Thursday, September 26, 2013

You Can't Buy a Customer's Love?

I recently attended the ABA Marketing Conference in San Antonio where a speaker from USAA said something similar to this post's title. Really? How do I explain the branding study by a client that identified Ally Bank as the most recognizable brand in their market?

As most readers know, Ally is the former bank-finance arm of General Motors (GMAC). They required a substantial capital infusion from Uncle Sam to keep them solvent during the financial crisis. I don't think they have many, if any branches. So how do they earn "most recognizable"? My money is on their ad budget. In other words, they bought their fame. Love? No. Head above the crowd? Looks like it.

This flies in the face of conventional wisdom spoken so eloquently by the USAA speaker. How could blast, one directional messaging still yield results in today's engagement world? And if money can buy customer love, what can community banks with limited ad budgets do to survive?

USAA is highly regarded in banking circles for their omni channel marketing approach. But I find it interesting that their representative took the position that budget heavy blast messaging was not effective at gaining customer loyalty.

Why? I'm a veteran and USAA insurance customer. I cannot recall speaking to a live person from the insurance or bank side. But I see plenty of TV ads during prime airtime, receive a couple of e-mails per month, and occasionally receive direct mail from them. Is this how to win my love? Perhaps. I'm not sure. But, according to their actions, they must think so.

But I do know most community banks cannot afford this path. We don't have the resources. So what are we to do?

Customers switch banks when something happens that compels them to do so. For each customer, it may be a slightly different "something"; a declined credit, difficulty sending a wire, accidentally bounced check, a bad experience with their banker. The key to be the bank they go to once "something" happens is to be on top of their mind when they decide to switch. Ally and, yes, USAA, do that through their ad budgets. You, on the other hand, must work harder and smarter to be that top of mind bank.

Traditional advertising can play a role. But actually knowing potential customers can go a long way. Do your employees, front line and support staff, participate in community organizations? Are they on LinkedIn and do they follow your bank's LinkedIn profile?

Does your bank blog, and interact with community members on the blog? Have you positioned your employees as subject matter experts on the blog, and host community based education sessions such as "How to Finance a Small Business"? Does your brand have personality, such as supporting the local sports team(s) by using Facebook post factoids on team athletes, and wearing team colors in your branches before a big game?

Whatever path you choose to combat big bank big ad budgets, ensure it is consistent, constant, integrated, interesting, relevant, and genuine.  USAA is thought to be best in class in omni channel engagement. You can be genuinely best in class. But you have to build the strategy and execute it.

What are you waiting for?

~ Jeff

Wednesday, September 18, 2013

Bar Rescue: Bankers Edition

My buddy Dave Gerbino and I are speaking about product profitability at the ABA Marketing Conference in San Antonio next week (Monday, September 23rd, 11am if you're in town). While developing our presentation, Dave drops Bar Rescue on me.

Never heard of it, I said. Apparently, it's a Spike TV reality show where a bar expert (great job!), Jon Taffer, helps owners turn their flailing establishments around (see video clip).

Dave said product profitability reminded him of Taffer badgering bar owners for their liquor cost. How much are they paying for their liquor and what is their gross margin? Most didn't know. Should they know?

That's a rhetorical question. But, let's be honest, most of us don't know our liquor cost. I read fascinating articles and hear endless speeches on big data, data analytics, deep data dives, relationship profitability, customer profitability, and segment profitability. But nary an article, speech, or mention of product profitability. It is the Rodney Dangerfield of big data. It gets no respect.

Its absence is peculiar. Peculiar because it is a pre-requisite for most other profitability endeavors. How do you determine customer profitability without cost per account? That's an output of product profitability. Go ask your deposit operations clerk how she spends her day. Will she say she spends two hours working on your Main Street branch overdrafts, or ABC Company's wire transfers? No, she'll say she spends two hours working on checking overdrafts. 

Do you calculate customer profitability using Return on Equity (ROE)? How do you calculate the "E" allocated to the customer? You do it by risk characteristics of the product(s) used by your customer. Again, an output of product profitability.

So where is your product profitability? What's your liquor cost?

~ Jeff

FYI: Dave Gerbino and I will be speaking more on this subject at the ABA Marketing Conference on Monday, September 23, 2013 at 11am in San Antonio. They think so many marketers are interested in their liquor cost that they made us repeat our performance at 1pm.

Friday, September 06, 2013

Loan Pricing: Must It Be So Complicated?

When it comes to pricing loans, my experience tells me we use competitor pricing as our de facto pricing model. For consumer and residential loans, where rates and fees appear on the competitors' websites, it's not so difficult. But for commercial loans, I suspect we follow anecdotes such as what customers tell us or what friendly competitors murmur to us at a cocktail party. We tell loan committees that this is the rate and structure needed to "get the deal done".

In comes the loan pricing models. Some are expensive. Some are free, such as the one recently mentioned by my friend Dallas Wells of Asset Management Group, an ALCO consulting firm based in Kansas City. 

Now, I have never been a commercial lender. But I'm a student of the lending function, and listen intently to senior managers discuss loan pricing in profitability improvement meetings that I moderate. That's where I hear the stories of the competition, irrational pricing, yadda yadda yadda.

I recently had two students from the Pacific Coast Bankers School (PCBS) ask me about how to risk price loans. Why they asked me, I don't know. Although I'm no loan pricing expert, I have my opinions. And my opinion is it should not be as complicated as those "in the know" would like us to believe. So for you, fair readers, I developed this simple loan pricing model (see table).

Four inputs, you say? Well, there is some back room gears at work too. For example, the loan duration should be calculated by the loan cash flows and repricing characteristics. Is it a five year, 20 year amortizing commercial real estate loan? Then perhaps the cash flow calculation pegs the loan duration at 4.3 years, as it does in this model.

The transfer price, or charging the lender a cost of funds for the borrowed money, is typically derived from a rate index, such as the Federal Home Loan Bank yield curve, for the same duration borrowing. That would have to come from Finance and be blended for odd-lot terms, such as 4.3 years.

Capital allocation should be determined by a risk adjusted return on capital model (RAROC). I described this in greater detail in a previous post. But this analysis would have previously occurred, and be assigned based on loan type code and the internal risk rating.

If your bank performs product profitability, a natural calculation from this model is operating cost per account based on type code. If you do not have product profitability, you can analyze your approximate operating cost per account or use industry benchmarks.

And lastly, the provision expense associated with this type of loan and risk rating should be driven by your Allowance for Loan and Lease Loss (ALLL) methodology. You already do this, I guarantee it (insert Men's Warehouse founder voice).

There you have it. Now you have a well priced loan that accounts for credit risk through the provision and RAROC calculations. Interest Rate Risk is accounted for in the transfer price, as this is taken from the same duration market instrument. You also account for other key risks through RAROC such as liquidity and compliance risk. 

Price by this method, and you are accounting for the risks, costs, and desired margin of each loan. You can overlay deposit products to hit your ROE targets in a similar vein.

Price by this method, and you can determine if doing a loan at a certain price point, as told to you by your borrower, may or may not be a mutually beneficial pricing structure. Banking is one industry where success is driven not only by your ability to build relationships that are not price driven, but also by not being as stupid as your competitors. If the market price is too low for your appetite, have the courage to walk away.

What else should be considered in pricing a loan?

~ Jeff