Rebalancing Retail Banking Growth

Organic growth in banking revenue and profit has been extremely challenging lately. Historically, such growth has come as clients’ product needs increased, new clients were added in growing regions and innovation created new markets. Yet, from 2008 to 2010, consumer lending and cards, deposit products and mortgage balances all fell, as a proportion of U.S. household balance sheets, by a range of 1% to 5%. As these categories dominate most retail bank business’ growth, profit results fell with them.

Over the same period, brokerage, asset management and defined contribution management, all of which are equally substantial to household balance sheets, grew 20% to 35%, according to our recent report, Rethinking Retail Banking Growth. Unfortunately, few banks benefited significantly from this upswing, due to the relatively small position banks have on the asset side of their clients’ balance sheets. One that did was a leading global bank that targets a 20% revenue contribution from its investments, pensions and life businesses and experienced a 16% cumulative average growth rate between 2008-2010 in this sector’s revenue. Wealth management, retirement and insurance have the scale to make a meaningful impact in a retail bank’s overall business results but they are typically underrepresented.

Looking forward, much as individuals have done in volatile markets, bankers are well advised to reconsider their portfolio allocation. Traditional portfolio segments, like credit and deposit products cannot be abandoned, but structural changes in product markets, client segments and geographies call for a new look at the future sources of organic growth and profit.

We have demonstrated that these minor parts of most retail bank portfolios have the ability to recover more quickly than consumer lending. They are also likely to be further bolstered by underlying long-term trends. Specifically, investments, savings and insurance are likely to benefit for the next decade. This is due to households continuing to repair the credit side of their balance sheets, leveraged up over the last 20 years, while Baby Boomers and others will continue to prepare for retirement, given that the number of Baby Boomers turning age 67 will not peak for another 10 years. Embracing more investment-oriented, fee-income and distribution-based products and services can diversify risk and may prove an important additional source of growth for retail banks over the next decade.

Three elements of client relationship focus have proven to be growth accelerators across industries: client segmentation, cross selling and lifecycle development.

Client Segmentation

Several financial institutions are already responding to the changed fundamentals by organically building their existing investment and distribution activities and/or acquiring advisory/securities firms. In fact, each of the top three U. S. banks are currently in the process of establishing or refining their mass affluent segment lines of business and expanding their retirement or insurance businesses.

If your bank has not developed a segmented approach to targeting and serving clients in the investment and insurance markets, it should. Traditional bank brokerage, with typical transactional product promotions, will find fewer profitable clients as the most attractive are carved out by more nimble, aggressive competitors. This is especially true for the mass affluent segment, which has been bounced back and forth between private banking and retail.

Some products developed for specific segments have seen attractive levels of growth – for example a virtual wallet for the emerging affluent/tech savvy. Other investments in segment research are being made to sharpen offer features and pricing to incent deeper relationships, thus producing additional revenue growth. This is also true for segments with specialized needs such as small business owners, whose resilience has made them a target for offers of more integrated solutions tailored to their specific needs such as employer/employee retirement plans.

Cross Selling

Fully developing the potential of wealth business growth, at the business and client relationship level, is highly dependent on what happens at account opening. This is as true for wealth management as it is for retail deposits and lending. Defining, supporting and incenting the sale of multi-product relationship packages at account opening represents a known cross-sale building block, but one most institutions still have room to improve. Sales of add-on products, such as IRAs or Keoghs, by advisors can be especially difficult. They require a cross-selling culture and payout hurdles, in addition to incentives, to drive cross-sell actions and match segment economics. Creating effective teams that generate and share referrals is a key to building a robust cross-sell culture. As new client groups are defined from within the existing client base, creating a “re-onboarding” experience can recapture the cross-sell opportunity, creating a new “first impression.”

Further growth in the depth of wealth client relationship revenues can be achieved by integrating profiling, planning, advice and client reviews much more deeply into the overall client-development processes. While this too is a known best practice, few brokerage and wealth management practices have been able to leverage it fully. Effective cross sell is predicated on not only having a basic customer profile but also collaborating with the client in building an understanding of their financial objectives and goals.

The ability to combine the identification of key trigger events your client is experiencing with the presentation of the appropriate next product offer has shown solid cross-sell results. This form of know-your-client is moving from a regulatory imperative to a competitive necessity. Information and insight are being fed throughout the relationship lifecycle, even by social media scanning programs that can provide news from Twitter, Facebook, LinkedIn and other sites. Real time knowledge of a client’s likes, dislikes and instantaneous life events has real benefits in advisor/representative effectiveness.

Lifecycle Development

Developing a wealth client lifecycle (even multi-generational) perspective is causing some cross-sell leaders to build a continuum of personal financial management and planning tools, from entry level retail and Web self-service to platform bankers, mass affluent advisors and private client teams. This continuum and incentive compensation are key to upward referral from the branches. Only then can the value of the large base of retail bank customers be fully captured in identifying and winning wealth client market share. This strategy requires providing continuity of client experience, congruence of evaluation assumptions and, importantly, consistency of advice delivered, which pays off in client trust and loyalty.

Continuity and consistency of the wealth client’s experience are being enhanced by increased investment in offer management and optimization capabilities and infrastructure – continuously improved by service quality and sales results measurement. From ability to provide a single customer view across channels to monitoring and management of campaign effectiveness, this progress is increasing advisor effectiveness and providing analytics to support more systematic approaches to pricing, offers and level of service.

Attempts to incent deeper client relationships have also fostered continued experimentation in rewards programs. Forward thinking client-centric leaders are investing in “Thank You” services to proactively demonstrate client appreciation. Rebuilding client trust comes through demonstrated knowledge and appreciation of the relationship, on-going relevant dialogue and recognition. This is the foundation for broadening relationships.

Of course, how these initiatives are executed still varies by segment – investment services for the mass market are still more “product push” oriented, while affluent services have become even more “pull” oriented. Pull, for example, is demonstrated by attracting new interest through shared values, unique experiences and associations with groups that are highly sought after.

Innovation for Growth

In addition to investment in today, new business, product and operating models are also still emerging, for example:

  • A mutual fund store, selling solely mutual funds through low-cost dedicated stores and advisors, hearkens back to the mono-line financial companies;
  • ETFs, index funds that trade throughout the day on exchanges and longevity insurance, allowing clients to assure cash flow if they live beyond retirement funding expectations, are product innovations;
  • Service offerings that combine modular planning, advice and asset allocation programs together with transaction accounts that consolidate holdings, optimize accumulation, payout and taxes, with the featured benefit being a weekly/monthly retirement paycheck, are an example of operating model innovation;
  • New mobile applications that provide research, trading and funds transfer capabilities are pushing the envelope on new distribution models while hybrid distribution that combines face-to-face, web cams and direct advisory services is resetting the cost of delivery.

While some of these markets are small, mobile trading users are estimated at 4% of the market, others are showing significant growth. ETFs inflows, for example, recently surpassed mutual funds for the first time.

The “killer app” innovation for investments and wealth is still to be created. It may lie in taking a financial life plan, created in collaboration with the client, and turning it into an integrated investment, reporting and benchmarked platform that seamlessly ties together all the investment, savings and transaction functionality of a client’s financial life. This integrated product/service would be goal-based with multi-period performance ratings, benchmarked with peer metrics and purposed to assist clients in achieving personal financial success. The input/constraints must be customized by client/lifecycle stage, wealth level, appetite for high-level summaries or management of details. It would be delivered virtually but enable an ongoing dialogue with clients concerning their most important goals and results. This could be the retention tool for investments and wealth that online banking has proven to be for retail. Even the initial, imperfect versions now available have had demonstrable cross sell and retention results.

Proactive banks are carefully nurturing growth. They are combining portfolio rebalancing, client relationship focus and pursuit of innovation. Investing in these initiatives is not for everyone. Some go well beyond where there is an evaluated and confirmed business case. Be forewarned: profit strategies that work for one bank may not work for another. Executives must decide which growth and profit expansion strategies are likely to hold the most long-term potential for their individual bank’s specific capabilities, client base, and geographic areas. Based on evaluation of portfolio allocation, client growth accelerators and opportunities for innovation, firms can create a fact base for their decisions. They are then positioned to best determine their roadmap for successful growth and profit expansion.

Mr. McNees is principal, financial services industries, for Deloitte Consulting LP in New York City. He can be reached at [email protected].