Five strategies for growing revenue
Editor Note: David Kerstein has updated this article.
Banks are hungry for growth: hungry for new customers, for deeper and more profitable relationships with existing clients and for better alignment of expense against revenue opportunities. But achieving that growth is a difficult challenge.
Low interest rates continue to put pressure on margins. According to the most recent FDIC Quarterly Banking Profile, “revenue growth has been modest and net interest margins continued to decline.” Although interest rates will inevitably start to rise when the Federal Reserve raises rates and this will help loan yields, it will also trigger competitive pressure on deposit rates, limiting improvement in the margin.
Furthermore, the “no fee zone” is expanding. Financial institutions are simply unable to charge for services that were once common sources of profit. Overdraft (OD) fees have been severely constrained, and the situation will only worsen as new regulations from the Consumer Financial Protection Bureau (CFPB) further limit this important source of revenue. Early analysis suggests potential reductions in OD revenue in the range of 25% to 50%, with the impact beginning in late 2016.
Finding topline revenue growth is the core issue facing the industry, and this begs for new pathways to success. As one C-level banker stated in response to our recent industry survey, “What we’re doing now isn’t working anymore; we have to take a different approach.”
Here are five suggestions for such a different approach:
Change the customer acquisition model. Historically, banks used direct mail to generate inquiries and branch lobby management to drive sales. Staging of customer traffic patterns, merchandising placement and teller referrals were keys to a robust sales process. However, direct mail is increasingly less efficient as customers communicate by text and email. Fewer customers are visiting branches as routine monetary and service transactions migrate to other channels. That translates into fewer natural sales opportunities. Furthermore, branches are becoming smaller. It makes them more efficient to operate, but also means they lose the marketing “billboard” impact of a large facility.
Banks need to re-establish the branch as a destination, a place where people want to go versus a stop for an infrequent errand. Simple presence in the community doesn’t automatically create gravity and attraction – that requires more focused programs. For example, the concept of “neighborhood marketing,” pioneered by Umpqua Bank, is based on embedding local micro-market strategies into the marketing and sales process, which can significantly reduce customer acquisition cost.
Standardized neighborhood marketing programs build on micro-market analytics to focus the right tactics on the right trade areas. The lower acquisition cost is not just an end in itself, but it also allows for re-allocation of investment to future digital growth strategies. Umpqua’s marketing spend, measured as a percent of assets, is only 65% of the industry average because of its adoption of neighboring marketing. PNC Bank took a similar approach, which enabled them to drive more branch traffic and acquire accounts at a lower cost.
Change the customer conversation. In our survey, 78% of respondents reported that improving sales skills was their bank’s primary strategy for growth. Yet, in the past, investment in training has not been sufficient to reverse the downward trend in branch sales productivity.
Sales effectiveness is not just a function of knowledge, but also of discipline and coaching. Most bankers understand that excellence in operational process is best achieved by consistency. However, there is a tendency to think that consistent process in customer conversations somehow indicates a “robotic” interaction. Sales excellence should focus on consistent, structured conversations at account opening and other significant client discussions. The road ahead cannot be a matter of, “train them on products and let them figure it out.”
Expand relationship depth. There has long been a disconnect between the willingness, even preference, of customers to consolidate multiple relationships at their primary financial institution, and banks’ ability to effectively execute strategies that accomplish this.
The opportunity is compelling. Fifty-five percent of the owners of small and medium sized enterprises are willing to consolidate their personal and business relationships at the same financial institution, according to a BAI Research report. Consumers report a similar willingness. Yet, we know that the majority of balances are not consolidated. Why is penetration so low? Lack of the right sales process and lack of the right predictive analytics that target the right customer.
One powerful tool to enhance value is to identify account “twins” and consolidate them into a single, higher value relationship. These prospects are “findable” in that targeting strategies can locate prospects with a high potential for consolidation. Combined with focused sales processes and product-bundling strategies, these methods produced an 85% improvement in household when implemented by one of our clients.
Utilize data analytics to improve fundamental product economics. We expect checking account economics to improve with rising interest rates. However, as the economy strengthens, these gains may be offset by competitive pricing pressure. Financial institutions have two levers to press in that scenario: improved pricing analytics that build revenue, and improved cost drivers that reduce delivery and service expense.
Tools exist to predict how customers will value financial products, and what price they are willing to pay, with a high degree of accuracy. These tools can help identify specific fee, balance and service combinations that customers prefer. As an example, a large regional bank that we know used data analytics and market research to successfully restructure demand deposit account pricing, resulting in a net increase of over $60 million in revenue.
The second opportunity is to encourage more profitable customer behaviors, channel usage and transaction activity. Customers are already migrating toward self-service channels, but the most expensive channel, the branch system, remains the primary point of contact. Shifting customer activity out of the branch reduces cost-to-serve, improving product profitability. At the same time, encouraging non-branch transactions increases interchange fee income and helps offset declines in OD and other miscellaneous fees.
Diversify services. Community banks are more dependent on deposit fees compared to larger institutions and this makes them vulnerable to a transactional model where consumers acquire low margin products from their primary bank but use specialized providers for high-margin products, such as investments and loans.
But that tide is changing. Indiana, Penn.-based First Commonwealth Bank re-entered the mortgage business. Peoples Bancorp of Marietta, Ohio, has thriving wealth management and insurance subsidiaries. Several community banks are gearing up credit card operations. San Antonio, Tex.-based Frost Bank has a well-integrated approach to delivering financial services, even dropping the term “Bank” from their branding in favor of “Frost: Banking, Investments, Insurance.”
We believe community and regional banks have a unique opportunity to leverage a diversified financial services model. They are large enough to acquire the necessary talent pool, but small enough to create a “one-bank” model that avoids the silos that impede larger financial institutions.