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BirdsEye View

retail banking drivers

Liat and I are well into the Food Pilgrimage. We post daily entries into blog.anatbird.com, including pictures, and also photos on www.anatbird.com. I hope you'll check us out.

This week's article focuses on the main business drivers that make Retail Banking work. I hope you'll take these drivers and use them to get your own retail bank to the next level, and tell me all about it!

Retail Banking Drivers

Brian Edwards, SVP of Marketing for Astoria Federal, is the inspiration and mind behind this article.

The business of retail banking isn't as much fun as it used to be. Competition is intense from all fronts, with de novo banks, foreign banks and internet banks leading the fray. Traditional fee income is drying up, as customers start modifying their behavior to avoid NSF charges and banks reach the end of the road in tweaking their NSF matrix and raising the charges. Customers are also becoming more demanding and spend more time researching their options on the internet before they come to the bank. The result: significant earnings pressure on the business.

The best way to revive any business is by giving the customers what they want while meeting the business objectives of the enterprise. A recent BAI study says that retail banking customers really want this:

  • Let me talk to a person who is capable of solving my problem
  • Give me hours to fit my lifestyle
  • Give me great service with knowledgeable people

What good retail banks really want is:

  • Core deposit growth
  • Fee income growth
  • Low cost asset growth
  • Stronger customer retention
  • New household growth

The real question is: how do we combine these two value drivers?

Retail banking is all about focus, discipline and execution. It relies on brand consistency, people skills and execution, and streamlined processes for both efficiency and ease of customer access. Its goals are more customers (acquisition), more business with existing customers (expansion) and longer customer tenure (retention). This article discusses how to achieve retail banking results while creating value for customers as well.

The brand foundation in an important element in retail banking. The brand is the promise the bank makes to both customers and employees, defining who you are, what you stand for and why. It is based on differentiating value for customers, telling them why you're a unique organization that fits them better than others. Delivering on the brand promise consistently to both is essential to success in a people intensive business like Retail. Where we often fall short is the consistency and frequency of message from executive management to the team, and the lack of consistent delivery to customers across people, branches and channels. One suggestion to overcome the inconsistency issue is to simplify the message. Explain clearly to your people what your business is about and what you'd like for them to achieve. It can be as simple as how the bank makes money and what's your path of profitably serving customers. Similarly, a simple brand message outward works exceptionally well, as Commerce Bank of NJ has proven repeatedly.

What Commerce has also done successfully is to align its distribution, service approach, sales culture, product offering, internal communications, merchandising, advertising etc. with the brand promise, such that the reinforcement loop is strong and repetitive. Building a consistent reinforcement loop to your brand is key to success and effective execution.

The people dimension has been talked about repeatedly in our business. Here are some additional thoughts:

  • Find people who like to make money deal with people and hate to lose
  • Hold them accountable
  • Reward and recognize with special focus on top performers (egalitarian reward systems where all employees share in the success of few or where most people get paid something and no one gets paid a lot don't work).
  • Offer simply incentives plans with no caps.
  • Remember that top performers crave visibility and give it to them; multi-level recognition programs can mean more than $$$.

Marshalling large groups of people requires a systematic approach to activities and results, considering every single day an important unit of time to get things done. Holding people accountable through transparent metrics and rank-ordering is the first half of the equation, and rewarding them while creating a "place to be" for the top performers is the second half. Retail is a simple and repetitive business. Everyday discipline wins, but only if the goals are crisp, simple and not so numerous your team doesn't know what really matters, what management is truly after.

Technology does not drive the process. It only makes you more efficient in terms of reporting and knowing which activities lead to the best results. Once the people are capable, arming them with better technology is the winning combination.

Service is the foundation of sales, not a distraction from sales. Having a service process in place is a necessary element in any successful retailing program. Prompt, positive, perceptive and personal service in both routine and high-value transactions enhances customer loyalty in a meaningful way. Once your employees understand that service and sales are not mutually exclusive, your results will improve on both fronts. We've all experienced WOW service moments. Institutionalizing these moments into a consistent culture will lead to success (a-la Disney, Starbucks etc.).

Successful retail banks can effectively acquire customers, expand their relationship with the bank and retain profitable relationships longer than their competitors. A bank needs to be effective in all three elements for its retail program to optimize its revenue generation.

Customer acquisition strategy needs to recognize that acquisition involves four distinct steps: awareness (prospective customers knowing who you are); consideration (prospects willing to consider your services when they shop); purchase (the actual buying decision); and loyalty (becoming advocates of your bank and recommending it to others). Elements of an effective acquisition and retention strategy include:

  • Cost effective customer acquisition is key, since the cost to acquire will make a meaningful difference in the account profitability. New account average balances after six months is the main metric in figuring out account profitability and cost of acquisition
  • On-boarding discipline starting early and prescribing on-going, appropriate communications; on-boarding is especially relevant given that over 70% of all new product sales in most retail banks come from existing customersÂ…One more essential element is to ensure that customers are put in the right account for them upfront, through proper needs-based probing.
  • Effective problem resolution process for both the front and back office; customers, like bankers, find navigating our convoluted organizations vexing and tiresome; we need to make it easier for both our own folks as well as our customers to address their problems and our defects quickly and efficiently
  • Properly aligned sales force which recognizes the value of both needs-based selling AND world-class service

As you contemplate your customer acquisition strategy, the following metrics might be useful:

  • New checking acquisition cost (should be under $250 "all in")
  • New checking account cross-selling (at least 3 within the first 60 days); recognize that 75% of all cross-selling occurs within the first 90 days after account opening; only 9% occurs after the first year
  • New checking account attrition of less than 25% in the first six months; attrition rates in the first three months are typically double or even triple those with six+ months relationships, so shooting for overall attrition of 15% or less in your checking account base implies that new checking accounts should not attrite much faster than 25% in the first six months

Expending relationships with customers is another important growth and retention strategy in retail banking. In addition to developing a solid understanding of the customer's needs, good retail bankers must be able to appropriate cross-sell customers to ensure they have all necessary payments solutions (such as direct deposit, debit card, credit card and online banking) and lifestyle cross-selling (such as retirement planning, wealth transfer). If your bankers are not making direct recommendations that enhance your customer's financial welfare and lifestyle, they are short changing the customer. If they are telling you they can't effectively sell products to customers because your rates are too low, they are short changing your shareholders.

The single most effective way to expand customer relationships is by understanding better their mindset and needs. Customers want us to understand their individual life goals and help them get there; save them time and money, and be ethical enough to put their needs and interests first (but not by transferring wealth from the shareholders to the customers); they want to feel special and validate that feeling through a sense of belonging and seeing their banker go out of their way for them. Technology can help find the answers to some of the questions above, but ultimately it is the individual banker actions that make the most difference in the customer experience and in their cross-selling.

Expansion metrics to consider include:

  • 2.2 services (NOT products) per household is industry average; expect more
  • Definitions are important and they vary; include EVERYTHING you sell, including free products that create value for your shareholders (such as direct deposit)
  • Expect adding 0/5 service per household per year (and spell those out to the banker level, i.e. how many more sales per banker per day)
  • Payment services penetration targets might be:
    • 50%+ direct deposit penetration
    • 80%+ debit card penetration and 80%+ debit card activation
    • 25%+ online banking penetration; 25%+ bill pay penetration of online customers
  • Investment and insurance penetration of 3% of the deposits is par, 6% is good, 10%+ is very good
  • Customer retention is at least as important as customer acquisition. Many banks experience significant household acquisition but little household growth, as the back door is left wide open.

    As you know, a new customer (a "green" account) is worth less than a seasoned customer. Balances typically take 18 months to optimize. Therefore, losing seasoned, profitable accounts is an immediate hit to profitability and balances, even if household acquisition is on target. Customer retention is a major element to drive retail profitability and growth, yet it does not take a lead role in most retail bankers' play books.

    The beginning of every relationship in the customer mind is the checking account. Hence, even though the balances might not be exciting to many banks, retaining checking accounts is the first step to success.

    Retention is directly correlated to (a) number of accounts per household (weakest correlation) - the more accounts, the greater the retention (b) number of services per household - the more services, the greater the retention (stronger correlation) (c) types of services per household - the more services of different types - depository, transactional, protection, credit - the better (strongest correlation). In addition, specific products have greater impact on retention, such as electronic bill pay, debit card usage, ATM usage etc.

    Understanding why customers leave beyond the standard answers (move; death; rate) is important. Customers typically don't reveal the true reason underlying their decision to leave the bank. However, that root cause it what will help you curb your attrition, and therefore it needs to be pursued with vigor through exit interviews and penetrating questioning by your branch management staff and possibly outside interviewers.

    Last, we all know that all customers were not created equal when it comes to profitability. Retaining the most profitable customers is the first order of business, and a pre-requisite is an accurate customer profitability system, preferably based on direct cost only, and possibly even variable cost alone.

    Leading indicators to account retention include:

    • Close account surveys, focusing on the uncontrollable reasons for account closure
    • Permitting account closure only by branch management
    • Surveying customers for four key questions:
      • Overall satisfaction
      • Likely to recommend
      • Likely to switch
      • Satisfaction with branch service

    Key metrics for managing customer retention include:

    • Net household growth
    • Services and accounts per household (2.5+ services, 3.5+ accounts)
    • Customer attrition (first year under 25%; portfolio under 15%)

    In summary, the real driver behind retail banking is a strong, execution- focused culture. A true, successful financial services culture is consistently better than others at finding out what customers really want Â… and providing a complete value proposition of trust, care, service, products and services, knowledge and convenience to satisfy those needs.