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The Role of Effective Customer Relationship Management (CRM) in the Customer Lifetime Value (CLV) of Banking and Financial Institutions

Published by Cubic Author

Posted on 05/08/2024

Introduction to Customer Relationship Management (CRM) and Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) is a prediction of all the value a business will derive from the entire relationship with your customers. In a term, CLV is a metric that demonstrates how the customers have a relationship with business value over time. CLV indicates how the transaction with your company, the customer has with the company over a lifetime. Some of the examples of the interaction between a customer and your firm that generate CLV are purchasing products, word-of-mouth referrals, and customer service interactions. By measuring CLV, a company is given an idea of how they should spend their marketing and retention dollars by calculating the CLV/CAC ratio. That is the ratio for Customer Lifetime Value (CLV) to Customer Acquisition Cost (CAC). When the ratio is less than 1, it means the company is not getting their money back, and may need to tweak their model. Most SaaS companies look for 3:1, 4:1 or even 5:1 or higher, depending on the company. When the ratio is really high, it means you have a highly effective business model.
This paper attempts to address the roles and importance of Customer Relationship Management (CRM) in the customer lifetime value (CLV) of banking and finance sectors, because these two industries are considered the pillars of each and every economy. CRM refers to the process utilized by companies to manage the relationship of their customer through the entire lifecycle of a customer (acquisition, distribution, and termination). As a result, the scope of CRM encompasses new hires, marketing, sales, customer service, training, professional development, performance management, and compensation. From a strategic perspective, CRM covers information technology, customer data, artificial intelligence, management, human resources, and human resource systems, and marketing and sales systems quality.

Importance of CRM in Banking and Financial Institutions

CRM system helps the banking industry to differentiate itself and serve customers with a long-term impact of sustainability. Such management is about building operational trust, loyalty, satisfaction from an increasing base of profitable and high-value customers. In such a case, customer relationship management can have a significant impact on the banking industry that pierces through the entire institution with the guidance of how the banks need to serve both their external and internal customers. When CRM is implemented, customer retention increases as the bank maintains a highly competitive, high-quality delivery channel with the usual direct person (relationship manager) available at the time, and the bank engages more professionally to know about customer heart and buying behavior. Overall, their profits increase, and they are in a better position to serve and know about customer motives and other background information. It can be said that banks have some differences in their CRM strategies, which can secure certain values in certain aspects, though the technological implementation is the same.

Banks and financial institutions are some of the most CRM-driven organizations with a clear emphasis on the fundamentals of customer trust and relationship. It is a need for these sectors, which is why, from the past century, such institutions have been advised to build and manage long-term relationships with customers, considering the nature, their customer value, and the expected benefits that banks foresee from such clients. Essentially, banks and financial institutions are in the business of sales of money and taking deposits from clients. Every business in a bank or finance company is a result of a cohesive set of functions, and the end result is aimed at building trust, discipline, delivery, sound default, zero fraud, and bad practices. Such institutions aim at trust and loyalty, and they do not believe in looting low-cost benefits.

Strategies for Effective CRM Implementation in Banking and Financial Institutions

CRM implementation strategies that can increase customer lifetime value are through attracting new customers who have a high potential for multiple transactions, retaining regular customers, maintaining and increasing the average frequency of transactions per customer, and increasing the unit financial margin. The result is to increase the added value per customer, so that the company can optimize customer potential and increase customer lifetime value. Having understood the framework implementation of CRM, it is necessary to develop implementation strategies, as well as CRM model solutions for the banking and finance industry. CRM application in customer transaction time and while opening an account, and by contacting customers through cell phones. Marketers must also update data on earned or used transactions, and mark customers who have high transaction values. During the customer settlement period, do not let the customer wait too long. Even though the month is quiet, it can be used to approach customers whose contract will end, to propose an extension of their contract.

Effective customer relationship management (CRM) is an important approach in banking and financial institutions. The ability to predict customer behavior helps the bank to choose strategies to increase customer lifetime value (CLV). The overall CRM strategy is based on one thing, which is to provide added value through products, services, or sales agents to customers, which will attract customers to duplicate transactions and be loyal to the company. Successful CRM implementation strategies include achieving customer loyalty, which includes technology and an integrated strategy, process optimization through personalization, a 360-degree view of the customer, product innovation, segmenting the customer by value, using letters and providing a good service channel. Drawing useful customer intelligence and training, and motivating employees to embrace the customer-centric organizational culture frame and motivate the employee to provide quality services.

Measuring and Enhancing CLV through CRM

CRM (Customer Relationship Management) is seen as a strategy to enhance the overall CLV of the bank. CRM collects all relevant customer data, organizes that data, and disseminates it throughout the bank. Each employee uses the information in the system to deliver services that are customized to individual customer’s needs. This focus on managing customers enables customer-driven strategy. According to Reichheld and Sasser, “The most successful businesses of the next decade will be those whose services can be better tailored to the needs of a target customer than the competition’s.” Analyzing the above literature review, it is suggested that in the banking and financial services sector, in general, “customers” should not be treated en masse but as individuals and managed accordingly. Customers have financial needs, and if the bank accurately understands them and provides suitable solutions, it is likely that the customer will continue their relationship with the bank in the future also. It is found that CRM is a useful concept that supports companies in their pursuit of long-term profits based not only on having a customer but on serving the customer better. The customer lifetime value (CLV) computed in the banking sector analyzes how long the customer relationship exists and the potential value in the future relationship with that customer. One of the important uses of CLV is that it is used as a basis to drive a rate of spend to develop, maintain, and protect the customer base. It also indicates the sum that a customer is expected to generate over the course of his or her relationship with the bank and hence checks the CLV continuously so that no customer with high CLV is lost. It is vital in banking where the bulk cost of the acquisition exceeds the average first-year gross margin on the customer’s business.

There are various methodologies available to measure customer lifetime value (CLV) from the bank customer’s profitability (monetary value) context. A few of them are based on aggregate in nature and they do not allow managers to ascertain the spread and estimate the lifetime cash inflow of various groups of present bank customers. Others are fewer aggregate and permit the banking administrators to perceive the spread in the expected lifetime value of numerous substitutes or groups of employees. Therefore, it is thoughtful for the bank managers to periodically measure the lifetime CLV of bank customers using both aggregate and disaggregate techniques for the banking sector. This helps bank managers to understand the lifetime customer base profits, distribute it segment-wise, and focus mainly on maximizing it at both the segment level and across all the segments. This is helpful for them to set a reasonable ROI-based budget for the acquisition, up-gradation, and retention of potential or present high-value bank customers and thereby execute an effective CRM strategy.

Case Studies and Best Practices in CRM for Banking and Financial Institutions

One of the biggest retail banks in the United Kingdom is able to derive long-term customer loyalty. Founded in 1999 and one of the largest personal banks in the UK, Halifax plc has a network of several hundred branches throughout the country. Another long-standing bank, moreover, is geographically and demographically extensive, with customers receiving the right product advice. Local branches and call centres have been able to assist a diverse customer group by presenting a unified image to the public. The experience of the contact and beyond should be made as humanly driven as possible and as amenable as possible, irrespective of the chosen channels. A business that combines tradition with modernity actively is never compromised. With the help of up-to-date technology and data, customer service must be a two-way street and continue to extract value from the database.

Banks and financial institutions often handle a lot of customer data; however, not many of them deploy it effectively in CRM applications. Transactability, consumer relationships understanding, and a societal focus are also important perspectives of CRM to increase business profit and efficiency, rather than just the number of customers. In simple terms, the main goal of CRM in both banking and the financial sector should be complete customer satisfaction, which must be considered by the organization from the inception of the product until its completion. The following figures provide examples of case studies and best practices to demonstrate the role of CRM for a bank or a financial institution.