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Do this: Five strategies for sustainable revenue growth

Sep 7, 2018 / Consumer Banking / Technology

The New York Times headline says it all: “What Stress? It’s Good to Be a Bank.” For the industry, 2018 is shaping up as a great year with higher net interest margins, higher operating revenues and the benefit of lower tax rates. Bankers are full of optimism, with many community bankers hinting about return on assets hitting pre-crisis levels.

But as the most recent FDIC Quarterly Banking Profile warns, clouds loom on the horizon. The economic expansion is the second longest on record and risks exist in the late stages of any cycle as the inevitable downturn comes closer. Furthermore, loan balances are growing faster than deposits.

In our interviews with bank CEOs, we hear the enthusiasm and concerns.  With a strong economy comes increased investment in the manufacturing and building sectors. But as more healthy banks push for growth, quality deals are harder to land. For many banks, loan-to-deposit ratios have soared so high that deposit growth again represents a key priority. While margins continued to grow last quarter, a crunch is inevitable as banks must raise deposits to fund loans.

We know good economic times and the short-term impact of tax savings can’t last forever, and that consumers and small businesses are changing how they use financial institutions. Now is the time to take initiatives that position your institution for continued, sustainable top-line revenue.

What are those pathways to future success?  Here are five practical recommendations to make part of your go-forward strategy.

1. Close the physical/digital divide.

It’s clear technology is redefining financial services delivery, the customer experience and money movement. But customers still want—and use—branches.

Recent research by Celent shows customers overwhelmingly prefer branches;  55 percent prefer in-person transactions, and 39 percent want some banking transactions conducted in person, and some digitally. The real “ah-ha” is that only 6 percent prefer exclusive digital interactions and rarely visit a branch.

Although there was a demographic skew—predictably, older consumers had stronger branch preference and younger consumers less so—it was not as dramatic as expected. The shift shows in terms of how much they used branches, not whether they used them. Very few consumers of any age were willing to cut the cord and go completely digital.

BAI Banking Outlook survey figures back this up, revealing that the top reason consumers choose a new main bank is convenient branch locations (35 percent), followed by cash incentives and rewards (32 percent).

And as a recent J.D. Power report demonstrated,  real differences exist in satisfaction, depending on the channel used to open an account. Those who opened their account in a branch, even if their future use was primarily digital, were more satisfied than those who opened accounts online. There seems something special about the in-person branch interaction that influences satisfaction and this has implications for relationship depth and customer retention.

We expect the shift to continue: Customers will still use branches, just less. Financial services organizations need to align their strategies with changing customer preferences.  It’s not either branch or digital, but a process of creating deep interaction between all channels, physical and digital, to create a seamless, personalized experience.

2. Get better at small business lending.

Banks have long struggled with the right approach to small business. Build skills in the branch? Assign small business lenders? Here’s the conundrum: Business lending is generally too complicated and infrequent for the typical branch banker to maintain a high skill level—but too small in revenue to warrant expensive business bankers.

According to the U.S. Small Business Administration, a whopping 99 percent of all U.S. businesses are small businesses, and they account for 47.5 percent of all employment. The big opportunity is with the “small” end of small businesses. Sixty-three percent of all small businesses have no employees (sole proprietorships, etc.) and if you add businesses with between one and 20 employees, the number jumps to 98 percent.

These smaller small businesses possess the greatest potential for deep, profitable relationships. Fifty-five percent of the owners of small and medium enterprises are willing to consolidate their personal and business relationships at the same financial institution. Yet we know most balances aren’t consolidated. Why is penetration so low? Lack of the right sales process and predictive analytics that target the right customer.

We believe financial institutions must do two things.

First, learn to underwrite small business loans as quickly and simply as credit card or automobile loans.

Several well regarded fintechs have made great progress in this arena and are working with financial institutions as partners. Experiment now and learn to use this very promising technology. Think how much more profitable your small business lending could be, and could grow, if every branch made loan decisions with the same ease as opening checking accounts.

Second, learn to identify business owners who haven’t consolidated their business and personal accounts at your institution. 

Financial institutions have made great progress at “householding” consumer accounts (bundling accounts into common ownership and even related family parties). But most lack the tools to link business and personal accounts. That often points to a legacy of different systems and account management: one for business, another for consumer.

One powerful tool to enhance value is identifying account “twins” and consolidating them into a single, higher value relationship. These prospects are “findable” because targeting strategies can locate those with high consolidation potential. Combined with focused sales processes and product-bundling strategies, these methods produced an 85 percent improvement in customer revenue.

3. Change the branch operating model.

It’s clear the branch transaction decline has big implications for branch staffing and organizational roles. Most branches today need only universal bankers who perform sales and service transactions.

But many banks are stuck with an old, outdated model where historically defined roles dictate staffing, rather than the demands of customer arrivals.

Today, 50-60 percent of branches are minimally staffed for the hours open and dual control. With the frequency of branch usage declining, this is simply not sustainable.  Branch staffing strategy needs a complete change: no longer driven by “I do this, you do that, and we help each other as needed” but rather a team of utility players whose job is to perform all functions as needed.

Many organizations are held back by mistaken perceptions that the physical arrangement (the teller line, or technology), salary ranges or extensive training present major roadblocks. Yet they need not.

At BAI Beacon we will lead a panel discussion on practical ways to implement the universal banker. Panelists will include institutions with a very mature strategy; another that implemented the strategy without changing their traditional branches; and one that created a hybrid model where tellers became integral sales team members.

4. Change the customer conversation.

Seventy-eight percent of banks report that improving sales skills is their primary growth strategy. Yet in the past, investment in training has failed 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 consistency best achieves operational process excellence. However banks tend to think that consistent process in customer conversations somehow indicates a “robotic” interaction. Sales excellence should focus on such conversations at account openings and other significant client discussions. The road ahead cannot be a matter of “Train them on products and let them figure it out.”

5. Utilize data analytics to improve fundamental product economics.

We expect checking account economics to improve with rising interest rates. Yet as the economy strengthens, these gains may be offset by competitive pricing pressure. Financial institutions will have two levers to press: improved pricing analytics that build revenue and improved cost drivers that reduce delivery and service expense.

Tools exist to predict with high accuracy how customers will value financial products and what price they’re willing to pay. These tools can identify specific fee, balance and service combinations customers prefer. For example, a large regional bank used data analytics and market research to successfully restructure demand deposit account pricing, resulting in a net increase of more than $60 million in revenue.

Make these five strategies for moving forward part of your plan as you move forward to 2019 and beyond. You have revenue and so much more to gain.

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David Kerstein is president of Austin, Tex.-based Peak Performance Consulting Group, which specializes in community and retail banking strategies. He can be reached at [email protected].