary market.

As to the regulatory framework, the Reserve Bank had initially issued

guidelines for bank-sponsored mutual funds in 1987 followed by guidelines
laid down by the Ministry of Finance in 1991. Thereafter, SEBI issued
guidelines in 1991 and a comprehensive set of regulations relating to the
organisation and management of MFs in 1993.

Increase in the number of MFs and the types of schemes offered by them to
the investors resulted in infusion of competition in this industry. It was,
therefore, considered necessary that all mutual funds follow uniform norms
for valuation of investments and accounting practices so that the investors
could judge their performance on a comparable basis.

In pursuance of these recommendations, SEBI issued new mutual fund

regulations in December 1996 which provide for a scheme-wise report and
justification of the performance, disclosure of large investments which
constitute a significant portion of the portfolio and disclosure of the
movements in the unit capital. An important feature of

the mutual fund industry in India is the tax shelter. A mutual set up by public
sector bank or a financial institution or that authorised by SEBI is exempted
from tax under Section 10 (23D) provided it distributes 90 per cent of its
profits.

The specialised status enjoyed by the mutual funds industry in terms of fiscal
incentives is one of the stimuli for its growth and accordingly, during the
seven-year period from 1987-88 to 1994-95, the industry registered an
annualized growth of 40 per cent. The subdued stock market conditions
during the last two years coupled with the perceived lack of transparency in
the functioning of MFs, delayed refunds, poor accountability and lack of
efficient service, led to poor performance of many MF schemes resulting in
low or even negative returns thereby eroding the investors' interests,
18 Consequently, the resource mobilisation by the mutual funds (other than UTT)
during 1995-96 and 1996-97 was low and in respect of UTI, there were large Financial Services
Markets: An
reverse flows in view of substantial repurchases. It is, therefore, widely Overview
recognised that mutual funds need to revamp their operations, be responsive
to investor needs and infuse greater expertise and efficiency in their
operations in order to win over the investors' confidence.

Activity 6
What ails the Mutual Funds industry in India?
Talk to about ten investors in mutual funds; about their expectation from their
funds before they invested... Have their expectation been met. What do you
think are the possible causes in case the expectations are only partly met.
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1.9 FOREIGN INSTITUTIONAL INVESTORS (FIIS)

The number of FIls registered with the SEBI/Reserve Bank are increasing
every year barring few years in the previous decade. The investment by FII
was 22188 crores in 2022-23 and cumulative investment is 1332770 crore.
FIIs invest both in debt and equity.

1.10 STOCK EXCHANGES - OPERATIONS

The BSE persevered with the reform process during which included
dissemination of unaudited half-yearly results of corporates on its bulletin
board service (BBS) and weekly trading and settlement cycle for all scrips
and screen-based trading facility in odd lots through BOLT terminals.

Besides, the Exchange secured in-principle approval from the SEBI for the
introduction of trade guarantee Fund (TGF) aimed at protecting the interest of
investors. The overall performance of BSE, however, was not very
encouraging as the market capitalization of the listed scrips declined.

National Stock Exchange (NSE)

The turnover on the capital market segment of the NSE rose over four-fold
during 97 was also more than double that on the BSE, despite the spectacular
rise in the latte The NSE, through its nation-wide network (with connectivity
to over 100 cities), has acquired the status of a premier stock exchange in the
country. The National Securities Depository Lid (NSDL) promoted by NSE. 19
Financial Services
IDBI and UTI became operational in October 1996
in India

Activity 7

What role did FIIs play in the Asian Monetary Crisis? From you knowledge
of the financial service market in India, and the FIIs role here, do you foresee
anything like the Asian Monetary Crisis happening here? Why or why not?

1.11 DEPOSITORY SYSTEM FOR INDIAN

STOCK EXCHANGE
The Indian capital market with the distinction of listing the largest number of
companies the world, has witnessed a spectacular rise in the volume of
transactions in recent years. In the absence of depositories, this has given rise
to a large volume of cumbersome paper work besides risks arising out of loss
or mutilation of share certificates, the increase in number of bad deliveries
and of stolen shares etc...

Against this backdrop, the passing of the Depositories Act by the Parliament
in August 1996 paved the way for setting up of multiple depositories which
would vastly improve the efficiency of the capital market. The Act vests
SEBI with the powers of registration of depositories and participants and to
approve and amend the bye-laws of a depository and allows for
dematerialisation (and rematerialisation) of securities in depositories thereby
facilitating the transfer of securities through electronic book entry..

A depository will interface with the investors through market intermediaries

called depository participants. All rights with respect to the securities held in
the depository will lie with the investors who have been granted the option of
holding securities in a physical or a dematerialised form and are indemnified
of any loss caused due to negligence of the depository or its participants.
Market participants such as public financial institutions, scheduled banks,
foreign banks operating in India, state financial corporations, certified
custodians of securities, clearing corporations of stock exchanges, registered
stock brokers and NBFCs are eligible become depository participants and the
registrar.

The National Securities Depository Limited (NSDL), which commenced

operations in October 1996, is the first depository in India which has been
promoted jointly by the IDBI UTI and NSE with the objective of providing
electronic depository facilities for securities traded in the equity and the debt
markets.

NSDI. offers services such as maintaining beneficial holdings through

depository of participants, providing for dematerialisation and
rematerialisation of securities, effecting account transfers for settlement of
trades, enabling receipt of allotment in the electronic form, providing
pledging/hypothecation facilities for stocks held with it and receiving advice
20 on rights and bonus shares etc.
. Financial Services
Markets: An
Overview
Activity 8

a) Comment upon the requirements of a depository in relation to Electronic

Trading?

Study the depository services being offered by any bank of your choice.
Write a brief note on the way the depository service are being marketed.

1.12 DEBT MARKET

Wholesale Debt Market NSE

The Wholesale Debt Market (WDM) segment of NSE witnessed phenomenal

growth during the nineties with the inclusion of several new categories of
securities viz., subordinated debt bonds issued by banks, Unit 64, Promissory
Notes issued by corporates and cumulative bonds issued by public sector
undertakings (PSUs).

Primary Dealers in the turnover of NSE was 37 per cent, 30 per cent and 10
per cent. respectively, while the balance 23 per cent was accounted for by
financial institutions. mutual funds, corporates, provident fund trusts,
individuals and overseas corporate bodies. Thus, the secondary market
activities of the debt market in India continued to expand through WDM
segment of the NSE

Public Sector Bonds

Notwithstanding subdued conditions in the primary market, PSUs raised

funds through bonds during the nineties While most of the entire amount was
raised through private placement, a little was also mobilised through public
issue.

1.13 GOVERNMENT SECURITIES MARKET

The substantial improvement in liquidity on the one hand, and sluggish credit
off take on the other, led to improved market absorption of Government
securities which facilitated early completion of the Government's borrowing
programme during 1996-97 according to the Reserve Bank records, the
aggregate net market borrowing (including 364-day Treasury Bills) of the
Central Government during fiscal 1996-97 at Rs.26,356 crore (Rs 36,152
crore gross) exceeded the budgeted amount of Rs 25,498 crore (Rs.35,294
crore gross).

In order to raise this amount, the Central Government accessed the market on
several different occasions, with lower devolvement Reserve Bank and PD,
as also with lesser strain on interest rate, than

21
Financial Services
in India
Secondary Market Transactions in Government Securities
The average monthly turnover in Government securities was, however,
marginally lower The average monthly turnover increased significantly in the
backdrop of a steady decline in interest rates.
Open Market Operations (OMO)
The open market operations including repo activities came into a sharper
focus during the ties given the imperative of neutralising the excess liquidity
generated from the buildup of foreign exchange reserves as well as the need
for rates of interest and exchange rates to rule at reasonable levels. The need
for efficient payments system has been heightened in the context of OMO. In
fact, the broadening of the securities eligible for OMO as well as fostering
the confidence in the financial system presupposes a well- functioning
payments and settlement system.
Activity 9
What could be the changes you foresee in the Securities market in the near
future?
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
…………………………………………………………………………………
………………………………………………………………………………...

1.14 THE ROLE OF THE PAYMENTS AND

SETTLEMENT SYSTEM IN INDIA
A payments system comprising a set of rules, institutions and technology for
transfer of funds from one entity to another constitutes the core of a well-
functioning financial system. Its importance results from the likelihood of a
systemic risk following the failure of a payment system thereby triggering
bank runs.

This is particularly so because inter-bank exposures, more often than not, are
unsecured in nature. In such an eventuality, not only the central bank be
called upon to perform its function as the "lender of the last resort', but the
public confidence over the functioning of the market may also be jeopardized.

An efficient payments system is also required for proper conduct of monetary

policy, in that the transmission of policy-induced impulses would be effective.
Accordingly, a well- functioning payment system is deemed to be a pre-
requisite for efficient delivery of financial services.
22
 Financial Services
Markets: An
Cross-country experiences show that there has been an increasing tendency to Overview

move away from paper-based, physical transactions to screen-based

electronic transactions in payments and clearing system. In developed
economies, while netting system and Delivery versus Payment (DvP) have
been in use for long, there has been a more general acceptance of the Real
Time Gross Settlement (RTGS) procedure for financial transactions whereby
each transaction is settled instantaneously, thus completely eliminating the
credit risk.

In India, in the capital market segment, the introduction of scripless trading in

the National Stock Exchange (NSE) and on-line trading at the Mumbai, Delhi
and other suck exchanges have brought in strong elements of accessibility,
efficiency and transparency in operations. The NSE-induced reforms and
simultaneously taking place in several other exchanges across the country.
With economic progress, and the role and functions of capital markets
undergoing significant change on system must gear set up meet these
challenges in heralding a new operational environment in the Indian capital
market

In the banking segment too, the inter-bank clearing system was strengthened.
Besides, electronic credits and debits system would require to the strongly
promoted The Reserve Bank has already introduced DVP mode of settlement
for Subsidiary General Ledger (SGL) transactions in Government securities,
electronic payment system to initiate balance enquiry and extended the MICR
cheque clearing to non-metropolitan centers. These apart, it has been decided
by the Reserve Bank to set up a Very Small Aperture Terminal (VSAT)
network to provide reliable communication to the financial sector. It is
expected that VSAT would not only improve payments and clearing systems,
but also facilitate funds transfers, and build-up of securities settlements on a
centralized basis.

1.15 TREASURY BILLS

When the government seeks to raise funds on the financial market, it issues
two types of debt instruments: treasury bills and government bonds. Treasury
bills are issued when the government has an immediate need for funds. The
interest rate on these bills is established by market forces; they are issued
solely by the central government.

They are distributed through auctions that the Reserve Bank of India (RBI)
holds on a regular basis. Banks, trusts, institutions, and individuals can all
buy T-Bills. However, financial institutions are usually the ones who invest
the most in them. Beyond investment products, they play a crucial role in the
financial market. The RBI receives treasury bills from banks in exchange for
money from repo operations. They can also store it to satisfy their Statutory
Liquid Ratio (SLR) requirements.
23
Financial Services Therefore, Treasury Bills are a vital monetary instrument used by the Reserve
in India
Bank of India. It assists RBI in regulating the economy’s total money supply
and in raising funds.

Types of Treasury Bills

14-Day T-Bill
These bills mature fourteen days after the date of issuance. They are
auctioned off on Wednesday, and payment is made the following week on
Friday. The auction is held weekly. These bills are sold in multiples of one
lakh rupees, and the minimum investment is one lakh rupees.

91-Day T-Bill
These bills reach maturity 91 days from the date of issuance. They are
auctioned off on Wednesday, and payment is made the following week on
Friday. Each week, they are auctioned off. These bills are sold in multiples of
Rs.10,000, and the minimum investment amount is Rs.10,000.

182 Day T-Bill

These bills reach maturity 182 days after the date of issuance. They are
auctioned on Wednesday, and payment is due the following week on Friday,
when the term expires. They are sold at auction every other week. These bills
are sold in multiples of Rs.10,000, and the minimum investment amount is
Rs.10,000.

364 Day T-Bill

These bills reach maturity 364 days after their date of issuance. They are
auctioned on Wednesday, and payment is due the following week on Friday,
when the term expires. They are sold at auction every other week. These bills
are sold in multiples of Rs.10,000, and the minimum investment amount is
Rs.10,000. As stated previously, the holding period for each bill stays
unchanged. Treasury bills’ face value and discount rates are subject to
periodic adjustment. This depends on RBI’s monetary policy and financial
needs, as well as the total number of bids received. In addition, the Reserve
Bank of India publishes an auction calendar for treasury notes. Before each
auction, it discloses the exact date of the auction, the amount to be auctioned,
and the maturity dates.

Operations of Primary Dealers

Primary Dealers (PDs) have been giving two-way quotes in the press/screen
and have been bidding in the auctions of 91-day/364-day Treasury Bills as in
the floatation of new loans.

1.16 HOUSING FINANCE MARKET

The overall minimum target for housing finance by scheduled commercial
banks was fixed at 1.5 per cent of its incremental deposits of the previous
year, or the amount of housing finance allocation fixed for the previous year,
24
whichever was higher. In order to provide flexibility to banks in the matter of Financial Services
Markets: An
deployment of their allocated funds, the distinction between direct finance Overview
and indirect finance including investment in the bonds of NHB/HUDCO was
withdrawn.

National Housing Bank

The National Housing Bank (NHB) continued its policies for developing a
sustainable housing system and improving the accessibility of institutional
credit, particularly to small borrowers. Out of the 25 Housing Finance
Companies (HFCs) approved by NHB for financial assistance, 24 had
achieved the stipulated minimum capital adequacy norm of 8 per cent. To
ensure a level playing field for mobilisation of deposits in a deregulated
environment, NHB freed the interest rates on deposits accepted by HFCs with
net owned funds of Rs.50 lakh and more subject to the conditions similar to
those stipulated by the Reserve Bank in respect of NBFCs While allowing
greater freedom to HFCs in determining their lending rates, NHB also
deregulated the interest rates to be charged from the ultimate beneficiaries by
the primary agencies on all loans above Rs.50,000 under its refinance
schemes.

Financial Market Interlinkages

The Indian financial market until recently was characterised by marked

segmentation among its various constituents because of variety of regulations
including barriers to entry. This impaired free flow of resources and
impinged on efficient utilisation scarce resources

Since the introduction of reform measures in early 1990s, broad segments of

the market - viz., money market, government securities market and foreign
exchange market have responded favourably with growing interlinkages
among them, thus facilitating faster liquidity pass through. This is borne out
of the fact that improvements in liquidity in 1996-97 were translated in
significant softening of various money market rates, interest rates on
Government papers, particularly those at the shorter end and forward
premium in the foreign exchange market. The increasing complementarity
between credit market and capital market on the one hand, and credit market
and external sources of financing on the other, has become evident in giving
the corporates a wider choice among alternate sources of funds. The
integration between yield rates on Government papers and those of other debt
market instruments is, however, currently at a formative stage on account of
inter alia, narrow investor base and lack of depth in secondary markets.
While these changes are symptomatic of a greater interplay of market forces,
the thrust of the Reserve Bank's policy is on elimination of the factors
constraining free flow of resources among these segments and to facilitate
opportunities for larger arbitrage so that pricing and allocation of resources
become more efficient. These interlinkages, however, have also added
another dimension to the conduct of monetary policy in view of the necessity
25
Financial Services
to assess, on a continuous basis, the liquidity in the system and to adopt
in India
appropriate measures minimising volatility in financial markets.

Activity 10

What are the types of facilities offered by housing finance companies? What
are some of the tax benefits that have been given to enhance the use of
housing finance?

1.17 SUMMARY
These units attempt to provide a general overview of the financial services
markets in India. An attempt has been made to give you the current trends in
the various components of the financial services markets. These components
and their inter linkages have also been discussed. Some recent development
like depository system for Indian Stock Market and role of foreign
institutional investor has also been discussed.

1.18 SELF-ASSESSMENT QUESTIONS

1. Comment upon the various types of financial services markets in India.
What are some of the recent developments in these markets?
2. What do you understand by the term money market?
3. Who are the key players in the mutual fund market?
4. Comment upon the depository scheme for Indian Stock markets
5. What is the role of payments and settlement systems in India?

26
UNIT 2 MARKETING OF FINANCIAL Marketing of
Financial
SERVICES: ISSUES AND CONCEPT Services: Issues
and Concept

Objectives

After going through the Unit, you should be able to:

• Discuss the Concept of marketing as applicable to financial services

marketing
• Describe the concept of service product mix.
• Discuss various orientations as applied to marketing of financial services.
• Differentiate between products and services based on service
characteristics
• Explain the implication of service characteristics for marketing of
financial services.

Structure

2.1 Introduction
2.2 Marketing and the Financial Services
2.3 Marketing as a Functional Area of Management
2.4 Financial Services and the Different Marketing Orientations
2.5 Difference between Services and Products Physical Goods
2.6 Characteristics of Service
2.7 Marketing Mix for Financial Services
2.8 Marketing Strategy and Financial Services
2.9 Summary
2.10 Self-Assessment Questions

2.1 INTRODUCTION
The first barter exchange can be looked upon as a reflection of the realisation
that exchange added value for both the parties to the transaction. This indeed
marked the of marketing. The recognition of value addition ultimately led to
the development of task specialisation, by far the first real step forward in
economic development. The last century has seen 'marketing' develop from a
mere practice, into a major academic discipline.

Marketing is both a concept and practice; an approach to exchange

relationships, which provides the driving force for formulation of strategies
every type of organisation.

Marketing in the true sense of the word, is relatively new to the financial
sector. Until recently, marketing in most financial sector organisations was 27
Financial Services
largely synonymous with advertising and public relations and it was not until
in India
the 1970s that marketing department was formed on any scale. (Newman
1984). Even then. The role of marketing tended to be tactical. Strategic
marketing was seen as a relatively low status activity with senior
management being dominated by executives with a background in finance
(Hooley and Mann, 1988). In the last decade, marketing has developed as a
more integrated function within financial service organisations largely
because of rapid changes in the operating environment. Nevertheless, Morgan
and Piercy (1990) suggest that marketing remains relatively young
management function in the financial service sector.

2.2 MARKETING AND THE FINANCIAL

SERVICES
1) Marketing is the process of determining consumer demand for a product
or service, motivating its sale and distribution it into ultimate
consumption at a profit (Brech 1953).

2) Marketing not only much broader than selling, it is not a specialized

activity at all. It encompasses the entire business. It is the whole business
seen from the view point of its result that is from the customer's point of
view. Concern and responsibility for marketing must therefore permeate
of areas of the enterprise (Drucker).

3) Marketing is the set of human activities directed at facilitating and

consummating exchanges (Kotler 1972).

Marketing is concerned with the creation and maintenance of mutually

satisfying exchange relationships. (Baker 1976).

5) The purpose of a business is to create and keep a customer. (Levitt 1983).

6) Marketing is the business function that identifies current unfilled needs

and wants, defines and measures their magnitude, determines which
target markets the organisation can best serve and decides on appropriate
products, services and programmes to serve these markets. Thus,
marketing serves as a link between a society's needs and its pattern of
industrial response (Kotler 1988).

To focus on one financial service i.e. banking, let us look at the definitions as
applied in the sector. The definition of bank marketing, as referred to by the
NIBM, Pune is as follows:

"Bank marketing is the aggregate of functions, directed at providing services

to satisfy customers' financial (and other related) needs and wants, more
effectively and efficiently than the competitor, keeping in view the
organizational objectives of the bank'.

28
This definition highlights the following points: Marketing of
Financial
Services: Issues
i) Banks provide services - with all the service characteristics discussed in and Concept
this unit being associated with them.
ii) The aim is to satisfy customers' needs and wants. The needs and wants
are mostly financial in nature and some may be even incidental to or
related to the main functions.
iv) The competitive element, efficiency and effectiveness are major factors
in the process, of designing and delivering these services.
v) Organizational objectives are still the driving force.

This could be seen as an extension of the 'Marketing concept, so modified as

to suit the nature of the banking activity.

The aggregate of functions mentioned in the definition, is the sum total of an

integrated effort to discover, create, arouse and satisfy customer needs. Each
individual working in the bank is a marketing person who contributes to the
total satisfaction of customers.

Bank marketing deals with providing services to satisfy customers' financial

needs and wants. Banks have to discover/ascertain/anticipate the financial
needs of the customers and offer the services, which can satisfy those needs.
Banks may be required to satisfy the customers' other related needs and wants
of the customers.

Marketing helps in achieving the organizational objectives of the bank. This

means that marketing is equally applicable to achieve commercial and social
objectives of the banks. Indian banks have dual organizational objectives:

1. Commercial objective to make profit and

2. Social objective, which is a developmental role particularly in the rural
areas.

Service area approach adopted by the Indian Bank is a marketing approach

whereby a specific target market is assigned to each bank branch for need
based banking activity in tune with the social objectives.

The marketing concept points to the following essentials, which contribute

towards bank's success

a) The bank cannot exist without the customers.

b) The purpose of the bank is to create, win and keep a customer. The
customer is and should be the central focus of everything the bank does.

c) It is also a way of organising the bank. The starting point for

organizational design should be the customer and the bank should ensure
that the services are performed and delivered in the most effective way.
Service facilitites also should be designed for customer’s convenience.
29
Financial Services
d) Ultimate aim of a bank is to deliver total satisfaction to the customer.
in India

e) Customer satisfaction is affected by the performance of all the personnel

of the bank.

Marketing is an organizational philosophy. The philosophy demands the

satisfaction of customers (consumers) needs as the prerequisite for the
existence and survival of the bank. Marketing for service industry like banks
is philosophy to be understood by the whole organisation from the chief
executive to the person working concept at the counter. The first and most
important step in applying the marketing concept is to have a wholehearted
commitment to customer orientation by all the employees. Marketing is an
attitude of mind. The central focus of all the activities of a bank is customer.

A traditional marketing department (and officers with marketing designations)

usually cannot be responsible for the total marketing function of a service
organisation like banks. Else, it is argued that personnel working in other
departments like operations and back of the counters may tend to ignore their
customer-related responsibilities and totally concentrate on just handling
operation and other duties mechanically.

Marketing is much more than just advertising and promotion: it is a basic part
of total business operation. What is required for the bank is the market
orientation and customer consciousness among all the personnel of the bank.

Activity 1

The marketing philosophy suggests that satisfaction of consumers need is the

prerequisite for existence and survival of any bank. How do you think this
philosophy will influence the traditional way in which banks develop and
offer their services.

2.3 MARKETING AS A FUNCTIONAL AREA OF

MANAGEMENT
Marketing is a complex phenomenon that combines both the philosophy of
business and its practice. That is, marketing consists of two inter-related
phenomena:

1) A basic concept that focuses on customers

2) A set of management techniques

Many organisations have a marketing department made up of both marketing

generalists, e.g. the marketing manager and specialists, e.g. the sales manager
or marketing research manager. Such marketing department will be based in
a physical location within the organisation in the same way as, say personnel
or purchasing. The people involved with the day-to-day running of the
marketing department will have at their disposal a range of management
techniques often referred to as the marketing spectrum or mix. These
30
techniques cover such areas as sales and sales management, advertising and Marketing of
Financial
promotion, pricing, packaging, product development, marketing research, Services: Issues
planning, distribution, and after-sales-service. Many of the specialisations, and Concept

with the marketing, offer separate career opportunities and are often
undertaken by specialists, with the marketing manager responsible for co-
coordinating all the separate but inter-related activities.

Looked at from this point of view, marketing is indeed a functional area of

management which is usually within the firm and which uses a number of
highly developed techniques in order to achieve specific objectives. As a
function, an important part of marketing's role is to identify correctly, both
the current and future needs and wants of specifically defined target markets.
This information is then acted upon by the whole organisation in bringing
into existence, the products and/or services necessary to satisfy customer
requirements. It is the marketing function that forms the interface with the
firm's existing and potential customers. Marketing provides entrepreneurship
by indentifying customer requirements, and through marketing, the rest of the
firm is able to mobilise resources to capitalise on them.

In fact, the process of marketing management is not different from any other
functional area of management in that is essentially comprises of four key
tasks: Analysis, Planning, Implementation and Control.

Analysis

The starting point of marketing management decisions is analysis. Customers,

competitors, trends and changes in the environment and internal strengths and
weaknesses must each be fully understood by the marketer before effective
marketing plans can be established. Analysis, in turn, requires information
using systematic marketing research and marketing information systems.

Planning

The second task of the manager is the planning process. The marketing
manager must plan both long-term marketing direction for the organisation
(strategic planning), including e.g. the selection of targets and the marketing
programmes and tactics that will be used to support these strategic plans.

Implementation

Both strategic and tactical plans must, of course, be acted upon, if they are to
have any effect. The implementation tasks of marketing management involve
such activities as staffing, allocating tasks and responsibilities, budgeting and
securing any financial and other resources needed to translate plans into
action.

Control

The fourth, and sometimes neglected task of the manager is measuring and
evaluating progress against objectives and target established in plans. Control
31
Financial Services
of marketing plans can be problematical with difficulties associated with both
in India
measuring marketing performance and pinpointing cause and effect. For
example, market share, a frequently used measure of marketing performance
and hence a basis for marketing control, needs very careful analysis and
interpretation if it is to provide a useful basis for controlling the effectiveness
of marketing the strategies and plans. Both qualitative and quantitative
techniques of control should be used by the marketing manager and including
budgetary control, control of marketing mix effectiveness in turn, forms part
of analysis function discussed earlier, thereby completing the essentially
circular nature of these four inter- related tasks

Although it can be seen that marketing has a very important functional role
within the organisation, the practice of marketing should not be restricted to
the marketing department. A marketing-oriented business has implications
for the way people throughout the organisation respond to the initiatives that
are forthcoming from marketing

2.4 FINANCIAL SERVICES AND THE

DIFFERENT MARKETING ORIENTATIONS
There are five competing orientations under which organisations conduct
their marketing activity.

The product concept is one of the oldest concepts guiding sellers.

The production concept holds that consumers will favour those products that
are widely available and low in cost. Managers of production-oriented
organisations concentrate on high production efficiency and wide distribution
coverage.

The assumption holds in at least two types of situations:

1) The first is where the demand of a product exceeds supply, as in may

third world countries. Here consumers are more interested in obtaining
the product than in its fine points.

2) The second situation is where the products cost is high and has to be
brought down through increased productivity to expand the market.

In the 19 century and early of the 20 century the fundamental role of business
was seen as production. Manufacturers were in suppliers' market and were
faced with a virtually insatiable demand for goods and services. Firms
concentrated on production and productive efficiency in order to bring down
costs. Firms tended to manufacture and offer products that they were good at
producing with customers' requirements and satisfactions of secondary
importance. This production mentality was a workable philosophy as long as
sellers market existed.

32
The Product Concept/Orientation Marketing of
Financial
Services: Issues
Often sellers are guided by the product concept. and Concept

The product concept holds that consumers will favour those products that
offer the most quality, performance or innovative features. Managers in
these product. centered organisations focus their energy on making
superior products and improving them over time.

These managers assume that buyers admire well-made products and can
appraise product quality and performance. Marketing management may
become a victim of 'better- mousetrap fallacy, believing that a better
mousetrap will lead people to beat a path to its ore. At a place where there are
no mice, the product would hardly sell!

Many firms have, in their own opinions, produced excellent products, but not
necessarily of the type, customers want to buy. Manufacturers who focus
their attention on existing products and pay little or no attention to the
changing needs and wants of the marketplace suffer from what as often
termed 'marketing myopia'. This is very short- sighted viewpoint where firms
are so busy concentrating on their products that they fail to take customers'
requirements into account.

Even today, firms can be found who pay little regards to the needs and wants
of their customers and still have the product concept as the guiding
philosophy of their businesses Such firms take the attitude that they produce
excellent products and that people will want to buy them.

Activity 2

In the context of financial services can you identify example from the Indian
industry. where the product concept is being followed? What do you think is
the disadvantage of using such a concept.

The Selling Concept/Orientation

The selling concept (or sales concept) is another common approach many
firms take to the market.

The selling concept holds that consumers, if left alone, will ordinarily not buy
enough of the organization’s products. The organisation must therefore
undertake an aggressive selling and promotion effort.

Philip Kotler defines this selling concept as :

A management orientation that assumes that consumers will either not buy or
not buy enough of the organization’s products unless the organisation makes
a substantial effort to stimulate their interest in its products.

From the above definition, the implicit premises of the selling concept are as
follows:
33
Financial Services
1) Consumers can always be induced to buy more through various sales
in India
techniques'.

2) Consumers tend to resist purchasing and it is the salesperson's job to

overcome this. The firm's key talk then is to organise an effective sales
force.

Peter Drucker, one of the leading management theorists, puts it this way:

There will always, one can assume, be need for some selling. However, the
aim of marketing is to make selling superfluous. The aim of marketing is
to know and understand the customer so well that the product or service
fits him and sells itself. Ideally, marketing should result in a customer
who is ready to buy. All that should be needed than is to make the
product or service available.

Marketing based on hard selling carries high risks. It assumes that customers
who are coaxed into buying the product will like it; and if they do not, they
will not bad-mouth it to friends or complain to consumer organisations. In
addition, they will possible forget their disappointments and buy it again.
One study showed that dissatisfied customers may bad-mouth the product to
ten or more acquaintances; bad news travels fast.

In case of banking, it applies thus:

During the times of famous scams in stock market, a foreign bank was in
serious trouble as the probable losses would have threatened its viability to be
in the business Many small scheduled banks had put their funds by way of
deposits in that bank. The news items revealed names of such banks and in
some cases, they were just rumours, however, had serious implications on
those small banks due to such rumours which spread very fast in their
command area and frightened depositors queued up their branches to
withdraw their deposits which gave a severe jolt below the belt to such banks
as a result of the rumours. They had to do a lot of PR and clarifying work to
bring back their deposits

The Marketing Concept/Orientation

The marketing concept is a business philosophy that challenges the previous

concepts. Its central tenets crystallised in the mid 1950s.

The marketing concept holds that the key to achieving organizational goals
consists in determining the needs and wants of target markets and
delivering the desired satisfaction more effectively and efficiently than
competitors.

The marketing concept rests on four main pillars, namely,

1) Target market Customer needs

2) Customer needs
34
3) Integrated marketing, and Marketing of
Financial
4) Profitability Services: Issues
and Concept
These are shown in the figure below, where they are contrasted with a selling
orientation. The selling concept takes an inside-out perspective. It starts with
the factory, focuses on the company's existing products, and calls for heavy
selling and promoting to produce profitable sales. The marketing concept
takes an outside-in perspective. It starts with a well-defined market, focuses
on customer need, and integrates all the activities that will affect customers
and produces profits by creating customer satisfaction.

Figure2.1: Selling and Marketing Concepts-Contrasted

Peter R. Dickson in his book Marketing Management asserts that in the

context of crowding of marketplace by competing companies catering to the
same target markets, a company to survive, will need to adopt the 'strategic
marketing concept which he defines thus:

The strategic marketing concept is defined as:

The corporation's mission to seek a sustainable competitive advantage over
competitors by meeting consumer needs.
The Societal Marketing Concept
In recent years, some have questioned whether the marketing concept is an
appropriate philosophy in an age of environmental deterioration, resource
shortages, explosive population growth, world hunger and poverty and
neglected social services. Are companies that do an excellent job of
35
Financial Services
satisfying individual consumer wants necessarily acting in the best long run
in India
interests of consumers and society?

The marketing concept side-steps the potential conflicts between consumer

wants, consumer interests and long-run social welfare.

For example, the detergent industry caters to the passion for whiter clothes by
offering a product that pollutes rivers and streams, kills fish and injures
recreational opportunities.

These situations call for a new concept that enlarges the marketing concept.
This new concept may be termed the societal marketing concept.

The societal marketing concept holds that the organization’s task is to

determine the needs, wants and interests of target markets and to deliver the
desired satisfactions more effectively and efficiently than competitors in a
way that preserves or enhances the consumer's and the society's well-being.

The societal marketing concept calls upon marketers to balance three

considerations in setting their marketing policies, namely 1) company 2)
consumer want satisfaction, and 3) the public interest.

Originally, companies based their marketing decisions on maximising short-

term company profit. Then they began to recognize the long-run importance
of satisfying consumer wants and this introduced the marketing concept. Now
they are beginning to factor in society's interests in their decision making.

Activity 3

From the Indian media scene, select examples of financial services where the
selling concept, the marketing concept and the societal marketing concept,
respectively are shown as being practiced.

2.5 DIFFERENCE BETWEEN SERVICES AND

PRODUCT/PHYSICAL GOODS
Services now account for more than 70% of employment and GNP of most
industrialised countries. Many industrial corporations also owe their revenue
and profitability to the peripheral services they add on to their products. The
marketing literature, however, has until recently concentrated almost entirely
on physical products. Obviously, this is because that is where marketing as a
separate function developed earliest, and where it has been most intensively
applied, particularly in the field of fast-moving consumer goods. As both
academics and practitioners have turned their attention to the increasingly
important services markets, the question has been debated, "how different
actually are services.

When we examine them, we can see that there is not such a clear-cut line
between services and products as might be thought. Many products in fact
include large elements of service in their delivery. Looked at from the buyer's
36
point of view, services may also form a vital part of the total bundle of Marketing of
Financial
benefits which is sought, particularly in industrial markets Services: Issues
and Concept
Likewise, many services include a large contribution from hardware: hotels,
airlines, fast food outlets are all classed as services but the physical elements
in the offering are a very large part of what customers buy. What is different
is that as buyers we do not receive ownership of the physical elements of a
service, but merely rent them for a period.

Levitt has suggested, "There are not such things as service industries. There
are only industries that service components are greater or less than those of
other industries are. Everybody is in service". Levitt was emphasizing that
with almost every tangible core physical product, an intangible service
component is associated.

Goods-Service Continuum

In 1977, Ms. G. Lynn Shostack, the Vice President of Citibank, suggested

that marketing 'entities' are combinations of intangible and tangible elements,
which are distinct and discrete. If these absolute tangible and intangible
elements are taken to the two ends of a continuum, as shown below, we can
observe that all goods and services occupy different positions in the
continuum. There is a range, which varies from an absolute tangible good
like salt to an absolute intangible service like education.

Figure 2.2: A Goods-Service Continuum: G. Lynn Shostack

Search Goods and Experience Goods

Another approach of distinction as proposed by Theodore Levitt, classifies

goods into two categories viz. Search goods and experienced goods. Search
goods are generally those goods, which are packaged goods that the customer
can see, evaluate and try prior to the purchase, like a pen or toothpaste like
holiday, travel etc. Some call search goods as tangible goods and the other as
intangibles. There is a range between the 2 absolute extremes and there could
be products falling in this range.

37
Financial Services
in India

Philip Kotler's classification is a further improvement in that he suggests five

category under which a company offer to the market place can be
distinguished.

1) A pure tangible good: No services accompany the product e.g. toothpaste,

soap etc.
2) A Tangible good with accompanying services: A tangible good
accompanied by one or more services to enhance its consumer appeal.
Levitt observes that the more technologically sophisticated the generic
product, (e.g. cars, computers) the more dependent are its sales on the
quality and availability of its accompanying customer services. (E.g.
display rooms, delivery repairs and maintenance, operator training,
guarantee fulfillment).
3) A Hybrid: Equal parts of goods and services: e.g. restaurants.
4) A major service with accompanying minor goods and services: Airline:
transportation service, accompanied by food, drinks, ticket stub, airline
magazine, the service requires a capital-intensive good an aeroplane for
its realisation, but the primary item is a service.
5) A pure service: Babysitting, banking hairdressing, gardener,
telecommunication. health club, psychotherapy etc.

2.6 CHARACTERISTICS OF SERVICES

Having looked at the differences between products and services, you may
now be ready to describe the essential characteristics of services and
understand how these differences affect the financial services.

There is general agreement in the literature that the main characteristics of

services are intangibility, inseparability, heterogeneity, perish ability.

38
Intangibility Marketing of
Financial
Services: Issues
Intangibility is relevant only to the pure service element, the hotel bed and and Concept
the hamburger are very tangible. The problem of intangibility is that it is
difficult to communicate and display exactly what the product is. It is often
not possible to taste, feel, see hear or small services before they are purchased.
Opinions and attitudes may be sought before hand, a repeat purchase may
rely upon previous experience, the customer may be given something
tangible to represent the service, but ultimately the purchase of a service is
the purchase of something intangible.

Inseparability

This refers to the fact the production and consumption of the service is
inextricably intertwined. The implications of this are that the consumer is
involved in production. Further, in many cases other consumers are also
involved at the same time, as in most retailing situations. This may be a
positive aspect of the benefits delivered (in a theatre or club), or it may be
potential negative aspect (waiting in queues at the post office). Whether the
buyer is physically present or not, the product comes into existence only
when it is bought, it cannot be mass produced in advance (although the
physical components may be, to some extent). Goods are usually purchased,
sold and consumed whereas services are usually sold and then produced and
consumed.

Heterogeneity

Heterogeneity or variability, is a result of the fact that services are usually

delivered by human beings, whose performance is necessarily variable;
quality control is extremely difficult. It is often difficult to achieve
standardization of output of certain services. The standard of a service in
terms of its conformity to what may be prescribed by the seller may depend
on who provides the service or when it is provided. Even though standard
systems may be used to handle a flight reservation, book in a car for service,
each unit' of service may different from other units'. Franchise operation
attempt to ensure standards of conformity but ultimately, with services it is
difficult to ensure the same level of quality of output as it may be with goods.
From the customer's point of view too, it is often difficult to judge quality in
advance of purchase,

Perish ability

This means that the service cannot be stockpiled. If a seat is unfilled when the
plane leaves or the play starts, it cannot be kept and sold next day or next
week, that revenue

is lost forever In some cases, such as insurance or banking, it could be argued

that potential stocks remain, in the sense that the service is there to be sold
every day as long as the underwriting or loan capacity exists. Most services
however, are clearly time- dependent, in a way that physical products are not. 39
Financial Services
Important marketing decisions in service organisations relate to what service
in India
levels will be provided and how to respond in times of low and excessive
usage, for example through differential pricing or special promotions.

These characteristics certainly do not apply in equal measure to all services.

Some services are highly intangible (e.g. education); others are highly
tangible (e.g. fast food restaurant); some may be highly variable (e.g. dental
treatment); some highly standardised (e.g., automatic car wash). The notion
of continuum of tangibility, inseparability, heterogeneity and perish ability is
helpful in understanding and applying these characteristics.

The origin idea of a single continuum of tangibility for understanding the

differences between goods and services has been extended recently to suggest
that all four characteristics of services can be described and related in this
way. (Payne, 1993).

Figure 2.3: A continuum of the characteristics of services

Thus, while legal service is less tangible, varied and can be performed away
from the customer, a fast food service is highly tangible, generally
standardised and usually performed near the customer. Different service
organisations offering similar services can place differing emphasis on each
of these characteristics to obtain competitive advantage and advantage in the
market place. Thus, one management consultant could offer a highly bespoke
service and undertake all assignment personally; another could subcontract
work to associates, thus potentially increasing the scale of business but
possible losing the benefit of a highly individual approach.

These different characteristics have positive and negative implications. The

challenge for marketers is to develop strategies and tactics that emphasize the
positive effects of these characteristics of finds ways of overcoming them
where the consequences are unhelpful.

Christian Gronroos (1990) presents the difference between physical goods

and services as follows:

40
 Marketing of
Financial
Services: Issues
and Concept

Definition of Service

Discussions on the nature of services lead us to a normally accepted

definition of services as follows:

A service is any act of performance that one party can offer to another that is
essentially intangible and does not result in the ownership of anything.
Its production may or may not be tied to a physical product. (Kotler and
Bloomm 1984).

Gronrous proposed a working definition in 1990. According to him:

'A service is an activity or series of activities of more or less intangible nature

that normally, not necessarily, take place in interactions between the
customer and service employees and/or physical resources or goods
and/or systems of the service provider which are provided as solution to
customer problems.

This highlights the following important features:

1) Services are largely activities' or they are a series of activities rather than
things
2) As a result the services are intangible.
3) They take place in the interaction between the customer and the service
provider, which means that the services are produced and consumed
simultaneously.

Customer has a role to play in the production process as the services are
provided in response to the problems of customers as solution.

In banking context, the bank has to be continuously aware about the changing
41
Financial Services
demands and expectations of the customers. At times they have to tailor such
in India
products/schemes thinking about the customer's probable expectations with
changing market senario e.g. telebanking or e-banking have been thought of
much in advance than customer himself asking for such products as the banks
have networked ATMs and computerised services like Demat which a
customer giving for computers would easily opt to have this benefit. Thus,
banks not only have to keep the present needs and wants of customers but
also have to innovate to create wants for the customers to extend
services/technology to meet his requirements.

Some of the characteristics discussed above have interesting implications for

marketing financial services.

In general, services must be produced and consumed simultaneously.

Therefore, services are perishable, must be produced on demand, and cannot
be inventoried.

The presence of inseparability tends to imply the consumers themselves play

a significant role in the production of services. In fact, some experts view
customers as quasi or partial employees (Bowen and Schneider, 1988). For a
service to be provided typically requires either the physical presence of the
consumer or some contact with the consumer to provide the information
required for the service to be performed. The consumer making a loan
application does not have to be in the physical presence of a loan assessor,
but must supply that assessor with information to evaluate the application.

The quality of the service product is typically highly dependent on personal

interactions and as a consequence, the potential for variability (heterogeneity)
is high. To a large extent, the qualities of inseparability and heterogeneity
arise because of the intangible nature of services. The characteristics of
services as an act rather than as an object lead to an emphasis on the
individuals providing the service and their interactions with the
organization’s customers.

In addition to these service characteristics, financial services display an

additional feature, which affects the marketing process. This is the issue of
fiduciary responsibility which refers to the implicate responsibility which
financial service organisations have in relation to the establishes that
although any business has a responsibility to its customers in terms of quality,
reliability and safety of the products it supplies, this responsibility is perhaps
much greater in case of financial service organisation. This may perhaps be
due to the fact the consumers of such services often find the precise details of
the service difficult to comprehend and therefore place their trust in the
organization they deal with. Equally important is the fact that the 'raw
materials' used to produce many financial products are consumers' deposits;
thus in producing and selling a loan product, the bank has a responsibility to
the individuals whose deposits have made that land possible. Christain
Ennew et al, in their book "Cases in marketing financial services' advocates
42
that "any organisation involved in the provision of financial services should Marketing of
Financial
retain an awareness of the magnitude of the impact which their marketing and Services: Issues
selling activities can have on the lifestyle of an individual or the property of a and Concept

company".

The implications of intangibility, inseparability and heterogeneity are

manifested at both strategic and tactical levels in services marketing. Thomas
(1977) stresses the importance of a clear understanding of the nature of the
business and the establishment of a distinctive basis on which to compete.
The latter is particularly significant given the difficulties of competing based
on offering a service with distinctive attributes or features. Ennew et al state
'the ease of copying and the lack of patent protection mean that corapetition
is more commonly based on service levels rather than service attributes and
this in turn will tend to increase the emphasis on efficiency and cost
effectiveness in service provisions.

As marketing moves towards tactical issues, it also moves closer to and must
be more tailored to, the distinguishing features of specific products and
markets. In the context of marketing mix, this suggests that in the case of
services, the composition of that mix, and the management of its elements
can be quite distinctive.

The essence of marketing strategy is to provide the organisation with a

sustainable competitive advantage in the markets in which it operates. This
requires that the organisation both understands consumer needs and identifies
how those consumer can be grouped into different market segments. By
identifying these segments and selecting target markets, the organisation can
determine where and against whom it intends to compare

Having determined where to compete and whom to compete, the firm will
have effectively determined its product/market scope. However, it must also
establish an appropriate position for its products in the target markets. The
whole purpose of positioning products in markets is to establish a
competitive edge for the products. For example, American Express Cards
may be seen as positioned as a high prestige charge card, with level of service
and price reflecting the prestige of the card holder. In selecting a position, the
marketing strategy is essentially defining the image, which the organisation
wishes to create for its product.

Once a position has been selected, that position will guide the formulation of
the marketing mix. Product attributes, pricing decisions, methods of
distribution and communication should all seek to reflect the chosen position.

In effect, the marketing mix represents the tactics employed to implement a

chosen strategy. The decisions made in respect of marketing mix need to be
operationalised and the outcomes monitored to check that the actual
outcomes match what was intended. Should the outcome deviate from
expectation, corrective action in the form of modification of marketing mix,
or even the overall strategy may be warranted. 43
Financial Services
The process of deregulation and environmental change is continuing with
in India
further liberalization of financial markets. This presents the financial services
sector with a number of new opportunities and threats. As the environment
facing suppliers of financial services has become increasingly competitive
and uncertain, the importance of marketing in guiding the business
development has increased.

Deregulation has removed the traditional restrictions on the types of product,

which particular institutions could supply and has created the opportunity for
expansion into new markets. It has also presented, the threat of an increase in
the number and variety of competitors in a specific market. In this scenario,
tactical marketing alone is no longer appropriate; no financial services
origination can afford simply to continue supplying the same products to the
same markets without some consideration of their possible reactions to the
changing opportunities and threats now confronting them. The essence of the
strategic stance not required, is that the firms should adopt an operative
approach to their markets and focus attention on developing a match between
organizational strengths and environmental opportunities. This will enable
the organisation to identify and satisfy existing customer requirements and
anticipate and be prepared for future developments.

The operation of a differentiation strategy depends on effective market

segmentation and targeting. The success of any differentiation strategy is
dependent on the development of an integrated and coherent marketing mix.
This requires the development of an appropriate product, which is then priced,
promoted and distributed in such a way as to produce an offered service,
which needs the needs of the target customers more effectively than
competing products. Marketing mix is not just a series of tactical responses to
changing market condition; it is a core component of any marketing strategy

Activity 3

Looking at the Indian Marketing Scenario around you can you identify the
differentiation strategies adopted by some financial services in India?
Enumerate some of these differentiations observed by you.

2.7 MARKETING MIX FOR FINANCIAL

SERVICES
Marketing mix is one of the key concepts in the modern marketing theory. In
practice the marketing mix is considered the core of marketing. Neil Borden,
while quoting from an article of James Culiton, wrote that a marketer is
viewed as a 'decider', or an

'artist' or a 'mixer of ingredients' who plans various means of competition.

"He may follow a recipe prepared by others, or prepare his own as he goes
along, or adopt a recipe to the ingredients immediately available, or
experiment with or invent ingredients no one else has tried". If a marketer
44
was a 'mixer of ingredients', what he designed was a marketing mix. Marketing of
Financial
Services: Issues
Borden further wrote that 'it was logical to proceed from a realisation of the and Concept
existence of a variety of marketing mixes to the development of a concept
that would comprehend not only this variety, but also the market forces that
cause managements to produce a variety of mixes' (to fight competition).

Subsequently, Borden's concept of marketing mix was given due recognitions

in the marketing theory.

Marketing mix is the set of marketing tools that the firm uses to pursue its
marketing objectives in the target market.

There are literally dozens of marketing mix tools. Mc Carthy popularized a

four factor classification of these tools called the four Ps: Product, Price,
Place (i.e. Distribution) and Promotion.

The particular marketing variables under each P are shown in the figure
below:

Sales promotion Public relations Direct marketing

A marketing mix is selected from a great number of possibilities. Marketing

mix decisions must be made for both the distribution channels and the final
consumers. The following diagrammatic representation of a company's
marketing mix strategy, by Kotler, points to the interplay of various factors
and players in the marker, which can affect the results of the marketing
efforts.

45
Financial Services
in India
Target Customers

A company may not be able to adjust all the marketing mix variables in the
short run Normally, the firm can change its price, sales force, size and
advertising expenditures in the short run. Development of new products and
modifications in its distribution channels. Are more feasible in the end. Thus,
the firm typically makes fewer period to period marketing mix changes in the
short run than the number of marketing mix variables suggest

The most basic marketing mix tool is product, which stands for the firm's
tangible offer to the market, including the product quality, design, features,
branching, and packaging. The company cold also provides various services
such as delivery, repair, and training as well as running an equipment leasing
business.

Place another key marketing mix tool, stands for the various activities the
company undertakes to make the product accessible and available to target
customers. The company must identify recruit and link various intermediaries
and marketing facilitators so that its products and services are efficiently
supplied to the target market. It must understand the various types of retailers,
wholesalers, and physical distribution firms and how they make their
decisions.

Promotions, the fourth marketing mix tool, stands for the various activities
the company undertakes to communicate and promote its products to the
target market. Thus, the company has to hire, train, and motivate salespeople.
It has to set up communication and promotion programmes consisting of
advertising, direct marketing, sales promotion and public relations.

It may be noted that 4Ps represent the sellers' view of the marketing tools
available for influencing buyers. From a buyer's point of view, each
marketing tool is designed to deliver a customer benefit. Rober Lautherborn's
suggestion was that the 4Ps correspond to the customers' 4Cs:

Winning companies will be those who can meet customer needs

economically and conveniently and with communication.

In the context of financial services however we use three additional Ps i.e.,

the people, physical evidence and process. These additional Ps have been
used to explain the marketing mix here because banking being a service is
inadequately explained if we use the four P classifications, traditionally used
to explain marketing mix for manufactured goods. The following marketing
46
mix used for services is used in the context of banking services. Marketing of
Financial
Services: Issues
Let us, therefore, see how each "P" is important in the context of marketing and Concept
of banking services:

Product: Bank marketing is unique in the sense both product (services) and
its delivery are very important. The product has to suit to customers' needs
and wants. Customers are interested in the variety (range) of products that
suit to their needs. The quality of product/service is the factor, which decides
customer preference to select a product from the given range of products that
suit to their needs by the same bank or different banks. The returns in terms
of interest payable by the bank, the packaging (suitably scheme) its branding
etc. like 'Suvidha scheme' or 'kamdhanu' or 'Grihavitta scheme' also count in
customers choosing bank products..

Price: In the competitive banking scenario, the price of a product is also very
important as it reflects/matches with the cost to the customer. Although they
know that, the interest rate payable has a ceiling by IBA/RBI, the
permutation combination of interest rate differentials mean a lot to customer
in term of pricing. The interest rates charged on loans (short, medium and
long term) and offered on deposits schemes by the banks is the impact of
pricing most visible to customer to decide and choose a banks' product.
Similarly, service fees, other charges do count to differentiate different
products of banks.

Place: The studies by IBA (mentioned in subsequent units) indicate that safe
and convenient place of a bank (branch location) is perhaps the foremost
preference area for a customer to opt for a bank's products/services.

Promotion: How the bank tailors, markets and advertises its products is the
key to success or otherwise in bank marketing. Communication by a bank
with its customers and public at large through advertisements, brochures, and
hoardings and through PR exercise in and out of its premises using its well-
trained sales force enables it to create better image amongst to get more
business.

Let see in brief the importance and relevance of balance 3 Ps as well with
respect to marketing of banking services:
47
Financial Services
People: This is the most important of the 7 Ps in bank marketing which
in India
includes the entire workforce of the bank i.e., executives, officers, employees
and the subordinate staff. The banks policies and systems are converted into
service only through people and that is why well trained and motivated work
force, which is committed to better customer service as a mission, is the
backbone of a bank's marketing efforts. The appearance of the counter staff,
the interpersonal skills of the sales force, the positive behavior and approach
of those coming in contact with customers and reflecting right interest and
care towards customers result into positive customer interaction which
enables the bank to grow its business successively over the years.

Physical Evidence: With the growing competition, in the banking industry

the right ambience that includes proper premises, furnishings, convenient
layout, attractive atmosphere, courteous staff and required peripherals to
ensure all sorts of help to the customer puts a bank in a winning position vis-
a-vis other competitors.

Process: Starting with the pro-active polices for better customer service and
simplified procedures systems to facilitate fast work flow by the employees
who are well empowered and who deliver the goods with quality
consciousness for pleasing the customer, the process has to have a proper mix
of quality, delegation, direction and discretion for effective customer service.

Activity 5

In the contest of your own bank or any other financial services provider you
are familiar with, identify the TP elements of the marketing mix

2.8 MARKETING STRATEGY AND FINANCIAL

SERVICES
The key elements in determination of the marketing strategies for financial
services are the marketing objectives of the organisation, its target segment
and its marketing mix. The process would involve the best possible selection
of the elements of the marketing mix to enable the greatest degree of fit
between the needs and wants of the selected target group and the organisation
services offer such that the exchange process results in value creation for the
consumers and the organisation. Once the organisation, looking at the needs
of the target

Market determines what is sold to whom (decision on the service product),

the pricing promotion and distribution will be easier to determine. In practice,
these determinations of these elements involve a thorough understanding of
buyer preferences and company capabilities. You will go through some of
these inputs in subsequent blocks. In developing a marketing strategy for
financial services, marketers would thus need to go through a two steps
process: First to select or identify its target market or markets and then to
design a marketing mix to meet the needs of the target market had better than
48
its competition can. Marketing of
Financial
Services: Issues
2.9 SUMMARY and Concept

Services because of their unique characteristics present challenges for

marketers, which cannot be addressed by applying concepts developed for
manufactured goods. Thus, unit exposes you to the underlying concepts of
marketing, various marketing orientation and marketing function in the
context of financial services. The services characteristics and their
implication for marketing of financial services, the marketing mix for
financial services have also been discussed.

2.10 SELF ASSESSMENT QUESTIONS

1) Define services. How would you define a financial service?
2) Explain the key differences between products and services? Why is a
bank characterized as producing a service rather than producing a
product?
3) Discuss the service characteristics and the implications that they create
for marketers of financial services.
4) Why is the marketing mix of services extended to include three more Ps.
Explain the significance of people, process and physical evidence for
financial services of your choice?

49
Financial Services
in India UNIT 3 CONSUMER BEHAVIOUR IN
RELATION TO FINANCIAL
SERVICES

Objectives

After going through this Unit you should be able to:

• Explain the importance of consumer behavior analysis for marketing
decision making
• Describe the variables that affect consumer decision making for financial
services.
• Discuss the impact of needs and motivation, perception and learning on
buying of financial services.
• Elaborate on the impact of group and social variables like family,
reference groups, culture and subculture on consumer decision making
for financial services.
• Apply the various models of consumer behavior for effective marketing
of financial services

Structure

3.1 Introduction
3.2 The Complexity of Consumer Buying Decisions
3.3 Individual Influences on Consumer Behaviour
3.4 Needs and Motives
3.5 Individual Perception
3.6 Learning and Habit Development
3.7 Family Influences on Buying Behaviour
3.8 Behavioral Models for Analyzing Buyers
3.9 Consumer Behaviour: Some Learning Points for Financial Services
3.10 Summary
3.11 Self-Assessment Questions
3.12 Suggested Readings
3.13 Further Readings

3.1 INTRODUCTION
Some people regard marketing as an art. Others consider it a science.
Actually, it is a combination of the two. Marketing involves the effective
blending of the behavioral science-anthropology, sociology, psychology with
the communications art writing, graphics, photography, drama, to motivate,
50
modify or reinforce consumer perceptions, beliefs, attitudes and behavior. To Consumer
Behaviour in
accomplish this, marketing professional must be constantly aware of the Relation to
consumer's attitudes, beliefs, likes and dislikes habits, wants and desires. Financial Services

Moreover, since these are always changing, steps must be taken to monitor
them.

As societies change their attitudes towards dress, recreation, morals, religion,

education or even other people, marketing techniques also change. Because
the behavioral characteristics of large groups of people give the directional
force to any marketing efforts aimed at those groups. Marketing tries to use
the trends in mass consumer behavior to effect changes in specific consumer
behavior.

3.2 THE COMPLEXITY OF CONSUMER

BUYING DECISIONS
While making even the simplest purchase, consumers go through a
complicated mental process.

For us to appreciate the complexity of the consumer's buying decision, we

need to understand the variety of individual influences on consumer behavior;
the impact of environmental factors such as family, social, and cultural
influences on the consumer, and how these components are integrated in the
consumer's mind.

A firm's marketing efforts interacts with non-commercial sources of

information to stimulate the purchase decision process. This process is
tempered by the individual in influences of consumer behavior, including
motivation, personality, learning and perception. The process stops when the
consumer loses interest or evaluates the product and decides not to make a
purchase. If the purchase is made, the consumer has an opportunity to see
whether the product satisfies his or her needs. If not, the consumer will
discontinue the use of the product.

3.3 INDIVIDUAL INFLUENCES ON CONSUMER

BEHAVIOUR
The effort of all marketing is to influence people's buying behavior, but it is
difficult to foresee the success of planned marketing programs because
human beings are all individuals. Each behaves differently, thereby making
mass consumer behavior patterns we see every day:

• People vary in their per suability. Some are easily persuaded to do

something: others are skeptical and difficult to convince.
• Some people have very 'cool heads' and control their emotions. Others
are 'hot heads' and anger easily.
• Some people are loners, whereas others need the security of a crowd.
51
Financial Services
• Many people are oriented towards the acquisition of material things.
in India
Some people are motivated mainly by spiritual matters.
• Some people spend their money cautiously. Others spend their money
extravagantly.

Many other contrasts in the behavior of people could be noted such as

interests in sports and hobbies, goal orientation, color preference. All affect
consumers' buying decisions.

To further complicate the marketer's goal of influencing consumer behavior,

consider this observation. First, people's attitudes, beliefs and preferences
change. What we have liked as children we may not like as adult. That
includes products, activities and living conditions.

Second, individual behavior is inconsistent and difficult to predict from one

day to the next. An individual may like to go out and have dinner today, but
he may prefer to stay home tomorrow.

Third, people are often unable to explain their own behavior. A man may say
he bought a shirt because he needed it and it was at a discount of 30%. The
real reason may be different.

People often do not understand why they behave as they do. In addition, if
they do understand their true motivations, they may fear expressing them. For
example, an executive who purchases a new Mercedes probably would be
reluctant to admit it if the real reason for the purchase was his insecurity
amongst his peer group.

Activity 1

Talk to your colleagues about some of the purchases of financial services that
they have been making. Ascertain how over a period of time

i) Their preferences have been changing

ii) Their buying patterns have changed

Can you furnish some explanation for this change? Comment.

3.4 NEEDS AND MOTIVES

In the study of consumer behavior, motivation is understood to mean the
underlying drives that contribute to the individual consumer's buying action.
These drives originate from some conscious or unconscious needs of the
consumer. Unfortunately, motivations cannot be directly observed. When we
see a person eat, we assume he is hungry, but that may not be correct. We eat
for a variety of reasons besides hunger to be sociable, because it is mealtime,
because we are bored, or because we are nervous.

52
Often a combination of motives underlines our behavior in making a decision. Consumer
Behaviour in
The reasons (motives) a person switches an account from the city bank to the Relation to
people's bank may be (1) the people's bank is closer to work (II) it does not Financial Services

charge for overdrafts and/ or (111) the staff at the peoples bank are more
friendly.

Psychologists have tried to categories needs to understand them better.

Abraham Maslow Developed the widely used hierarchy of needs on the
theory that the lower biological or survival needs are dominant in human
behavior and must be satisfied before higher, socially acquired needs become
meaningful.

1) Physiological needs food, drink, oxygen and sleep

2) Safety needs avoidance/protection from threatening situations
and economic security.
3) Social needs friendship, affection and a sense of belonging.
4) Esteem needs self respect, recognition, status and success.
5) Self-actualization self fulfillment.

Although Maslow's hierarchy is a convenient way to classify human needs, it

would be a mistake to assume that needs occur one-step at a time. Usually
people are motivated by a combination of needs.

The problem of analyzing motivation for marketing purposes is aggravated

by the fact that people are admittedly moved by both conscious and
unconscious needs. To explore the depths of the unconscious. Psychologists
like Emits Ditcher have developed a discipline called motivation research,
which although limited to very small samples of consumers and hampered-by
analytical subjectivity, has offered some insight into the underlying reasons
for unexpected consumer behavior.

Activity 2

1) What are the various needs in terms of the above hierarchy that are
targeted by the following financial products?
Credit Cards
Fixed Deposits.
Safety Bonds.
Insurance
ii) Looking at the needs and consequent buyer motivation how do you
suggest that these products should be promoted? Advice.

3.5 INDIVIDUAL PERCEPTION

While an individual is motivated by his personal needs for self-esteem, love
or social recognition, his behavior is affected by his particular perception of
53
Financial Services
himself and world around him.
in India

Perception is the sensing of stimuli to which an individual is exposed-the act

or process of comprehending the world in which the individual exists. E.g.,
when an individual looks at an automobile that he needs for transportation, he
perceives more than a random collection of steel, glass, tires and paint. He
perceives an integrated entity designed to provide a variety of benefits-
transportation, comfort, convenience, economy and even status for the driver.

A person's perception of this integrated entity may be affected by the

individual's self- concept, needs and motivations, knowledge, past experience,
feelings, attitudes and personality,

Self-concept and roles: We all carry images in our minds of whom we are
and who we want to be. If a man wants to appear successful and wealthy, he
may favour a "Gold" credit card from citibank of American express rather
than from an Indian bank

Marketers are very concerned with the perceptions that consumers have of
their products or services, because to the consumer, the perception is the
reality. As marketing consultant Howard Moskowitz says, if the consumer
wants a 'natural taste and if the consumer thinks lemonade with additives
tastes natural, that is what we will give her.

'Lemon flavor' is lemon flavor, whether you get it from a tree or from
chemical ingredients. The constituents are different but what is perceived as
lemon flavor is lemon flavor. That is reality'. Similarly a customer of an old
nationalized bank say SBI or BOI will continue will be a valuable customer
of that bank as long as his ego is not hurt and motives of security and
convenience are satisfied. He would believe "A bank is a bank why shift to
another when he is happy with the present bank'

Selective perception: One of the major problems that marketers face is the
fact that each individual exercises selective perception.

As humans, we have the ability to select from the many sensations

bombarding our brains those that relate to our previous experience, need and
desires.

The average adult is exposed to nearly 10,000 messages a day twice as many
as we are 10 years ago. Yet most people are hardly aware of most of theses.
We are limited not only by the physical capacity of our senses but also by our
interests. We focus attention on some things and avoid others. A single
newspaper may contain hundreds of advertisements but the average reader
recalls only a small number of these and is influenced by even less.

Recent research has shown that new automobile buyers are more likely to
read advertisements about the brands of cars they have already purchased
than about competitive makes. This selectivity makes it important for
marketers to obtain satisfied customers and build brand loyalty, and the
54
product to fit the image created by advertising. Satisfied customers will be Consumer
Behaviour in
less likely to obtain information about competing products and probably will Relation to
not even notice it when it is forced on them. Bank customers often prefer to Financial Services

see/read the ads/messages of their own banks that re-enforce their

perceptions/feelings about security and returns through their banking
products. Unless a new bank or its products has something very special and
attractive or very unconventional and yet convenient and convincing such
customer may not be diverted easily.

Theory of cognitive dissonance: Selective perception services us in many

ways besides saving us time by filtering out irrelevant or uninteresting data; it
protects us from having to face unpleasant realities. Leon Festinger
developed a theory of cognitive dissonance, which states basically that people
strive to justify their behavior by reducing the degree to which their
impressions or beliefs are inconsistent with reality (dissonance).

For example, people who use a 'diners club' credit card because they believe
it is the most prestigious and widely accepted card, may receive a mailer
from 'ANZ Grindlays that proves that their gold card is even more exclusive
with many more advantages. This exposure may create dissonance because of
the gap between current thinking and "new evidence. Marketers such and
ANZ Grindlays hope that the recipient experiences dissonance because the
"Diners club' card holder upon seeing the proof of greater effectiveness or
value might than relieve the uncomfortable tension resulting from the
dissonance by applying for an ANZ Grindlays card.

Activity 3
Study the perception of some of your friends and colleagues about the
recently advertised financial services like the following. Note these
perceptions.
a) Safety Bonds.
b) Jeevan Suraksha Scheme,
c) MTNL Card
d) Cards

What are the various inputs that have resulted in these perceptions? What are
the principles of selectivity that have been applied by your respondents?

3.6 LEARNING AND HABIT DEVELOPMENT

Another individual influence on consumer behavior is the way in which
consumers learn new information and developed purchasing habits. The
major objective of marketing is to teach people about products and where to
buy them. Therefore, marketers are interested in how people learn. Many
psychologists consider learning to be the most fundamental process in human
behavior. The advance, 'higher level' needs, for example, are learned.
Learning produces our habits and skills. It also contributes to the 55
Financial Services
development of attitudes, beliefs. Preferences, prejudices, emotions and
in India
standards of conduct.

Learning is a relatively permanent change in behavior that occurs as a result

of reinforces practices. Theories of learning are numerous but most can be
classified into two broad categories: cognitive and stimulus-response theory.

Cognitive theory views learning as a mental process of memory, thinking and

the rational application of knowledge to practical problem solving. This
theory may be an accurate description of the way we learn in school.

Stimulus response theory, on the other hand, treats learning as a trial and
error process whereby needs, motives or drives are triggered by some cue or
stimulus to cause the individual to respond in an effort to satisfy that need.
Satisfaction, then rewards or reinforces the response by reducing the drive
and producing repeat behavior the next time the drive is aroused.

Let us examine how the stimulus-response theory works in marketing. An

advertising is a stimulus or cue, while a purchase is a response. The
motivation is to satisfy various needs. If the product that the consumer
purchases gives satisfaction, then there is some reinforcement. Additional
reinforcement may be given through superior product performance, good
service, and the reminder advertising. The advertisements by banks like
Citibank or on T.V., in news papers and at public places like airport, railway
station or bus stops re-enforces the response to the stimulus created about its
products and services with respect to safety, security, utility and status appeal
which is re-enforced by repetition. The publicity campaign and hoarding by
banks like UTI or HDFC bank regarding one counter service or service with
guidance to meet the needs easily have similar re-enforcing effect on bank
customers both existing and probable.

Through repetition of the cues (advertisements), the learning process,

including memory, may be reinforced and repeat behavior encouraged.
Learning may be further enhanced by engaging the consumer's participation
in the process through the use of free samples or in-home trials of the product.
Finally, if learning is reinforced enough and repeat behavior produced, a
purchasing habit may result.

Habit is the natural extension of learning. It is the acquired or developed

behavior pattern that has become involuntary. The old cliché 'people are
creatures of habit' is true.

Why most consumer behavior is habitual: There are three reasons that
consumer behavior is habitual. First, we resort to habit when we select
products because it is easy. When we consider an alternative to an existing
brand choice, we are forced to think, evaluate, compare, and then decide.
This is difficult for most of us, not to mention risky. We may be dissatisfied
with the new choice.

56
Second, we rely on habit because of necessity. Consider the person who Consumer
Behaviour in
purchases 25 items at a provision, store. To evaluate all the features and Relation to
ingredients of competitive brands would require hours, which no one has the Financial Services

time-or the inclination to do.

Third, we resort to habit because it is the rational thing to do. As we learn

through trial and error, which brands, serve us well and which do not, we also
learn which stores and service outlets satisfy us and which do not. When we
find a product or service of a bank to our liking, we continue to buy the
product, patronize the bank branch, because it is the intelligent choice to
make.

Marketers have three Habit-related Goals

1) Habit breaking a device to get consumers to break an existing purchase

habit - that is to stop buying their habitual brand and try a new brand.
Many promotional devices are used to attract consumers to a new
product or visit a new store once. Giving away free samples, introductory
trial offers, limited time price offers. Store opening special prices etc. are
some of the methods used to generate customer traffic and new clientele.

2) Habit acquisition to get consumers to acquire a habit of buying from

their establishment. To build a product preference habit, marketers may
use 'reassurance advertising to remind customers of an earlier purchase
response. Examples of advertising themes designed to build purchasing
habits are:

The Citi never sleeps' for Citibank’s round the clock services;

"Don't leave home without it for American express cards.

Habit reinforcement- once consumers are won over, to get them to remain
habitual users. Each time a consumer uses a product and is satisfied with it,
the habit is reinforced. Continued satisfaction may reinforce the habit to such
a degree that the purchase decision is virtually automatic. Examples of
second and third generation customers of banks around in each city...

Activity 4
Look at the various promotions/advertisements for financial services. Identify
the ads that are directed at
1. Habit breaking.
2. Habit acquisition.
3. Habit reinforcement

57
Financial Services
in India 3.7 FAMILY INFLUENCES ON BUYING
BEHAVIOUR
We are all aware as to how our needs and expectation change over different
stages in our lifecycle. Your priorities as a teenager or a young adult or a
family man are very different. These differences are important and marketer
as they enable the marketer to fine tune his marketing effort by using family
life cycle as a segmentation variables.

The family life cycle was developed in 1960 and was based on variables like
marital status, number and ages of children, work status and age. It has since
then, been widely used as a segmentation tool.

Because our age, income and family requirements, except for the necessities
change over time, the family life cycle and identification of family needs over
various stages of the FLE are useful inputs to the marketer. The family life
cycle consists of 5 stages, the young bachelor stage, the full nest I, the full
rest II the empty nest and the solitary survivor stage. Expenditure priorities
and need for money at different stages have interesting implication for the
demand for various financial services. Figure 1 gives you an idea of varying
requirements of consumers for banking services.

Figure 1: Family Life Cycle and Banking Needs

Stage Financial Situation Banking Needs
Young Bachelor Stage Few financial burdens Credit Cards, auto loans
per capita income high low cost banking
income low as services
compared to future
prospects
Full nest I Married with Home buying a priority Mortgage, Credit Card
young children liquidity low may have overdraft savings
working couples account housing and
situation durables loans
Full nest II Older Income stabilized. Home improvement
Married with older Good financial position, loans equity
dependent children mid career, comfortable investments certificate
position, money- of deposits money
involving matters market deposit accounts
fixed or flexi-deposits,
other investment
services.

Empty nest-Older Significantly reduced Social security services,

couple, with children income few loan services,
now not living at home mediclaim services
May be retired

Source: Adopted from Exhibit 6.4. The family life cycle and Banking needs "Marketing of
Financial Services Many Ann Pezzullo American Bankers Association, McMillan
58
3.8 BEHAVIOURAL MODELS FOR Consumer
Behaviour in
ANALYSING BUYERS Relation to
Financial Services

Four different models of the buyer's "black box' are detailed along with their
respective marketing applications:

a. The Marshallian model, stressing economic motivations

b. The Pavlovian model, learning
b) The Freudian model, psycho-analytical motivations
c) The Veblenian model, psycho-social factors

The Marshallian Economic Model

Economists were the first professional group to construct a specific theory of

buyer behavior. The theory holds that the purchasing decisions are the result
of largely 'rational' and conscious economic calculations. The individual
buyer seeks to spend his income on those goods that will deliver the most
utility or value (satisfaction) according to his tastes and relative prices.

Adam Smith set the tone by developing a doctrine of economic growth based
on the principle that man is motivated by self-interest in all his actions.
Jeremy Bentham refined this view and saw man as finely calculating and
weighing the expected pleasures and pains of every contemplated action.

Alfred Marshall was the great consolidator of the classical and neoclassical
tradition in economics. His theoretical work, but his method was to start with
simplifying and to examine the effect of a change in a single variable (say
price) when all other variables are kept constant. Over the years, his methods
and assumptions have been refined into what is now known as the modern
utility theory: economic man is bent on maximising his utility and does this
by carefully calculating the consequences of any purchase.

Marketing Applications of Marshallian Model

From one point of view the Marshallian model is tautological and therefore
neither true nor false. The model holds that the buyer acts in the light of his
best 'interest'. However, this is not very informative,

A second view is that this is a normative rather than a descriptive model of

behavior. The model provides logical norms for buyers who want to be
'rational'. Although the consumer is not likely to employ economic analysis
to decide between a box of 'ship' and 'shakti matched, he may apply
economic analysis in deciding whether to buy a new car.
A third view is that economic factors operate to a greater or lesser extent in
all markets and therefore must be included in any comprehensive description
of buyer behavior. Furthermore, the model suggests useful behavioral
hypotheses such as:
1) The lower the price of the product, the higher the sales. In banking
59
Financial Services
context, it applies to increase in advance with lowering of interest rates.
in India

2) The lower the price of substitute products, the lower the sales of this
product and the lower the price of complementary products, the higher
the sales of this product applies in case of over drafts and loans.

3) The higher the real income, the higher the sales of this product, provided
it is not an inferior product holds good regarding medium and long-term
deposits if perceived as safe and interest rate is reasonable.

4) The higher the promotional expenditures, the higher the sales applies to
credit cards, consumer loans and ATM cards

The validity of these hypotheses does not rest on whether all individuals act
as economic calculating machines in making their purchasing decisions. For
example, some individual may buy less of a product when its price is reduced.
They may think that the quality has deteriorated or that the ownership has
less status value.

If majority of buyers view price reduction negatively, then sales may

decrease, contrary to the first hypotheses

However, for most goods a price reduction increases the relative value of the
goods in many buyers’ minds and leads to increase sales. This and the other
hypotheses and intended to describe average effects. This is observed in
respect of reduction of interest rates in case of loans by banks

The impact of economic factors in actual buying situations is studied through

experimental design or statistical analyses of past data. Demand equations
have been fitted to wide variety of products. More recently, the impact of
economic variables on the fortunes of different brands has been pursued with
significant results.

However, economic factors alone cannot explain all the variations in sales.
The Marshallian model ignores the fundamental question of how product and
brad preferences are firmed. It represents a useful frame of reference for
analyzing only one small corner of the buyer's mind the black box'.

Activity 5

Do you think that the Marshallian model appears well to financial services
like banking on investment advisory services? Why or why not?

The Pavlovian Learning Model

This has its origins in the experiments that Russian psychologist named
Pavlov conducted on dogs Pavlov rang a bell each time before feeding a dog.
Soon he was able to induce the dot to salivate by ringing the bell whether or
not food was supplied. Pavlov concluded that learning was largely an
associative process and a large component of behavior was conditioned this
way. The model has been refined over the years, and is today based on four
60
central concepts those of drive, cue, response and reinforcement Consumer
Behaviour in
Relation to
Drive: Also called needs or motives, drive refers to the strong stimuli internal Financial Services
to the individual, which impels action. Psychologists draw a distinction
between primary physiological drives such as hunger, pain, cold, thirst etc.
and learned drives which re- derived socially such as cooperation, fear
acquisitiveness. A customer of a bank once recognized and responded
positively will show drive to come repeatedly.

Cue: A drive is very general and impels a particular response only in relation
to a particular configuration of cues. Cues are weaker stimuli in the
environment and/or in the individual, which determine when, where and how
the subject responds. Thus, a cold drink advertisement can serve as a cue,
which stimulates the thirst drive in a child. His response will depend upon
this cue and other cues, such as the time of day, the availability of other thirst
quenches and the cues intensity.

Response: The process is the organism's reaction the configuration of cues.

Yet the same configuration of cues will not necessarily produce the same
response in the individual. This depends on the degree to which the
experience was rewarding, that is, drive- reducing. A bank customer would
demonstrate his behavior satisfied or otherwise depending on his past
experience.

Re-enforcement: If the experience is rewarding, a particular response is re-

enforced; that is it is strengthened and there is a tendency for it to be repeated
when the same configuration of cues appears again. An individual for
example, will tend to frequent the same bank outlet so long as it is rewarding
(convenient, fast friendly, flexible) and the cue configuration does not change.
However, if a learned response or habit is not re-enforced, the strength of the
habit diminishes and may be extinguished eventually. Thus, an individual
may acquire a new credit card, if the existing card has some limitations or
drawbacks. Alternatively, he may change his bank due to location, timing
service standards, facilities etc.

Forgetting, in contrast to extinction, is the tendency for learned associations

to weaken. not because of the lack of reinforcement but because of non-use.

Cue configurations are constantly changing. The individual may see a new
bank branch near his house, or a special advertising offer for a bank credit
card. Experimental psychologists have found that the same learned response
will be elicited a similar pattern of cues; that is, learned responses are
generalized. A homemaker will buy a similar brand of tea when her favorite
brand is out of stock.

A counter tendency to generalization discrimination. When an individual uses

two banks and finds one more rewarding in terms of location, timings, speed,
courtesy, facilities. etc. his ability to discriminate between similar cue
configurations improves. Discrimination increases the specificity of the cue
61
Financial Services
response connection, while generalization decreases the specificity.
in India

Marketing application of the Pavlovian Model

The modern version of the Pavlovian model makes no claim to provide a

complete theory of behavior such important phenomena as perception, the
subconscious, and interpersonal influence is inadequately treated. Yet the
model offers insights about some aspects of behavior of considerable interest
to marketers.

An example would be in the problem of introducing a new brand in a highly

competitive market. The company's goal is to extinguish existing brand
habits and form new habits among consumers for its brand. However, the
company must first get customers to try its brand; and it has to decide
between using weak cues and strong cues.

Light introductory advertising is a week cue compared with distributing free

samples. Strong cues, although costing more, may be necessary in markets
characterized by strong brand loyalties.

For example, new credit cards issuers frequently resort to waiving

membership fees for a limited time promotional offer to attract new members.

To build a brand habit, it helps to provide for a period of introductory offer.

Sufficient quality of product or service must be built into the brand so that
"brand experience' is reinforcing. Since buyers are more likely to switch to
similar brands than dissimilar ones (generalization), the company should
investigate what cues in the leading brands have been most effective.
Outright imitation may not provide the most transference, the question of
providing enough similarity should be considered. (Notice the levels of
exclusivity conveyed by the coloring/naming of credit cards as 'silver', 'gold,
and 'platinum').
The Pavlovian model also provides guidelines in marketing and advertising
strategy. The Pavlovian model emphasizes the desirability of repetition in
advertising. A single exposure is likely to be a weak cue, hardly able to
penetrate the individual's consciousness sufficiently to excite his drives above
the threshold level.
Repetition in advertising/marketing messages has two desirable effects. In
fights forgetting, the tendency of learned responses to weaken in the absence
of practice. It provides reinforcement because after the purchase the customer
becomes selectively exposed to advertisements of the products.
The model also provides guidelines for 'message' strategy. To be effective as
a cue, an advertisement must arouse strong drives in the person. The
strongest product related drives must be identified. For chocolates, it may
hunger for cars; it may be status, for safety belts, fear. The marketing and
advertising practitioners must search his cue box- words, color pictures and
select that configuration of cues that provides the strongest stimulus to these
drives.
62
The Freudian Psychoanalytic Model Consumer
Behaviour in
Relation to
According to Freud, the child enters the world driven by instinctual needs, Financial Services
which he cannot gratify by himself. Very quickly and painfully he realizes his
separateness from the rest of the world and yet his dependence on it. He tries
to get others to gratify his needs through a variety of blatant means, including
intimidation and supplication. Continual frustration leads him to perfect more
subtle mechanisms for gratifying his instincts.

As he grows, his psyche becomes increasingly complex. A part of his psyche-

the id- remains the reservoir of his strong drives and urges. Another part the
ego becomes his conscious planning centre for finding outlets for his drives.
An a third part his super ego channels his instinctive drives into socially
approved outlets to avoid the shame of pain or guilt.

The individual's behavior, is therefore, never very simple. His motivational

wellsprings are not obvious to the casual observed not deeply understood by
the individual himself. If asked why he purchased an expensive sports car, he
may reply that he liked its speed and shape. At a deeper level, he may have
purchased the car to impress others, or to feel young again. At a still deeper
level, he may be purchasing the sports car to achieve substitute gratification
for unsatisfied sexual strivings.

Many refinements and changes in emphasis have occurred in this model. The
instinct concept has been replaced by more careful delineation of basic drives;
the three parts of the psyche are regarded now as theoretical concepts rather
than actual entities; and the behavioral perspective has been extended to
include cultural as well as biological mechanisms.

Marketing Applications of the Freudian Model

Perhaps the most important marketing implication of this model is that

buyers are motivated by symbolic as well as economic functional product
concerns. The change of a bar of soap form a square to a round shape may be
more important in its sexual than its functional connotations. A cake mix that
is advertised as involving practically no labor may alienate homemakers
because the easy life may evoke a sense of guilt.

Motivation research has proved some interesting and bizarre hypothesis about
what may be in the buyer's mind regarding certain purchases.

Motivational researchers have to employ time consuming projective

techniques in the hope of throwing individual 'egos' off guard. When
carefully administered and interpreted, techniques such as word association,
sentence completion, picture interpretation and role

playing can provide some insights into the minds of the small group of
examined individuals; but a 'leap of faith' is sometimes necessary to
generalize these findings to the population.

63
Financial Services
Nevertheless, motivation research can lead to useful insights and provide
in India
inspiration to creative men in advertising and marketing. Appeals aimed at
the buyer's private world of hopes, dreams, and fears fan often be as effective
in stimulating purchase as more rationally-directed appeals.

The Veblenian Social-Sociological Model

While most economists have been content to interpret buyer behavior in

Marshallian terms, Thorstein Veblen struck out in different directions,

Veblen was trained as an orthodox economist but evolved into a great social
thinker. He was man primarily as a social animal conforming to the general
forms and norms of his larger culture and to the more specific standards of
the subcultures and face to face grouping to which his life is bound. His
wants are greatly molded by his present group memberships and his aspired
group memberships.

Veblin's best known example of this is in his description of the leisure class.
His hypothesis to that much of economic consumption is motivated not by
intrinsic needs or satisfaction so much as by prestige seeking He emphasized
the strong emulative factors operating in the choice of conspicuous goods like
clothes, cars and houses.

Some of his points, however, seem overstated by today's perspective. The

leisure class does not serve as everyone's reference group many persons
aspire to the social patterns of the class immediately above it. In addition,
important segments of the affluent class practice conspicuous under
consumption. There are many people in all classes who are more anxious to
'fit in' than to 'stand out. As an example, William H. Whyte found that many
families avoided buying air-conditioners before their neighbors did.

Marketing Applications of the Veblenian Model

The various streams of thought crystallized into the modern social sciences of
sociology. culture anthropology and social psychology. Basic to them is the
view that man's attitudes and behavior are influenced by several levels of
society culture, subcultures, social classes, reference groups, and face-to-face
groups. The challenge to the marketer is to determine which of these social
levels are the most important in influencing the demand for his product.

Culture

The most enduring influences are from culture. Man tends to assimilate his
culture's mores and folkways, and to believe in their absolute rightness until
he confronts members of another culture.

Subcultures

A culture tends to lose its homogeneity as its population increases. When

people no longer are able to maintain face-to-face relationships with more
than a small proportion of other members of a culture, smaller units or
64
subcultures develop which help to satisfy the individual's needs for more Consumer
Behaviour in
specific identity. Relation to
Financial Services
The subcultures are often regional entities, because the people of a region, as
a result of more frequent interaction, tend to think and act alike. However,
subcultures also take the form of religion, nationalities, fraternal orders and
other institutional complexes that provide a broad identification for people
who are strangers. The subcultures of a person play a large role in his attitude
formation and become another important predictor of certain values he is
likely to hold.

Social Class

People become differentiated not only horizontally but also vertically through
a division of labor. The society becomes stratified socially based on wealth,
skill, and power. Sometimes castes develop which the members are reared for
certain roles or social classes develop in which the members feel empathy
with others sharing similar values and economic circumstances.

Because social class involves different attitudinal configuration, it becomes a

useful independent variable for segmenting markets and predicting reactions.
Significant differences have been found among different social classes with
respect to magazine readership, leisure activities, food imagery, fashion
interests, and acceptance of innovation. A sampling of attitudinal differences
in class is the following with respect to their banking habits:

Members of the upper middle class place an emphasis on professional

competence; indulge in expensive status symbols; and more often than not
show a taste, real or otherwise, for theatre and the arts. They want their
children to show high achievement and precocity and develop into physicists,
vice-presidents and judges. The class likes to deal in ideas and symbols. They,
besides recurring and fixed deposits also take pride in credit cards and ATM.

Member of the lower middle class cherish respectability, bank savings,

college education and good house-keeping. They want their children to who
self-control and prepare for careers as accountants, doctors, lawyers and
engineers. They prefer to keep amounts in fixed deposits to meet future needs.

Members of the lower class try to keep up with the times, if not with the
Mehta’s. They stay in older neighborhoods but buy new kitchen appliances.
They spend proportionately less than the middle class on major clothing
articles does, buying a new suit mainly for an important ceremonial occasion.
They tend to raise large families and their children generally enter manual
occupations. This class also supplies many local storekeepers, garage owners,
politicians, sports stars and labor-union leaders. Such segment keeps their
funds in savings banks mainly for getting liquid funds to be available in case
of day-to-day needs.

65
Financial Services
in India
Reference Groups

There are groups in which the individual has no membership but with which
he identifies: and may aspire to reference groups. Many young boys identify
with test cricket players or astronauts, and many young girls identify with
Hollywood stars. The activities of these popular heroes are carefully watched
and frequently imitated. These reference figures become important
transmitters of influence, although more along lines of taste and hobby than
basic attitudes

Face to Face Groups

Groups that have the immediate influence on the person's tastes and opinions
are face-to-face groups. This includes all the small 'societies' with which he
comes into frequent contact his family, close friends, neighbors, fellow
workers, fraternal associates and so forth. His informal group memberships
are greatly influenced by his occupation, residence and stage in the life cycle.

The powerful influence of small groups on individual attitudes has been

demonstrated in a number of social psychological experiments. There is also
evidence that this influence might be growing. David Riesman and his co-
authors have pointed to signs, which indicate a growing amount of other
direction, that is, a tendency for individuals to be increasingly influenced by
their peers in the definition of their values rather than by their parents and
elders.

For the marketer, this means that brand choice may increasingly be
influenced by one's peers. For such products as cigarettes and automobiles,
the influence of peers is unmistakable.

The role of face to face groups has been recognized in recent industry
campaigns attempting to change basic product attitudes. For years the milk
industry has been trying to overcome the image of mild as a 'satisfied' drink
by portraying its use in social and active situation. The means wear industry
is trying to increase male interest in clothes by advertisements indicating that
business associates judge a man by how well he dresses.

Of all face to face groups, the person's family undoubtedly plays the largest
and most enduring role in basic attitude formation. From them, he acquires a
mental set towards not only religion and politics, but also toward thrift,
chastity, human relations land so forth. Although he often rebels against
parental values in his teens, he often accepts these values eventually. Their
formative influence on his eventual attitudes is undeniably great.

Family members differ in the types of product messages that they carry to
other family members. Most of what parents know about cereals, candy and
toys comes from their children. The wife stimulates family consideration of
family appliances, furniture and vacations. The husband tends to stimulate
the fewest purchase ideas, with the exception of the automobile and perhaps
66 the home.
The marketer must be alert to what attitudinal configuration dominates in Consumer
Behaviour in
different types of families and also to how these change over time. For Relation to
example the parent's ideas about the child's rights and privileges have Financial Services

undergone a radical change in the last 30 years. The child has become the
centre of attention and orientation in a great number of households, leading
some writers to label the modern family a 'filliarchy'. This has important
implications not only for how to market for today's family but also on how to
market to tomorrow's family when the indulged child to today becomes the
parent.

3.9 CONSUMER BEHAVIOUR: SOME

LEARNING POINTS FOR FINANCIAL
SERVICES
It is said, satisfaction suffices. However, delight dazzles. Average services set
up will compete for the customer by conforming to his/her expectations
consistently. Winner will surpass by constantly exceeding expectations,
delivering at doorstep additional benefits which the investor would never
have imagined possible!

A personal loan to a cash strapped investor, surprises and leading to

satisfaction will retain the customer-investor. Telling the investor new
opportunities and helping him or her invests. If no cash with the customer,
get a loan for him/her under a guarantee you offer to the lender and help your
customer invest and help him/her reap benefits. Yes, it is that is where how
you can hold your customer with you and the customer is in need of such
entrepreneurs who will look after him/her at all times. If you can fill the bill
then you are most needed!

Reward always your loyal customer before your customer thinks he/she
deserves specials from you.
Similarly hold back your potential defector. Attract the fence sitters. Serve up
unparalleled value to your customer, is the watch word in the new
millennium customer psyche. After all why he or she should be with you and
for what if you cannot take care of him or her!

Pradeep Kar, Managing Director of Microland, says:

Customer delight does not end at the front-office of a company it (just)

begins there.

" Abraham Koshy, a Professor of IIM-A, says:

'Customer delight should add value to both the customer and the company.
Don't provide a free lunch'.
What is a delight-It is a fulfillment of latent needs that the customer is not yet
aware of -a quality of service that he/she does not consider possible from
marketers complete personalization of a standardized product or service an
67
Financial Services unexpected benefit that does not result in profits for the company solutions to
in India
problems offered by a company's personnel at personal initiatives.

What justifies a delight only continuously rising satisfaction levels can hold
back potential defectors ever-rising value strengthens the loyalist's resolve
not to switch to the competition the promise of constant surprise turns
experimenters into lifelong customers entry barriers are raised for new
competitors who have to set new standards and the compulsion to innovate
constantly leads to pay-offs in cost reductions and quality. How to generate
delight? Strive constantly to provide additional customer value in every
transaction, use a flexible service envelope around the core product to
generate surprise benefits, constantly surpass expectations that the customer
has built around your product or service treat every customer as though
he/she is the only customer whom the company wants, look for expectation
performance gaps in order to identify opportunities to delight.

R. Sridar of Ogilvy & Mather says:

If you want to drive competition crazy, ignore your competitors and

concentrate on your customer one-on-one. You won't find a more potent
competitive weapon than that."

Hence, it is relevant to know that the only safe way to bet on market is to
assess whether a company is capable of creating greater value for the
customer than its rivals. The challenge there is to attain a value insight. In
fact while the value system is market specific, it is influenced by the level of
consumer evolution and the nature of alternatives available as well as the
cultural conditioning of customers.

C.K. Prahalad and Garry Hamel's concept is that in emerging markets there is
a great need for foresight because of rapid pace of change which needs an
understanding of future drivers of value of three planes, Macro consumer
changes plane, competitive offerings plane and the categories codes plane.
Value foresight being crucial in the emerging markets, needs an
understanding of the likely changes in the value system driven by historical
events, fresh competition and the new cultural categories.

3.10 SUMMARY
This unit explored the basic concepts for understanding the way a consumer
believes in selecting and consuming product and services. In order to be able
to manage their marketing effectively, marketers of financial services must
understand why and how people believe, so that the pricing, distribution and
communication of the organisations offer can be profitably offered to them
target markets. Buyer motivation is created by current or partially fulfilled
needs. The resulting behavior is also influenced by individual’s perception of
the stimuli surrounding them. Apart from needs and perception, a number of
individual variables like consumer learning, their personality and self concept
68
as well as group variable like family culture, sub-culture reference groups Consumer
Behaviour in
and society affect buyer behavior. The various models given in the unit Relation to
furnish some explanations of how these variables material to create Financial Services

influences on buying behavior. As a marketer you must seek to understand

and apply these influences for effective marketing.

3.11 SELF-ASSESSMENT QUESTIONS

Briefly explain the following terms and how do they affect buying behavior.

• Consumer needs and motives

• Need hierarchy
• Life cycle
• Selective exposure, retention and distortion
2. How does perception affect consumer choice. Explain with reference to a
financial service of your choice.
3. Comment upon the family and reference group influences on buying
behavior.
4. How does the Marshallian model explain buying behavior?
5. Do you think that social class is an important determinant of buying
behavior, in the context of financial services? Use examples to
substantiate your answer.

3.12 SUGGESTED READINGS

1. Mary Ann Pezzullo 'Marketing Financial Services, MacMillan India
Limited (1999), IBA.

2. A.H. Mas low, "Motivation and Personality (New York: Hamper and
Brothers1954).

3. Richard P Coleman. "The Continuing significance of social class to

Marketing" Journal of Consumer Research, December 1983.

4. National Automated Clearinghouse Association Website

(http/www.racha.com March 1997).

3.13 FURTHER READINGS

1. Henry Assail "Consumer Behaviour and Marketing Action "PWS Kent
Publishing Co. Boston, 1992.

2. Mite Sujan and James Bateman, "The Effect of Brand Position Strategies
on Consumer Brand and Category Perception "Journal of Marketing
Research Nov. 1989 pages 454-467.

69
Financial Services
in India

70
 Consumer
Behaviour in
Relation to
Financial Services

BLOCK 2
MARKETING OF BANKING AND OTHER
SERVICES

71
Financial Services
in India

72
UNIT 4 BANKING PRODUCTS AND Banking Products
and Services
SERVICES

Objectives

After going through this unit, you should be able to:

• describe the concept and significance of banking product types and

product cycles
• explain the concept of product and service
• understand the product strategies as applicable to banking
• discuss the process of product analysis and product development
• evaluate the role of brand in marketing of banking services.

Structure

4.1 Introduction

4.2 Nature of Product

4.3 Products and Services in Banking

4.4 Elements of Product Mix

4.5 Product Life Cycle and Product Strategies

4.6 Using Product Life Cycle to Manage Marketing of Banking Products

4.7 New Product Development

4.8 Branding in Bank Marketing

4.9 Process and Product Development Cycle for Banking Services

4.10 Product Development

4.11 Summary

4.12 Self-Assessment Questions

4.13 Key Words

4.14 Further Readings

4.1 INTRODUCTION
The product/service offering is among the most crucial element in marketing
of banking services.

The service is integral part of product in banking and is at times an

indivisible part of any banking product. Similarly whether we talk of brand or
selling a product, the institution (bank) is always the deciding factor in
73
Marketing of Banking product design and delivery as the customers do not look at any product in
and Other Services
isolation but look at it as the particular bank's product.

In this unit we will discuss the important concepts of the types of banking
products, product life cycle, product strategies, product analysis, product
development and innovation and role of brand in marketing of bank's services.

4.2 NATURE OF PRODUCT

A product is defined as: "Anything that has the capacity to provide the
satisfaction, use or perhaps the profit desired by the customer." Product and
service are the words used interchangeably in banking parlance.

It must be remembered that whatever be the form in which a product or

service is provided, the focus will be on the want and need satisfying aspects
of that product or service. Without such a focus on the customer's want need
satisfaction no product/ service can exist for long.

For a product or service, when it is marketed the following two aspects are
very significant:

1) Offer-what is offered say a product at a price, and

2) Manner of offering-how it is offered i.e. the manner of product delivery.

The product includes quality, features, accessories, packaging, brand, warrant,

etc. As the services are marketed like the products, products also include
services.

An organisation may offer different product lines, each product line

comprising of different product varieties all of which collectively represent a
product mix.

Product planning, as it is called, comprises of the process of developing and

maintaining a portfolio of products which satisfy the wants and needs of
customer from different segments. Such product planning has to ensure
maximum utilisation of skills and resources of an organisation.

This product planning function consists of decisions on:

1) Product Line

2) Product Mix

3) Branding

4) Packaging

5) New Product Development.

In the following paragraphs we shall discuss all the above aspects elaborately.

74
4.3 PRODUCTS AND SERVICES IN BANKING Banking Products
and Services

As we have seen, a product is a bundle of all kinds of satisfaction of

customer's wants and needs.

A product can be a goods, a service or a goods + service or even just an idea.

A product is, in short, all the things offered to a market. It can involve
physical objects, design, brand, package, price, services, literature, attractive
ideas, personalities or even the image of a bank or its branch.

It is thus essential to define a product or service in terms of product functions

i.e. what the customer expects from a product or service offered by a bank.

The normal connotation to differentiate between the product and the service
is that the is something tangible and service means something intangible. In
general marketing terms, word product is mostly used. Philip Kotler defines a
product as :

"A product is anything that can be offered to a market for attention,

acquisition, use or consumption; it includes physical objects, services,
personalities, places, organisations and ideas."

The bank's products are its deposit or borrowing scheme or other products
like credit card or foreign exchange transaction which are tangible and
measurable whereas service can be such products including the way/manner
in which they are offered which cannot be shown but can be expressed.

But if two banks have same or similar products and pricing; it is the service
(though abstract) which differentiates between these two banks and the better
service (delivery or offering) which wins customer's confidence and satisfies
him.

It can, therefore, be said that the better service is even more important than
just a good product when we talk about marketing of banking services.

We will discuss more elaborately about various services offered by a bank

various types of deposits and services offered by a bank.

Different Banking Products

The discussion and process of understanding the bank marketing will not be
complete unless we know the various products/schemes tailored by different
banks to cater effectively to the customers’ needs. Important among the
banking products are the following

Deposit Accounts

Knowing the human behaviour with respect to wants and needs or rather
making wants to be felt as need is the first challenge in marketing of bank's
schemes. The second challenge is the resistance to change and/or new ideas

75
Marketing of Banking which becomes a touch barrier in the process of marketing products/services
and Other Services
of a bank.

Banks, therefore, tailor various deposits schemes and market them to either
their/existing customer or the new segments of customers. Before selling the
deposit schemes, it becomes necessary to identify the needs and aspirations
of the customers to make them most ideal and acceptable to satisfy their
needs.

From the marketing angle the different deposit schemes of the bank can be
grouped on the basis of:

• the mode of deposit

• the mode of repayment
• additional benefits
• the end use of accumulated funds
• the calculation and payment of interest
• need for liquidity, safety, growth, etc.

Let us illustrate a few schemes on these criteria:

S.No. Need Deposit

1. Personal Saving. Liquidity, easy Saving
withdrawal
2. Turnover, many transactions, business current
3. Interest income required and lumpsum fixed deposit monthly int
saving dep. scheme, quarterly int.
dep, scheme, cumulative
deposit scheme.
4. Gift to some one Gift cheque, Festival
Deposit Certificates
5. Safe Travel Travelers Cheque
6. Deposit in small instalments Recurring deposit scheme,
daily deposit

Let us first discuss the type of 'main deposits' from the broad classification
point.

• Savings Deposit

Means a form of deposit which is a deposit account titled as savings account,

savings bank account or savings deposit account which is subject to
restrictions about the number of withdrawals therefrom. (RBI Directive
dt.27.12.85)

• Current Deposit Account

76
Means a form for deposit from which withdrawals are allowed freely, any Banking Products
and Services
number of depending upon the balance in the account or upto a particular
agreed amount and shall be deemed to include other deposit accounts which
are neither savings deposit nor term deposit (RBI Directive dt.27.12.85)

• Demand Deposit

Means a deposit received by a bank which is withdrawable on demand. S.B.

C/A and overdue deposits are the examples of demand deposits. Customers
having these accounts can withdraw their deposits from their accounts at any
time they desire.

• Time Deposit

Are deposits which are not repayable on demand. Such deposits are repayable
on a fixed date in future which is termed as a date. Rate of interest for the
said period is contracted at the time of opening the account. Deposits held
under these following schemes are called time deposits.

These deposits are:

1. With due dates
2. Long Term
3. Higher Interest Rates
4. Each transaction: a separate contract
5. Non negotiable

Let us briefly examine the characteristics of each of the above 'Time

Deposits"

1) Short (Term) Deposit: Deposits for a period of 15 days and less than 12
months" are called short term deposit. Rate of interest is as prevailing
from time to time as directed by RBI.

77
Marketing of Banking 2) i) Fixed Deposits: Deposits for a period of 12 months and above upto
and Other Services
120 months are termed as fixed deposits. Minimum amount accepted
is Rs. 100/- Interest is paid in 1/2 yearly basis at agreed rate and as
directed by RBI from time to time

ii) Monthly Income Plan: Interest is payable every month. Minimum

amount accepted is Rs.500/- and interest is paid at the discounted
rate or if depositor agrees to holiday of 3 months, the bank pays
interest at the stipulated rate from 4th month.

iii) Regular Income Plan: Interest is paid every quarter to the

depositor. Minimum amount stipulated is Rs.500/-. Interest is paid
on quarterly basis.

3) Deposit at Notice: While keeping he deposit with the bank a depositor

stipulates the notice period ranging from 15 days to 90 days. Depositor
has to give stipulated notice to bank he intends to withdraw the deposit.
Due date will count from the notice date. Minimum amount for 15 days
to 45 days is Rs.1,000/- and for 45 days to 90 days it is Rs.2,500/-

4) Recurring Deposit: This is recurring in nature. A depositor while

opening the account has to stipulate the period of deposit and amount of
the agreed monthly instalment which is normally in multiples of 5 or
10% and for the periods in multiples of 12 months upto 120 months.

Instalment is required to be deposited regularly between any day from first to

last date of month Interest is compounded quarterly and principal interest
(accumulated) becomes payable on due date or one month after payment of
the last installment whichever is later.

5) Festival Deposit: Account is opened in the name of festival. Minimum

amount stipulated is Rs.25 This account can be opened for a minimum
period of 4 months and maximum of 12 months.

6) Cash Certificates: This scheme is meant for persons having seasonal

incomes like farmers, artisans, etc. The face value is in multiples of
Rs.50 upto Rs.10,000/- and maturity period from 24 months to 120
months.

Some schemes combine recurring deposit and fixed deposit schemes benefits.

The prepayment of deposits at the desecration of bank attracts penalty i.e. 1%

less interest than due for that period.

When loan is allowed e.g. such deposits (where allowable) interest on that
loan is charged 2% above the rate of interest payable on these deposits which
is a price to cover the cost involved in that transaction.

It is interesting to observe that there is not a very large difference/variation in

the lowest and highest deposit rates of deposits offered by a small co-
operative bank, a nationalised bank, a private bank or a foreign bank. What
78
differs is the presentation, pricing strategy, labelling and marketing style Banking Products
and Services
which projects quality and professional friendly approach which makes all
the difference in customer making a decision to bank with such banks using
professionally marketing.

It is equally interesting to know that although benefits are same or similar as

to interest rate or maturity value, the titles vary very much in their 'catchy'
value.

One more shifts is, earlier most brochures highlighted only interest rate or
benefits but now service charges are also advertised in a subtle and friendly
manner.

Activity 1

a) Just to have an idea of how the deposit schemes are marketed, you must
look at some of the brochures of a (i) Private Bank (Vysya bank), (ii)
Foreign Bank (ANZ Grindlays Bank); about deposit schemes and service
charges. Please go through them, read between the lines and note your
observations as part of your understanding.

……………………………………………………………………………

……………………………………………………………………………

……………………………………………………………………………

……………………………………………………………………………

Non-Resident Account

We have seen the types of deposits maintained by bank of Resident Indian in

Rupees.

Banks authorised to deal in foreign exchange also maintain various non-

resident accounts which bring the non-resident Indian segment in their
portfolio and ensure both business and exchange profit in the conversion
process.

Due to the special consideration in cash reserve calculations and the

exchange communication/profit involved, many banks have been competing
with each other to attract and retain such non-resident accounts.

Who is a Non-Resident Indian?

As per FERA, 1973, an Indian Citizen staying outside India (except in Nepal
or Bhutan) for employment or carrying out business or vocation outside India
or for any other purpose in circumstances indicating his intention to stay
abroad or for an uncertain period is called "non-resident'

a) Indian citizens who proceed abroad for higher studies, business visits or
medical treatment continue to be treated as persons resident in India even
during their temporary absence from India. 79
Marketing of Banking Indian citizens staying abroad on foreign government/government assignment
and Other Services
world bodies or officials of Central/State Government, Public Sector
undertaking and deputed posted abroad to their offices including Indian
Diplomatic missions are treated as non-resident during their stay abroad.

Non-Resident Account can be opened by the names of non-resident persons

and persons of Indian origin residing abroad.

Persons of Indian origin means a person who himself or either of his parents
or any of his grand-parent was an Indian citizen or a permanent resident in
undivided India at anytime.

or

A wife of an Indian Citizen or a person of Indian origin shall also be deemed

to be of Indian Origin even though she may be of non-Indian origin.

However, non-resident (E) accounts can also be opened in the names of

overseas companies, partnership firms, societies and corporate bodies which
are owned by non- residents of Indian nationality/origin or trusts, wherein
these persons have irrevocable beneficial interest to the extent of 60%

these non-resident accounts have to be properly introduced.

the following types of non-residential accounts can be opened in Rupees.
a) Current Account
b) Saving Account
c) Term Deposit
d) Special Term Deposit
e) Recurring Deposit
f) Cash Certificates
B) Annuity Deposits
Such N.R.I. accounts can be even jointly opened if:
i) all the account holders are N.R.I.S
ii) all are of Indian Nationality or origin

iii) all are resident in the same country if belonging to bilateral group (now
modified or in the same or different countries in Ext. group)

Funds in N.R. (E) accounts can be accepted in any currency if they are
transferred to in an approved manner from the country of residence of the
account holder or from any other foreign country if the country of residence
of the account holder and the country from which remittance is received are
both in same group (now modified).

ii) Interest on Term Deposit of account holder

80
iii) Transfer from accounts to account holder ad the same another branch of Banking Products
and Services
bank.

The following is difference in N.R. (0) and N.R. (E) Account:

N.R. (O) N.R. (E)

Conversion of resident accounts as Conversion not allowed from

account holder becoming non- resident account to NR (E)
resident or new account in the name
of N.R.

Source of credit resident as well as Sources foreign credit only

foreign

Repatriation not allowed Repatriation allowed

Joint account with Resident Indian- Joint account with NR only

close relative allowed

No Tax exemption Eligible for tax exemption

NR (E) accounts are eligible for:

1) Tax Exemption
1) Income tax
1) Wealth tax
i) Gift tax
2) Repatriation of balances held in N.R. (E) account including interest is
allowed without prior reference to RBI.
3) Interest rates payable are higher for N.R. (E)
4) Reconversion facility is available
5) Funds from NR (E) can be transferred to N.R. (Ext) Term Deposit
Account

6) Loans/O.D. against N.R. (E) Term Deposit is allowed upto specified

limit for approved purpose and repayment has to be made either by
adjusting the deposit or by fresh remittances in Forex from abroad.

• Premature payment is allowed like conditions for domestic deposits.

• When the account holder changes his status from N.R to resident the
account should be changed to resident on getting intimation from
account holder. 81
Marketing of Banking Types of Loans/Advances
and Other Services
Like the Deposit Account are life blood or raw material for the bank, the
advances are essential to deploy those funds to earn revenue for the banks.

In order to balance liquidity and profitability properly, banks have to use their
available (lendable) funds judiciously keeping in mind the statutory
requirements imposed by RBI.

The employment of funds is made generally as:

1) Cash-certain portion has to be held to meet day-to-day demand of

customers and to hold certain portion in QRR with RBI.

2) Money to call or short notice-Refers to inter-bank borrowings. In day-

to-day requirement banks borrow from each other, the interest varies
day to day.

3) Investments-The investment by bank depends upon statutory

requirement as per Sec. 24 of Banking Regulation Act, 1949 and Sec.
42 of RBI Act, 1934.

4) Advances As banks have to pay interest on various types of deposits

received from customers, in addition to salary cost, rates, taxes,
insurance, stationery cost and other administration costs, they have to
earn adequate profit to meet all these expenses by deploying funds
profitably.

This is done depending on RBI guidelines and bank's own policies.

The advances are granted to eligible borrowers as per bank's policy, available
lendable funds, bank's corporate plan, its performance budget and borrowers'
character, capacity. capital and credit needs.

The following principles are kept in mind:

1) Safety-the advance should be safe.

2) Liquidity as the time deposits are slowly reducing, advances should be

liquid and not blocked for long period.

3) Profitability-Interest and charges be remunerative

4) Spread decided on security, risk, type of industry, etc. which is the

pricing decision linked to bank rate prevailing

5) Purpose-The advances are generally granted for productive purpose

after verifying utilisation and repayment capacity.

6) Security-This is the safeguard to fall back upon in case of emergency

and recovery by sale of assets. The stock or Fixed Assets or collateral
securities are insisted upon.

82
7) Margin Depending on the security a cushion is required in case of Banking Products
and Services
recovery by sale of asset and this is normally dependent on the type of
security - which be marketable, ascertainable, saleable and transferable.

8) Repayment the period of repayment and quantum is linked to type of

security, life of security and fund generation capacity (cash flow).

Main Types of Advances Granted by banks:

As the bank's function is to accept deposits from customers and lend money
to borrower, the advances are granted on short-term, medium term or long
term basis depending on the fix deposit, lendable funds, exposure to
industries and bank's business policy and profitability requirement.

The types can be classified as:

Funded:

Short Term Long Term

Overdraft Short term loans

Cash credit Medium Term Loans

Bills purchased/'discounted Long Term Loans

b) Non-Fund:

Bank Guarantee & Letter of Credit

Let us briefly touch each of these types as a product by the bank:

a) Fund Facilities

i) Over draft-under this type of facility, bank permits a borrower to

overdraw his current account upto a decided limit. The borrower is
allowed to draw in excess of the amount of deposits upto a specified
sum. Normally, it is short term and for specified purpose to finance
current assets.

ii) Loans The loan is normally for acquiring fixed assets and repayable
within 12 months, 1-3 years, 5-7 years or 10 years.

In loan there is usually only one debit and several credits (repayment) in a
phased- predefined manner.

iii) Cash Credit-It is a form of advance to meet the demand of trade,

industry etc. Operations are conducted similar to the overdraft. The
difference is that while in O.D., CA is necessary and it is usually
temporary or short term, in cash credit limit is assessed based on
83
Marketing of Banking projected sales level and required inventory. (C/A) level. A limit for
and Other Services
year is allowed and balance fluctuates within the range. This is given
for working capital requirement of a corporate borrower.

Technically, it has to be brought in credit once a year.

iv) Bills purchased and bills discounted-A bill of exchange comes into
being when business transactions takes place on credit basis.

A Bill of Exchange is an un-conditional order in writing, addressed by a

person (drawer) to another (drawee) signed by the maker, requiring the
person to whom it is addressed to pay on demand or at a fixed or
determinable future time a certain sum of money to or to the order of a
specified person or the bearer. Banks grant advance against such bills by
purchasing or discounting these bills

b) Non-fund limits

1) Bank Guarantee

A guarantee is a contract to perform the promise or discharge the liability of a

third party in case of his default. In such contract when the bank undertakes
the function of guaranteeing it is known as a Bank Guarantee, where a bank
issues a guarantee on behalf of its corporate customer to a third party. There
are generally 3 parties:

• The principal debtor

• The creditor
• The surety

In a bank guarantee the liability of surety is secondary and depends on the

principal debtor. In bank guarantee the surety undertakes the obligation at the
request of the principal debtor.

This like L/C is called as non-fund facility as immediately parting with funds
is not required and it earns good commission to the banks.

2) Letter of Credit

A letter of credit is the undertaking given by bank at the instance of its

corporate customer addressed to a seller saying that it (bank) would honour
the drafts drawn thereunder subject to the terms and conditions stipulated
therein.

An Inland L/C is when both buyer and seller are in India and Foreign L/C is
issued on behalf of Indian buyer (importer) to the Foreign Seller (exporter).

The L/C is on the basis of the contract between buyer and seller and the bank
undertakes to honour the commitment on behalf of the to pay the amount in
case of satisfying stipulated condition

84
The buyer gets credit and seller gets an assurance from and the corporate Banking Products
and Services
client either buyer seller gets the benefit of this arrangement.

Banks earn commission for issuing LCs.

Products in Demand

We have seen in the earlier paragraphs, different types of deposits advances

and non fund facilities. In the context of products of Banks in recent day
Bank Marketing it is essential to take a look at the following two products
which attract the middle class customers and also are profitable to the bank:

a) Consumer Loans

b) Credit Cards

Due to the restrictions of loanable funds and the less demand for loanable
funds by industry the profits of banks were affected during the period when
stock market and industrial scenario was slack. Merely mobilising deposits
does not mean sound marketing policy. It becomes all the more necessary to
market the loans as well to improve profitability. Similarly, taking into
account the customers need to buy things in the open market either products
of high value of moderate value consumer loans and credit cards serve the
purpose of satisfying such need adequately thereby matching consumer's
demand and supply of bank's loanable funds.

a) Consumer Loans

Like financing the needs of working capital (for current assets) and loan (for
fixed assets) of an industrial customer or a trader, banks also finance
'consumer loans under different captions to its individual customers. The
middle class being the largest segment of bank depositors (savers) and their
purchasing power being tapped by various companies in consumer durable
industry, the job of identifying credit needs of such already tapped segment
makes it easier for the banks to market the consumer loans. As such
customers have ready needs to buy consumer durables like fridge. TV, stereo,
two wheeler, etc. for which they have comfortable cash flow but not the
capital (ready cash/balance) to purchase such items of their own.

Let us examine the modalities of such consumer loan' scheme:

1) For whom?

• For existing consumers of the bank

• For customers with proven ability and willingness to repay and who are
interested in starting relationship with the bank.

II) Salient Features

• It can be availed by individuals who are 18 years of age. (As minors are
not entitled)
85
Marketing of Banking • It is offered for worthwhile purchase or approved purpose to purchase an
and Other Services
article, furniture, TV/Video, air-conditioner or a vehicle-2 wheeler or 4
wheeler.
• The amount can be minimum Rs.5,000/- to maximum Rs.5.00 lacs
• The purpose can be besides, purchase of consumer durable goods, to
pursue higher education or for holiday or meeting wedding expenses etc.
• The security taken while advancing such loan is hypothecation of asset
so purchased or lien over another asset of adequate value to cover the
loan amount.
• The repayment is in equated monthly instalments (EMI) which is to be
repaid over a period of (minimum) 12 mouths to (maximum) 60 months.
This is arrived at after verifying the customer's income, saving/repaying
potential and the life of asset so purchased.
• The repayment can be through a standing order or by collecting post-
dated cheques from the customer.
• Interest rate charged for such leans is as per bank's policy and RBI
guidelines from time to time.

Although such loans have very good potential demand from middle class
customers, it becomes obligatory for the banker to do a thorough scrutiny of
the customer and his creditworthiness as well repaying capacity. For this
purpose a probing scrutiny is made to cover the following important aspects.

1) Age-Proof like ration card or school leaving certificate.

2) Address Should be n hank's command area, can be checked from ration

card, electricity bill, proof of salary/income.

3) Income proof-Salary slip or salary certificate regarding employees in

service and income proof/certificate copy of 1.T. Return in case of
person on their own (self employed, professionals)

4) Creditworthiness-Satisfactory confidential reports from the employer.

5) Credit limit- The debt ratio is arrived at as follows:

Total Monthly Expenses 100

—————————— × —— = Debt Ratio

Total Monthly Income 1

The acceptable ratio normally is 75% The higher the ratio, the greater is the
risk (minimum amount of income after all expenses + instalment of consumer
loan should not be less than Rs 3,500/- for individual customer and not less
than Rs.5,000/- for professional self employed)

86
(ii) Some banks insist that the net pay packet should not be less than 45 to Banking Products
and Services
50% of Gross Pay (monthly salary) after accounting for the EMI of
loan asked for/considered.

5) Security-The customer’s personal worth is calculated by taking into

account:

- Average balance in account

- Shares/Debentures (M.V.)
- Life Insurance Policies (S.V.)
- Real Estate Property
- Gold/Jewelry

The minimum value of such assets blocked should not be less than
Rs.50,000/- for salaried customers and not less than Rs.1.00 lacs for
professional customers.

7) Margin Usually 75% of asset value is allowed as loan, keeping 2% as

margin. In some cases even 10% margin is considered good enough and
loan upto 90% of the asset value is considered. This 10%-25% has to be
arranged by the customer from his own saving/sources.

8) Repayment-In EMI within 12-60 months

9) Costing-Let us take an example of a consumer loan say for Rs.1 lac.

Loan amount — Rs.1,00,000

Repayment period — 36 months

Interest rate — 15% (say)

Therefore, EMI = Principal component + Interest components

Principal component of EMI = 1,00,000/36 = Rs.2778 p.m.

Interest component of EMI = 1,00,000 ×15 ×3/36 = Rs.1250 p.m.

Therefore EMI -

Rs.2778.00

Rs.1250.00

Rs. 4028.00

Besides interest:

i) Processing fees of 1% of loan amount subject to a minimum of Rs.500/-

and maximum of Rs.1,500/- is charged.

ii) For post dated cheques Rs.10/- per cheque is charged.

87
Marketing of Banking Banks have had very good experience about these consumer loans in terms of
and Other Services
customers demand and as nationalised banks were not encouraging such
loans (except loans, FD), Co-operative banks, private sector banks and
foreign bank have tapped this segment very well and have deployed the funds
and broadened customer base on one hand and have earned good income as
well.

b) Credit Cards

'Plastic Money' or credit cards have become very popular as bank's product
and have wide acceptance in Indian Market.

The credit card allows a holder to make purchases (upto his sanctioned credit
limit) without making purchases in lending shops/markets to make payment
of bills electricity or telephone or to withdraw funds (cash upto a predefined
limit) as and when required.

The credit cards widely accepted are:

VISACARDS

• Who can have it ?

The profile for the prospective visa card holders can be wide i.e. persons of
18 years to 60 years of age. Higher middle income, professionals and
financially mature segment is the largest segment for credit cards.

• Salient Features:
• It is open even for non-customers (non-account holders)
• No entrance fee is charged
• Annual subscription fee of Rs.250/- is charged
• add-on cards are issued @ Rs.200/- each
• These are affiliated to visa international
• It is valid for transactions in a chain of over 8- 10000 merchants
• Minimum amount payable can be as low as 1/20th (5) of the principal
outstanding.
• Cash advance of upto a certain limit is allowed on which 2% (p.m.)
service charges are charged.
• For purchases, no service charge is applied if a payment comes within 15
days.

BENEFITS

• It is safe and convenient

• It facilitates easy purchases
• It provides confidence while travelling

88
• The owner of the card is sanctioned a revolving credit facility which Banking Products
and Services
satisfies his 'Ego Needs' and also 'purchases-anywhere, anytime-need as
well.
• Cardholder's limit is enhanced every year.
• This enables bank to have higher profits and more holders (who can be
non- customers, in its wings)

4.4 ELEMENTS OF PRODUCT MIX

By product mix is meant the total range of products offered by a bank. In
marketing terminology the product mix has three main characteristics :

1) Width
2) Depth
3) Consistency

This can be shown as a diagram in the following way:

Width of a product-mix depends upon the number of product groups or

product lines whereas the depth depends upon the number of products in each
line. The consistency means whether the products have production affinity as
well as market affinity.

For the purpose of diversification, frequent changes are made in the product
mix. Broader product mix enables better business turnover to minimise the
risk of failure.

The following factors affect any product-mix:

1) Cost of production/delivery
2) Demand from customers
3) Advertising/distribution cost
4) Policy of the bank
Acceptability of any product or product mix depends upon :
1) Consumer acceptance
2) Satisfactory Performance
3) Adequate distribution
89
Marketing of Banking 4) Effective Packaging/Branding
and Other Services
5) Good service/delivery

It can thus be seen from the foregoing details that in marketing of banking
services, product mix consists of product lines which mean similar products
or services like deposits, loans, investment counselling services. In each
product line there can be different products like example under category of
deposits there can be saving or checking accounts. The width depends upon
such number of product lines whereas the depth means how many product
types are offered in a particular product line. To cite an example a bank
giving 12 different types of loans like education loan, housing loan, industrial
finance, consumer durable loan, etc. has a broader product mix. Depending
upon the market demand i.e. customer's needs this mix has to be widened or
deepened as a prudent marketing strategy.

Activity 2

Looking at your bank, describe the product mix offered by you. How is this
mix different from the product mix offered by a Multinational Bank?

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

4.5 PRODUCT LIFE CYCLE AND PRODUCT

STRATEGIES
As the products volume (sales) and sales revenue follow a typical pattern, the
concept of product life cycle has been one of the important concepts in
marketing which must be properly understood.

As each product passes through certain typical but definite stages in its life-
span, we will look up into the important stages:

i) introduction

ii) growth

iii) maturity

iv) decline

It must be borne clearly in mind that the growth or decline of a product

depends not on product alone but the market in which it is launched.

90
 Banking Products
and Services

A key concept on which marketers rely is the concept of PLC i.e. Product
Life Cycle. It in essence means the stages in product life from its conception
to obsolescence as mentioned earlier. From strategic view point it provides
important guidelines about product management.

The figure given above depicts a typical PLC where the Y-axis shows
volume of sales (business), X-axis shows the time scale.

Introductory Stage/Phase

This is the stage when a new service or product has just been introduced in
the market This stage in the product's life cycle is characterised by low sales
and most of the times negative profits which may be due to lack of awareness
about the product or limited distribution or unfamiliarity with the product.

In banking industry, however, it is different from consumer goods industry as

the products have been regulated for long and prices were also controlled by
statutory agencies. Promotion being the only variable which could be
manipulated, advertising and personal service were the options for enabling
rapid product growth.

Growth Stage

After a product survives the introductory stage, it passes into the growth stage.
At this point, competitive strategies by other banks can affect the growth. The
promotional tend to during this stage to keep up the sales. The
product/services are fine-tuned during this stage. Sales tend to grow and
profits increase during this phase. Market acceptance of the product is the key
factor at this stage.

Maturity Stage

Having continued at the growth stage, the product reaches a plateau in it

growth curve and thus into the maturity stage. The most notable indicator of
this phase can be the initial stability and then slowdown in volume of
sales/profit.
91
Marketing of Banking Products in maturity stage can give indications about changes required in
and Other Services
product strategies. The competition at times may tend to thin up, the margin
to stabilise the growth at maturity phase. It may force to lower the price of
the product or additional cost in promotion and distribution of the product.

Decline Stage

After maturity, with increased competition on change in consumer

preferences a downward shift/drift in sales or reduction in profit may start.
Except in case of new or diversified products in banking industry, such
sudden decline cases are not many. We will see the application in the
foregoing paragraphs with respect to decline, death or obsolescence of bank
products.

In real life, in banking being a financial service industry, all products need
not follow such a cycle but still the concept of product life cycle has
important place in product marketing strategy. The bank, knowing what
happens to different products and services at different stages in a given
economic scenario in a market can decide and improve its planning. In fact
the trial balances, monthly MIS data and quarterly business figures compiled
by the planning divisions can indicate the demand and supply position of
various products as inter-se composition (vis-a-vis budgeted pattern) and as a
percent share of the total market vis-a-vis the potential for each product. A
suitable flexible plan with a matching pricing strategy can ensure sustained
growth of all the products ensuring growing business and matching profits of
course with growing customer satisfaction.

Understanding product life cycle may provide inputs for strategic planning at
various stages.

4.6 USING PRODUCT LIFE CYCLE TO

MANAGE MARKETING OF BANKING
PRODUCTS
The introductory stage of the product's life cycle is characterised by low or
negligible sales and negligible or no profit. When any new account or product
which is designed to suit to a particular segment of customer is launched after
research by R & D or marketing department, if the same is not properly
advertised or promoted by the staff, initial launching costs will be higher and
due to unawareness resulting in low or no response. Initially it may show
very low or negligible sales. Credit card or ATMs when introduced initially
in India shared similar response.

The products like consumer loans or housing loans or automobile finance

shared a very high growth when the market was booming due to high growth
rate in consumer durable, car and housing (Real Estate) market.

ensured growing demand, very good sales and also very good profit due to
lucrative lending rates charged to such customers who had smooth cash flow
92
but not lump sum money to buy the much needed car or home or TV/VCR Banking Products
and Services
which were strongly marketed by the seller of these products. In this growth
phase, aggressive marketing by product launchers in these industries enabled
bank to fulfill the needs created by them through their (banks') own products
and services. Here, so to say the growth phase of real estate, consumer
durable and automobile industry coincided (matched) with growth phase of
products/services marketed by banks - which was a very good timing to
launch and continue provision of such products as loans and credit limits or
loans/advance against deposits, shares etc.

When all the banks started giving liberal loans for products marketed by
these 3 sectors, the competition went up although the demand was growing,
which resulted in maturity or saturation of banks' products/services and
compelled some banks to adjust the pricing (lending rates) downwards to
continue their products/services to be attractive to buyers so as to ensure the
business growth.

The saving accounts or pass book accounts have also reached the maturity
phase as the growing awareness amongst the customers for higher yield make
such low yield products less attractive. Due to the change in interest rate
structure which is linked to the demand and period of (short term) deposits,
customers don't like to block more funds in such type of accounts except for
basic safety and liquidity criteria to meet urgent/unforeseen expenses. To
overcome the decline in such accounts some banks have started flexi-
accounts giving a combination of saving and short term investment to
provide mobility at the same time ensure retaining of low cost funds for the
bank.

There has been a clear-cut decline in current account of traders who don't
block any funds in such '0' yield accounts and arrange funds to get the
cheques passed as and when the clearing cheques are received.

Due to tax-saving option in the market the short term deposits are getting
diverted to such schemes which provide safety, short term liquidity, and
comfortable yield and tax concessions.

A close watch of economy, government policies, industrial scenario and the

middle class habits provide an insight to the banks to study and watch the
shift in saving/borrowing habits of its The change in macro-economy affect
the customer's behaviour at the micro-level due to which proper research and
analysis of the trends of demand and supply as well as the shifts in pattern of
various deposits gives an idea and opportunity for the bank to change its
products with respect to the design, pricing and need to launch new or
innovative products/services to ensure customer's interest and loyalty to their
bank accounts.

Through observing and monitoring the product life cycle, it becomes easier to
decide and implement the product development strategy.
93
Marketing of Banking Generally, these are four strategies recommended for growth in business and
and Other Services
profits which are:

1) Market Penetration
2) Market Development
3) Product Development
4) Product Diversification
It can be shown through the following Figure:

Market Penetration

Market Penetration strategies involve increasing the sales for an existing

product in an existing market. This, generally, involves an increase in
marketing effort. This can be possible through three strategies:

i) Increasing current rate of use of a product

ii) Attracting competitor's customers
iii) Attracting non-users of a product

Increasing rate of usage is strategy normally used by many marketers in

consumer’s durable industry. Banks can use this strategy to promote
increased usage of certain services. Of course, not all services are conducive
to this type of strategy.

Attracting competitor's customers is the second option in market penetration

strategy. Making a SWOT analysis of a bank and its competitors with respect
to consumers' needs and place, promotion, price of bank's own products
enables a bank to attract customers to its products.

The third strategy is to attract the non-users. Cross-selling of a product of a

bank is an example of such market penetration strategy. Providing
trust/advisory services can be another example of such strategy

Market Development

Market Development strategies involve the increase in marketing effort for

existing in new markets. The one option can be to attract new customers for
existing products and the second- expanding areas (branch expansion policy).

94
Managing bank's product/service mix in increasingly competitive market Banking Products
and Services
determines the success or survival of banks in the volatile market situations.

Activity 3

With respect to the Banking services, identify some mature products. What
are the strategies being followed by banks to revitalise or promote these
products? What suggestions would you like to offer in this regard?

4.7 NEW PRODUCT DEVELOPMENT

The new products can be developed for a new market or existing market.
New product can also be launched in improved market or in the new market.
Innovating a product essentially means developing a product resulting in an
increase in the product line. This enables diversifying business risks,
continuing life cycle of a product and also ensuring profits

New product development may start with the maturity or decline of an

existing product or due to lack of demand or due to obsolescence of a product.
Stiff competition compels a bank to think of new ideas for survival or success
in a given market. Based on changing customer wants and needs the bank's
market research department generates new ideas

Such ideas are subjected to discussions and examination by expert bankers,

economists, experienced field staff and marketing experts within a bank to
validate the applicability of such ideas to lead to new and suitable product.

Normally such ideas for new products pass through following stages:

The very modern manifestation of new product development has been the
consumer- convenient-credit card. The major impetus of bank charge account
plans began about 3 decades ago when the Franklin National Bank near New
York city sponsored a plan which received massive publicity within the
banking community. By mid 60's, seventy- five commercial banks had set up
such credit plans. However, risk of recovery and lack of quick profits let to
gradual withdrawal of new entrants from the plan. It took almost a decade to
establish credibility amongst merchants regarding acceptability of credit
cards and streamline recoveries. As time passed revolving credit and shift of
95
Marketing of Banking charges to consumers was acceptable and then credit cards became a buzz
and Other Services
word. This innovation has thereafter proved to be of convenience to
customers, enabled merchants in sales promotion and proved to be profitable
for the banks as well.

Role of Product in customer satisfaction

Any product or service developed by a bank has to satisfy the of the customer.
In fact, the product development, positioning, launching etc. is decided based
on customer needs only. It is, therefore, necessary that the strategies keep the
customer needs and satisfaction as the focal point.

General Need of customers are:

• Financial Security
• Service
• Convenience
• Attractive yield
• Low cost loans
• Personalised service
• Advice/Counselling
• Easy Access
• Simple Procedure
• Attractive Package
• Friendly Approach
• Variety of Products

This list is only illustrative.

The product conceptualisation and development has to bear these needs in

mind. e.g. Using the PLC approach seen earlier a banker may group these
needs into following segments:

Young Customer A Family with teenage A retired couple

children

Would prefer a bank Would have need for Would prefer for high
which provides security, proper saving with safety, higher yield.
convenience and quick, safety of funds, counselling advice and
friendly service at reasonable yield and personalised service at
convenient hours. availability of low cost convenient location.
loans for children's
education, convenient
location and convenient
hours.
96
Thus some needs like safety, liquidity, better yield, personalised service and Banking Products
and Services
convenient location and timing are the common factors which have to be
satisfied by any bank's product.

As we have seen in the earlier inputs, proper matching of market segments

and needs is the key factor in deciding product strategies for existing as well
as new products. An ongoing market research about positioning strategies by
other banks vis-a-vis changing needs of customers would positively
supplement such exercise to design and launch new products which lead to
customer satisfaction and also more business for the bank.

The following are some of the real life examples of new products developed
by banks to meet the growing needs/expectations of its customers:

i) Flexible deposits
ii) Debit cards
iii) Credit cards with ATM card
iv) Cumulative deposits
v) Facility of over drawing and saving bank account.

Such new products are developed keeping in mind the growing/new demands
arising out of customers' needs/expectations within the guidelines/directives
of IBA/RBI with permutation combination of interest payable on deposit
accounts.

Activity 4

Identify any three new products in the banking sector. What are the specific
customer needs that these products are targeted at?

Product I

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

Product 2

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….
…………………………………………………………………………………
97
Marketing of Banking Product 3
and Other Services
………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

4.8 BRANDING IN BANK MARKETING

You have already studied this concept in your earlier unit on branding in MS-
6 in detail. However, to focus the concept with specific reference to bank
marketing let us re-look at the same.

A brand is the name or design which identifies the products or services of a

manufacturer and distinguishes them from those of competitors.

Brand names may be given to each product or to a complete product line..

Branding is the process of deciding what brands the company should offer.

Branding also differentiates a product which invites the attention of

customers. It gives details as to benefits and quality and ensures the loyalty of
customers. It enables a bank to do the market segmentation as each product
from out of a product line can attract a distinct segment of customers.

Branding decisions are taken based on market research and assessment of

customer needs and preferences.

Generally before deciding brands, the following questions have to be

answered satisfactorily:

1. Is the brand name essential?

2. What brand name would suit?

3. Should products be branded separately or as a product line?

4. It is necessary to segment the market for each brand?

5. Is the brand needed for strengthening existing market segment or form a

new market?

While selecting a brand name a bank should

i) Chose a short and simple one

ii) Prefer one which is easy to pronounce and remember
iii) Avoid confusing or negative connotations
iv) Ensure that it suits the characteristics of a market

98
v) If the bank's name is highly established and accepted the brand name Banking Products
and Services
should include that (bank's) name also like 'citicard' or 'Indbank' fund or
'Bobcard', etc.

Advantages of branding to buyers (customers)

Brands are dependable guides to contents, processes, qualities etc.

They make shopping of various products feasible and convenient

c) They assure satisfaction

d) They satisfy the status needs or the emotional needs of the customers.

Advantages of branding to sellers (Bank)

a) It ensures repeat sales through identification

b) It ensures product stability through customer loyalty

It helps segmenting a market

d) Customer may even pay a higher price for branded product than an
unbranded one.

e) It shields the product from price competition

Successful brands add to the corporate image of the bank.

The brand establishes after undergoing following chain-

Nonrecognition Recognition→ Preference Loyalty→ Insistence Repeat

buying

Role of Brand in Bank Marketing

As the brand enables seller bank to build up a certain image which in turn
ensures receptivity of advertising as well as repeat business and consumer
loyalty, brand plays an important role in marketing of banking services.

In banking industry as the competition is 'cut throat' and products are quite
similar as to the basic nature and benefits/returns to the customers, the service
delivery and branding are excellent tools which enable a bank to create and
maintain an image among the customers.

Like the brand names 'TATA" or "Godrej" or even "Lijjat Papad" or "Zandu
Balm", customer loyalty goes to products which are linked to the brand
names of their established and well known producers.

Brand name has to give a positive message and create pleasant associations.

In USA there are more than 5 lacs brands registered. In India also thousands
of brands are registered. It has become important even here in India where
products of widely different nature are entering the selling channels.
99
Marketing of Banking Branding is significant and essential in banking until faith and confidence of
and Other Services
the customers are firmly established.

In India the banks have been creating their distinct marks by establishing
brands for their total image like A Bank with personal touch' or 'Friendly
Bank', 'Good to Bank With'. Bank to bank upon or Growing with you' etc.
Such brand names were not product related but provider related and banks
largely by positioning themselves within the perceptual marketplace to gain a
more advantageous position.

In fact at the macro level or corporate level the positioning provides a bank
framework to view itself in the industry concerning the totality of its
orientation towards the marketplace strategy and as micro application w.r.t. a
specific product or service brands can help to establish its products in the
competition market.

Some of the examples of brands are:

BANK PRODUCT BRAND

Citibank Credit card Citi bank card

State Bank of India Mutual Fund SBI Mutual Fund

Canara Bank Growth Fund Schemes Can Growth

Can Share

Indian Bank Housing Loan Ind Shelter

Citibank Car loans Citimobile

It can be, therefore, said that brands are very important as product (marketing)
strategy in marketing of bank's services as branding indicates how the
organisation chooses to use branding as an integral part of its overall
marketing strategy. To the customer such brand name means a way to
identify the product and differentiate the product from other similar products
in the market.

In the context of bank marketing it is important to note that as the customer

loyalty and patronage is built around bank's name and image, the bank's
position and consumer's perception of a brand in customer's mind makes it
easier to market the product brands.

Logically, it is very few products which sell as brands irrespective of bank's

name if they have distinct advantage and benefits and have been so
advertised constantly. In majority of cases, the bank's overall image is what
100 counts in the selling process and the customer comes to know about the
specific brands more beneficial to him. It is, therefore, clear that with all its Banking Products
and Services
product range and brand of distinctive products/services, the bank has to
develop an image among the customers and then encashing this 'whole'
brand-image, has to market the products branded for specific customer
segments to win over other bank's products.

In a customer's language, two questions have to answered satisfactorily in

this branding effort:

i) What is it in this bank which is different from other banks in terms of

its position, sign off and product range?

ii) What are the product brands which are more beneficial to me which
bank offers distinct from other bank's products,

In summary, both bank's brand and product brand are important in the
marketing strategy for more clientele, more customer satisfaction and more
business in the long run.

Activity 5

In terms of brand recall and recognition, which are the most successful
brands of banking products, in your view? According to the concepts just
studied by you, what accounts for the clear identity of these brands.

Brand I ………………………………………………………………….

Brand II ………………………………………………………………….

Brand III ………………………………………………………………….

Brand IV ………………………………………………………………….

4.9 PROCESS AND PRODUCT DEVELOPMENT

CYCLE FOR BANKING SERVICES
In the 7 'P's of marketing of banking services, the product related decisions
are very important. To know about the concept of product/service delivery, it
is necessary to know the process cycle concept. In order to have effective
marketing or selling, proper understanding of the concept of product service
delivery is essential.

The products have to be launched through a well thought product

development strategy. Launching a product or delivering a product to
customers depends on whether it is a totally new and innovative product or
just modification of an existing product. Equally important is the timing and
market situation when a product is launched. It, then, becomes necessary to
have suitable pricing and/or promotion strategy.

101
Marketing of Banking Process Cycle in Product Development
and Other Services
The product development in banking depends on many factors which
together with the steps in the process decide the success or otherwise of a
product launched.

The process cycle is the stages of product while it is given in the hands of a
customer. It is like a flow-chart of steps involved in this process. Let us take a
simple example of a savings bank deposit account. The following aspects are
involved before opening the account.

1) New customer approaches with a request to open the account.

2) He has to establish identity/bring introduction

3) Account opening documents/forms have to be completed duly signed.

4) Pay-in-slip has to be filled in to pay deposit/required amount in cash.

Specimen signature card/form has to be signed

If cheque book is required, the requisite application form/slip has to be

completed and signed.

7) The pass book issued has to be collected.

Thus the Savings Deposit as a product develops from the cash brought in by
the customer and deposited in his account opened after passing through the
aforesaid process.

The acceptability of the product is facilitated by simplification of the process

so the customer, find it easier and convenient to go for that product.

In service organisation like banks, the system by/through which service

delivery take. place is called the 'Process'. This process of delivering a
product or service is akin to the operation management in a manufacturing
industry where the raw material gets converted into a finished product i.e. an
input passing through a mechanism or process - becomes an output.

The three processes applicable in delivery of service products can be

indicates as:

i) Line Operations-e.g. self service hotels

ii) Job Shop Operations combination of operations using different sequence

e.g. Hospitals or Educational institution

Intermittent Operations-i.e. service is rarely repeated e.g. consultancy for

projects

In application of these concepts of process in banking situations a banker will

have to as some pertinent questions.

i) what are the steps involved in delivery process of a product/service?

102
ii) what can be the logical sequence of event? Banking Products
and Services
iii) what modifications are necessary to smoothen the process?

iv) at what point and how much consumer contact is involved/desirable?

v) can the technology be useful to speed up the process?

The marketing can be successful if the product development, packaging and

delivery are properly synchronised from the view point of the bank as well as
the customer.

It becomes quite necessary in reviewing the process cycle to consider:

a) customer's benefit

b) concept of service as seen by customer

c) method of offering the service

d) service delivery system

In such delivery of service, the process cycle and a specific market segment
has to be considered specifically.

Packaging and Delivery

Packaging in the context of marketing of banking services means the art,

science and techniques of selling the products and services to the customers
ensuring their satisfaction, keeping in mind two salient aspects:

a) Actual delivery and sale of product

b) Packaging as a function should consider

(i) selecting proper material 103

Marketing of Banking (ii) behavioural aspects
and Other Services
Functions of Packaging

Packaging in normal marketing parlance should do the following functions

1) Protection
2) Appeal
3) Perform
4) Convenience
5) Cost-effectiveness

6) The packaging must be attractive and attracting the customer, should

build confidence and indicate real intrinsic value of the product.
Consumer research Indicates that the colour and design of packaging is
very important as it affects the consumer purchase decisions. Packaging
also should be convenient, useful and cost effective

Delivery: Packaging, it must be borne in mind, is much more than just

packing. It is a marketing necessity. As the customer doesn't just want a
product, he wants an integrated, combined, pleasant and eye catching
package "get it on the top to gain action" at the close of a sale. Packaging so
to say completes the sale (process) cycle triggered off by advertising.

A simple example can be of the Piggy Bank or Pigmy Deposits popularised

by Syndicate Bank giving small Saving Bank Boxes in the shape of Pigs or
minty - similar scheme by Bank of Maharashtra in the shape of a squirrel
which promoted the product fast among children due to the novelty and toy
value of the packaging.

Colourful and Crisp plastic envelops of FDRS by many banks facilitate the
close of sale on a very positive note and attract other customers as well. It
serves as a means of publicity and has retention value and multiplier effect to
popularise not just the product but the image of the bank as well.

Service Delivery: When you go to a bank with an intention to withdraw your

money from S.B. Account, either with the cheque book or a withdrawal slip,
it is given to a clerk who verifies the instruments and balance in your account
and then given the monthly corresponding to the withdrawal amount.

Here the check, withdrawal slip, become the delivery system. In

product/service delivery the physical evidence and the people are very
important elements.

Activity 6

What are the differential advantages that 'packaging' as explained above, can
bring about for banking products? From your own bank, pick up illustration
of use of packaging to create differentiation or sales appeal for consumers.
104
 …………………………………………………………………………. Banking Products
and Services
………………………………………………………………………….

………………………………………………………………………….

………………………………………………………………………….

4.10 PRODUCT DEVELOPMENT

Product Development and Delivery: Some Examples

To understand better about the concept of product development and stages of

delivery of a product in banking situation let us take three illustrations:

i) The Flexi Limit Deposits

ii) The Easy Access Deposit to know product development

ii) The classical example of fixed deposit --to know the stages of delivery
of a bank product.

Let us first take the example of a Flex Units Deposit Account of a Private
Sector Bank.

It is the facility that provides a customer freedom of transferring the excess

funds in saving bank account to a Term Deposit Account of his choice. It also
ensures the flexibility in transferring a portion of the term deposit back to
savings bank account in case of a need.

With this type of facility (product), the bank can offer higher interest to
customers without affecting their liquidity position which gives the attractive
option to customers to have both liquidity as well as higher yield.

Let us first understand how this scheme works as a product and then try to
see the intricacies involved in such product development:

i) Balance in excess of the minimum required sum Savings bank account

is automatically transferred to a term deposit of customer's choice.

ii) In case of need, to meet the cheques drawn by the customer, his term
(Flexi) deposit gets transferred to his S.B. Account.

iii) On maturity as per customer's instructions the (Term) Flexi Deposit is

either renewed automatically or the entire amount (principal interest) is
transferred to S.B. account.

iv) The transfer of funds from SB Account to term deposit account is made
at a minimum of 5 units of Rs.1000/- each and a further in multiples of
Rs.1000/- each.

v) A statement giving details of outstanding balances under SB (Term)

Flexi deposit is furnished as and when required.
105
Marketing of Banking Now as a product when such a scheme is developed it requires a close co-
and Other Services
ordination between the following departments:

a) Corporate office- -to approve such a product as a concept as a policy-

taking into account RBI/IBA guidelines

b) Marketing Dep’t.-- to study the demand and products developed by other

banks

c) Operation Dept. - to decide suitable transactions and required accounting

for the same

d) Accounts Department -to streamline the inter department transactions

smoothly and effect the funds properly under respective heads to decide
the interest accrued and payable from the date of opening of account of
passing (converting) a transactions.

Thus the product development in case Flexi Deposit Account requires close
co-ordination between the following departments

Corporate Marketing Operation Accounts Delivery.

Dep’t. Dep’t Dep’t.

If we take another example of easy access deposit of a foreign bank,

following aspects are important:

- Minimum deposit accepted is Rs.10,000

- Deposit is accepted under any scheme of term deposit (except R.D.)
- Rate of interest and period of deposit is as per RBI guidelines
- An overdraft of upto 75% is available through current account at a
chargeable interest.
- If such overdraft is taken, interest is paid on full deposit amount and
interest is charged only on amount of O.D. for the actual period of use.
- The period of deposit is 46 days to years
- A cheque book is given with current account
- Depositor can avail cash advance upto Rs.3,000/- from any branch of the
bank.
- Interest on O.D. can be recovered from the customer's current or savings
account
- Transaction charge of Rs.1/- per transaction is charged on all transactions
n C/A.
- O.d. is made available @ 2% higher interest than the simple base rate
payable on deposit.

106
Benefits Banking Products
and Services
- The customer pays no service charges withdrawals take place through
C/A cheques
- Freedom to avail 75% of deposit as withdrawal
- Despite withdrawals, deposit continues to earn interest
- The customer's money is safe

Now if we look at this scheme a product development it is both a deposit as

well as advance scheme and close co-ordination between following
department is essential from conceptual state to actual delivery of product.

Corporate Marketing Operation Advance Accounts Delivery

office Dep’t. Dep’t. Section

Fixed Deposit Account

Product Attraction: It is a deposit for a fixed amount of money, for a

specified period and at a fixed rate of interest. The rate of interest opted may
be simple or compound. It being higher than interest payable on S.B. account
it becomes an attractive feature.

The term deposits are accepted as short term, simple fixed deposit or reinvest
deposits.

Features:

- Deposits can be 46 days or 5 years

- The term of deposit is fixed initially
- Rate of interest is decided as per term
- Premature withdrawals though allowed attract a penal rate of interest.
Benefits:
- the customer earns higher interest
- funds are secure
- Funds can be saved for specific purpose
- Funds can be withdrawn in emergency
- Free remittance of interest is allowed
- Irrespective of fluctuations, guaranteed earnings are assured
- Term Deposit (fixed deposit) transferable to any branch of the bank in
India.
Process of Delivery
1) Customer Approaches with cash/cheque/instruction for fixed deposit
2) Application made on fixed deposit voucher/record
107
Marketing of Banking 3) Account opening form and signature/authority card is completed
and Other Services
4) Pre-numbered certificates of deposits are issued
5) Customer's instructions regarding renewal/repayment are obtained
6) Fixed deposit receipt prepared ‘signed/entered F.D. actually delivered
to the customers.

Thus the above stages involved in delivery of a simple case of bank fixed
deposit enables to visualise how the product delivery process has many stages
from the time a customer approaches for a particular product (being
attracted/convinced by its use in fulfilling his specific need) till it is actually
delivered.

These stages have to be simple/easy and quick for better acceptability of

product.

4.11 SUMMARY
In this unit an effort has been made to expose you to the concept of product
and product mix in the context of banking services. Basic description of the
different banking products to enable you to understand the wide range of
service products on offer today was provided.

The concept of product like cycle and new product development process, as
well as I the market development strategies for banking products were
discussed.

As competition becomes stronger product differentiations has become an

essential element of marketing effort by banks. Issues in branding and
packaging of banking products have been discussed to draw your attention to
these important functions. Process has been discussed as an component of the
product development activity.

4.12 SELF-ASSESSMENT QUESTIONS

1) Define the concept of product and product mix for banking services.

2) Explain briefly the 'product life cycle' concept with reference to a bank's
product.

3) Selection, development and launching a product are equally important

Comment.

4) People do not just buy a bank's product they buy service". Illustrate
citing examples

4) Give 10 brands in the context of marketing of bank's services 5 with a

bank's name included in product and 5 with brand names of products.
Differentiate between these two types as a concept.

108
5) In order to attract the customers, what strategies will you adopt in your Banking Products
and Services
branch.

Which deposits will be best suited for the old prisons among your customers?
Why?

4.13 KEY WORDS

Pricing : is equivalent to the total product offering which
includes the brand name, product benefits, service,
delivery, credit extended etc.

Break-even Analysis : It is a tool which by using the concept of fixed cost

and variable cost gives us the stage of no loss

Elasticity of Demand : It tells us the response of demand to a charged

product

Fixed Cost: It is the cost that does not vary with cost of
production or sales

Variable Cost : It directly varies with cost of production or sales.

Total Revenue : It is the proceeds of sales of a product which if

more than total cost results into profit and if less
than the total cost (fixed variable) results into loss

4.14 FURTHER READINGS

Dynamics of Bank Marketing, R.K. Madhukar. UBS Publisher-1990

A Handbook of Management Techniques M. Armstrong. Excel Books-1995.

Principles of Bank Management, Vasant Desai, Himalaya Publication-1993.
Elements of Marketing Management, Pradeep Kumar. Kedarnath & Co.
Meerut, 1995.

109
Marketing of Banking
and Other Services UNIT 5 NON BANKING FINANCIAL
COMPANIES

Structure
5.1 Introduction
5.2 Types Of NBFCs
5.3 NBFCS In India Economy
5.4 Role Of Non-Bank Lenders: In Last-Mile Delivery Of Financial
Service
5.5 India's growth aspirations

5.6 Customer Experience

5.1 INTRODUCTION
The Indian financial landscape consist of many players, each addressing
various financial requirements of a diverse and heterogeneous population in
terms of financial characteristics and one such player is NBFC sector. Even
before the term ‘Financial Inclusion” came into popular discourse NBFCs
were serving the customers in underserved and unbanked areas. They play a
complementary role in banking system by broadening access to financial
services, enhancing competition and diversification of the financial sector.

Non-banking financial companies (NBFCs) comprise of financial

intermediaries engaged in providing wide range of financial services that
include equipment leasing, hire purchase, loans, investments and chit fund
activities stock broking, micro finance, etc. NBFCs mainly provide services
to the unorganized sector and to the small borrowers who do not have credit
history or very little credit history. The largest activities by the NBFCs are
that of hire purchase finance.

. The segments that have a strong presence of NBFCs include:

• Commercial vehicle financing including used commercial vehicles
• Credit against gold collateral
• Affordable housing loans
• Consumer durable loans
• Loan against shares and margin financing for stock market traders

• Loan against property (LAP) for micro and small business owners as
well as construction and real estate development firms

Since the expertise of NBFCs is sector specific they operate in niche segment,
where they can leverage their capability and expertise in more efficient
sourcing of customers, prompt provision of services, specialized sectoral
110
expertise, better underwriting etc. to overcome their funding cost Non Banking
Financial
disadvantage. Companies

NBFCs, as the name suggests, are companies that provide credit like banks
but are not banks. The main difference being the way in which NBFCs raise
capital. Banks can accept public deposits – both demand and time whereas
NBFCs are not allowed to accept to accept demand deposit and only a tiny
fraction of them are allowed to accept time deposits. Most NBFCs fund
themselves by borrowing from commercial banks and by issuing bonds or
debentures (often to banks and mutual funds), in addition to equity capital.

5.2 TYPES OF NBFCS

The NBFCs that are registered with RBI are basically divided into 4
categories depending upon its nature of business:
• Equipment Leasing Company - Equipment leasing or financing of such
activity
• Hire purchase finance company - Hire purchase transactions or financing
of such transactions
• Investment Company - Acquisition of securities. These include Primary
Dealers (PDs) who deal in underwriting and market making for
government securities
• Loan company - Providing finance by making loans or advances, or
otherwise for any activity other than its own
• Residuary Non-Banking Company – Involved in receiving deposits
under any scheme or arrangement by whatever name called, in one lump-
sum or in installments by way of contributions or subscriptions or by sale
of units or certificates or other instruments, or in any manner. These
companies do not belong to any of the categories as stated above

Apart from this classification RBI also classifies NBFCs based on access to
Public Deposits. All NBFCs are classified into a small group of deposit
taking (D) and a larger group of non-deposit taking (ND) companies. Based
on size these companies are further sub classified as systemically important
non-deposit taking NBFCs (NBFCs-ND-SI) and all other non-deposit taking
NBFCs were considered a separate group (NBFCs-ND).

After the regulatory overhaul in October 2022, NBFCs are segregated into
four layers, namely,
Base Layer (NBFC-BL),
Middle Layer (NBFC-ML),
Upper Layer (NBFC-UL) and
Top Layer (NBFC-TL)
based on their size, activity, and perceived level of riskiness. In terms of size,

111
Marketing of Banking NBFC-BL comprises all NBFCs-ND with asset size below `1,000 crore.
and Other Services
NBFCs-ND with asset size above `1,000 crore and NBFCs-D are put in
NBFC-ML .

NBFC-UL comprises those NBFCs (including NBFCs-D) which are

specifically monitored by the Reserve Bank on the basis of a set of
parameters and scoring methodology. The framework also envisages that top
ten eligible NBFCs in terms of their asset size shall always reside in
NBFCUL..Accordingly, the Reserve Bank has identified and placed 16
NBFCs (including HFCs) in NBFCUL.NBFC-TL shall ideally remain empty
and will be populated if the Reserve Bank perceives a substantial increase in
the potential systemic risk from specific NBFCs in NBFC-UL. Apart from
scale, the new regulatory framework also prescribes activity-based regulation
for NBFCs as shown in Exhibit 2

Exhibit 1: Structure of NBFCs under Reserve Bank of India Regulation

112
Exhibit 2: Classification of NBFCs by activity as per new regulatory Non Banking
Financial
framework Companies

5.3 NBFCS IN INDIAN ECONOMY

NBFCs have been agile to spot the gaps in credit landscape and pioneered in
extending credit to retail customers in under-served areas and to unbanked
customers. They are also quite active in the informal sector where
participants do not have any credit history or formal bank transactions this is
reflected in the fact that they finance more than 80 per cent of equipment
leasing and hire purchase activities in India.

Investment and consumption are major drivers of economic growth, for both
consumption and investment sustained availability of credit is required
Historically in the Indian economy, credit has grown faster than gross
domestic product (GDP).

Banks are major source of credit in the formal economy whereas bond
markets and non-bank lenders accounted for a relatively smaller share of
credit till 2014.At that time due to NPAs problem the credit growth rate of
banks started shrinking and a part of this short fall was made up by NBFCs.

Credit is advanced in two ways:

113
Marketing of Banking • intermediated credit that is provided by financial institutions such as
and Other Services
banks and NBFCs; and
• market credit is raised through the bond market.
Commercial credit in India is generally provided by banks and financial
institutions as bond market lack necessary liquidity and depth. Commercial
banks have access to low cost deposits and ability to convert these savings
into investments. In recent years credit growth of banks is slowing down and
the non-bank sources of credit, especially NBFCs and housing finance
companies (HFCs), have gathered momentum as alternative institutions for
providing credit (Exhibit 3).

Exhibit 3: NBFCs Credit vis-à-vis SCBs Credit and GDP

Evolution of non-bank lenders:

Exhibit 4: Trend in credit deployment by non-bank lenders (INR Lakh Crores)

Exhibit 4 depicts the credit deployed by The overall credit deployed by non-
bank lenders is over INR 35.9 lakh crore (as on Sept-2019) and contribute to
nearly 25% of the domestic credit in the system.

NBFCs grew at an annualized rate of 19% over the last 10 years, whereas
HFCs have had a linear growth - an annualized rate of 21% during the same
period. These specialized mortgage financiers have carved out a niche for
114
themselves in an intensely competitive (bank dominated) market by lending Non Banking
Financial
to self-employed/ informal sections of society while maintaining healthy Companies
asset quality. About three-fourth of loans assets are attributed to individual
retail borrowers for purchase/ construction of housing unit .

Nonbank lenders became a vehicle for business activities that banks were
unable to undertake due to regulatory restrictions.

Non-bank lenders have gained market share from banks in key segments such
as retail consumer loans, lending to micro and small enterprises, vehicle loans
and housing loans. They have been able to capture share by catering to
underserved and unbanked customer segments (Exhibit 5).

Exhibit 5: Market share trend between banks and non-bank lenders

5.4 ROLE OF NON-BANK LENDERS: IN LAST-

MILE DELIVERY OF FINANCIAL
SERVICES
a) Penetrating underbanked areas and driving financial inclusion: As
highlighted earlier, non-bank lenders play a key role in the distribution of
financial services in underbanked areas. They target an audience of customers
with limited banking access in urban and rural areas. On the contrary, banks
face challenges in their outreach to customers in these areas.

Exhibit 6: Share of loans to ‘New to Credit Customers’

Source: Transunion, FICCI and CIBIL

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Marketing of Banking As shown in Exhibit 6, non-bank lenders have dominated the sourcing of
and Other Services
‘New to Credit’ customers accounting for over 50% of incremental credit
flow to this segment across geographies.

Many small and medium sized non-bank lenders provide last mile credit to
under banked areas. Over the years, they have increased their branch
footprint and 70% of branches are located in semi-urban and rural areas .
Over the last few years, microfinance emerged as a product to promote
financial inclusion and has been termed as “Next wave of Financial
inclusion”. Microfinance if used in judicious manner both by customers and
lenders has potential for poverty reduction, assisting vulnerable groups and
improving standards of living.

Exhibit 7 highlights the journey and inclusion of a typical microfinance

customer where their income is expanding due to credit access. Therefore,
customers have a varied choice of financial products. The Microfinance
sector has grown over the years to reach a market size of ~INR 2 lakh crore
with 6.4 crore unique live borrowers.

Exhibit 7: Inclusion journey of a typical microfinance Customer

b) Complimenting credit dissemination ability of banks:

Non-bank lenders are increasingly being recognized as complementary to the

banking system and are capable of absorbing shocks at times of financial
distress. They support the vast financing needs of sections that are outside the
catchment of banks and drive financial penetration. As seen in Exhibit 8,
non-bank lenders fill the vacuum created by private banks in rural/ semi-
urban India and account for one-third of loans originating in the financial
system.
Exhibit 8: Share in new loans originated–Region wise FY19

116 Source: Trans Union, CIBIL, FICCI

Furthermore, non-bank lenders collaborate with banks through various modes Non Banking
Financial
like securitization, on-lending, business correspondents etc. to help Companies
disseminate credit by underwriting small ticket loans to agriculture and
MSMEs. These loans are eligible under priority sector lending (PSL) targets
for banks and hence, many of them are dependent on non-bank lenders to
meet the PSL targets. There is a strong interconnectedness between banks
and non-bank lenders for instance ~31.8% of NBFC-ND-SI borrowings
originating from banks as on H1FY2016 (26.9% through direct lending and
4.9% through debentures and commercial papers).

Supporting financial inclusion through extensive reach

Many non-bank lenders focus on rural and semi-urban geographies. With a

large on-ground presence in these areas coupled with underwriting expertise,
non-bank lenders position themselves to effectively cater and target 'new-to-
credit' customers and customers in the ‘bottom of the pyramid’. They provide
high-risk / high yielding loans which are outside the focus segment of the
banks.

c) Delivering niche products:

Non-banking finance companies form an integral part of the Indian financial

ecosystem, they provide under banked/unbanked individuals and businesses
an opportunity to be a part of the financial mainstream. Over years, non-bank
lenders have developed/ acquired a skill-based arbitrage in comparison with
banks due to continuous innovation in their business model and processes
that rely on surrogate non-financial information, use of third-party sales
channels, and collection processes.

Non-bank lenders have been successful in bridging the credit gap for the
entire spectrum of customers ranging from high ticket structured loans to
corporates/ HNIs to microfinance customers due to their higher risk
underwriting capacity, credit-assessment skills and deep understanding of
customer or of an asset being financed.

Non-bank lenders developed a niche on specific product segments which are

generally overlooked by banks such as used vehicles, gold loans, and
affordable housing. These segments contribute to significant portion of their
lending mix compared to Banks. This helps provide required management
focus for the development of the segment.

d) Augmenting growth of key segments:

Non-bank lenders play an important role in the economy by financing micro

and small-scale industries (informal sector) and provide employment and
entrepreneurial opportunities at a ground

level. Banks prefer lending to entities with stronger balance sheets or to lower
risk segments such as the salaried class of people. Non-bank lenders support
financially weaker sections of society by channelizing financial resources to
117
Marketing of Banking capital formation. A large share of their assets (~45%) is deployed into retail,
and Other Services
MSME and vehicle finance segments. The ground-level presence and high
touch based collection mechanism is the key differentiator.

5.5 INDIA'S GROWTH ASPIRATIONS -

Credit accessibility in India remains comparatively lower (Exhibit 9) against
developed nations and other BRIC economies. This is evident from the credit
to GDP ratio for India which stands at 58% compared to 150% and 205% in
the US and China respectively. Additionally, mortgage to GDP ratio in India
is low at 10%. This indicates significant opportunity to bridge the gap in
credit penetration in India

Exhibit 9: Credit accessibility – cross country comparison

Source: BIS, World bank, IMF, EY analysis

Exhibit 10: Credit to GDP trend in India

Source: BIS, RBI, EY analysis

118
 Non Banking
Financial
The key levers to bridging this gap includes Companies

Expected consumption growth:

Indian middle-income population ~80% in 2030 ~50% in 2019
India’s per capita income is estimated to increase to US$ 3,500 by 2024 from
US$ 2,100 in 2019. Movement of population to higher income categories will
drive both consumption in the economy and associated credit need.
Increased consumption is also expected to be aided by the spread of mobile
usage and technology which is bridging credit access to customers.

Favourable demographics

‘Demographic Dividend’ – It is estimated that proportion of Working age

population would be nearly 60% in 2041 as compared to 49.3% in 2019 With
a working age population rising by approximately 9.6 crore every year, it is
expected to reach over 120 crores by 2031 (amongst the largest workforce).
Thus, it would provide impetus for consumption and credit growth.

Conducive policy framework

Over the past few decades governments have initiated some major policy and
reform measures e.g., GST, Make in India, FDI norms liberalization,
Atmanirbhar Bharat package etc. These measures are expected to increase
employment and domestic investment, which will provide growth leading to
increased consumption.

Increased Infrastructure build up of INR100 lakh crore worth of investment

in infrastructure assets .This can have a cascading effect on the economy.
Increased money supply is expected to drive consumption demand especially
in rural areas

Increased Urbanization
India’s urban population is expected to be 40% of total population by 2030
35% in 2019 Increased population moving to urban centers is expected to
spur credit demand.

Given India’s significant credit need, it is important that financing options

other than banks are given due weightage. Non-bank lenders have already
proved as a strong platform for credit dissemination in India. Strengthening
this platform provides an impetus to credit growth in the country. Case in
point is with the entry of private banks, the credit to GDP metric had grown
significantly as indicated in the Economic Survey of India 2019-20.

In order to compete with banks and other alternative lenders and

operate efficiently NBFCs should focus on the following aspects

119
Marketing of Banking Segmentation strategy
and Other Services
An appropriate well designed segmentation strategy helps the firms to define
the scope and focus of their services and identify opportunities likely to
generate success.

An effective segmentation strategy will::

• Identify sources of advantage and assist in positioning services in a

fragmented market
• Focus the resources towards specific areas, where potential for success is
more likely
• Derive sales, branding and distribution strategy
• Provide a pivotal opportunity to build a long-term customer relationship

Choosing the right segmentation strategy

Starting point for any Segmentation strategy is to find probable answers to

these dynamic variables:

• customer segments that will be served

• product and services for offer
• physical and digital channels that will deliver the product and service
• geographies where the lender will create presence.

Once probable alternatives are identified for these, the firm will narrow down
the alternatives taking into considerations the following

What is the size of potential addressable market?

It is important to develop a fair estimate of the potential addressable market

over a five year horizon as this will decide the resources to be deployed. If
the market is too small without any potential for growth than the idea of
introducing new product or service can be dropped altogether but if it has
potential to grow in future the services can be offered. The estimate must
include target customer segments that are likely to use or benefit from the
lending product. The main tool to find answer to this problem is market
research and primary surveys.

What are key considerations for offering the product?

Firms offer products and services where they have competitive advantage and
to gauge competitive advantage/ disadvantage firms shall analyse —intensity
of competition, cost of risk, target customer base, size of market, yield rate,
growth rate, operating efficiency, ability to bundle and cross-sell with
existing products

The purpose of analysis is to find if the proposed service/product is aligned

and fit with the enterprise strategy. It is important to consider if the lending
120
product (and associated variants) help address an opportunity in the market. Non Banking
Financial
If yes, can the NBFC differentiate from competition when it comes to Companies
delivery of the product and service?

How equipped is the distribution channel?

Old NBFCs relied on physical infrastructure and agents to deliver services,

but with advent of cheap internet and smartphones and introduction of
similar services by Fin techs a large part of distribution channel has
transformed into digital space. Many of the customers specially the younger
ones prefer to access and transact digitally. As a result, digital-driven
distribution models are increasingly gaining prominence. However, it is
important to note that no target customer segment is fully digital—the human
touch-point will remain vital.

Customer Experience
With wide variety of players operating in NBFC space and entry of Fintech
companies customer expectations have evolved. They expect seamless,
interaction across multiple touch-points. To be customer focused firms would
require customer insight by constructing customer personas and journey
maps,

Moving from segmentation to micro-segmentation

Micro segmentation can be a useful strategy to create a better customer

experience as micro segmentation allows effective communication about
price, features etc. on products and services

Customer retention

Building customer loyalty can result in life long revenue stream from
customers. Strategy should focus on reducing customer attrition

To harness the lifetime value from customers, customer’s retention is

necessity. Customers can be retained with efficient engagement,
designing reward and loyalty programmes and by focusing on customer
satisfaction

Improve processes and transform operations to compete efficiently

Well defined process are a pre requisite for efficient and risk free operations.
Absence of well defined process can heighten operational risk, increase
operational inefficiencies and ultimately affect customer experience. To
streamline your process try to understand the potential of automation for your
organization and line of business. In light of these select appropriate
automation capabilities. Apart from improving process also focus on products
and services simplification, front end customer experience and optimization
of delivery model

121
Marketing of Banking Leverage technology advances to reduce decision time and pro-actively
and Other Services
manage risk
Technology-based models can transform approach to underwriting reducing
decision time. . Technology can be used to detect, manage and mitigate credit
risk.

Use a personalized approach to underwriting by incorporating segment-

specific policies that leverage alternative data sources and apply scorecard-
based credit decisions.

For applying technology based credit decisions select target customer

segments, products and geographies where customization is possible and
meaningful and pay attention to design without compromising on risk
standards.

Adopt a customer-focused, data-driven approach to collections

Collection of overdue accounts is a difficult task even in normal times but in
difficult economic conditions it becomes more of a problem. In order to have
minimum problems in collections NBFCs shall focus on:

• A separate functional set up for collections and overdue collections

• Plan collection efforts strategy across life stages(tenure of credit)
• Identify accounts requiring special attention
• Use wider data sets including alternative data, external agents to draw
borrower profile

Supplement technology build-up with agile development mind-set

Using technology is not enough to acquire competitive advantage, it is the
application which will differentiate the market leader from others. In
application of technology following should be kept in focus.

Use a loosely coupled architecture as loose architecture allows for changes in

systems to improve in application scalability, resilience, maintainability, and
extensibility. Loose architecture also allows to asynchronous communication
to be included in work flow process.

Use agile development methodology as it can be used for rapid prototyping

which allow to create bare minimum working model to test its suitability
before incorporating the same in mainstream applications.

Information security is of vital importance as most of the processes are online

Explore synergistic alliances with Fin tech Players

Fin tech players were seen as competitors to NBFCs and they possesses some
of the unique characteristics which NBFCs are striving to develop for a long
time. A lot of synergies can be created if capabilities of Fin tech in
distribution, underwriting, risk management, etc., can be combined with the
unique strengths of NBFCs which is deep understanding of the segment,
122
presence on ground and multiple touch points for customers. Fin tech alliance Non Banking
Financial
can be useful in following areas.. Companies

• Creation of new product offerings:

• Enhanced distribution through digital acquisition
• Widening of customer database
• Higher operational efficiency

5.11 SUMMARY
NBFCs are an important player in the credit landscape of India addressing
the credit needs of the population which is financially excluded. As they
grew in size and complexity they have also venture into areas in which
traditionally banks were operating. As the size of the economy is growing so
are the credit needs of the population and NBFCs have to a large extent
addressed those needs. In times of technological innovations and to adopt to
change strategies are needed especially when one is operating in mass market
crowded with many players.

5.11 SELF ASSESSMENT QUESTIONS

1. What are NBFCs?

2. What are the various types of NBFCs and explain how are they
classified?

3. Explain the role of NBFCs in Indian economy.

4. Discuss the role of NBFCs in last mile delivery of financial services.

5. Briefly explain India’s growth aspirations.

6. Explain the role of segmentation and micro segmentation in NBFC’s

strategy.

7. Discuss the role of technology in NBFC’s strategy.

123
Marketing of Banking
and Other Services UNIT 6 DISTRIBUTION, PRICING AND
PROMOTIONS STRATEGY FOR
BANKING SERVICES

Objectives

After going through this unit you should be able to:

• explain the concepts of distribution, pricing and promotion for banking

services
• apply these concepts in bank marketing
• discuss issues in delivery of banking services
• describe the effect of pricing policies in marketing of banking services
• appreciate the role of promotion strategies in the banking services.

Structure

6.1 Introduction
62 Banking Services and Issues in Delivery
63 Channels of Distribution for Banks
6.4 Types of Branches
6.5 Electronic Methods of Distributing Financial Services
6.6 Pricing of Banking Products/Services
6.7 Pricing Objectives
6.8 Pricing Methods
6.9 Pricing Reviews and Committees
6.10 Price Setting in Practice
6.11 Promotion of Banking Products/Services
6.12 Guidelines on Advertising by Public Sector Banks
6.13 Sales Promotion
6.14 Internal Communication
6.15 Marketing Information Systems (MIS)
6.16 Summary
6.17 Self Assessment Questions 6.18 Further Readings

6.1 INTRODUCTION
In an organisation engaged in marketing, channels of distribution for
financial services should be thought of as a means to increase the availability
and/or convenience of services that help satisfy the needs of existing users or
124 increase their use among existing or new customers. The marketers of
financial services has to ensure facilitating right product for the right people Distribution,
Pricing and
at the right place and at the right price. Pricing can be strategically used as Promotions
the tool to meet/reduce the competition. Pricing is equivalent to the total Strategy for
Banking Services
product offering which includes the brand name, package, product benefits,
service delivery, credit extended. It can be described a sum of expectations
and satisfactions. Promotion is a generic term used for the communication
efforts of the firm that are directed towards achieving the objectives of a
marketing strategy. You will see in this unit how the promotion mean
conscious efforts towards integrating its marketing strategies with business
plans.

6.2 BANKING SERVICES AND ISSUES IN

DELIVERY
Let us now attempt to see what effect the special nature of services has, on
the formulation of banking delivery systems:

1) Tangibility: It is not often possible to illustrate. demonstrate or display

the services on offer, and therefore storage, transportation and inventory
control are not relevant for the bank marketer. This partly explains the
relative absence of intermediaries or middlemen in the delivery of
banking services. As a result it severely limits the alternatives available
to the financial services marketer and often necessitates the use of direct
channel for distribution.

2) Inseparability: Because of the simultaneous production and distribution

of financial services, the main concern of the marketer is usually the
creation of time and place utility that is that the services are available at
the right place and at the right time. This implies that direct sale is almost
the only feasible channel of distribution. But as we shall discuss later one
way of overcoming the inseparability factor is the use of credit cards,
whereby the service is transferable.

3) Highly individualized marketing system: When selecting channels of

distribution the goods marketer will usually have a marketing system that
contains several established middle persons. This is not always the case
with financial services with a few traditional distribution channels. In
many bank transactions a client relationship exists between buyer and
seller, as distinct from a customer relationship. This is especially true in
the case of many corporate and trust accounts, although it not extends
more and more to other retail customers as well. Where such a close
personal and professional client relationship must exist direct channels
may be only feasible choice,

4) Lack of special identity: To the public often one financial service is

very much like the other. The reason why a particular financial
institution or branch is used, is often related to convenience. As the
competing products are similar, the emphasis is on the 'package'
125
Marketing of Banking reputation, advertising and from time to time new services. As major
and Other Services
competitors offer similar services, the emphasis will be on the
promotional aspects rather than on the inherent uniqueness of a particular
financial institution's service,

5) Geographical dispersion: There has to be a branch network in any

financial institution of size and scope, in order to provide benefits of
convenience and to meet international, national and local needs.
Therefore, all services or promotion must have both appeal and wide
application.

Activity 1

i) Based on your experience of the bank branches that you are familiar with,
with respect to a specific branch, enumerate the components of the
distribution functions carried on by the branch.

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

ii) In addition to the tasks mentioned 6.1. does the branch carry out any
other activities in relation to the distribution function. Describe.

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

Barriers to Provision of Delivery System

Barriers to the provision of delivery systems in financial service can be

considered to fall under two broad categories:

1) Business barriers, and

2) Technological barriers

126
 Distribution,
Pricing and
Promotions
Strategy for
Banking Services

6.3 CHANNELS OF DISTRIBUTION FOR

BANKS
The channels of distribution in financial services perform a number of key
functions, as follows

• Sale and offer of services and products, as well as advising customers.

• Contact and liaison with advertising and public relations agencies to
assist in designing more effective advertising/promotional campaigns.
• Gathering of information necessary for planning marketing activities,
strategy decisions and product development.

In distributing financial services, firms employ a number of channels. The

advantages of direct distribution channels for example branches, used to be
lower operational costs and more efficiency. In comparison, the selling
through indirect channels offers convenience to the customers and more
"impartial advice, as in the case of agencies.

127
Marketing of Banking The Branch Network
and Other Services
Bank's major distribution outlets are their branches. The design and
development of the branch network will be affected by:

• Characteristics of the products- importance of service quality,

inseparability of the product, intangibility of the product
• Customer needs-convenience, opening hours, availability of ATM,
telephone: banking, home banking and so on.
• Environmental factors-legislation, development of information
technology
• Competitors-if a branch network is efficient, it will be a competitive
advantage, keeping up to date with changes made by competitors.

Advantages of the branch network include:

• Its accessibility for customers

• It keeps a bank's name in the public eye
• The prime sites
• Banks become accepted as an important members of the community

Disadvantages of the branch network include:

• It is costly to maintain premises

• The staff costs
• The major investment involved the amount of capital tied up in it
• It is old fashioned, difficult to modernise
• Small branches can be difficult to enlarge when expansion is necessary.

Branch location and distribution

As the roles and functions of financial services continue to grow in most

countries, pressures are building up for more efficient distribution systems.
Historically, for financial services branches have essentially been retail
outlets. Although in the last few decades or so the roles of the branches have
changed, financial services customers still regard convenience of delivery as
being decisive when choosing a financial organisation. Moreover, location
decisions involve long-term commitment of resources and as such have
implications on the long term profitability of the banks.

In distribution of banking service the marketer is faced with a huge market

that should be duly served. For e.g. in recent years many banks, have already
grown and diversified through acquisition, they have had to face the necessity
of developing profitable services for mass business. This market falls into
two broad categories:

128
The mass (retail) market: Standard products, relatively inflexible in Distribution,
Pricing and
performance and cost, can be offered to this market. It spells out the Promotions
requirements of geographical decentralisation, standardized services, heavy Strategy for
Banking Services
advertising and promotion, attractive services and above all cost effective
processes.

The individual (corporate) market: This market constitutes single orders of

sufficient size of importance to be profitably singled out for individual
treatment. It requires individualised services and counselling, such as
comprehensive financial advice, the availability of research services and
contact brokerage to the customer, negotiated terms and so on.

Banks are now changing the image of their branches. Bank branches used to
be serious, dull places that often intimidated customers. All the staff used to
work behind security screens and this created an unfriendly atmosphere. Now,
some security screens have gone, banking halls are brighter and a friendly
atmosphere has been created that is less daunting for customers. Branches are
more like a financial services shop Newly designed branches are open,
planned and many staff have moved into the banking hall to tables, to advise
customers in a friendly way about financial matters, opening of accounts,
solve problems or answering queries.

It is expected that by the end for this millennium, the most important aspects
of branch workload will be ATMs, telebanking and the retail counter in that
order. Currently, the developed countries' bank branch workload is in reverse
order, the retail counter demanding the most time and effort from the branch
staff and management. In Indian conditions, the lion's shares of service is
through retail counter only. The other. components in the delivery system
have just begun to catch up

As mentioned, branches still continue to be the most important channel of

distribution for banks although demand for electronic systems has been
registering high growth rate.

The traditional reasons for establishing branches were to collect deposits,

arrange loans and provide convenience in conducting transactions
Technological development has meant that there is less need for customers to
go to branches for their business transactions. This reduces the possibility of
any "impulse' cross service sales

Activity 2

a) You may have noticed changes in the layout and placement of various
services within the bank. Briefly list these changes in respect of your
own bank.

…………………………………………………………………………….

…………………………………………………………………………….

129
Marketing of Banking …………………………………………………………………………….
and Other Services
…………………………………………………………………………….

…………………………………………………………………………….

b) Talk to at least 10 long standing bank customers and take their feedback
on these changes. Report on the feedback received by you. What do you
think is the impact of these changes on service delivery?

…………………………………………………………………………….

…………………………………………………………………………….

…………………………………………………………………………….

…………………………………………………………………………….

…………………………………………………………………………….

6.4 TYPES OF BRANCHES

Branches of different financial institutions deliver different types of service
for different types of customer as explained in following section:

1) Full service branch: The full service branch has been the conventional
delivery system, providing a full range of the products and services
offered by the institution to both corporate and retail customers however,
in the developed countries, the services provided by banks have incased
immensely as deregulation has led them to extend their range of
conventional financial service variants. In India, too with the
liberalisation and deregulation in the financial sector, similar position is
set to be evident soon.

2) Specialty branch: Speciality branches now serve as alternatives to full

service operation. Speciality branches focus on either retail or corporate
business but not both; for example real estate specialist branches focus
on mortgage finance. Thus the time devoted to withdrawal and deposit
transactions is reduced. On the domestic scene, we have many SSI
branches, industrial finance/corporate banking branches. NRI branches,
Hi tech agricultural branches, service branches, commercial and personal
branches, recovery branches, leasing branches, housing and finance
branches.

3) High net worth branches: These branches are located in appropriate

socio- demographic areas and they distribute a range of financial services
for up market customers. These services are often based on minimum
account balance criteria. and they emphasise personal financial
counsellor services rather than conventional bank teller services.

4) Corporate branches: These aim at middle-market corporate accounts

130 and do not usually handle retail financial services. The services provided
 are on-line foreign exchange, letters of credit, asset-based financial Distribution,
Pricing and
specialisation, corporate cash management services and so on. Promotions
Strategy for
5) Hub and spoke banking: The status of each branch is determined by the Banking Services
area and customers it serves. There is little point for a branch in a small
rural village to have a business advisor. It is more beneficial for the bank
to ignore this service when the market is very small and to cater for it at
a larger branch in the nearest larger town. This system of providing a
limited service in the smaller branches, backed up by a nearby, larger
core branch, that is able to carry out all the services the bank offers, is
called 'hub and spoke branch banking. The smaller satellite branches
provide a limited and mostly highly automated service, dealing mainly
with the personal banking. These are linked to a key branch that offers a
full range of services and often co-ordinates the activities of its satellites.
Normally there can be between four and 15 satellites to one key branch.
The hub is responsible for corporate business and has overall jurisdiction
for the network as a whole. In India such an organisational arrangement
is not common.

The hub and spoke structure has many benefits. One very important benefits
is that it is part of a rationalisation strategy. The new structure reduces the
large amount of replication that was occurring at every site (including
expensive equipment and personnel) and which was not being used in an
efficient way anyhow. This reduction and regrouping at the key site has
vastly reduced the excessive duplication in a move towards getting the bank
to provide the correct range of services in an area.

The advantages of hub and spoke branching are:

1) Costs are reduced by concentrating specialised (and expensive) staff in

key branches;

2) Duplication of management skills is avoided:

3) The processing function in centralised in a limited number of branches;

and

Banks are able to pursue simultaneously both product and relationship

strategies, for example identifying good customers in satellite branches, who
are then served by product managers (bankers) located in key branches.

Overall the tendency is towards fewer bank branches. The reason for this is
that, the high operational and staffing costs of running a branch, the increase
in scale and benefits of automation and technology, the advent of direct
banking (via telephone, home link and in-touch services offered to larger
financial customers), and the mergers and /or acquisitions by banks, have
given rise to rationalisation (reduction) of the number of branches.

It often happens that a financial product that might be unprofitable when

delivered through one type of branch-say a satellite branch-might be
131
Marketing of Banking successful when it is distributed through a central, regular branch. The
and Other Services
selection or emphasis on one type of distribution outlet rather than another
depends on the personal service required, service content (for example
information, advice, personal attention and so on) financial product
complexity and its customisation requirements, purchase frequency and level
of customer sophistication.

There are three perspectives that determine distribution profitability in

financial services:

1) Channel profitability
2) Branch profitability
3) Customer profitability

Branch profitability is particularly important, as the costs of managing and

operating branches and to increase. Obviously, the profitability of a branch is
affected by its administration Research has shown that the profitability of a
branch depends largely on the volume of deposits, that is a high
volume/economies of scale approach is usually profitable. To handle this
problem banks have developed a number of different types of branch, as
mentioned above and depicted in figure below:

Branch location and shopping/commercial centers

Branch locations often tend to be concentrated in larger hopping centers

because financial institutions seek to attract personal savings and past
experience indicates that these are the most advantageous locations,
especially for banks. The advantages of locating branches in shopping centers
include easy market entry since many shoppers and potential customers
frequent the high street and shopping centers. Generally, availability of
parking and transport facilities as well as proximity make the location ideal
for customer contact.

A few of the distinct limitations for such branches are:

1) they might not be able to expand because of limited adjacent space

132
2) they might lose their special identity because of the many competing Distribution,
Pricing and
branches around Promotions
Strategy for
3) in certain areas, shopping centers have restricted opening hours which Banking Services
might affect the branch's activity.

The Indian experiments of opening rural branches, service area approach and
directed lending uniquely combined both the marketing and social
responsibility roles for bankers. The liberalisation and deregulation may
focus more on the viability of operations more than in the past and hence, the
aspects that go to make a branch profitable will need to be addressed more
effectively.

Activity 3

Through a visit or on the basis of your experience, compare the banking

services offered at personal service branches, service branches and automated
branches. Briefly enumerate the differences in type of services offered.

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

6.5 ELECTRONIC METHODS OF

DISTRIBUTING FINANCIAL SERVICES
The need to make branches and distribution more efficient has led to the
introduction of electronic methods in financial services. The first ATMs
(automated teller machines) were introduced in the UK in the form of cash
dispensers by Barclays Bank in 1968 The main objectives of this distribution
facility were to save costs and staff time, and to provide greater customer
convenience (that is service outside normal banking hours). Since the system
was introduced, there have been four main features associated with ATMs
reliability, security from fraud, volume generation at any particular location,
and the relatively high costs per machine network.

• The decision whether or not to install an ATM depends on a number of

factors, as follows:
• Its impact on branch staffing levels, branch business and costs. (Recent
research suggests that paying out money via cash dispensers is about
65% cheaper than counter withdrawal).
• The cost of investing in a large network of ATMs including service
support and reciprocal arrangements with other financial institutions.

133
Marketing of Banking • The impact of ATM installation on a financial institution's image and its
and Other Services
ability to differentiate its services/products.

The distribution of financial services has been further affected by

development of the electronic funds transfer systems (EFTS), whereby
money can be exchanged between the consumer, retailer and financial
institution in the form of electronic data rather than being transferred
physically which involves the processing of paper. ATMs form part of EFTS
and have been used to provide the customer with a quick, convenient and safe
service 24 hours a day, seven days a week.

Financial services today are making determined efforts to make use of the
latest technology is changing the market rapidly and this will have a major
impact on financial services branches. ATMs and Eftpos (electronic fund
transfer at point of sale) are much more efficient in cost savings, time and
labour.

Calculations, show that on an average an ATM equals (or leads to) a total net
labour savings of 1.33 full time staff. There are a number of important
reasons for installing ATMS.

1) to increase customer convenience,

2) to increase customer traffic,

3) to reduce cheque volume and consequently cheque processing costs,

4) to reduce labour cost,

5) to reduce cash security problems, and

6) to provide the bank with clear strategic advantages (for example entry
barriers, greater economies of scale, and product differentiation).

There is now a trend to establish ATMs in satellite or away from branch

locations in shopping centers and in commercial complexes. ATMs can be
used to absorb extra customer demand during peak hours or outside branch
business hours. They also save staff time. ATMs now perform as many as
150 functions ranging from cash dispensing to accepting split deposits to
trading in stocks, to buying mutual funds.

Future electronic payment systems in financial services will consist of a

flexible telecommunications network that will join terminals situated on the
premises of retailers in customer's homes, and on the counters of branch
offices, and ATMs. The network will then link these terminals via
microcomputers to financial service computers. All these new electronic
methods will eventually make cash and cheques less necessary but it will take
some years for their full potential to be achieved. In the meantime, it is
essential for financial services to have branches with full payment facilities
so as to maintain their strong competitive edge. Some of the electronic
banking methods in use are
134
Telemarketing: Consider the case of the largest branch of the manufacturer’s Distribution,
Pricing and
bank in the USA. No customer visits it Its customers reside throughout the Promotions
USA and their business is solicited by long distance telemarketing or direct Strategy for
Banking Services
mail. There has been substantial growth in both loans and deposits via
telemarketing and direct response to newspaper advertising. These systems
can be much cheaper than full branch operation and are especially useful to
institution that do not have a large network of bricks and mortar outlets

ATM: Many banks now have ATMs outside their branches. Those outside
offer 24 hours banking to customers. Some banks also have an ATM in the
lobby and customers use their security card to enter the lobby and then use
the machine in the normal way. These machines can be used to withdraw
cash, pay money and cehques into an account or to order statements balances
or information packs ATMs are also now located at many of the larger retail
stores and at factories. The machines are maintained by the local branch The
development of the ATM network may mean that at some point of time in the
future, cashiers will be replaced by the ATM machines.

Eftpos: Eftpos offers a cashless method of payment to the customers at the

point of sale and is important in all areas of retail transactions In many
countries, the Eftpos schemes proposed by bank have run into difficulty as
the banks have endeavored to charge more than retailers have been prepared
to pay. While trends show that Eftpos will become an important payment
mechanism, it is not expected wholly to replace cheques, although successful
Eftpos systems are likely to reduce cash payments and in particular stimulate
the use of debit rather than credit cards. As with ATMs, Eftops also reduce
the need for customers to visit their branches.

Intelligent Terminals: In the corporate market, developments in electronic

banking have led to the introduction of intelligent terminals. With these, and
backed up with their own central processing units, corporate treasures can
interact with the bank's own mainframe computers to undertake cash
management, transactions, letters of credit and the like, receiving timely
transaction data and other economic and financial information services.

Telephone Banking: Some banks are now offering home or telephone

banking. This may reduce the need for branches in the future. An example of
this is Midland's first direct service which is a new concept in banking. It
does not operate through a branch network but entirely by the use of the
telephone and the postal system. It also provides all the usual banking
services - current accounts, loans, ATM facilities. Customers can contact first
direct service 24 hours a day. Midland have spend a lot of money advertising
this new venture. The market they have tried to attract is the younger market
particularly the age group 20-35, who are more financially aware and are
used to dealing with matters by phone.

Home banking or in-touch Financial Services: Another innovative means of

distributing bank service has been pioneered in the USA through the
135
Marketing of Banking application of computers Computerised facilities have been used in
and Other Services
supermarkets to record each transaction with the respective customer's
account with the bank. The Seattle- first National bank has promoted an in-
touch home service that provides customers with access to a talking computer
from touch-tone phones at home. By calling up the bank computer, the
customer can instruct it to perform financial services such as:

• Paying bills by transferring funds from his bank account to that of a

creditor.
• Aiding family book-keeping by reporting expenses with a biweekly
budget analysis broken down into several categories (food, housing,
clothing etc.)
• Computing income tax data.
• Storing household records such as insurance policies, credit card
numbers driving license numbers an vehicle registration numbers

Normally, home banking is likely to be just one of a range of services

provided as part of a home information system which also offers shopping,
news, entertainment and information data. The home banking service itself
will usually permit account interrogation, inter account transactions, bill
payments, loan generation and electronic mail. In addition some systems are
adding brokerage, insurance and mortgage banking facilities Home banking
is expected to become a significant alternative delivery system to
conventional branch systems in due course.

Internet Banking: Security First Network, Bank, an Atlanta (US) based

savings bank, in one of the first international banks to go operational on the
internet. Within 10 months of its launch in October, 1995 it garnered 5550
accounts and US$ 15 million deposits across the world. The services being
envisaged by Indian Banks include:

Customers with PC and net connectivity can

• view transactions in their accounts, exchange messages with the officers

concerned in the bank through a mailbox, request cheque book and get
printed account statements, structure loans by asking a series of 'what if
questions and getting answers
• Request for funds transfer between accounts, issue stop payment requests
and standing instructions and do deposit modelling
• Have on-line connectivity providing the customer with the ability to
directly debit and credit the account without the bank's intervention etc.

A recent study estimates that in a full service branch, the cost per transaction
is US$ 1.07 as against US$ 0.54 for telephone banking, USS 0.27 for ATM
full service, USS 0.015 for PC banking and US$0.01 for internet based
banking.

136
Activity 4 Distribution,
Pricing and
Promotions
a) Discuss with 15-20 bank customers, the uses and applications that they Strategy for
have been making of the electronic modes of banking. What are the Banking Services
specific advantages they perceive?

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

b) Very large percentage of existing bank customers however, do not avail

of the electronic banking facilities. Discuss with some of these customers
to elicit the reasons for their non utilization.

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..
……………………………………………………………………………..

6.6 PRICING OF BANKING

PRODUCTS/SERVICES
No discussion on marketing mix for banking services can be complete
without understanding the concept of pricing and its importance in detail.
Pricing can be strategically used as a tool to meet/reduce the competition.

Pricing affects the product cost and also plays a key role in decision making
of the buyers (customers) Pricing is affected by competitions, seasonality and
general trend of demand and supply. In short, it can be said that the price is
determined by cost,

demand and competition in the market. Price in the eyes of the consumer is
the evaluation of the total product offering which includes the brand name,
package, product benefits, service, delivery, credit extended etc. Price can be
defined as the money value of a product or service agreed upon in a market
transaction and can be shown as -PRICE-sum of expectations + satisfactions

137
Marketing of Banking Pricing for Profitability
and Other Services
In a competitive market, price is determined by free play of demand and
supply. Price will increase or decrease depending on increase or decrease in
the demand for product. Pricing decisions link the marketing actions with the
financial objectives of organisations. Pricing affects:

1) Sales Volume
2) Profit Margin
3) Rate of return on investment
4) Product position
5) Image of the organisation

Pricing is the key decision through which the other marketing strategies have
to consider in order to result into profit or revenue like:

Price simply read can be described as 'cost plus profit. Therefore, proper
analysis of cost and proper decision regarding profit level have direct impact
on pricing decisions/ strategy.

Normally direct expenses which vary with volume of production/sales are

variable cost and indirect expenses are fixed cost.

6.7 PRICING OBJECTIVES

Before we review the pricing theories in detail, it is essential to know the
typical pricing objectives. Important among which are:

1. Growth in Sales-A low price can achieve higher growth in sales volume
but may the profit level adversely.

138
2. Market Share The customer acceptance is reflected by market share of Distribution,
Pricing and
a product and is an indicator of acceptability of price. Promotions
Strategy for
3. Competition -To face the competition, prices can be lowered to Banking Services
maintain sales or in the absence of it, prices can be revised but stable
prices help in maintaining image or brand name and quality.

4. Pre-determined Profit - If a profit level is pre-decided as a policy, the

price has to be maintained at a particular level despite other factors as
to ensure attaining that objective.

5. Corporate objectives to have pay-back in a specific period also can

affect the pricing and price level.

6.8 PRICING METHODS

Market based pricing system

In order to understand consumers based inputs on pricing system, we should

also take into account the market related pricing systems which adopt one or
more of the following approaches:

1) Perceived value pricing

ii) Psychological pricing
iii) Promotional Pricing
iv) Skimming

i) Perceived value pricing: These are based on the belief the consumers
have about the value of products and pricing is based on these
assumptions. This is supplemented by market research and if price is
more than buyer - recognised value, it may affect sales whereas if price
is less than buyer - recognised value, the revenue will suffer.

ii) Psychological Pricing: In many pricing systems, pricing is based on

prestige- and can be kept higher to promote the idea of status and quality.

Many other times the price will be just below a round figure say Rs.59.20 (to
show it is less than Rs.100) or Rs 499.00 (i.e. not Rs.500/- or above).

Sometimes instead of giving a 20% discount, the price per unit per-se will be
constant (uncharged) but it will advertised that on purchase of 4 units one
unit will be free.

iii) Promotional Pricing: This is used for promoting high level of sales or to
clear excess stock which although is with a reduced profit margin
improves sales and reduces holding cost.

iv) Skimming: This strategy is to 'skim the cream' Le. adopting a high price
approach. When the product is new and innovative and in a monopolistic
or less competitive market, the price will be higher (like in mobile
139
Marketing of Banking phones) which can be progressively reduced with entry of more
and Other Services
producers and skimming the cream sufficiently

b) Cost based Pricing

There are four main cost based pricing methods which are:

1) Standard cost pricing

2) Cost-plus pricing

3) Break-even analysis

4) Managerial Pricing

c) Competition Related Pricing Strategies

The competitive pricing means pricing to compete with the leader in the
market with respect to the price.

It can be either to set higher price initially and then to offer discounts known
as 'discount pricing' or to significantly increase sales volume by competing
with others already leading in the market by undercutting the prices
significantly with the sole idea of penetrating the market.

Pricing Decisions as applied in Banks

Decisions in pricing are generally taken in view of the market opportunities.

Pricing decisions are differently handled by different organisation as a policy
or as a strategy.

The factors such as economic, social, political affect pricing decisions. In

small organisations pricing decisions are taken by the top management
whereas in big organisations the divisional or product line heads have the
authority to decide/fix the price. In some other organistions, committees are
set up to fix the price.

As we focus our attention to marketing of banking services and further on the

pricing aspects, these are two major costs which have to be considered and
they are:

a) Interest cost

b) Servicing cost

If we analyse the profitability statement of any bank it shows following broad

classification:

Interest Cost 67

Admn. (staff) cost 27

Other (non-int.) cost 6

140 100
The interest rates for banks in India have been administered for decades by Distribution,
Pricing and
the Reserve Bank of India and the service charges have been advised and Promotions
administered by the 1.B.A. with which although in funds management market Strategy for
Banking Services
forces and demand and supply do play a role, in respect of interest or service
charges, the market forces did not affect to any considerable extent.

Pricing policy and strategies, however, is equally relevant in banking due to

the fact that it affects the demand as well as profitability and after a
considerable stress on social banking in Indian context, due to the guidelines
regarding capital adequacy by Narasimham Committee, once again
profitability has become an important consideration of bank viability.

Now, even the public sector banks have freedom to stipulate rate schedules
for such activities which are not covered under uniform schedules. The
interest rates on domestic deposits can also be fixed by banks, within the
stipulated range, for deposits with different maturities

With the winds of globalisation and liberalisation flowing freely in India and
the competition faced due to aggressive marketing strategies and innovative
products by private and foreign banks, the banks have to re-think their
marketing policies - more so the pricing strategies

Activity 5

In the context of liberalization, what do you think is going to be the impact

on rate schedules in view of the freedom given to public sector banks, for
activities not covered under uniform schedules? Discuss with senior bank
officials to assess their views on this issue.

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

6.9 PRICING REVIEWS AND COMMITTEES

It is well known that the banks in UK and USA have already diverted their
attention to service and non fund activities for improving revenue.

With regulated interest rates and uniformity in service charges for a longtime,
customers too are now aware and many accept the service fees/transaction
fees charged by banks in giving better and prompt service.

141
Marketing of Banking There have been many studies to analyse the ways and means to improve
and Other Services
profitability of banks

• The very 1st report on cost aspects of Indian Banks was published in
1972.
• Traditionally, interest or funds activities were the only source of profit
for the banks.
• The remittance business and bills business did not prove to be of much
help in increasing profit/revenue.
• Besides profit from forex business and exchange profit, there was not
enough amount under other income which now is increasing steadily.
• Before standardisation efforts by IBA, banks were using different
methods for service charges like
• flat service charge
• measured service analysis
• complete analysis method
• On bill business the fees charges were not very adequate compared to the
service rendered.
• In 1985 IBA efforts for rationalisation and standardisation of service
charges met with success to bring about uniformity in several banking
services. while public sector banks are governed by IBA guidelines, the
foreign banks and the private banks had the freedom to decide their own
charges.

The committee of public sector banks for service charges was set up to
provide guidance, check costing and decide the implementation schedule.

• Sinha Committee was constituted by IBA with Mr.T.K.Sinha as

Chairman to give report on costing of services. The report was submitted
to IBA on April 1987. This was a very useful study providing a firm
basis to all the banks to decide pricing strategies.

The steering committee set up by RBI advised commercial banks to

undertake costing studies in two phases.

The banks were advised to collect data on deposits, advances, foreign

exchange business, bill business, govt. business etc.

In the second phase exercise was given by RBI to each bank to work out cost
in following fields:

1) Transfer pricing
2) Pricing of different services
3) Analysis cost trends
4) Cost benefit analysis for concession etc.
142
5) Break-even analysis of branches to categories and monitor profit making Distribution,
Pricing and
and loss making branches and to decide strategy. Promotions
Strategy for
• With the advent of new departments and products, like merchant banking, Banking Services
investment, counselling, project consultancy, etc. pricing of new
products, services was required to be based on cost assessment and
commercial (viability) criterion.
• Even at the branch level awareness was created to be in tune with macro
level (corporate) planning and decide selective recommending/selling of
bank's products at branch for better pricing mix and better overall
revenue.

6.10 PRICE SETTING IN PRACTICE

Concept of service fees

We have seen from the discussion on earlier pages that in Indian Banking it
has been a regulated pricing system, till recently regarding interest as well as
the service costs.

If we take a look at the following table (taken from the consumer federation
of American report) it will be clear as to how bank fees/services vary and
customers accept such a variety of service fees.

LOW HIGH

Savings

Minimum balance for interest 0.00 200.00

Monthly fee if below minimum 0.00 3.00

Regular chequing 7.00 20.00

bounced cheque

returned deposit

Now A/cs 0.00 12.00

Minimum to avoid charge 50.00 2500.00

Monthly service charges

Pre-cheque charge if below minimum 2.00 8.00

Other checking 0.20 0.50

holds on non-payroll cheques from out of 2 days 20 days

state

143
Marketing of Banking Banks have to develop better strategies and understanding with customers to
and Other Services
convince regarding the cost by way of service fees as essential for good
quality service.

Traditional bank pricing approach

Primarily two types of approaches are being adopted by banks abroad to set
prices:

1) Bundling

2) Auction

Bundling involves the aggregation of bank product or services offered i.e.

combination of deposit and loan account or credit and non credit accounts
and bundling these with respect to the compensating balances and a prime
rate.

In auction mechanism, banks desirous of making loans to both retail and

corporate sectors auction their loans in a (restricted) competitive market

These are further based on considerations like relationship with credit

worthiness of the client, average balance's maintained etc.

Price Determination

It is not just the interest rates alone that determine pricing, it is also the fee-
based pricing (for services rendered) that is fast gaining momentum. As each
deposit/product or service has potential to achieve certain marketing goal to
satisfy a particular customer segment. the pricing must be set with respect to
the said objectives and customer needs ability and level of satisfaction.

Target Pricing

This is decided by keeping in view a pre-decided target level of business

(volume) or profit (revenue). This depends on the level of investment and
degree of risk involved.

If we look at the factors determining the "base" price level for any
organisation, its relevance to banking can be judged.

Some Limitations in Pricing for Banking Services

In banking the concepts determining prices have been

BANK RATE

MNR- Minimum Lending Rate

MLR- Maximum Lending Rate

PLR-Prime Lending Rate as a reference rate

144
Lendable funds- Banks have to work within the framework of RBI guidelines Distribution,
Pricing and
due to which a bank can lend only a certain portion of mobilised deposits Promotions
after providing for cash reserve ratio and statutory liquidity ratio i.e. out of Strategy for
Banking Services
Rs.100 funds only about 58% can be lend as loans/credit. It becomes obvious,
therefore, that the revenue by interest on lending should be enough to cover
the cost of interest paid on deposits and administration cost.

SPREAD- Due to the limitations of CDE (Credit Deposit Ratio) and lack of
sufficient demand for borrowings in the money market all banks are
consciously considering the service fee concept to improve their profitability
on the SPREAD is not quite enough to improve the profit planning in view of
higher administrative costs and non-interest bearing advances (non-
performing assets).

Transfer Pricing Concept and Mechanism

Simply speaking if we take profit as excess of income over expenditure, the

same has to be re-thought in branch level system where some branches will
be predominantly deposit

centers and some branches will be predominantly advance centers where

deposit centers will have mostly interest payable and show losses. The
advances branches will have large demand and all profits by way of interest
on advances but these will not be deposits available as lendable funds.

This means in one branch there will be high supply (deposits) and high
interest payable and no demand or interest receivable whereas as in other
branch there will be high demand and high (profitability) interest receivable
but no supply

is, therefore, taken to compensate this demand and supply of funds and
interest payable receivable by transferring pricing concept where high deposit
branches are taken as fund supplies and certain interest is payable to them
and high advances branches have to pay certain interest to such supplying
branches.

6.11 PROMOTION OF BANKING PRODUCTS/

SERVICES
Promotion is a generic term used for the communication efforts of the firm
that are directed towards achieving the objectives of a marketing strategy.

The promotion efforts include the marketing communication through

• Advertising
• Publicity
• Sales Promotion
• Person-to-person communication
• Bank's internal communication process, etc. 145
Marketing of Banking These elements of promotion serve as the links between the Bank and the
and Other Services
target segment of its market (customers).

In this section we will discuss the communication theories and their

application in Banking organisations through the promotional mix-aspects.
You may note that promotion does not mean only advertisements but a
Bank's conscious communication efforts towards integrating its marketing
strategies with business plans.

Promotion thus means the Bank's well organised, planned and goal oriented
communication efforts which must be in congruence with its overall business
goals and objectives in the desired market area keeping specific needs of
customer in mind.

Table: Composition of Promotion Mix

Mass Communication Person-to-person communication

Advertising Person Sales

Publicity Internal Communication

Sales Promotion

Public Relation

In the service industry like Banking, promotion assumes all the more
important position as what we really sell is 'abstract thing i.e. service with the
interest rates, range of product etc. being more or less same, the service given
through proper promotional channel makes all the difference between two
Banks in marketing context.

Promotion can thus mean 'communicating with the buyer (customer), in order
to strengthen his attitudes that are favourable to the (Bank's) sellers' offering
and to change his attitudes which are unfavourable to the sellers. This
presupposes ensuring that such buyers become satisfied customers of the
Bank, now or later.

The objectives of "Promotion" are

1) Informing/telling/educating potential customer about the banking

service and its value to them.

2) Informing existing customers about new products/services.

3) Following up with existing/potential customers for schemes introduced

4) Approaching a new segment of customers to attract them to buy new

scheme.
146
It can thus be briefly said that the objectives of "PROMOTION" are Distribution,
Pricing and
product/service information, persuasion and re-enforcement so as to create Promotions
and/or keep up Bank's image among its existing and potential customers. In Strategy for
Banking Services
the traditional wheel of marketing as after the 3 Ps viz. Product, Place and
Price, Promotion is the 4th important "P" in marketing

Advertising (Budget) Expenditure

Advertising Expenditure in relation to total market costs (cost of promotion

and distribution) has to be decided as the first step. This budget is decided
after an extensive market research. The Advertising cost may vary from
1/2 % to as high as 40% depending on the anticipated business, profit margin
and the positioning of product in a given market.

Joel Dean in his paper published in 1966 had raised a very significant
question "Does advertising belong in the Capital Budget ?" Dean's thesis is as
follows, "Most advertising is, in economic essence, an investment. How
much to spend on advertisement is, therefore, a problem of investment
economics. A new approach is required economic and financial analysis of
future. This approach focusses on future after-tax, cash flows and centers
around the profit productivity of capital."

6.12 GUIDELINES ON ADVERTISING BY

PUBLIC SECTOR BANKS
In view of the social commitments of Nationalised Banks and comparatively
limited budgets of advertising, the policy related to advertisement
expenditure by Public Sector banks has been examined by Reserve Bank of
India periodically. This has been done with a to improve effectiveness on one
hand and reduce the cost on the other.

November 1970- Banks were instructed to show the expenditure on

Advertising as a note to P & L A/C.

July 1982 It was advised that the total advertising expenditure should not
exceed 0.1 (1/10) % of Bank's Gross Earnings.

April 1984 There was a sort of ban on incurring expenditure on publicity and
advertising up till September 1984. However, the foreign banks were allowed
to incur Advertising Expenditure to the extent of 50% of their expenditure
under this head during the previous year.

October 1985 These norms were relaxed.

1987 Public Sector Banks were permitted to incur expenditure upto 0.05
(1/20)% of their gross earnings from Domestic Operations on Domestic
Publicity. For publicity abroad, banks were allowed to incur additional upto 1
(1/10)% of their Gross Earnings on Advertising and Publicity.

147
Marketing of Banking The Joint Publicity Committee (JPC) of Public Sector Banks constituted in
and Other Services
1971 with Government approval played active role since February 1976. In
1980 all the 28 Public Sector Banks were brought under its preview and joint
action was proposed as follows:

i) Ensure considerable savings in expenditure on advertising by joint

publicity.

ii) Ensuring non-controversial advertisements

iii) Improving overall image of public sector banks

iv) Taking up the matter regarding distorted advertisements with concerned

bank.

JPC recommended use of following media:

1) Press

ii) Hoardings/posters

iii) Radio/TV sponsored programmes

iv) Cinema (slides)

v) Films

vi) Direct Mail

JPC emphasised on areas of common interest for advertising and publicity.

i) Deposit mobilisation

ii) Customer education

iii) Priority sector advances

iv) Performance highlights of public sector banks

v) Borrower's responsibilities to repay obligations.

Advertisements by Foreign Banks

Unlike the Public Sector Banks, leading Foreign Banks had liberal approach
and higher budgets to regularly advertise in leading newspapers, newsletters,
catchy brochures and attractive hoardings in prime locations of metropolitan
cities. This enabled them to continuously build a positive and brighter image
in the eyes of customers which also reflected in their multifold business
achievements and high profitability vis-a-vis public banks.

Effectiveness of Advertising

Although advertising is a very effective and most frequently used

promotional tool in marketing of banking services, it is desirable to measure
the effectiveness (impact) of an advertisement campaign. For this there
148
cannot be any one criterion to assess the effectiveness. These are multiple Distribution,
Pricing and
objectives to asses such an aspect. Promotions
Strategy for
Normally below mentioned methods are used to measure results of Banking Services
Advertising:

1) Usage Measurement : This is done through measuring

business growth, interviewing
consumers.

2) Measuring Recalls : This can be either unaided recall or

aided recall – which assesses the extent
to which advertisements are retained
by customers' mind.

3) Psychological measurements : Through interviews or inventories this

can be measure J.

4) Attitude Measurement : This is done through structured

interviews or attitude scales.

5) Measuring Awareness : This is done through simple YES/NO

type questionnaires.

The success of advertising affects successful launching of product/schemes,

customer's positive response or increase in business share. This can reflect in
the business figures like Deposits, Advances, Profitability, etc. and the
comparison of pre and post advertisement figures can reveal the visible effect
of advertising campaigns.

It can thus be summed up that effective advertising is the technique of

creative communication. It ensures co-ordination and application of various
batches of the art and profession to achieve a pre-determined end is to
communicate a message to the public in general or to the desired segment of
public/market in particular Advertising is significant both as a social and
economic force. Advertising serves as a "mouthpiece for the organisation's
objectives to be made public.

In simpler words, advertisement makes use of communication process with

in-built psychological and sociological contents which influence the buyer's
behaviour in Advertiser's favour through a process cycle of stimuli, response,
motivation and reward

Activity 6

Carefully look through bank advertisements on the television and newspapers.

What are the major themes that have been used to promote the banks List
these themes.

………………………………………………………………………………….

…………………………………………………………………………………. 149
Marketing of Banking ………………………………………………………………………………….
and Other Services
………………………………………………………………………………….

………………………………………………………………………………….

Do the promotion effort vary? How.

i) With the type of Bank Le public, private or foreign.

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

ii) With the type of product being marketed?

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

……………………………………………………………………………..

6.13 SALES PROMOTION

Advertising and Sales Promotion as parts of the marketing mix are integrated
with the marketing objectives and they are often co-coordinated with other
selling efforts.

As the name suggests, sales promotion is a collective name given to all

measures used to promote the sales. Any sale by an intending seller of a
product presupposes a corresponding buyer and, therefore, to sell anything
the buyer has to be made aware about the product and its advantages to the
buyer. The visible benefits of the product have to be demonstrated to
facilitate buyer's decision to buy that product.

in a controlled economy and market if the competition is low or less, sales

promotion may not be necessary if there is only one seller and many buyers
but in a competitive market place, the importance of sales promotion cannot
be undermined.

In the banking context due to severe competition between different types of

banks, sales promotion assumes lot of importance.

For many sales promotion, three essentials have to be borne in minds

150
a) Product knowledge Distribution,
Pricing and
b) Market information Promotions
Strategy for
c) Reaching the desired customer segment Banking Services

In the context of a company/firm, the sales promotion serves as a 'link'

between the advertising and its sales force's impact as the trade and public in
the retails stores. There is generally a triumvirate of selling forces-advertising,
sales promotion and personal selling The sales promotion measures gives the
salesman a cutting edge in his selling activities.

The main difference between advertising and sales promotion can be

described as while the advertising moves the consumer to the product: sales
promotion moves the product to the consumer.

The following activities are usually the part and parcel of sales promotion
activity:

1) Designing and preparing advertising and sales promotion material.

2) Purchasing/arranging different types of material for display/distribution.

3) Organising direct mail to customers

4) Organising exhibitions/trade shows

5) Arranging demonstrations in sores, factories and homes

6) Arranging lectures for public, academia, trade and industry

7) Sales meetings and conventions

8)Sales training to sales people and dealers/retailers

9) Sales contests/dealer contests

10) Sales bulletins

11) Preparing bulletins/magazines

12) Giving sales manuals

13) Preparing sales-films

14) Organising seminars/training for customers

15) Display in trade outlets.

These multifarious activities under sales promotion induce a temptation

among buyers to buy the product on the spot.

From the above discussion it can be understood that the sales promotion is an
activity which enthuses the salesforce and distributors to sell more products
and also makes the potential buyers eager to buy, use or consume a product
more frequently.
151
Marketing of Banking Steps required in sales promotion
and Other Services
Sales promotion pre-supposes a planned and sustained activity involving
systematic steps which includes:

1) Product promotion and image building

2) Selling the idea

3) Selling the idea of comprehension promotive involving all forms of

publicity

4) Selling the idea that the salesman is enthusiastic colleague and helps the
people in promoting campaigns

5) Ensuring right product for right buyers at right times.

Some of the foreign banks do the sales promotion jobs through information
booklets and brochures sent with credit cards etc. in excellent manner.

sales promotion strategy

In India context in general and in marketing of banking service in particular

during the launching of product, distribution channel sales promotion is an
important task.

Before deciding promotion strategy it is important to keep in mind three

essentials, as already mentioned earlier

i) Product Knowledge: This is the first essential. the employees and

specialised staff promoting a scheme/product must have the thorough
knowledge of both the advantages and disadvantages of the product.
only after ensuring the market demands and specific needs of customers,
the product/scheme has to be launched with full details made available
to staff before hand to promote this product in a better way.

ii) Market information : This means knowing who will buy the product ,
when he will buy and why he buy ? this gives an idea about the
probable market share and enable to decide promotion (selling) strategy
to specific segment of the market. this also enable the seller to decide
on the advertising through proper media keeping in view the specific
needs of the potential buyers

iii) Reaching the customers : After ascertaining the market and ensuring
proper product knowledge to all concerned: when it’s time to teach the
customers, the campaign has to take into account :

a) TIMING- to launch the product;

b) APPEAL- to target audience; and

152
c) GEOGRAPHICAL TIMIMG – to ensure that when the customers Distribution,
Pricing and
respond, in adequate, product will be available at all probable locations Promotions
of demand. Strategy for
Banking Services
Personal Selling : Sales promotion also can be done through personal selling.
in banking context, it is the clerk at the customers who is the primary contact
point with both existing and potential buyers (customers) well informed and
well-trained staff at the counter eager to explain the scheme to the customers
using smile, courtesy and proper communication process can ensure
successful sales promotion through personal selling within the branch, across
the counter.

The pro-active approach of the staff and projecting a harmonious image of

the bank taking keen interest in customer’s interest can do wonders to boost
the image and increase business of the bank.

• seminar
• exhibitions
• deposit mobilization-month/fortnight
• branch anniversary etc. are some of the other special sales promotion
measures taken bank
• The effectiveness of sales promotion depends upon the following four
variables:

The sales promotion is very important instrument which smoothens the

process of selling a product to the customer successfully. A well thought
strategy of sales promotion, like planned advertising, should be looked at as
an investment and not just another expenditure. Sales promotion is a bridge
between advertising and actual selling in the field. Like the sum 2+2 5, when
proper advertising is added with sales promotion, publicity and personalised
service it can bring rich dividends in promotional efforts.

153
Marketing of Banking Strengths of Sales Promotion
and Other Services

STRENGTHS WEAKNESSES

1 Developing favourable customer 1 The impact of a promotion

attitude campaign can be temporary

2 Flexibility for use at any stage of 2 It is supplementary to adverti-

product life sement and personalised
selling

3 Inducing instant purchase 3 Un-trained staff can create

behaviour of the buyer obstacles in promotional
efforts

4 It ensures continued brand loyalty 4 Over doing may result in

by customer adverse effects.

Having looked into the details of advertising and sales promotion we can
make a comparison as under:

Advertising Sales Promotion Personal

Selling

Strategy Pull strategy Pull as well as Push useful for

useful for push individual
consumer products
durables

Activity Promotion is Promotion is More in

important in important in both individual goods
consumer consumer and
durables individual goods

Efficiency High High Low

Effectiveness Low Low High

In marketing of banking services a combination of all three ensures success.

Publicity

We have just discussed the role of advertising and sales promotion at some
length. 'Publicity' is a generic term used for a wide range of activities ranging
from antics of stars in films or media to genuine methods of getting a product,
154
service or even an organisation (or even an individual) 'talked about' and Distribution,
Pricing and
more widely known to the public. Promotions
Strategy for
The Oxford English Dictionary gives definition of the word 'Publicity' as Banking Services
"The quality of being public, the condition or fact being open to public
observation or knowledge. The business of making goods or persons publicly
known."

The publicity differs from Advertising not in its aim but in its technique/s.
Whereas the latter has a more specific job to do i.e. inform and motivate,
publicity seeks to interest and draw attention, without essentially motivating
or informing the public,

Publicity can be good or bad. With high customer expectations and presence
of various consumer councils these days it is just possible that a branch of a
bank can get wide bad publicity for some mistakes/flaws or inadequacies in
giving service.

The publicity handouts or press releases are the commonest form of publicity.
Such a press release must

i) give specific facts

ii) not give any sales promotion suggestion

iii) be accompanied by photographs

iv) be prepared/sent well in advance of the function/event Publicity normally

is not paid for by the organisations. It comes through good liaison with
press reporters. journalists and column writers: Good public relation
strategy (P.R. strategy)

usually compliments publicity to boost the bank's image.

Publicity does the job of reducing ill effects of bad news and also positive
effects of good news if properly backed by proper public relation.

6.14 INTERNAL COMMUNICATION

Thus far we have seen the various promotional measures that are required in
the communication process to achieve the corporate goals and objectives of
the banks.

In order to supplement such external communication measures, most of the

banks also have internal communication strategies in the form of an Annual
Budget or business and corporate plan which spells out its goals, objectives
and targets during the financial year.

For such a budget or business plan, Head Offices of the banks assess the
business targets of various branches, divisions, zones and regions in the past
with reference to the achievement (of deposits and advances targets) and the
market shares vis-a-vis branches of other banks in that command area. Field 155
Marketing of Banking Managers, Planning Officers and P.R. or marketing specialists assist in this
and Other Services
function to assess the projected levels of business at micro (branch) and
macro (corporate) levels.

Internal communication used for this purpose uses "Top to Bottom' and
'Bottoms up' approach as shown below:

In this manner the expectations of the CMD are conveyed with respect to
corporate goals using data in the past and changes in economy and business
environment appealing to the managers/staff to realistically assess the
business potential in the common area of their branches and to arrive at
revised business targets as expected by corporate goals based on analysis of
market and potential of branches Motivational Techniques and Recognition
measures are used in such an exercise of budget or business plan.

The success of such an exercise largely depends on the realistic assessment of

past data and realistic targets set. The utilisation of positive strokes and
empathy in the top-bottom communications ensures positive
feedback/response from bottom to top.

The response and involvement by each level in deciding/accepting and

implementing business plan decides the success of such an important internal
marketing communication.

Besides business plan exercise, internal communication also involves:

1) House Journals
2) Circular
3) Corporate objective/Business plan booklet
4) D.O. letter for encouragement/appreciation
5) Posters, etc.

156
Integrated Marketing Communication Distribution,
Pricing and
Promotions
The integrated marketing communication is used through corporate strategy Strategy for
as can be represented through the following diagram: Banking Services

In order to know about steps in integrated marketing communication, we will

now look into the finer aspects of approaching the market (customer) through
media keeping in mind the various promotional plans as the extension of an
Integrated Marketing Process.

Advertising Sales Publicity Personalised

Promotion Service

It should cover The sales A publicity This should

the following: promotion plan plan should cover:
should cover: cover

1 Objectives Objectives Objectives Business Goal

Objectives

2 Targets Business Targets Targets

(Sales) Targets

3 Action Plan Action Plan Deciding Proper

products/ implementation
services to be strategy
important for
publicity
157
Marketing of Banking
and Other Services 4 Theme/Contents Scheduling/ Budget Privatizing the
Sequencing segments/
events scheme

5 Selecting Media Budget Evaluation Budget

6 Budget Evaluation Review of

services given

7 Feedback/ Evaluation
Evaluation of
Effect Result

As a shrewd marketing communication strategy, the promotion plan under

aforesaid four major categories must be:
1) Relevant
2) Implementable
3) Specific
4) Thorough
The integrated marketing communication should aim at :
1) Improving market share
2) Increase sales/Business turnover
3) Create Awareness
4) Create Brand loyalty
5) Create conducive climate for future sales
6) Establish a positive image
7) Reach untapped segments
8) Win over competitors
9) Highlight special aspects of products
10) Educate the customers

Such an integrated marketing communication should be hand-in-hand with

the broad corporate objectives and policies so as to ensure that it becomes
effective by meeting the necessary purpose.

Proper co-ordination and integration of selling, advertising and sales

promotion coupled with due publicity and personalised service results in a
better image of the bank and ensures achieving business targets efficiently
and effectively.

158
6.15 MARKETING INFORMATION SYSTEM Distribution,
Pricing and
(MIS) Promotions
Strategy for
Banking Services
Since having accurate data and information regarding Buyers' (Customers')
needs and wants is a very crucial requirement and also the feedback and
evaluation after implementing the integrated marketing communication; the
MIS i.e. Marketing Information System becomes another vital pre-requisite
of an integrated communication system.

This system (MIS) simply speaking, is an arrangement for ongoing and

regular collection of relevant market linked information. This is nut shell can
be shown as the computer system i.e.

This generally includes:

a) Internal Report System: In company information

b) Market Intelligence System: Information from outside

This serves TWIN objectives i.e. analysis of data for marketing opportunities
and locating grievances/problems and offering solutions to them.

MIS can consist of storing data in a compartmentalized fashion i.e.

1) Customers' details

2) Product range

3) Place (location)

4) Pricing details

5) Promotional needs and avenues

6) Competitors' details

7) Changes in external market conditions

8) Required changes in internal policies/operations

9) Newly identified product needs

10) Budgetary allocation and utilisation with respect to each aspect of

promotional mix, etc.

MIS is essential in the integrated marketing communication because the

opportunities existing in the market and the nature of problems cannot be
properly known without having such data and its proper analysis.
159
Marketing of Banking MIS serves the purpose of marketing support decision system and provides
and Other Services
means for selection, adoption and speedy operation with reference to
emerging market opportunities.

How to design a MIS?

Designing adequate and proper marketing information system involves three

important steps.

1) Defining the required information needs

2) Collecting, collating and storing required information

3) Utilizing the information through retrieval whenever required.

Thus, MIS has to be designed taking into account the business needs.

It should be put to operation and data should be processed by appropriate

persons. The systems should be monitored on an ongoing basis and periodic
review should be taken for improving it whenever necessary.

With reference to the Integrated Marketing Communication it can be said that

the highly competitive nature of banking business in the recent years is in a
way compelling banks to give their competitive edge in the marketing. In
such an effort is not a single arm of promotional strategy or integrated
communication which should be effectively used but rather all of them duly
blended

In addition to using all the above types of promotional measures and MIS, the
bank has to be prompt to launch a product or service at proper time to suit to
the customers' requirement.

To sum up, the Integrated Marketing Communication involves well-planned

strategy of using all types of promotional ways viz. Advertising, publicity,
sales promotion, personal selling etc in tune with its business goal to launch
the products/service to meet the customers' demands. Proper blend of
different strategies and use of a specific media ensures achieving the business
goals efficiently and effectively.

Some important pointers to be kept in mind while communicating with the

consumer are summarized in the Table below:

Dos Don'ts

Maintain your cool Be angry

Listen Be aggressive

Be positive Shift responsibilities

160
 Distribution,
Be humble Intempt Pricing and
Promotions
Strategy for
Call customer by name Neglect a customer Banking Services

Ensure details Criticize

Follow up till customer is satisfied

6.16 SUMMARY
The success of marketing of banking services apart from the service product
itself, depends upon the three pillars:

• Distribution
• Pricing
• Promotion strategies

Distribution refers to 'place' one of the 'Ps' in the marketing mix. If an

organisation has managed to create the correct marketing mix in all other
respects but cannot distribute the product to the customers, the product will
fail. Channels of distribution should be thought of as means to increase the
availability and/or convenience of service that help satisfy the needs of
existing users or increase their use among the existing or new customers.
Financial marketers must facilitate the right product for the right people at the
right price at the right place at the right time.

In the changing scenario of Indian Banking the concept of pricing is also

undergoing fast changes.

There has been a shift from fixed rates link to PLR and MLR to flexible rates
to induce more healthy competition and better customer service. The fee-
based service or service based fee concept is gaining ground and banks have
to make this concept more consumer friendly backed by improved quality of
customer service.

Various objectives, strategies and techniques of deciding proper pricing is the

bed rock of marketing of banking services. A proper understanding and
application of these will certainly sharpen your skills as professional bankers.
Pricing should be used as an effective tool to strike a balance between
additional satisfaction to customer and additional revenue for the bank.

6.17 SELF-ASSESSMENT QUESTIONS

1 Explain the role of distribution in the marketing mix. Elucidate the
influence of the characteristics of services, in restricting the delivery
system of banking service essentially to bank branches.

161
Marketing of Banking 2 Technological advancement has enabled the introduction of various
and Other Services
models of delivery for banking services. Please discuss.

3 Explain the development of different types of bank branches and other

models of delivery of banking service.

4 Explain briefly various methods of pricing financial products.

5 Illustrate the concept of break even analysis and it s relevance in pricing.

6 Pricing is the backbone of profitability in banks. Comment.

7 Define Promotion. What should be the "Ideal Promotion Blend" for

marketing banking services ?

8 Explain the process of communication in marketing. Give illustration

with reference to bank marketing.

9 What is sales promotion? Explain its role in marketing.

10 Write a note on publicity measures taken in banks.

11 What is integrated marketing communication?

12 What is advertising? Illustrate its role in marketing of banking services.

Quote advertisements by a few banks and what appealed you most in it
as a banker and as a customer?

6.18 FURTHER READINGS

• LMarketing Concepts and Strategies, Dr. S.J. Bedekar, Oxford
University Press-1991
• Marketing Management, S.A. Sherlekar, Himalaya Publication House-
1986
• The Formula for Successful Marketing, Ralph Mroz, Galotia
Publication-1991
• Professional Update for Faculty Development Programme, Dr.
Ravishanker, NIBM.

162
UNIT 7 ATTRACTING AND RETAINING Attracting and
Retaining Bank
BANK CUSTOMERS Customers

Objectives

After going through this unit you should be able to:

• explain the importance of customers satisfaction and customer service in

the context of the banking services.
• discuss the need for relationship marketing in the banking sector.
• identify the basic levels of customers relationships management.
• describe the process of creating service differentiation through service
quality.

Structure

7.1 Introduction
7.2 Defining Customer Value and Satisfaction
7.3 Factors Influencing Consumer Behaviour in Banking
7.4 Relationship Marketing and Attracting Customers
7.5 Customer Relationships Management
7.6 Retaining Customers Through Quality, Service and Values
7.7 Delivering Customer Value and Satisfaction
7.8 Image as a Managed Perception
7.9 Fulfilling Promises: Internal and Interactive Marketing
7.10 Customer Service and Customer Care
7.11 Bank Marketing: Future Challenges
7.12 Summary
7.13 Self-Assessment Questions
7.14 Key Words
7.15 Further Readings

7.1 INTRODUCTION
In the earlier units of this block you looked at the various elements of the
marketing mix for banking services. This unit deals with the strategies for
generating consumer satisfaction and retaining bank consumers.

In times past, management could arrive at a fair understanding of its buyer

groups through the regular experience of selling to them. But the growth in
the size of companies and markets has removed many decision makers from
direct contact with consumers. Decision makers increasingly turn to
163
Marketing of Banking statistical data and to behavioural theory and spend large amounts of time and
and Other Services
money to study and understand their consumers.

Mr. James E. Turner during the 11th International Retail Banking Conference,
at London, November 1992, opined:

For many financial institutions, profits are down;

Growth has slowed or stopped

Competitors are targeting the most profitable segments of your customer base.

He continued It is just the right time to think about Service Quality:

He argued that operating with a high level of service quality made sense
because it saved money instead of costing it. This rationale was based on the
fact that it was less costly to do a job right at the first time.

It is also less expensive to keep a current customer than to attract a new one,
as various studies have shown. Premium quality always brought premium
price from the most profitable hut demanding and heavy financial service
user customers, who generally did a switch banks at the slightest change

That a satisfied customer is not only more likely to stay with the bank, but
may also recommend it to others, was good and sufficient reason for Mr.
Turner to advocate service quality even in times of recession, even when
profit margins were at strain. The more affluent the customer is, the more
influential he is in referring other customers who are high users of financial
services.

Institutions that make service quality a high priority, tend to have high
employee morale and low employee turnover.

The situation prevailing in Indian financial markets is no different now,

particularly in the deregulated and liberalized environment. A lot of interest
has been generated by the terms service quality and customer service in
different contexts; in a market economy, the very survival of the
organisations depend on their ability to attract and retain their profitable
clientele and in a regulated economy, the power-groups of the consumers
glamour for qualitative performance when the protected firms fail to meet the
group's expectations. India is in a transitional stage now, and for certain, the
financial institutions will need to address the issue for their own benefit
rather than as an imposition from the regulatory authorities or power-groups.

7.2 DEFINING CUSTOMER VALUE AND

SATISFACTION
Today's in their choice of banking services customer face a vast array of
product and brand choices, prices and suppliers. While making a choice,
customers form an expectation of value and act on it. Then they learn or
164 experience whether the offer lived up to their value expectation. Customers'
satisfaction and their repurchases or continuance with the product are directly Attracting and
Retaining Bank
dependent on this experience. Customers

Customer delivered value as defined by Kotler, is the difference between

total customer value and the total customer cost.

Total customer value is the bundle of benefits customers expect from a given
product or service. The customer adds values from sources like - product,
services, personnel and image and may perceive an offer to be of more total
customer value, if additional value is perceived through some of these
sources.

Total customer cost consists of more than the monetary cost. As Adam Smith
observed two centuries ago, 'The real price of anything is the toil and trouble
of acquiring it. It includes the buyer's anticipated time, energy and psychic
costs. The buyer evaluates these costs along with the monetary cost to form a
picture of total customer cost.

A rational buyer's action would be to buy from whoever offered the highest
delivered value.

In bank marketing context, we may say that the following values are the most
sought after:

1. Safety: Since keeping money at home is very risky and creates a sense of
insecurity, every customer treats safety of funds as the primary value and
looks up to banks as safe place to keep their hard earned savings.

2. Convenience: The customer looks to branch location, timing and

procedures from convenience point of view and prefers that bank which
keeps this value as prime thing to suit to customers' expectations.

3. Growth: With growing needs of people and growing inflationary trends

of the market, customer assign priority to growth of their funds as
important value and banks have to ensure that this value also is
sufficiently taken care of to meet customers' expectations.

4. Speed: Customers rate time as high as money and due to automation and
rapid progress of technology and IT, speed is becoming yet another value,

5. Relationship: In marketing of banking services, service concept itself

rests on relationship between banker and customer and it grows with
approach and pro-active schemes marketed with care and personal touch
while selling the products to the customers.

7.3 FACTORS INFLUENCING CONSUMER

BEHAVIOUR IN BANKING
In a survey of customers' expectations done by Indian Banks' Association for
rural and urban market revealed the following:
165
Marketing of Banking Customer Expectation
and Other Services

Criteria % Preference/Response

RURAL URBAN

Suitable location 46 63

Quality of service 24 09

Variety of service 11 02

Interest rate 02 02

Canvassing 03 03

Security 03 06

Credit 07 03

Emergency need 04 07

100 100

Each segment of customers has a different perception of a good bank and

quality of service.

Research and a study conducted by IBA/NIBM of factors that influence

behaviour of customers in banking indicates the following:

a) Location: Where a bank branch is located often influences the choice of

the bank. Subconsciously the consumer is looking for convenience and
what matters is whether the location of the branch is close to his home
or office. Very often the 'bank next door' often wins on that basis alone.

b) Safety: Depositors are very often placing their hard earned money in a
bank and a worrying factor for them is 'is the bank safe? To quell the
fear, the background of the bank, its promoters, international
connections, the years it has been operating in the country, all influence
the choice.

c) Returns: A consumer having satisfied himself that his money is safe

wants to be sure that the returns being earned are attractive.

d) Customer Service: The experience of the customer when he has been

within the branch will influence a strengthening or a weakening of the
166
 relationship. Speed. politeness and friendliness in the service are factors Attracting and
Retaining Bank
which do matter. Customers

e) Range of Services: With greater sophistication in the environment a

consumer gets more demanding and would like his bank to offer a
variety of services and products which increase convenience for him.
Example, phone billing + ATMs or offer him greater choice -a range of
term deposit products which offer him high returns and liquidity.

f) Easy Documentation and well-defined Eligibility Criteria: When a

consumer wants to borrow from a bank, what bothers him is 'Will I
qualify for the loan?" so a bank will do well to clearly establish the
eligibility criteria and simplify and make loan documentation easy.

Activity 1

The criteria listed above have been researched with respect to individual
customers. Talk to at least 3 organisation, elicit from them the criteria they
would consider most important to their definition of a "good bank". List these
criteria and comment upon how different, if at all, are these from the criteria
considered important by individual consumers.

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

7.4 RELATIONSHIP MARKETING AND

ATTRACTING CUSTOMERS
The term 'Relationship Marketing' was introduced in the 1980s and is a
relatively new and evolving concept. One definition is:

'Relationship marketing is the attraction, maintaining and nurturing

relationship with customers in a multi service organisation aimed at
enhancing customer relationships'.

There are three primary objectives for the study of relationship marketing:

1) Companies have changed their perspectives as regards their relationship

with customers. Emphasis has changed from a transaction focus to a
relationship focus aimed at long-term customer retention.

2) In addition to customer markets, the organisation is concerned with the

development and enhancement of enduring relationships with other
167
Marketing of Banking external markets including suppliers, potential employees, opinion
and Other Services
leaders and influences and people providing referrals, as well as internal
publics.

3) The integration of marketing activities, customer service and quality

standards is essential to achieve a strong and stable relationship
marketing orientation.

Customers have become more individualistic, quality conscious and

impulsive in their buying behaviour. Any service organisation which wants
more than one-off sales has to nurture the relationship with existing
customers. Various international studies have proven that retaining existing
customer, and building loyal repeat buyers, costs only one- fifth as much as
acquiring new ones.

So companies need to monitor customer service at every level including

internally, because personnel who treat one another well serve customers
better. Successful companies listen to everyone in the distribution chain-
dealers, distributors, retailers etc. They know that the relationship does not
end with the sale, so they try to stay as close as possible to their customers.
That is how they get to the next sale.

With the costs of generating and maintaining databases dramatically

decreasing over the last decade, the age of relationship marketing is rapidly
reaching both maturity and sophistication. As databases collect and store the
right information about your customers and prospects, through the sales force,
branch network, letters and telephone calls, the database becomes the focal
point for all marketing activities from customer loyalty programmes to
internal communications.

To build a productive and profitable relationships with target consumers, the

marketer needs to tailor general mass marketing messages into several
different messages, targeted directly at individuals. The marketer then can
reward regular customers and cement their loyalty. Also reactivate lapsed
customers, tempt away competitor's customers and cross

sell new products and services to the existing customers. You can also reach
critical audiences such as your sales force and your shareholders to motivate
and inform them about issues that affect them personally.

There are simultaneous and major long-term benefits both to the marketer
and the consumer. Firstly, accurate targeting produces fewer communications
with less wastage and better results. Incorporating a relationship marketing
strategy allows for the fine tuning of the marketing communications plan and
schedule.

Secondly, a databased marketing strategy can create a stronger company

and/or stronger brand image. This is because, the mass communication and
direct promotion efforts work together and result in both sales and awareness
168 increases.
As Theodore Levitt says, "The sale merely consummates the courtship. Then Attracting and
Retaining Bank
the marriage begins. How good the marriage is depends on how well the Customers
relationship is managed by the seller".

Activity 2

Carefully observe the marketing communications made by banks in India.

Can you identify banks which are focusing on relationship marketing in their
advertisement List these banks and the type of communication created.

Bank Appeals used

1…………………… …………………

2……………………… ………………..

3……………………… ………………..

4…………………….. ………………..

Customer Markets

Customer must, of course remain the prime focus area for marketing activity.
But the focus needs to be less on "transactional marketing' and example on
the one-off sale or hooking a new customer and more on the building of long-
term client relationships.

As companies are starting to recognize that existing customer are easier to

sell to and are more profitable the lifetime value of the customer the retention
of existing customers become even more critical. As mentioned earlier, it
costs five times more to hook a new. customer as it does to retain an existing
one.

This is not to say that new customers are not important - indeed they are vital
to the future of most financial service businesses. A delicate balance needs to
be maintained the efforts directed at existing and new customers.

Transaction Marketing and Relationship Marketing

The critical differences between transaction and relationship marketing can

be contrasted

as below:

Transaction Relationship

Single sale focus Customer Retention focus

Product feature orientation Product benefit orientation

Short time frame Long time scale

169
Marketing of Banking
and Other Services Low emphasis on customer service High customer service

Moderate customer contact High customer contact

Moderate quality concern High quality concern

Some service organisations have adopted the relationship focus, but it is

noticeably absent in many others. Unfortunately, many companies still take
the transactional route which has both limited utility and profitability. The
investment made in winning a new customer, once successful, is immediately
transferred to the next potential customer. Little effort goes into keeping that
customer and the economic benefits of customer retention are often ignored.

Many marketers put their main efforts on the initial activities of identifying
prospective customers and attempting to convert them into customers, rather
than on both deepening and widening the scope of the relationship. It is
ultimately more rewarding to ascertain the needs of customers and cross sell
additional products and services which will subsequently result in strong
supporters and active advocates for the company and its services. For
example an ANZ Grindlays Bank current account holder could well be
receptive to applying for a credit card as car loan, loans against assets etc.

Moving customers up the consumption and loyalty ladder is not easy.

Marketers need to explicitly know, in great detail, what each customer is
buying and how every customer is different and how the marketer can
continue to offer additional product benefits and service advantages that will
distinctively differentiate its offerings. Essentially, one of the ways to change
a casual customer into a committed customer is to replace customer
satisfaction with customer delight that is by providing service quality that
exceeds customer expectations.

Referral Markets

The best marketing is that which is carried out by the company's own
customers; that is why the customer loyalty ladder and the creation of
advocates is so important. But existing markets are not the only sources of
referral. Referral markets to under many names intermediaries, connectors,
multipliers, agencies and so on.

An example from a bank will serve as an example here. Referral sources

from the bank included insurance companies, real estate brokers, accountancy
and law firms as well as existing customers and internal referrals. An internal
study was conducted for a bank which reflected the amount of businesses that
originated from referral sources. It showed how important these sources were,
although the bank had done little in the traditional sense to promote itself in
this area.

170
A strategy retreat was subsequently organised which included sessions on Attracting and
Retaining Bank
referral sources, including presentations from several important Customers
intermediaries. The bank received a lot of criticism during these presentations.
Made aware through it research of the importance of this business, the bank
established a task force to develop better relations with referral sources and
establish a marketing plan to deal with referral markets. The result was
noticeable and continued improvements in business generated by referral
sources.

Most organisations will need to take similar action. The current and potential
importance of referral sources should be established and a plan developed for
allocating marketing resources to them. Efforts should be made to monitor
results and cost benefits. However, it is worth emphasizing that developing
these relationships take time and that the benefits of increased marketing
activity this area may to come to fruition immediately.

Supplier Markets

The relationship between an organisation and it suppliers is undergoing

fundamental changes mainly under the influence of the Japanese. The old
adversarial relationship where a company tried to squeeze its suppliers to its
own advantage, is going way to a relationship that is based more on
partnership and collaboration. One can sense good commercial value in this.
Manufacturers in the Asia-Pacific region typically spend over 60% of total
revenue on goods and service from outside suppliers.

This new relationship has been termed differently at different places. For
example, at AT&T, it is 'vendor ship partnership'; at electronics group
Phillips in Europe it is called 'co-makership". In the US, it is referred as
reverse marketing. Whatever the term, however the aim is close co-operation
between customer and supplier from a very early stage, mutual concentration
on quality, commitment to flexibility, lowest costs and long- term
relationships.

Recruitment Markets

The key scarce resources for business is no longer capital or raw materials
they are skilled people, a vital perhaps the most vital element in customer
service delivery. An the situation is not getting easier, even if unemployment
climbs to historic levels. The reason: demographic trends. The new skilled
workers entering the labour market originate from the following key
groups :16-24, and 25-34. If demand outstrips the supply, which is quite
possible then effectively marketing an organization to its potential employees
will become vital success factor. A brief case study shows the kind of effort
that may have to be made:

Several years ago a large and well known accountancy practice was having
problems attracting new recruits. The reasons were hard to discover. Its
recruitment was old fashioned and lacked visual impact. A marketing plan to
171
Marketing of Banking try improve the situation involved redesigning recruitment literature (with the
and Other Services
help of recent graduates), sending the brightest partners on university visits
with managers with interesting experiences to recount, and sponsoring
awards and prizes at target universities. As a result of this marketing plan, the
firm's offers to acceptances ration increased by nearly 200% within two years.

Activity 3

With respect to your own bank and at least one other bank that you are
familiar with, identify the efforts that the banks have made to reach and
cultivate

a) Referral Markets

b) Supplier Markets

c) Recruitment Markets

Do you think these efforts are sufficient? Give your suggestions for creating
an adequate level of such efforts for your organisation.

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

………………………………………………………………………………….

7.5 CUSTOMER RELATIONSHIPS

MANAGEMENT
All markets require equal levels of attention and in that respect the customer
market cannot be excluded. This is where the role of customer relationship
management comes into play.

The seven activities that constitute customer relationship marketing/After

marketing' are the following:

1) Establishing and maintaining a customer database

2) Blue Printing or planning customer contact points
3) Analyzing informal customer feedback
4) Conducting customer satisfaction surveys
5) Managing communication programmes
6) Hosting special events or programmes for customers
7) Auditing and reclaiming 'Lost Customers'.
172
Successful 'After marketing' has direct impact on the customers. It shows the Attracting and
Retaining Bank
customers that the marketer: Customers

• Appreciates their business

• Is interested in maximizing their satisfaction
• Cares about their problems
• Is interested in their suggestions and inputs
• Wants their repeat business

So we find, that acceptance and relevance are the key twin concepts of
successful 'after marketing'.

Customer Information database

The customer information database should include data on the following

• Current customers
• Prospective customers
• Lapsed on lost customer

'Conversion' ratios and 'loss ratios should be calculated and targets

established.

Customer Satisfaction Measurement

Organisations that develop and implement customer satisfaction programmes

derive several benefits by delivering value addition:

• A deeper understanding of the buyer-seller relationship can be developed,

for both party's benefit.
• The organisation/bank focuses on delivering measurably high standards
of customer satisfaction not in just being competitive.
• A customer satisfaction audit can also monitor how 'front line' employees
affect customer satisfaction.

Managing Customer Communication Programmes

Every organisation has a set of priority communication goals. They are:

• To position the bank in a distinctive manner

• To keep customers informed on what is new
• To educate customers about the banks products and services and usage
conditions.
• To reaffirm the customer's purchase decision, and lower post purchase
dissonance
• To stimulate cross-selling: promote the bank's range of products and
services to potentially eligible customers.
173
Marketing of Banking Banks with a large retail branch network use a variety of communication
and Other Services
vehicles to promote their products and services to both existing and potential
customers, some of these are:

• Individualised letters on new product introductions

• Special offers for affinity products, e.g. gold, credit cards to high net
worth customers auto loans for corporate etc.

Special Events and Programmes for Customer

Banks that have carefully segmented their customer universe can use a host
of methods to address key customer groups, as below:

• Bank newsletters
• Corporate videos
• Special interest magazines
• Invitations to cultural and other events
• Affinity product introductions

All these devices seek to create a deeper relationship with customers and also
communication a sense of belonging to an exclusive club. For example, a
citigold credit card holder may receive complimentary copies of a specially
conceived and produced quarterly magazine; invitations to exclusive music
and theatre performance; discounts at five star hotels etc.

Lost Customer Programme

Banks should also implement ongoing studies to track the status of lost
customers so that appropriate actions can be taken to stem the attribution rate.

The key issues monitored through these studies are the following:

• Know who your lost customers are

• Find out why they are left out
• Establish if the problem can be fixed Apologize if it's the bank's fault
• If the problem can be fixed, fix it
• If the problem cannot be fixed, monitor the situation to see if:

a) The banks' ability change

b) The customer's preferences or personnel change.

Lost customer programmes are becoming more critical in a highly

competitive environment because customers that have deserted the
organization may often have a residual loyalty and some inclination to be
won back. The bank already has customer information files on this sub-group,
and knows them, so these customers can be reconverted cost effectively and
can be more profitable than new customers,
174
7.6 RETAINING CONSUMERS THROUGH Attracting and
Retaining Bank
QUALITY, SERVICE AND VALUES Customers

Customer Satisfaction

'Satisfaction is the level of a person's felt state resulting from comparing a

product's perceived performance (or outcome) in relation to the person's
expectations".

Therefore, the satisfaction level is a function of the difference between

perceived performance and expectations. If the performance falls short of
expectations, the customer is dis-satisfied. If the performance matches
expectation, the customer is satisfied. If the performance exceeds
expectations, customer may be highly pleased or delighted.

What factors decide or influence 'expectations'?

Expectations get formed, on the basis of the buyer's past buying experience,
statements made by friends and associates and marketer and competitor
information and promises. If the marketer raises expectations too high, and
the company cannot match its delivery with the expectation level, the buyer is
likely to be disappointed. On the other hand, it the company sets expectations
too low, it won't attract enough buyers although it will satisfy those who buy.

Most successful companies raise expectations and deliver matching

performances. These companies are aiming at 'Total Customer Satisfaction'
(TCS). Another observed characteristics of the market place is that those who
are just satisfied, find it easy to switch suppliers when a better offer comes
along. Those who are highly satisfied, are much less ready to switch.

Defining Service Quality

One of the difficult aspects of managing service quality is establishing a

common understanding of what we all mean when we talk about it. A one
sentence description of what constitutes acceptable service quality will be
significantly different from one person to the next. The definitions given even
by the staff within a bank may vary, depending on the level of the staff in the
organisation. Here are just a few ways in which individuals define quality:

• Courtesy
• Problem-solving ability
• Environment
• Speed
• Accuracy
• Range of service.

Service quality, one of the potentially significant weapons of competition, is

just now gaining an important role in the strategic marketing process at many
175
Marketing of Banking institutions. Its growing importance is in part, a reflection of consumer
and Other Services
themselves. They are better educated and more affluent than any other
segment of consumers in the history of mankind and they are much more
demanding.

Differentiation through Quality

Competing on the basis of service quality is very appealing from the

marketing perspective, because prime consumer segments seek it and because
competitors cannot match it as easily as they can match pricing or product
change. There are several reason why service quality is so difficult to match
or even so difficult to achieve:

Service quality is culture, not equipment. Adding a new ATM system is

relatively easy when compared with the task of taking the diverse range of
your employee's attitudes and molding them into a cohesive and consistent
service culture. Unlike equipment, their performance can vary significantly
between good days and bad days. Furthermore, they cannot simply be
reprogrammed to change old habits into the new customer-oriented actions:
altering behaviour takes time. In short, people are human;

In the past, we have focused more on the operations and security activities of
delivering financial services than on the human side of the equation. We may,
for example, try to teach tellers to be friendly and thank customers but at the
end of the day, the only things we monitor are their technical errors and
drawer count. In turn, tellers are rewarded, or not rewarded, based only on
how they perform the operational aspects. It is therefore not surprising that
customer service is difficult to improve, and

There is a difficulty in communicating what we mean by high quality service

from the top ranks of the institution, down through middle management to
the people who deliver service on the front-line the tellers, receptionists,
personal bankers and lending staff for example. All bank chief executive,
presidents or directors say that high quality service is a main priority in their
institutions. At the same time, this is often not translated into the service that
customers actually receive when they do business with the bank.

The research by A Parasuraman et al have focused on developing a procedure

for quantifying customer's service quality. The research suggested that
service quality can be measured on the following five dimensions:

Reliability : The ability to perform the promised service dependably

and accurately.

Tangibles : The appearance of physical facilities, equipment,

personnel and communication materials.

Responsiveness : The willingness to help customers and provide prompt

service.

176
Assurance : The knowledge and courtesy of employees and their Attracting and
Retaining Bank
ability to convey trust and confidence. Customers

Empathy : The caring individualized attention provided to the

customer.

In order to develop greater understanding of the nature of service quality and

how it is achieved in an organization, a service quality model was developed
by Parsuraman and eal in 1985 Their model clearly indicated that consumer's
quality perceptions are influenced by a series of five distinct gaps occurring
in organizations. These gaps which can impede delivery of services that
consumers perceive to be of high quality are:

Gap 1 Difference between consumer expectations and management

perceptions of consumer expectations.

Gap 2 Difference between management perceptions of consumer

expectations and service quality specifications.

Gap 3 Difference between service quality specifications and the service

actually delivered.

Gap 4 Difference between service delivery and what is communicated

about the service to consumers.

Gap 5 Difference between the perceived service and expected service.

This gap depends on the size and direction of the first gaps associated with
the delivery of service quality.

Another work of the same team of researchers identified an exhaustive set of

constructs that could affect the magnitude and direction of Gap 4. Most of
these constructs involved communication and control processes used to
manage employees, as well as consequences of these processes.

They summarized by stating that the service quality is a subjective

assessment that customers arrive at by comparing the service level they
believe an organization ought to deliver to the service level they perceive is
177
Marketing of Banking being delivered. Extensive qualitative research conducted in the recent past
and Other Services
by Parsuraman and et al suggests that service-quality deficiencies perceived
by customers, e. the gap between their expectations and perceptions, are
caused by a series of organizational gaps.

• Marketing information Gap: inadequate or inaccurate management

understanding of customer's service expectations.
• Standards Gap: Management's failure to develop performance
specifications reflecting customer's expectations.
• Service Performance Gap: Discrepancy between service
communication to customers describing the service actually delivered.

Developing Better Service

To use quality effectively as a marketing strategy, Bank managements should

play a pivotal role in the service design and implementation. Their function is
to guide the programme to fulfil consumer expectations, which also change
from time to time. This is done through such activities as evaluating your
competitors to see how you compare, and researching consumers to identify
your strengths and weaknesses.

In managing the human side of quality service, it is typically most efficient to

plan from the top down, and implement from the bottom up. This means the
quality imperative is defined by the highest level of management, but
implemented in waves, starting at the front line of the bank their tellers. The
reasons to start there is that they create more customer contact than any other
area of the bank. When Jan Carlzon embarked on the service quality
programme for Scandinavian Airlines in the mid-1980s, he defined these
types of contacts as "moments of truth", during which the success or failure
of his airline would ultimately be determined. These "moments of truth" will
be positive, neutral or negative for the customer depending on how he
perceives to have been attended to by the person with whom he had to have
interaction.

A quality programmer can be effectively started at counters where more of

the transactions are relatively straightforward and routine, and where basic
standards distinguishing high quality form low quality service can be easily
identified. Furthermore, the initial training required can be completed in a
matter of days or weeks, and measurement can be achieved directly and
accurately.

From the should be rapidly extended to reception and telephone service, new
accounts or personal bankers, extending upward through the organization to
commercial lending, trust and private banking.

Counter personnel should be rapidly extended to reception telephone service,

new accounts or personal bankers, extending upward through the
organization to commercial lending, trust and private banking.
178
Counter personnel with little service can pose a special challenge because, Attracting and
Retaining Bank
their perception of what constitutes a superior level of service can be Customers
radically difference from what your customer has in mind. Thus, when senior
managers talk among themselves about high quality service, they may all
have a common concept in mind, but their ideas of quality will probably be
different from those of lower staff levels in the bank. Tellers may not, for
example, be totally confident when dealing with the public, so they may
speak softly, keep eyes averted from the customer, forget to smile and almost
never thank the customer by name. These are all actions which could lead the
customer to feel unwelcome.

7.7 DELIVERING CUSTOMER VALUE AND

SATISFACTION
"Moments of Truth'

The metaphor of the 'moment of truth is a very powerful idea for helping
people in services business shift their point of view and think about the
customer's experience. Donald Porter as Director of customer service quality
assurance for British Airways, points out:

If you are a service person, and you get it wrong at your point in the
customers' chain of experience, you are very likely erasing from the
customer's mind all the memories of the good treatment he or she may have
had up until you. But if you get at right, you have a chance to undo all the
wrongs that may have happened before the customer got to you. You are
really the moment of truth.

Every time a service organization performs for a particular customer, the

customer makes an assessment of the quality of the service, even if
unconsciously. The sum total of the repeated assessments by this customer
and the collective assessments by the customers establish in their minds the
organisation's image in terms of service quality.

Managing service means having as many of the moments of truth as possible

come out well. As a customer, or the received of a service, one experience the
moment of truth as intensely personal. Most will forgive "system" screw-ups,
even to a preposterous degree, If there is someone there who acknowledges
the personal needs and makes an effort to make things right. The concepts of
managing the moments of truth is the very essence of service management.

When the moments of truth go unmanaged, the quality of service regresses to

mediocrity Karl Albrecht/Ron Zemke

Karl Albrecht and Ron Zemke, in their book 'Service America', indentified
three important characteristics that differentiate outstanding service
organizations from mediocre ones:

Three features outstanding service organizations have in common

179
Marketing of Banking 1. A well conceived strategy for service: This service concept the
and Other Services
attention of the people in the organization toward the real priorities of
the customer.

2) Customer-oriented front-line people: The effective front-line person is

able to maintain an "otherworldly" focus of attention by tuning o the
customer's current situation, frame of mind, and need. This leads to
level of responsiveness, attentiveness, and willingness of help that
marks the service as superior in the customer's mind and makes him or
her want to tell others about it and come back for more.

3) Customer-friendly systems: The delivery system that backs up the

service people is truly designed for the convenience of the customer
rather than the convenience of the organization. The physical facilities,
policies, procedures, methods, and

The Triangle of Service

Kari Albrecht (1984) suggested that the relationship between the company
and its customer be represented by the service triangle model as shown below:

The Service
Strategy

The Customer

The Systems The People

This triangle model is radically different from the standard organization

charts in that it represents a process rather than a structure, and it forces us to
include the customer in our conception of the business.

A customer-driven organization, has to start with the customer as the basis

for defining the business. That the company exists to serve the customer is
perhaps never disputed. But the company has to consciously and deliberately
organize and manage for service

They suggest that first and foremost, a clear conception of the motivational
structure of the customer, needs to be in place. Some kind of workable model
for service can be attempted only thereafter. The aim would be to agree upon
a basic business strategy that will service to differentiate company from its
competitors, in the mind and in the experience of the customers. In many
cases, it is a very challenging task to formulate a nontrivial philosophy of
service that can really make a difference. The service strategy must mean
something concrete and valuable to the customer, something he or she is
willing to pay for.
180
Armed with an understanding of the customer's buying motivations and Attracting and
Retaining Bank
concept for service that will position the bank advantageously in the market- Customers
place, the marketer must explore the interplay between the strategy, the
people of our organization, and the systems that are available to them to get
the job done.

It is instructive to take each of the parts of the service triangle and to explore
some of the obvious interactions. Each of the lines in the diagram can
represent an important dimension of impact.

The Customer-Service Strategy connection.

It can be taken to represent the critical important of building the service

strategy around the core needs and motives of the customer. This is no place
for guesswork. We need to find out, if we don't really know, what goes on in
our customer's mind when he or she thinks about out kind of service.

b) Conversely, the line that flows from the service strategy to the customer
represents the process of communicating the strategy to our market. It is not
nearly enough that we give good service, or that our service is uniquely better
in some way; the customer has to know that fact for it to do us any good.

The Customer-People in Organisation connection

This line connecting the customer and the people of the organization explains
itself. It is be crucial point of contact, the continuation interplay that accounts
from more of the moments of truth. It is this interplay that presents the
greatest opportunity for gain or loss, and for creative effort procedural
systems as well as physical hardware. Many negative moments of truth in the
business world arise because of system peculiarities and malfunctions. When
the customer's interest is treated as an afterthought in the design of service
delivery systems, the situation is virtually programmed for mediocrity and
dissatisfaction. Forms that don't make sense and are impossible to fill out,
illogical or confusing building layouts, and administrative process that
burden the customer with tasks that could be handled by service employees
all make it more difficult for the people to provide service effectively.

iv) Systems-People; Strategy-Systems; Strategy-People connections

a) The three outer lines of the service triangle tell their own individual
stories as well. For example, think about the interplay between the
people and the systems. How often have you seen highly motivated
people prevented from giving the quality of service they really wanted
to give because of nonsensical administration procedures, illogical task
assignments, regressive work rules, or poor physical facilities? In
situations like these, the service concept is nothing more than normal
procedure. Front-line people are usually much better prepared than their
manager to find ways to improve the systems they use every day. The
big question is do, their managers realize that facts, and are they willing
to invite the people to contribute what they know? 181
Marketing of Banking b) The line connection the service strategy with the system suggests that
and Other Services
the design and development of the physical and administrative systems
should follow logically from the definition of the service strategy. This
seems obvious, but given the inertial resistance to change found in most
large orgnisation, it sometimes seems like a Utopian precept.

c) And finally, what about the line that flows between the service strategy
and the people? That line suggest that the people who deliver the
service need to have the benefit of a clearly defined philosophy from
management. Without some sense of focus, clarity and priority, it is
difficult for them to keep their attention on service quality. The
moments of truth tend to deteriorate and regress to mediocrity.

7.8 IMAGE AS A MANAGED PERCEPTION

What are some of the factors that come to your mind when you hear the word
image? These might include terms like goodwill, credibility, honesty, ethics,
reputation, trust, a sense of permanence, consistency, quality, and integrity.
These are some of the images a bank can have. But what is an image ?

A practical definition of the term image from the standpoint of business

strategy is "a managed perception on the part of the customer of the way the
company does business." How do we want our customers to perceive us ?
What kind of an image do we want to earn by the way we conduct out affairs?

Banks reflect their mission or values to project such image in their literature
like brochures and in advertisements like ::

• A bank than helps

• A bank that cares
• A bank with the personal touch
• Why go to 10 counters for one work, get 10 works done at 1 counter
• A bank to bank upon
• A bank for all needs etc.

Understanding how a bank's image is created is critical to the process of

building one. The moments of truth concepts remind us that our image
improves or deteriorates moment to moment and day by day as a result of the
sum total of our customer's experience in dealing with us. We manage the
customer's perception - our image by managing the moments of truth.

Let's return now the concept of the service triangle (See Figure). When we
can find the elements of (1) a meaningful service strategy (2) customer-
oriented front-line people and (3) customer-friendly systems working in self-
reinforcing interplay, we are doing what is necessary to earn a positive image.
We are creating such an image indirectly by managing the customer's
experience. We are reinforcing his or her perception of our organization by
182 making things come out right at the moments of truth.
7.9 FULFILLING PROMISES: INTERNAL AND Attracting and
Retaining Bank
INTERACTIVE MARKETING Customers

Employee’s abilities and motivation to meet the expectations of customers as

created by external marketing efforts are backed up by internal marketing
efforts. By creating and maintaining a service culture through marketing
campaigns and activities directed towards the employees the organization
may prepare its employees for the moments of truth.

Personnel management policies based on detailed understanding of

employees' personal needs of jobs, life and career path, role ambiguity, role
conflicts and job conflicts, employee motivation etc., would have a definite
impact on employees' performance in the moments of truth of buyer-seller
interactions.

Marketing effort is towards establishing developing and commercializing

long term customer relationships, so that the objectives of the parties
involved are met. This is done by mutual exchange and keeping of promises.
According to one definition the most important issue in marketing is to
establish, strengthen and develop customer relations where they can meet
business objectives. And the marketing functions envelops the total
organization, even outside the marketing department, (called part time
marketers) and also covers activities (beyond Ps) which exercise an impact
on the current and future customers. Another point in a service organization
is that the effective or ineffective operations management influences the
perceptions of the organization and therefore both HRD and operations
management need to be integrate with marketing.

It is perceived that there is a need to achieve integration between marketing,

operations, human resource, R & D etc. It is in this context Regin McKenna
remarked that in service organization "marketing is everything and
everything is marketing". The underlying idea is that everyone in the
organization who is in customer contact (personnel) should be oriented
towards customer relations. It implies that the firm has to manage the
business from the customer's point of view. The business processes are to be
such as would meet customer needs and technologies of service delivery are
to be harnessed to improve customer satisfaction.

Quality in service industries would imply, executing customers' expectations,

timeliness, accuracy, responsiveness, performance, etc. A higher quality
would obviously generate brand loyalty, word of mouth publicity and
willingness to pay higher.

The relationship has to be kept vibrant to remain attuned to customer's

changing expectations. Scheduling of service augmentations to meet the
specific need of the customer, at the precise moment when these needs get
developed, would definitely enhance the customer's delight.

183
Marketing of Banking Managing service recovery is also important in building customer satisfaction.
and Other Services
Exceeding customer expectations when things go wrong, may leave a
stronger positive impressions on customers.

If there suggestions are followed by each functional department and

personnel, then an organization can create and keep loyal customer for a
profit.

7.10 CUSTOMER SERVICE AND CUSTOMER

CARE
Financial services involve the continuous delivery of service and a strong
membership relationship. Hence relationship management is extremely
important. It in turn depends on the quality of the service offered. If the
perceived quality of the financial service exceeds

consumer expectations, there is a basis for building a relationship. If the

reverse prevails, the relationship tends to deteriorate. Service quality is of
strategic importance in the marketing of financial services, and is considered
by some as one of the most important elements in the mis. Relationship
management is dealt with in greater detail in a later module.

These are two dimensions of quality of financial services Technical quality

and Functional quality. Technical quality depends on the know-how or
technical ability of the company. Functional quality comprises aspects such
as staff attitudes, customer contacts. internal relations, service mindedness,
approachability, appearance and personality of staff, access to specialized
staff and accessibility of location.

If is not generally accepted that financial services consumer's expectations of

quality are increasing, and that people are becoming increasingly critical of
the service they experience. In addition, financial service organizations are
becoming more aware of the importance of "looking after' their client base,
especially in the light of the increasingly competitive environment.

It is not just the competitive environment that is changing consumer attitudes

to service, technology also pays a role. Kreitzman sees technology as an
opportunity to increase service, however it is also accepted that technological
developments such as electronic banking and direct line insurance make
banks and insurance companies more impersonal, and less customer contact
could make customers less loyal. Marshall (1985) found that leadership in
technology was not such an important quality that customers want it in a
financial service company. Indeed customers are more concerned with
quality of services than with innovative features such as home banking (S.M.
Wong and Percy 1991).

184
Service Quality Attracting and
Retaining Bank
Customers
The most recent trend in many service industries has been their emphasis on
quality as a vehicle for sustaining competitive edge. Berry et al (1989)
believe that service excellence is key strategic weapon, highlighting that
service quality is the marketing strategy for the financial service industry.

Service quality must have the full commitment of every echelon in the
organization, but essentially it is the commitment of top management that
yields the initial quality orientation. "Effective quality strategies should
involve all levels of staff and should be supported, planned and directed by
managers at the top to the organisation". (D. Hutchins-1986)

Many definitions are applied to the concept of service quality, and phrases
such as 'meeting customer expectations', or 'providing customers with what
they want, when they want and at an acceptable cost' are well-known
explanations of the meaning of quality. Essentially, quality is a judgmental
issue relating to an individual's perceived expectations of service and actual
service performance.

It service organizations care about their employees as well as their customers,

the result should be increased motivation and satisfaction, and a higher level
of service quality compared with the quality expected by customers, and
therefore increased customer satisfaction and loyalty.

Customer Care

Customer care is an extension of customer service, but is wider in context.

Customer services implies and immediacy of actions, the focal point being a
tactical response to customer requirements. Customer care, on the other hand
is more strategic it is the planned provision of services in anticipation of
customer requirements. As already mentioned, customer care is essential if
financial organizations are to maintain their customer base.

Heinz Pekarek, Creditanstalt Bankverein, says thus:

A major criterion, in making a product or rendering a service, is creating

more value while using resources For the banks, quality is a means of
differentiating an otherwise homogeneous range of service in order to obtain
a "unique selling position" in the competitive environment.

A service or product is of high quality if it meets the demands and

expectations of the customer’s i. e. if the service or product can be matched
with customer's actual needs and expectations e.g. housing loan, car loan or
consumer durable loans by banks which help a customer to meet his growing
social needs and improve his status.

The satisfaction of customer needs depend on how far the bank optimizes its
internal procedures. Decisive factors or internal quality are technology and
organizational aspects. The following requirements must be met:
185
Marketing of Banking • Speed (Same day processing of transfers)
and Other Services
• Security (ensuring that transactions are handled correctly)
• Accuracy and
• Punctuality.

7.11 BANK MARKETING: FUTURE

CHALLENGES
Under the fast pace of liberalization, Indian economy is gradually opening up.
The globalisation of financial services is creating a 'pressure' effect on the
financial firms and companies making them more effective and productive.

Coupled with socio-economic changes, the I.T. related changes is bound to

change the complexion of Indian financial market and banking and marketing
of banking services is no exception to that. They are now required to design
new customer friendly products to cover the emerging needs of changing
preferences and the risk factor. As it is the slack in demand for credit has in
itself made all banks to come out in the arena of marketing their services with
easier terms and attractive packages. More and more banks are labelling their
products more effectively as only getting deposits is not going to generate
any field. The prudential norms are creating positive pressure on banks to be
more transparent, effective in recovery and to strengthen their capital base.
From just social angle, banks are now compelled to focus on optimum profits
not only for growth but even for healthy survival amidst the competition all
around.

If we review the changes in financial markets on the backdrop of 'future

challenges, it is realised that the financial services, in general, have
undergone a sea-change.

In the first phase of development, the emphasis was on setting up and

functioning of investment institutions, insurance business, leasing and
merchant banking firms.

In the second phase, the focus shifted on hire purchase, factoring, venture
capital funds and reforms in stock market and capital market.

In the third phase, the emphasis was on computerization, paperless trading,

depository’s innovative use of new financial instruments and integration of
financial services with the rest of the world.

Since there is strong emphasis on development of infrastructure sector as a

priority area of Govt policy it would need massive outlay and how the
financial institutions cater to its need will be a great challenge. The foreign
exchange market amidst the currency fluctuations and the trend of rupee
weakening will be another challenge to be faced. The increasing expenditure
vis-a-vis thinning margin and its compelling effect on controlling human
resources - in terms of not many fresh recommitment and schemes like VRS
186
are the challenges to HRD and their socio-economic effect has to be closely Attracting and
Retaining Bank
monitored. Customers

Effect on Banking and Latest Trends in Banking Marketing

Let us now review the latest glimpse of the latest trends in bank marketing
which will give a glimpse of the changing fabric of banking services and its
effect on marketing of banking services.

Latest Trends in Banking Marketing

The banking business is becoming more and more complex with the changes
emanating from the liberalisation and globalisation, with UTI, NSC,
Company Debentures and NBFCT competing in deposits and new private
banks and foreign banks competing in advances, with aggressive marketing
strategies, bankers are becoming growingly aware about the need for
marketing.

With the restricted (though now free to decide) rates of interest on deposits
and advances the main emphasis is being given on:

i) Efficient and courteous customer service

ii) Attractive and innovative schemes
iii) Developing subsidiary services
iv) Aggressive personalised selling strategy

Marketing has not remained just a strategy but many banks like Citibank,
Hongkong Bank in Foreign Bank Sector and State Bank of India, Canara
Bank among the nationalised bank sector adopted a pro-consumer philosophy.

The 'customer is a king' - thought is getting more and more deep-rooted. If

we take a look at the tables which give reasons as to why a customer leaves a
bank (a) in India and (b) in USA, it will be clear as to why banks are giving
top priority to quality of people (through continued training) and quality of
service (through continuous improvement) as the bedrock of a good
promotional strategy:

Why a Customer leaves a Bank?

In India % In USA %

Death 01 Poor Service 20

Moved away 03 Move away 45
Forms other relationship 05 Loan related problems 05
For competitive reasons 09 Services charges 10
Dissatisfied with products 14 Changed jobs 10
Indifferent attitude 68 Changed travel pattern 10
100 100 187
Marketing of Banking Since nationalisation, the Indian Banking scenario has been successively
and Other Services
changing each decade and the banking system today through more
transparency, is showing signs of maturity.

The changing environment directly affects bank's marketing strategy with

respect to the following categories:

i) Political/legal dimensions
ii) Technological dimensions
iii) Socio-cultural dimensions
iv) Economic dimensions
v) Competitive dimensions

With computerization on a large scale, the traditional concept of

communications are undergoing sea change. The letters are now replaced by
E-Mails. In place of cashiers and even tellers, ATMs are responding quickly
and for 24 hours. 'Plastic Money' is gaining more acceptance and popularity.
Home Banking, tele-banking, room service are the new catchy concepts
which attract the customer to appeal to his valuable time factor and
convenience.

The following Table will indicate the effect of changes in economy on saving
pattern which too is a very important dimension leading bankers to reorient
their marketing strategy

The money supply (M-3) has been affecting growth of banks' deposits which
is, in fact, the raw material for banking services. These is almost perfect co-
relation between money supply and deposit growth. Due to changing rates of
interest on deposits, there is also shift in the patters of short term, medium
term and long term deposits with Banks. Due to large supply of bank credit to
government and the corporate sector preferring to raise money through the
share market, it has also been affecting the growth of advances. This exerts
pressure on profitability which compels bank to go for low cost deposits and
higher rates on advances. This leads to more emphasis on selling to corporate
clients, The growth of market and vide spread of debenture and share culture
provides the corporate sector a direct access to saver causing dis-
intermediation. This too forces the banks to provide new types of services in
the investment area. The money market instruments also have shown
innovative additions like (CP) Commercial Paper (CD) Certificate of Deposit,
Stock invest, Mutual Money Market Fund, etc.

le the corporate sector, despite easy access of credit which enabled the small
and medium industries to widen their entrepreneurial base, the adoption of
Tandon and Chore Commit- see norms for credit decision and credit
monitoring (which had the objective of orienting the corporate borrower to
gain more and more for self reliance in equity), has been a compelling factor
for corporate sector to turn to capital market to raise additional funds/ equity
188
Now with more liberalisation of bank credit to corporate sector against the Attracting and
Retaining Bank
present slack state of affairs in the capital market, banks can aggressively Customers
utilise their marketing strategies to market their products/schemes to
corporate sector borrowers whereby the resources can be gainfully employed.
This can ensure comfortable profit margin for the banks and more
importantly higher economic growth through better industrial output
Changing banking scenario in India is causing changes in the marketing
strategies of commercial banks.

The need for being more competitive and transparent, to be socially

committed without sacrificing profits has compelled the banks to be more
conscious about quality customer service and to be sensitive to their changing
needs and expectations. The changing patterns of household and corporate
sector has affected the saving-borrowing patterns. This makes banks to think
of more assertive promotional strategies to attract new customers and
maintain the existing ones as satisfaction.

Due to the freedom to decide interest rates on deposits and advances vis-a-vis
the shifts in demand and supply of deposits of loanable funds, banks are
turning more towards relationship (bank) marketing and selling to corporate
clients. Instead of concentrating on high cost deposits and more number of
customers with low deposit, banks are preferring the corporate clients. Banks
are also devising new and innovative schemes to attract corporate borrowers.
Such an exercise has to be carried out to ensure that the cost of funds is kept
low and return are better so that profitability is maintained and banks can
strengthen their capital base as required by the Narasimhan Committee.

With relationship and transaction banking banks are also becoming more
quality oriented and offer quick and courteous customer service. To facilitate
this swiftly and selling to corporate clients better banks also have to have a
pro-active work culture and a flexible structure. The concept of venture teams
can be useful for the banks for selling suitably to the corporate customers as
it has the combination of line and functional type of organization. The banks
organisational structure for selling to corporate customers must be flexible
with motivated personnel who are properly empowered so that they can
mobilise the customers for long term banking relations. A corporate
marketing department can also be set up to cater to the corporate clients All
this requires proper promotional strategies

The bank marketing has, therefore, become a very complex and yet
interesting subject as it requires the knowledge of economics, sociology,
psychology, banking and also marketing concepts. The buyer behaviour and
socio-economic situation being constantly changing, an on-going monitoring
and reorienting the promotional strategy is the essence of effective marketing
of banking services.

189
Marketing of Banking
and Other Services
7.12 SUMMARY
We started off our discussion in this unit with the observation that
competition has been eating into the margins of banking industry.
Improvement of service quality is what will keep a customer and the cost in
doing a thing right at the first time is cheaper than the process of recovery. IT
is proved be far more expensive to win a new customer than to retain an
existing one and hence it is big business sense to keep the service standard at
high enough levels as per the perceptions of the client so that he does not get
tempted to look the other way.

Therefore the clear need of a banker is to understand the meaning of

customer satisfaction and the way in which this can be achieved through the
management of three crucial parameters viz quality, service and value.

Satisfaction level is a function of the difference between perceived

performance and expectations. If the performance falls short of expectations,
the customer is dissatisfied. If the performance exceeds expectations, he may
be highly pleased or delighted.

Expectations get formed on the basis of buyer's past experience, marketer and
competitor information etc. Successful companies raise expectations and
deliver matching performance, always aiming for Total Customer
Satisfaction (TCS).

Customer's experiences of moments of truth are based on certain expectations

created by the service provider. The traditional marketing efforts give
promises. Employee’s motivation and abilities to meet customer expectations
are backed up by internal marketing. So by creating and maintaining a service
culture through marketing campaigns and activities directed towards the
employees, the organization may prepare its employees for the moments of
truth.

Service quality must have the full commitment of every echelon in the
organization, but essentially it is the commitment of top management that
yield the initial quality orientation.

For banks, quality is a means of differentiating an otherwise homogeneous

range of services in order to obtain a 'unique selling position' in a competitive
environment.

It can be summed up that banks exist because of customers and that is why
their products and services must meet with customer's growing expectation in
terms of product price and delivery and the quality of the service.

7.13 SELF ASSESSMENT QUESTIONS

i) Explain the terms relationship marketing in the context of banking
services. How is relationship marketing different from loyalty
190 programmes?
ii) What are the essential factors affecting customers choice for bank Attracting and
Retaining Bank
customers? How do banks try to meet some of these expectations? Customers

iii) With respect to banking services, explain the concepts of service quality,
customer value and customer satisfaction. Briefly identify the sources of
the five gaps with respect to the discussion on gap analysis in the unit.

iv) What do you understand by the term "Moments of Truth", How can a
bank manage to convert most of its moments of truth into winning
transactions. Explain with reference to your own bank.

7.14 KEY WORDS

Relationship Marketing is an approach to marketing emphasizing on on-
going relationship between the bank and the customer, with emphasis on
customer service and quality.

Value chain is a tool to identify the organisation's activities which are

strategically relevant,

Support activities are activities designed to be perceived by the customer as

being of unique value extending offer beyond the customer's expectations and
contributing to shift in customer's perceptions about the organisation and
product.

SWOT Strengths, Weaknesses, Opportunities and Threats.

Organisation is a living being which has a life cycle and it grows. It is the
formation of an effective executive and the administration of an effective
direction.

Performance Budget is budgeting for the performance of an individual or an

organisation.

Relationship Banking Rather than confirming to only short-term relation, the

focus in this is on long term relation with the customer. Banks plans
hereunder to meet customer's total requirements and to ensure repeat business.

7.15 FURTHER READINGS

• Management Techniques, R. Mittal, G.K. Publishers-1996
• Marketing Management, Dr. Verma & Aggarwal, Forward Book Depot
1988
• The Formula for Successful Marketing, Ralph Maroz, Galotia
Publications-1990
• Dyanamics of Bank Marketing R.K. Madhukar, UBs Publisher-1990
• Essentials of Management, JL. Massie, Prentice Key, 1994

191
Marketing of Banking
and Other Services

192
 Attracting and
Retaining Bank
Customers

BLOCK 3
MERCHANT BANKING AND ALLIED
SERVICES

193
Marketing of Banking
and Other Services

194
 Issue Management
UNIT 8 ISSUE MANAGEMENT SERVICES Services

Objectives

After reading this unit you should be able to:

• Discuss the basics of Capital market.

• Explain the concept of merchant banker.
• Explain the role of merchant banker as issue manager.
• Describe the responsibilities of merchant banker.
• Identify the regulations governing the merchant banking activity.

Structure

8.1 Introduction
8.2 Merchant Banking in India.
8.3 The Capital Market
8.4 Issue Management
8.5 Role of an Issue Manager
8.6 Other Agencies Involved in Issue Management
8.7 Monitoring by SEBI
8.8 Self-Assessment Questions
8.9 Further Readings

8.1 INTRODUCTION
Merchant Banking as defined in the Narasimhan Committee Report means:

"Management and underwriting of new issues, syndication of credit and

provision of advisory services to corporate clients on fund raising and other
financial aspects."

A Merchant Banker has been defined by Securities and Exchange Board of

India (Merchant Bankers) Rules 1992, as "any Person who is engaged in the
business of issue management either by making arrangements regarding
selling, buying or subscribing to securities or acting as manager, consultant,
adviser or rendering corporate advisory services in relation to such issue
management".

Services provided by the Merchant Bankers include:

• Management, marketing and underwriting of issues

• Corporate advisory services
• Syndication of credit,
• Project promotion services ⚫ Investment advisory services 195
Merchant Banking • Venture capital
and Allied Services
• Financial collaboration
• Lease financing
• Hire Purchase financing
• Portfolio Management
• Brokerage and market making
• Project counseling
• Corporate restructuring and financial engineering Factoring
• Stock broking
• Custodial services
• Depository services
• Credit rating

Activity 1

List out the merchant banking services given by your organisation. Find out
the fee-based income earned by the hank through these services during the
last 3 years.

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

8.2 MERCHANT BANKING IN INDIA

Formal Merchant Banking activity in India originated with the setting up of a
Merchant Banking division by the Grind lays Bank in 1969. This was later on
picked up by other Banks and institutions.

Merchant Banker is required to be registered with SEBI for

i) Activities related with Capital Issue,

ii) debenture trusteeship,
iii) takeover or acquisition of shares, and
iv) portfolio management.

The merchant banker is an essential intermediary for Issue Management, in

the Capital Market. The Merchant Banker may be registered under any one of
the under-mentioned categories, as per SEBI Merchant Banking regulations
1992. given below:
196
 Issue Management
Category 1: To carry on any activity of the issue management, which will
Services
inter-alia consist of preparation of prospectus and other information relating
to the issue, determining financial structure, tie-up of financiers and final
allotment and refund of the subscriptions of and; to act as adviser, consultant,
manager, underwriter portfolio manager.

Category II: to act as adviser, consultant, co-manager, underwriter, portfolio

manager.
Category III: to act as underwriter, adviser, and consultant to an issue.
Category IV: to act only as adviser or consultant to an issue.
The capital adequacy requirement prescribed by SEBI for these four
categories should not be less than Rs 5 crore

The merchant Bank is required to pay requisite registration fees according to

the category, as per regulations in this regard.

Appointment of Lead Merchant Bankers: (Article 19, of SEBI Regulations

for MB)

All issues should be managed by at least one merchant banker functioning as

the lead merchant banker.

Provided that in an issue of offer of rights to the existing member with or

without the right of renunciation the amount of the issue of the body
corporate does not exceed rupees fifty lakh, the appointment of a lead
merchant banker shall not be essential.

Restriction on appointment of Lead Managers:

The number of lead merchant bankers may not exceed in case of any issue of:

Size of Issue No of lead Merchant Bankers

a) Less than 50 crores Two
b) 50 crore & above up to 100 crore. Three
e) 100 crore & above up to 200 crore four
d) 200 crore & above up to 400 crore five
e) Above Rs 500 crore five or more as may be agreed by
the Board

Activity 2

In relation to the concepts studied by you in Unit 3, Block 1. Prepare a plan

for marketing any of the merchant services at your branch, with details about
the risks and remedies there against.

…………………………………………………………………………………

…………………………………………………………………………………
197
Merchant Banking …………………………………………………………………………………
and Allied Services
…………………………………………………………………………………

…………………………………………………………………………………

8.3 THE CAPITAL MARKET

The Financial Market consists of:

i) Money Market, which involves raising or short term assets and

ii) Capital Market, which refers to raising of long term financial assets.

The Capital Market is classified as: a) Primary Market and b) Secondary

Market.

The Primary Market

This refers to the market of new issues of capital and debt instruments. The
Primary Market operations include:

i) New issues of shares by new and existing companies,

ii) Rights issues to the existing shareholders,
iii) Public offers and issue of debt instruments such as bonds, debentures.

The investor offers to invest in to the company directly, through the

capital/debt issue mechanism. There is no trading of securities, and hence this
market is called as a Primary market. The investor benefits by earning his
share of profit through the dividend or rights issue/capital appreciation, and
the Company gets the capital at cheaper rate from the general public.

The Institutions involved in the Primary Market

1. A regulatory body, ( SEBI in India), to ensure fair play and protect

interests of all the parties concerned,
2. The Company which desires to raise capital/debt through public issue,
3. The Merchant Banker, the registrar to the issue, the depository
4. The underwriters to the issue,
5. The Investors.
6. The Stock exchange for listing the shares after issue, the brokers and sub
brokers.

Secondary Market

The secondary market is where the securities acquired by the investor are
traded. The market provides liquidity to various capital market instruments.

The secondary market players are the investors who are willing to sell or buy
the scrip the speculators who trade for profits only, the stock exchange which
198 routes these transactions of purchase and sell, and the broker/member of the
 Issue Management
stock exchange, investment adviser and the transfer agent. The regulator
Services
body (SEBI in India), takes care of interest of all the parties involved,
specially the investors.

The intermediaries involved in the secondary market

1. Broker/member of stock exchange-Buyer's broker and seller's broker.

2. Investor/stock holder who wants to buy/sell the stock
3. Stock exchange
4. Company concerned which will note the change in ownership of stock
5. Portfolio Manager/Investment Adviser, which are optional from
investor's point of view
6. Depository
7. SEBI, as a regulatory body to ensure safety of interest of all the parties.

8.4 ISSUE MANAGEMENT

This activity involves the management of issues for long-term funds through
various types of instruments by the companies. The management of issue of
securities. Involves the following activities:

i) Capital structure counseling to the company and deciding upon the

instrument to be issued
ii) Pricing of the securities, and quotas of various groups such as NRI,
promoters, general public etc.
iii) Assessing and appraisal of the project report
iv) appointment of agencies such as bankers, underwriters, brokers, registrar,
advertising agencies, lead managers
v) meetings of all the concerned parties for finalisation of contracts/
publicity
vi) finalising the schedule of opening of subscription, closing of subscription,
vii) getting the subscription for the floated instruments
viii) stock exchange approval for basis of allotment
ix) actual allotment of shares through Registrar
x) listing of securities on the stock exchange

Types of Issues

Companies raise capital or debt through various sources. The decision about
a particular source of finance is based on various parameters such as the
capital structure, the cost of capital cost of borrowing, the instruments to be
floated, the ease of operation, the time period for which the funds are needed
and market position of demand and supply from the various sources and so
on.
199
Merchant Banking The issues may be classified as under
and Allied Services
i) Public Issue: It is the most common method of raising long-term assets.
The instruments normally offered to the public are shares, and
debentures/bonds. Shares can be equity shares, preference shares.
Preference shares can be cumulative, non-cumulative, redeemable or
non-redeemable. Debentures or bonds can be of various types such as
convertible, convertible, non-convertible, bearer bonds, mortgage bonds
etc. The offer to the public is made through the issue of prospectus for a
fixed number of shares at a stated price. Any person can apply for the
shares. The prospectus is required to disclose all the material and
essential factors of the company. Provisions of Companies Act, SEBI
guidelines. Income Tax act, Indian Contract Act, is required to be
followed strictly in the process of this issue.
II) Rights Issue: Shares offered to the existing shareholders of a company
are called right shares, and the issue is called rights issue. While issuing
such shares to the existing shareholders, a time limit within which they
have the option of exercising the right is prescribed. After the limit, the
directors of the company may dispose off the shares as they think fit.
iii) Private Placements: It is a speedier and cost effective way of raising
capital. When a company does not intend to go public through a
prospectus and wants to issue securities to the public through a private
arrangement then this process is called making a private placement of
securities SEBI has prescribed limits for the minimum number of shares
and amount for such private placements, to be made with the individuals
and corporate. The role of regulatory authority is limited, as it takes
place mostly through bilateral negotiations between the investor and the
company. The new companies which are new, and unknown to the public
find this method of raising capital quite fast and cost effective.

The procedure and steps for managing public issues fall under two phases.
These phases are completed by the Issue Manager.

1) Pre issue management commencing with structuring of issues and up to

the opening of subscription list
2) Post issue management: starts after opening of subscription list and up to
listing of securities on the stock market.

Both these phases are monitored and regulated by SEBI through regulations,

Activity 3

Has your bank been involved with issue management?

In respect of the issue management services offered by your bank, or any

other bank that you are familiar with, prepare a note on the basis of the last
issue made on

200
 Issue Management
1. Promotion of the issue
Services
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
2. Pricing aspect of the issue
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
3. Processes involved in creating access of the investor to the application
forms..
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………
……………………………………………………………………………

8.5 ROLE OF AN ISSUE MANAGER

The merchant banker required to play this role is bound by many legal
provisions and ethical issues. Comprehensive guidelines are given in various
acts, such as the SEBI Merchant Bankers Rules, SEBI Merchant Bankers
Regulations, SEBI Bankers to an Issue Rules, SEBI Underwriters Rules. All
these acts are enclosed as Annexure to this unit.

SEBI Guidelines for issue managers

1. All issues should be managed by at least one merchant banker

functioning as the lead manager. (Art18)
2. Merchant Banker must be registered with the SEBI.
3. Number of lead merchant bankers may not exceed in case of any issue of
Size of issue (Rupees) No of lead managers to issue
a) less than 50 crore two
b) above 50 crore but less than 100 crore three
c) above 100 crore but less than 200 crore four
201
Merchant Banking d) above 200 crore but less than 400 crore five
and Allied Services
e) above 400 crore five or more as may be agreed
by the board
Public Issue Management
Pre-Issue Activities
1. Memorandum of understanding: In terms of SEBI regulation (18-2),
every merchant banker acting as lead manager, should enter into a
Memorandum of Understanding with the company, before taking up the
issue management. This sets out authorities and responsibilities between
all the concerned parties. including the other lead managers to the issue.
2. Prepare and Submit the offer document to SEBI: The lead manager
drafts the offer document i.e. the prospectus, in the prescribed format, as
per extant rules, and submits the same to SEBI, along with the due
diligence certificate, and other documents namely: 1) undertaking from
CEO of the Company to attend to complaints. 2) undertaking from the
company secretary to get the issue listed within the stipulated time, 3)
undertaking by the issues that funds will be made available to the
registrar for refund activities, 4) certificate of promoters contribution,
and other such certificates as prescribed by the SEBI.
3. Filing with RoC: After incorporating the SEBI observations in the
prospectus the complete document is filled with Registrar of Companies
and acknowledgement is obtained.
4. Appointment of other intermediaries: The lead manager appoints the
Bankers to the issue, underwriter’s legal advisers, advertising agency and
Registrar to the issue in consultation with the issuers, and enters in to
MOU wherever necessary.
5. Dispatch of Issue Material: The dispatch of issue material to the stock
exchanges. brokers, underwriters, hanker to the issue, well in advance.
6. Underwriting obligations: The lead manager is required to keep a
minimum underwriting obligation of 15% of the total underwriting
commitment or Rs 25 Lakh whichever is less
7. Publicity of the Issue: In order to ensure the fall subscription of the
issue, the lead manager ensures adequate publicity through
advertisements in media, though the advertising agencies .
8. Opening of the Issue: After due publicity through the media, 10 days
before the opening date of the issue, newspaper advertisement is given,
and the issue opens for subscription from the day declared in the
prospectus. Applications for subscription along with the payment
instrument are received at the collecting centers. The collection figures
are obtained on daily basis and filed with SEBI in 3 days reports.
Announcement is also made in newspapers about the closure of the issue.

202
 Issue Management
Post Issue Activities:
Services

After the closure of the issue, the Lead manager has to manage the Post Issue
activities pertaining so the Issue.

1. Post issue monitoring reports: Whether an issue is subscribed fully or

not, the Lead manager is required to submit various reports to SEBI
Within 7 days from the date of closure of the issue, lead manager shall
inform to SEBI the exact position of the subscription. Certificate of 90%
subscription from Registrar as well as final collection certificate from
bankers are obtained and submitted to SEBL
2. Liaison with all agencies: The lead manager keeps close liaison with all
the intermediaries until all the formalities about the issue are completed.
In case of under subscription, the invocation of underwriting is done, if
within the limit. Else if the issue is not subscribed to the extent of 90%
then refund of subscription is required to be completed.
3. Stock exchange: Inform the stock exchange about the closure of
subscription list and advertise the closure of issue. 4. Allotment of shares:
The registrar to the issue completes the formalities of allotment of shares
based on guidelines issued by SEBI. In case of over subscription, the
allotment is done on the basis of applications received for total number
of shares, and marketable lots, after approval to the basis of allotment, by
Stock exchanges as per SEBI guidelines.
5. Publicity to schedules of allotment/refund: Publicity, to be given to the
schedule of refund/or allotment as the case may be, is given in two
dailies.
6. Issue of share certificates/refund orders: Companies/Registrars are
required to finalise the basis of allotment and dispatch of refund orders
within 30 days from the closure of the issue failing which the company is
required to pay interest at the rate of 15% per annum from the 31st day
of closure of issue.
7. Listing formalities: The Lead manager, completes the formalities for
listing of the shares on the stock exchanges.
8. Commission and fees payment: Ensure that the commission/fees are
paid the company to all the intermediaries.
9. RBI Approval for NRI: Obtain permission from RBI for allotment of
securities to NRIs.

10. Investor's grievances: The lead manager is also required to handle the
grievances of the investors.

Rights Issue

For rights issue the lead manager should submit the draft of the letter of offer
to SEBI, six weeks before the issue is scheduled to open for subscription.
Any suggestions would be received within 3 weeks from SEBI should 203
Merchant Banking incorporated within the draft before filing the letter of offer. The copy of final
and Allied Services
letter of offer should be sent to SEBI 2 weeks before the opening date of
issue. The issue should be offered the existing shareholders. The allotment
formalities for offers received from the right holders should be completed.

Activity 4

With respect to the Issue Management, process studied by you for activity 3,
fist out the various pre and post issue activities that were undertaken by the
bank.

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

8.6 OTHER AGENCIES INVOLVED IN ISSUE

MANAGEMENT
Besides the Merchant Banker who acts as the Lead Manager, the other
agencies involved in the issue management are:

1. The Company which floats the issue

2. The Registrar to the Issue, who is so licensed by SEBI

3. The Legal Advisors to the issue

4. The Company Secretary

5. The Chartered accountants, for finalising the volume of issue

6. The Advertisers

7. The collecting bankers to the issue

8. The stock exchange where the issue is expected to be listed

9. The Stock exchange agents

10. Securities and exchange board of India

Bankers to the Issue

This is one of the important intermediaries in management of an Issue. Banks

are involved in all the activities starting with the collection of application
forms for securities, until the final refund in case of non-allotment. SEBI
Bankers to an issue Rules, 1994 and Bankers to an issue Regulations 1994,
are applicable to the banks. The various responsibilities entrusted to the
204 bankers in the capital market areas under:
 Issue Management
a) Controlling bank: to control all the activities connected with issue, and
Services
control the branches designated for the issue work. Various functions of
this bank are as under.
1) To Issue consent letter to act as controlling bank to the Issuing
company
2) To finalise the branches which will act as collecting branches?
3) Follow the instructions from the lead managers, registrar and
company of Issue
4) Maintain account of the Issue, and submit reports as per
requirements to the company/registrar/lead manager
5) Ensure receipt of stationery at the collecting centers
6) Ensure appropriate communication about the opening and closing of
subscriptions of issue
7) Receive daily collections and report the same to the lead manager
8) Ensure proper functioning of role of the collecting branches
9) Remove irregularities in the collection by the collecting branches
b) Collecting bankers to the issue: As a collecting banker, the branch of
the bank is required to undertake the following function
1) Follow the instructions received from the Registrar and the main
branch
2) Ensure receipt of stationery for issue procedure, and give adequate
publicity to the issue
3) Ensure that the bank and branch name is branded under the name of
broker! underwriters to the issue
4) Accept subscriptions as per applications from investors, and issue
acknowledgement slips
5) Lodge the instruments and collect the same for credit to the special
account opened in the name of the company for this purpose, remit
the balance to the controlling branch, as per instructions
6) In case of return of cheques, return the applications with instruments
to the applicant at his address
7) Send reports about collection in the appropriate stationery/format
8) Forward the applications, along with reporting schedules, and final
certificate to the Registrar to the issue
9) Claim the fees/out of pocket expenses from the controlling branch.
c) Refund bankers to the issue: for refund because of non-allotment
d) Investor's bank: working either as portfolio manager, adviser, or his
banker holding account of the investor,
e) Bankers of the issuing company: Holding bank account of the
205
Merchant Banking Company, on which dividend warrants, interest warrants may be drawn,
and Allied Services
or /and may be acting in any other capacity as Merchant Banker.

8.7 MONITORING BY SEBI

The work of the Merchant Banker in issue management is monitored by
SEBI through the system of penalty points for non-observance or violation of
the guidelines. Lapses up to a maximum of penalty points per issue may be
condoned by SEBL These penalty points are of four types as under

Type I General Default 1 point penalty

Type II Minor default 2-point penalty
Type III Major Default 3-point penalty
Type IV Serious default 4-point penalty

Merchant Banker getting accumulated penalty points beyond is liable for

suitable punitive action by SEBL

8.8 SELF-ASSESSMENT QUESTIONS

1. Define Merchant Banking
2. Discuss the nature and scope of Merchant Banking functions.
3. State whether True or False:
a) A merchant banker registered with SEBI under Category II, is
empowered to give more varieties of services than those under
Category I merchant banker.
b) Category III merchant hanker should have minimum capital of Rs 1
crore.
c) For the Capital issue of Rs 45 Lakhs, minimum number of lead
merchant bankers is 2.
d. In primary capital market. shares are sold at market value.
e) A partnership firm can raise a public issue of shares for Rs 25 Lakhs
f) Minimum of 10 penalty points should be accumulated by a merchant
banker, for a punitive action by SBL
g) Dow Jones index is the index of shares prices traded on Mumbai
Stock Exchange.

8.9 FURTHER READINGS

1. Securities and Exchange Board of India Merchant Banking Rules
(updated).
2. Securities and Exchange Board of India Merchant Banking Regulations
(updated).
3. Securities and Exchange Board of India Stock Brokers and Sub brokers
206
 Issue Management
Rules.
Services
4 Securities and Exchange Board of India Stock Brokers and Sub brokers
Regulations
5 Securities and Exchange Board of India Underwriters Regulations.
6. Securities and Exchange Board of India Registrars to an issue and share
transfer agent’s regulations.
7. Securities and Exchange Board of India Bankers to an issue regulations.
8. Government of India, Report of the Banking Commission.
9. Government of India, Ministry of Finance, guidelines for Merchant
Bankers.
10. Inside Investment Banking, by Ernest Bloch, 1986.
11. What is a Merchant Banker, by Hans-Peter Bauer, The Banker. London.

207
Merchant Banking
and Allied Services UNIT 9 STOCK BROKING SERVICES

Objective

After reading, this unit you should be able to:

• Describe the basics of the Stock Exchange and its functions

• Comment upon role of the stockbroker.
• Discuss duties and responsibilities of the broker/sub broker.
• Explain the code of conduct of the broker
• Describe duties of the investor.

Structure

9.1 Introduction
9.2 Stock Exchange and Its Functions
9.3 Membership of the Stock Exchange (Stock Broker)
9.4 Role of the Member (Stock Broker)
9.5 Code of Conduct for the Brokers
9.6 The Duties of the Investor
9.7 Trading Procedure at the Stock Exchange
9.8 Related Institutions and Terminology
9.9 Summary
9.10 Self-Assessment Questions
9.11 Further Readings

9.1 INTRODUCTION
The working of the capital market is very technical, and highly sensitive, and
hence requires an expert knowledge of the rules and regulations. The
stockbroker acts as an important intermediary between the investor, the
company, and the stock exchange. The stockbroker is a member of a
recognised stock exchange and is engaged in buying. selling, and dealing in
various capital market securities. He has to observe the discipline on
maintaining adequate capital, registration with SEBI, payment of fees,
maintenance of books and records for the investors, and ensure fair play in
the dealings. He may or may not appoint a sub broker. A sub broker is also
required to be registered with SEBI. The sub-broker cannot enter into direct
dealing with stock exchange or other market players. He has to route his
transactions through the broker only.

SEBI Stock Brokers Rules and SEBI Stock Brokers Regulations are
important enactments, which protect the interests of the investor, the
208 company and the stock exchange. The Stockbroker or sub-broker who has to
 Stock Broking
be the member of a Stock exchange has to play his role within the framework Services
of these enactments.

9.2 STOCK EXCHANGE AND ITS FUNCTIONS

What is a stock market?

A stock market refers to the organised market, where securities are traded. It
consists of investors, brokers or members of the stock exchange, stock
exchange, companies, and regulatory authority. The securities traded on the
stock exchange include various long-term financial instruments, raised by the
companies for meeting their financial requirements.

Stock Exchange

The Securities Contracts (Regulations) Act 1956, defines Stock Exchange is

an association, organisation or body of individuals, whether incorporated or
not established for the purpose of assisting, regulating and controlling
business in buying, selling and dealing securities.

A recognised stock exchange is defined as the one, which is recognised by

the Government. (S 26 of the Securities Contracts (Regulations) Act 1956.

The Stock Exchanges are regulated by the Securities Contracts (Regulation)

Act 1956, and Regulations issued by Securities and Exchange Board of India.

Constitution and Organisation of Stock Exchange

Stock exchange, may be either an association, joint stock company, or

company limited by guarantee, as per rules prescribed in the Acts as stated
above. It is required to be registered with the Registrar of Companies as a
Company. The Government grants recognition, to the stock exchange if the
activities are found to be satisfactory and in conformity with the
rules/regulations.

It is managed by a Governing Council, a Board of Directors or Management

Council. As per SEBI directives, the governing body normally has 13
members of which 6 members are elected, the Central Government or SEBI
nominates not more than 3 members. 3 public representatives nominated by
SEBL one executive director appointed by Stock Exchange.

Every stock exchange is a link between the general public and corporate
bodies interested in raising long-term resources. Hence, it is responsible for.

Maintaining fairness in trading on the stock exchange,

Maintaining discipline in the activities of the members
Maintain transparency and efficiency in operations.

Functions of Stock Exchange

1. Provide ready market for securities,

209
Merchant Banking 2. Provide negotiability to transactions of sale and purchase,
and Allied Services
3. Provide liquidity to security,
4. Channel for distribution of new securities through network of members,
5. Help the capital formation process,
6. Direct the flow of resources to successful enterprises.

Stock exchanges are the important constituent of the Capital Market. Well-
regulated and smoothly functioning stock exchange is an indicator of the
developed capital market.

Stock exchange transactions can be made only through the member.

Activity 1

How many stock exchanges are currently functioning in India. Find out the
statistical details of any 4 of them for the last 3 years.

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

9.3 MEMBERSHIP OF THE STOCK EXCHANGE

(STOCK BROKER)
Membership is granted to only those persons who are financially sound and
possess adequate expertise and experience. The member of a stock exchange
is also required to be registered with Securities and Exchange Board of India
(SERI) Membership to the stock exchange and SEBI is obtained only after
payment of certain fees. The members act at custodians for the securities of
the investors who entrust them to sell/purchase as the case may be.

The members or Stockbrokers normally perform the under-mentioned

functions, either directly or through sub-brokers to act as commission broker,
floor broker, jobber, dealer in securities, dealer in Govt. securities,
underwriters.

The Brokers on stock exchange normally perform the following functions:

1. Investment/speculative broking for individual investors

2. Trading on-account
3. Arbitrage
4. Up country business on brokerage basis
5. Primary market fund mobilisation
210
 Stock Broking
6. Management of portfolio of investment of individuals/bodies Services
7. Placement of shares with Foreign Institutional Investors, mutual funds
8. Institutional broking
9. Inter corporate broking of funds
10. Mergers acquisitions, and amalgamations
11. Forex services
12. Borrowing through commercial paper

The relationship between the stockbroker and the investor involves great
deal of trust, and is governed by Stock exchange bye-laws, SEBI rules and
regulations. The broker is indemnified by the client. He has a lien on the
property of the client for payment of amount due as margin money, brokerage,
interest and other expenses.

Corporate Membership to Stock Exchange

In order to get corporate membership to the Stock Exchange, a Company

should fulfill the following norms

1. Net Worth norms: A Company seeking admission as a corporate

member of any stock exchange shall have a minimum net worth as
specified by particular exchange. This will also depend upon the segment
in which corporate member wish to operate. The basis of fixing the
minimum paid up capital norm is as per the formula prescribed by Dr.
L.C. Gupta Committee.
2. Capital adequacy norms: The Company should maintain capital
according to the capital adequacy norms specified by SEBI.
3. Additional financial and other requirements: Stock exchange may
specify other financial requirements, which are binding on the corporate
member, which will have to be fulfilled by the company.
4. Multiple memberships: Where a corporate member desires to have
membership of more than one stock exchange then the company should
fulfill the conditions mentioned in 1, 2, and 3 above, separately for each
stock exchange and maintain separate accounts for the same.
5. Collection of deposits: The rules as applicable to Non banking financial
companies will apply in respect of collection of deposits from public, not
being margin money from investors,
6. Directors on the board of such company: Individuals, who have been
penalised by cancellation of their registration, as intermediaries are not
allowed to be on the board of directors of the companies.

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Merchant Banking
and Allied Services
9.4 ROLE OF THE MEMBER (STOCK BROKER)
The Stock Broker means the Member of Stock Exchange.

Sub-Broker means any person not being a member of a stock exchange who
acts on behalf of a stock broker as an agent or otherwise for assisting the
investors in buyings/elling or dealing in securities through stock brokers.

Stock-brokers and sub-brokers are governed by the Rules and Regulations,

issued by SEBI in this context.

Registration with SEBI Compulsory

A stockbroker or sub broker cannot buy/sell/ or deal in securities unless he

holds a certificate from SEBI, or at least has applied for obtaining such a
certificate. He is required to pay required fees to SEBI for keeping the
registration in force.

9.5 CODE OF CONDUCT FOR STOCK

BROKERS
The role of a stock broker or sub broker is defined in the Code of Conduct
for Stock Brokers in, Schedule II of Regulation 7 of the SEBI Stock brokers
and sub brokers Regulations 1992. (See Annexure 1 to this unit).

The relationship between the investor and the stock broker is based on utmost
mutual trust and faith. In addition, it is obligatory on the part of the investor
as well as the broker to perform the business with utmost care and honesty,
maintaining high levels of secrecy, integrity and clarity in the transactions.

A stock broker is required to perform his duty with integrity, high standards
of fairness, and promptitude in all his dealings. He is required to exercise
skill, care, and diligence in the conduct of his business. He should not indulge
in any manipulative, fraudulent or deceptive transactions or schemes or
spread rumors with a view to distorting market equilibrium or making
personal gains. A stockbroker shall not either create false market singly or in
concert with others or indulge in any act detrimental to the investor's interest
or which leads to interference with the fair and smooth functioning of the
market. A stock broker shall not involve himself in excessive speculative
business in the market beyond reasonable levels not commensurate with his
financial soundness.

Duties to the Investor: The stockbroker shall issue to his client, a contract
note, for all the transactions, in a form specified by the stock exchange.

The stock broker should disclose to the client whether he is acting as a

principal or as an agent and shall ensure that no conflict of interest arises
between him and the client. In such an event of conflict, he shall inform to
the client accordingly and shall not seek to gain a direct or indirect personal
benefit from the situation and shall not consider clients" interest inferior to
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his own, maintain accounts of the investment transactions, give account to the Services
client of the securities and their disposal, and make payments of money due
to the client. The broker must deliver securities acquired within 2 working
days of payout unless the client has requested otherwise.

Stock broker shall not make a recommendation to any client who might be
expected to rely thereon to acquire, dispose of, retain any securities unless he
has reasonable grounds for believing that the recommendation is suitable for
such a client upon the basis of the fact, if disclosed by such a client as to his
own security holding, financial situation and objectives of such investment.

9.6 THE DUTIES OF THE INVESTOR

The investor is also required to complete all the transactions as per contract.
He is required to pay the necessary brokerage, commission etc due, to the
stock broker and be responsible for his own decision of purchase, sale or
dealing in the security. He is required to pay at least 20% of the price of
securities ordered to be purchased, to the broker, as margin for all the orders
for purchase of securities. An investor is required to furnish full details about
his name, address, status of employment or business, name of the banker, and
bank account number through which operations are to be done, and other
such details to the broker. He should also give proper introduction to the
broker, and permanent income tax account number, in case of transactions for
more than Rs. 1 lakh.

Activity 2

Obtain the issue prospectus of at least five companies, and as an ordinary

investor give reasons for investing or non-investing Rs 1 lakh in each of these
issues in India.

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

9.7 TRADING PROCEDURE AT THE STOCK

EXCHANGE
The normal procedure

a) The client places an order with his broker/sub broker, for purchase/sale
of a specified security within the specified range of price.
b) Broker executes the order, i.e. completes the deal for either purchase or
sale of the specified number of security instruments through another
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Merchant Banking broker.
and Allied Services
c) The brokers prepare the contract note.
d) Delivery of shares by broker/client, against the bill or delivery note.
e) Payment against the delivery note.
Types of delivery of securities
a) Spot delivery: delivery of security and payment is made on the day of
contract or on the next day.
b) Hand Delivery: delivery and payment should be made within 14 days of
contract date. This period may be extended by Stock Exchange, in slots
of 14 days at a time, up to a maximum of 90 days.
c) Special delivery: is completed beyond the period of 14 days, and is
permitted by Board or President of Stock Exchange.

Delivery of scrip is said to be completed when a seller of a security (scrip)

delivers the scrip along with transfer deed signed by the transferor and duly
witnessed, to the buyer member, and the buyer members takes the scrip and
the certificate.

The broker is expected to see that the delivery is good. This means that the
security certificate should not be fake, forged or mutilated, and must be
properly signed by the transferor as per his specimen signature. The broker
should be fully aware of the SEBI guidelines about good and bad deliveries,
and ensure that the delivery is not bad.

9.8 RELATED INSTITUTIONS AND

TERMINOLOGY
OTCEI: Over the counter exchange of India is a limited Co. and acts an
exchange without a specified trading floor. It does not have a market place
physically and the market is spread across the country through counters. All
the counters are connected. Through network of computers and transactions,
take place through satellite communication. The authorised share capital of
10 crores is held by UTI, ICICI, IDBI, IFCI, LIC GIC, SBI Capital Markets
Ltd., Can bank Financial Services Ltd.

NSE: National Stock Exchange: It was incorporated as per the

recommendations of Pherwani committee on establishment of a powerful
stock exchange. The NSE is established in Mumbai, and provides three-tier
structure consisting of principal stock exchange, regional stock exchange and
additional trading floors sponsored by a stock exchange. It provides support
to

1) National Clearing and Settlement Corporation to administer the clearing

and settelment of securities and

2) Central Depository Trust and securities facilities support corporation for

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 Stock Broking
network between exchanges. It provides satellite based fully automated Services
screen based trading, transparency to transactions, regional spread. It operates
wholesale debt market segment, capital market segment, and derivatives
market segment

Arbitrage: The purchase or sale of securities so as to profit from by

reversing the transaction through the price differential, with respect to stock
exchange (place), or time.

Asking price: The lowest price at which the stockholder is willing to sell the
scrip.

Bid: An offer of a price one is willing to pay for buying the security.

Brokerage: Commission (as per rates stipulated by stock exchange Byelaws)

payable to the stockbroker for services rendered by him in respect of
purchase/sale of the desired scrips.

Closing out: When a party to contract does not fulfill delivery against sale or
payment against delivery of documents, the other party closes out the
transaction, through the medium of stock exchange. The loss or gain is borne
out by the defaulter.

Contract note: Is written evidence given by the member of the stock

exchange to the client giving out details of the number of shares to be bought
or sold rate of the price and date of conclusion.

Depository: Is an organisation where the securities of a share holder are held

in the electronic form at his request. This helps the share holder in quick
disposal of the security for liquidity and profit making, through the
depository.

Activity 3

What do you understand by BSE and NSE? Which are the international
equivalents of these terms?

…………………………………………………………………………………
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…………………………………………………………………………………
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9.9 SUMMARY
A stockbroker must be a member of a Stock Exchange, and should hold the
necessary certificate from SEBI, for dealing with the securities because of the 215
Merchant Banking investor’s .He has to provide high standards of service to the investors, the
and Allied Services
stock exchange and the SEBI. He is required to maintain the books of
accounts and necessary record. He should fulfill the general obligations such
as payment of fees to SEBI, and abide by the code of specified, allow the
records and transactions to be inspected by the SEBI/Stock exchange
authorities. He must ensure fair play. The investor on the other hand should
not be carried away by the advice of the broker, and should take his prudent
judgement.

9.10 SELF-ASSESSMENT QUESTIONS

1. What are the functions of Stock Exchanges?
2. State whether true or false:
a) A stockbroker is required to be registered with SEBI as well as
Stock Exchange for doing business.
b) In a spot delivery contract of sale of securities the delivery of the
security and payment thereof are made after 48 hours.
c) In a special delivery of securities SEBI permission is necessary.
3. Which books of accounts and records are compulsorily required to be
maintained by the Stock Broker?
4. Write three acts of the Stock broker, which may result in, to the award of
punishment of suspension of registration by SEBI
5. Find out the meaning of the under mentioned terms used in Stock
Exchange Markets in India
a) Bear, Bull, Premium, at par
b) Bottom Line
c) Blank Transfer
d) Bad delivery, and good delivery
e) Call money, notice money
f) Open ended and Close ended schemes
g) Marking of a security to market, and current yield
h) Earnings per share
i) Stock
j) Junk bond
k) Listed shares
1) Mhurat trading
m) Derivatives in capital market
n) Over bought, oversold and square position of the broker
o) Quote for a security
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 Stock Broking
p) Real profit and notional profit Services

9.11 FURTHER READINGS

1. Merchant Banking: Dr JC Verma, Bharat Law House P Ltd, Delhi.
2. Indian Capital Market, Sanjiv Agrawal, Bharat Law House P Ltd, Delhi.
3. A Practical Hand Book to Public Issues and Euro Issues, V I Iyer,
Taxman Allied Services (p) Ltd.
4. SEBI Capital Issues and Listing, Bharat Publishing House.
5. The Manual/guidelines on Investment Management issued by the
commercial banks individually.

217
Merchant Banking
and Allied Services

218
 Stock Broking
Services

BLOCK 4
SECTOR SPECIFIC MARKETING
STRATEGIES

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Merchant Banking
and Allied Services

220
UNIT 10 MARKETING OF INSURANCE Marketing of
Insurance Services
SERVICES

Objectives

• After reading this unit, you should be able to:

• describe the broad spectrum of insurance services
• explain need for marketing of insurance services
• discuss scope for marketing of insurance services
• relate the hindrances in marketing of insurance services
• describe strategies for effective marketing
• comment upon the role of other institutes in marketing insurance services

Structure

10.1 Introduction
10.2 Broad Spectrum of Insurance Services
10.3 Need for Marketing Insurance Services
10.4 Scope for Growth of Marketing Insurance Services
10.5 Limitations in Marketing of Insurance Services
10.6 Strategies for Effective Marketing
10.7 Role of Other Institutions in Marketing of Insurance Services
10.8 Summary
10.9 Self-Assessment Questions

10.1 INTRODUCTION
India, with a population over 140 crore, accounting for 17.76% of the world
population is ranked tenth (eleventh in 2020) in global insurance business
with a market share of 1.85 per cent in 2021. In India, overall insurance
penetration was 2.71 per cent in 2001 and has increased to 4.2 per cent in
2020. As per economic survey 2022,”In 2020, the penetration for life
insurance in India is 3.2 per cent and nonlife insurance penetration is 1 per
cent. Implying that only 3 out of 100 are covered by some kind of life
insurance, While India is at par with international average in terms of
insurance penetration for life insurance, we lag behind in terms of non-life
insurance. Globally, insurance penetration was 3.3 per cent for the life
segment and 4.1 per cent for the non-life segment in 2020.”

Total insurance premium in India increased by 13.46 per cent (7.8 per cent
inflation adjusted real growth) in 2021 whereas global total insurance
premium increased by 9.04 per cent (3.4 per cent inflation adjusted real
growth) during the year. Coverage provided by traditional life or health
insurance models is very low in the country. It is due to many reasons
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Sector Specific including low per capita income, high proportion of rural population, lack of
Marketing Strategies
financial literacy among many others.

In life insurance business, India is ranked ninth (tenth in 2020) in the world
in 2021. India's share in global life insurance market was 3.23 per cent (3.11
per cent in 2020) during 2021. Life insurance premium in India increased by
14.16 per cent (8.5 per cent inflation adjusted real growth) in 2021 whereas
global life insurance premium increased by 9.91 per cent (4.5 per cent
inflation adjusted real growth).
In non-life insurance business, India is ranked fourteenth in the world same
as last year. India's share in global non-life insurance market was 0.78 per
cent (0.76 per cent in 2020) during 2021. The Indian non-life insurance sector
recorded 11.30 per cent (5.8 per cent inflation adjusted real growth) growth
during 2021 whereas the global non-life insurance premium had only 8.37
per cent growth (2.6 per cent inflation adjusted real growth).
Globally, the share of life insurance business in total premium was 43.69 per
cent and the share of non-life insurance premium was 56.31 per cent during
2021. However, the share of life insurance business for India was high at
76.14 per cent while the share of non-life insurance business was at 23.86 per
cent.
Table 10.1: Premium Volume by Region in the World in 2021

Table 10.2: Insurance Penetration and Density by Region in the World

in 2021

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Table 10.1 and Table 10.2 depict the relative position of the Indian Insurance Marketing of
Insurance Services
Sector. From the above discussion it is clear that India’s insurance sector is
progressing, but there is still huge untapped potential both in life and non-life
insurance sector.

But the big question is whether the players are able to effectively exploit the
potential by creating and marketing attractive insurance products with high
rates of return on premium investment. This would help deepen the market as
the same family could opt for different schemes catering to different needs.

Though the scope of operation of general insurance is wide by definition, the

general insurance premium has been lower than life insurance. In 1993, total
life premium income in India was US $ 3.2 billion which rose to US$96.68 in
2021, while general insurance premium was US $ 1.5 billion. General which
rose to US$ 30.30 in 2021.

Management of Non-Life insurers was taken over by the Central government

in 1971 as a prelude to nationalisation. General insurance business was
nationlised with effect from 1.1.1973 by the General Insurance Business
(Nationalisation) Act, 1972.

10.2 BROAD SPECTRUM OF INSURANCE

SERVICES
Life Insurance

Life insurance is a contract for payment of a sum of money to the person

assured (or failing him her, to the person entitled to receive the same) on the
happening of the event insured against.

Usually the insurance contract provides for the payment of an amount date of
maturity or at specified dates at periodic intervals or at unfortunate death if it
occurs earlier. Obviously, there is a price to be paid for this benefit. Among
other things the contract, also provides for the payment of premiums by the
assured. Life insurance is universally acknowledged as a tool to eliminate
risk, substitute certainty for uncertainty and ensure timely aid of the family in
the unfortunate event of the death of the breadwinner. In other words, it is the
civilized world's partial solution to the problem caused by death.

Life insurance in its existing form came to India from the United Kingdom
with the establishment of the British firm Oriental life Insurance Company in
Calcutta in 1818 followed by the Bombay Life Insurance Company in 1823.

By 1956, 154 Indian insurers, 16 foreign insurers and 75 provident societies

were carrying on life insurance business in India. Life insurance business was
concentrated in urban areas and confined to the higher strata of the society.
On January 19, 1956 the management of life insurance business of 245 Indian
and foreign insurers and provident societies then opening in India was taken
over by the Central Government through nationalisation.
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Sector Specific
Marketing Strategies
Life Insurance Corporation of India (LIC)

LIC was formed in September 1956 by an act of Parliament, viz. LIC Act
1956, with a capital contribution of Rs. 50 million.

LIC has more than 2000 branches. It is made up of 100 divisions, into 7
zones, there are about 5,58,000 agents in the country.

Benefits of Life Insurance

Unlike any other saving plan a life insurance policy affords full protection
against risk of death. In the event of death of policy holder, the insurance
company makes available the full sum assured to the policy holder's near and
dear ones. In comparison, any other savings plan would amount to the total
savings accumulated till date. If the death occurs prematurely, such savings
can be much lesser than the sum assured. Evidently, the potential financial
loss to the family of the policyholder is sizeable.

A saving deposit can easily be withdrawn. The payment of life insurance

premium. However, is considered sacrosanct and is viewed with the same
seriousness as the payment of 'the interest on a mortgage. Thus, a life
insurance policy in effect brings about compulsory savings.

A life insurance policy is the only financial instrument the proceeds of which
can be protected against the claim of the creditor of the assured by effecting a
valid assignment of the policy.

Speculative or unwise expenses can quickly cause the proceeds to be

squandered. Several policies have foreseen this possibility and provide for the
payment over a period of years or in a combination of installments and lump
sum the amount.

- A life insurance policy can, after a certain time period (generally three
years), be surrendered for a cash value. The policy is also acceptable as a
security for a commercial loan, for e. g . A student loan. It is particularly
advisable for housing loans when an acceptable LIC policy may also cause
the lending institute to give loan at lower interest rates.

Death is not only the hazard that is insured; many polices also include
disability benefits. Typically, these provide for waiver of future premium and
payment of monthly installments spread over certain time period.

- Many policies can also provide for an extra sum to be paid (typically equal
to the sum assured) if death occurs as a result of accident.

Under the Indian Income Tax Act, tax relief is also available

Activity 1

Talk to 5 LIC policy holders and discuss with them the benefits they perceive
in investing in LIC. List these benefits. How these do perceived benefits
224 compare with those listed above.
………………………………………………………………………………… Marketing of
Insurance Services
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General Insurance Corporation (GIC)

GIC was incorporated as a company in 1972 and it commenced business on

January 1st 1973, prior to 1973, general insurance was urban-centric, catering
mainly to the needs of organised trade and industry, One hundred and seven
insurers including branches of foreign companies operating in the country
were amalgamated. These were grouped into four companies, VIZ. the
National Insurance Company Ltd., the Oriental Insurance Company Ltd., the
New India Assurance .company Ltd., the United India Insurance Company
Ltd. With their head offices at Kolkata, New Delhi, Bombay and Chennai
respectively. GIC is the holding company and today undertakes mainly re-
insurance business apart from a bit of aviation insurance. The bulk of the
general insurance business of Fire, Marine, Motor and miscellaneous
insurance is undertaken by the four subsidiaries.

The Government of India subscribed to the capital of LIC and GIC, in turn,
subscribed to the capital of the four companies. All the companies are
government companies registered under the Companies Act.

Types of Non-Life Insurance Products

The different types of General Insurance products are listed below. While
most policies are optional i.e. at the behest of the insured, some are
mandatory. The mandatory ones are:

Motor insurance
Public liability (for corporate class).
Other policies include
Fire insurance:
Building or Flat
Furniture fixture and others
Loss of profit i.e. consequential loss
Miscellaneous Insurance:
Personal Accident
Burglary, theft
Workmen's Compensation
Fidelity guarantee
Cancer
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Sector Specific
Marketing Strategies
Mediclaim

Comprehensive Package Policy for jewellery, T. V.V,.C.R, Videsh Yatra

Policy: a personal accident insurance for overseas travelers.

Marine Cargo Insurance:

Cargo in transit
Cargo declaration Policy
Marine Hull Insurance:

Inland vessels, ocean going vessels, fishing & sailing vessels, freight at risk,
construction of ships, voyage insurance of various vessels, ship breaking,
onshore & offshore risks including construction risk.

Non-traditional / Rural:
Cattle I Hens
Crop
Water pump for agriculture
Hut
Other livestock.

Activity 2

From your own general insurance agent collect information on which are the
most bought general insurance policy schemes apart from the mandatory
ones.

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10.3 NEED FOR MARKETING INSURANCE

SERVICES
It is clearly evident from the above that there is an enormous scope to exploit
the potential market and raise per capita life premium. The need for
marketing of insurance services also arises due to following factors:

The insurance products have a distinct feature where benefits of the product
come at the later date and at times after a considerable time.

The demand unlike consumer’s products is not inbuilt.

Among the financial services to the insurance sector gets the least priority to
226
ether investments avenues provide immediate yield. Marketing of
Insurance Services
In case of life insurance the case is further complicated as in India people
have belief, traditional culture and religious background and tendency to
leave everything to fate. This happens especially in rural areas.

The rural market is still untapped. The insurance sector is yet to exploit this
which has vast potentialities.

The concept of proper financial planning, taxation and investment is still

lacking among the middle class strata.

Over the period of time the L.I.C have come out with multipurpose better
attractive terms insurance's policies which certainly needs effective
marketing to wipe of the synergic ideas in the minds of people that life
insurance policies are mainly for death hazards.

The General insurance have wide scope for marketing as small and medium
business entrepreneurs are yet to reap the benefits of general insurance
schemes.

10.4 SCOPE FOR GROWTH OF MARKETING

INSURANCE SERVICES
The scope for marketing insurance services is vast and thereby marketing of
insurance services needs a re-look. There are number of impending changes
that are likely to make this sector more dynamic. The Insurance Regulatory &
Development Authority (IRDA) has been established in 1999 for promoting,
regulating and strengthening the insurance sector. The following factors may
further induce promotion of marketing activities If the insurance sector.

a) IRDA aims at promoting and regulating professional organizations

connected with insurance and re-insurance business.

b) The insurance sector is thrown open to private and corporate sector. This
will certainly expand the business dimensions.

c) There is also a move to specify the percentage of life insurance business

as well as general insurance in rural and social sector,

d) With the increased spirit of investment education and awareness there are
already indications of increased participation.

e) The yield on other avenues of investments such as banks, other financial

institutions, mutual funds, capital market have come down and almost at
par with insurance investments. This trend will further enhance the scope
of marketing insurance services.

f) Service standards are bound to improve and insurance premium should

come down once the insurance reforms takes place, with such a positive
development the marketing scope would further increase.
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Sector Specific
Marketing Strategies
g) The process of privatization will bring in many customer friendly
insurance products,

h) The marketing of insurance services would take altogether new shape

once banking services, insurance selling and fund management are all
inter-related.

i) Though the market of general insurance is smaller in comparison to life

insurance nevertheless the scope of growth is ample,

j) The Budgetary provision has provided additional tax saving opportunity

to certain specified insurance products such as pension policies. This will
give further fillip to marketing strategies.

Activity 3

Against the backdrop of recent opening up of the insurance sector, what do

yo11 think are the marketing implications for nationalised providers like LIC
and GIC?

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10.5 LIMITATIONS IN MARKETING OF

INSURANCE SERVICES
The marketing of insurance products is certainly not an easy task. At the first
instance need for insurance products for an investor is to be created. At
present the marketing of insurance products is by and large undertaken by
appointed insurance agents. The following are the general hindrances which
often come in the way of effective marketing.

1) Due to lack of proper awareness about the benefit of insurance products,

people in general have developed an apathetic attitude and developed a
tendency of fear of being forced into buying these products. The entire
selling process is interspersed with objections.

2) There are mainly two stages of selling an insurance product, one is to sell
the product by convincing an investor and the other one is post-sale
service. The LIC being the only agency having monopoly over this
sector suffers with poor quality of post sales service.

3) Even though the insurance sector has been opened for private sector and
foreign institution, their operational efficiency may not be that easy.
Problems such as weak stock market, bad loans and poor returns on
228
 investment, would affect the efficient functioning of these companies. Marketing of
Insurance Services
4) The rural and social sector offers enormous opportunities to market
insurance products but poor infrastructure, communication and slow pace
of information technology are obstacles in the required growth of
insurance services in these areas.

5) The government of India has launched a scheme to landless agriculture

labourers through social security fund. The insurance is completely free
of cost to the beneficiary. But due to lack of proper publicity measures in
rural areas, the scheme has not been that popular. There are other such
schemes but response is poor.

6) Availability of segment wise data for different kinds of income, savings

capacity, family needs etc is very scant , This in turn affects marketing
efforts' in a systematic manner.

7) The insurance salesmanship skills lack professional approach.

8) There are no better avenues available for consumer education where they
could understand protection of their rights and interests.

9) Practically absence of other players in the market other than L .I. C has
lost the spirit of competitiveness and thereby choice of better yield, quick
disposal of claims, cost of premium etc. to investors.

10) Social sector includes unorganised, informal and economically backward

classes of the society. They have practically no access to insurance
services due to illiteracy, lack of medical facilities, absence of a viable
premium collection arrangements and non-availability of reliable age
proof etc. This kind of situation limits marketing efforts.

11) Lack of multipurpose products suiting and meeting various short term
requirements and short liquidity is another factor where marketing
efforts get setback.

12) Publicity measures to popularize general insurance products benefits to

the consumers, lengthy and cumbersome procedures of settlements,
unawareness among middle and small business class people etc. are the
constraints in effective marketing of general insurance products.

13) There are few products of general insurance suitable for household sector
such as theft, fire etc but lack of awareness large sector of society affects
marketing among programme.

14) There is also a dearth of general insurance products for various

household assets security purposes.

15) Lack of proper training arrangements to publicise insurance products and

lack of professional approach among selling agents is another crucial
factor which affect the marketing process.
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Sector Specific
Marketing Strategies 10.6 STRATEGIES FOR EFFECTIVE
MARKETING
Selling of services is different from goods in that, they are sold before
production and consumption take place. Goods are purchased first then sold
and consumed.

Services also have particular characteristics such as their intangibility and

variability where they are difficult to standardize. This makes it more
difficult for customers to evaluate them(especially when they have no
understanding of the service being provided and are relying on professional
competence). This assumes significant importance in case of insurance
services.

Opening of insurance to private insurers has potential of increasing sales in

different segments because of :

1) Sophisticated and knowledgeable selling by qualified agents,

2) Cost effective products,
3) Increased use of "Family Package" policies (A good product-mix)
4) Innovative products for:
i) Widowed mothers
ii) Un-married mothers
iii) Single parent family
iv) Multipurpose products.

However to augment the business in this sector and exploit huge resources
available in the markets, marketing strategies will have prominent role.
Broadly we would effective cover the following factors influencing
marketing strategies

a) Salesmanship skills
b) Consumer education
c) Financial and fiscal planning
d) Economic factors

Salesmanship Skills

The majority of insurance business is undertaken by the agents nominated for

the purpose. They have crucial role in mobilising the business. Therefore
their professionalism approach to consumers assumes significant importance

Personal Growth of Agent

Attributes of personal growth are as under:
i) Planning
230
ii) Knowledge of insurance scenario Marketing of
Insurance Services
iii) Personal acceptability as an agent.

One who works by fits and starts does not succeed in his objective. One has
to work according to a well-thought out plan of work. Therefore plan of
works has to be: result effective, cost effective and time effective.

Awareness about Demographic Changes

An agent must keep himself aware of latest trends, such as:

i) With increase in "Average Life Span!' in our country, the number of

aged persons are on the increase every day. Therefore, his financial
problems of longer retired life are no less than those of early death. In
future insurance market of Annuity and Pension plans is going to expand
significantly.

ii) Restructuring of national economy has brought in its wake many

Voluntary Retirement Schemes. The employees affected from these
schemes form potential group for pension or Annuity Schemes.

Product Knowledge

It is obvious that a life insurance agent must know the product he is selling.
What he is selling is an INTANGIBLE commodity. Therefore, an agent
should not have superficial knowledge about various types of policies. He
must be able to draw out the philosophy behind the launch of a product or
insurance plan.

Ability to Convince

Imagine a situation where an agent says to his client " I will get to my office
and find out". Such a salesman will not be able to convince his prospects.
KNOWLEDGE IS POWER: Yes, it has the powers to convince others An
agent, order to be successful in must attain training sessions or seminars on
insurance whether held by his company or outside agency. He should make it
a habit to read daily the material connected with his profession.

Consumer Orientation

A customer is always right because he is the cause of your profession. You

are for him. There may be many agents who are interested in him. Why he
should be interested in you only? Here lies the secret of your skills of
salesman. Therefore, an agent has to so establish himself as to enable the
client to think that Agent cares for his interests, i.e.

i) Agent understands his needs.

ii) Agent is considerate towards his difficulties.

231
Sector Specific
Marketing Strategies
Selling Right Type of Policy

An agent should never go by his personal gains. The benefit of the customer
(life assured) should be uppermost in his mind. It is said a stitch in time saves
nine. However, for an insurance agent a right advice brings nine
opportunities. Therefore, always sell the right type of policy.

Activity 4

Contact at least 5 people who have tried to claim their motor insurance or
household insurance policy in the event of a mishap. On the basis of their
feedback note the kind of problems customers may face while collecting
policy claims. What is the advise that you basis collected would have for the
marketers of insurance on the of the feedback by you.

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

Behavioural Aspects

Behaviour means how one treats others. Do you consider others as human
beings having same basic instincts like 'you? If you have emotions and
sentiments, others too have.

Whether you behave well or otherwise is to be decided by others who come

in contact with you. Some of the behavioural aspects are:

Motivation

Means to inspire others to do things. An agent’s job is to ensure that

resistance or his hesitation on the part of client towards life insurance is
removed by clearing his of doubts and objections. In life insurance, it has to
be an achievement motivator for himself and also for his prospective clients.
Only a self-motivated person can motivate others.

Self Motivation: It can come from:

i) Healthy competition with ethers
ii) Other high achievers amongst colleagues.
iii) Success-nothing succeeds like success.
iv) Knowledge – study of circulars, pamphlets, instructions issued from time
to time will keep you informed to the latest of products innovation and
marketing techniques. It instills confidence to overcome any difficulty
that may come in the way.
How to Motivate others

232 1) Agent's own confidence in his job : If an agent is himself convinced

 about the products and their benefits, only than he can inspire confidence Marketing of
Insurance Services
in, his clients.
2) Use of right method in persuasion of the client: Never denigrate or
belittle your client without any basis. Convince others by knowledge of
facts and figures.

An agent should have a very high morale at all times. Temporary set-backs
should not be allowed to dampen the enthusiasm and &termination. Never
feel frustrated an agent syndrome has to hear “NO” frequently. This “NO” or
negative attitude of others is part of nature of your job.

One as an agent may put across his view to others. If they are able to
understand it in clear and unambiguous terms then be is said to have
communicated well. If the listener is not able to grasp full meaning of what
you say, here is a communication gap and one nay have to re-phrase what has
to be conveyed. The essentials of a good communication are:

i) Message should be communicated in the language which the listener

knows,
ii) One should never use official language.
iii) Communication should appeal to the listener

Be brief in communication, however, central message must be conveyed.

Purpose of communication: it must be conveyed because it instills

confidence in the listener \bout the urgency of the matter.

Have patience: a customer is always right. it is you who are to convince him.
Do not annoy hid Have patience in your nature.

It means these ideas/steps that change the mind 6f others, Persuasion is a

long-drawn process whet effort should continue to be made. Let us see how
this can be achieved.

i) Be polity—-civility cost nothing hut brings a la in return. Politeness

induces others listen to you .
ii) Be forceful\—about your viewpoint and prove it logically.
iii) Do not negate the other's view point. You can sty "you may be right but
now the situation has changed and things stand differently'.
iv) Be watch for the opportune time. There may be an occasion when client's
own argument nay be railing apart and going your; Here is the time to
break the resistance and strike the deal.

Objections are stepping steps towards success. By raising objection a

prospect is not criticizing you r life insurance, but wants to clear his doubts.
Therefore, objections should please’ an agent rather than disappoint him.
Objections are, in fact, an essential part of any and very sale, may be a cloth,
shoe, car or life insurance, Objections at an approach stage ted small answer
233
Sector Specific
Marketing Strategies
such as:

i) You are very wise in buying insurance, but it does not have benefit of
children education.
ii) We have a Jin which gives you option to receive maturity value in the
shape of annuity, it will take care of pour old age.
iii) Objections at the 'interview stage" must be met with forceful but correct
and accurate answer Mind, it is the clinching moment for the salesman.

An agent who does not keep association with his policyholder is bound to
either fail or remain just a lo\r producer of business. He cannot develop his
contacts, and thus cannot grow in his profession. The life assurance contracts
run for long period during the course of which the policyholder faces
situations when he is to deal with an insurance company for some work such
as raise loan, registration or change o nomination etc. If the agent does not
assist him on these occasions, the assured feels deceived by the agent.

The above are some of the useful tips to enhance salesmanship ability and
form important part of marketing strategies.

A new economic environment is emerging fast with increased competition,

demanding customers, deregulated financial markets and globalization of the
economy. Insurance companies will feel the impact of the new environment
and hence it requires that they should be correct in advice and sincere on
service to policyholders.

In the past several decades, a social movement has arisen to ensure that the
voice of the customer is heard and responded to. This has become known as
consumerism and refers to politics and activities designed to protect the
interest: and rights of consumers. Four consumer’s rights have been accepted
as basic.

a) the right to safety

b) the right to be informed
c) the right to choose
d) the right to be heard (redress)

The marketing strategies have to be very effective towards this goal. There is
also an immense need for creating greater awareness among the insurance
products through consumer education. There should be short period
workshops, seminars and consumer meets where insurer could participate
actively.

Financial and Taxation Planning

Financial and taxation planning is an important tool of marketing strategy.

The insurer should be in a position clearly elaborate various investment
avenues available in the financial sector, their merits, tax benefits etc so as to
234 enable an investor to take appropriate decision, An ideal investment scheme
should answer favourably to the following tests; Marketing of
Insurance Services
1) Safety
2) Liquidity. (easily encashable)
3) A high rate of interest growth.
4) Capital growth
5) Beneficial to save tax

If the above tests are applied, one may be tempted to look around for some
most perfect' investment from which to expect everything. There is not a
single wonder investment which has all those attributes together. One cannot
have the opportunities of windfall gains of the stock market with the safety of
Government securities, or the lit cover and tax concessions of life insurance,
all in one. A sacrifice has to be made for the sake of one or the other
attributes.

The 'highest' return and the 'best' return are not necessarily the same thing
High return may be offset by risk to capital. The best return should be
determined but advantage an investment offers to achieve ones financial
objectives under one's own circumstances in life.

Availability of market information on the above parameters is very scanty it

calls for strengthening and widening the information database to enable better
marketing effort.

Rural and Social Sector

The rural and social sector has practically been neglected so far with the
benefits of insurance services. People of this segment, by and large remain
untouched. With the establishment of IRDA every new insurer is required to
fulfill the following obligations towards the rural sector during the first five
years.

a) RURAL SECTOR
i) Five per cent in the financial year:
ii) Seven per cent in the second financial year;
iii) Ten per cent in the third financial year;
iv) Twelve per cent in the' fourth financial year;
v) Fifteen per cent in the fifth year;
Of total policies written direct in that year.
b) SOCIAL SECTOR
i) Five thousand in the first financial year;
ii) Seven thousand five hundred lives in the second financial year;
iii) Ten thousand lives in third financial year;
235
Sector Specific
Marketing Strategies
iv) Fifteen thousand lives in the fourth financial year;
v) Twenty thousand lives in the fifth year;
vi) Marketing strategies: Our definition of rural and social sectors enables us
to segregate the clients into following categories;;
1) Agriculture farmers, big and small
2) Shopkeepers, small traders, commission agents etc,
3) Employees of pnnchnyats, municipal committee, market committees and
primary school teachers etc.,
4) Persons living below poverty line.

The first three categories listed above have some means of livelihood and
enjoy varying degree of financial status and income. Upper strata forming big
farmers and traders are found to possess all the amenities of urban rich.
Therefore a regular liaison has to be with them. The degree of liaison needed
should be more frequent than what is required for urban areas. A village
friendly policy, having in-built provision for extended days of grace and
revival period, is needed. The fourth group, comprising of person below
poverty line, need special efforts.

Economic Factors

The marketing strategies of insurance schemes are to a large extent

influenced by the following economic factors,

1) Pattern of real income distribution

2) Inflationary and deflationary pressures
3) Changes in consumer expenditure patterns
4) Changes in savings/debt ratio
5) The growth of financial market and variety of investment opportunities
6) Fiscal incentives available to consumers

Therefore the marketing strategies should be able to focus and understand

consumer’s behaviour affected by economic environment. The insurer has to
be fully equipped with the latest developments and chalk out plans as an
effective, marketing tool.

10.7 ROLE OF INSTITUTIONS IN MARKETING

OF INSURANCE SERVICES
An open entry has been permitted to private corporate sector, foreign
institutions, banks and other financial institutions to the insurance sector. The
systematic and planned marketing strategies by new entrants in the market
will certainly give a different shape to marketing practices for various kinds
of insurance services. We may mention the possible outcome benefits as
under:
236
a) Banking services, insurance selling and fund management are inter Marketing of
Insurance Services
related synergies. Therefore insurance selling by banks are mutually
beneficial to banks and insurance companies, Banking products offer
insurance product through the banking channel will complement
banking.
b) With the entry of corporate sector with sophisticated technology, the
quality of services will improve significantly and so are the cost effective
products. This will certainly widen the market horizons.
e) The regulations and controlling measures by IRDA would provide
protection to investor,
d) The professional training institutes will also have important contribution
in training the personnel and thereby sharpening their professional skills.
It will have positive development on marketing of insurance services.
e) There is also a need to expose institutional structure more particularly in
the marketing segment to rural and semi-urban areas.
The efficient and well organized marketing strategies will bring more number
of investors to insurance services and large population uncovered so far will
have advantage of access to this sector,

10.8 SUMMARY
The insurance services in our country have wide scope. for growth. A huge
number of investors could|, be covered with effective marketing practices.
The operational difficulties encountered to far effective marketing will
altogether have a new look henceforth due in to large number of players in
the market, the professional skills to mobilize the business will have key role
in competitive environment. With the increased participation by various
segments, the role of other institutes will also increase considerably.

10.9 SELF ASSESSMENT QUESTIONS

1) Define the role of insurance sector in the Indian economy.
2) Differentiate between life and general insurance.
3) Describe the benefits of insurance investments over other financial
investments.
4) What are the factors for poor growth of insurance business in our
country?
5) Explain how effective marketing will be useful in enhancing the
insurance business?
6 ) Describe personal and professional skills of an insurance agent.
7) How would you suggest to expand insurance business in rural areas?
8) What are the economic and social factors responsible for growth of
insurance business?
9) Describe future prospects of marketing insurance services.
237
Sector Specific
Marketing Strategies UNIT 11 MARKETING OF MUTUAL
FUNDS

Objectives

After going through this unit you should be able to:

• explain the various basis on which mutual funds complete

• describe the Indian scenario for marketing of mutual funds.

• comment upon the Investor attitudes towards mutual funds.

• elaborate on the marketing strategies followed by mutual funds.

• describe strategies for effective marketing

• comment upon the role of other institutes in marketing insurance services

Structure

11.1 Introduction

11.2 Why Mutual Funds?

11.3 Mutual Fund :The Service Product

11.4 Performance Based Differentiation Strategies

11.5 Summary

11.6 Self-Assessment Questions

11.7 Further Readings

11.1 INTRODUCTION
Mutual funds are simple and transparent financial intermediaries, but in
practice are complex. The Investment Company Institute (USA) has
classified more than 21 types of funds offered by mutual fund. They range
from growth funds to precious metals funds to single state municipal bond
fund. A variety of fee structures are used to charge customers for fund
services. And, evaluating the performance with funds objectives may seem to
many customers a mystical science.

Mutual funds can compete with one another either by satisfying different
economic function or by configuring the activities in the value change so as
to produce either a low-cost or a differentiated product.

This Unit discussed the various types of differentiation that mutual funds use
to market their services. Investor perceptions towards various features of
238
mutual funds will give you an insight into the inputs that should go into the Marketing of
Mutual Funds
design of a specific scheme. To enable you to have an overall idea of the
mutual fund services and the investor profile relevant statistics in the form of
comprehensive tables are provided at the end of the unit,

11.2 WHY MUTUAL FUNDS?

Mutual funds can survive and thrive only if they can live upto the hopes and
trust of their individual members. These hopes and trust echo the peculiarities
which support the emergence and growth of such institutions irrespective of
the nature of economy where these are to operate. Mutual funds come to the
rescue of those people who do not excel at stock market due to certain
mistakes they commit which can be minimized with mutual funds. Such
mistakes can be viz. lack of sound investment strategies, unreasonable
expectations of making money, untimely decisions of investing, acting on the
advice given by others, putting all their eggs in one basket, i.e. failure to
diversify.

Mutual funds are characterized by many advantages that they share with
other forms of investments and some that are unique to themselves. The
primary objectives of an investment proposal would fit into one or
combination of two broad categories i.e. income and capital gains. How
mutual fund is expected to be over and above an individual in achieving these
two said objectives, is what attracts investors to opt for mutual funds. The
mutual fund route of investment offers several important benefits. Some of
these are:

Professional Management: Making investments is not a full time

assignment of investors, so they can hardly have a professional attitude
towards their investment. When investor buys a mutual fund scheme, an
essential benefit one acquires is expert management of the money he puts in
the fund.

High Value Diversification: A sound investment policy is based on the

principle of diversification, which is the idea of not putting all the eggs in one
basket. By investing in many companies the mutual funds can protect
themselves from unexpected drop in value of some shares. The small investor
cannot achieve wide diversification on his own because of many reasons,
mainly that of funds at this disposal. Mutual funds on the other hand, pool
funds of lakhs of investor and thus can participate in a large basket of shares
of many different companies.

Easy Liquidity: A distinct advantage of a fund over other investments is that

there is always a market for its units/shares. Moreover, Securities and
Exchange Board of India requires that mutual funds in India have to ensure
liquidity. Mutual fund units can be sold in the share market as SEBI has
made it obligatory for close ended schemes to list themselves on stock
exchanges. For open ended schemes, investor can always approach the funds
239
Sector Specific
Marketing Strategies
for repurchase at Net Value (NAV) of the schemes.

Reduced Risks: Risk in investment is as to recovery of the principal amount

and return on it. Mutual fund investments on both fronts provide a
comfortable situation for investors. The expert supervision, diversification
and liquidity of units ensured in mutual funds minimize the risk. Investors are
no longer expected to come to grief by falling prey to misleading and
motivating headlines leads and tips, if they invest in mutual funds.

Investor protection: Besides depending on the expert supervision of funds

managers, Regulation in a country (like SEBI in India and Securities
Exchange Commission (SEC) has laid down provisions for regulation of
Mutual Funds. These agencies act as watchdogs and attempt wholeheartedly
to safeguard investor interests.

Switching: Mutual funds provide investors flexible investment opportunities.

Mutual fund family allows investors to switch over from one fund to another
e.g. investors can switch from income scheme or vice-versa or say from close
ended schemes to open ended schemes as the investors opt.

Tax Benefit: Many schemes of mutual funds provide tax shelter. Like in
India, for equity linked schemes of mutual funds, under section 88, tax rebate
upto twenty percent of investment (upto Rs. 10,000/-) is available. Under
Section 80L income from mutual funds dividends along with other specified
incomes, upto Rs. 10,000/- is exempted from tax. Such provisions vary from
country to country.

Low Operating Costs: Mutual funds having large investible funds at their
disposal avail economies of scale. The brokerage fee or trading commission
may be reduced substantially. The reduced operating costs obviously increase
the income available for investor. Investing in securities through mutual
funds thus has many advantages over organizing a personal portfolio. Other
advantages include the option to reinvest dividends, strong possibility of
capital appreciation, regular returns, etc. Mutual funds are also relevant in
national interest. The test of their economic efficiency as financial
intermediary lies in the extent to which they are able to mobilize additional
savings and channelize them to more productive sectors of the economy.

11.3 MUTUAL FUNDS: THE SERVICE PRODUCT

Service Products of mutual funds refer to the schemes they offer to investor.
The schemes are selected as per the objectives of earnings of the Mutual
Fund. Mutual Funds adopt different strategies to achieve these objectives and
accordingly offer different schemes of investments. Schemes can be grouped
into six broad classifications:

Operational Classification

On the basis of the way the schemes are operated, they can be divided into
240 open-ended and close-ended schemes.
Opened Ended Schemes: Such schemes accept funds from investors by Marketing of
Mutual Funds
offering its units on a continuing basis. Such mutual funds schemes even
stand ready to buy their shares or units (shares in USA, unit in India).
Further, these shares or units are normally not traded on the stock exchange.
Open-ended schemes have comparatively better liquidity despite the fact that
these are not listed. The reason is that investor can any time approach mutual
fund for sale of such units. No intermediaries are required. Moreover, the
realized amount is certain since repurchase is at a price based on declared net
asset value. No minute to minute fluctuations in rates haunt the investors. In
such funds, the option to reinvest its dividend is also available.

Close Ended Schemes: Such schemes accept funds from investors by

offering its units on a continuing basis. The funds are ready to buy its
securities at any time. It implies that the capitalization, i.e. their corpus
normally does not change throughout it tenure. While open-ended funds are
repurchased or sold directly by mutual funds on the basis of NAV,
the close ended fund unit’s trade among the investors in the secondary market
since these is to be quoted on stock exchanges. Their price is determined on
the basis of demand and supply in the market. Their liquidity depends on the
efficiency and understanding of the engaged broker. On account of being
market based their price is likely to deviate from the NAV, i.e. there is every
possibility that market price may be above or below its since fund managers
can evolve and adopt long term investment strategies depending on
the life of the scheme. Liquidity is available after comparatively longer
period, i.e. normally at the time of redemption.

Interval Scheme: It is basically a close ended scheme with a peculiar feature

that every year for a specific period (interval ) it is made open. Prior to and
after such specific interval the scheme operates as close ended. During the
said period, mutual fund is ready to buy or sell the units directly from or to
the investors.

In India as per SEBI (MF) regulations, every mutual fund is free to launch
any or both types of schemes including interval scheme. In the USA, UK and
Canada close ended funds are popular as investment companies/trusts,
whereas open-ended funds are known as mutual funds. Such distinction is not
made in India. In the countries mentioned above mutual funds are more
popular than investment companies. Till mid 1994, in India also close ended
funds were popular but later on investors’ preference for open-ended funds
forced mutual funds to change their product offers.

Return-based Classification

To meet the diversified needs of investors, the mutual fund schemes are
designed accordingly. Basically, all investments are made to earn good
returns. Returns expected are in the form of regular dividends or capital
appreciation or a combination of these two. In the light of this fact, mutual
fund schemes can also be classified on the basis of returns.
241
Sector Specific
Marketing Strategies
Income Funds: For investors who are more curious for regular returns,
Income funds are floated. Their object is to maximize current income. Such
funds distribute periodically the income earned by them. These funds can
further be split into two categories: those that target constant income at
relatively low risk and those that attempt to achieve the maximum income
possible, even with the use of leverage. Obviously the higher the expected
return, the higher the potential risk of the investment.

Growth Funds: Such funds aim at appreciation in the value of the

underlying investments through capital appreciation. Such funds invest in
growth oriented securities which can appreciate in long run. Growth funds
are also known as Nest eggs or Long haul investments. An investor who
selects such a scheme should be able to assume a higher than normal degree
of risk.

Conservative Funds: These are funds with a philosophy of its issue offer
document announcing objectives as: (1) to provide a reasonable rate of
return, (2) to protect the value of investment and, (3) to achieve capital
appreciation consistent with the fulfillment of the first two objectives. These
are also known as middle of the road funds, such funds divide their portfolio
in common stocks and bonds in a way to achieve the desired objectives. Such
funds have been most popular and appeal to the investors who want both
growth and income.

Investment-based Classification

Mutual funds may also be classified on the basis of securities in which they
invest. Basically, it is renaming the sub-categories of return-based
classification.

Equity Fund: Such funds, as the name implies, invest most of their
investible funds in equity shares of companies and undertake the risk
associated with the investment in equity shares. Such funds are clearly
expected to outdo other in a rising market, because these have almost all their
capital in equity. A special type of equity fund is known as ‘Index Fund’ or
‘Never beat market fund’. These funds have comparatively lower operating
costs.

Bond Fund: Such funds have their portfolio consisting of bonds, debentures,
etc. ‘This type of fund is expected to be very secure with a steady income but
with little or no chance of capital appreciation. Obviously risk is low in such
funds. In this category we may come across the funds called Liquid Funds as
the focus is on liquidity and they are associated with lower risks and low
returns.

Balanced Fund: The funds which have in their portfolio a reasonable mix of
equity and bonds are known as balanced funds. Such funds will put more
emphasis on equity shares investments when the outlook is bright and will
tend to debentures when the future is expected to be poor for shares. Majority
242
of funds fall in this category, of course, their mix proportion varies. Marketing of
Mutual Funds
Sector-based Classification

There are number of funds that direct investing in a specified sector of an

economy. While such funds do have the disadvantage of low diversification
by putting all their eggs in one basket, the policy of specializing has the
advantage of developing in the fund managers an intensive knowledge of the
specific sector in which they are investing. The specialized sectors can be (i)
gold and silver, (ii) real estate, (iii) specific industry say oil and gas
companies, (iv) off-shore investments, etc. There can also be Funds of Funds
i.c., mutual funds investing in units in other mutual funds only.

Leverage-based Classification

Some mutual funds broad base their investible funds by borrowings from the
market and then make investments, thereby making leverage benefits
available to the mutual fund investors. Such funds are known as ‘leveraged
funds’. It depends on the regulating provisions in a country whether
borrowings are allowed or not. Normally leverage funds use shorts sale,
which allows the management of the fund to avail the advantage of
declining markets in order to realize gains in the portfolio. Leverage funds
also use Options, specifically, Call Options.

Other funds

There are some other types of schemes which do not fit in to the above given
classifications. Some of such funds are mentioned here. There are ‘load
funds’ and ‘no-load funds’. In load funds, the mutual funds charge a fee over
and above the net asset value from the purchaser. In No load funds, no load
fee is charged because little sales efforts are made to promote the funds unit
sales except through direct advertising. Mutual funds schemes can also be
designed to offer some tax exemption. Besides these, there are money mutual
funds which interact only in money market. Offshore mutual funds (also
known as regional or country funds) are the funds mobilizing funds abroad
for deployment in India market. Many mutual funds abroad have floated
property funds, art funds, commodity funds, energy funds etc.

A point that needs to be viewed is that irrespective of classification of

schemes, every scheme will be either an open-ended scheme or a close-ended
scheme.

Activity 1

a) Contact some mutual fund investors and ask them why do they invest in
mutual fund schemes?

b) Consult any financial newspaper to identify the types of mutual fund

schemes in operation in India. 243
Sector Specific
Marketing Strategies 11.4 PERFORMANCE BASED DIFFERENTIATION
STRATEGIES
In the investment selection dimension, funds may attempt to differentiate
themselves on the basis of their historical investment performance. Michael
Jensen (1968) and other studies have failed to demonstrate that fund
managers can consistently earn superior risk adjusted returns. Nevertheless,
funds offering exceptional historical returns can use and performance record
in their marketing to differentiate themselves from others, In a research
paper, and (1993) found that performance matters but only for star
performers. Top-performing mutual funds receive net inflows of new money,
yet funds that perform poorly do not lose very many assets. This asymmetry
between consumers' reaction to very high performance and very low
performance a possible "heads I win, tails I don't lose" strategy. Once fund
does well and captures assets, it does not appear to lose them through
subsequent poor performance.

New-Product Differentiation Strategies

Introducing new products is not cost less. A complex must incur the direct
costs of lawyers and accountants, time and expense to educate sales people
and consumers. New funds may cannibalize existing complex accounts. It is
feared that new fund that performed disastrously and received media
attention could harm the sales of existing funds. A study shows that on an
average, independent load fund complexes introduced about half as many
new products as no-load and captive-border complexes. However, there is a
strong positive association between growth and a strategy of differentiation
through new-product introductions.

Bond Funds

Bond funds can be floated in order to generate high current income with a
minimum of risk. As seen in the recent times many bonds have been
oversubscribed, launching of bond funds would facilitate to wipe out the fear
in the minds of investors caused by poor performance of growth funds or
stock funds. Such fund concentrates either only on high-grade corporate
bonds or holding a mixture of different grades.

Index Funds

Index funds can also be floated in order to adopt a passive investment

strategy to avoid transaction costs as well as market uncertainties.

Money Market Funds

Money market fund can also be created to meet the short-term shortage of
liquidity and will earn higher rates of return.

244
Dual Funds Marketing of
Mutual Funds
At the fund's inception, two classes of stocks are sold, each class having the
same number of shares and same rupee value. One class is income share that
is entitled to receive all the dividend income earned by the fund after
expenses are deducted. They are assured a minimum dividend and have
claims against other class of shares. At the termination of the fund, Income
shares will be redeemed for an amount approximately equal to the original
purchase price and any unpaid dividends. The other class of share is capital
shares that are entitled to receive all assets remaining at termination after the
preferred has been redeemed. This class is not entitled to receive any
dividends during operation.

Leverage Funds

These funds use borrowed funds to their utmost in order to increase size of
the value of the portfolio. The excess returns over the cost of the borrowing
will benefit the unit holders of funds.

Junk Bond Funds

Although most of the bonds have higher than average risks, these unit holders
are rewarded higher yields. Though individuals would not prefer such bond,
such funds can be floated to niche markets.

Distribution Method Differentiation Strategies

Load and no-load funds offer similar investment management, record

keeping, and investor liquidity services. Complexes in the higher-fee load
sector typically differentiate their fund product form those offered in the no-
load sector by bundling costly person-to-person selling an investment service.
As a result fees that funds charge consumers vary dramatically for relatively
similar investment products sold through varied distribution channels.

Low-Fee Strategies

Mutual funds charging lower fees tend to dominate and grow faster than
funds charging higher fees, unless funds can convince that they offer highly
differentiated products. The fund selling an equal but lower-fee product
would enjoy a cost advantage that from economies of scale. Perold and
Salomon (1991) found that Mutual funds may achieve economies of scale in
record keeping reporting and marketing/distribution and economies of scope
in marketing/distribution and liquidity services. Fund may also enjoy
economies in investment selection. Dermine and Roller (1992) supports that
complexes can achieve scale and scope economies, and those fees charged
are statistically related to proxies that measure these economies. These
studies documented scale and scope economies in the mutual fund industry.

245
Sector Specific
Marketing Strategies
Figure 1: Strategies for mutual Funds

Value Chain Element Cost-Based Strategies Differentiation-Based

Strategies
Investment Selection Scale-assets under Superior performance
management over (fund)
narrow region (fund)
Trading and Execution Economies at large- Superior trading skills
scale (complex) translating into higher
returns
Customer Record Scale-number of Superior technology-
Keeping and Reporting accounts (complex) quicker reports, fewer
mistakes (complex)
Marketing and Scale-national Superior marketing and
Distribution advertising economies advertising (complex)
(complex)
Investor Liquidity Scope-economies in Wide selection of funds
Services new-product exchange privileges,
development (complex) related financial services
cheque writing
(complex)
Source: Sirri and Tufano (1993).

Activity 3

Assume that your bank is planning to launch a mutual fund. What are the
problems and opportunities that you foreseen for such a service? What
strategies would you suggest for effective marketing of the mutual fund.

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

…………………………………………………………………………………

11.5 SUMMARY
Mutual funds can effectively implement their marketing strategies to market
their products to mobilise the individual savings mostly in the form of
currency and bank deposits. Such scheme would cater to the needs of investor
who prefer high safety, regular income and life cover. Studies show that
investor prefer investment more in liquid form than in non-liquid form. The
management of mutual funds should also consider lo improve their quality of
investor services.

246
11.6 SELF-ASSESSMENT QUESTIONS Marketing of
Mutual Funds

1. How do mutual funds apply differentiation Lo focus attention on their

products ?
2. What is the general investor profile of an Indian investor, and what
implications does this profile have for the providers of Financial
Services.
3. Comment upon the status of mutual fund investments in India.
4. What arc investor preferences towards specific features of mutual fund
schemes?
5. Critically analyse the opportunities for mutual funds in India.

11.7 FURTHER READINGS

Dermine J., and Roller, I., (1992) Economies of Scale Scope in the French
Mutual Funds (SICAV) Industry, Journal of Financial Intermediation, Vol .2
(1992) pp 83-93.

Ennew, Christine, Watkins, Trevor and Wright, Mike, ( 1990)(Ed .)

Marketing Financial Services, Heinemnnn Professional Publishing (Oxford).

Meidan Arthur 1983 Rank Strategies, International Journal of Bank

Marketing, Vol . 1 (2), pp 3-17 (1983), Marketing Financial Services,
Macmillan Press (London).

Perold, Andre and Robert Salomon ( 1991), The Right Amount of Assets
Under Management Financial Analysts Journal, May/June 1991.

Riepe, Jnmes S., ( 1989), Marketing of Mutual Funds, In Marketing Financial

Services by Zenoff, David B .(Ed .), Ballinger Publishing Company
(Cambridge).

Sahadevan,, K.G. and Thiripalraju, Mutual Funds India Fact book, Institute
of Capital Markets, (Navi Mumbai). Mutual Funds Data, Interpretation and
Analysis ( under print), Prentice-Hall of India, (New Delhi).

Sirri, Erik R and Tufano , Peter, (1993), Cornpetitiorr and Change in the
Mutual Fund Industry, In Financial Services Perspectives and Challenges By
Hayes, Samuel 1, III (Ed.), Harvard Business School Press (Boston).

247
Sector Specific
Marketing Strategies UNIT 12 MARKETING OF PENSION FUNDS

Objectives

After going through this unit you should be able to:

• describe the need and requirement of Pension plans
• distinguish between the type of Pension plans
• identify the type of risk associated with Pension funds
• explain the fund management process for Pension funds
• comment upon the Financial Market Implication of Pension funds
• comment upon the role of other institutes in marketing insurance
services.

Structure

12.1 Introduction
12.2 Emerging Dimensions Relating to Investment Services
12.3 Pension Funds: A General Overview
12.4 Why Pension Plan?
12.5 Types Pension Plan
12.6 Pension Fund Risk
12.7 Funds Management
12.8 Pension Fund Investment: General Guidelines
12.9 Pension Funds and Capital Markets
12.10 Pension Funds: Some Related Statistics
12.11 Summary
12.12 Self-Assessment Questions
12.13 Further Readings

12.1 INTRODUCTION
Since the volume of International business and capital flows are increasing,
the commercial banks are likely to be exposed to different types of risk and
there is a need to hedge these exposures. The emerging ,derivatives in foreign
countries are increasingly used by hanks to bring variations in the sensitivity
of their funds and also the underlying portfolio, It is the right time that forex
dealers, especially the commercial banks, in India, familiarize with the
complexity of these instruments and acquires skills to manage these emerging
challenges.

Establishment of foreign banks and non-banking companies has played a

very key role in introducing the technology cult in the financial sector in
248
India. In the light of the diversified product range the banks and financial Marketing of
Pension Funds
institutions are offering Local public various types of financial services in a
global perspective. Hence, in the aspiration towards becoming major player
in the modern financial service sector, commercial banks and various
investment institutions will have to evolve appropriate strategies for
technology integration for providing faster and efficient financial services.

The pension funds are playing a very important role in U.S.A, and other
European countries in ensuring channelizing of savings into fruitful
diversified investment portfolio.

Different types of financial. services are being provided by these passion

funds. The aim of financial sector reforms in India has been to encourage the
foreign institutional investors to invest in India and it is hoped that in the
changing global business scenario, more and more pension funds will, enter
in India to provide wide variety of financial services. Presently some of the
investment schemes in the same of pension funds investment have been
started by IDBI, ICICI and by some other financial institutions.

15.2 EMERGING DIMENSIONS RELATING TO

INVESTMENT SERVICES
Over the years, with the changing scenario in Indian economy, new
challenges are emerging, which the banks have to face with suitable
strategies. The major challenges in the nineties relating to investments and
other financial services are likely to be in the following areas.
a) growing importance of the corporate sector and its diversifying needs,
b) development of capital markets, the disintermediation phenomenon and
their impact on commercial banks,
c) development of factoring and commercial paper,
d) need for export promotion and disintermediation in international
business, and
e) universal banking.

15.3 PENSION FUNDS: A GENERAL OVERVIEW

A Pension is an agreement to provide regular income during a person's post-
retirement life. During the past decade, people have wanted to be provided
after their retirement due to rising life expectancy and the earlier retirement.
The profound social changes have also an impact on the growing population
to seek some sort of regular income after retirement instead of depending
upon their children in their old age.

In the U.S. the first pension plan was established by the end of 19th Century
by Railroad. (The earliest one set up in 1875 by American Express Company
was later on closely associated with Railroad). At that time the pension plan
was quite informal and that too at the discretion of the employer and used as 249
Sector Specific
Marketing Strategies
a disciplinary devise. During depression in 1930’s, the many pension plans
failed to make payment to the beneficiary. These wide spread collapse of
pension plans led to more regulations and it was also a major factor for the
establishment of government sponsored pension plan and social security.

The World War II brought a major expansion of pension plans. This was
necessitated due to scarce labour, government imposed wage control and
social security benefit. In 1949, the U.S. Supreme Court upheld decision of
National Labour Relation Board that pensions were a legitimate part of
collective bargaining. Since then, the pension funds have grown rapidly.

Changing Demographic Structure

• Although the proportion of people who are old is highest in OECD
countries and transitional socialist countries, most of the growth is in the
world's old population- from half a billion people in 1990 to almost 1.5
billion people in 2050,
• About one old person in four is "very old" (over age 75) and of these
almost two-thirds are women the economic position of the very old is
very different from that of the younger old, and the position. of old
women is very different from that old men.
• The proportion of the population that is old rises with per capita income.
In low-income countries, less than 7 per cent of the population is over
60. This proportion rises to 12 to 16 per cent in middle-income countries
and to 17 per cent or more in most high income countries. The ratio of
old people to working age people (old age dependency ratio) also rises
with per capita income a relationship that sterns directly from the lower
fertility rate in richer countries and the ability to lengthen life span
through medical intervention.

• Most old people live in poor countries (which is also (he most populous),
a pattern that will intensify towards 2030. By then, more than three-
quarters of the world s old people will be in areas not now industrial
more than half in Asia and more than a quarter in China alone.

Indian old age population would increase from 6.5 per cent in 1990 to the
extent of Marketing of Pension Funds 7.58 per cent in 2000, 13 per cent in
1030, 28 per cent in 2100 and 30 per cent in 2150.

Need for Reforms in Social Security

Political pressures lead to tax financed benefit formulas that are not
sustainable.

• High payroll taxes that are not closely tied to benefits discourage
employment.

• Early retirement provisions reduce the supply of experienced workers.

• Financial methods mix-allocate capital and may reduce national saving.

250
• Workers often evade contributions but manage to qualify for benefits. Marketing of
Pension Funds
• The failure to index benefits means that pensioners in many countries
have not been protected from inflation.

• The growing deficits of old age programs are passed on to general

treasury, requiring higher taxes, and higher public borrowing less public
spending for other important purposes.

• Publicly managed pension reserves are invested unproductively, earning

low, even negative, rates of return.

• Large income transfers go to upper-income old people, while many of

the lower- income old are not helped.

• Occupational pension plans have not been adequately regulated.

• Today's children and young workers may pay the price of higher taxes,
lower pensions, and therefore lower living standards, as old age
dependency rates rise and growth declines.

Activity 1

Talk to 5 employees of your bank, from different cadres, who are

approaching retirement, to take their views of the pension scheme offered by
the organisation. What limitation and shortcoming do they perceive in the
pension plan?

12.4 WHY PENSION PLAN?

Pension plans receive special tax treatment and are subject to eligibility,
coverage and the benefit standards. For individuals, it would be indifferent-
pension benefits and personal savings if it provides some retirement benefit at
the same cost of forgone current consumption. Tax advantages create
favourable savings through pension plan. For firms, it provides a substitute
for wages and pension can provide firms with a source of financing at a
cheaper cost.

• Pension cost of a firm is tax deductible.

The investment income of pension plan is tax exempt.
Pension benefits are taxed when the benefit paid to the beneficiary not
when earned by them.
• There are three options available to the employee for their retirement
benefit:
• Employer does not make any contribution but he pays full amount lo the
employee.
• Employee himself saves that amount for his retirement benefit.
• Employer does not make any contribution hut he pays full amount to the
employee. 251
Sector Specific
Marketing Strategies
• Employee himself takes a life insurance policy for his retirement benefit.
• Marketing of Mutual Funds, Employer makes a contribution to the
pension fund for the retirement benefit of the Insurance and Pension
Funds employee.
Before considering the comparative advantage of above three options, let us
make assumption that :
• employee is in tax bracket
• his marginal rate of tax throughout his life is assumed to be 30 per cent.
• return earned on his saving assumed to be 14 per cent.

In case of option No. l employee receives only after tax income of 0.7 (1.00 -
0.3). This after tax income is deposited in a bank which earns rate of interest
of 14 per cent. His effective rate of return would be 9.8. In this case,
employee receives Rs. 7001- after paying 3 0 per cent taxes on gross income
of Rs. 10001- and depositing in a bank for 35 years. The interest earned on
savings again reinvested after paying the tax' for that income for each year.
Therefore, his return after 35 years will be Rs.18,457.8 after 35 years. This
amounts to a rise of 26.37 times over his initial investments.

In case of option No. 2, employee receives after tax income and takes an
insurance policy of Jeevan Dhara at a single payment of Rs. 31.50. It will
accrue and would receive an amount of Rs. 1,0001- after 35 years. It amounts
to 31.75 times over his initial investment.

In case of option No. 3, employer contribute Rs. 1,0001- to the pension plan
instead of paying him after tax income of Rs. 7001-. The pension plan
accrues an assumed rate of 12 per cent, the amount returned to the
beneficiary would be Rs. 52,8001-. It comes to 52.8 times over his initial
investments.

Considering the above three options, it is obvious for an individual to opt for
a pension fund which accrues 52.8 times over his initial investment even at a
lower rate of return of 12 per cent.

Activity 3

Looking at the kind the interest rates now prevailing in the country, carry out
the relative benefit analysis/or the prevailing pension fund schemes in your
organisation for yourself as an employee.

12.5 TYPES OF PENSION PLAN

There are two basic types of pension plans:

• Defined Benefit Plan

• Defined Contribution Plan
252
Defined Benefit Plan: This plan assures the contributors a pre-defined Marketing of
Pension Funds
pension payment system depending on the final contribution structure. The
plan usually has a formula which will be worked out and paid accordingly to
the employee upon his retirement. In essence the pension payment will
depend upon the length of the service of the employee and the earnings of the
employee. The pension obligations are effectively the debt obligations of the
sponsor of the fund, which assumes the risk of having insufficient funds in
the plan to meet the contractual payments to the retired employees. Thus all
the investment risk is borne by the plan sponsor.

Defined Contribution Plan: This plan specifies the contribution and pension
income depends upon the amount of contribution, number* of years in which
contributions are made and the performance of the fund. Thus risk of
investment is transferrer1 to the investors in the pension fund. Defined
contribution pension plans come in several legal forms: Money Purchase
Pension Plans, 401(k) plans, Employee Stock Ownership Plans (ESOPs).

With a defined contribution plan, employer merely passes pension fund

management to Marketing of Pension Funds the insurance company arid
stops making contribution to the plan upon the termination of the plan by
employee. With the defined benefit plan, it become more complicated and
controversy. The pension fund assets do not necessarily equal the present
value of promised benefit. If assets are greater than the benefit the excess
assets are transferred to the employer. If the assets are lower than the benefits
then it falls short of obligation.

Hybrid Pension Plans: These combine features of both defined benefit and
defined contribution plans. It appeals to both employee as well as employers,
since bearing of investment risk by the employee in case of defined
contribution plan, while it is expensive and complex to implement defined
benefit plans for employers. Thus there will be risk sharing between sponsor
and members of the plans. Floor-Offset Plan is one of the hybrid plans.
Employee contributes a certain amount each year to a fund as in defined
contribution plan. The employer guarantees a certain minimum level of
benefits, depending on the employee's number of years of service as in a
defined benefit plan. The employer manages the fund and informs the
employee periodically of the value of his investment. If the managed fund
does not generate sufficient growth to achieve the present levels of benefit,
the employee is obliged to contribute an additional amount to bridge the gap.

Factors affecting Contributions

An organisation must evaluate on actuarial funding projection designed to

accumulate assets to provide benefits to the retiree. An actuarial funding
programme combines the data on plan specification, employee characteristics
and pension fund size with assumption about future interest rate, salary
turnover, and death and disability ratio. Given these assumptions and data, an
actuary estimates both future pension obligation and the annual payment
253
Sector Specific
Marketing Strategies
schedule to satisfy those obligations. Different interest rate and salary
assumptions have an impact on annual contribution. A rule of thumb is that
rising annual interest rate by 1 per cent point will lower pension liabilities by
15 per cent holding all the factors held constant. Similarly, different actuarial
funding method can substantially alter required and allowable contribution in
any given with even a same plan characteristics and actuarial assumption.

12.6 PENSION FUND RISK

The pension funds generally face the following risks:

• Coverage Risk
• Replacement Risk
• Investment Risk
• Longevity Risk.

Coverage Risk: Employee failing to participate in the pension schemes

which in turn leads to impossibility of economies of scale of operation in the
funds management. It can be avoided by mandatory contribution by
employee as well as plan participant.

Replacement Risk: Employee who retires will not be able to maintain the
standard of living after retiring comparable with same standard of living
during pre-retirement periods.

Tax benefit should be given for employee to contribute more to funds as well
as to contribute longer time so that replacement risk can be reduced.

Investment Risk: The investment made by pension funds may perform

poorly due to market risk and other risk inherent to assets in which the
investments are made. Better diversification across assets and across
countries would help reduce the investment risk which partly depends upon
the fund management.

Longevity Risk: Risk that the retiree will live longer than expected and thus
exhaust the amount saved for retirement before he dies. This risk can
perfectly be hedged against of Mutual Marketing Funds, insurance, since
longevity risk is 'beneficial to insurance companies and mortality risk is
Insurance and Pension Funds beneficial to pension funds. The life insurance
companies would be more beneficial by floating pension funds and pension
fund institutions would be more benefited by floating life insurance
companies.

Inflation Risk: The risk of price increases, which erode the purchasing
power of the lifetime savings. This risk were entirely depend on government
policy, fiscal deficit and central bank's monetary policy. The government
must bring a regulation similar to ERISA in USA and form the Pension
Benefit Guarantee Corporation (PBGC). The corporation would guarantee at
254 least inflation risk by charging insurance premium for eligible pension
fund. The corporation liabilities should be guaranteed by central government Marketing of
Pension Funds
and central bank which are accountable for inflation.

Risk Sharing

Certain risks that are uncorrelated across individuals, such as longevity risk,
are minimised by pooling across the largest number of people including
everyone in a single insurance pool or reinsuring across several smaller pools
since the average outcome for the group is much more certain than the
experience of any particular individual.

Other risks, such as disability risk, are subject to moral hazard problems,
which should be constrained to keep costs down.

Some degree and type of indexation, shifting part of the inflation risk to
younger workers, is needed to prevent the very old from living in poverty
during inflationary periods Investment, insolvency, and political risks are real
and potentially large, but they cannot be reduced through risk pooling
because they are correlated across individuals and subject to moral hazard
problems. Diversification is the solution here. Diversification across several
managerial and financing mechanisms protects pensioners against exposure
to extreme failure of any one arrangement, reducing overall risk for the old.

Activity 3

the respect to the Pension scheme offered by your organisation critically

assess? s I he risks that arc associated with this plan. What arc the possible
risk management processes that the organisation may use.

12.7 FUNDS MANAGEMENT

Long-term vs. Short-term

Pension fund benefits from regular inflow of funds on contractual basis and
for long-term liabilities which together imply little liquidity risk. Pension
funds are contractual annuities meaning that the lump sum withdrawals are
precluded each during the period their claims are payable after retirement.
The members of the pension funds are willing to accept low liquidity, giving
potential for higher returns at a greater risk and liberal portfolio regulations
are also responsible for better management and growth of pension funds.
Time also needs to be taken as an important variable in the investment
decision process. Long- term investment could reduce risk significantly and
increase return. Madhusoodanan (1997) found that taking longer term view of
the market definitely pays rich rewards. That is, buy and hold strategy is
likely to be better than any trading strategy on long-term basis. this is in
conformity with several stock markets. Thus it is very important to look
beyond asset allocation strategies based on the risk-returns trade-off of
different asset classes.

255
Sector Specific
Marketing Strategies
Asset Classes and Diversification

How much fund the pension plan should raise and what kind of assets to
invest in are the questions which hove different implications depending upon
the types of plan. For defined Marketing of Pension Funds employer
contribution plan, has to make a promised contribution each year and has no
other funding decisions to make. The only question with defined contribution
plan is how to invest the assets. The standard portfolio theory that it would be
best with some well diversified combination or stocks, bonds and treasury
bills. More risk employee wants to take higher the proportion will be in the
stocks. In practice, most pension plans in U.S. are fully funded meaning that
assets equal the present value of benefits already in earned by employee.
Pension plan is equally split between stocks and bonds. This fifty-fifty ratio
gives possible explanation for the pension fund. There are number of factors
term which determine the appropriate asset mix policy. The factors are long-
term prospects of the capital markets, short-term fluctuations in economic
values, plan assets and liabilities, A the impact of returns on employers'
contributions and riskiness of the portfolios. Most pension funds choose the
mutual funds to rely on the investment expertise from mutual funds. Further,
real returns on pension funds show that privately managed funds do better
than publicly managed funds. Domestic vs. International Diversification

International diversification reduces risk faster than domestic diversification

because domestic securities exhibit stronger correlation as a result of their
joint exposure to country-specific shocks. International diversification should
cover both stock and bonds; efficient portfolios made up only stocks display
a substantially higher risk for the same level of returns than efficient
portfolios made up of both stocks and bonds. (Solnik and Noetzlin, 1982)
(See also Shashikant, Uma 1998).

How much funds the pension plan have has different implications depending
upon the types of plan. The firms owing pension fund shall chose the funding
and tie portfolio strategy with higher net present value. This leads to two
opposite solutions. Under funding needs to buy risky assets, over funding
facilitates to buy high grade bonds.

Ambachtsheer points out that pension funds can be classified on the basis of
liability goals. It can run on the basis of termination liability goal or going
concern goal. A termination liability definition assumes that goal of the fund
is to meet current accrued liabilities. The going concern liability reflects an
assumption that the pension benefits accruing will actually be paid out over
time and that the nominal pay-out value will reflect actual inflation
experience. The investment implications varies according to the selection of
goal of the pension fund. If the pension obligations is termination obligation,
then passive fund management is enough. If the duration of the liabilities is
known, investments are to be made in the portfolio of assets that matchless
the duration of the liabilities. An immunization strategy is constructed
256 through a portfolio of zero coupon long dated paper or coupon paying fixed
income securities. The immunization strategy is subject to an element of Marketing of
Pension Funds
interest rate risk. If the pension liabilities are going concern basis,
investments in stocks could be worth considering. Then the element of
market risk will be with the fund. If the termination liability view is static
view of the world, then the going concern is a dynamic view of the world.

Passive vs. Active Management

The Management of pension fund depends on the efficiency of the asset

market in a particular country. Arumugam (1997) found day of the week
anomaly (high stock returns on Friday) and Arumugam ( 1998a) found high
stock returns before holidays in Indian equity market. The institutionalized
investing could exploit the inefficiencies and anomalies present in the market.
However, Monday-buy and Friday-sell trading strategy can be used to exploit
the day anomaly in the Indian equity market, since any reversal of timing of
investment (Friday-buy and Monday-sell.) would incur loss of 20% as
against the profit of 6% as in the Monday-buy and Friday-sell Marketing of
Mutual Funds, strategy.

12.8 PENSION FUNDS INVESTMENT: GENERAL

GUIDELINES
Prudent man Rule
The pension funds should invest the money in the way how prudent man
invests in the asset of the portfolios. The onus of being prudent is put on the
fiduciary investment committee — the committee that oversees the pension
funds. They would have to basically ensure that they review all the
investments properly, having all the document properly and all due diligence
that a normal prudent man would, in order to take a decision. This process
which would have major impact on the pension fund industry.

Sole Benefit of the Plan Participant

All investments have to be made on the basis of providing benefit to the
plan participants. In a framework of the decision making in pension funds
which has help up f w the test of the time, and the pension fund industry
generally speaking has been free of scandal.

Management Structure of the Pension Fund

Fiduciary Committee at the top (like the board of governors, or board of
trustees) takes action on specific investments, on investment policies, the
asset allocation, and administration of the fund. These investment activities,
administrative actives, oversee any external investments or managers are
being done by Chief Investment Officer on behalf of the trust. The officer
reports to the fiduciary committee. The Chief investment officer and mutual
funds or investments managers are fiduciaries and are liable for any
‘malpractice. This is the kind of structure in US pension industry and has
been really good success.
257
Sector Specific
Marketing Strategies
Asset Classes
While most of the pension funds follow prudent man rule, Table 12 exhibits
stipulated investment limit for the pension and provident funds in India.
Investments are not fairly diversified as it holds only of bond portfolios, nor
any foreign investments.

Foreign Investments
Though international diversification ensures reduction of risk and maximise
the expected returns, many pension funds are biased towards domestic
investments either by prudent man rule or restrictions by the government.

Performance Measurement
Let us now see how the performance of a given pension fund can be
measured. To take an example. Cost Effectiveness Inc. (CEM) have created a
seven-point GAAP for measuring pension fund management operation
(Source: Ambachtsheer, 1994)

• Total fund returns must be decomposed into policy and implementation-

related components before any peer-relative comparative analyses are
performed. Funds may have different investment polices because of
differences in such factors as liability structure and risk tolerance, so
policy-related return components across different funds contain no
information about management skill.

• To understand the sources of implementation-related fund return, it is

useful to decompose it into within-asset-class and across-asset-class
(mix) segment. Ideally, return (and risk) decomposition continues down
to the level of individual portfolio management mandates within the
fund.

• When peer comparisons of fund returns are made, only implementation-

related fund returns (and risk) components calculated with identical
decomposition procedures are comparable.

• Total fund operating costs must be decomposed into minimum-required

and incremental components before any comparative analyses are
performed. Because funds have different asset values and different
investment policies, minimum-required Operating costs across different
funds will differ and will contain no information about management
skill.

• To understand the sources of incremental operating costs, it is useful to

further decompose them into those directly related to investment
management and those related to governance and administration. Ideally,
the costs directly related to ‘investment management should be further
decomposed down to the level of individual portfolio management
mandates within the fund.

258
• When peer comparisons of fund operating costs are made, only Marketing of
Pension Funds
incremental operating Cost components calculated with identical
decomposition procedures are comparable.

• When peer comparisons of fund return-operating cost combinations are

made, Only implementation-related fund return and incremental
operating cost combinations calculated with identical decomposition
procedures are comparable.

12. 9 PENSION FUNDS AND CAPITAL

MARKETS
• Investment policies of pension funds have a profound effect on the
capital affecting the rate and direction of financial innovation, the
behaviour of security prices and the policies of the corporations whose
securities they hold.

• Fiduciary role in pensions management and a large increase in the

volatility of interest fates modest it important for pension funds to hedge
their liabilities,
• In response to the hedging demands of pension funds, the financial
markets hay, produced a variety of innovative products.

• Pension funds have also pioneered in the development of index trading.

• Pension funds having a substantial option of the stock in corporations

and their voting powers can profoundly affect corporate policy.

• Growth of funds has influenced international capital flows. International

diversification is a means to reduce systematic risk in domestic markets
and beneficial effects on the efficiency of global capital markets.
Opportunities for Growth of Pension Funds

• More than 60 per cent of the household savings are in the form of
currency and deposits, which can be channalised through pension fund
reforms (See Table 15).

• Provident and pension fund assets in India constitutes only below 20 per
cent of GDP as against average of 30 per cent for developed countries
(See Table 16), though percentage of household savings are almost
similar.

• The government must bring a regulation similar to ERISA in USA and

form the Pension Benefit Guarantee Corporation (PBGC).

• The corporation would guarantee at least inflation risk by charging

insurance premium for eligible pension fund.

• The corporation liabilities should be guaranteed by central government

and central bank, which are accountable for inflation.

259
Sector Specific • The regulations should encourage wide diversification across assets and
Marketing Strategies
countries although to 8 smaller extent in the initial periods.

• Vesting rules should be simplified so that participant can change the

funds depending upon the performance of the funds to encourage
competition among pension funds.

12.11 SUMMARY
On account of their sheer volume, pension funds assume great significance
for investment services and as sources of funds. Countries like India have
clearly specified, for the Government Provident Fund avenues in which the
pension funds can e invested in addition to the providential norms which
have been prescribed. This unit explains the need and significance of pension
funds and the type of pension funds across countries that are in vogue today.
The type of risks associated with pension funds and the general guidelines for
investment of service funds have been discussed. Important statistics in
relation to pension funds have been provided to enable to you to have an
overall view of this market across courtiers.

12.12 Self – Assessment Questions

1. How does the changing demographic profile influence the scope of
pension funds?

2. Why are pension schemes beneficial?

3. Describe the different types of pension plans.

4. What are the risks associated with pension plans? Can these risks be
managed? How?

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Pension Funds

BLOCK 5
EMERGING ISSUES

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Sector Specific
Marketing Strategies

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 Technology and
UNIT 13 TECHNOLOGY AND DIGITAL Digital Marketing

MARKETING
Learning outcomes
After going through this unit you what should be able to:
• Provide an overview of technology use in present day Financial Services
• Discuss the potential and impact of the adoption of emerging
technologies for the marketers as well as consumers
• Discuss the role and importance of digital marketing for Financial
Services in India
• Describe the different digital marketing tools that can be integrated into a
financial services marketing plan
• Develop and apply an effective digital marketing strategy for financial
service organisations
• Suggest the measures that should be applied to assess the effectiveness
of a digital marketing programme for financial services
Unit structure
13.1 Introduction
13.2 Fin tech: Technology as an enabler and related issues
13.3 Impact of technology on user experience for financial services
13.4 Digital Marketing and Financial service
13.5 Digital Marketing tools relevant for financial services
13.6 Developing a Digital Marketing strategy
13.7 Monitoring the effectiveness of Digital Marketing
13.8 Let us Sum up
13.9 Self-assessment questions
13.10 Further Readings
13.1 INTRODUCTION
Recall the use of financial services like banking, insurance, investment
planning, mutual fund investment and others that you and your family may
have used or acquired in the last three months. If you recall your acquisition
or consumption journey, right from search for alternatives to alternative
evaluation to decision and final buying or completing the user transaction,
you would realise the support that digital resources in terms of digital and
social media advertising as well as net banking sites plus website linked
processes provided to you as a consumer in terms of product and competitor
information, suggesting criteria for evaluation and helping with queries
through the CRM support. You would also realise that only for a very few, if
any of these processes, did you need to actually visit the service provider or
physically interact with the service personnel at these service establishments.
Does that make you realise that a large number of marketing processes right
from product information, to marketing communication to actual product 263
Emerging Issues
delivery and use in financial services are being managed through digital
means? Digital Marketing has, on account of the changing technology
facilitation and the emerging consumer behaviour in respect of availing the
convenience of this facilitation, has assumed a great significance for financial
services. You have been introduced to the basic concepts of Digital
Marketing in your core Marketing course, Marketing for Managers in Unit 14
of the course. In this unit, you will be exposed to the application and
implementation of Technology in financial services and to the rising
importance of digital marketing for the sector as well the upcoming trends
in user expectations and user experiences in financial services in the digital
marketing and servicing environment.
13.2 FINTECH: TECHNOLOGY AS THE
ENABLER IN FINANCIAL SERVICES
SECTOR
The fast paced technological changes have witnessed an accelerated rate of
development of new products and services leading to intensified competition
on the one hand and rising consumer expectations on the other.
In the past few years, the impact of technology on financial services has been
massive. Businesses are compelled to let go off the traditional financial
practices and follow agile, innovative approaches to stay ahead of the
competition.
The emergent technology applications to the financial services sector have
become so clearly visible and widespread that a new term “Fin tech’ has been
coined to collectively refer to them. The term Fin tech refers to the
integration of technology into offerings by financial services companies in
order to improve their use and delivery to consumers. It primarily works by
unbundling offerings by such firms and creating new markets for them. Fin
tech is utilized to help companies, business owners, and consumers better
manage their financial operations, processes, and day to day operations by
utilizing specialized software and algorithms that are used on computers and,
increasingly, smartphones. Firms specialising in Fin tech have evolved over
the years to develop, customise and offer fin tech solutions to financial
service providers like banks, investment firms, insurance ,financial
intermediaries and indeed stock broking firms. Large financial institutions are
now increasingly investing in their own in house Fin tech divisions or
subsidiaries.
The rapid acceleration of change has spawned entirely new portfolios of
products and services in fields such as mobile banking, online investments
and digital payments. Partly as one of the impacts of the pandemic, and the
accelerated transformation it brought about, new technologies were harnessed
to overcome the difficulties imposed by restricted movements, slowdown of
processes and bottlenecks in consumer servicing
New technologies aim to improve efficiency, service quality and customer
experience. If their adoption is done well, it could help the financial industry
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 Technology and
create innovative solutions, develop new business models and target new Digital Marketing
markets. Tapping the potential of application programming interfaces (APIs)
and the cloud, and using data to create customized solutions, could ensure
that investment in digitization delivers good returns as well as opportunities
for market leadership. Further, financial institutions can better target potential
consumers and market their products and services with the enabling support
of data analytics, machine learning and Artificial Intelligence. Applications
like predictive behavioural analytics that encompass data mining, data
visualization, algorithm clustering, and neural networking to find patterns or
trends in data are being used to forecast future behavior trends based on
current or past behavior analysis include identifying customers likely to drop
out or default; identifying products customers are likely to buy next and
developing an understanding of emerging behavior. Uses of predictive
segments. To quote Ravi Narayanan Country Head -Branch Banking &
Retail Trade FX Business, “We organized the Digital Innovation Summit in
March (21) where we invited a couple of fin tech companies and start-ups to
collaborate with us in areas of emerging technology. As a part of the
program, we have collaborated with an AI based start-up Senseforth to help
us develop our conversation- based platform. I am sure in the next six month
you will be able to see a more enhanced chat related services being offered
by HDFC Bank”
Some development of technology adoption in the insurance sector can be
seen in the online buying and renewal op policies in both life and non life
insurance sector as well as portals like Policy Bazar.com that allow
consumers to search and evaluate all possible option on a single platform and
make informed decisions, Some other technology related developments as
per the IBEF report on Overview of Indian Insurance Industry 2022, are
shared below:
-In August 2021, ICICI Prudential Life Insurance tied up with the National
Payments Corporation of India (NPCI) to provide a unified payments
interface auto pay
-November 2021, ICICI Prudential Life Insurance partnered with NPCI
Bharat BillPay, a subsidiary of National Payments Corporation of India
(NPCI), to offer ClickPay feature to its customers
- In November 2021, Acko, a digital insurance start-up, raised US$ 255
million in funds
In August 2021, PhonePe announced that it has received preliminary
approval from IRDAI to act as a broker for life and general insurance
products. As a result, the company can now offer insurance advice to its 300+
million users.
Activity 1
Analyse the recent financial service products announced by leading banking
and insurance companies in India. Select any 3 of the most innovative ones
among these and comment upon the role of technology in the design and
delivery processes of these services 265
Emerging Issues
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13.3 EMERGING TECHNOLOGIES IN THE
FINANCIAL SERVICES SECTOR AND
THEIR IMPACT ON USER EXPERIENCE
Until quite recently, financial services institutions offered a variety of
services under a single umbrella. The scope of these services encompassed a
broad range from traditional banking activities to mortgage and trading
services. In its most basic form, Fin tech unbundles these services into
individual offerings. The combination of streamlined offerings customized to
different consumer segments with the help of technology enables financial
service organizations to be more efficient and cut down on costs associated
with each transaction.
Most industry analysts liken fin tech innovations in trading, banking,
insurance, financial advice, and products to ‘disruption,’ Financial products
and services that were once the realm of branches, salesmen, and desktops
,move toward mobile devices and have become more democratized, moving
away from institutional processes to a direct to consumer processes. This has
made it easier for consumers to access services from the comfort of their own
respective locations, while the entire informational and delivery access is
available through a chatbot or digital assistant based interactive support.
Emerging technologies in the financial services industry like chatbots and
automation interfaces, reduce man-hours, improve the quality of customer
relationships, and improve profitability. While the impact of new technology
in financial services will differ based on the function, most service providers
stand to benefit from an investment in these applications
Let us try to understand how technology impacts consumer user experience
of financial services by going through the benefits that accrue to the Financial
Service organizations implementing technology applications in a sustained
fashion.
• Coverage:; Through Internet and mobile connectivity, technology has
enabled almost everyone to access banking , insurance and investment
services easily. It is in sharp contrast to the traditional banking
system that allowed only for branch based coverage, which therefore
limited the coverage to the available branch networks. Nowadays,
266 signing up for financial services is just as easy as a few clicks on smart
 Technology and
phones, tablets or laptops. Technology has enabled FinTech companies Digital Marketing
to break geographical barriers in terms of coverage.
• Convenience: As shared in the introductory section of this unit,
technology has created levels of convenience for both service providers
and consumers that were unheard of in the days of traditional banking or
other financial services. Right from signing up for the service, making
customer inquiries, payments, accessing loans, transferring funds ,mobile
and net banking applications enable customers to access their services
from anywhere at any time. Such apps have eliminated the need for
consumers to queue up at brick-and-mortar premises of the service
provider to get access to the service. You would have seen countless ads
on people managing their stock investing portfolios from the
convenience of their homes on their laptops or mobile, well before they
begin their work day !
• Safety : supported by robust software solutions for fraud detection or
detection of breach in any aspect of the transaction processes have
rendered technology supported banking or other Financial Services
transactions relatively safer options. Well defined processes are in place
to make sure customer are not put to any loss if unauthorized
transactions are timely reported
• Speed: This is one of the most visible benefits as online transactions and
processes date get completed in a matter of minutes rather than taking up
hours in terms of accessing the service physically.
• Overall User Service Experience: The combined impact of variables like
speed safety convenience and availability of end to end solutions for a
given financial service, on a single portal have served to enhance the
overall user experience for consumers. Add to these the associated
services of resolution of queries, interactive chat bots as a personalized
assistants as well as customer relationship managers or advisors online or
over phone and you would realize how financial service providers have
integrated a large number of technology solutions to make the entire user
experience far more satisfying and productive, one that can lead to long-
term customer relationships and brand loyalty.
Activity 2
Talk to about 10 young professionals about their use of financial services to
assess their use of technology based applications like mobile and net banking,
digital wallets and online insurance buying. Share below what are the main
benefits they derive from these applications and what are the main challenges
they have encountered in the use of such services
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Emerging Issues
Important emerging trends in technology that could be transformational
for financial services include the following:
• Digital Experience platforms for Banks
Digital experience platforms for banks are not new but emerging
technologies like hybrid cloud are enabling financial institutions to find
new ways of engaging with and serving the consumer better. For
example, hybrid cloud(cloud/server)solutions are applied to provide
consumers both privacy and accessibility to a variety of Financial
Services. Digital platforms also allow for real-time intelligent data
integration, real-time digitization, personalization, and make way for
advanced analytics. Another relatively new application is API platforms,
where customers can integrate their banking data into other apps and
vice-versa.
• AI Applications : Also termed as cognitive technologies, Artificial
Intelligence applications are increasingly being explored for their
transformational potential in financial services. AI with its high-
computing and cognitive abilities can be applied by financial services
industry to manage risk, identify data patterns to make decisions on real
time information, and detect fraud.AI applications can impact back room
operations, product delivery and security, as machines use simple
algorithms to complete activities ranging from routine data entry to risk
evaluation to loan form processing, freeing up huge employee time for
large banks. These application are accessible to smaller financial
institutions as well as well, with tools to automate specific processes
such as documentation, data sharing, data analysis and customer
communication,
• Chatbots –While chatbots have existed for a long time, their new
popularity is on account of their AI powered conversational capability to
handle a large proportion of business to consumer communications
efficiently and effectively. It is predicted , that over time, upwards of
70% Business-customer communication will be transacted through AI
powered Chat bots in the financial service sector
• Blockchain Simply described, blockchain is a digital, ever-growing list
of data records. Such a list is comprised of many blocks of data, which
are organized in chronological order that are linked and secured by
cryptographic proofs. This technology is still at a low adoption rate . It is
the technology mainly used in so far crypto currencies like Bit coin and
has been used by large banking systems like J P Morgan Chase.
Consultancy firm Accenture predicts that Investment banks could
achieve saving of ten billion dollars by using this technology for their
clearing and settling processes.
• Automation ;Automation technologies like robotic process automation
( RPA) have found application in financial services as they have the
potential to cut down operational costs by automating routine , repetitive
processes. Unlike Artificial Intelligence applications, RPA uses simple
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 Technology and
preprogrammed rules encompassing structured data ( for example- Digital Marketing
incoming data on interest charts) or unstructured data (forms filled in by
hand) to handle digitization, approval, risk flagging and irregularity
detection. RPAs primarily function is to generate reports, logging data,
automating repeatable processes, and maintaining logs, for example to
automate processes to clear routine payments instantly, provided all
preconditions are met by using pre programmed simple rules
• Cloud Computing: In the age of widespread use of mobile based
accessing and transacting of financial services like banking, insurance
and investments and an even more pervasive use of digital wallets across
different services, financial services providers have begun applying
cloud computing technology to achieve the delivery of all these
seamlessly. For an interlinked global financial service industry that
enables transactions on a 24 hour basis, cloud computing supports
mobility in a true sense and helps keep up with the digital customers’
pace
Cyber security
In financial services that control and utilise large volumes of confidential and
sensitive consumer data, security of that data and technologies to ensure that
no third party breach in data security ever compromises customer confidence,
is of vital importance. Financial service providers invest significantly in
Cyber security technologies like Open Standard Authorisation to help protect
them from third party attacks or deliberate breaches.
Embedded Finance
Embedded finance is a new tech in financial services that is still at early
adoption phase in developed economies. It is a concept that allows non-
financial platforms to integrate payments for loans, insurance, debit cards,
and investment instruments. Embedded financial services are especially
beneficial for e-commerce enterprises since they help improve client loyalty
by facilitating transaction speed.
Retch
As you are aware , financial service organizations operate in a highly
regulated environment , and with currently changing the regulations to both
from the government and the financial markets regulators, it often becomes
difficult to keep track if every one of their operations across different
locations and in different regulatory environments is fully compliant and
legal at all times .RegTech is a Fin tech application that enables financial
institutions to monitor the correctness and legality of their actions
automatically and assists in adhering to legal requirements and avoiding
fines. The term RegTech was first coined by UK's Financial Conduct
Authority (FCA) in 2015 who called it: “A subset of Fin tech that focuses on
technologies that may facilitate the delivery of regulatory requirements more
efficiently and effectively than existing capabilities.

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Emerging Issues
Activity 3
Discuss with some professionals from the financial service sector or your
own service providers to get an idea of which among the above emerging
technology applications are being used or are planned to be used in their
respective financial services in India. Briefly describe the way the technology
is being used
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13.4 DIGITAL MARKETING AND FINANCIAL
SERVICES –
The rapid proliferation and adoption of technology in our lives has, changed
the way we live, work, save, spend and behave, perhaps irreversibly. While
awareness and access to products and services, financial services included,
has become far more widespread, competition among the marketers for the
larger segment of the same common consumer pool for their financial
services has become intense, resulting in escalating use of digital marketing
to have a closer and in depth understanding and engagement with consumers
for more focussed and targeted marketing effort. It follows the simple
marketing logic of consumer orientation- As a service provider you need to
be where your consumers are, and as increasingly , a growing number of
consumers are migrating to accessing financial services through mobiles ,
payment wallets and internet , marketers need to have an effective digital
presence to reach out and service these consumers
A simple way of defining digital marketing is to say it is “the achievement of
marketing objectives through application of digital technologies, data and
digital media. Philip Kotler and Armstrong in a more comprehensive
definition have defined digital marketing as ‘A form of direct marketing
which links consumers with sellers electronically using interactive
technologies like emails, websites, online forums and newsgroups, interactive
television, mobile communications etc’ for communication, underlining that
digital marketing, through the means of electronic devices connects the
consumers directly with the marketers, in two way interactive relationships.
A key focus of digital marketing apart from the vast access and consumer
convenience it creates is on cost effectiveness, it is an effective way of
reaching out and servicing consumers with the help of websites, SMSs,
emails, Social Media and Search Engine marketing.
You have already been exposed to types of digital marketing and the benefits
of digital marketing to business in general through your exposure to your
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core course on Marketing. In this unit we will build upon those inputs in the Digital Marketing
specifically context of financial services.
The primary goal behind digital marketing for financial services is to
improve customer engagement and win trust through maintenance of regular
touch and building relationships that are more interactive. It therefore
follows that financial services, in order to maintain and enhance their
competitive edge in this digital age ,will need to implement digital strategies
to gain more visibility ,reach more potential customers, service them better,
resolve their queries or complaints expeditiously and maintain a regular touch
through active interaction. Digital marketing, through application of IT tools
and processes has effectively enabled all of these. To make this possible,
financial institutions have begun allocating a significant portion of their
budget earmarked for digital marketing across various channels.
Financial institutions are leveraging omni channel marketing for a wider
consumer reach. As consumers of services like banking, insurance,
investment advisory, mutual funds, pension plans and more, you would have
noticed that you are getting more email and SMS alerts from financial
institutions as well as search engine based push to service websites. Add to
that the power of big data, and consumer analytics and you can easily
imagine how financial service providers can now reach out to prospective
consumers with targeted campaigns and communication messages that align
with their lifestyle to enhance the conversion rate and user experience
following their conversion.
According to a 2022 BFSI report on marketing communication spend by the
financial services industry, the figure reached Rs 2587 crores in 2022. The
media wise break up of this expenditure will make you realise the growing
significance of digital marketing for this sector

A well targeted and effective content strategy in digital media for a financial
service provider can improve his brand awareness, and customer engagement,
and earn the trust of both prospects and customers. By leveraging digital and
traditional marketing simultaneously in an integrated marketing effort
financial service providers can gain valuable and measurable insights for
traditional and digital marketing. To quote the Chief Digital Officer of Kotak
Mahindra Bank, Deepak M Sharma, “We are in the midst of digital 271
Emerging Issues
revolution, where all aspects of our lives are getting transformed using digital
enablers. At Kotak Mahindra Bank, it is our endeavour to offer all our
customers a frictionless & delightful banking experience…………It has
been our effort to provide enriching content & relevant tools with deep
personalization to give you a unique experience and ease of transactions,”
Activity 4
A. In the context of the banking services used by you and your family,
identify the various digital marketing applications your bank/banks have
used to reach out to you about their new products and service offers, to
promote their services and to connect with you in one way or the other.
List out these activities below
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B. How would your response differ if the services in question were
automobile insurance or mutual fund investments? Describe below
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13.5 DIGITAL MARKETING TOOLS RELEVANT
TO FINANCIAL SERVICES
In the Unit 14 of your core course on marketing, you have been introduced to
the tools to use by digital marketers. As well as the pull and push digital
marketing approaches applied. A brief recap of the types of tools you have
studied would include search engine marketing, search engine optimization,
social Media Marketing, radio ,television ,mobile and online advertising,
content marketing, e-mail marketing, pay per click method, viral marketing
and influencer or affiliate marketing. In this unit, let us look at the
approaches that are relevant to the digital marketing of Financial Services
You must also appreciate that the present day consumers interact with
businesses using a combination of smart phones, tablets, laptops and desktop
computers, TVs, gaming devices, virtual assistants (like Amazon Echo) and
other connected devices, creating the opportunities for marketing outreach for
marketers using multiple channels across digital devices
From the above list, the following digital marketing tools have been found
to be applied most and quite effectively by Financial Services providers like
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 Technology and
banks, insurance companies, investment companies, non banking financial Digital Marketing
companies, mutual fund agencies and others. These applications have been
used to attain multiple marketing objectives like building brand awareness
and trust, developing innovative and multiple ways of engaging with the
customer, tracking the user experience of customers throughout the
transactions cycle, managing client conversion and enhancing it, generating
new leads and constantly keeping track of consumer feedback and service
gaps.
Social Media Marketing:
With consumers spending increasing hours of their own time on social media
like Facebook , Linkedin, Pintrest Instagram ,Web communities,Whatapp
and Youtube, these sites become an obvious choice for marketers to access
and engage with their consumers. Social media have become a highly
effective avenue for financial services for building brand awareness,
developing a deeply engaged consumer connect through sharing of brand
stories and consumer experiences, interacting with them on a regular basis
and indeed for developing insights into their behaviour through the
conversations shared. These sites are also valuable platforms for sharing
useful content and actionable knowledge about new products, new features,
reviews and ratings received and in general building their brand story.
Search Engine Optimisation
As you are well aware, search engines crawl the Internet search for required
content and therefore aid people to find out what they’re looking for in terms
of information, content or sources of information. Examples of the most
common search engines are Goggle, Bing, Yahoo, AOL,Baidu and Ask.com.
Of these Google is by far the most used search engine with 92% of all
searches being conducted and handling about 3.8 billion searches every day.
Search engine optimization (SEO) is the practice of orienting your financial
service for e.g. your bank website, to rank higher on a search engine results
page (SERP) so that your bank receives more traffic. The aim is typically to
rank on the first page of Google results for search terms that are most
relevant to your target audience for a given Financial Service. The term used
for non ad, regular searches are organic search. SEO is about making
improvements to your website’s structure and content so its pages can be
discovered by people searching for what you have to offer, through search
engines. Technically speaking, you need to use a set of technical and content
practices so that your website page gets aligned with the ranking algorithm
of the search engine, so that your website page can be easily found ,crawled,
indexed and appears in the search engine result page in response to the
queries made by prospective consumers.
Content Marketing
Content marketing is a strategic marketing approach used to attract,
engage, and retain your target audience by creating and sharing
relevant material ,blogs, articles, videos, podcasts, and other media. This
approach helps establish expertise, promotes brand awareness and brand trust 273
Emerging Issues
and create top of the mind awareness for your brand. Financial Service firms
have been using a variety of content marketing approaches ranging from blog
posts and white papers, checklists (enabling bank consumers to plan for
retirement , or saving them from cyber frauds) videos , podcasts and
interactive webinars.
Content marketing should ideally focus not only on generating relevant and
fresh content, to keep your consumers engaged but also provide usable and
valued information that empowers the consumers and builds their trust in
your brand. Effective content should ideally engage the interest of the
consumers sufficiently for them to read and interact through their comments,
replies and suggestions.
Email Marketing:
Once you start generating consumer inquiries and traffic from your website
or as a result of your SEO efforts, it helps you build sizeable contact data on
your prospective consumers. In addition, a Financial Service provider may
have contact database of existing consumers engaged in traditional banking
relationships with them. Marketing of financial services, use these contact
databases to generate their email mailing lists which provide an excellent
communication tool to engage with customers in a more personalized and
interactive manner. Financial Service providers use these to send newsletters
, keeping the customers informed about new developments, new products,
exciting special offers or additional services being offered to long-term
customers in the marketing is also a very effective tool to keep consumers
informed about any changes in services or regulatory requirements in respect
of a given service.
A key objective of e-mail marketing is exploiting the potential for a close
personalisation based on the information collected through the other tools
being used in conjunction, for example consumer reviews and chatbots .
Used in an integrated fashion, these approaches can lead to customer
engagement and long-term customer loyalty.
Mobile optimised web design
In the evolving digital business ecosystem ,your website is your first
introduction to your most important stakeholders-the customers! Research
shows that visitors to a commercial website, make their favourable or
unfavourable impression about the website within 54 milliseconds of being
on the site. For any financial service that intends to utilize the advantages of
digital marketing, it is imperative that the website design is accorded
significant attention from a marketing orientation point of view.
The organization’s website , in order to be an effective marketing interface
needs to be easily navigable, with visual elements that complement the
design. For financial services which are characterized by offering
consumers a variety of choices for a given product, it is good practice to
build the search function into navigation itself.
Since a large proportion of consumers of financial services that use digital
274 mode, utilize their mobile phones for conducting their service transactions,
 Technology and
service websites need to be optimised for use on mobile phones Digital Marketing
Chat bots :
We discussed Chatbots under section 13.3 of this unit. As marketing tools,
Chatbots offer the advantage of quick and efficient two way communication
with consumers on a 24/7 basis and always hold forth till a Customer service
representative can take over for more individualised issues. The AI based
Chatbots are becoming an increasingly important tool of handling consumer
communications including complaint resolution ,initiate corrective action for
errors or faults
To take an example from the banking sector, Chatbots can be used for a
variety of banking processes, like collecting and processing data and
documents, creating and managing customer accounts, providing account
details and balance information, reducing the impending wait time and
paperwork by using existing data to automate processes for clients, doing
KYC processes, making and receiving payment transactions, etc. By
automating these processes, the bank improves the speed and responsiveness
of its communication while simultaneously improving the overall customer
experience.
AI supported chatbots in the banking industry can be also be used as virtual
financial advisory assistants.
Analysis of Consumer Reviews
Consumer reviews can be a valuable source of frank, candid opinions of
consumers, following their transactional activity with the service provider.
Once consumers have started using the financial services, it is useful for the
provider to get a real time evaluation of the user experience with different
processes and their overall review. The analysis of these reviews can generate
highly useful insights into what consumers really have to say about how well
or otherwise a given service is being performed and what are the issues
impacting the user’s consumption journey. The output of such analysis can be
used to generate ideas for process improvement, new product concepts, ideas
for increasing speed and reliability of processes as well as to resolve generic
complaints. Consumer reviews can be solicited or encouraged not only on
your website one but also on social media sites like the Facebook
Activity 5
A. Analyse the last 5 email marketing messages received from your bank,
your insurance company, your investment advisory company or your
mutual fund.
What are the marketing objectives or functions being fulfilled by the
email marketing tool in each case? From your understanding of the
contents of this unit, what additional role can e mail marketing play?
Share.
B. Visit the websites of three major banks and 2 insurance companies.
Study the marketing function that their Chatbot functionality is
performing. Comment upon the scope and range of communication being
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addressed.
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13.6 DEVELOPING DIGITAL MARKETING

STRATEGY FOR FINANCIAL SERVICE
A majority of Financial Services in India today, are adding on digital
marketing plans to their ongoing, existing marketing strategies, which were
developed for traditional brick and mortar based service deliveries and
processes. While net banking and mobile banking supported usage of
Financial Services have been available for quite some time, the fast
developing preference of non cash payment transactions even for routine ,
day to day purchases by retail customer during the pandemic and the post
pandemic period served to accelerate the digital habit taking root and
prospering . Digital wallets became routine, online banking, insurance
buying and investing practices became highly prevalent and most financial
services organizations realised the huge benefits of going digital to achieve
scale, cost efficiencies, and greater effectiveness of their customer outreach.
Their digital marketing strategy in most cases was crafted as a subset of their
overall marketing strategy. You therefore need to see the case of digital
marketing strategy for Financial Services in India in the context of the
existing and evolving target segments, the overall marketing objectives and
the specific marketing objectives sought to be achieved through digital
marketing. We must also be completely mindful of the fact that your digital
marketing strategy needs to contribute to and complement the overall
marketing strategy, rather been be seen as a separate, isolated initiative. For
example, the digital marketing communication will need to be crafted as a
component of the overall integrated marketing communication for the
organization, even though the organization may need to specify focused
objectives and expected outcomes for the digital marketing communication
component
Your digital marketing strategy development therefore will comprise of
answers to the following questions:
• Objectives: Within the overall framework of the organisation’s
marketing objectives, what are the specific outcomes that we want our
digital marketing initiative to achieve? In other words, what specifically
do I want my digital marketing effort to do for the organization? These
outcomes in order to be meaningful would need to be specific,
measurable, and achievable and time bound. For example, if the
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 Technology and
objective you want to assign to digital marketing effort is increasing your Digital Marketing
market reach, you should be able to specify that the digital marketing
effort needs to increase the present market size by 10% within the next
financial year. This objective for the digital marketing initiative is then
required to be broken into a hierarchy of sub objectives that you plan to
assign to each one of the component tools that you plan to use in your
digital marketing effort. To take an example, what are the specific roles
that you want to allocate to your SEO, e-mail marketing, or your website
to name a few and the sub objectives of the defined in terms of by what
percentage do you want the web site traffic to increase, consumer
awareness to go up, consumer engagement to improve and so on, all
articulated in specific terms and within a time frame
• Target Segments: What target segments, in addition to the presently
served segments, does the organization aims to reach with the digital
marketing initiative? What are the unserved or underserved segments
that you want to reach out to? What are the additional services or value
that the organization wants the digital marketing initiative to create for
the existing customer base?
• Specific mix of tools to be used:
What tools should we include in our digital marketing effort and why?
We have discussed the digital marketing tools that are being applied by
Financial Services in section13.7 above. At this stage, and in response to
the sub objectives for each tool, you need to decide upon the exact mix
of the tools that you would like to deploy, in order to develop an
integrated, balanced digital marketing initiative that resonates with the
identified needs of your proposed and potential target segments.
In addition, the digital communication tools like social media, email
marketing, website communication and content marketing will need to
be well integrated into your IMC (Integrated marketing communication)
for the financial service
• Overall budget allocated: Using the objective and task approach, the
budget for the digital marketing effort would be finalized, and
apportioned to the different components that you intend to mobilize in
your digital marketing strategy.
• Developing detailed plans for each phase of your digital marketing
campaign which can generically be broken down to:
-acquisition phase aimed at acquiring new prospects or
customers/attracting existing customer to new Financial Services being
offered in the digital mode
Monetisation phase aimed at generating revenue from the leads generated
through the phase above
Engagement phase aimed at keeping the converted leads (now your
customers) engaged and involved, gradually building brand preference
and brand loyalty, as well as converting these into brand advocates and
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Emerging Issues
brand ambassadors for your financial service
Having identified the objectives and tasks for each sub component/tool
of your digital marketing initiative, and the expected outcomes, you
would need to develop detailed plans to operationalizing your strategy.
These would also include allocation and mobilization of human
resources, technical and managerial teams with identified responsibilities
and action plans.
• Defining the evaluation metrics: How do we know that our Digital
Marketing strategy is achieving the outcomes it should? It is a good idea
to develop specific measures to help evaluate the effectiveness of your
digital marketing strategy, and the stage of preparing the strategic plan
itself. These measures will obviously be drawn from the objectives and
sub objectives defined for the digital marketing effort and the component
tools respectively
Activity 6
Visit the website of any two large banking organizations in India and one
leading mutual fund. Carefully study the components of their digital
marketing activities. Also, read the published literature on digital marketing
activities of these organizations accessed by you.
Comment upon how the various tools of digital marketing have been applied
by these organizations in their digital marketing initiative
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13.7 MEASURING THE EFFECTIVENESS OF
YOUR DIGITAL MARKETING STRATEGY
As you have already studied in your basic marketing course, assessment of
Marketing effectiveness is a management process that determines which
metrics will be used to measure an organisation’s defined marketing
objectives and evaluate the achieved outcomes of the marketing processes
in comparison to those objectives. The advantage with digital marketing
related processes and outcomes is that in the electronic environment, activity
and outcome related data are generated immediately and are therefore
available for measurement and comparison with respect to the objectives.
Depending upon the objectives that have been set by you for the war or
digital marketing effort and the sub objectives for the component tools, the
following measures may be utilized to evaluate the effectiveness of different
tools and their contribution to the attainment of the overall digital marketing
278 objective
 Technology and
• Enhancement of Reach and Access as measured from website activity, or Digital Marketing
measuring the impact on SEO activities on website traffic
• Conversion evaluation based on percentage of clicks on your website
that get converted into actual service requests, trial and adoption,
contribution of each channel/tool in directing the prospect to conversion
• Content marketing evaluation : With respect to the resultant consumer
behaviour, which element of the content was most relevant to the
prospect, how did the visitor go through the website, the “calls to action”
reflected in the highest conversion or to seeking more information
leading to buying intention, impact of location , sequencing and
placement of content, where did the visitors come from( search engine
related actions ,company’s email campaigns, mobile advertisements, TV
ads) time spent on the website, number of pages visited, frequency of
revisits and so on
• Evaluation of social media activity in terms of generating brand and new
offer awareness, developing brand trust and conviction , impact of bas
news as reflected in social media conversations, related consumer
activity on social networks (favorites / likes / ratings), usage of links,
downloads, subscriptions, fans, followers and friends, number of shares,
reviews, page time spent and so on
• Evaluation of social media interaction in terms of behavioural and
attitudinal metrics like consumer engagement and involvement user
generated content and sentiment analysis.
• Measures based on individual phases of the buyer's decision cycles and
search for interconnections –Digital marketing metrics such as reach,
frequency, quest size, visibility are used for the initial interest trigger
which results in further search for information by the prospective buyer.
For tracing activity during the search phase number of clicks, number of
visits, duration of visits, bounce rates are applied. For the information
evaluation phase, measures such as user questions, subscriptions, and
Prospect but comments are used. At the purchase stage , metrics such
as the number and percentage of conversions, the number and percentage
of search engine conversions are put to use. For the post purchase
evaluation phase, number of registrations, user reviews and ratings are
applied as measures of effectiveness against the expected goals
• Measures of financial returns –These metrics are used to measure the
effectiveness of digital marketing initiatives in terms of financial value
created. These could range from simple cost benefit analysis to detailed
ROI analysis based on the valuation of quantitative and qualitative
outcomes generated by digital marketing.
As shared earlier in the section on developing digital marketing strategy for
financial services, an articulation of the metrics that will be used to evaluate
the effectiveness of the strategy is usually made as part of the strategic plan
itself, so that the all the stakeholders in the planning and implementation of
the digital marketing strategy are kept informed about the respective targets 279
Emerging Issues
they need to achieve.
Activity 8
A major bank, ABS mounted a major digital marketing programme to
complement and support its existing marketing plans. The bank has consumer
spread across India and overseas, but is facing competitive pressures from
new entrants in the market with strong technology supported services ,
digital outreach and fast growing presence among the young professionals.
ABS launched its digital marketing programme in 2020 and has met with
some success in increasing its customer base and support for its new digitally
oriented service delivery options
It has set up 35% of its promotional budget for email based customer
communication and analysis of customer reviews in addition to a robust
CRM system. It also completely revamped its website and internet banking
portals to make them dynamic and highly interactive, complete with an AI
supported Chatbot called ABBY.
While initial reports show that it has improved ratings on online customer
connect and client servicing, its face to face customer service ratings have
slipped. ABS has asked for advice from you regarding its digital marketing
initiatives before it makes prospective plans to strengthen the effort.
Explain how you would advise them in terms of measures to be used to
assess the effectiveness of their digital marketing efforts
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13.7 LET US SUM UP

Of the many developments that the Financial Services sector has witnessed
none has been as pervasive and as transformational as the large scale use of
technology in financial services. The development of technologies
specifically for the sector became so prolific that an entire range of
applications called Fin tech became available for use for financial services to
improve their reach, customer acquisition, consumer communication and
better monitoring of processes to improve cyber security. This unit builds
your exposure to the emerging technologies or Fin tech that has relevance to
the marketing of financial services. The unit also discusses in detail the
application of digital marketing to financial services, the various tools in use
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 Technology and
by financial service institutions and traces the steps in developing a digital Digital Marketing
marketing strategy for such organizations. Inputs are also discussed on
evaluation of digital marketing strategy for Financial Services
13.9 SELF ASSESSMENT QUESTIONS
1. What are the major trends in technology adoption by financial services
organizations? Take any two examples of Financial Services being used
by you and your family to illustrate.
2. Fin tech, is one of the most rapidly developing fees of technology
innovations. Take any three of the recent developments in Fin tech
studied by you in this unit and explain the likely impact of that
implementation of these technologies would have on services like
a. Household Insurance Services
b. Investment advisory services
c. Non banking finance companies
d. Venture Capital Services
3. How does the large scale adoption and operationalisation of technology
in banking services benefit the banking service providers? What are the
benefits of such adoption for those consumers of such services>
4. What in your view of the major reasons for the fast development of digital
marketing applications for financial services? What are the objectives
that are sought by financial service marketers in using digital marketing?
5. From among the whole list of tools of digital marketing, identify any
three which are most commonly used by Financial Services that you
personally are using. Describe the value created by these tools for the
service providers as well as the consumers.
5. Using the inputs studied by you in this unit, how will you develop a
digital marketing strategy for the following?
a. A bank catering to financing for medium and small enterprises
b. A health insurance company,
c. A financial credit rating agency
d. An investment banker
6. Discuss the important measures that can be applied to measure the
effectiveness of the digital marketing programme for a Financial Service
of your choice.
13.10 FURTHER READINGS
1. Dave Chaffey, Fiona Ellis-Chadwick, Digital Marketing (6th Edition),
Publisher: Pearson.2017
2. Jason I.Miletsky, Principles of Internet Marketing - New Tools and
Methods for Web Developers, Course Technology, Cengage Learning.
2015
3. Eric Enge, Stephan Spencer, Jessie Stricchiola, The Art of SEO,3rd
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Emerging Issues
Edition. O’Reilly Media Inc, 2019
4. Joe Pulizzi, Epic Content Marketing, McGraw Hill Education,2017
5. Jay Baer, Youtility, Portfolio/Penguin, 2013
6. Fulgoni, G., & Lipsman, A. (2014). Numbers, Please: Digital Game
Changers: How Social Media Will Help Usher in the Era of Digital.
Journal of Advertising Research, 54(1).
7. Strauss, J., & Frost, R. (2014). Emarketing (7th Ed.). Pearson.
8. Surma, J. (2011). Business Intelligence: Making Decisions through data
analytics.
New York: Business Expert press.
https://www.knorex.com/blog/articles/digital-marketing-financial-services
https://www.operatiomarketing.com/the-importance-of-digital-marketing-for-
financial-institutions/
https://everfi.com/blog/financial-education/8-financial-digital-marketing-
trends/
https://mediaboom.com/news/digital-marketing-for-financial-services/
https://www.smartinsights.com/tag/digital-marketing-for-financial-services/
https://iimskills.com/a-guide-for-digital-marketing-for-financial-services/
https://www.investopedia.com/terms/d/digital-marketing.asp
https://martech.zone/modern-technologies-impacting-digital-marketing/
https://eventscustom.economist.com/webinar/financial-services-in-2022-and-
beyond/?gclid=CjwKCAiAqaWdBhAvEiwAGAQltp8OH9RtdxR3ao6KZaV
zs-h
https://everfi.com/blog/financial-education/emerging-tech-in-financial-
services/
https://www.mckinsey.com/industries/financial-services/our-insights/next-
gen-technology-transformation-in-financial-services
https://www.forbes.com/sites/bernardmarr/2022/01/14/the-5-biggest-
financial-services-tech-trends-in-2022/?sh=20f50c8233bf
https://www.kellton.com/kellton-tech-blog/top-7-financial-services-
technology-trends-2020

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 CRM and Role of
UNIT 14 CRM AND ROLE OF ANALYTICS Analytics

Content Structure
14.1 Introduction
14.2 Analytics and CRM
14.3 Analytics for CRM Objectives
14.3.1 Market Segmentation
14.3.2 Identify customer groups
14.3.3 Understand customer behaviour
14.3.4 Predict future behaviour
14.3.5 Personalize customer experience
14.3.6 Measure the effectiveness of marketing campaigns
14.4 Understand Customer Sentiments
14.5 Cross-Selling and Up-Selling
14.6 Personalized Marketing
14.7 Improve Customer Service
14.8 Increase Customer Sales
14.9 Reduce Customer Churn
14.10 Glossary of key terms
14.11 Questions
14.12 Further Readings

14.1 INTRODUCTION
Customer Relationship Management (CRM) is the practice of managing
interactions with customers and analysing their behaviours to improve
business relationships. Analytics, on the other hand, is the process of
analysing data to extract insights and make informed decisions. Analytics in
CRM involves using data analytics techniques to better understand
customers' needs and preferences, and to optimize business operations. In this
chapter, we will discuss the application of analytics in CRM and its benefits.

14.2 ANALYTICS AND CRM

Analytics can be used to segment customers into groups based on their
purchasing behaviour, demographics, and other characteristics. For example,
a company may use analytics to identify the most profitable customers and
target them with personalized marketing campaigns. It can be also used to
predict which customers are most likely to leave a business. This information
can be used to proactively engage with these customers and try to retain
them. For example, a company may use analytics to identify customers who
have reduced their spending, and offer them personalized incentives to keep
them engaged.

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Emerging Issues
Analytics helps to analyse customer feedback and sentiment to identify trends
and improve customer service. For example, a company may use analytics to
identify common complaints and issues, and take steps to address them. It
helps identify products and services that are commonly purchased together,
and offer them as a bundle or package. For example, a company may use
analytics to identify customers who have purchased a specific product, and
offer those related products or services.

Analytics can be used to create personalized marketing campaigns that are

tailored to the specific needs and preferences of customers. This can improve
customer engagement and loyalty. Analytics can be used to identify common
issues and complaints, and take steps to address them. This can improve
customer satisfaction and retention. Analytics can be used to identify cross-
selling and up-selling opportunities, and offer personalized recommendations
to customers. This can increase sales and revenue. Analytics can be used to
predict which customers are most likely to leave a business, and take steps to
retain them. This can reduce churn and improve customer retention.

14.3 ANALYTICS FOR CRM OBJECTIVES

14.3.1 Market Segmentation
Analytics is helpful in market segmentation by providing businesses with
insights into their customers' behaviour, preferences, and needs. Here are
some ways analytics can help with market segmentation:

14.3.2 Identify Customer Groups

Analytics tools can help identify different customer segments based on
factors such as age, gender, income, location, and buying behaviour. By
analysing these factors, businesses can create customer profiles and tailor
their marketing strategies to better target each segment.

14.3.3 Understand Customer Behaviour

Analytics can provide businesses with data on customer behaviour such as
purchase history, frequency of purchase, and customer lifetime value. This
information can help businesses segment customers based on their behaviour
and tailor their marketing efforts accordingly.

14.3.4 Predict Future Behaviour

Analytics can use past customer behaviour data to predict future behaviour.
By using predictive analytics, businesses can identify which customers are
likely to make a purchase and which ones are at risk of churning. This helps
businesses create targeted marketing campaigns and retention strategies.

14.3.5 Personalize Customer Experience

By segmenting customers based on their behaviour, preferences, and needs,
businesses can personalize their customer experience. Personalization can
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 CRM and Role of
lead to increased customer loyalty and improved customer retention rates.
Analytics
Measure the effectiveness of marketing campaigns: Analytics can help
businesses measure the effectiveness of their marketing campaigns by
tracking key performance indicators (KPIs) such as conversion rates, click-
through rates, and customer acquisition costs. By analysing this data,
businesses can optimize their marketing campaigns and improve their ROI.

Hence, analytics can help businesses segment their customers based on

behaviour, preferences, and needs. By doing so, businesses can create
targeted marketing campaigns, personalize the customer experience, and
improve their ROI.

14.4 UNDERSTAND CUSTOMER SENTIMENTS

Analytics can be helpful in sentiment analysis by providing businesses with
insights into how their customers feel about their brand, products, or services.
Sentiment analysis is the process of using natural language processing (NLP)
and machine learning techniques to analyse text data and determine whether
the sentiment expressed is positive, negative, or neutral.

Here are some ways analytics can help with sentiment analysis:
Monitor social media: Social media platforms are a rich source of customer
feedback and sentiment data. Analytics tools can monitor social media
conversations and identify the sentiment expressed in customer comments
and posts. This information can help businesses understand how their
customers feel about their brand, products, or services and identify areas for
improvement.

Analyse customer feedback: Analytics tools can analyse customer feedback

such as reviews, ratings, and surveys. By using NLP and machine learning
techniques, businesses can automatically extract sentiment from customer
feedback data and identify common themes and issues that customers are
concerned about.

Measure brand reputation: Analytics can help businesses measure their

brand reputation by analysing sentiment data over time. By tracking changes
in sentiment, businesses can identify when their brand is experiencing
positive or negative sentiment shifts and take appropriate actions to maintain
or improve their reputation.

Improve customer service: Sentiment analysis can help businesses identify

common customer complaints and issues. By addressing these issues,
businesses can improve customer service and overall customer satisfaction.

Forecast customer behaviour: Analytics can use sentiment analysis to

forecast customer behaviour. By analysing sentiment data, businesses can
predict which customers are likely to churn or make a purchase, and take
appropriate actions to retain or acquire those customers.
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Emerging Issues
Thus, analytics can be used by businesses to perform sentiment analysis by
monitoring social media, analysing customer feedback, measuring brand
reputation, improving customer service, and forecasting customer behaviour.
By doing so, businesses can gain insights into how their customers feel and
take appropriate actions to improve customer satisfaction and brand loyalty.

14.5 CROSS-SELLING AND UP-SELLING

Analytics can be helpful in cross-selling and up-selling by providing
businesses with insights into customer behaviour and preferences. Cross-
selling involves offering additional products or services that complement the
product or service that the customer has already purchased, while up-selling
involves offering a more expensive version of the same product or service.
Here are some ways analytics can help with cross-selling and up-selling:
Analyse customer behaviour: Analytics tools can analyse customer behaviour
such as purchase history, browsing history, and search history. By analysing
this data, businesses can identify patterns in customer behaviour and
preferences and tailor their cross-selling and up-selling strategies
accordingly.
Identify complementary products: Analytics can help businesses identify
products or services that complement the product or service that the customer
has already purchased. By recommending complementary products,
businesses can increase the value of the customer's purchase and improve
customer satisfaction.

Personalize recommendations: Analytics can help businesses personalize

cross-selling and up-selling recommendations based on customer behaviour
and preferences. By providing personalized recommendations, businesses can
improve the relevance of their recommendations and increase the likelihood
of the customer making an additional purchase.
Use predictive analytics: Analytics can use predictive analytics to identify
which customers are most likely to make an additional purchase. By using
machine learning techniques, businesses can analyse customer data to predict
which customers are most likely to cross-sell or up-sell and target those
customers with relevant recommendations.

Measure the effectiveness of cross-selling and up-selling strategies: Analytics

can help businesses measure the effectiveness of their cross-selling and up-
selling strategies by tracking key performance indicators (KPIs) such as
conversion rates and revenue per customer. By analysing this data, businesses
can optimize their cross-selling and up-selling strategies and improve their
ROI.

Hence Analytics can be leveraged by businesses for cross-selling and up-

selling by analysing customer behaviour, identifying complementary
products, personalizing recommendations, using predictive analytics, and
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 CRM and Role of
measuring the effectiveness of their strategies. By doing so, businesses can
Analytics
increase the value of customer purchases and improve customer satisfaction.

14.6 PERSONALIZED MARKETING

Analytics can be driving factor to offer personalized marketing by providing
businesses with insights into customer behaviour and preferences using data
about customers. Personalized marketing is the practice of tailoring
marketing messages and offers to individual customers based on their
interests, behaviour, and preferences. Here are some ways analytics can help
with personalized marketing:
Analyse customer data: Analytics tools can analyse customer data such as
purchase history, browsing behaviour, search history, and social media
activity. By analysing this data, businesses can identify patterns in customer
behaviour and preferences and tailor their marketing messages and offers
accordingly.

Personalize offers: Analytics can help businesses personalize offers based

on customer behaviour and preferences. By providing offers that are relevant
and timely, businesses can increase the likelihood of the customer making a
purchase and improve customer satisfaction.
Use predictive analytics: Analytics can use predictive analytics to identify
which customers are most likely to make a purchase. By using machine
learning techniques, businesses can analyse customer data to predict which
customers are most likely to make a purchase and target those customers with
personalized offers.

Test and optimize campaigns: Analytics can help businesses test and
optimize their personalized marketing campaigns by tracking key
performance indicators (KPIs) such as conversion rates, click-through rates,
and customer acquisition costs. By analysing this data, businesses can
optimize their campaigns and improve their ROI.

Improve customer retention: Personalized marketing can improve customer

retention rates by providing customers with relevant and timely offers. By
improving customer retention rates, businesses can increase customer
lifetime value and improve their bottom line.

In summary, analytics can help businesses with personalized marketing by

analysing customer data, personalizing offers, using predictive analytics,
testing and optimizing campaigns, and improving customer retention rates.
By doing so, businesses can increase the effectiveness of their marketing
efforts and improve customer satisfaction and loyalty.

14.7 IMPROVE CUSTOMER SERVICE

Understanding customer behaviour: By analysing customer data,
businesses can gain insights into customer behaviour such as their
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Emerging Issues
preferences, buying patterns, and communication channels. This information
can be used to personalize the customer experience and provide targeted
solutions to their needs.

Identifying customer pain points: Analytics can help identify areas where
customers are struggling or experiencing difficulties. This can help
businesses prioritize improvements and allocate resources to address these
pain points.

Real-time monitoring: Analytics tools can monitor customer interactions in

real-time, enabling businesses to identify and respond to issues as they
happen. This can help improve response times and reduce customer
frustration.
Proactive customer service: By analysing customer data, businesses can
identify potential issues before they arise and take proactive steps to address
them. For example, if a customer is regularly experiencing slow delivery
times, the business can proactively reach out to offer expedited shipping
options.

Performance tracking: Analytics can help track key performance metrics

such as customer satisfaction, response times, and issue resolution rates. This
information can be used to identify areas for improvement and measure the
impact of customer service initiatives over time.

Analytics can help better understand customers, improve response times, and
proactively address issues to deliver a more personalized and effective
customer service experience.

14.8 INCREASE CUSTOMER SALES

Personalization: Analytics can help businesses personalize the customer
experience by analysing customer data such as browsing behaviour, purchase
history, and demographic information. For example, an online retailer may
use data analytics to personalize product recommendations based on a
customer's browsing history or purchase history.

Predictive modelling: Predictive modelling can be used to identify patterns

in customer behaviour and preferences, enabling businesses to anticipate
customer needs and offer targeted promotions or product recommendations.
For example, a restaurant chain may use predictive modelling to identify
which menu items are most likely to be ordered by a particular customer
segment and tailor their marketing efforts accordingly.

Customer segmentation: Analytics can help businesses segment their

customer base by demographics, behaviour, or other factors. This information
can be used to tailor marketing and sales efforts to specific customer
segments, increasing the effectiveness of these efforts. For example, an e-
commerce business may use customer segmentation to target specific groups
of customers with personalized promotions or product recommendations.
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 CRM and Role of
Real-time monitoring: Analytics tools can monitor customer interactions in
Analytics
real-time, enabling businesses to identify opportunities for cross-selling or up
selling. For example, a retailer may use real-time analytics to identify when a
customer is browsing a particular category of products and offer related
products or promotions to increase the likelihood of a sale.

Performance tracking: Analytics can help businesses track sales metrics

such as conversion rates, average order value, and customer lifetime value.
This information can be used to identify areas for improvement and measure
the impact of sales initiatives over time. For example, a subscription-based
business may use analytics to track customer churn rates and identify
opportunities to improve customer retention and increase customer lifetime
value.

Overall, analytics can help businesses improve the customer experience,

anticipate customer needs, and tailor marketing and sales efforts to increase
customer sales.

14.9 REDUCE CUSTOMER CHURN

Identifying at-risk customers: Analytics can be used to identify customers
who are at risk of churning. By analysing customer data such as purchase
history, engagement rates, and customer feedback, businesses can identify
patterns that indicate a customer is likely to churn.

Personalization: Analytics can help businesses personalize the customer

experience by analysing customer data such as preferences, behaviour, and
demographics. By tailoring the customer experience to individual needs,
businesses can increase customer satisfaction and reduce the likelihood of
churn.
Proactive customer service: Analytics can be used to proactively reach out to
customers who are at risk of churning. For example, a telecommunications
company may use analytics to identify customers who have experienced
multiple service interruptions and proactively offer compensation or other
incentives to retain their business.

Real-time monitoring: Analytics tools can monitor customer interactions in

real-time, enabling businesses to identify and respond to issues as they
happen. By addressing customer issues in real-time, businesses can reduce
customer frustration and increase the likelihood of customer retention.

Performance tracking: Analytics can help businesses track customer retention

metrics such as churn rates, customer lifetime value, and customer
satisfaction scores. This information can be used to identify areas for
improvement and measure the impact of customer retention initiatives over
time.

For example Netflix uses analytics to identify which TV shows and movies
are most popular among its subscribers. By analysing viewing patterns and
289
Emerging Issues
preferences, Netflix can tailor its content offerings to individual subscribers,
increasing customer satisfaction and reducing the likelihood of churn.
Amazon uses analytics to personalize the customer experience by analysing
customer data such as purchase history, browsing behaviour, and
demographics. By tailoring product recommendations and marketing efforts
to individual customers, Amazon can increase customer satisfaction and
reduce the likelihood of churn. Similarly leading CRM firm Sales force uses
analytics to monitor customer engagement and identify at-risk customers. By
analysing customer interactions and engagement rates, Sales force can
proactively reach out to at-risk customers and address issues before they lead
to churn.

Thus analytics is handy approach for businesses to improve customer

retention by identifying at-risk customers, personalizing the customer
experience, providing proactive customer service, monitoring customer
interactions in real-time, and tracking customer retention metrics over time.

14.10 KEYWORDS
CRM: Customer Relationship Management, a strategy used by businesses to
manage interactions with customers and potential customers.

Analytics: The process of using data and statistical methods to derive

insights and knowledge from large datasets.
Predictive Analytics: The use of statistical techniques and algorithms to
analyse data and make predictions about future events or outcomes.
Segmentation: The process of dividing customers into groups based on
shared characteristics or behaviours. Segmentation can be used to target
specific groups with marketing campaigns or other outreach efforts.
Business Intelligence (BI): The use of data analytics tools and techniques to
gain insights into business operations and make informed decisions.

Data Mining: The process of extracting useful information from large

datasets, often using statistical techniques and algorithms.

Sentiment analysis: Method to provide businesses with insights into how

their customers feel about their brand, products, or services. Sentiment
analysis is the process of using natural language processing (NLP) and
machine learning techniques to analyse text data and determine whether the
sentiment expressed is positive, negative, or neutral.
Key Performance Indicators (KPIs): Metrics used to evaluate the
performance of a business, department, or individual. KPIs can be used to
measure progress towards specific goals and objectives.
Customer Lifetime Value (CLV): A measure of the total value a customer
brings to a business over the course of their relationship. CLV can be used to
guide marketing and retention efforts.
290
Churn: The rate at which customers leave or discontinue their relationship CRM and Role of
Analytics
with a business. Churn can be a key metric for evaluating the effectiveness of
customer retention efforts.

14.11 QUESTIONS
1) What is the role of analytics in CRM?
2) What are some examples of how analytics can be used in CRM?
3) What are the benefits of using analytics in CRM?
4) How can analytics be used to improve customer service?
5) How can analytics be used to increase sales?

14.12 FURTHER READINGS

• Kumar, V., & Reinartz, W. (2018). Customer relationship management:
Concept, strategy, and tools. Springer.
• Li, X., & Yang, J. (2019). Applying customer relationship management
and data analytics for enterprise decision making. Journal of Business
Research, 98, 439-450.
• Rajkumar, M., & Raju, K. S. (2018). A review on customer relationship
management and data analytics. International Journal of Engineering &
Technology, 7(3.3), 114-117.
• Sánchez-Mangas, R., & García-Peñalvo, F. J. (2018). Analytics in
customer relationship management: A review of the literature. Journal of
Business Research, 82, 101-112.

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Emerging Issues
UNIT 15 FUTURE DIMENSIONS

Objectives
• Discuss the future trends of financial services
• Describe the macro trends
• Discuss about economic frictions
• Describe the role of economies of scale and scope
Structure
15.1 Introduction
15.2 Global macro trends
15.3 Economic frictions and forces in financial Services
15.4 The Impact of digital innovation on key economic frictions
15.5 Consequences for financial service firm
15.6 Shifting economies of scale and scope
15.7 Impact on financial services providers
15.8 Summary
15.9 Self Assessment Questions

15.1 INTRODUCTION
The financial services industry is at a pivotal point in its evolution in the light
of global economic crisis’s, pandemics, geo political tensions and renewed
focus on millennium development goals, new technologies, and evolving
investment preferences, and other drivers of change. All these developments
are transforming the economy from being producer-led to one led by
consumers.

Financial Services firms’ faces twin challenges of economic frictions such as

information asymmetries and economic forces such as economies of scale
and scope; the combination of these twin forces give rise to financial
intermediation and these twin challenges also shape market structure. Digital
innovations due to advances in mobile connectivity, computing power and
storage solutions have enabled creation of huge databases which when
analysed properly provides insight into consumer behaviour and potential
untapped market for financial products and services. The change in the cost
structure due to digital innovations has resulted in evolution of new business
models and new entrants. Increased connectivity and online transactions
produce huge amount of data resulting in information exchange and reduced
transaction costs. These developments have lead to disaggregated process for
the production of financial services. Traditional financial services providers
have diversified their product offerings leading to unbundling of financial
services. This has allowed consumers to search and assemble their preferred
suites of products best suited to their needs.
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 CRM and Role of
In spite of the technological advances and changing macroeconomic scenario
Analytics
fundamental economic forces remain relevant. These forces relevant for
production and distribution of financial are

• Economies of scale and scope and

• network effects

Are present in most aspects of financial services production, in financial

services consumer search and assembly costs are significant. These forces
encourage re-bundling, and confer advantages to large multi-product
providers, including technology (big tech) firms expanding into financial
services from adjacent markets.

The technological innovations increasingly used by the retail consumers are

mobile money, peer-to-peer (P2P) or marketplace lending, roboadvice,
insurance technology (insurtech) and crypto-assets, on line banking, online
share trading, depository services and many more. The technological
innovations adopted by financial services providers have resulted into greater
access, reduction in transaction cost and convenience to retail users.

The back end processes of financial institutions are making increasing use of
artificial intelligence (AI),cloud services(including cloud computing and
storage), and distributed ledger technology (DLT).The application of these
technologies are transforming financial market trading and regulatory and
supervisory technology (regtech and suptech) thereby substantially
decreasing cost of operations. In order to survive and compete, dig ital

Transformation has become a strategic priority for existing institutions. The

existing financial institutions will have to rapidly digitize not only the
internal processes but also customer offerings and interface, to compete with
fin techs and the large technology (big tech) firms that have also entered into
financial services.

Increasing adoption of digital technology and innovations have the potential

to make markets more diverse, competitive, efficient, and inclusive, these
gains are more pronounced in developing countries where penetration of
financial services is low.

Since many of the innovations are technology intensive and require huge
capital and infrastructure there is also a likelihood that innovations may lead
to concentration among both traditional and new financial services providers.
New players and business models have potential to disrupt and challenge
financial stability, financial integrity, fair competition, and consumer
protection (including data privacy), thereby requiring novel regulatory and
supervisory approach.

The recent worldwide COVID-19 pandemic has accelerated the digital

transformation wherein physical interaction gave way to digital document
submission and for many of the financial services this has become a standard
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Emerging Issues
procedure. Similarly shift to digital payments and e commerce is also
significant.

Digital and financial innovations have enabled both consumers and financial
institutions to address to a significant extent challenges of financial
intermediation – including asymmetric information,Uncertainty, incomplete
markets, and fixed and variable costs of production

15.2 GLOBAL MACRO TRENDS

To understand the future, we must have a sound understanding of the present
situation and what factors are responsible for the present state of affairs.

A financial service not only generates employment and revenue in form of

taxation for government but also is a driving force for the real economy on
the ground by intermediation of funds from savers to investors.

As we discuss about future trends the recent pandemic of COVID -19 will
have major impact on fundamental economic factors for 2-3 years and it will
take some time to return to growth stage of pre pandemic level.

Let us briefly discuss few of the pronounced macro economic trends that will
have impact on design, structure and operations of financial firms in the
future.

Low interest rates: The pressure and disruptions generated by global

financial crisis led governments and central banks to intervene in the markets
with strong fiscal and monetary policy coupled with substantial quantitative
easing .This was done to spur growth through consumer demand and to
incentivize private and public sector to undertake capital investment.

This has reduced the net interest margins of banks and asset price distortion.
Similarly for insurance companies the returns have been impacted, but on the
flip side low interest rates have pushed the investors away from cash holdings
to mutual funds and other alternative investments.

Financial companies will have to reduce costs, digitize and improve

productivity to maintain profits and margins.

The recent spurt in interest rates is due to inflation and is likely to subside
once inflation is bought under control

Reduced risk bearing capacity: The pandemic induced recession, asset

impairments and subsequent geo political tensions have reduced the lending
and risk bearing capacity of the financial institutions which is witnessed in
lack luster credit growth. Since banks would be constrained to provide credit
to real economy companies will diversify it funding sources to alternative
financing industry like Private Equity funds, Sovereign Funds, NBFCs etc.

Alternative providers of capital will increase market share: In recent

years non bank enteritis have not only increased their market share in
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 CRM and Role of
informal sector, but also have made inroads in the informal sector.
Analytics

This development has happened due to the increased cost differential (and
availability) of

Regulated versus unregulated capital. Post financial crisis and pandemic; the
need to repair and rebuild

Will require fresh sources of capital. Small and medium-sized enterprise

(SME) which were the most hit have been provided both equity and non
equity support by governments.

For incumbent financial institutions, the rise of alternative capital brings into
question their very

Role as a capital provider versus an intermediary. They will have to re orient

themselves to remain competitive in the evolving landscape where the
platform economy and varied funding models will evolve and function

Implementation of regulatory measures: The past two decade has been

significant in the way in which various events have impacted the economy. In
order to address d the challenges to the economy regulatory changes were
done to tide over the crisis; but they were temporarily and ado in nature and
would be eventually rolled back.

Regulation will be a major consideration in such areas as international

sanctions (both unilateral and multilateral), anti–money laundering, and know
your- customer.

The implementation of Basel IV and tighter capital regulation will continue,

challenging traditional lending business models and institutions across the
board

The Principles for Responsible Investment (PRI) will govern the fresh
investment and funding in the real economy and will be increasingly be done
on the basis of environmental, social and governance (ESG) criteria.
Advanced countries especially European countries will require detailed
disclosures regarding sustainability and other related measures.

Millennium development goals, sustainable development and climate change

considerations will play a role in the funding decisions of banks and other
financial institutions and they will serve, as A mechanism to transmit—
through risk-pricing and funding costs—both the

Benefits and the costs of sustainability to clients.

Continued de-globalisation: In the wake of economic disruptions

governments and regulators felt that bailing out financial institutions whose
risk and capital were deployed globally is not an viable option as a result we
have seen that after the global financial crisis there has been shrinkage in the
size and scale and scope of many European and American financial
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Emerging Issues
institutions with corresponding rise in size and scope of Chinese financial
institutions. In general developed countries will saw shrinkage in the size of
their financial institutions whereas institutions from emerging economies will
grow. The size and scope of the financial institutions will be more aligned
with the domestic economic activity.

The off shoring of back office activities of banks and financial institutions
will continue due to cost pressure and relative advantage of qualified
manpower available in developing economies.

However, de-globalisation could lead to a renewed focus on near shoring

and the diversification of offshore locations.

Pressure to boost productivity through the digitisation of the business

and the workforce: Legacy infrastructure which includes branch
infrastructure and support systems are less agile and costly to operate. To
bring agility and cost competitiveness financial institutions will have to
digitize customer interaction models and sales and service models. The
client-driven shift to a platform- and ecosystem-based financial services
industry will create a new wave of disruption and disintermediation.

Apart from the factors discussed above the financial institutions will be
facing the following additional challenges:

• Emerging financial technologies (fin tech)

• Growing global regulatory complexity
• New business models
• Increased cyber threats and data security breaches
• Increased customer adoption of mobile devices
• Increased number of retail channels
• Passive strategies/products
• Changing customer demographics in key markets
• Labor and talent shortages
• Competition from new entrants

15.3 ECONOMIC FRICTIONS AND FORCES IN

FINANCIAL SERVICES
Suppose you have to lend some money to someone totally unknown to you.
In order to make your lending process risk free you will have to incur
contracting, search, and verification costs which may be more than the
amount you may be lending. Here is where the role of financial
intermediation arises as financial institutions are better equipped to handle
risk arising out of principal-agent challenges and incomplete or asymmetric
information.
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 CRM and Role of
Financial transactions are characterized by risk and partial trust and
Analytics
customers require

Trustworthy counterparties with which to transact. In the absence of

complete trust and information between parties, market interactions on the
production side and the customer side are characterized by risks. To minimise
risk and create trust entails cost on both the producers and consumers which
is manifested in the form of transaction cost which is the reason de attire for
the existence of the firm.

Usually financial institutions focus and operate in niche areas’, but in quest
for growth, new revenue streams and market expansion they venture into new
but inter related areas. For example banks moving into insurance and
eventually becoming universal banks providing range of financial service,
micro financial institutions becoming small banks

Internalization of activities within a single financial services firm reduces

many of the economic frictions apart from scaling scale and scope, less
reliance on network effects and increased scope for cross subsidization of low
revenue products which may have potential in the future. Internalization of
diverse financial activities also help the firms to design new investment
products in line with market conditions and investor preferences due to the
quantity and quality of information that firm possess across diverse financial
domains

Information asymmetry coupled with uncertainty about future outcomes

makes it difficult to draw a contract for all potential future states .This makes
the market incomplete and the consequences of incomplete markets is
inefficient resource allocation; manifesting in the form of higher interest rate
for some borrowers in order to compensate for expected losses from other
borrowers, higher insurance premium etc. This will result into large section
of the society being under served and in extreme cases a section of the
society may be unserved.

The increasing economic disparity, young working population, ageing

society, growing aspirations and other factors makes it difficult to design
products and services for the precise circumstances of different segment of
customers. This implies that pricing, maturity, or other terms are not as per
the expectations of the consumer segment. Either this may result in the
consumers declining the financial services or the financial services company
may not offer these services to certain segments for being

Unviable commercially. This is where the new age financial services come
into play case in point is micro financial institutions and micro finance.

Financial intermediation is prone to information gaps and frictions, financial

services companies are designed to address these through their structure and
processes.

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Emerging Issues
To produce and offer financial services companies require not only structure,
processes and trust capital but also physical infra structure in form of man
power, equipments and premises for physical location. To manage and
process customer transactions. With digital innovations this mix of resources
is changing on the positive side accruing significant cost benefits to existing
companies and lowering barriers to entry for new entrants.

The macroeconomic environment and economic frictions are changing the

operating landscape in which financial services firms operate altering the
scale, scope and the network impact.

• Economies of scale. Although financial services are intangible their

offering and distribution requires real resources in terms of back office
systems, branch network, manpower, regulatory compliance operations
and minimum capital requirement. All of these costs are more or less
fixed in nature. Economies of scale would be favourable when this fixed
cost can be amortized over a large customer base. The other benefits of
operating with economies of scale are that it permits diversification of
balance sheet allowing firms to better manage liquidity and credit risk. In
addition it also reduces marginal cost of risk taking and allows better
pricing of products including cross subsidization of products which have
potential to generate revenues in future

• Economies of scope as financial services firms diversify by offering

diverse financial services they enlarge their economies of scope. Scope
can be enhanced by bundling interdependent financial services that can
be delivered through the same physical customer interfaces and leverage
the same balance sheet. Cross-selling loan products and insurance i.e.
along with home loan, home insurance policy can be sold. Network
effects. On the demand side, network effects (or “externalities”) are
significant in financial services such as payments, where the value of the
network to all users (both payers and payees) increases when the number
of connected users increases. A bank serving a business, suppliers and as
well as its customers, could more efficiently connect counterparties to
quickly transfer payments and provide working capital.

15.4 THE IMPACT OF DIGITAL INNOVATION

ON KEY ECONOMIC FRICTIONS
Financial services have been early adopter of technology basically to improve
operational efficiency, but were constrained in other areas age data
processing and storage was expensive. Due to this data from various sources
could not be gathered and analysed for better price and risk management and
designing customized products and services for customers

Technology advances in connectivity, data processing, and storage have

greatly facilitated the application of machine learning and artificial
intelligence has contributed to the current wave of technology-based finance:
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 CRM and Role of
• Increased connectivity and. Internet has enabled the ability to transfer
Analytics
information and interact remotely, both between businesses and directly
to the consumer. This has enabled financial institutions to transfer many
of their operations from high cost geographies to low cost geographies.
Through the percolation of mobile and smartphones, most financial
services can be now delivered directly and digitally, vastly increasing
access to finance along with low cost of delivery. Many of the services
can now be delivered without the need for an intermediary. These
developments have enhanced access to, and the efficiency of, direct
delivery channels and also have potential to lower-cost of tailored
financial services.

Big Data, Data, networks, and new business models

Data generated through digital transactions having high volume, variety,

velocity and veracity are known as “Big Data.” The source of big data is the
location and usage data from mobile phones, the contact information from
social networks, the delivery information from logistics companies, and the
sales data from retail outlets and payments networks.

Analysis of these data can generate useful insights which can be used for
credit analysis, process efficiency, risk management, product design,
customer service and other areas.

Another advance

Low-cost computing power and storage has increased use of cloud-based

computing technology being used by FIs which allows them to connect to
externally operate and managed data centres and obtain infrastructure on
demand. This reduces fixed cost and lowers barriers to entry. For new
entrants.

An off shoot of these technological developments is emergence of platform-

based business models. Platform based models basically intermediates
between customers and large numbers of financial institution simultaneously
providing customers a wide choice to choose services and products most
suited to his requirements. These models have ability to quickly and easily
collaborate, discover counterparties, and package and deliver a range of
digital and physical goods and services.

Technology companies operating platforms with large customer bases like

google,amazon, uber,ola are often referred to as big techs

The implications of these aspects for financial

Impact on transaction costs, information asymmetries, and market gaps

• Reducing information asymmetries:

Information asymmetry among banks and financial institutions and

customers may increase credit costs , denial of credit, denial of insurance etc 299
Emerging Issues
.

Better information generated through consumer data from other activities and
analytics, could improve risk assessment and reduce the need for collateral as
an indicator of creditworthiness in lending..Small businesses and individual
with no credit history or limited credit history can also be provided financial
services based on their profile generated through their digital transactions.

More information builds transparency into system and enhances trust,

enabling FIs to work with a wider range of counterparties. Transparency
built into the system can greatly reduce intermediation as is the case in fin
tech credit models such as P2P or marketplace lending seek to directly link
investors and borrowers

• Enabling customization of financial services to construct more

complete markets.

Data and automation facilitate the execution and monitoring of complex

contracts and creation of more complete markets.

Traditional FIs and marketing channels design and sell standardized products,
with little scope for consumer centric design and development of products.
With information available not only about financial transactions but also
about various facets of individual tailored services, such as loans, investment
advice, or retirement planning structured according to individual
circumstances of the can be developed based on AI .

Digital marketing systems enable specialized products to find a sufficient

customer base. The increased availability of data and computing power
makes it possible to better price risk,

• Reducing fixed and marginal costs of producing financial services.

Technology has potential to reduce cost and eliminate a part of physical

infra structure that accounts for majority of fixed cost. For example use
mobile wallet, UPI apps, mobile payments will reduce number of ATMS,
POS machines and bank branches. Cloud-based

Infrastructure, such as Banking-as-a-Service (BaaS), provides all computer

infrastructures

A niche financial services provider or new entrants can connect to these

services thereby saving on this type of infra structure. They can further
reduce marginal cost by using technology-enabled automation and “straight
through” processing,

Digital innovation can also help to overcome. Spatial (geographical) barriers

can also be overcome through technological innovations.

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 CRM and Role of
15.5 CONSEQUENCES FOR FINANCIAL Analytics
SERVICES FIRM
The financial services value chain consists of four broad components:

i. customer interface
ii. back-office functions,
iii. infrastructure, and
iv. balance sheet.

The operations that ‘manufacture’ financial services involve the first three of
these.

Prior to the advent of fin tech, the combination of transactions costs and
economies of scale and scope resulted in large financial intermediaries that
tended to be vertically and horizontally integrated, providing all four
components internally.

Prior to the advent of fin tech, the combination of transactions costs and
economies of scale and scope resulted in large financial intermediaries that
tended to be vertically and horizontally integrated

Implications for market entry

As discussed previously in the unit Digital innovations have reduced cost

barriers and capital requirements; allowing new and smaller players to enter.
Local regulations and trust capital (reputation) the reduction of many fixed
costs and a decline in marginal and switching costs allow new low-cost
providers to enter the market and be economically viable.

Such new providers initially focus on one segment of market and wean away
customers from that particular segment. They also broaden access to financial
services for under served and un served customer segments.

APIs (Application Programming Interface) and open banking initiatives

which are usually built as a service on top of the safety net provided by
existing financial institutions are also going to gain traction as both the
requirements of trust and convenience is inbuilt in such ecosystem

Infrastructure connectivity and a reduced need for physical branches allow

Established companies from other sectors like telecom, retail, and ecommerce
will also enter into financial services as they can leverage their existing
customer base and customer trust already established in their core market.
Some are able to combine financial services with other products or core
capabilities as part of a platform offering.

The burden of regulatory compliance on new entrants can be reduced by the

ability to turn regulatory compliance into a technology integration process. In
order to diversify product offerings, customer base risk profile and generate 301
Emerging Issues
alternative revenue streams several banks have built BaaS platforms to serve
fin techs and even other banks.

This kind of arrangements allow new entrants to connect to the payment

system or a bank balance sheet, thus reducing the need to deal with the
complexities of licensing, regulation, and developing their own core banking
systems.

15.6 SHIFTING ECONOMIES OF SCALE AND

SCOPE
The technological innovations have to some extent changed the ways in
which financial services providers operate through pulls and pressure of
economic forces and frictions. Economies of scale and scope are still relevant
but to not that extent as they used to be in past.

That has been accomplished to the shifting of the scale effects to the service
providers, previously these services were performed in house now they have
been outsourced. Scale remains important for service providers of in part by
shifting the scale effects to the infrastructure providers; scale remains highly
relevant in areas of cloud computing and data processing and software
platforms.

Financial services providers, particularly new non-bank providers, face two

important costs in the unbundled marketplace:

• Customer acquisition costs. Customer acquisition costs consist of

marketing, on boarding, KYC, and initial credit assessment, remain
significant relative to revenues, especially for retail financial services.

With use of technology and mass media it is easy to reach users

digitally, but the conversion rate is low along with the associated cost
due to user inertia more prominently witnessed in retail and SME
business lines. In case of wholesale customers also customer acquisition
costs are also significant due to cost associated with system integration
and business process changes. Initial credit assessment is also more
complex. Amortizing these and other fixed costs across large customer
base and varied products offerings allows for economies of scale and
scope.

• Funding costs. Some products have natural complementarities due to

which the cost of one or both the products can be reduced if the products
are offered simultaneously. For banks offering loans is more economical
if it has access to low cost deposits. In case of stock broking loan against
securities can be a profitable proposition due to lower risk, and greater
liquidity of traded funding instruments. In general banks have lower cost
of funding as compared to non banking financial firms as the latter use
more equity and have no deposits.
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 CRM and Role of
Consumers and other users also experience frictions in the unbundled
Analytics
financial services marketplace. As consumers balance choice and
convenience, they may favour firms offering broader scope:

Assembly costs. User inertia, trust, simplicity and convenience , often result
in preferences for a single provider of financial services that offers varied
range of financial products and services . even if each individual product
may be less convenient or well-designed, or marginally more expensive, than
those of alternative niche providers. In order to avoid cost to the time, effort,
and potential confusion of assembling fragmented services from various
niche players and moving funds between them customers stick to the
platform/ financial service provider thereby the incumbent FI save on
boarding costs and convenience for the user creates economies of scope for
the FI.

• Switching costs. To wean away existing customers of other financial

institutions is a difficult task as there are barriers in the form of effort,
inertia, and inconvenience. In addition f disentangling a service that has
been linked to multiple activities and systems is cumbersome Financial
institutions intentionally embed Switching costs in product design to
safe guard their customer base from potential future competition

15.7 IMPACT ON FINANCIAL SERVICES

PROVIDERS
The financial institutions in the future will be impacted by

• Reduced economic frictions,

• the ability to reconfigure the value chain,
• new opportunities for entry, and
• shifting economies of scale and scope

The financial services eco system in future would consist of three main types
of entities, which are:

• Existing players
• Fin techs
• Big techs

These factors will affect different financial services providers differently. The
impact will depend on their current market positions and ability to leverage
technology.

Existing players with advantages in trust capital and regulatory position will
try to integrate technology in their operations to protect their existing
positions and face competition. Multi-product incumbents ameliorate
customer switching and assembly costs. Disaggregation can disrupt this
business mode. Offering of niche specialised services can erode stand alone 303
Emerging Issues
profit of incumbent’s products and services. The fixed cost base of
incumbents will impact profitability of remaining low margin products. Large
incumbents will have to build upon their existing strength of scale, customer
base, regulatory expertise and capacity to update technology to compete with
big techs. Small incumbents will have to rationalise their cost structure by
using on demand infra structure and external service providers

Fin techs are small niche players and their operations are mainly technology
based. Their core strength lies in leveraging data and connectivity for
marketing, sales, customer acquisitions, distribution and delivery of their
products and services. Economies of scale and scope are relevant and come
into play when one is operating in mass market such as financial services. Fin
techs will have to offer a wide variety of services to amortize customer
acquisition and regulatory compliance cost over a large revenue base.

Big techs

Big techs by their nature of operations have an added advantage over fin
techs, big techs that already have a large customer base for non-financial
business lines. Big techs venturing in financial services will have to focus on
trust capital, addressing regulatory concerns especially anti trust laws and
reaching out to consumers as marketing of financial services is more
complex.

Big techs with their existing strength have all the resources like capital,
customer base &trust which enhance their economies of scale and scope and
also network effect. The main impediment in their operations in financial
services may be the lack of physical touch points and distribution and
delivery infra structure. Regulatory and compliance function which is much
specialised may also act as one of the bottleneck in their operations.

Uphill now we have discussed the likely scenario of future regarding

financial services, now let us briefly look at the future scenario associated
with the components that make up financial services. The services we are
going to discuss are:

• Payments

Payments:

• All financial institutions and businesses are looking to modernize their

payments platforms and capabilities to reduce their infrastructure costs
and payment floats. Present payments environment is complex and
changing faster than ever with proliferation of many service providers
and new innovative investments. To succeed, companies must be both
agile and innovative to navigate change manage risk and deliver an
outstanding customer experience. Innovations have occurred in payment
landscape leveraging mobile devices and connectivity i.e. digital wallets,
Unified payment interface (UPI) and automated machine-to-machine
304 payments. Most of these innovations have modified front end process
 CRM and Role of
(the way you make payments), but the underlying payment infrastructure
Analytics
has not changed much.

The need to carry cash will be minimised due to these innovations. As

more and more customers link their bank account to payment solutions
banks and merchants would be able to use data-driven customer
engagement platforms, point-of-sale vendor financing. The use of credit
cards could also be displaced. With development and emergence of
payment decision support systems the share of payment wallet may be
splintered across different cards and conversely default card share could
also increase.

Depending upon the consumer behaviour and future technological

innovations there are three likely scenarios in the payment landscape.

• Consolidation of the Payment Market

• Fragmentation of the Payment Market
• Displacement of Credit Cards

Consolidation of the Payment Market In this scenario customers lose

visibility of their payment choices as innovations like Amazon’s 1- click
and Uber¡¦s seamless payments push more and more transactions to a
single default card. The significance of differentiator like brand and
design would be reduced as default card’s share in consumer spending
will increase. Use of variety of card will decrease as payment solutions
provide a seamless transaction experience. Simplicity and convenience
drives, customers to do transactions from a single default card,
increasing the default card¡¦s share of wallet, Overall if this scenario
plays out there would be reduction in number of credit card providers
and increase in stickiness of the existing credit card customers. Banks
will have to develop more personalized features and reward points to
retain existing customers and attract new customers. Competition and
innovation will decrease as consumers use fewer card eventually leading
to decrease in number of available card choices.

Fragmentation of the Payment Market

The use of digital wallets with credit card interface will eliminate the need to
physically carry credit cards thus allowing niche cards to gain popularity with
value conscious.

The development of decision support systems that interact with digital

wallets and credit card will optimise card usage by automating card
selection based on loyalty points and other benefits will assist customers
choose the best card for each purchase due to which owning and operating
multiple cards would be seamless customer experience, prompting further
proliferation of niche / merchant-issued cards. The share of wallet would be
splintered across many card providers.
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Emerging Issues
Displacement of Credit Cards

Today, merchants and payment solutions providers, such as mobile wallets

pay higher merchant service charges on credit card-funded transactions than
on bank account-funded transactions. To reduce costs, these players will use
incentives to encourage customers to switch their funding method from credit
cards to bank accounts. At the same time, merchants will adopt data-driven
alternative vendor financing solutions that offer customers lower interest
rates and provide financing income to merchants.

These innovations will place pressure on credit card transaction volume and
interest income; limiting issuers’ ability to offer attractive loyalty
programmes and reducing competitiveness in the face of merchants who are
able to directly offer their own incentives (e.g., loyalty points, special offers).

15.8 SUMMARY
Financial services are changing the ways in which it conducts business.The
main catalyst for this change is the rapid development in the field of
technology and its application in financial services. New technology players
are also entering financial services and threatening the position of the
existing financial services providers

15.9 SELF ASSESSMENT QUESTIONS

1. What economic forces remain relevant for financial services even after
technological advancements?
2. Discuss the globsal macro economic trends
3. What are economic frictions and forces in Financial Services
4. Discuss the impact of digital innovations on key economic frictions
5. What do you understand by shifting economies of scale and scope?

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