Actionable Insights From APT's Financial Services Practice

Kmart Joins Wal-Mart in Move into Retail Banking

February 4th, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Kmart Joins Wal-Mart in Move into Retail Banking)

The Washington Post recently reported that nearly 30 million households do not have bank accounts. These “unbanked” customers are looking to their local big-box retailer for basic banking services, such as check cashing, money transfers, and prepaid cards. In addition to Wal-Mart, which is already expanding into retail banking, the Chicago Tribune details how K-Mart is now testing new financial centers in 23 stores “where shoppers can cash checks, pay bills, place money orders, and transfer money.”

Banks should have two key takeaways from retailers’ moves into the financial services space. First, additional competitors will put pressure on fees.  Many banks have significantly increased fees in response to regulation, resulting in attrition and lower account generation. Additional competition will only exacerbate this problem, and banks will need to decide if and how they want to compete for accounts.

However, retailers are actually providing banks with a unique learning opportunity.  Banks should determine the impact of competitor actions by measuring the number of accounts lost at nearby branches, as compared to other similar branches where retailers have not opened a financial center.

The number of accounts lost should be looked at in comparison with the profitability of those accounts to determine how to best respond to competitor actions.  If the accounts lost were not profitable to begin with, then no action is required.  However, if profitable accounts are being lost, banks may need to consider new fee structures or other incentives to keep those accounts.

A second key takeaway is to learn from how retailers rigorously test new ideas before rolling them out.  K-mart is testing these new financial centers in 23 locations before rolling the idea out more broadly.  Wal-Mart has been slowly expanding its own financial center program, and as of a September article in US Banker, money centers were still only in 40% of stores. (more…)

Should Banks Be Nicer About Overdraft Fees?

February 1st, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Should Banks Be Nicer About Overdraft Fees?)

US Banker wrote an article on Huntington Bank’s unique policy of allowing customers one day to fix an overdraft before charging the customer a fee.

Huntington’s Director of Products and Pricing, Dave Schamer, has said that this policy has hurt fee income but driven an increase in new account generation and customer retention.  Huntington reports that the policy is successful and overall generating more income.

We think this is a great idea, and Huntington is right to focus not just on fee income but on overall profitability and customer lifetime value.  Other banks are not moving in this direction, though.  Most are focused solely on making up for lost fee revenue due to regulation and have been implementing new fees without thinking about the impact on attrition or new account production.

We recommend that banks try new policies like this in a few well-selected representative markets and measure the impact on attrition, fee income, production, and total revenue.  This will allow banks to focus on long-term profitability instead of being short-sighted and trying to replace fee income at any cost.

Banks should also find the best ways to market these new approaches, as much of the benefit in account production and retention is driven by the positive impression the policy causes.  These benefits will not be realized if customers aren’t aware of the new policy.

Finally, as the US Banker article highlights, customers might also be willing to pay for these types of services, which would provide fee income in addition to other benefits.  For example, to avoid a $39 overdraft fee, customers may be happy to pay a $5 servicing fee to fund the account within 24 hours and waive the overdraft.  Banks should also be testing to determine which services customers are willing to pay for and how much they are willing to pay.

Strategic Testing Nearly Doubled at Leading Banks in 2010

January 24th, 2011 | Posted by Jatin Atre in Uncategorized - (Comments Off on Strategic Testing Nearly Doubled at Leading Banks in 2010)

WASHINGTON, D.C. & NEW YORK – January 24, 2011 – Applied Predictive Technologies (APT) announced today that 2010 saw significant increases in scientific testing aimed at understanding the impact of various strategic and tactical initiatives at leading North American banks. APT’s study reveals that testing at larger banks (those with more than 2000 branches) increased by 23% from 2009 to 2010, while banks with over $20B in assets increased testing by 85% in the past year. These leading banks are testing new ideas in nearly all functional areas, including staffing, pricing, customer retention programs, ATM surcharges, new product introduction and marketing, among others.

Over 38% of tests focused on media and marketing programs. Banks increasingly want to measure the ROI of numerous media channels (TV, radio, online) and a variety of campaigns focusing on different products and messages. Banks have also been increasing testing in other areas, including a 261% increasing in testing of pricing changes and actions related to mergers and acquisitions. Cross-channel servicing, relationship management programs, and branch remodels have also been areas of increased focus. Using sophisticated analytical tools, banks are increasingly able to answer nuanced questions, such as which elements of a remodel program help increase ROI, how changing staffing mix between part-time and full-time tellers impacts customer satisfaction and profits, and the optimal strategy for each branch after an acquisition.

Despite the significant uptick in testing, there still remains an untapped opportunity to increase scientific testing to identify the right strategies to respond to regulatory changes, further optimize deposit and loan pricing, and understand the best ways to improve customer retention and cross sell. While some banks are already doing this, many are leaving money on the table by not making the most of scientific testing to fuel innovation. “The banking environment continues to evolve very rapidly,” said Patrick O’Reilly, APT’s President. “Testing ideas before rolling them out is the most powerful way to de-risk key decisions. Some leading banks have pushed scientific testing to new levels. Their experiences hold important lessons for all banks.”

Top Banks Cut Staff – Effective Cost Reduction or Growth Killer?

January 22nd, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Top Banks Cut Staff – Effective Cost Reduction or Growth Killer?)

The Wall Street Journal reported that many top banks, including PNC, Fifth Third, and Wells Fargo, are planning significant staff cuts.  In recent years, efficiency ratios have skyrocketed due to loan write-offs and lack of growth.  The challenge highlighted by the Wall Street Journal is that loan demand remains weak, and fee income is under pressure with regulation.  This leaves some banks with no choice other than to cut staff.

While staff reduction may be unavoidable, banks need to be extremely cautious in how they go about this.  Cutting staff in the wrong places could further reduce growth, increase attrition, and ultimately not end up improving efficiency ratios.

Banks need to determine precisely where staff can be cut with minimal impact to KPIs.  This means understanding optimal staffing by channel, by position, and by location (for example, which specific branches are currently overstaffed).

The best way to do this is to look back at prior changes in staffing and learn from those changes.  For a variety of reasons, there are constantly changes in both staffing levels and staffing mix.  Measuring the impact of those changes can inform where staff should be reduced in the future.  The challenge is to measure only the impact of the staffing change and minimize noise from economic factors, competitor actions, and anything else that affects performance.  This requires finding a comparable set of control branches that are similar in all ways except for the staffing change.  Comparing to this control group isolates the impact from the change in staff level of mix.

Too few banks learn from the impact of past staffing changes.  Well executed analysis of those changes can inform staffing decisions going forward and minimize risk and maximize efficiency gains from those decisions.

Are you ready for the demise of Regulation Q?

January 18th, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Are you ready for the demise of Regulation Q?)

The repeal of Regulation Q goes into effect on July 21st, 2011 under the Dodd-Frank Act.  Banking Strategies recently published an article about the impact the repeal will have now that “banks will be able to offer interest on demand deposit commercial checking accounts for the first time in more than 75 years.”

So far, “experts predict the vast majority of banks will play wait-and-see.”  However, Joshua Siegel of StoneCastle Partners believes that smaller, regional banks will start offering interest as a way to steal business accounts from larger rivals.

Reacting to competition is not the right strategy for any bank, large or small.  By the time you respond to a competitor offering interest, you’ll likely have already lost business accounts that will be difficult to gain back.  At the same time, offering interest too broadly will erode net interest margin more than is necessary.

As soon as Regulation Q is repealed, banks should immediately try different interest offers with a small number of business accounts.  Testing will allow banks to measure the actual response to offering interest and will provide insight into the optimal interest rate as well as which types of business accounts respond best to design a more targeted approach.

Banks also do not need to wait until July 21st to start testing.  While accounts cannot offer interest until that date, there are hybrid approaches that can currently be used.  Banking Strategies describes how banks currently get around Regulation Q by offering an “earned credit rate.”  Banks can apply fees and charges against the ECR, which ends up being similar to paying interest on the account.

In advance of Regulation Q’s repeal, banks can try different ECR tactics to start building knowledge on how businesses may respond to offering interest on checking accounts.

As with any change in regulation, the key is to get out ahead of it, test different strategies, and quickly develop the best approach.  This maximizes potential gains, minimizes losses, and provides a leg up on the competition.  Start acting now to come out of this Regulation Q change as a winner.

Click to read more about the Test & Learn Approach.


Citi is Building the Branch of the Future

January 17th, 2011 | Posted by Jatin Atre in Uncategorized - (Comments Off on Citi is Building the Branch of the Future)

Like many retail banks, Citi has been investing to transform its branch network to better meet the needs of customers.  An American Banker article details how this includes “more technology, longer hours,” and a new “concierge-style desk.”  The labor model is also changing, and “employees take on multiple roles throughout the business day depending on customer need.”

So far, however, only a limited number of branches have made these types of changes.  Citi’s model for the branch of the future is its new branch in Manhattan’s Union Square.  The real question will be how broadly these innovations will be rolled out across the branch network for Citi and other retail banks.

It’s easy to design new branches with their model in mind, but it will be more challenging and more expensive to renovate existing branches.  And, as banking transactions move online, it will be increasingly important to make the most of the branch network and set up branches to best handle the more complicated, relationship-based transactions that can’t be done online.

Banks will need to go branch by branch to understand which ones warrant investment and what changes would be most profitable for a given branch. Identifying the best approach for each type of branch requires accurate measurement of the impact of branch renovations and segmentation of response by branch characteristics.

In the end, a tactical approach will maximize return on investment and better meet customer needs.

Click to read more on Branch Remodels.

Bank of America Tests New Fees, But To What End?

January 13th, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Bank of America Tests New Fees, But To What End?)

Bank of America was in the news last week because it is piloting a “test program” in three states to charge customers for maintaining a checking account.  The fees will vary based on the size of customer relationship.  This pilot has received a lot of press attention, with the focus on the changing nature of checking accounts.

We find another part of this news interesting – Bank of America has already announced plans to roll the pilot nationally next year.  So before even starting the test, Bank of America already expects to move forward.  Wouldn’t it make more sense to see if the test actually works first?

This is symptomatic of the significant flaws in the decision making process at too many banks.  At these banks, “tests” are not run to learn anything and guide decision making, but just as a first phase in an implementation.  This is why many banks roll forward almost every single idea that they pilot.  Either these banks are being way too risk averse or they are not actually learning anything from the pilot itself.

Banks need to take a page from retailers’ playbook and be more innovative, more willing to experiment, and more willing to recognize that some tests fail.  Until then, too many banks will be flying blind in their critical decisions.

What to Do with Unprofitable Customers

January 11th, 2011 | Posted by Jarred Brown in Uncategorized - (Comments Off on What to Do with Unprofitable Customers)

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.

New Fees are Not Just for Checking Accounts

January 11th, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on New Fees are Not Just for Checking Accounts)

It isn’t news that most banks are raising fees on checking accounts. The latest development is that many banks are talking of adding fees to other types of products like debit cards. The Wall Street Journal recently wrote about these possible upcoming fees. Debit cards in particular will likely see changes in 2011. The product has been very popular with customers and profitable for banks as it typically doesn’t come with any fees and generates significant interchange revenue.

The Federal Reserve has proposed a drastic decrease in interchange “by as much as 84% from the current average rate of 44 cents.” Banks clearly need to find another way of making these cards profitable, and many will turn to annual fees.

After all, many of the most popular credit cards carry hefty annual fees in excess of $50. Banks will without a doubt lose debit card customers if they start adding fees, though. There will always be no-fee alternative that some customers chose. Credit cards companies, for example, often lure customers away from competitors by promising to waive the annual fee for the first year or two.

Banks will certainly have to add fees to make up for lost revenue but should add them in a targeted way based on risk of attrition, whether the customer has other products with the bank, and profitability by customer with the proposed new interchange levels.

Using the Call Center to Generate Revenue

December 28th, 2010 | Posted by Will Weidman in Uncategorized - (Comments Off on Using the Call Center to Generate Revenue)

Banking Technology News just wrote an article on how the call center has become a major revenue driver after being treated in the past as simply a cost center.  Specifically, the article discusses how the caller center can be a source of cross-sell and up-sell when customers call in.  A key aspect of maximizing revenue from inbound calls is to know how to best direct each incoming call.  There are a variety of options to service each call from the call center location (outsourced, US-based facility, remote agent) to the qualifications of employee (training, tenure, past experience). 

The cost implications of these different options are clear and easy to measure, but the impact on revenue is much harder to quantify.  The challenge in measuring the impact of a given channel is to find comparable customers who did not call in or were routed to a different channel.  Customers calling in tend to be inherently different, so this requires careful matching.

After getting this matching right, we have found that in general the more expensive call center options do result in more cross-sell and up-sell, but only for some customers.  As a result, some customers should be routed to low cost channels while those with more revenue potential should receive the more expensive and higher level of service.  It is difficult to tell which customer falls in which bucket, but getting it right can drive millions of dollars of profit improvement.