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Change is in the air: Why banks are leaving money on the table


Again and again, banks have been warned: FinTech startups will disrupt established financial service organizations and steal business, customers and profits. One analysis predicts that 60 percent of traditional banks’ profits and 40 percent of revenue could disappear by 2025. Another report claims that, in the lending arena, more than one-third of revenues are at risk if traditional financial institutions don’t respond to FinTech challenges.

But these threats are greatly overstated. There is no doubt that FinTech startups are coming to market with new innovations—but many fill market gaps rather than cannibalize existing business.

We have met the enemy: File under ‘underperform’

There is a revenue threat for banks: underperformance. Existing leaders in the market that underperform—in terms of revenue per member, revenue per account, and revenue per employee—can cost a typical community bank millions of dollars in revenue every year.

In other words, banks that underperform the market leave money on the table.

Of leaders and laggards: Closing the revenue performance gap

According to the Cornerstone Performance Report, a bank with 100,000 checking accounts that improves checking account-related performance from laggard to leader for interchange, ATM income, and other income (excluding non-sufficient funds [NSF] and overdraft [OD] fees) would add nearly $4 million in incremental revenue—a gain that effectively scales upward and downward for smaller or larger mid-size banks.

The difference in interchange per account between leaders and laggards is relatively small: just 39 percent. Leading banks, however, generate roughly three times as much ATM income and other income per account as laggard banks.

Income per Checking Account

Banks currently at the median level of performance could see large gains in revenue by achieving leader status. Improving from the median to highest level of ATM and other income account adds roughly $20 per checking account in incremental revenue.

How to do it? Leading banks increase debit card swipes by creating payments marketing calendars or even payments revenue reports to bring visibility to their marketing campaigns. Others have launched or relaunched credit card programs. The new revenue from increased payments engagement also diminishes the probability that clients will defect to disrupters such as PayPal or Venmo.     

Within the wealth management business, improvement from laggard to leader puts about $5 million on the top line for a bank with 1,000 brokerage accounts, and another $3 million in revenue for a bank with 1,000 custody accounts.

Income per Wealth Management Account

The revenue improvement opportunity isn’t just driven by revenue per account, but by checking account penetration as well. Among leading banks brokerage accounts represent 3.2 percent of checking accounts, while at the median bank brokerage penetration measures 2.0 percent.

Among the laggards? It’s 0.9 percent.

The custody account penetration gap between leaders and laggards grows even wider. The leaders have nearly 13 times as many custody accounts per checking account as the laggards, and five times as many custody accounts per checking account as median banks.

How to do it? Leading mid-size banks have built wealth programs around personal touch and fiduciary interests that the larger banks can’t touch—or don’t want to touch.

Expense accounted: Don’t leave money on the table

The threat from FinTech startups may be real someday. But in the meantime, banks should focus now on improving revenue productivity and closing the gaps between their current levels of performance and what leaders in the industry achieve.

While expense reduction opportunities certainly exist, many banks for a number of years have focused on the expense side of the coin at the expense (pun intended) of the revenue opportunities.

Many banks leave money on the table by not measuring and managing revenue drivers, such as calling programs and turnaround time, with as much passion as they do cost control and risk exposure. Banks should engineer revenue growth with the same drive as fraud protection or core system processing. Be willing to compare yourselves to top-performing peers and take action on known ways of improving against the benchmarks—while leaving the laggards to warm the bench.

Ron Shevlin is the director of research and Sam Kilmer is a senior director at Cornerstone Advisors, a consulting firm in Scottsdale, Ariz.