Friday, December 31, 2010

Bank Product Pushing: Is this our strategy?

Banking has taken a beating in the media and court of public opinion in the past two years. Some of it has been unfair, particularly with how banks were associated with subprime mortgages (very few were originated by banks) and how community banks were lumped in with the practices of very large financial institutions (FIs). But if we are to be honest with ourselves, some of it is deserved and we should take positive steps to repair our image, better serve our customers, and lead us into the future.

This post is part of a three part series regarding strategies to improve our image and move us forward. The three parts include:

1. Executive compensation;
2. Fees;
3. Product pushing

In previous posts I wrote about Executive Compensation and Fees. This post will focus on Product Pushing.

In either a bank strategy session or an educational session, I can’t remember which, a speaker gave an anecdote about shopping for a mattress. A couple enters a mattress store and a salesman, most likely on commission, rapidly approaches them as they walk through the door and says “may I help you”? The couple, in unison, say “no thank you, we’re just looking”. They were just looking… in a mattress store?

Now I don’t know how much you know about mattresses. I know very little about them. But I have to believe that simply looking at a mattress would not be helpful in making an informed “buy” decision. I would need help. But I also think my reaction to an oncoming salesman would be similar to the couple’s reaction. We possess an automatic defense mechanism from being sold to.

In this context, doesn’t “just looking” in financial services seem more unlikely than the mattress analogy? But this is what customers do when they visit a bank’s website to peruse product offerings without ever contacting the bank. We avoid the human interaction because we don’t want to get sold.

Financial services, though, are very complex. Banks typically offer dozens if not over 100 traditional spread banking products. If our FI offers investment, insurance, and/or trust products, the list can grow exponentially. Why do customers not seek us out for help? Why are they “just looking”?

I think there are two reasons: 1) they do not view us as advisers, and 2) they view us more as salesman. We have perpetuated this view by emphasizing cross sales in the branch, pipelines for lenders, and gross production from our investment reps. This emphasis puts greater value on the point-of-sale, or transaction.

The result is that bankers are not perceived as acting in the customers’ best interests. Take the video below as an example of how our industry is viewed. The protagonist needs advice, probably from his parents, to help protect him from a product (in this case a credit card) pushed on him by a banker using giveaways as a promotion. This is classic product pushing, regardless of what is right for the customer.

But what if the bank took a different approach? Perhaps the parents have a great relationship with their local banker, and trust his or her advice. They consult the banker regarding their son going to college and the banker suggests a savings-account collateralized credit card that sports lower interest rates and where the parents can monitor usage.

This may not be a better transaction than giving the son a credit card knowing he is likely to run up the balance at high interest rates. But it increases the loyalty of the parents, and makes it more likely the son will bank with the same person as the parents because of this loyalty. The bank enjoys the higher balances from the parents, and ultimately wins the business of the son once he graduates and enters his earnings and borrowing years. But this philosophy won’t help the banker meet his or her quota of the product de jour.

Which situation would be better? The short-term, walkie-talkie giveaway for a high interest rate credit card would certainly be a better short-term winner for the bank. Long term is a different story. So why are banks perceived as pursuing the short-term strategy? Could it be the incentives we put in place? Could it be the capabilities of our staff responsible for relationship building? Or is it simply misfortune?

We have to ask ourselves the very strategic question of how we want to be perceived? Perception is mostly within our control and is strongly influenced by the people we hire, the manner in which we compensate them, and the strategy we pursue. I have not been in a strategy session where bankers chose to promote the product de jour, push products on customers, or resemble the mattress salesman. We should align our actions with our strategy.

~ Jeff

Sunday, December 26, 2010

Bank Strategy Tweetup: Here's how I think it would go...

I recently read a funny post by Don Cooper on how he thought the birth of Jesus would have went if Joseph was able to tweet about it (see the link below). This got me thinking how a bank strategy session would go if we conducted it via Twitter. Below is an abbreviated tweet stream of how I envisioned it going down.

@bankceo Welcome to our first ever strategy tweetup! Today we will set bank strategy in 140 characters or less.

@bankconsultant I hope this strategy tweetup thing doesn’t reduce our fee.

@banklender Every second I spend in this mind-numbing strategy tweetup I can’t be with customers, having a power lunch, or be on the links.

@bankmarketer This strategy tweetup thing is the best idea EVER!

@bankfinance REMINDER: Request an ROI on this tweetup thing from @bankmarketer

@bankconsultant Ok everyone… let’s role with this tweetup idea. What are this bank’s key strengths?

@banklender Lenders

@bankmarketer Our website

@bankceo Me

@bankfinance We have no strengths.

@bankconsultant Moving on… what are weaknesses that we must address?

@bankmarketer Branch people, because they can’t sell.

@bankceo Branch people, because we have the wrong people in the wrong seats.

@bankfinance Branch people, because our cost of funds is too high.

@banklender Branch people, because they’re not lenders.

@bankconsultant Alright, let’s talk vision. If we were to look out five years, what should the vision of this bank be? Where do we want to go?

@banklender [eyes rolling]

@bankmarketer To be the best bank we could possibly be by positioning ourselves to create value for customers… and world peace.

@bankceo To provide superior service to our customers: retail, business, not-for-profit, ethnic, non-ethnic, under-banked, over-banked, [exceeds 140 characters]

@bankfinance I never got the “vision thing”.

@bankconsultant Alright, @bankfinance insists we get specific on financial targets. Where do we see this bank’s ROA in 3 years?

@bankceo We have to be careful putting a number out there bcause we don’t want the Board to pull this doc in 3 yrs and hold us accountable.

@bankmarketer What’s an ROA?

@bankfinance 2%! [Thinks to self: Do we have to pay @bankconsultant for this?]

@banklender The ROA would be great if lending didn’t have to pull this bank like we were Budweiser Clydesdales hitched to a beer wagon.

@bankceo Thanks to all 4 joining our first strategy tweetup. It was very productive and we clearly have our marching orders for the future!

The above, of course, is a figment of my imagination. However, if you're bank actually had a strategy tweetup, please notify me and we will be happy to put your guest post on these pages!

Have a great holiday season everyone!

~ Jeff

The Birth of Jesus: As tweeted by Joseph

Monday, December 20, 2010

Bank Fees: Are We Out to Get-em?!

Banking has taken a beating in the media and court of public opinion in the past two years. Some of it has been unfair, particularly with how banks were associated with subprime mortgages (very few were originated by banks) and how community banks were lumped in with the practices of very large financial institutions (FIs). But if we are to be honest with ourselves, some of it is deserved and we should take positive steps to repair our image, better serve our customers, and lead us into the future.

I would like to look at three issues regarding our profession:
1. Executive Compensation;
2. Fees; and
3. Product Pushing

I focused on Executive Compensation in my last post, and would like to focus on fees here.

Fees are an absolute necessity to developing profitable products. For example, it costs a financial institution (FI) on average $388 per year in operating expenses to originate and maintain a non-interest bearing checking account (see chart).

According to my company's profitability database, FIs collect $24 in fee income per checking account per year, on average. That leaves $364 to be made up in the spread. As my banker friends know, re-investment rates are at all time lows. If an FI can re-invest checking balances at a market rate of 2.43%, as was the case in the second quarter of this year, a checking account would have to carry an average balance of $15,000, just to break even!

For the non-banker reading this post, if there are any, this may be an epiphany to you. Checking accounts are not inexpensive to maintain. Since re-investment rates that drive the spread are largely out of an FIs control, we turn to fees. This makes perfect sense.

But fees are under attack, as the link to a recent Wall Street Journal article indicates. It is part of conventional wisdom that all fees charged by FIs are bad, and forced on the public by insidious bankers. How did this perception come about?

Probably as a result of the logic presented above. In order to make deposit products profitable, fee income is an important part of the revenue stream. But this drive to increase fees came at the expense of reputation risk. I'm talking about the decisions bankers may have made with little discussion about how the application of this fee or that will be perceived by the FIs customers and the public at large.

An example of fee income gone wild is the order of check presentment to maximize overdrafts. You know what I'm talking about... ordering the checks received during a business day so that the large ones are presented first, causing an overdraft, and the subsequent checks are all overdrawn as well. If we presented them in a different order, the FI may have honored most of the checks. This may have sounded like a good idea when the vendor presented it to us, but the accumulation of decisions like this has led the public to draw its conclusions that we are "out to get them". We must consider this possibility in future decision making.

Recent legislation and regulation has put pressure on fees. The opt-in requirement that has the potential to reduce overall deposit fees has not resulted in wide-scale deposit fee declines (see chart). But the Durbin Amendment to the Dodd-Frank Act was worrisome, and now that the Fed has proposed reducing interchange fees from an average of $0.44 per debit transaction to $0.12, we will seek new revenue sources and expense reductions to offset the loss.

But while looking, we must ask ourselves the following questions:
1. Are we providing value that the customer should be willing to pay us for?
2. Is this fair to both our FI and the customer? and
3. Are we delivering the product and service as efficiently as possible?

I think if the answer is yes to all three, then customers should be willing to incur changes to their deposit products that allows their FI to profit fairly from their business.

If we answer no to any one of the three, then we will be encouraged to try old tricks... charge fees with as little transparency as absolutely required, and run the reputation risk we have so willingly accepted up to this point.

~ Jeff

WSJ Article: Why Checking Fees Keep Going Up