Pilgrim Bank Answer 1 => Retail Banks make money by the following methods: A.

The interest spread between the deposit and lending rates is used to earn money on the balance deposit in the retail customers account. It is essentially the difference in the amount the bank earns from investing the customers money, say mortgage and commercial lending, and the interest on the deposited money that it pays to the customer. B. Fees earned from customers due to late payments, overdraft and checking fee was used to supplement the low interest rates. C. The interest earned from loans to retail customers were a dominant revenue earning source for the bank. Such loans constitute a major part of the asset that has potential to earn long term revenue. There is a huge variation in profit across customers. The standard deviation for the profitability in the sample is 272.84 which is very high when compared to the sample mean of 111.50. Given that only 10% customers contribute to 70% of the profitability, it is important for the bank to retain these customers and enhance their customer experience. There must be a process to identify such customers when they interact with the bank either physically at a branch location or call a service call center. The bank must have a special status for such customers that will enable bank staff to identify and readily serve such customers. All new products and services of the bank should be directed at gaining a better share in its captive pool of premium customers. The bank should redirect its cross selling effort to service and cater to the needs of this group. On the other hand the bottom 50% customer should be incentivized to communicate with the bank using new communication channel like the internet, automated phone service and ATM. This would bring down the service cost of the bank for attending to the non profitable customers. Also, the bank management can put an upper limit on the number of transactions that can be made and charge any visit to the bank or calls to customer support centers. In return, the bank can offer to charge a slightly lower fee for availing checking facilities. 2. The graph to plot cumulative profit vs. cumulative customers reveals that 70% of the profit is contributed by only 10% of the customers. The graph flattens out at 50% of the customer indicating the only half the customers contribute to any profit of the bank. After this the graph falls indicating that the remaining customers are causing a fall in profitability. There are a large number of accounts which have profitability close to 0 (over 10000+ policies lie in the profitability range of 0 to 60). If such customers can have the service cost reduced appreciably they would start contributing to the profitability of the bank. 3. The difference in profitability of online customers which is 116.67 and offline customers 110.79 in 1999 might not seem significant when the standard deviation for the 1999 data is 272.84. The difference in mean of the two customer categories can well be due to the nature of the distribution. The difference, given the high standard deviation seems to be insignificant.

However, as per the incomplete data available for 2000, the average difference in profitability between offline customers in 1999 who had gone online in 2000 was found to be 44.38 as opposed to the customers who chose to remain offline in 2000 showing a profitability increase of only 25.75. This is a considerable jump in average profitability from customers who had online in 2000. We need more data to confirm the assumption.