1) Downward Pressure on Profitability
Expect the yield curve to remain flat throughout much of the year, making it a continuing challenge for banks to manage spreads. “That will really test the mettle of bank managements,” says Mark Fitzgibbon, director of research at Sandler O’Neill & Partners LLP in New York.

Since a flat yield curve was also much in evidence in 2006, why is that a challenge for banks? Because many economists worry that the U.S. economy could weaken in 2007, which could depress the two phenomena that upheld bank earnings last year – robust loan growth and credit quality.

A softer economy might lead the Federal Reserve to ease its interest rate policy by bringing short-term rates down, but perhaps not enough to offset the expected decline in loan quality. “Will the interest rate cycle abate before the next credit cycle starts?” asks John McDonald, a securities analyst with Bank of America Securities in New York. “That’s really the issue.”

McDonald also expects deposit growth within the 2% to 3% range in 2007, which he says probably won’t be sufficient to ease the industry’s margin pressure.

2) Consolidation Accelerates
Both Fitzgibbon and McDonald expect to see merger and acquisition (M&A) activity pick up considerably this year as managements struggle to produce top line growth. “I wouldn’t describe it as a ‘boom’ in M&A, but I would expect it to be more active in recognition that the environment will remain difficult,” McDonald says.

Jean-Louis Bravard, managing director of the global financial services industry practice at Plano, Tex.-based EDS, expects some of those buyers to come from overseas. Bravard traveled widely throughout Asia and Europe last year meeting with senior executives at global banks and observed, “Many U.S. banks are very attractive to foreign buyers.”

3) More Sales Focus
As the economic environment becomes more challenging, bank managements “are going to have to focus more on sales than they ever have before,” says consultant Charles B. Wendel, president of Financial Institutions Consulting in Ridgefield, Conn. “But a lot of banks don’t have good sales skills.”

In 2007, Wendel says, banks will have to sell deeper into their customer bases and look for as many cross-sell opportunities as possible. “Good managements must create a sense of urgency,” Wendel says. “They’ve got to out-sell and out-produce the industry.”

4) Leading with the Best
One method of strengthening a bank’s sales culture is to identify the top sales managers in the organization, understand what makes them effective and find ways of maximizing their performance. “You’re only as good as your sales leaders,” says Seamus McMahon, who heads up the retail banking practice at New York-based consultant Booz Allen Hamilton.

McMahon suggests that banks separate the sales and operational management functions in their branches. “The industry is going to have to redefine the job by separating the sales leader from the operations leader,” he says.

McMahon also says that banks need to simplify their product lines and sales processes so that less skilled sales people can still be successful.

5) More Creative Rewards Programs
Another avenue to sales growth in 2007 will be developing incentive programs that link different retail product lines, says Nina Owens, global sales leader for MasterCard Advisors in Purchase, N.Y.

A growing number of large banks have been extending customer reward programs from credit cards to checking accounts and home equity loans. The next step, according to Owens, will be to enable customers to accumulate points across all those consumer banking products.

Owens also expects some banks to set up rewards programs with participating retail merchants so that customers also earn points on purchases made through their credit and debit cards.

6) Connecting Distribution Channels
At most institutions, the branch, Internet and call center channels operate as independent entities with little if any communication with each other, according to Jerry Silva, research director of the retail banking and delivery channel practices at Needham, Mass.-based TowerGroup Inc. Because most consumers consistently use all three channels, those channels need to be connected better in order to provide superior customer service and cross-selling, he says.

7) Technological Enhancements
Bob Egan, director of emerging technologies for TowerGroup, expects to see some banks make greater use of interactive video, which links the customer with a live customer service representative over a video screen, to improve service and help boost sales in 2007.

Gwenn Bezard, research director at Boston-based Aite Group LLC, predicts significant enhancements in the online banking capabilities at many banks, driven in large part by the November 2006 acquisition of Digital Insight Corp. in Calabasas, Calif., by Mountain View, Calif.-based Intuit Inc. – which marries Intuit’s financial management software with Digital Insights’ online banking services.

8) Forensic Security Schemes
With Internet security still a major issue, TowerGroup’s Egan expects to see more banks adopt technology that enables them to monitor a customer’s online banking activities from their own facilities, the so-called “forensic security approach.” The bank can determine, for example, whether the customer has signed on to his or her online banking program from their primary computer, and whether or not they’re performing their typical kinds of transactions.

9) Enterprise View of Payments Processing
TowerGroup senior analyst Colin Kerr expects more banks to take an enterprise view of their payments operations. This could include, for example, developing detailed business plans with specific revenue targets for services such as ACH transactions and wire transfers. That will also require that banks do a better job of integrating their various payments products.

“One bank could have several different ACH or wire applications, each with its own screening protocol,” says Kerr. To overcome the problem of working with data from different systems, some banks are beginning to construct “payments warehouses,” where all payments transactions are stored in a consistent format. This makes it easier to build a single customer profile that shows all of its payments relationships with that company, Kerr says.

“One bank could have several different ACH or wire applications, each with its own screening protocol,” says Kerr. To overcome the problem of working with data from different systems, some banks are beginning to construct “payments warehouses,” where all payments transactions are stored in a consistent format. This makes it easier to build a single customer profile that shows all of its payments relationships with that company, Kerr says.

(For more discussion of the issues involved in taking an enterprise-wide view of payments, see “Can Banks Profit from Payments’ Transition?” in the September/October 2006 issue of BAI’s Banking Strategies.)