Fee Income at Premium as Crisis Threatens Credit

Companies today have to work smarter and harder to survive the coronavirus crisis, said Green Dot Corp. CEO Daniel Henry in the company’s recent earnings call.

Henry joined Pasadena, California-based Green Dot as CEO on March 26, and has been working remotely to get up to speed on the $3 billion financial company’s operations, which include prepaid cards, tax processing and a banking platform. Those diversified business lines are a source of strength, he said.

“We’re in a much better position than just kind of a monoline neo-bank to weather the storm,” he says. “We’ve got positive free cash flows, strong revenues and cash in the bank.”

After a couple of years of moderately rising interest rates, the Federal Reserve began to back off mid-2019. They dramatically dropped them to zero in February as one tool to fight the economic downturn caused by the Covid-19 pandemic and have promised to keep them low until the economy shows firm signs of recovery. Now, it looks like the industry needs to strap in for another lengthy period of low interest rates.

All this puts further pressure on already-squeezed net interest margins.

While the spread between deposits and loans represents a bank’s traditional method of generating revenue, banks also focus on fee income sources to drive profitability. Business lines that expand non-interest income opportunities could be particularly valuable in the current environment.

With this in mind, Bank Director ranked publicly traded institutions based on noninterest income as a percentage of net income, using year-end 2019 data from S&P Global Market Intelligence. We focused on profitable retail banks with a return on average assets exceeding 1.3%.

Many of these banks rely on traditional sources of noninterest income — mortgages, insurance, asset management — but two differentiate themselves through unique business models.

Green Dot topped the ranking, with the bulk of its fees generated through prepaid card transactions. It also earns revenue through its Banking-as-a-Service arrangements with companies such as Uber Technologies, Apple, Intuit and long-term partner Walmart.

Meta Financial Group deploys a similar model, offering prepaid cards and tax products. The Sioux Falls, South Dakota-based bank will soon issue federal stimulus payments via prepaid cards to almost four million Americans through a partnership with the U.S. Treasury.

The remaining banks in our list take a more traditional approach.

Institutions like Dallas-based Hilltop Holdings primarily generate fee income through mortgage lending. Keefe, Bruyette & Wood’s managing director Brady Gailey believes the low-rate environment will favor similar financial institutions. “Hilltop has a very strong mortgage operation … which should do even better this year, given the lower rate backdrop that we have now,” he says.

The $15.7 billion bank announced the sale of its insurance unit, National Lloyds Corp., earlier this year; that deal is expected to close in the second quarter. Even without its insurance division, Hilltop maintains diverse fee income streams, says Gailey, through mortgage, investment banking (HilltopSecurities) and commercial banking.

Hilltop CEO Jeremy Ford said in a January earnings call that the insurance business wasn’t “core. … this will allow us to really focus more on those three businesses and grow them.”

As the fifth-largest insurance broker in the U.S., Charlotte, North Carolina-based Truist Financial Corp. enjoys operating leverage and pricing power, according to Christopher Marinac, the director of research at Janney Montgomery Scott. “[Insurance will] be a key piece of that income stream,” he says. “I think insurance is going to be something that every bank wishes they had — but Truist truly does have it, and I think you’re going to see them take advantage of that.”

In Green Dot’s earnings call, Henry said he’s still evaluating the company’s various business lines. But with Covid-19 pushing consumers to dramatically increase their use of electronic payment methods — both for online shopping and more hygienic in-person transactions — he’s bullish on payments.

Covid is really forcing a lot of consumers [to] search out a digital solution,” Henry said. Visa recently reported that while face-to-face transactions declined significantly in April, there was an 18% uptick in digital commerce spending.

Recently, Green Dot investigated a spike in card sales in a particular area. It turned out that a local cable company’s offices were closed due to Covid-19. A sign on the company’s door instructed customers wanting to make in-person payments to go to a store across the street and buy a Green Dot card so they could make their payment electronically.

“A lot of the consumers that were hanging on to cash over the last few months really didn’t have an option and got pushed into the electronic payments world,” he said. “That will definitely benefit us at Green Dot.”

 

Top Fee Income Generators

Rank Bank Name Ticker Primary Fee Income Source Total Noninterest Income ($000s), YE 2019
#1 Green Dot Corp. GDOT Card $1,071,063
#2 Hilltop Holdings HTH Mortgage $1,206,974
#3 Waterstone Financial WSBF Mortgage $129,099
#4 HarborOne Bancorp HONE Mortgage $59,411
#5 Meta Financial Group CASH Card $221,760
#6 Truist Financial Corp. TFC Insurance $5,337,000
#7 FB Financial Corp. FBK Mortgage $135,038
#8 JPMorgan Chase & Co. JPM Asset management $58,456,000
#9 PNC Financial Services Group PNC Corporate services $7,817,138
#10 U.S. Bancorp USB Payments $9,761,000

Sources: S&P Global Market Intelligence, bank 10-Ks

Have MVB and BillGO Reached True Financial Symbiosis?


payments-7-18-18.pngSometimes a fintech partnership doesn’t result in a new product or service for the bank but can still result in new opportunities for both organizations. The relationship between BillGO, a real-time payments provider based in Fort Collins, Colorado, and MVB Financial Corp., a $1.6 billion asset financial holding company headquartered in Fairmont, West Virginia, isn’t your typical partnership story. Instead, it’s an example of true symbiosis between a bank and a fintech firm, with MVB gaining deposits and fee income while helping BillGO scale its real-time payments solution to more than 5,000 banks and credit unions. Less than a year ago, the company worked with just 200 institutions. It plans to go live with another 3,000 in the next few months.

The two companies were recognized as finalists for the Best of FinXTech Partnership at Bank Director’s 2018 Best of FinXTech Awards.

MVB supports BillGO’s growth in a number of ways. The bank processes its payments, resulting in fee income for MVB. The bank also holds deposits for the company and its B2B clients in connection with their transactions. And the bank’s compliance expertise is another key benefit. “We keep them out of trouble, so to speak,” says MVB CEO Larry Mazza.

This growing understanding of the fintech industry’s needs, gained in part due to its relationship with BillGO, is quietly turning MVB into a bank of choice for fintech firms.

“We’re meeting other, more mature fintech companies that allow us to help them in different ways,” Mazza says. “It’s really started to be very positive for us, in learning fintech [and] in profitability, deposits as well as fee income.”

“They don’t really advertise it, but they do have a specialty with fintech because of their compliance [expertise], because of their ability with payments and their ability with partnerships to deliver some unique offerings that fintech companies can’t normally do by themselves,” says BillGO CEO Dan Holt.

Before partnering with MVB, BillGO worked with a larger bank, but Holt says MVB is a Goldilocks-style bank for the company: Big enough to help the company scale, but small enough to make decisions quickly and develop an in-depth relationship with his company. Holt adds that his company has access to MVB’s executive team, unlike his previous banking provider.

And MVB is an investor in BillGO. “I felt this would be a really good [way] for us to start the process of investing in fintech,” says Mazza. “Once you invest money in it, it definitely piques your interest.” He describes the bank as an active investor, and Mazza has served on the company’s board since January 2017.

This expertise has been invaluable for BillGO, given Mazza’s financial background and his ability to shed light on the needs of the banking industry, says Holt.

Just as the BillGO relationship is a strong reputation-builder for MVB with other fintech firms, Holt says that MVB’s investment in BillGO speaks volumes about his company’s reputation to potential bank clients. New customers feel more comfortable knowing a traditional financial institution is an investor and has completed the associated due diligence.

Holt joined the MVB board late last year as an extension of the partnership between the two organizations, and Mazza says his background has been highly beneficial to the bank. “[Holt] has intimate knowledge into the industry and payment processing,” says Mazza, and his expertise enhances board discussions about technology trends and opportunities. “Our board members could see the difference.”

Many bank boards struggle to add tech-savvy directors, with 44 percent of bank directors and executives in Bank Director’s 2018 Compensation Survey citing this as a key challenge.

“Banks are more traditional. They really honor regulation,” says Mazza. “It’s our lifeblood, and we have taken regulation extremely seriously. We see regulation as a competitive advantage, if we do it right.” But partnering with BillGO, and adding Holt to the board, is helping MVB think like a startup as well. “That has changed our lives,” he says. “BillGO has helped us think more innovatively [and be] more forward-thinking.”

“Whatcha Gonna Do When the Fed Raises Rates on You?”


interest-rate-9-9-16.pngThe elephant in the room: What happens to earnings, funding costs and liquidity if the Fed aggressively tightens? It’s time to acknowledge the need for contingent hedging plans and evaluate how to manage risk while remaining profitable in a flat or rising rate environment.

For the past several years, the banking industry has faced significant earnings challenges. Profitability has been under pressure due to increases in nonaccruals, credit losses, new regulatory costs and the low rate environment. Some banks have responded by cost cutting, but community banks do not have as much flexibility in this regard, especially if they are committed to a level of service that distinguishes community banks from larger banking institutions. Among the risks community banks face today are:

Margin compression from falling asset yields and funding costs that are at their lowest.

Interest rate risk. Borrowers are seeking fixed rates at longer and longer terms. The fixed term necessary to win the loan often may create unacceptable interest rate risk to the bank.

Irregular loan growth has often lead to increased competition for available borrowers with good credit.

To meet the challenge of generating positive earnings at more desirable levels, most community banks lengthened asset maturities while shortening liabilities. This resulted in some temporary margin stabilization, provided short term rates stay where they are, in exchange for higher risk profile if rates rise. The strategy has generally worked for approximately the last five years, but the question is for how much longer can we expect this to continue to work? In my opinion, community banks need more robust risk management programs to manage these risks and, in response, many have increasingly turned to swaps and other hedging solutions.

One competitive solution commercial lenders are employing is loan level hedging. This is a program where the bank will use an interest rate swap to hedge on a loan by loan basis. An interest rate swap is a hedging instrument that is used to convert a fixed rate to floating or vice versa. Loan level hedging allows the borrower to pay a fixed rate, and the bank to receive a floating rate. There are two simple models:

  1. Offer a fixed rate loan to the borrower and immediately swap the fixed rate to floating with a dealer. The loan coupon would be set at a rate that would swap to a spread over LIBOR that would meet the bank’s return target.
  2. Offer a floating rate loan and an interest rate swap to the borrower. The borrower’s swap would convert the floating rate on the loan to fixed. Simultaneously, the bank would enter into an offsetting rate swap with a dealer. This model is usually referred to as a “back to back” or “matched book.”

In my view, these solutions help the community bank compete with dealers, regional banks, and rival community banks. These models have been around for decades and their acceptance and use among community banks has increased dramatically over the last several years. Their benefits include:

They protect margins by improving asset/liability position through floating rates on commercial assets. They may enhance borrower credit quality by reducing borrower sensitivity to rising rates.

They diversify product lines and level the playing field versus larger commercial lenders and community banks in your market who offer hedging alternatives.

They are accounting friendly. Banks should always be aware of accounting treatment before entering any hedging strategy. The accounting treatment for loan level hedges is normally friendly and often does not create any income statement ineffectiveness.

They create fee income. When properly administered, a swap program may provide the bank a good opportunity to generate fee income with no additional personnel or systems costs.

Swaps and other derivatives may provide an immediate solution without the need for restructuring the balance sheet or changing your lending and funding programs. If you haven’t considered interest rate hedging before, you should consider contacting a dealer you trust for a discussion.

A Remedy For Commercial Client Headaches


Banks can solve a major headache for commercial clients by offering business services to help manage accounts payable, accounts receivable, tax collection and other payments. In this video, Matthew Hawkins of Mineral Tree explains how this approach can strengthen the client relationship while generating additional fee income for the bank.

  • How the Bank Gains by Offering Business Services
  • Benefits for the Client
  • How Technology Providers Can Help

Putting the Retail Back in Retail Checking Design


mobile-rewards.jpgAsk bankers how they go about designing their retail checking products and most will answer with much more of a focus on the checking part than the retail part. Don’t get me wrong, the checking part is essential. The account has to be operationally secure, reliable and accurate in terms of supporting transactions and related information. However, customers have overwhelmingly shown they aren’t willing to pay for just checking. To be different, to generate much needed fee income and to really change the game of checking, banks must focus more on the retail part of retail checking. Here’s why.

With mobile and online banking growing rapidly, customers’ face-to-face interaction with bankers is becoming less frequent. As a result, customers’ experience with and connection to the bank is more tied to their direct interaction with their checking product and what that product delivers. Plus, the checking account continues to be critically important as the primary fee income vehicle on the retail banking side.

This begs the question, how does your bank design its retail checking accounts to be so relevant and engaging to your customers that they will gladly pay a fee for them? This is where the retail focus in the design of your checking products comes into play—your bank has to deliver to your customers a more meaningful and emotional experience with the product itself. It seems like the banking industry has talked forever about being retailers. Yet, very few banks apply basic retailing principles to product design. Even fewer have been willing to commit to doing what they need to do to experience the success of top retailers. For the last decade or so, it was easy to understand why—free checking and overdrafts were the gift that kept on giving, so thinking about retailing in regard to product design and relationship-building took a back seat.

To learn how to incorporate retailing to make your checking accounts more relevant and engaging so that your customers willingly pay for them, just take a look at the best retailers outside the banking industry. The online shopping websites LivingSocial and Amazon make incredible emotional connections with their customers yet rarely interact with them face-to-face. The customer relationship is almost entirely defined through the design of the product and the value it delivers. In most cases, the only interaction with the customer is by email.

So the next question begging to be answered is what retailing best practices are naturally transferable to incorporate into your checking products? There are many possibilities, but there are primarily three that easily fit into the design of a checking account and aren’t so costly as to make the monthly fee non-competitive. These three are local, mobile and social.

First, nearly every geographical market today is promoting the local mindset—thinking, supporting, buying local, etc. Banks already know this power of local as they already classify themselves as community banks (even the mega-banks employ this positioning). So it is very logical to extend this role to becoming a community connector. This means connecting your consumer customers who buy things locally with your small business customers who are looking to grow their sales.

Second, mobile delivery of banking products/services is here to stay. Banks that think like a top retailer already know that three of the top four ways consumers want to use their mobile phones involve shopping and coupons. (The Federal Reserve reports on “Consumers and Mobile Financial Services,” March 2012 and March 2013, provide a wealth of information about how consumers want to use their mobile phones, not how banks think they want to use their mobile phones.)

So combining these local and mobile best practices into a checking benefit like a local merchant discount network that delivers the discounts via a customer’s mobile phone is not only a difference maker but a game changer. Think about it—your retail customers talking about how their checking account saved them money on purchases and your small business customers seeing how your bank helped grow their business. Plus, it’s already proven that your customers will gladly pay a monthly reasonable fee to get access to attractive local merchant discounts, around $6 per account.

This leaves the social best practice. To be clear, we’re not talking about social media. What we’re referring to is purposeful communication that is unexpected, unselfish and engaging. The typical social experience of checking customers is they open an account and the bank doesn’t meaningfully communicate with them again until the customers have some type of issue or problem, or they come back in the branch. Smart retailers already know the power of purposeful communication, sending periodic emails to customers that make offers that usually save them money or at least recognize them as valuable customers.

If you want to put the retail back in retail checking, then study up on how other top retailers are using the local, mobile and social best practices and determine how your bank can incorporate these features into your checking accounts. Doing so will make your checking accounts different, change the game for your consumer and small business customers, and provide ample customer-friendly fee income that every bank needs.

*This article has been updated from an earlier version.

Facing Headwinds: What Concerns Today’s Banking Leaders


Financial leaders are facing major headwinds this year. Declining net interest margins, loan growth and regulatory challenges are top concerns for banking leaders, according to the results of an audience survey at Bank Director’s Acquire or Be Acquired conference in Arizona in January. Jordan discusses the top concerns and what to do about them.

Download the full survey results in PDF format.


The Top Five Retail Checking Trends for 2013


outlook-new.jpg2013 holds much promise and potential for financial institutions (FIs) willing to think, believe and invest in checking product design and delivery that takes into account the top trends shown below. For those FIs that don’t, good luck waiting for overdrafts to make a comeback or for customers to start gladly paying for traditional checking-related benefits.

#1 Customer Friendly  Fee Income Will Continue to Emerge

2013 will mark the beginning of many more FIs deciding to design checking accounts that are so good that their customers will actually want them enough to willingly pay for them. Design previously   employed to devise complicated account terms and conditions that result in customer confusion and unfriendly penalty fees will be rechanneled into innovative design of great products focused on a fair exchange of value with customers for a reasonable monthly fee. This customer-friendly, fair value approach is the only way to generate massive, growing and sustainable fee income in today’s regulatory environment.  

#2 Relationship Building Will Necessitate  a More Engaging Product Experience

The rapid and projected growth of online and mobile banking (e.g. a March 2012 Federal Reserve study) has reduced branch traffic (25 percent over the past five years per consulting firm Bancography). This limits the number of opportunities for customers doing routine, checking-related transactions to interact directly with branch employees and experience firsthand exceptional customer service.

This means the checking product’s inherent value has to step up to play a larger role in building customer relationships. To do this, the checking account’s “customer connection factor” (CCF) will need to be much higher than it is today. In 2013, more and more FIs will realize the growing importance of the checking CCF and design and deliver accordingly. The top FIs are already there.  In 2013, they will smartly integrate applicable retailing best practices like local, mobile and social into their design and delivery. Those that wait to improve the CCF and rely solely on great customer service will regret this decision.

#3 Fixing the Unprofitable Relationships Will Be Required

The primary revenue generators (loans and fees) will continue to struggle to recover in 2013, while operating costs will continue to rise. This stubborn financial pinch will necessitate that FIs can no longer ignore dealing with the approximate 40 percent of their checking household relationships that are unprofitable (and make up only 3.5 percent of total revenue and 2.2 percent of all other deposit and loan relationship dollars). FIs will fix these relationships by actively employing the first two trends and not depending exclusively on the elusive cross-sale. Otherwise, the financial pinch will continue its squeeze and hurt.

#4 Optimizing the Existing Base of Profitable Checking Customers

Just as important as financially optimizing the unprofitable relationships is getting as many of the approximate 60 percent of customers who are profitable to experience your product’s improved CCF. This is the plan to optimize protecting (retaining) and growing existing profitable customers.

The top way to do this is to let them experience checking products with higher CCF than what you offer them today. Getting this done means FIs must also use innovative ways to get these enhanced products into the hands of these customers via unordinary marketing strategies like sweepstakes, contests, satisfaction guarantees, email communication, viral promotion and small business community tie-ins. Free or modified free checking will still be the dominant product strategy (only 9 percent of community banks have gotten rid of it and another 9 percent plan to). The difference maker when it comes to optimizing the experience of your best customers is for products to be better, not just free.

#5 Simple, Simple, Simple Will Win

This has been a trend for many years before 2013 and will most likely continue for years after. There are the three simple things FIs can do to win the retail checking game more in 2013 than in 2012. First, simplify your line-up down to three accounts (two if you don’t offer free checking) and clean up the grandfathered ones. Second, don’t invest in a branch sales report that tracks more than just direct sales, cross sales and referral sales by product that can’t be ranked in terms of sales performance down to the individual employee. Third, your checking-related sales incentive plan must be always on, (not just “on” when connected to a product or marketing campaign) and  explainable and calculable in less than thirty seconds.

Statistics stated are from StrategyCorps’ proprietary database of over two million accounts and polling research of about 100 FI executives.  

Getting Bank Customers to Happily Pay Fees


giving-money.jpgIt seems hard to believe after years of customers not paying for basic bank services due to free checking accounts, there are actually some services many are willing to pay for.

Nearly all bank customers feel basic banking services typically found in checking accounts should be free due to providing the financial institution with low cost funding from account balances. Free checking, the dominate consumer checking strategy over the last decade, has successfully reinforced this feeling.

This sentiment may be changing for a new type of bank services. According to the Integrated Study on Service Fees, which was conducted by San Anselmo, California-based Market Rates Insight in April 2012, and included responses from 1,500 current bank customers and credit union members 18 years old and over, an average of 67 percent of consumers are likely to use and pay for what was identified as “lifestyle financial services” (see table below).

Lifestyle Financial Services

Overall likelihood of use (%)

Identity Theft Alerts

82.5

Credit Score Reporting

73.7

Personalized Couponing

69.2

Overdraft Transfer Service

67.9

Personal Money Transfer

66.2

Mobile Remote Deposit Capture*

63.4

Prepaid Reloadable Cards

47.1

Average All Services

67.1

* Per deposit

 

 

The study states that consumers feel differently about lifestyle financial services. These services have emerged as technology has advanced and personal lifestyle behaviors have changed. The result is a much more acceptable value proposition due to the services embracing increased consumer mobility, personal financial management, informed purchasing, time efficiency, digital identity protection and media connectivity.

So how much are consumers willing to pay for these lifestyle financial services? The study respondents state they are willing to pay an average fee of $3.63 per month for each of these financial lifestyle services.

There is market validation for some of the study’s results already. StrategyCorps, which provides consumer checking account solutions that incorporate some of these lifestyle financial services, has found a material percentage of consumer checking customers do indeed pay for them happily. The most popular services are personalized couponing and identity monitoring/alerts (along with cell phone protection and insurance programs), which are all mainstays of our best performing fee-based checking solution.

Our experience is that the price point customers will pay for these popular lifestyle financial services bundled in the checking account (rather than sold separately) are averaging nearly $6 per month. The typical sell rate is about 30 percent of new accounts (when unconditionally free checking continues to be offered and 60 percent+ when not offered) and 40 percent of existing accounts, when these services are properly designed in the checking account, the account is smartly positioned in the overall consumer checking lineup and product merchandising is aligned with customers’ purchasing behavior.

While customers acknowledge the value in these types of services, our experience is that product design, lineup positioning, and aligned merchandising play a critical role in a customer’s willingness to pay. In other words, these services, despite their inherent value, don’t easily sell themselves like free checking. However, when properly offered to customers, the sales rate is very high.

This means a lot of new customer-friendly fee income at a time when non-interest income at U.S. banks generated from fees on deposit accounts decreased $2.1 billion or 5.8 percent in 2011, the continuation of a five-year trend. Pile on top of this trend line the continuing regulatory pressure on overdrafts and a full year’s impact of the Durbin amendment not captured in the 2011 numbers, and the challenge of getting more fee income without ticking off customers gets even more difficult.

It‘s clear that trying to generate new fee income from just basic banking services is a proposition that customers will not accept. The market has definitively spoken on this strategy.

The good news from the results of this study and StrategyCorps’ proven market experience is that there are fee income based checking solutions that do work in addressing the fee income challenges faced by every financial institution.

Which Fee Income Camp Are You In?


fee-income-squeeze.pngThere’s no debate: Every bank needs more fee income, as do a lot of credit unions. The only debate is how a financial institution is going about meeting this need.

In StrategyCorps’ interactions with hundreds of banks and credit unions, we’ve identified three distinct camps in the need-more-fee-income challenge.

The Do-Nothing Camp. This group of financial institutions seems to be waiting for a sign that this recent decline in fee income will eventually pass. We’re not sure if that means they believe overdrafts are going to make a comeback or the Dodd-Frank Act will be repealed, or are simply in a state of denial over the fee income body blows the industry has been dealt. This camp nearly always seems to have fee income replacement on the to-do list, just not at or near the top, and oftentimes it is easily displaced by other things that are not as hard to deal with.

The “Fee-ectomy” Camp. A fee-ectomy is simply charging a fee for the same thing(s) that have been given away for free for a long time and with no corresponding additional value. As the name implies, the extraction of more fee income from customers on this unfair exchange of value basis is seemingly an easy and convenient way to generate more fee income. That is, until it starts causing significant heartburn for customers, provides negative headlines in the media and prompts the politicians to start politikin’. (Think $5 debit card fee.) This camp is comprised primarily of the larger banks that must feel the industry is basically an oligopoly, given their acceptance and commitment level to this fee income pricing strategy. Unfortunately, the by-product of the fee-ectomy strategy is an increased, or at least an ongoing, level of distrust for all banks that eventually breeds things like “bank transfer day” and unflattering customer reviews on Facebook.

The Back-to-Basics Camp. For years the industry talked about relationship banking, but never got around to doing much about it as the lucrativeness of overdrafts from free checking drowned out such discussion. Now smart financial institutions are genuinely trying to figure out what this means as a way to restore fee income by charging new fees for added value and also trying to cure the thousands of unprofitable accounts rather than firing them with arbitrary and value-less fees. This back to basics camp is approaching the fee income challenge by designing products with new features customers gladly pay for (for example, cell phone protection), marketing in a purposeful way that customers actually notice, creating better connections with customers through customized e-communication and reinforcing product education and sales training to frontline branch staff.

It’s pretty obvious which of the three camps will be the winner here (hint, it’s not the first two). But as those institutions that have adopted a back-to-basic strategy will attest, it’s not the passive way or the easy way. However, with clearly superior financial results and much happier customers, it is proving to be the right strategy for banks and credit unions that genuinely commit prioritized time and resources to addressing this issue.

How Can Retail Branches Become More Profitable?


fishbowl.jpgI have two grown children, 25 and 28 years old, who have checking accounts, but have never been in a bank office.  Yet, despite all the evidence that branch usage is in decline over the past decade, the industry continues to build new offices.  As a director of 10 different FDIC-insured banks during my 25 years as a consultant/investor for the financial services industry, I do not envy the job of current bank directors preparing for the future.  With a large amount of capital tied up in single-purpose real estate and fees on accounts restricted by regulators, where can bank management and directors turn to make the branch profitable again?  The answer to this problem may lie in the historical study of how we got where we are today.  

In the first 10 years of my banking career at Trust Company of Georgia (now SunTrust), I held responsibilities in both management and internal consulting of operations and technology.  I remember going to our Fulton Industrial Boulevard branch on a payday Friday and hearing the branch manager ask, “What can we do to get all these people out of our branches?”  Well, mission accomplished!  These days the long lines on payday are more frequent at a Walmart financial center than at a bank branch.  What will draw these people away from Walmart, check cashers, payday lenders and title pawn shops and turn them back into profitable bank customers? Evolutions in technology, social media and product offerings now provide the solution.

Asset quality disasters, regulatory concerns and other survival issues have consumed the lives of many bankers as of late, leaving little time to pursue the five-year plan.  Banks now must begin to reshape business plans to reflect the evolution in technology and consumer behavior or become the next victim of obsolescence, much like such industries as home entertainment, photography, telecommunications and specialty retail.  Can a full function ATM machine replace a branch the way that a Blockbuster Express self-service movie rental kiosk replaces a store?  Never has the role of a bank director been more important than today; financial institutions must proactively chart a new course for retail banking.  Personal interaction with successful retailers in other industries can provide directors with the needed experience to guide their own companies.  Think of the experience of renting a movie from a kiosk instead of going into a store and compare it with using a full-function ATM instead of visiting a branch.

Now is the time to begin the evaluation of which branches are crucial to the customers in an area, provided all of the other ways that are now available to meet their banking needs.  Given the unlikely event that margins will grow, replacing fee income lost as a result of regulatory changes for most banks is critical to future earnings growth.  Directors need to be proactive in encouraging management to recruit customers that the bank lost to alternative financial services providers, such as check cashers and payday lenders.  To get these customers back, banks must offer a new suite of products and services, which includes cashing checks, money transfer, money orders, prepaid cards, reloadable cards, and fees to guarantee funds. In the future, perhaps a cash advance fee at a bank can replace payday lending.  These services can be highly profitable, as evidence by the large number of alternative financial services providers in the market place. 

An argument usually brought up by bankers is that no other bank is doing this. That’s not true. Regions Bank recently announced Regions Now Banking in all 1,700 branches.  The products mentioned earlier are all included in this offering.  Early results are extremely pleasing to Regions’ management team, which expects the new fee income will replace revenue lost as a result of regulatory changes.

When an industry must react to changes in technology and consumer behavior, the first thing to ponder is if the consumer still needs the product.  Does the public still need financial services?  The answer is yes.  So, how can banks use new technology?  The answer is still evolving, but every bank director who  has purchased something on Amazon, rented a movie from a kiosk, or used the self-service checkout at the grocery store has a personal experience that can be valuable in shaping the future retail bank customer experience.