Every bank has a significant number of unprofitable customers that hurt performance. A recent Banking Strategies article cites that “5% of customer relationships are extremely unprofitable.” It is critical to address this issue and find ways to make these accounts profitable.
There are two main ways to approach this problem. The first is to increase fees or reduce deposit rates. This will either make those accounts more profitable or remove them through attrition. The second is to have targeted efforts that encourage those customers to grow their relationship, for instance by increasing balance or signing up for more profitable products and services.
The right approach will vary by customer. For a newer, high income customer with only one product, the best strategy could be to assign a relationship manager to cross sell additional products. For customers that have been with the bank for a long time and consistently have a low balance, it may be better to add a monthly fee or reduce rates.
Different strategies should be tried with a subset of customers that represents a wide range across different factors – income, tenure, number of products, balance levels, etc. Segmenting response across these characteristics will identify the best approach to improve profitability for each customer segment.
After this initial customer segmentation, banks should continue to update the list of unprofitable customers and should continue testing new strategies to improve profitability.
Click to read about how to improve checking account profitably.