Actionable Insights From APT's Financial Services Practice

Top 10 Trends for 2011 in Retail Banking

December 15th, 2010 | Posted by Will Weidman in Uncategorized

1. Get ready to compete with Wal-Mart

Wal-Mart has continued to make inroads toward becoming a full-fledged retail bank, and banks are worried about this to say the least.  A Forbes article details how Wal-Mart now has “Money Centers” with bill payment services, as well as a pre-paid debit card program.  Essentially Wal-Mart has “4,300 platforms to sell stuff,” and why not include products traditionally sold by retail banks?

Wal-Mart will offer two major benefits to potential banking clients – price and convenience.  Wal-Mart will without a doubt have some of the lowest fees in the industry, and with 4,300 locations, it will also be extremely convenient, particularly for those who already shop there regularly.  To compete with Wal-Mart on price, banks will need a competitive fee structure.  This does not necessarily mean having the lowest fees, and banks will need to determine the right fee level relative to Wal-Mart and other competitors to balance the goals of keeping customers and maintaining profitability.

Banks will also need to compete on convenience.  This includes having accessible branch locations, a high quality branch experience, and a strong online presence.  Getting fees right and improving convenience will not only help prepare banks to compete with Wal-Mart but will also help banks become more competitive in general.

2.) Make targeted, smart investments in branch remodels

Many banks cut back on investment in branch renovations over the past several years, but capital spend has started to ramp up.  The key questions banks will have to answer for 2011 will be which branches to start with, how much to spend at each branch, and what remodel elements to include in each branch.  While a certain level of investment is required to maintain the branch network, banks will be under more pressure than ever to show return on investment.

Read our branch remodel case study.

3.) Expand and improve relationship management programs

Many banks have been hiring relationship managers and placing them in certain branches to improve cross sell and retention with the bank’s most valuable customers.  These programs will continue to expand in 2011, and banks will need to determine which branches should add relationship managers.  But the more important question will be which households should be assigned to the relationship manager.  Correctly identifying the highest opportunity households for the relationship manager is critical to the success of the program, and many banks still have not fully optimized relationship manager books.

Read our staff specialization white paper.

4.) Shift media investment to online channels

As with other industries, banks have been shifting media investment to online channels.  Online advertising can be very effective in driving new account generation, but the challenge is in measuring success given that most accounts are still opened in brick and mortar locations.  Without understanding ROI of online advertising and how it compares to ROI from traditional media channels, it can be difficult to build the case to shift spending online.

Leading banks are testing online advertising in some markets and measuring impact for branches in those markets against a carefully matched group of branches from non-advertising markets.  The results typically show a clear response in the branch network to online advertising, and more detailed analysis shows which message works best, which vehicle is most effective (e.g. search vs. banner), and which products should be featured.

Read our white paper on optimizing the online channel.

5.) Survive the death of free checking by getting fees right

Some of the nation’s largest banks have already implemented broad changes to fee structures due to pressure on fee revenue from new regulation.  For example, Bank of America now charges a fee for the majority of checking accounts.  However, many banks have not yet made significant changes to checking account fees, particularly regional banks.  Expect this to change in 2011.  But the winning banks will be those that don’t implement broad changes across all accounts.  Instead, the best approach will be to identify which customers and products should have a fee increase based on customer profitability, loyalty, and risk of attrition. Click here to read more.

6.) Launch the killer new product

Innovating and launching successful products and services is important to remain competitive and is also another key aspect of making up for lost fee revenue.  The best way to make up for lost fee revenue is to introduce desirable products and services that customers are willing to pay for.  As banks launch new products in 2011, achieving success will require knowing which new products work best, and it will be even more important (and more challenging) to understand cannibalization of existing products.  Banks will also need to understand the most effective way to market and promote new products.

7.) Prepare for rate increases

Both loan and deposit rates have been at rock bottom levels, but they will not stay at historic lows forever.  In 2011, banks will need to determine where rates should be increased – which markets, which customers, and which products.  Rates will increase slowly, but banks should be proactive in identifying where rate sensitivity is higher for deposit products and lower for loan products to be able to take targeted increases and stay ahead of the competition.  A recent article in the Wall Street Journal highlights how “historically low interest rates are starting to take a toll throughout the financial industry.”  Setting rates optimally will be essential to preserve net interest margin in this tough environment.

Read our rate optimization white paper.

8.) Make the most of ATMs

ATMs serve a dual purpose.  They are a convenient way for your customers to transact and also a source of revenue.  To improve convenience, leading banks have been testing and rolling out remote check imaging.  This will continue, and there will also be other innovations to improve convenience and customer service, such as adding the ability to book an appoint in the branch.  Banks need to identify where these improvements matter most to determine which ATMs warrant this investment.

On the revenue side, there has been a continual upward trend in ATM fees.  However, the increase has slowed in recent years.  While many banks are at $3.00, the New York Times reports the national average is at $2.33.  Banks should continue testing the optimal surcharge and look for opportunities to further increase surcharge rates next year.

Read the Wells Fargo article in American Banker.

9.) Improve employee performance with better training

Many banks have been reducing or just maintaining staffing levels and have, as a result, focused more on training programs to make employees as effective as possible.  Training programs can help increase productivity, improve cross sell, and enhance the customer experience.  However, training programs are also expensive due to both the cost of the training program itself and lost productivity during training.  Banks will continue investing in training programs in 2011 but need to be targeted about identifying which training programs work best and which employees respond best to the training.

 Read our staff training case study.

10.) Acquire more profitable customers

In the past, one of the major focuses for banks was to acquire as many new customers as possible. Now the strategy has shifted to acquiring the right new customers.  Focusing simply on acquisition resulted in far too many underfunded and unprofitable accounts (think of customers who opened accounts for the $100 incentive and never made a deposit).

Acquisition is still important, but going into 2011, banks are rightly focusing on bringing in only profitable new customers.  One important element in achieving success is to identify which types of offers are most likely to attract profitable customers.  For example, with a $50 incentive offer, is it better to require direct deposit or three checking card transactions to receive the $50?  Another key element is to have the right on-boarding strategy.  When should a new customer be contacted, which channel is most effective in on-boarding outreach, and what is the best cross sell strategy for new customers? Click here to learn more.

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