Industry Insights by David Carlson and Dr. Sean Payant, Haberfeld
In times of uncertainty, organizations have a tendency to put the brakes on, losing sight of long-term strategic initiatives and established growth goals. However, history has taught us that the decisions your bank makes today will have lasting implications tomorrow. Business as usual will return and our strategic initiatives and growth goals will still be there. The key is to stay focused on growing core customers—regardless of the economic environment. Here’s why.
Having more customers is one of the best ways to guarantee strong performance in all economies. Banks executing a growth strategy consistently have up to two times the number of customers per branch when compared to industry averages.
To understand how customers impact bank performance, consider data compiled during the recession of 2008. For context, the average bank has approximately 1,100 retail and business checking customers per branch. Banks consistently executing a growth strategy have approximately 2,200 retail and business checking customers per branch.
The data (see chart 1) illustrates the impact core customers have on return on assets (ROA) and return on equity (ROE). What we learned from the 2008 recession was that while everyone was challenged, growth-oriented banks fared much better. ROA declined less than the industry average (26 percent for growth-focused vs. 56 percent for the industry). ROE followed the same trend. Just as important, banks that stayed the course through the crisis also came back stronger in the recovery.
While nothing can completely insulate your bank from worsening financial performance during an economic downturn, the data illustrates that having more customers certainly helps. But 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 (average of $60 p/a/p/y) and valuing overdraft services (average of $90 p/a/p/y). Chart 2 illustrates the impact that focusing on growth and having significantly more customers has on non-interest income.
More low-cost funding: 70 percent of the time, the first product purchased at a bank by a consumer is a checking account. It’s 55 percent for businesses. Checking deposits are the lowest cost funding available, with business checking deposits having a cost of funds less than .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, averaging 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.
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. Chart 3 is based on recent research regarding the criteria consumers use when selecting a banking provider. Interestingly, comparing consumers of all ages with consumers under 40 years of age produces very little difference as it relates to what people desire.
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 your team: 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 commits to ongoing 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 options when they transfer their checking account, meaning 65 percent of your current customers already know where they would bank if they didn’t bank with you. You must be top-of-mind before consumers and businesses consider switching banks. Your marketing must create the opportunity for them to pick you.
- Targeted. 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 that haven’t chosen your bank yet, but could and should.
- ROI Focused. 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.
David Carlson is senior executive vice president of business development and Dr. Sean Payant is chief consulting officer at Haberfeld, a data-driven consulting firm specializing in core relationships and profitability growth for community-based financial institutions. Contact Carlson at 402/323-3600, firstname.lastname@example.org. Contact Payant at 402/323-3614, email@example.com.