In a recent interview on Bloomberg TV’s “Taking Stock with Pimm Fox,” APT CEO Anthony Bruce comments on how consumer-facing companies can measure the return on Facebook advertising dollars.

A recent article in Banking Strategies highlighted that the biggest challenge with fee revenue may be changing consumer preferences rather than increased regulation.   “The decrease in service fees started three years prior to any relevant regulatory mandate,” so the main driver of reduced revenue may that consumers have simply become less willing to pay for traditional products and services.

Banking Strategies argues the banks need to determine what services customers want and how much they will actually pay for those services.  The article calls for “an integrated study that brings together information on consumers’ preference, price sensitivity and the competitive landscape.”

It is expensive to invest in new products or services, and this type of research can help prioritize investments.  However, consumer studies are not sufficient by themselves.  First, the actual consumer response is often different than what consumers tell you in survey.  One example we have seen is that customers will say they prefer healthier menu options, but in some cases sales actually decrease after making the menu healthier.

Second, some types of consequences will not show up in consumer or competitive research.  Banking Strategies highlights that there is additional “uncertainty” banks need to address, such as whether consumers will protest a new fee strategy.  Similarly, banks need to consider the possibility of significant backlash in the press or from government officials. 

To supplement initial studies, banks should also run business experiments to try out new strategies in a few markets.  In-market testing is the only way to truly understand the full range of impacts and consequences from any new fee strategy.  It can be challenging to accurately evaluate tests, but it is a vital part of the innovation process and should not be ignored.

This month, Banking Strategies released an editorial discussing some new challenges as banks focus more on multi-channel delivery. The strategy suggested is to create a profitable, scalable, and flexible multi-channel delivery strategy that caters to a new customer. This new customer requires a seamless experience across channels and is much more fee sensitive than we’ve seen in the past.

Adjusting the current delivery strategy is operationally difficult. Some channels need to be modified and others need to be introduced into the mix. Ideally to mitigate the risk involved in these major changes, banks should consider approaching these shifts as a set of small steps. As we’ve seen recently with Bank of America back-tracking on debit card fees, pulling a few small levers can cause dramatic disruptions. Banks should understand the customer response to each of these steps, so that the overall delivery strategy is built off only the small changes and additions that truly drive value.

As banks begin to use this approach, they will need to accurately determine what works, what doesn’t, and what will work if fine tuned. The robust way to do this is by piloting some of these new ideas in a small subset of branches. Trying out these strategies in a subset of the branch network, enables leaders to correctly understand the impact of these ideas, without making costly missteps in network-wide rollouts. Carefully isolating ideas that truly generate incremental profits is essential for many banks to survive today’s turbulent environment.

A byline written by APT VP Will Weidman was recently featured in American Banker. Will explains that many banks are not currently employing three easy strategies to realize significant returns on remodel investment. Click here to read more.

Last week, the Wall Street Journal shared that Bank of America is considering changes to its checking account fees.  The fees being considered are steep and range from $9 to $25 a month, though customers could avoid fees through actions like maintaining a minimum balance or adding a mortgage.

In this latest step, Bank of America announced that it will pilot these programs in Arizona, Georgia, and Massachusetts.   In recent years, many banks have quickly rolled out new programs that ended up not working and hurting performance.  For example, Bank of America tried introducing $5 monthly debit card fees but experienced significant backlash and had to roll the fees back. 

We are glad to see BofA testing before a broad rollout this time around.  This approach will significantly reduce losses from programs that do not work.  However, there is more opportunity to understand how to market these types of initiatives.

Wal-Mart has been widely praised for their debit card that comes with a $3 monthly fee, while Bank of America was vilified for having only a slightly higher fee.  Banks need to improve marketing efforts to both highlight the services that come along with the fees and provide more transparency in their pricing.

American Banker wrote recently about a new credit card from Barclay’s that is aimed at providing more transparency.  Among other features, customers can quickly and easily see “how adding or removing certain features would affect the card’s pricing.” 

Providing greater transparency and making it a central part of the marketing message could help big banks avoid the backlash they have been facing and make product changes more successful.  Part of testing new fees should include testing different messages to provide transparency and highlight the value proposition to the customer.  As Bank of America and others have realized, it is hard to predict how customers will react to a particular message, so trying different approaches will be important to make these programs successful.

Finding ways to introduce new fees and increase profitability is a fact of life for banks today.  So far, many of these efforts have been unsuccessful, but banks are starting to get smarter to find what works.  After all, if airlines could find a way to introduce many unpopular new fees, banks should also be able to find an approach that works.

Banking Strategies featured an article recently describing how banks need to move away from fixed overdraft limits and develop a more nuanced approach.  Many are still using the same overdraft limit for all customers.  As a result, the limit is too high for some customers making them more likely to default while the limit is too low to properly serve other customers.

Smart credit card providers have become adept at finding the right limit for each type of customer.   They test different limits with thousands of prospective customers and compare against random control offers.  By measuring the impact of different limits and segmenting the result by criteria like credit scores, they can determine the right limit for each type of customer to maximize revenue and minimize default.

Finding the right overdraft limit is a tougher problem.  Banks do not have the luxury of sending offers to tens of thousands of random prospects, and there is risk of losing customers by not getting the limit right.  Banks also have a wealth of information about each customer, and it is challenging to know what is important in setting overdraft limits.  Is prior balance fluctuation the most important indicator or do factors like tenure or demographics matter more?

To find the optimal dynamic overdraft strategy, banks need to find a way to try different approaches with a limited number of customers.  It will be important to both measure the impact of each strategy and to also identify which factors matter most in setting the overdraft limit for a customer.  With overdraft revenue squeezed by regulation, banks need to be innovative and rigorous in their approach to maximize revenue and minimize default.

The Washington Post recently wrote an article featuring a partnership between Bank of America and tech firm Cardlytics that brings forward a game changing idea. The new program will use past debit and credit card transaction data to offer B of A customers targeted discounts at relevant retailers.  We have highlighted in the past that B of A needed to improve its approach to debit cards; this is a great innovation and a big step in the right direction.

Most retailers have a loyalty program or something similar to strengthen and grow the relationship with existing customers.  Many offer cut-rate promotions made available to the general public, with the “deal of the day” being a recent extreme example.  With these promotions, retailers offer huge discounts to anyone who signs up, yet a large portion of redeemers are consumers that will take advantage of the offer and never shop again.

By leveraging past purchasing information, B of A is providing something much more compelling.  For example, an offer could be targeted just to consumers currently shopping with a competitor.   By targeting those with a willingness to spend in the category, this is more powerful for merchants and will presumably make the offers more relevant for consumers.

There are several important factors to make this a success.  B of A will need to be sure to address privacy concerns and make sure to build momentum by providing a great experience at the outset for both merchants and consumers.

B of A should also make the most of this opportunity to recover from bad press around debit cards and find a way manage the challenging fee environment.  At the very least, B of A should test different approaches to marketing this service.  Banks in general have been doing a poor job of highlighting their value proposition and justifying account fees by showing the great services they provide.  This is a valuable program for their customers, and B of A should find the best way to market it.

B of A should also consider testing waiving or reducing fees for customers who opt in to this program.  Additional revenue from interchange fees as customers transact more or additional revenue from participating retailers could allow B of A to reduce fees.  However, it will be important to test this strategy to see if those new sources of revenue outweigh the reduced fee revenue.

B of A will also need to test different offers to make sure the right offers are provided to the right people.   The article highlights that B of A sees this program “as a way to build loyalty.  The idea is that a customer will use the card linked to the deals she likes more often.”  For that to work, B of A needs to make customers aware of this program, provide the best deals possible, and highlight this great value proposition as a benefit of being a B of A customer.

B of A should be applauded for introducing this program.  B of A has also made the right decision to test this program on a limited basis first, as they have moved forward too quickly without testing an idea to understand the consequences (e.g. adding $5 / month debit card fees) in the past.

Overall, this type of initiative presents a great example of how big data can enable collaboration and experimentation.  APT has been at the forefront of helping the world’s leading retailers develop these types of insights and programs.  Other banks should seriously consider launching and testing similar programs.  It presents a great opportunity in today’s challenging environment.

Wal-Mart has made big waves with its pre-paid debit card.  With over 4,000 locations that have a huge amount of traffic, any effort by Wal-Mart to offer financial products is instantly a serious threat to banks.  The $3 monthly fee for their debit card is highly competitive at a time when checking account fees have been rapidly increasing.  As a result, Wal-Mart has been stealing clients from traditional banks.

A recent American Banker article highlights how some credit unions have started to “embrace this trend by modifying their ATMs to sell fee-free stored-value cards.”  More banks should test these types of strategies to adapt to the rapidly evolving environment and compete against new threats like Wal-Mart.

This particular strategy may not be the silver bullet to win back or retain customers.  The article points out that “people go to ATMs because they don’t want to use a card for their next purchase,” and the ATM may not therefore be the best delivery mechanism.

Even if customers take advantage of these pre-paid cards, it will not be sustainable to continue providing this service for free.  Banks will need to continue testing to find the right price that makes the product workable for the bank and still a compelling value proposition for the customer.

Banks are clearly in need of innovation to develop winning strategies in an environment with increasing regulation, lower profitability, and pressure from low-cost competitors.  Larger banks in particular have not innovated enough and should follow the lead of the smaller banks and credit unions.  Banks cannot afford to be stagnant and cannot afford to roll out strategies that do not work.  Trying many new strategies, measuring the outcome, and rolling out the ideas that work is the only way to win in this environment.

JP Morgan Chase recently announced it will add 800 new ATMs in California and four other Western states. Many other banks have also been making investments to expand the ATM network. Investing in ATM expansion is a good idea in our current economic environment if done right and has two main potential benefits.

First, it could reduce the need for customers to transact in the branch. The branch is by far the most expensive channel of service, so this could help banks reduce costs. But to actually realize these cost savings, banks need to understand the impact to the branch on metrics like the total number of teller transactions and transactions by time of day. This could allow banks to reduce teller staffing or cut back on hours while still meeting customer needs. Without understanding the impact on the existing network, banks will simply be adding in more cost.

Second, having a more convenient network could bring in new customers or help retain existing customers. Major ATM network expansion should be accompanied by marketing campaigns to make current and potential customers aware of the bank’s investment. Ideally, banks would experiment with different marketing approaches (e.g. radio, local marketing, or social media) to find what is most effective.

Banks should also measure the impact on new account generation and retention for branches near the new ATMs and identify whether there are particular cases where the new ATMs are most effective to inform future investments. Do they have more of an impact when placed close to the branch or further away? Do demographics or competitive factors influence the effectiveness of the ATMs?

Investing in ATMs can be a smart idea as banks try to find the right service model and make the most of less expensive channels. However, just adding ATMs is not enough by itself and can simply be one more additional cost. To make ATM expansion successful, banks need to market the new ATMs, locate them in the right places, and identify opportunities for offsetting cost reductions in the branch.

As banks struggle to maintain revenue and profitability with low rates and increased regulation, mass affluent is a segment where banks can achieve success in this difficult environment. For example, Bank of America recently reported strong growth in mass affluent despite the significant challenges in retail banking right now.

In fact, A relatively small percent of customers have always driven the majority of profit for banks.  However, this is even more true today as it becomes harder to make money from customers with smaller relationships (due to shrinking debit card and overdraft fees).  All banks are competing fiercely for these mass affluent customers and the larger, more profitable relationship they bring to the bank.

How can you win the business of these valuable customers?  With the current rate environment, banks cannot easily provide the special pricing that has worked in the past, and the offer would not be that compelling to most customers anyway.  For example, providing a significantly high deposit interest rate may only mean 20 basis points. But banks can still achieve success by focusing on excellent service for these customers and rewarding and recognizing their loyalty.

1. Provide excellent service and relationship management.

Banks need to ensure that mass affluent customers are receiving excellent service across different channels.  Key service elements to be competitive include adding relationship managers to branches, routing these customers to a special part of the call center tailored to handle their needs, and providing the technology to seamlessly and easily manage their accounts.

These are all expensive investments, so banks will need to pick and choose where to spend on service to maximize the benefit to the customer and the response from the customer.  With each potential investment, banks should invest on a limited basis when possible (for example with a subset of customers, branches, or markets), measure the impact, and move forward with the investments that work best.

2.  Reward and recognize customer loyalty

It is also important to recognize these customers for giving you their business and to reward them for their loyalty.  Some banks are rolling out more traditional loyalty programs to directly reward customers based on the depth and size of their relationship.

Another approach is to provide customers with perks for their loyalty, such as waiving fees or providing automatic fraud protection.   These types of perks may go unnoticed, so you also need reach out to customers to make sure they are aware they receive these perks for their valued business.

There are many different ways to reward and recognize customers, so banks should also experiment with different options to see what is most meaningful for customers and drives them to stay with the bank or expand their relationship.