Thursday, June 25, 2020

Three Ways to Align Marketing With Profitability

The inability to connect Marketing activities to the bottom line is what I frequently hear from bankers that think the Marketing Department is a cost center. Measurement is difficult. 

I also hear that silos are a problem in banking. Yet Marketing is frequently held to account for the ROI of the checking or home equity campaign. And branch bankers say they weren't consulted nor were they included in promotion planning. They often hear of the campaign on the radio while driving home. 

If you read my articles, watch my videos, or have heard me speak you know I'm a big proponent of the Marketing function taking a more prominent role in banks because customer acquisition and the customer experience has changed so much in the past decade. There must be an integrated, cross functional approach to acquiring, onboarding, and serving customers well to deepen relationships and turn them into champions of your brand. And that includes support functions. Nothing is more frustrating than turning a raving fan customer into a cynic because they get buzz sawed by the wire transfer person at HQ.

I have a bias towards profitability and against widgets. I remember doing a process review at a bank where one branch had hundreds of checking accounts with $100 or less. When I asked... you know the answer, right? A CD promotion that required opening a checking account. Widget counting. If the branch manager was accountable for consistently improving the profitability of her branch, and the Marketer was responsible for the continuous profit improvement of retail checking, this wouldn't have happened. Because having hundreds of low balance retail checking accounts attracts cost, with little revenue. But I bet you the CD promotion report had none of this.

So here is what I suggest:

1. Make profitability the ultimate accountability. 

Mandatory disclosure, my firm measures line of business, product, and feeds to customer profitability systems. And I work diligently with banks to analyze, adjust, and improve their profit trends using this information. Because I believe it is the way to go. Imagine if Marketing were responsible for the continuous improvement of the home equity line of credit product (see table).

The pushback from using profit and profit trend as the ultimate accountability, and not just from Marketing mind you, is that there are so many things outside the control of the marketer. True. But isn't that the case for any line of business with their profit and loss responsibilities? I have no control over the D&O insurance premium at my firm. But I'm sure as heck responsible for the firm's profitability. Which leads me to my second way to hold Marketing accountable.

2.  Implement Product Management. 

Which is totally related to (1) above. If Marketing was accountable for managing the HELOC product, wouldn't they engage in cross-functional collaboration to improve the profit picture? For example, in examining the above table, it is clear that the Bank has done a good job at increasing the product's spread. Fee income has been flat. And operating expense as a percent of the portfolio has been rising, even as the portfolio has been growing. Aha! What is afoot? Is credit underwriting manual? Do customers apply online and the loan moves seamlessly and electronically through the bank's underwriting, closing, and booking process? Does someone in loan servicing spend half their time on insurance tracking? i.e. are your processes scalable and efficient? Did you have a $100,000 marketing spend to generate 10 loans? All would be on the table as the person responsible for the continuous profit improvement collaborates with all areas of the bank that touch the product to improve the profit trend. And if the HELOC profit trend improves, branches will be more profitable (if they are the line of business responsible for HELOC origination).

3.  Identify Root Causes and Track Improvement. 

I'm currently reading the book Everything They Told You About Marketing Is Wrong by Ron Shevlin. In it, Ron says "The key to future profitability isn't in simply keeping customers-it's from deepening their relationships. And engagement is a necessary precondition for that to happen." There's that profitability word. What was Ron thinking? But fine, let's assume that "engagement" is key to keeping and deepening relationships. What the heck is engagement? Ron says it's whatever the bank thinks it is. And here was the chart from the book to highlight the point: 

I took a picture from my Kindle. Don't judge.

I asked Ron how to measure it, and he sent me a slide deck that showed it was measured by survey. If there was evidence that there was a strong correlation between engagement and customer profitability, I think the savvy marketer can measure it without having to perform surveys in today's AI and CRM world. But let's assume engagement deepens and lengthens a relationship. Let's look at the profit trend of a business interest checking product.

This product is much more profitable than the HELOC. In terms of ROE, fuhgetaboutit. So profitability should drive what marketing initiatives you implement.

Back to increasing engagement to increase profitability. If Marketing was responsible for assisting bankers migrate customers from low, to medium, to high engagement, how would that impact the profit picture? For one, it would lessen the operating expense as a percent of the product portfolio, because there would be no Know Your Customer, Address Checks, promotions to win a new customer, etc. And second, the deposit spread would increase because the duration (CFO term) of the product would increase, yielding a greater FTP Credit for Funds. 

By increasing the profitability of Business Interest Checking, you also increase the profitability of branches that are generally responsible for deposits, and possibly the commercial lender if the bank measures their portfolio profitability, including the deposits they brought in. 

So identify root causes with high correlation to improving product profitability, and measure Marketing on them. 

This level of accountability breaks down silos as Marketing now works with various departments within the bank to improve the profit picture, and aligns Marketing interests with those of profit centers (i.e. no hundreds of low balance checking accounts). When product and therefore line of business profitability goes up, so goes the bank.

What's stopping you?

~ Jeff

Thursday, June 11, 2020

Money Is Math. And Math Is Color Blind.

Typical conversation at my house:

Me: How much was on the credit card?!?!
Wife: Well, it's because of [reason 1], [reason 2], and [reason 3].
Me: Our checking account doesn't care about the reasons. We pay the amount on the credit card, and it comes out of the checking account. Simple math.

This conversation is amplified for households in low-to-moderate income (LMI) families. So often they have too much month left when they run out of money. Causing them to do inefficient and costly things such as remit late payments and be assessed a late fee, use a high-cost payday lender, or sometimes ignore the bill. The cascade of falling dominoes leads to societal dependencies such as 30 million children relying on the National School Lunch Program for food. 

Nobody described this situation better than John Hope Bryant, an American Banker 2016 Innovator of the Year, in my firm's This Month in Banking podcast three years ago. I encourage you to listen to it for ideas on what your financial institution can do to facilitate economic mobility among LMI families. 

I also penned a TKG Perspectives article on the Community Reinvestment Act, its obvious lack of effectiveness if you consider outcomes instead of activity, and what financial institutions can do to promote economic mobility and community development.

Hint about the podcast and the article: It's not about altruism or box checking. In Bryant's words, "you can do well by doing good."

We tend to be emotional spenders and don't consider the long-term impacts of our decisions. I recall being the "money guy" for my daughter's travel softball team. It was a club team and we had an annual fee. Club teams are important for players that want to be seen by college coaches. 

We estimated our expenses and divided by the number of players to determine the fee. We usually rounded up in case of unanticipated expenses and to help families that may not be able to afford it. One family didn't pay, and after several unsuccessful attempts to contact them, we determined they must not be able to pay. So the rest of the families absorbed that expense.

And then the family showed up to the first tournament with the nicest ride on the team. They made the decision to buy a nice car, and couldn't pay for their daughter's club softball team. I'm sure the emotional excitement of buying that car, and pushing their budget to the limit, might have made sense that day. But imagine if, instead of other parents paying that fee, we kicked the girl off of the team? Had they considered this outcome when asking "can we afford this car?" 

This is where banks can play a constructive role. Had their bank positioned themselves as an advisor, the banker would've counseled the family on cars they could afford, without pushing the family budget to the brink, running the risk of dominoes falling if one thing went wrong, and teaching sound family financial management. Perhaps even set them up on budget monitoring tools and automated savings apps. 

Because we often make foolish financial choices if left to our own devices. Think how many people don't contribute to a 401k minimally to get the full company match? People leave the company match piece (i.e. free money) on the table because they don't want to reduce their pay by their contribution. What bank financial counselor would recommend that?

Financial foolishness is color blind. We all could use a dispassionate advisor. But it's particularly acute among LMI families because of the reasons stated above. 

As John Hope Bryant said in the podcast, in the U.S., the poor can save capitalism. Banks can help make it so.

~ Jeff

Note: If you're interested in my annoying video to my daughters on personal financial management, click here. I still own those shorts.