Market Research in Financial Institutions

Market Research in Financial Institutions

The common consensus about financial institutions is that they serve as the medium linking borrowers and lenders in an economy. Few people are aware of the fact that these institutions are basically full-fledged businesses, flourishing on the scenario of money-lending-and-borrowing, which have their own targets of earning revenues and making positive profits.

The rate of interest that they offer to the lenders is the cost that they must bear, while the rate of interest that they charge from the borrowers is the revenue that they earn. If observed carefully, then it shall be found that the latter is usually greater than or equal to the former so as to make the difference, i.e. the profit, positive. So, basically the market for credits is in operation here. There is a ‘supply of credits’ by the lenders and a ‘demand of credits’ from the borrowers whose interaction is finally determining the equilibrium rate of interest.

The banks may have information about the supply function, but they lack complete information on the demand function. Credit is demanded by investors, entrepreneurs and industrialists. This demand is influenced by a number of factors and the true demand may end up being quite different from the expected demand, leading to a shift of equilibrium rate of interest. Now, demand shifts may often cause to the problems of excess supply or excess demand for credit, which affects the profit curve of the financial institution adversely. In order to prevent themselves from such mayhem, they need to conduct market research on a continuous basis.

Consumers today are more conscious about their finances than ever before. They try to strictly stay within their budgets and go for those products which optimally meet their ends. So, banks and other financial institutions are constantly in the process of understanding the consumers’ needs and providing them with more options to choose from. Like other industries, the industry of financial services also needs to know its customers well, so that they can create suitable products according to customer preferences and do away with the loopholes.

Market research might help the financial institutions to gather the feedbacks of the consumers on their products and services, on their desires, on the reasons behind their choices et al. This will help them to improve their production efficiency, increasing the demand. Also, market research can give them an idea about the possible demand function in reality and take into account all the factors that influence it. This will help them to charge a reasonable rate of interest that doesn’t sway too much from the expected equilibrium and hence prevents them from earning losses. The primary aim, therefore, is to keep attracting a substantial number of customers by offering newer and more convenient policies.

In a research paper, First Data writes, “As financial institutions try to build better customer relationships, their ultimate goal is to increase share of wallet and, eventually, to be a customer’s only banking relationship. But typically, that doesn’t happen. It’s rare for customers to have all of their financial products or services—from checking accounts to mortgages to personal loans to retirement plans—in one place. Even within a particular product category, like CDs, it’s common for consumers to have accounts at multiple institutions. Financial institutions have an opportunity to improve in this area, although the challenge is to show consumers the value of consolidation.”

A few solutions that market research has provided the financial institutions – as of now – include improvement of customer service or personal interaction, provision of customized schemes in specific cases and use of technology to make banking more convenient. These steps have significantly revolutionized the banking sector, along with increasing the returns to the sector by major amounts.

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