CPG's May/June 2011 Wire Newsletter
CPG's May/June 2011 Wire Newsletter
The Payoff from Profitability Analytics
Excerpted from BAI Banking Strategies, May 27, 2011
- Intelligent exception pricing. There remains a rather random application of fee waivers at many banks. Frontline staff members are either permitted to waive fees or not – but these two extremes miss the mark. What frontline staff members need is information that tells them for whom to waive fees and by how much, not some simple flag that indicates a profitable customer relationship.
- Rationalized loan pricing. Properly pricing commercial loans so that risk is balanced with return also requires profitability information at the relationship level. In today’s competitive environment, banks that are able to factor into their pricing decisions the value of the full set of services a customer uses and understand the risk of both the borrower and the facility (a two-factor risk rating) will be positioned to offer the best prices to the best customers while ensuring the total relationship remains profitable and the bank is compensated adequately for the risk it assumes.
- Better product design. In the product design process, understanding how changes to individual products will impact the overall customer relationship is critical. Building into this equation overall customer relationship profitability and additional customer level analytics such as price sensitivities, propensity to purchase additional products, and cost-to-serve metrics can ensure that product line and price changes result in more relationships that are profitable over the long term.
Finance, marketing, and business line experts have to work together to build robust customer-level information and then transform it into applied knowledge. When done right, this knowledge can be transformational for the organization.
According to a recent report from Challenger, Gray & Christmas, Inc., 45 financial services CEOs have announced their departure through April, the third most of any industry this year after health care and government/non-profit.
These recent shuffles relate to banks’ preparations for the so called new-normal. Sullivan contended that the departures are "unique to each bank in some respects." But at the same time, "we’re in a different operating environment so you need different skill sets and you’ve got people who are understandably ready to move on."
Customer Onboarding to the Rescue
Excerpted from BAI Banking Strategies, May 23, 2011
Effective onboarding programs help to cultivate primary banking relatinships and stable, low-cost core deposits. By aiding and encouraging new customers to adopt services, such as direct deposit and online bill payment, onboarding helps to ensure checking accounts are funded regularly, transacted actively and thus maintaining higher average balances. To improve onboarding performance, retail bankers should start by examining the five key components of a successful new customer onboarding program:
- Customer Relationship Enhancement Objectives. Services that typically drive profitability include direct deposit, online banking and online bill payment. In response to Durbin, many banks have cooled on incenting debit card use. However, debit cards remain an attractive vehicle for creating active checking accounts and primary relationships. Account alerts are another increasingly important relationship enhancement service. According to Jack Henry’s ProfitStars, Bank of America reportedly saved $110 million in the first 12 months of its alerts program by preempting in-person and IVR call volumes.
- Process. Onboarding success is very much contingent upon when banks communicate with new customers, and banks should look to improve upon traditional 2x2x2 programs which do not align well with the behaviors of many new customers. Banks frequently place a 10-day hold on an initial check deposit, and as a result most new customers will not have the ability to manage their accounts online until the end of this period. It is at this point—beginning at day 11—that banks should be getting most aggressive about encouraging online service activation.
- Communications. Banks are wise to have sales representatives ask customers to provide an explanation if they do not immediately enroll in key services. These initial questions enable bankers to identify new checking customers who are predisposed to maintain their primary relationships at other institutions. Such information helps the bank reduce acquisition costs by distinguishing between customers who may require a cash incentive to enroll in alerts, e-statements, and online bill pay and those who would not be motivated by such offers.
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Execution. Onboarding program execution is perhaps the greatest challenge for most banks. A number of banks are focusing time and energy to improve execution effectiveness, some by centralizing onboarding activities to ensure more consistent execution. The case for centralization makes increasing sense. As online account opening becomes more prevalent, the percentage of customers that form a “relationship” with a branch or phone sales representative is declining.
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Program Management. Onboarding programs must be “owned.” It makes sense to designate someone outside of the branch system or call center with responsibility for the overall program to ensure that at least one person at the bank is in a position to assess the end-to-end process and evaluate each of the program components. This person must have the cooperation of all key units, and together they must share responsibility for attaining performance objectives.
First Quarter Industry Snapshot
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Source: CPG analysis of data from Highline Financial. LLC, 2011. Data is for all publicly traded banks and thrifts as of March 31, 2011.
Excludes institutions that are foreign owned, have a loan to asset ratio less than 10%, or have credit card loans representing more than 70% of total loans.
- Most institutions achieved a positive return on equity (ROE) during the first quarter of 2011, albeit at levels far below average industry levels before the financial crisis.
- The positive ROE was attained despite declines in revenue on a linked quarter basis.
Source: CPG analysis of data from Highline Financial. LLC, 2011. Data is for all publicly traded banks and thrifts as of March 31, 2011.
Excludes institutions that are foreign owned, have a loan to asset ratio less than 10%, or have credit card loans representing more than 70% of total loans.
- Across all asset tiers, revenues declined between the fourth quarter of 2010 and the first quarter of 2011, with the largest decreases occuring among the nation's larges banks with more than $100B in assets.