By Bob Giltner
In the last 18 months, the financial industry has undergone unprecedented changes. Credit quality, margin compression, technology advancements, loss of core deposits and increasing competition from non-financial intermediaries are only a few of the challenges banks continue to face. Achieving revenue and profit growth in a slow economy is challenging but by focusing on key areas, banks can increase core deposits, account openings and profitability.
Consumer behaviors change. New competitors arrive on the scene. Sometimes they even come up with a better mousetrap. A significant challenge therefore is to understand what actually drives future profitability, not just what worked in the past. This is especially important in banking, where a wealth of available metrics makes it easy to mistake the trees for the forest. Asset-liability management, asset quality, compliance with federal requirements like those in the Patriot Act and dozens of other issues are vital to the success of a bank.
They don’t, however, drive profitability. In the long run, earnings growth depends on growth in customer business. Four areas of the retail banking business are especially important to actively manage going forward, rather than leave to chance.
Account openings from referrals
The strategic relationship that provides entrée into a consumer’s wallet is the transaction account, and the key going forward is word-of-mouth referrals. The number of customers who refer other customers is a critical measure of your growth potential and market presence. Top performing banks get 40 percent of their total openings from referrals, and these accounts have higher balances, stay longer and bring in other accounts. In a nutshell, the best customers come from the referrals of satisfied customers.
Referrals do not need to be left to chance, and a strategically managed referral process can leverage technology to make it turnkey and Internet-savvy. Automated tracking of who actually recommends the bank provides a far richer return on investment than heavy-handed promotions. After all, customers who chase rates once will move again when they spot a better deal. People who move their business around for free toasters certainly aren’t likely to become loyal customers.
Debit card usage
It’s been fairly clear for some time that consumers’ primary banking relationships are with the banks that hold their checking accounts. But with aggressive marketing putting second and even third checking accounts into the hands of so many consumers, banks need to aim higher to be sure they’ve secured the first spot in their customers’ hearts. The way to do that is by encouraging the use of their debit cards.
Heavy debit card users generate an average of approximately $100 a year in interchange fee revenue. But even more importantly, heavy debit using customers have significantly more relationships per household with their primary bank than customers who do not use the card. And, their attrition is much lower.
Banks that understand how debit card usage drives relationships are tailoring different offers to different customer groups, based on the level of their card usage. On average, 80 percent of a bank’s customer base uses their debit card less than 10 times per month or not at all. Segmentation is key to effectively increase debit card use among the low to non-users. Successful banks are building incentives around the recognition that people who don’t use the card at all are most likely to respond to very simple offers, where the reward for immediate action is immediate itself. These simple actions can transform a non-user into a heavy user over just a few months. At the same time, these banks are making unique offers to heavy users that specifically recognize the volume of their activity.
Non-sufficient fund income
Traditionally, bankers have had trouble getting their heads around the very positive role that non-sufficient funds (NSF) income plays, but they need to. NSF revenue provides nearly half of the transaction account revenue, and will be a key to banks for years to come. And with shifts to debit transactions, banks need new processes to sustain income. While returned paper checks generate NSF fees, for example, declined debit transactions do not. Though NSF policies and attendant revenue pose public relations challenges, the business is far too important to ignore or, worse, avoid.
If board members are intent on keeping a finger on the bank’s pulse, they’ll carefully track NSF revenue per customer. And as with each other driver of retail profitability, they’ll demand that management nurture the business, and not just hope for the best. That’s done with attention to service and to risk management.
The best account acquisition efforts in the world are of little value if business spills out the back door as quickly as it’s coaxed in the front door. Today, the average bank sees 15 percent to 18 percent of customers leave to go to another bank. Top performing banks work hard and work smart to retain business by getting their services deep into customers. They fulfill the explicit and implicit promises they make. But they also get customers to do plenty of business with them, selling multiple accounts to customers, based on their needs, and encouraging customers to actively use their accounts.
Financial metrics, to be sure, provide boards and management teams with essential information about a bank’s safety, soundness and progress. Returns to shareholders, however, depend on customer business and understanding what keeps customers coming back for more.
Bob Giltner is consulting partner for Velocity Solutions (www.myvelocity.com). Velocity Solutions is the leading provider of revenue enhancement strategies for financial institutions. Giltner has more than 24 years of experience assisting financial institutions with a broad suite of profitability and software related engagements and programs. He can be reached at 910-254-9383 ext. 227 or at firstname.lastname@example.org.