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Value Creation through the interaction of Financial and Social Activities

Updated: Apr 27, 2021

This topic contains

  1. How does a financial service create value?

  2. Social value of finance

  3. How to create value for customers?

In the last decade, financial firms have gone through major changes and reforms. The firms include all

  • Retail banks

  • Banks

  • Insurance companies

  • Brokers

  • Credit card companies

A significant number of new financial sectors have also come into existence due to the consolidation of their services. These include cash management, mortgage-backed securities, index funds, etc. The decade even witnessed new technologies coming to blossom, particularly in the fields of computers and communication. These new technologies gave birth to new ‘fintech firms’. The only purpose of this fintech is to create value for the customer. This could be in the form of strategies, easy processes, and services.

How does a Financial service create value?

Traditionally, it was believed that functional excellence is the secret ingredient behind creating value. Therefore the main focus of banks was gaining excellence. The banks who had preferred good organization, distribution, intermediating, and servicing were considered more likely to succeed in the long run. This view changed with time. The next belief was unique resources by firms help to create value for customers. Thus, banks possessing more information stock, and the ones with the greatest reach were considered to succeed. However, later it was observed that customers don’t care about information or risk exposure. In fact, The banks with limited area operation were performing better. They were serving local markets instead of large counterparts. Now the most recent view is that a customer-focused strategy is the best to create customer value. The focus on customer anticipation and serving them what they need rapidly and efficiently to build a relationship between service providers and customer is the key to create value.

Social value of finance

A book by Robert Shiller (2012), Finance and the good society says, financial services are of great value to society. Banks and financial services are supposed to identify and finance the entrepreneurs and the companies who are seeking these services. The following are the prime social functions of finance

  • Capital allocation

  • Consumption Smoothing

Capital allocation is traditionally seen as the most important social purpose of finance. Banks are made to create economic value in the system. Various economists conducted researches to find out which financial system help at better capital allocation. Jeffery Wurglue (2000) concluded that countries with more developed financial sectors are better at economic development than those of less-developed financial sectors.

The second and more advanced study focuses on consumption smoothing. ‘Consumption Smoothing’ refers to the idea that people tend to strive for a stable consumption pattern. For instance, A shift worker might have earned INR 10000 to spend in one month, and 8000 in the next month, while his expenses remain constant. Consumption smoothing helps to control expenses to meet uncertain future obligations. The financial system can help people to manage their consumption patterns. Through financial systems, people can save money and safeguarding their pensions. They can borrow money against future incomes and also get insured for negative shocks.

How to create value for customers?

To create value it is necessary for firms to not just focus on customers but creating value for customers. Creating value for customers results in creating value for shareholders as well as employees. A customer value-focused firm is aware of the fact that not only best practices but other factors such as the efficiency of financial sectors, markets, and changing tastes and preferences also affect value creation. These factors are outside the control of firms or external to them. Other factors such as product designs, scale, technology choices that are internal might also result in value creation. Customer Value creation is an outcome as well as a process. It comprises

Four elements of value creation-

  • Strategies

  • Services

  • Systems

  • Success Measures

All four must be systematically designed to be customer-focused. I believe, this combination helps the firms to understand customer’s ideologies and needs. This would be the only way for firms to deliver appropriate services at the right time, at the right place, and at the right price.

Customer-focused strategies

Value creation starts with strategy. A carefully planned strategy should address what a customer wants? The answer to this question is a prerequisite for success. There has been a drastic change in financial services over the last few decades, the main categories of these changes are

  • Market place Change

  • Demand

  • Supply of financial services

The markets include globalization and other revolutionary developments. On-demand side, the financial service has to satisfy the needs of more demanding customers who might be less faithful and expect high returns on their savings. The Supply-side includes competition from both other banks and new suppliers and fintech. Customer relationships result in multiple services as a firm’s product mix. Such practices create synergies either from reduced costs or increased revenues.

For creating value, financial service providers should implement the following strategies:

Pay attention to customer experience

To increase value, it is important to retain customers in the first place. Poor customer service is a threat to service providers. A slow server or a poor interface, anything could be the reason for a customer to make a shift to a competitor brand.

Stay in competition

Customers today are very comfortable in trying out different services. The service providers should offer compelling deals to attract customers and stay in the competition.

Appropriate partnerships

Forward-thinking financial service providers have the ability to establish themselves as trusted advisors for customers by partnering with other high-quality product-delivering companies. Along with generating revenues, these partnerships help financial brands in maintaining relationships with their customers.

Use data and analytics

To identify and understand customer needs collecting and using data is one of the most effective proven ways. Data-driven personalized data is important for creating valuable products. Predictive analysis can be utilized to inform the customer about the products they need.

Engage the customers

Customers love to track their activities engage them, financial brands should grab the opportunities to share the customer’s data in innovative ways. A large number of customers find it valuable to track their personal finances.

It is obvious that customer value is an effective way to design and deliver financial services in this competitive environment. It evokes motion and oneness in an ever-changing environment. This is the only way to be successful for financial service providers in long run. To create customer values it is necessary to understand what are his needs and design the services to satisfy them.

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