In times of uncertainty, organizations have a tendency to put the brakes on, and in doing so, they can lose sight of long-term strategic initiatives and established growth goals.
History, however, has taught us the decisions your bank makes today will have lasting implications. Business as usual will return and your strategic initiatives and growth goals will still be there. The key is to stay focused on growing core customers, regardless of the economic environment.
More customers, more profit cushion
Having more customers is one of the best ways to guarantee strong performance in all economies. Banks executing a consistent growth strategy average about 2,200 retail and business checking customers per branch, roughly double the average.
During the Great Recession of 2008, when the entire banking industry was challenged, growth-oriented banks fared much better. Return on assets declined significantly less than the industry average (a 26% dip for growth-focused vs. 56% for the industry), and return on equity followed the same trend. Just as important, those banks that stayed the course through the crisis also came back stronger on the recovery side.
While nothing can completely insulate your bank from worsening financial performance during an economic downturn, the data illustrates that having more customers may certainly help.
How do customers cushion profitability?
Non-Interest Income: Banks executing a growth strategy simply have more non-interest income. As the customer base increases, non-interest income also increases – not because of regular service charges, but through more customers using income-producing services, such as interchange income and valuing overdraft services.
More low-cost funding: The first product typically purchased at a bank is a checking account – this happens 70 percent of the time for households and 55 percent of the time for businesses. Checking deposits are the lowest-cost funding available, with business checking deposits having a cost of funds less than 0.01 percent. This translates into improved net interest margins.
Relational intensity: Checking customers buy additional products and services. Growing retail and business checking customers affords your bank first right of refusal on other products and services 73 percent of the time. On average, the result is 5.64 retail and 5.86 business product and service relationships.
Loans from local markets: Having more customers also allows your bank to lend more money to more people in your local communities. These loans tend to have less risk.
Keys to accelerating customer growth
Get product right: People hate fees. Compressed margins and decreased profitability can lead to the discussion of increasing monthly service fees or adding minimum balance requirements. Recent research on the criteria consumers use when selecting a banking provider showed that fees and branch locations had the greatest impact.
Compression in bank earnings will have little impact on what consumers want from their banking partner. Your retail and business products must be compelling if you want to have the greatest opportunity to grow core customers.
Invest in training: Too often our industry treats training as an event rather than a way of life. Employees who do not understand your products and services will never be able to recognize opportunities with customers, let alone speak in terms of benefits. It is crucial that your institution commit to on-going training initiatives regarding all of your products and services.
Marketing to grow: Increase your spending on strategic marketing.
- Proactive: According to Novantas, 65 percent of consumers only consider two other banks when moving their checking account, meaning 65 percent of your current customers already know where they would bank if not with you. You must be top-of-mind before consumers and businesses know they want to switch. Your marketing must create the opportunity for them to pick you.
- Targeted: You need to use data and analytics to help you understand where to market before you market. Your marketing resources must be allocated to target consumers and businesses who haven’t chosen your bank yet, but could and should.
- ROI-focused: You must define what and how you will measure success before you market, not after. Make sure your marketing investment is working to create tangible, measurable results.
The past informs the present – banks that stay focused on growth reap the greatest rewards. While it may not be intuitive, now is the perfect time to make sure you have all of the right strategies in place to capitalize on the growth opportunities that present themselves in any economic environment.
Sean Payant is chief consulting officer at Haberfeld.
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