Since the recession there has been a pronounced flight to quality in consumer banking, particularly in the checking business. But has the trend gone too far?
Many retail players have consciously deemphasized mass market consumer banking, further intensifying a trend of significant decline in new customer relationships and account origination. The average regional bank branch booked only 70 new accounts per month in 2012, down from 100 per month in 2008, and the deterioration is continuing.
Certainly retail bankers have reason to be discouraged about the mass market. By far the largest portion of their customer base, the profitability of this segment has stagnated with the introduction of new fee regulations; reduced margins on an already modest slice of deposit balances coming from the mass market; and an overall low demand for consumer credit, an important enhancer of mass market profitability.
In reaction, players are crowding to the other side of the boat. Fees have been hiked on basic products, discouraging mass market account formation, and meanwhile banks have focused their energies on customer acquisition and cross-sell within the mass affluent and affluent market segments. Such concerted pursuit of top-tier customers is a natural tendency seen across a variety of industries in times of duress.
But banks will face an even larger problem if they give up on the mass market. Drawing on a lesson from the airline industry, coach class passengers cover the cost to fly the plane, allowing the carrier to earn profits on business and first class service. But if coach seats are empty, the costs of idle capacity depress profits across all segments.
Lagging Sales Productivity
Retail branch banking is no different. While incremental returns (revenues in excess of variable costs) from mass market consumer banking have declined, they have not been eradicated. And they are critically needed to support overgrown branch systems while networks are winnowed out and repositioned for a multi-channel marketplace. Even today, following the travails of the recession and all of its aftershocks, incremental revenues from the mass market customer portfolio still pay for roughly two-thirds of branch network overhead at many banks.
Sales productivity is a burning issue in boosting this contribution. In the peak years prior to the recession, banks were generating roughly four dollars of sales value for every one dollar of expense incurred for full time equivalent sales staff. But the former 4x “return on sales force investment” now languishes at roughly 1.5x, a victim of declining sales volume, falling revenues per sale and rising labor costs.
But why does an up-market sales strategy worsen this problem? First, there simply is not enough untapped potential in this market tier to make up the gap in sales productivity. Second, many staffers lack the higher level of consultative sales expertise that is required. Third, an up-market focus overlooks an achievable and meaningful revenue stream from high-volume sales of everyday consumer banking products, including checking accounts.
In our research across multiple U.S. banking companies and thousands of branches, we carefully examined the tradeoffs in high-value versus high-volume sales and determined conclusively that both revenue streams must be nurtured to lift sales productivity. Otherwise, branch sales reps would need to generate massive double-digit sales increases with high-end customers, either in volume or value per sale, to offset the lack of a mass market customer base; either scenario is highly unrealistic.
Because of the significant revenues and expenses associated with branch sales staff, addressing branch sales productivity is an immediate priority. Our multi-bank surveys and research show significant skews in account acquisition among regional banks, with some players lagging by 20% to 30% or more in the overall trend of deposit account origination among mass market customers. This is not a healthy development at a time when cost-burdened retail banks need to nurture incremental revenues to the greatest extent possible.
Our analysis of the entire U.S. branch system shows that one of every four branches is a candidate for near-term closure, both because of a slack market and because of dwindling lobby traffic as people more fully embrace remote banking. But quick action is near impossible given the enormous cost – an estimated $30 billion representing one full year’s worth of collective earnings in retail banking.
Thus, banks will have to cope with a substantial overhead burden for some time to come. To handle this transition successfully, banks will need to firmly reinstate unit sales volume as a goal for retail sales staff. A reenergized outreach to mass market customers will surely be a central factor in meeting that goal.
Mr. Demos is a managing director in the Boston office and Mr. Johnson is a principal in the Chicago office of Novantas Inc., a management consultancy. They can be reached at [email protected] and [email protected], respectively.
