Using Technology To Drive Profitability

When Coleman Clougherty used to look around the lobby of his main branch in the middle of the afternoon, he knew there was trouble ahead. Most of his customers were retirement age and there was no getting around the fact that their money would start leaving the bank once they passed away.

As president and chief executive officer at FC Banc Corp, the holding company for $355-million-asset Farmers Citizens Bank in rural Bucyrus, Ohio, Clougherty knew he needed to expand into new markets where he could attract younger customers. And he knew the only way to do that was through a major infusion of technology.

Clougherty is not alone in taking a closer look at how technology can change the business and boost profitability. Faced with tepid credit demand, a major regulatory squeeze on retail fee income and limited investment returns caused by the flat yield curve, most institutions do not have a lot of revenue levers to pull at the moment.

Properly deployed, technology can have an extremely powerful impact on the bottom line. Institutions are using it to boost their top line growth. Or they’re finding new ways to drive efficiencies and cut costs. Either way, they’re ending up with a nice kick to profitability at a time when they really need it.

Clougherty embraced technology with a vengeance once his bank made plans to open a new branch in a university town. “We were going to a market that was more dynamic and we needed something a little on the sexy side,” he says. Upon visiting a vendor he had met at a community banking conference, Clougherty “bought every product they sold,” he says.

The products, from Austin, Texas-based BancVue, included the design and maintenance of a new web site featuring online account opening, support and marketing for a new type of checking account, and a new rewards program featuring iTunes. In addition, Farmers Citizens signed up to tap into the power of a nationally branded checking account program, called Kasasa, that BancVue created and supports through broad media exposure and advertising.

The results since Farmers Citizens began working with BancVue about two years ago have been striking. Now, 25 percent of the bank’s accounts are opened online, up from zero. “Prior to this, we didn’t have an avenue for these customers,” Clougherty says.

The BancVue checking account program Farmers Citizens has deployed pays out high interest rates to customers who perform greater amounts of electronic transactions, such as direct deposits, debit card purchases and electronic bill payments, “all those things that save or make us money,” Clougherty notes. At the bank’s newest office, where the average age of the customer is 15 to 18 years younger than at the main office, almost 75 percent of the business is transaction-oriented.

The REALTunes checking account from BancVue gives customers a $10 iTunes credit upon account openings and rewards them with free downloads, rather than higher interest rates. About 20 percent of Farmers Citizens accounts are now opened that way, mostly by younger customers. The accounts “have no more than a couple hundred dollars in them at best, but they have 64 debit card transactions,” Clougherty says.

Overall, Farmers Citizens’ earnings were up 37 percent last year. That’s not without help from the bank’s high-performing loan portfolio, Clougherty adds, but the bank’s deposit funding picture is decidedly changed. Before, a little less than 7 percent of the bank’s accounts were demand deposit. Now the percentage is closer to 21 percent. “This has changed the balance sheet of the bank,” Clougherty says.

Really big banks might not be able to shift their balance sheets so dramatically through a single technology effort, but they can still effect major change. New York-based JPMorgan Chase & Co. has saved millions of dollars through an initiative aimed at wringing paper out of its treasury department.

The effort actually began with the bank’s corporate customers. In 2007, the bank decided to test the market’s appetite for moving receivables processing onto a fully electronic platform. “We were totally floored by the enthusiasm,” says Gregory Long, program manager for J.P. Morgan Treasury Services’ Go Green campaign.

The bank has since expanded the program to 11 products, including disbursements, information reporting, ACH and liquidity management, and at the end of 2010 it expanded the program geographically by reaching out to clients in the U.K. and Asia. The program has so far eliminated about 140 million documents a year, which is the equivalent of about 44,000 trees-enough to fill a forest four times the size of New York City.

Long estimated that about half of the 25,000 customers the treasury department reached out to decided to go green in some way, even if it was just receiving electronic statements. These moves save both J.P. Morgan and its customers significant sums.

Long relayed the story of a large insurer that went totally green and ended up eliminating $100,000 of paper-based fees. The insurer reinvested $70,000 of that savings into electronic tools that offer J.P. Morgan much better margins than the paper-based products the insurer had been using previously. Up until then, Morgan had actually been losing money on the company’s business. “This is a client that had probably been in the red because they were so invested in paper,” Long says. In the end, the bank was able to move that client from a negative return to a positive 15 percent return, he says.

J.P. Morgan expects its savings to continue to pile up as more customers go green. The bank has so far been able to reduce paper, systems and headcount for its lockbox and information reporting products. At the same time, it has added revenue in those same departments as well as disbursement and depository products due to new imaging purchases made by clients to replace paper. In addition, the bank has reduced paper by so much it was able to move into smaller facilities in Houston, cutting its real estate, staffing and production costs there by almost 30 percent.

Some banks have been able to move the needle on profitability by both improving efficiencies and generating revenue. Memphis-based First Tennessee Bank, with $25 billion in assets, has been doing this within its marketing department by using an IBM software program called SPSS Modeler.

First Tennessee wanted to create marketing campaigns that took better advantage of the information the bank had about customers. For example, it wanted to be able to identify customers likely to respond to email so it could send them marketing material at a fraction of the cost of regular mail. It also wanted to be able to identify customers not likely to respond at all. “We could take them out of the mailing, save the cost and be more relevant,” says Dan Marks, chief marketing officer.

First Tennessee also wanted a tool that was easy to use. Its previous direct marketing tool involved many laborious processes, was updated infrequently and required a lot of sophistication to run, so much so that First Tennessee sometimes outsourced the work to vendors. “We wanted to be able to do more frequent updates to our models at lower total cost by using internal folks to do it,” Marks says.

Campaigns that First Tennessee conducted over the past year have resulted in enhanced revenue, along with reduced costs. Response rates on some campaigns have improved by more than 3 percent, while overall mail costs have declined by nearly 20 percent. That equates to a return of $6 for every $1 of cost, Marks points out.

Improved analytics is the engine behind many institutions’ profitability efforts these days. Stamford, Connecticut-based research firm Gartner Inc. identified next-generation analytics as one of the top strategic technologies for 2011, noting, “the potential exists to unlock significant improvements in business results.”

South Carolina Bank & Trust, a $3.6-billion-asset institution based in Columbia, South Carolina, has been enjoying such results by using a software program called Banker’s Dashboard from an Atlanta-based company of the same name. The software lets users better understand all the factors that impact daily margins.

Executives at the bank, for example, can drill down to view the firm’s financials from a number of perspectives-holding company, region, branch and even loan officer. Previously, they received such information only through monthly reports.

Branch managers, meanwhile, can use the software to make better decisions on the proper rates to apply to certificates of deposit. “Before, they couldn’t get the data,” says John C. Pollok, chief operating officer of the bank. “Now, we’re able to drive decisions down to the local level to drive profitability.”

Pollok points to the bank’s net interest margins as proof of the system’s worth. “Ours continues to stay at 4 percent and higher,” he says. “It’s definitely had a material impact on making sure we maintain our margins.”

Branches represent a huge opportunity to enhance profitability. They are plentiful and expensive to run, and so present one way to reduce costs. On the flip side, they still attract lots of customers, offering sales opportunities that can drive top-line growth. Bank of the West, a $58 billion bank headquartered in San Francisco, sought to extract improvements from both sides of this equation when it embarked on a three-year branch renewal project that was completed in the second quarter of 2010.

On one hand, it wanted to lower its costs, a goal it achieved by installing teller capture throughout its nearly 700 branches. Before teller capture, the bank had three internally managed sites and seven run by Fiserv that received checks from branches and converted them to images.

Now tellers in the branches are converting the checks to images. As a result, all 10 processing sites, as well as the staff and the couriers that transported paper checks to them, have been eliminated. “My check processing expense, for all practical purposes, went to zero,” says Donald Duggan, senior executive vice president of operations and systems.

Bank of the West also wanted to boost sales in its branches, a goal it achieved by installing a system that supports a full view of current customer relationships. By pushing sales leads out to bankers, the new system generated an increase in daily core sales per banker of 120 percent in the first year, Duggan says.

The system also works in the background as retail bankers are assisting customers to provide insights on their next likely purchases. This effort has resulted in a 20 percent increase in sales made during customer interactions. “That equates to 50,000 new product and service sales for the year,” Duggan notes.

The bank is also saving 700 hours per month on customer-related data entry and has reduced deposit account opening times by 30 percent. At the same time, the customer experience is much smoother. Rather than presenting identification and account numbers when they approach the teller, customers simply swipe their debit card and put in their PINs to get authenticated.

The overall project has both brought down expenses and boosted revenues. “There’s definitely been a positive impact to the P&L,” Duggan says.

And that’s something that few other strategies-except technology-can offer these days. |BD|

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