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Ready for renewal

Russia’s financial sector is in recovery from the 1998 crisis and banks are keen to gain an edge by using customer relationship management. But, as Wendy Atkins explains, first they must do their homework.
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Six years after Russia was rocked by a financial crisis, the country’s banking sector is now going through a period of renewal. By bringing the latest technologies on board, the market could be thrust into a major position as a user of the most advanced Customer Relationship Management (CRM) tools. But a mountain must be climbed before the country’s banks are in a position to adopt the technology seriously.

Profit lies at the heart of CRM, and this can only be achieved if a CRM system is established that understands each bank’s business model. By using CRM to identify customers’ wants, needs and habits, banks are better able to retain customers, promote spending, and encourage the most cost-effective use of banking services.

An important aspect of CRM is customer segmentation, which identifies the best and worst customers, and those most likely to leave. As competition in retail banking heats up, this becomes increasingly important to ensure banks do not waste time on customers who will leave regardless of the services banks provide. Discovering which customers display the characteristics of being likely to leave, and working to retain those worth keeping is essential: acquiring new customers is much more costly than retaining existing ones. Besides retention, CRM can also be used to make customers more profitable by guiding them towards more cost-effective channels, such as internet or telephone banking.

Single view needed

For a CRM system to perform effectively, banks must have a single view of their customers – which is where Russia still has a problem, says Alexander Beresnev, sales director, Russia & CIS countries, at Sanchez Computer Associates: He says: “Currently, most Russian banks don’t have [a single customer view], which means they serve clients with separate systems and databases for each line of business, so even giving a loan or issuing a credit card is done without seeing what other products each client has with the bank.”

Another consideration is how to get customer information to the people on the front line, such as sales staff and cashiers, who can use it to promote a customer’s commitment. “In terms of loyalty, this is essential as you want your customers to identify you as a supplier of services when they are choosing new financial offerings,” comments Eric Hien, product manager CRM, at Sanchez. “From a technical standpoint, you need a way of taking information from multiple core systems and integrating them in one spot. Ideally, if it can be made web-based, it will be fast and more efficient. Architecturally, branches, call centres and internet IVR [Interactive Voice Response] all feed through a single middleware solution, which acts as a connection to all these, then feeds back into them.”

While it seems unlikely many Russian retail banks will make any major moves towards CRM in the immediate future, many organisations are now going through a process of renewal, and most are moving from outdated systems to meet the growing need for banking services. Currently, many retail banks are unable to sustain high growth rates and are eager to reduce operational costs. Consequently, they have started to invest heavily in IT and are still developing their core banking systems. This provides a real opportunity for banks to prepare for a future move to a customer-oriented strategy, backed up by a modern system that enables them to have live real-time data feeds.

“If CRM is to be effective, it needs to be real-time. Because most systems in other parts of the world have taken a batch/database approach to CRM, these tend to be less effective – although they do allow a single customer view on the system,” says Richard Phillimore, chief marketing officer, at Sanchez. “Modern banking architectures include a three-tier structure, where the channels at the front end are connected to the back-end product processors through a real-time middleware layer. Critically, the middleware needs to include a single customer database.

Real-time picture

“This provides the bank with a real-time and complete picture of its customers in terms of both the total relationship as well as real-time transaction tracking. In this picture, CRM is an integral and pervasive component of the whole banking system, not simply a separate application attached to the system.”

With the migration of banking cards to the Europay MasterCard Visa (EMV) standard, it is inevitable that people should consider building on the power of smart card technology to combine banking functions with loyalty and CRM. “As soon as banks receive chips and think about how they can use them, they start thinking about loyalty. But that doesn’t mean that they know what to do with it,” says Andrew Vereninov, OpenWay director for Russia and CIS. “Nevertheless, loyalty doesn’t have to be on a chip. Whether you have loyalty or not depends not on whether you have a chip, but on whether you understand how to create a discount system for your clients over a certain network so that you can keep the best hold on your clients and merchants. EMV is an alluring technology tool because it allows the banks jointly with a point of sale, to realise a loyalty business-scheme, based on enough secure infrastructure, without an on-line connection to a host system.”

Several smart card schemes that include a loyalty application have been rolled out in the Central Europe Middle East and Africa region, and these provide interesting reference points for Russian banks. ST Microelectronics has provided Proton technology for several schemes in former communist countries, including Poland, the Czech Republic and Hungary. Michel Baroen, manager for business development and sales at ST Microelectronics Finance ID Solutions, says: “EMV can trigger the platform for banks to add value or put other things on the card.” In Eastern Europe, the ‘Balcard’ (Balkan Card) is a CEPSe-purse card pilot operating in Bulgaria, Cyprus, Greece and Romania, which now includes a loyalty application.

Chip money

Meanwhile, in Turkey, MasterCard reports success in schemes such as the Axess card operated by Akbank. Smart card technology is used to give ‘chip money’ – money that can be spent as soon as it is earned – surprise gifts and customised rewards based on ‘Recency, Frequency and Monetary (RFM)’ criteria. The success of the card is born out by figures released in 2002. In the first eight months of the scheme, Axess gained one million customers, leading Akbank to increase its share of the Turkish credit card market by 53% during the same time period.

Banks in Russia are less advanced in CRM than their counterparts in Europe. Whereas Eastern Europe and the Baltic States are now dominated by foreign banks, Russia still has a strong state presence in its banking industry, with Sberbank and Vneshtorgbank accounting for a significant share of both banking assets and the retail market. This compares with former Soviet countries such as Ukraine and Kazakhstan, which are now driven by large private banks. “The government guarantees all deposits placed with Sberbank, which creates a huge competitive advantage,” says Andrey Volkovsky, sales management, Central and Eastern Europe, at SAP.

“However, this situation is likely to change as the government has announced plans to introduce a deposit insurance system, which will trigger competition and undermine the position of Sberbank in the retail market. The reform is likely to reshape the market and this will dramatically increase the importance of customer management and boost the CRM banking market. Banks will need to improve customer management processes in all areas (marketing, sales, distribution, customer services) and at all levels (front-line employees and top management).” As new players – including foreign banks – enter the arena, banks will be under pressure to focus on their more profitable customers.

Customer retention is currently not much of a problem in Russia. A large percentage of the population deposits its money with Sberbank not out of loyalty but because citizens still remember the consequences of the 1998 crisis. A lack of trust prevails, and CRM is not necessarily the immediate tool to attract customers. “Firstly, banks need to leverage their brand to prove they are reliable – and most banks need to think about core systems replacement first. A requirement for a new system would be to have CRM capabilities built in,” says Mr Beresnev.

In the short term, there are fewer retail bank products and little product differentiation in the country, making it less desirable to switch banks. However, this could change with the entrance of international banks and the emergence of large Russian private banks. Organisations with a global brand and identity are offering products and services in Russia that are comparable to their offerings in other countries – and this could help drive a requirement for CRM and loyalty schemes.

Different solutions

Where Russian banks and card companies have started to adopt loyalty solutions, these are often different from other markets, as Denis Shilakin, associate vice president at MasterCard International, Russia, says: “Other markets tend to use technical solutions more widely available from software companies instead of their own bespoke systems. Air miles have yet to prove their popularity as loyalty schemes in Russia, though several schemes do already exist and there is a growing interest in them from both banks and airline companies.”

Being several years behind other former communist countries, Russia is able to learn a lot about how they have adapted their banking systems. As Mr Phillimore says: “Poland provides a good example of how the Russian banking system could look in the future. Over the past 10 years, the Polish banking industry has gone through a period of infrastructure renewal. As a result, all banks in the country have gone for real-time, on-line banking solutions.”

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