Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

D ATA A N A LY S I S & DECISION MAKING

PGP-I | 2010-2012 Prof. Utpal Bhattacharya PILGRIM BANK: CUSTOMER PROFITABILITY ASSIGNMENT
Submitted by:
Group 2 | Section B Ravi Shankar Niranjan Felix G Chanakya Levaka Satyam Gupta Dipayan Roy Amit Kumar Bhil Raja Vijay S

SUBMITTED ON 11 T H MARCH, 2011 INDIAN INSTITUTE OF MANAGEMENT INDORE

1 Data Analysis and Decision Making

Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

Executive Summary
Joe Greene, a new manager at Pilgrim Bank wants to better understand profitability data for banks customers. He needs to answer the decision problem of whether charging fees for online banking use is more profitable for Pilgrim Bank than offering incentives to promote wider use of the online channel. To begin solving the problem, Mr. Green first must address the following research issues: how much more/less profit do online users generate; is this difference significant, what are the measures of customer profitability, what are the characteristic of the banks online users and profitable customers, what are the costs of operating the online banking channel, and finally what measures does the bank take to retain its most profitable members.

Data Collection & Methodology

Greene collected the information about the research design in two-part. The first is an informal qualitative meeting with analyst Jane Raines. The purpose of this research is to obtain any useful general knowledge on measures of profitability, customer behavior, cost structure, profitability management and their relations with each other. The second part is an indepth qualitative research based on statistical analyses on a database of customer profits, online usage, demographics (age, income, geographic), and tenure years. The meeting with Jane Raines was an eye-opener for Greene as he learned the customer profitability is given by: (Balance in deposit Accounts) * (Net Interest Spread) + (Fees) + (Interest from Loans) - (Cost to Serve)
2 Data Analysis and Decision Making

Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

The total cost is further divided into variable costs and fixed costs. Variable costs are lower for online transactions, but it has a higher fixed cost structure. Mr. Green also finds that there is no clear correlation between Lastly, Alan learns about the balance amounts and customer profitability. profitable customers.

initiatives Pilgrim Bank take to increase profitability and retain its most

Data Analysis
Data analysis of the customer database begins with the testing for sample bias. Customers are sorted from descending profitability and they are charted against percent cumulative profitability of the bank. Alan finds congruency between his findings and the one results presented by Jane Raines, thus finds reassurance that his sample is not biased. The results also confirm that roughly 10% of the customers constitute 70% of Pilgrim Banks profits. He then proceeds to summarize the statistics and finds that, on average, online users are more profitable than non users ($116.36 versus $110.79.) summary of the statistics also include standard deviation. nominal scale. The The mean and

standard deviation is not calculated for geographic information since it is a

3 Data Analysis and Decision Making

Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

Plotting a frequency chart yields results where the majority of profits lie in the -$100 to $200 range. By examining the samples, Green concludes that only a little more than half of the customers are profitable, and more importantly, a little over 20% of Pilgrims Bank customers contribute to 100% of total profits. This shows the importance of retaining existing highly profitable customers, but it also shows that there is plenty of room to make non-profitable customers valuable.

Regression Analysis
Dorstamp provide Greene with 31,634 sample data to analyze. But some of the attributes like age bucket and income bucket have incomplete information. By cleaning up those samples, we get 22812 samples to work upon 1. Regression analysis with profit as the dependant variable and online usage as the independent variable
4 Data Analysis and Decision Making

Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

Regression Statistics Multiple R 0.006 R Square 0.000 Adjusted R 0.000 Square Standard Error 282.857 22812.00 Observations 0 ANOVA Df Regression Residual Total 1.000 22810.00 0 22811.00 0 Coefficien ts 126.522 5.003 SS 64359.478 1824986620. 020 1825050979. 498 Standard Error 2.007 5.578 MS 64359.478 80008.182 F 0.804 Significanc eF 0.370

t Stat 63.033 0.897

P-value 0.000 0.370

Intercept 9Online

Lower 95% 122.587 -5.930

Regression equation: Profit = 126.522 + 5.003(Online) The adjusted r-squared value is very close to 0, meaning that the best fit line does not accurately estimate the relationship between profit and online usage. It also translates to a possibly poor regression model where important variables are left out. The most significant information derived from the regression is the p-value. The associated Ho is 2 = 0 and Ha is 2 0 in the model y = 1 + 2x+ where y is profit, 1 is the intercept, 2 is the coefficient of online usage and is the standard error. The 0.370 p-value is much greater than the significance level of 5%, thus we do not have enough evidence to reject Ho. In other words, we do not know for sure if online usage significantly affects profit.

5 Data Analysis and Decision Making

Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

2. Regression analysis with profit as the dependant variable and

online usage, Age, Income, tenure, Location as the independent variables

Regression Statistics Multiple R 0.240 R Square 0.057 Adjusted R 0.057 Square Standard Error 274.644 Observations 22812.000 ANOVA df Regression Residual Total 5.000 22806.000 22811.000 Coefficien ts -103.924 18.242 18.288 17.842 4.028 0.010 SS 104804631.8 89 1720246347. 609 1825050979. 498 Standard Error 46.831 5.509 1.246 0.785 0.236 0.038 MS 20960926.378 75429.551 F 277.8 87 Significanc eF 0.000

t Stat -2.219 3.311 14.682 22.734 17.083 0.263

Intercept 9Online 9Age 9Inc 9Tenure 9District

Pvalue 0.026 0.001 0.000 0.000 0.000 0.792

Lower 95% -195.717 7.444 15.847 16.303 3.566 -0.065

y = 1 + 2(online usage)+ 3(Age)+ 4(Income)+ 5(Tenure)+ 6(District)+ . Y= -103.924+18.24(online usage) + 18.288 (Age) + 17.84 (Income) + 4.028 (Tenure) + 0.010 (District) + .

We accept Ha (2 0), and conclude online usage significantly affects profit. Looking at the other p-values, it should also be noted that there is very strong evidence that age and income and tenure are both related to profit.
6 Data Analysis and Decision Making

Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

Not surprisingly, there does not seem to be any proof supporting geographic region as a significant estimator of profit. In trying to explain why the p-value becomes significant in the latter regression, we need to first look at correlation values of online usage and the demographic variable. positive correlation. The correlation matrix reveals that age is slightly This information seems reasonable since younger negatively correlated with online usage and income has an extremely small generations are more computer savvy, and some income is required to have computer and internet access, plus the education to be computer literate. Thus, when these variables are factored in the regression, we obtain a truer effect of online usage on profit, and consequently, enough evidence to reject the null hypothesis. To investigate if there is any systematic difference between consumers with complete demographic records and those who dont, basic descriptive statistics should first be reviewed. Profit and online usage averages are 127.18 and 0.1295 respectively for data with demographic records, and 72.95 and 0.104 for incomplete records. There is a big difference of more than 50 in the two means. Nonetheless, a hypothesis testing is required to see if the difference is significant. Sampl es Mean Deviati on Samples With Complete Demographics Profit 127.18 282.87 Online Usage 0.129 0.335 Profit 72.95 243.01 Samples With Incomplete Information Online Usage .104 0.304

7 Data Analysis and Decision Making

Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

The results from a hypothetical testing conclude that the differences for both profit and online usage are material. This raises the question of external validity. The regression analysis

shows that there is a positive effect on profit from online users, but the analysis omits the data without complete demographic records, thus we need to excise caution when generalizing conclusions to the entire population. ]

Conclusion
To effectively implement the online banking promotion strategy, we need to determine any significant characteristics of online users. The results indicate that age and income are significant variables, while geographic region is not. Since the age co-efficient is negative, Pilgrim Bank should focus more efforts to younger customers to migrate them to the online channel. income co-efficient is positive. Although we have determined the statistical significance of online users, the economical significance should also be reviewed. Offering incentives to do online banking will increase the load of the online channel. The management of Pilgrim Bank must carefully assess the estimated increase in online usage after the promotions to see if existing infrastructure can support the extra load. All costs associated with the increase of online bankers, including any new infrastructure needed to be built, will need to be compared with the expected increase in profit to determine the net value. economic value of this strategy be entirely addressed. Retain the 20% profit-making customers
8 Data Analysis and Decision Making

The

same should be done with customers in higher income brackets since the

Only then will the

Amit | Chanakya | Dipayan | Felix | Ravi | Satyam | Vijay (Group2SecB)

201 1

Use incentives to improve the transaction costs of the other 80% and make them profitable

Theres a small positive correlation between profit and online-usage, so consider the economic benefits before employing online rebates

Rope in more young investors as age has a negative correlation to profit due to the tech-savvy mind of the young users.

Rope in more income investors as more the income, more the profit (a positive correlation)

No correlation between profit and district-wise usage. The more the customer retains the same bank (tenure), the more the profitability, hence try to add incentives to retain customers

9 Data Analysis and Decision Making