Setting Up the Middle Class Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio This case is dedicated to development of affluent segment customers attraction and retention segment for Alfa-Bank, the leading Russian private bank. Last year the bank managed to perform in the green in retail segment despite this market softening overall in Russia. In order to maintain growth rates and leading position in the market Alfa-Bank is implementing the segment oriented strategy where one of the key bank advantages is its ability to understand and perceive customer business needs correctly. Participants will have to analyze target customers and their needs, define best approach to cooperation with them, establish a correct method of services provision and communication, and to suggest new competitive products and services.
Contents
Contents
3 Introduction
6 Alfa-Bank
10 Banking in Russia
21 Strategy of Working with Affluent Customers
13 Retail Banking Operations
24 Competitors
27 Supplements
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Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
2
Introduction
3
Introduction
Introduction The main trend of this year for us is the implementation of segment-oriented strategy. We are rebuilding our business model so that we focus on customer needs rather than on products per se. Our customers are characteristic of pro-active attitude and self-motivation, and we are ready to satisfy even most sophisticated demands on their part. Our customers are striving to go forward, they understand that the world around is ever-changing, and they indeed are looking for service banks to become better. Our mission, as we see it, is to become the everyday bank for our customers, and the best one at that.
Andrey Korovin,
Head of Retail Segment business unit
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Customers with over 1 mln rubles income
Mass affluent segment – customers with 57 to 156 thousand rubles income (in Moscow and St. Petersburg – from 91 to 250 thousand rubles)
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3 Affluent segment – customers with income exceeding 156 thousand rubles (in Moscow and St. Peterburg – exceeding 250 thousand rubles)
Ivan, Director of Alfa-Bank Retail Customer Segments unit, was on his way back from business trip to Perm. In 2014, Alfa-Bank implemented a new customer services model and Ivan participated in the opening of an office designed in the new format. While sitting in the business class compartment of a deluxe train and enjoying the sight outside, Ivan thought with satisfaction that despite overall unstable economic situation in Russia Alfa-Bank continues to evolve by expanding its retail chain and offering brand new service formats to its customers. The shades of evening began to descend… Ivan opened his briefcase and took papers out. Wobbling train sounds helped Ivan to work and he expected to have the plan for Alfa-Bank target customer segments strategy development ready by the time he would be back in Moscow. Once Ivan had finished carefully studying all current materials he came with the following general picture: Alfa-Bank had set up a great approach to the VIP segment1, interaction with the mass segment was also quite good, and there were further opportunities for enhancement of interaction with mass affluent2 and affluent3 segments. Ivan decided that it was extremely important to focus on those middle segments as related customers could scoop in 5-6 times larger income than the mass segment. Thus, the main goal was to understand how to find, attract and
retain such customers. Furthermore, it was important to increase the aggregate profit from affluent and mass affluent segments to 45% from the overall retail portfolio and to focus on three fields of customer service: loans, deposits, and transaction services. When it comes to servicing customers the first and foremost point of focus is, of course, bank products and services. Ivan made a note to instruct bank products development team to prepare analytic reports on sources of the bank major profits and to develop suggestions on ways to improve profit generation with subsequent product line expansion and upgrade. Efficient interaction with customers was of no less importance for the bank further development. Ivan was proud at the fact that Alfa-Bank was a steady leader among other banks in terms of customer satisfaction. However, he well understood that the client relations strategy was based on top-down vertical approach, i.e. the bank was actually creating customer needs through new product offers. Ivan paid a thought as to how interaction with affluent customers could be extended, on the ways Alfa-Bank could demonstrate all inherent advantages of its products and services. Ultimately, how could the bank demonstrate that it was so much more than just a place for transactions and cash handling? For Ivan himself,
Setting Up the Middle Class - Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
Alfa-Bank had long ago become a true financial advisor and every-day assistant. Mobile and Internet applications made it easy to pay bills and kept Ivan updated on account movements; his special-purpose accounts safekept moneys purported for children education, and his grace period credit cart relieved him of any worries about paying for everyday purchases. Ivan made another note in his notebook to remind him inquire on the progress of addition of utilities companies into the UI list of the bank internet and mobile banks. Ivan was well aware that such seemingly small services in the end result in longterm quality bank-customer relations. The easier and the more comfortable is the interaction with the bank for a customer, the more place does the bank occupy in the everyday life of its customers. Profit from bank commissions naturally depends on extent and simplicity of bank services. Quite satisfied with the job well done Ivan decided to have a small break and walked in to the compartment of his deputy Tatiana, who was in charge of marketing. They discussed various means of attracting affluent customers back en-route to the train station and agreed to continue the same during the journey. Tatiana was working with various materials and suggested Ivan took a look at the presentation on her notebook.
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Introduction
— As you know Ivan, today it is topical for us to develop new methods for efficient physical attraction of new customers. Our advertising budget is allotted for the entire retail segment and is targeted at bank products rather than at potential customers. At the moment we are not quite ready to change this strategy drastically, so I advise we focus on attracting new customers through our network, including both local offices and other bank branches such as consumer lending and payroll customers. I also see an impressive potential in furthering our segmentation of the existing customer base and singling out affluent and mass affluent segments. — Thank you, Tatiana – said Ivan. – Please prepare your suggestions and conclusions and we will have them discussed tomorrow at the unit’s meeting. I am certain that you remember of our goal.
Setting Up the Middle Class - Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
We have to develop a segmented strategy for affluent and mass affluent retail customers attraction and retention, and to provide for the increase of bank profit share in this segment from 30% to 45% by the end of 2017. The strategy should cover the following fields: • New customers attraction channels and methods • Existing customers loyalty improvement • Better product and service offers The next day would be both challenging and interesting. Ivan planned to call together his team and to assign various tasks pertinent to development of the strategy that would be presented at the board of directors meeting in just two months.
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Alfa-Bank
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Alfa-Bank I History
History
Alfa-Bank Russia, founded in 1990, has developed rapidly to become one of Russia’s leading privately owned banks. It provides a full range of banking services — corporate banking, retail banking, investment banking, asset management and trade finance. Its story began in 1990, on the 20th of December, Alfa-Bank was established as a commercial bank in the form of a limited liability company in the Consortium Alfa-Group - one of the largest private investment groups in Russia. In January 1998, after 8 years, Alfa-Bank was reorganized into open joint stock company. Alfa-Bank merges with Alfa-Capital, then a sister company of Alfa-Group, contributing to the creation of new divisions in the promising areas of investment banking. This merger, the Bank’s efficiency and professional management allowed Alfa-Bank to tide it through the economic crisis in Russia in 1998.
In the 2000s, Alfa-Bank demonstrated steady growth, entered into a strategic partnership with a number of companies opening dozens of new branches and developing new solutions for customers. For several years in a row, the bank was dubbed the «Best Bank in Russia» according to the European financial magazine Euromoney. In 2001 Alfa-Bank opened a subsidiary in New York City, Alfa Capital Markets. In addition, Alfa-Bank became the 100 percent owner of Amsterdam Trade Bank N.V. and thereby acquired a full banking license in the European Union.
with a focus on reliability and profitability, as well as the focus on industry-leading customer service, technology, efficiency and integration of the business. In the same year the Bank celebrated (together with its customers) the twentieth anniversary in the market. Alfa-Bank organized a variety of events across the country. In Moscow the Bank held a 4D laser show on Sparrow Hills, listed as the largest by area of the projection in the Guinness Book of Records, with the audience of more than 800 thousand people.
In 2006 Alfa-Bank completed the country’s first securitization of diversified payment rights with a $350 million deal. In 2011, Alfa-Bank approved the development strategy, striving to maintain the status of a leading private bank in Russia
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Alfa-Bank I The Bank Today
The Bank Today
For six years in a row Alfa-Bank has been leading the Сustomer Experience Index based on survey of Russian retail banks and for two consequent years Alfa-Bank has received the highest award in the Best Retail Bank4 nomination. Spear’s magazine named Alfa-Bank the best Russian bank for private banking services and large capitals management in 2013. The next year Alfa-Bank topped three nominations of the second annual innovations and achievements competition in financial industry organized by the Banking Industry magazine. The bank was also titled the Most Innovative Bank for being the financial institute that utilizes state-of-the-art technologies. Leading international rating agencies hold Alfa-Bank among the top rated Russian private banks. In June 2014, Moody’s Investors Service international rating agency confirmed the long-term credit rating of Alfa-Bank at Ba1 level, stable forecast5, which reflects impressive results of cohesive strategic planning by the bank management and quality everyday work of the bank team in general.
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Retail Finance Awards, December 2013
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Rating List Moody’s Corporation, 2014
Alfa-Bank head office is located in Moscow. There is a total of 617 bank branches and offices in Russia and all over the world, including subsidiaries in Netherlands, the USA, the United Kingdom, and Cyprus. Over 25 thousand employees are working in Alfa-Bank today. The bank continues to evolve as the universal bank in the following directions: corporate and investment business (including SMEs, trade and structured financing, leasing, and factoring), retail business (consumer lending, cash credits, credit cards, savings accounts, deposit accounts, distant service channels). All customers of the bank can be divided into several groups: private persons, individual entrepreneurs and small enterprises, medium and large business, and financial institutions. Alfa-Bank offers a unique approach and a special range of products for each customer group. All customers are of equal interest and value for Alfa-Bank. Furthermore, the bank follows diverse customer portfolio strategy, i.e. strives to have approximately the
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
same number of customers from different groups. As of January 1, 2014, AlfaBank services around 109 000 corporate customers and about 10.6 million private persons. According to forecasts for 2014, Alfa-Bank’s customer base will grow by 13-15 %. Main growth drivers are expansion of geographical presence, active growth in cities and development of representation network. In 2014, Alfa-Bank stays the largest Russian private bank by total assets, total capital, the size of the loan portfolio and deposits. Alfa-Bank is seventh in terms of assets, and sixth in terms of shareholders’ equity in the overall rating of all Russian banks. As of January 2014, assets of Alfa-Bank accounted for 1.682 billion rubles – this parameter is significantly higher compared with its nearest competitors. The loan portfolio increased again in 2013 and equaled 1.19 billion rubles. Net profit for 2013 equaled 31.5 million rubles.
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Alfa-Bank I Strategy and Goals
Strategy and Goals Alfa-Banking Group’s general strategy is to maintain the status of the leading private bank in Russia, while enhancing the bank’s stability and profitability. The Group also aims to set the industry standards in key areas such as customer experience, technology, efficiency and teamwork.
Alfa-Bank collaboration with leading Russian companies is based upon a wide range of products and its in-depth knowledge of the industry sectors in which its customers operate, and of its customers’ businesses. The tailor-made solutions that the Alfa-Bank is able to offer its customers give it a competitive advantage. The bank pays particular attention to its employees, since their dedication and loyalty are key to building successful relationships with customers. For Alfa-Bank management, people are not merely raw material, but human capital. A manager’s path to success depends on the achievements of his colleagues, and the keystone to success forAlfa-Bank as a whole is steady work as part of a unified team. The task of managers is to achieve results by developing their people, keeping them abreast of what is happening at Alfa-Bank and helping them feel they are part of a team. The excellent results achieved in recent years show that this personnel policy works and lies at the heart of achieving success. Another important element of Alfa-Bank’s development strategy is focusing on the customer and his or her needs and wishes. This is the key to the long-term success of its business, and the bank is certain that interacting with customers in a way that is convenient for them is vital to successful operations. That is the Alfa-Bank way of doing things — it does
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not sell specific financial products; rather, the bank provides its customers with convenient, contemporary solutions that not only meet their current banking needs, but also anticipate future needs and expectations. In order to make the right decision, the bank studies the world around. Alfa-Bank constantly looks at itself through the eyes of customers, listening to the opinions of those who choose Alfa-Bank as their «home» bank. This is why the bank makes a special effort to obtain feedback, both through Alfa-Bank’s branches, as well as with the help of cutting-edge communications channels, like social networks. «The Bank through the Eyes of the Customer» is Alfa-Bank’s motto for 2013. In the autumn of 2011, the Alfa-Banking Group launched an updated retail banking strategy to aggressively expand its retail loan portfolio and increase the volumes of personal installment loans issued and credit cards provided to customers. The Alfa-Bank is continuing to expand its presence and penetration both in the major cities and the regions of Russia, adapting its offerings through physical or virtual channels, depending on the profile of specific regions, and adopting its risk assessment models to keep them current to minimize losses through fraud and default. As of this moment Alfa-Bank classic format offices are present in over than 80 cities of
the Russian Federation. In addition to this, consumer lending is available in more than 20 thousand POS. These are proliferated in small towns, villages, even small hamlets – and such Alfa-Bank products as consumer loan, credit card, or Basic Services package are available in all of them. By September 2014, Alfa-Bank distribution network included over 450 offices, and 68 of them were done in new format. The bank is well known for integration of innovative technologies. Alfa-Bank has always been marketing state-of-the-art solutions and brand new approaches to customer interaction – first and foremost through the Internet and cell phones. Alfa-Click Internet bank client has won the nomination of the Best Russian Internet Bank Client for several years in a row, and in 2013 this client was title the most efficient one. According to recent surveys6, Alfa-Bank also became one of the leaders in mobile applications in Russia. Today, the bank has around 17 % share of the mobile banking market. In 2014, the total number of Alfa-Click subscribers exceeded three million people, and the force of Alfa-Mobile application users was over 400 thousand people. This is a considerable portion of the market and it means that the bank is an alpha dog player that sets trends in mobile and internet banking and defines development trends in this market segment.
Mobile Banking, Deloitte, 2014
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Banking in Russia
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Banking in Russia I Banking Industry Overview
Banking Industry Overview
All banking industry trends and issues are of direct impact on strategic development of every bank in the Russian Federation. The considerable part of Alfa-Bank assets are located in Russia, therefore the overall country economic conditions are explicitly affecting the bank business. In 2013-2014 the most noticeable trend in banking industry was the Central Bank revoking licenses from many lending institutions (33 licenses were revoked in 2013, and 38 more licenses were revoked in first half of 2014). Even more important is that the Central Bank started to take licenses away from quite large regional players with large office networks and not just from smallish banks with assets of around 1 billion rubles each.
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As for capitalization figures it is noteworthy that Russian banks increased own capital by 4.3% (up to 7.37 trillion rubles) in first half of 2014. This actually means that the growth rate has slumped somewhat, because the same indicator was 7.4% in the first half of 2013. This is mainly attributable to the drop of income experienced by many banks, the increase of investments to affiliates and subsidiaries of major state banks (such as Gazprombank, VTB Bank, etc.), and lower additional banks capitalization by shareholders. Licenses revoked from comparatively large banks didn’t help either. Along with slower growth rates the Russian banking industry also sees a certain deficiency of cash availability (bank
liquidity). There are several reasons for that and the main ones are slower growth of deposits volume and cut downs on credit limits from international financial institutions. Deposit growth rates per annum have drastically decreased and the first quarter of 2014 saw a flight of capital: depositors cashed out 393.5 billion rubles from private banks (2.3%). Standard & Poor’s international rating agency has worsened the forecast for Russian banking industry from stable to negative. The agency still believes that there is no risk of banking crisis in Russia for the next two years, so the credit rating itself was not changed despite the recent downgrade of Russia’s country rating and the rating of certain large banks7.
http://www.standardandpoors.com/ratings/
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Banking in Russia I Banking Industry Trends and Outlook
Banking Industry Trends and Outlook
In many respects, the market growth and development of the banking industry will be attributed to new products and technologies. The secret of prosperous development is simple: you should give the customers what they need, satisfy their primary wants, be able to outrun your opponents in recognizing and timely following the oncoming trends. The topside directions for development of the banking industry could be stated by a single phrase: Go Digital, Be Simple and Build Loyalty. The key trends of the banking industry are as follows:
8 Accenture «The Everyday Bank: A New Vision for the Digital Age»
Tools and techniques of processing of large sets of data, the size of which exceeds the capacities of conventional software applications, for further collection, storage, and analysis
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The future of mobile payments, Deutsche Bank, December 2012
New products and digital technologies. The world becomes progressively digital, and new technologies become more and more attractive and convenient for customers. This can be a vital sign for the banking sector. Based on the two latest reports by Accenture, 35 % of the banking market share will become totally ‘digital’ by 20208. New channels. Banks should also be able to recognize signals indicating changes in trends and servicing
techniques. The social media and websites are a reasonably priced but quite efficient channel, and if its advantages are properly exploited, could be quite profitable. Big Data technologies9. Accumulation of information leads to a point where data analysis only becomes possible if based on high capacities and technologically sophisticated tools. Unstructured data is most commonly the data produced by the bank clients, and identify the users in the Internet environment. These include client search requests, visited sites, mouse behavior on the screen, Network access point, activity in social networks, etc. When properly collected and analyzed in accordance with data acquisition strategy (having a clear vision of what the bank is looking for and what does it need it for), such information could help spot the clients’ needs, offer relevant products and services, and significantly improve interaction. Competition with non-bank institutions. In the field of development of electronic channels, banks start facing increasingly strong competition from non-
bank institutions. The Deutsche Bank10 analysts advise banks of the growth of potential competition from Internetcompanies, social networks, and mobile operators, which have already started to actively cultivate the payment service market, and are likely, in perspective, to proceed for the market of deposits and loan financing, and launch their own payment systems. Their advantage is in high loyalty of the clients to these companies, and the client bases they have are by no means smaller than those of the banks. According to Strategy Analytics, the NFC11 based e-commerce market will be capable of putting through up to 48 billion dollars by 2017. Omni-channel Banking12. The Omni-channel Banking concept allows the bank clients to self-choose the suitable interface channel, which they want to use. For instance, the clients will be able to get personal consultations in a bank branch, effect payment via Internet-banking, acquire information about their cards by means of mobile banking, etc. The Omnichannel Banking allows banks to make financial servicing be more available and integrated into everyday life of their clients.
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NFC technologies (“Near Field Communications”) transform a cell phone into a cash card
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Omnidirectional interface. A concept implicating a high quality servicing level via all interface channels
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Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Retail Banking Operations
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Retail Banking Operations
Retail banking operations
There are several feasible directions for successful growth of retail banking in 2014. Banks can offer extensive development and increase their branch network. If Europe has an average of 475 branches per 1 million of citizens, then Russia has only 266. Intensive development suggests raising the efficiency of working with an existing client base (client segmentation, increasing the banking product consumption per client, improving servicing technologies and personnel performance).
The transition to the omni-channel client servicing concept suggests further development of mobile and Internet banking, and implementation of innovative payment systems. The forecasts of BCG analysts say, in 2014–2018, the retail banking growth may become driven by transactional revenues, which will grow faster than those produced by loan and deposit operations. The key factors for success in such case will be a full range of such products, convenient interface channels, comfortable state-of-theindustry branches, profound client skills of personnel.
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Retail Banking Operations I Segmentation of bank retail clients
Segmentation of bank retail clients
To form a better bank offer for retail clients, it is critical to identify their need for financial servicing. The financial activity rate and the package of utilized products vary against age, social status, material wealth, and other sociodemographic factors. This is how banks segment their clients in different ways. One of the most common ways of segmentation is based on income level13. Affluent — the most prosperous segment; among these are company top managers and small business owners. Their monthly income amounts to approx. 150–250 thous. roubles (in megacities — over 250 thous.). They value convenience, personal service, personnel attention and individual financial solutions, require a more complex financial servicing, and are ready to spend more time to figure things out.
Mass-affluent — this segment includes high-paid specialists, “white collars”, mid-level managers, microbusiness owners. Their monthly income averages to 57–156 thous. roubles (in large cities — from 90 to 250 thous. roubles). Their values are shorter service time and its higher quality, as well as options to settle issues without visiting the bank branch.
Mass — this is the bulk mass of economically active population, whose income level varies from 0 to 57 thous. roubles (in megacities — up to 91 thous. roubles). This is the largest segment in the client’s portfolio of the majority of banks. Separate sub-segments can stand out inside this segment, such as low mass, mass, and upper mass. For the mass retail segment, the most critical thing is simplicity, swiftness, availability, and time saving. Such clients require cheap or free servicing, simple and comprehensive financial solutions, easily accessible servicing channels.
See also Supplement 5 and survey materials «Winning through customer experience: EY Global Consumer Banking Survey», 2014 (customer segmentation based on behavior, expectations, and bank relationships)
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Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Retail Banking Operations I Retail block of Alfa-Bank
Retail block of Alfa-Bank
The Alfa-Bank retail client base amounts to about 10.6 million clients, of which 5.4 million are active bank clients. The number of active affluent segment clients among them is 135 thous., that of the massaffluent segment is around 600 thous., and the number of active mass segment clients is in the order of 4.7 million.
Revenue Structure of the retail portfolio of Alfa-Bank
The structure of the retail portfolio revenues is formed by commission income, passive income (from funds allocated by savers), and percent of loans provided. The share of various client segments within each of these disciplines is unevenly distributed.
people take consumer loans with the bank, however the majority of them after reimbursing their credits do not extend their relationships with the bank. As a result, the performance of the channel also depends in many respects on the efficiency of reselling to such clients. The bank’s statistics shows that approx. 20 % of such clients are retained by offering them other products of the bank.
The bank income level will also vary depending on its operating activities. The average yield per product by assets (loan products) is about 200 roubles per month, by liabilities — 1000 roubles, transactions (service packages) bring 700 roubles, other products (payroll cards, insurance, etc.) — bring 400 roubles. Alfa-Bank employs three main channels for landing clients. The majority of the retail clients present themselves to the bank by arranging consumer loans (around 49.5 %). This channel mostly brings the mass segment clients to the bank. Each month, about 250 thous. of
Source: Alfa-Bank data
The second important channel is the payroll and corporate projects (30.5 % of clients). Such work requires close interaction of the retail and the corporate blocks, as the clients are sourced by legal entities. The payroll project market is capable of continuing its growth by means of penetration of this service into the small business, as all largeand average-scale clients are already covered. The third landing channel is the landing and cash service offices, i.e. the clients,
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
who self-selected Alfa-Bank, and came to its branch for a certain product (around 20% of clients). Landing clients at the branches “from the street” requires the bank to essentially invest into products, advertisement, and active promotion. The key factor for development of this channel is the presence of attractive anchoring products with better conditions as compared to the market. The advantage of this channel is that the bank from the very start obtains a more loyal client as against the previously mentioned channels. Alfa-Bank does not employ any specific standalone channels for landing average segment clients (affluent and massaffluent). The structure of the entire client input stream is as follows: out of 10 clients, only one lands in the average segment, whereas the mass-affluent to affluent proportion is 4.5 : 1.
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Retail Banking Operations I Retail block of Alfa-Bank
Apart from income level segmentation, Alfa-Bank employs segmentation based on lifestyle from the perspective of potential offering them bank products. The clients can be broken down into three categories: Travellers — they are offered the products with bonus points for purchasing of airline tickets, travelling loans, etc. Discount hunters (shopaholics) — they can be offered the products with shopping discounts, purchase credits, etc. Fans of novelties and hi-tech products — highly sought among them are specialty products (custom designed cards, products with peculiar tokens), purchase credits.
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Retail Banking Operations I Prosperous segment client profile
Prosperous segment client profile
The criteria for distinguishing the prosperous segment clients in the banks are established in different ways. Normally, they are based on the two main parameters: highly liquid financial assets of the client (that is the quantity of deposit and investment products) and his regular income. On the average, the prosperous segment envelops the clients possessing liquid assets within the range of 1.5–2 to 35 million roubles, and/or a regular income of 70–100 thous. roubles outside Moscow and 140 plus thous. roubles in Moscow. Some banks practice splitting the prosperous segment into two subsegments: affluent and mass-affluent. Despite the fact that the prosperous segment clients amount only to about 5–6% of the population of Russia, they possess 39% of income of the entire country’s population, and are capable of bringing the bank up to 50% of all its retail revenue14. By the nature of their business, the prosperous segment representatives are majorly top managers or business owners (affluent), as well as high-paid professionals,
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“white collars” (mass-affluent), however these may include the representatives of many sorts of trades including government officials, people of art, freelancers, etc. The women covering 25% of the segment are mostly family members of prosperous businesspersons and managers.
The excess funds remaining at each level of capital are routed to form the funds capital level.
The financial resources of the prosperous segment are formed by means of principal (salaries, bonuses, business revenues) and additional sources (investment capital income). The structure of resource expenditure is as bulleted below: 1) working capital: covering operating expenses, purchasing residence property, loan servicing, health fees, insurance payment, financing vacations, maintenance of parents, hobbies, charity; 2) reserve capital: creating liquid reserves, financing pensions, financing education; 3) investment capital: open-market operations, real estate investments, investments in art objects, financing existing businesses, creating/purchasing new businesses.
Expert review by Citigold
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Retail Banking Operations I Needs of affluent customers and their attitude towards banking products
Needs of affluent customers and their attitude towards banking products
The affluent segment is one of the most perspective and dynamic segments from the point of view of potential growth of business volume. Clients belonging to affluent segment are tremendously busy at work or developing their own business, this is why they particularly value their time and quality of service, and they are ready to pay for this, and banks, in their turn, get an opportunity to increase their profit margin. The peculiarity of working in this middle segment lies in the fact that affluent customers require less credit. As a rule, they take out large sums for specific purposes: purchasing a car, flat renovation, providing education for their children, etc.
The structure of client portfolio by subsegments looks as follows: for affluent customers 15% falls to assets (credit), 75% falls to passives. For clients belonging to mass affluent segment, assets and passives are distributed almost evenly. Deposit and investment products are much more in demand among affluent customers, because they have an opportunity to keep high balances on their accounts. Funds allocated by affluent clients on bank accounts or deposits are the most stable passives, because these customers are aimed at building long-term relationships. Investment behaviour of affluent customers looks as follows: over a half of them prefer
to have their liquid assets in cash form using bank deposits, one third invests around 75 % of their funds in international investment instruments, and for 14% of customers local investments (unit investment funds) amount for 70-75% of investment portfolio. At the same time, such customers have not formed their personal investment priorities yet. They prefer to follow the conservative pattern, financing their own business in the first place and using classic banking services, which have virtually no difference from mass retail services, but offer a higher level of support. The most popular banking products among customers remain debit cards (used by over 90% of customers belonging to affluent and mass
Needs of affluent customers
Capital preservation
Capital gains
• wealth preservation
• capital increase
• careful tax planning
• successful investment strategy
• privacy
Transfer of capital • centralization of functions for managing capital • inheritance capital
Use of capital • ensuring the personal needs of the family • children's education • charity Source: Citigold’s survey, 2013
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Retail Banking Operations I Needs of affluent customers and their attitude towards banking products
affluent categories), and credit cards with increased limit. Therefore, such customers require several current accounts, package products, deposits offering better interest rates, premium plastic cards, etc. The behaviour of customers belonging to affluent segment when choosing financial instruments can be characterised by separating them into three groups15: • aggressive, who are ready to take risks and aim to get maximum return on investment (24%); • thrifty, who seek stability and invest to achieve a certain standard of living when retired (44%); • high-profile, who strive for certain level of income and invest with the purpose to solve their financial tasks (32%).
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According to the survey, conducted jointly by NES and Citigold, the majority of affluent customers value independence, physical and psychological health, harmony in their family life, and prefer to pursue an active lifestyle. As compared to mass segment, they travel more often, they are keen on sports, and visit theatres and museums. As a rule, such customers have one or several foreign-made cars, and own several real estate objects. They prefer to receive information from the Internet and business press, but they treat it with prejudice. The share of remote banking channel users among customers with income level of 50-100 thousand RUR per month is 71%, while among customers with income level of over 100 thousand RUR this figure is 63%16.
Source: RBC data, 2012
Findings of Internet Banking Rank 2014 research commissioned by Markswebb
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Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Strategy of Working with Affluent Customers
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Strategy of Working with Affluent Customers
Strategy of working with affluent customers
After the crisis of 2008-2009, the banks moved from extensive development model to the intensive one and focused on forming relationships with existing customers. Today, when customers may be serviced in several banks at the same time, the goal of any financial institution is to become the major one for its clients and to execute the major part of their transactions. However, according to the findings of research commissioned by Deloitte17, only 19% of bank’s retail customers have three or more products in addition to current account in their major bank, as compared to 49% of clients that use three or more products in other financial institutions. On average, one client of a Russian bank has less than 1.5 banking products, while in the Eastern Europe this figure is above 2, and in the Western Europe this figure is 3 products per client18.
when and where, and also to conduct negotiations and find the best offers. For example, based on aggregate data on the customer and his operations, the bank is able to forecast the moment, when the client might want to purchase a car (based on the age of existing car, income level, family structure, etc.). After that, the bank might grant the customer additional support, recommend car models that match his or her way of life, personal preferences, and budget. Then, as soon as the bank is able to conduct negotiations on behalf of its customers about settling deals of car purchase and sale, it might obtain the price from the supplier, which is amenable both for customers and dealers. After completing the offer with insurance and other corresponding products, the bank will recommend the payment schedule, which is optimal for the client.
Banks have a unique opportunity to capitalise on the vast amount of customer data in their possession, if they go beyond simple payment transactions and become an Everyday Bank for their clients. An Everyday Bank helps its clients to take decisions about what purchase to make,
According to Accenture report, using the data about clients’ transactions, and having an opportunity of safe data management, banks may increase the number of customer interactions by 250%. Bank customers receive a financial partner that foresees their needs, cares about them, and rewards
them for loyalty recommending ideal providers of goods and services. The bank, in its turn, does not only build a deeper and more stable relationship with consumers, but also increases its financial efficiency by means of high transaction volume with lower costs, and through additional service commissions. In order to increase the share of affluent clients, it is necessary to utilise unorthodox approaches of advertising and information distribution. Such clients rarely pay attention to outdoor advertising and Internet banners (only 10% of affluent clients come to the bank following these channels), they believe in references from people they know and who have been customers of the bank for a long time. Another efficient approach to attract customers is to create an individual service package and to provide bonus privilege programs (for instance, accumulating bonus air miles). Therefore, in order to retain the clients belonging to affluent segment, the banks firstly need to provide quality service, and secondly to constantly develop the product portfolio and promptly react to new market trends.
Deloitte «Kicking it up a notch. Taking retail bank crossselling to the next level», 2013
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McKinsey «Managing customer base profitability», 2013
Accenture report «The Everyday Bank: A New Vision for the Digital Age», 2014 19
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Strategy of working with affluent customers at Alfa-Bank
Strategy of working with affluent customers at Alfa-Bank
Examples of branch offices in Moscow: — “Novokosinskiy” branch, 7 Nosovikhinskoye Highway, Reutov, Moscow region — “Alabyana Street” branch, bldg.1, 3 Alabyana Street, Moscow — “Yuzhnaya” branch, 2/12 Sumskaya Street, Moscow
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In 2013-2014 Alfa-Bank introduced a new service model offering each client segment various types of service. This model resulted in changes in the design of branch offices, including the functional perspective20. The office area was separated into several physical zones used for service of customers belonging to different categories. Specific zones were created for mass affluent customers in these branches, where they could avoid the public queue, and get serviced by a specifically provided financial consultant. By now, 70 branches of the new format have been created in 27 cities of Russia. Such practice has not only sped up the service process, but it has also stimulated the growth of banking product sales. Previously, one and the same specialist provided service for the whole incoming flow of clients, the quality of sales became unescapably lower because such specialist had to keep in mind information about a wide variety of products. Today, such financial consultant provides advice to clients only about 5-7 products and has full information about them. As a result, owing
to maximum interaction and engagement of such consultant, clients become more loyal. For the affluent segment, Alfa-Bank has developed specialised VIP modules that exist in 60 cities of Alfa-Bank presence. The module is a detached room with a separate entrance, that has premium decor (leather furniture, pieces of graphic art, designer interior), and a personal manager responsible for 100 clients. When mass affluent clients call the contact centre, they have the shortest possible waiting time, while customers belonging to affluent segment may directly reach their personal manager. As a result, the bank not only gets higher profit, but it also increases operational efficiency: providing service for one affluent customer requires the bank to spend the same funds as on 12.5 mass clients (or on 4.5 mass affluent clients), despite the fact that affluent customers have higher requirements for quality and comfort of service.
In order to attract customers belonging to affluent segment, Alfa-Bank has launched several anchor products at the same time. An anchor product is a product, which defines the relationship between the client and the bank, and it is also used to choose the major bank. Eventually, clients transfer to their major bank the major part of their transactions, open additional accounts and deposits, execute asset management. Also, using anchor products allows the bank to segment all incoming flow of clients. In order to single out the affluent and mass affluent segments, Alfa-Bank utilises the following anchor products21: 1) joint loyalty program with Aeroflot (accumulation of bonus air miles); 2) promotional credit card with grace22 period of 100 days; 3) premium gold and platinum credit cards with free service for the first year; 4) custom-built service packages «Comfort» (for mass affluent segment), and «Maximum» (for affluent segment).
For more detailed information about these and other products please visit http://alfabank.ru/retail/
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Promotional period, when the bank does not collect interest for servicing credit. In case of timely repayment, the borrower uses bank funds free of charge
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Обзор текущих финансовых показателей Альфа-Банка
Competitors
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Competitors
Competitors More and more banks have recently started to restructure their models aiming to target customers belonging to affluent segment. Strong competitive advantages of Alfa-Bank are its openness, new technologies, and its orientation towards customer. But in order to keep its leading position, Alfa-Bank has to promptly react to all the changes and new market trends, to define priorities correctly, and to assess perspectives for success.
Raiffeisen Bank Raiffeisen Bank offers two service packages to clients belonging to mass affluent and affluent segments: Premium direct and Premium banking respectively. Premium direct is based on cutting service time in branch offices, and on personal information support for the customer. The customer gets an opportunity to address remote personal manager, who undertakes diagnostics and defines the following zones of financial growth. Also, the clients of Premium direct have access to «Concierge Premium» service that allows to reassign small tasks to personal assistant. In order to increase customer loyalty, the bank provides a discount program in shops and restaurants. Users of Premium banking package receive additional opportunities for a more comfortable service. Branch offices have specialised rooms that provide comfort and confidentiality during the meetings with personal manager. The bank specialists believe that the affluent segment is more aimed at investing and increasing stability at the same time. This is why Raiffeisen Bank offers them a specific product “ProFinance”, which guarantees the safekeeping of invested funds, and grants an opportunity to receive additional investment income.
Another strategy to attract customers belonging to affluent segment is to provide a specialised privilege package Easy Europe for travelling around Europe. The package gives the right of free access to business lounges in 600 airports, aeroexpress travel in Moscow, a safe deposit box for storing valuables during the trip, and insurance of real estate. When they are abroad, the clients enjoy a more profitable currency exchange rate, an opportunity of emergency cash withdrawal, callback service (when there is a need to contact the bank, the specialist calls them back).
Citibank Citibank is one of the major players in the segment of affluent customers, and it was one of the first to enter this market. The bank offers its customers the Citigold program. Citigold is focused on investments, and all sales managers are certified investment specialists. The program represents a set of portfolios containing a variety of investment instruments, and the decision is made based on the analysis of horizon periods, ideas and risks that the customers are willing to take. Customers can enjoy free service in the framework of this program, provided that they have average monthly balance starting from 2.5 mln. RUR. Affluent
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
customers also enjoy additional banking services free of charge: money transfers, cash withdrawals in all ATMs, specialised exchange rate. Apart from that, the bank offers its clients a variety of privileges: access to airport business lounges, airport taxi service, concierge service. Private functions are organised exclusively for Citigold clients: themed parties, jazz music evenings, elite wine tastings, culinary art classes, test drives of premium car brands, and sailing races, exhibitions, symphony music concerts, etc.
VTB 24 A new strategy, which was adopted in 2014, changes the development vector of the bank towards the affluent segment (mass affluent and affluent), and privileged clients (private banking). In August 2014 the minimum deposit amount was raised (from 30 to 100 thousand RUR). The bank analysts believe that this will help to focus on quality of service for more affluent customers. Now VTB 24 provides service for around 900 thousand clients belonging to affluent segment. The bank offers them two packages of programs with higher quality of service: “Privilege“ and “Priority“. It includes priority service granted by personalised manager, concierge
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Competitors
service, and a line of banking products with specialised conditions. VTB 24 has developed and launched a new format of “Flagship” offices, where specialised zones have been allocated for affluent and privileged customers. Each branch office will have around 12 personal managers.
Promsvyazbank In 2010, Promsvyazbank launched a premium service program “PSB-Priority“, which was oriented towards customers belonging to affluent segment. It includes products and services aimed at providing higher comfort and convenience of service. They include an international premium banking card with individual credit limit, an opportunity to open fixed-term deposit accounts and to receive cash loans on the most profitable conditions, to get new investment opportunities, and other services. Apart from that, the bank offers a premium banking card “PSB-Platinum”, which provides its owner with insurance program “Traveller Protection“ at the
amount of 50 thousand USD, insurance program “Card Protection“ at the amount of 75 thousand RUR, an opportunity to receive an additional Gold card free of charge, and other services. Promsvyazbank offers its customers participating in “PSB-Priority” program and holding “PSB-Platinum” cards to join the membership club W. The club gives its members privileged access to premium class services (offers are made by partners of the club). These services include, for example, tasting of wines and restaurant sets, health care programmes from the leading clinics and fitness centres, SPAservice, foreign travelling, and many more. The client can purchase these services only on the website of the club.
highly qualified personal manager, who has good understanding of savings, investment, and insurance products. For each client, the bank matches an optimal product offering and compiles his financial/risk profile and plan. The bank follows the general strategy to put the stake on investment products in order to reach an average European level, where around 10 % of personal financial assets of customers is allocated to financial markets. Specifically for mass affluent segment, Unicredit bank has broadened the deposit lineup with multi-currency and investment deposits. Also, Unicredit has launched a project to attract affluent customers through partnership program with restaurants, bars and cafes: when customers pay by Unicredit card there, they get a discount or a cashback.
Unicredit At Unicredit, the project addressing the mass affluent segment started in February 2010. Within the new service model - Unicredit Prime Club - client service is provided by
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Обзор текущих финансовых показателей Альфа-Банка
Supplements
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Supplements
Supplement 1
Alfa-Bank customer base
Affluent
Mass Affluent
Mass
PARAMETRES
NUMBER
Number of active clients
Number of active clients
Number of active clients
Average income per client per month
Average income per client per month
Average income per client per month
135 thous.
263 USD
600 thous.
65 USD
4 700 thous.
24,5 USD
A: Moscow, St. Petersburg, Tyumen region, Khanty-Mansi region B: all other cities Source: Alfa-Bank data
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Supplements
Supplement 2
Profitability by product
Area of business
Average monthly yield per 1 product, RUR
Assets
200
Passives
1000
Service packages
700
Miscellaneous (payroll cards, insurance, etc.)
400 Source: Alfa-Bank data
Setting Up the Middle Class – Affluent Segment Development Strategy for Alfa-Bank Retail Portfolio
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Supplements
Supplement 3
Retail financial figures
Line of business
Average monthly operational income, mln. RUR Affluent
Mass Affluent
Mass
Grand Total
Commission income
314,4
583,8
1347,3
2245,5
Passives
785,9
589,4
589,4
1964,8
Loans (interest income)
168,4
393,0
2245,5
2806,9
Source: Alfa-Bank data
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Supplements
Supplement 4
Organization of work in branch offices Service staff work with customers in selfservice zone, welcome zone, and 7/24 zone. Their major functions are meeting customers, identifying their needs, controlling the time of waiting in the queue, helping to conduct operations using automated service, consulting clients.
Floor staff
Service staff
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Specialist Administrator
Service manager
Service administrator
Senior specialist
Safe deposit boxes specialist
Service specialist for VIP clients
Senior operationally cash employee
Leading specialist
Administrative staff
Sales staff
Consultant manager
Financial consultant
Service manager for VIP clients
Deputy director
Floor staff work with customers in the bank floor, their major function are transaction and cash services for the incoming flow. Sales staff also work in the bank floor, their major function are to consult, to achieve sales, to work with the incoming flow and new customers (mass, mass affluent, and affluent). Another category is administrative staff. Their major functions are planning the branch office operations, organising sales, working with non-standard situations of the clients, staffing issues.
Director
Source: Alfa-Bank data
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Supplements
Supplement 5
Banking customer segmentation in Russia 16 to 22 years old These are people with high mobility. This group encompasses students, and people employed for the first time (often part-time). They require short-term loans, money transfer services, simple forms of savings, and also services related to tourism (purchasing insurance, withdrawing cash abroad, multi-currency accounts, etc.), plastic cards. Inside this group we may single out young people not receiving specialised education, but living away from home and receiving some education. 25–30 years old At this age people create families, set up housekeeping, this is why people from this group have corresponding needs: savings targeted to buy a house, flat, durable goods, insurance of recently bought property. The bank can offer such services as money transactions, opening a unified account for family members, various forms of revolving credit, financial protection (insurance), operations. 28–45 years old This segment encompasses people with fully formed career, with stable but partially constrained financial situation. Their goals are more diverse: providing education for children, financial provision for family, improvement of living conditions. The services are long-term loans to buy durable goods and new residential real estate, savings programs for children and their parents, consultations related to insurance, savings, taxation. 40–55 years and older As regards tasks and objectives, this group is very much alike with the previous one. Representatives of this group also give support to the family and are aimed at long-term products. However, a substantial part of income is again spent on personal needs and travelling. The major peculiarity is income growth with fewer financial commitments, and also pension planning. 55 years and older The most settled and stable group of bank customers. Is characterised by availability of high balances on accounts. Needed services are testamentary arrangements, financial consulting, trust management of capital, tourism-related operations (purchasing travellers cheques, insurance, etc.), and also plastic cards. Also, in any group it is necessary to distinguish single or divorced people.
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