The Profit Disruption

By Bryan Knops and Neil Hartman

The growth of digital customers continues to discombobulate traditional financial services. In light of this change, what should banks do to generate more noninterest income and ensure profitability in the years ahead?

In an era fueled with technology innovation, where today’s startup is tomorrow’s next billion- dollar idea, it’s not difficult to understand why customers still see banking as a commoditized marketplace.

When viewing the industry from the outside, there isn’t much that sets one financial institution apart from its competitors. Novel products once found enticing—such as email payments, mobile capture or even personal financial management—are now expected from even small community banks and at no additional cost. Needless to say, generating noninterest income is no longer as simple as charging customers fees for the products and services provided.

Additionally, with an increasing number of sophisticated third-party nonbank competitors emerging there is pressure for banks to find niches where they can add more value to customers and generate fee income. For instance, the payment space is under fierce competition with the emergence of products such as Square, PayPal, Google Wallet and now Apple Pay. As innovation continues to influence customer behavior, banks are at risk of being viewed as payment processing centers similar to a utility company.

So, what should banks do to drive noninterest income and profitability?

Focus on providing value, not just an experience

The majority of banks will highlight customer experience as part of their 2015 business strategy. But what few will address is what improving the customer experience entails and whether or not it will provide a return. One of the challenges with customer experience is that it typically becomes a question of measuring and not a goal of delivering value in the eyes of the customer. This mindset leads to a great deal of time and resources being allocated to establish quantification for a subjective measurement rather than actually focusing on direct drivers of return on investment, which is achieved when servicing a need the customer is willing to pay for.

While quantifiable data provides helpful insights, banks need to focus on the original goal—generating income with customer experience. An all-encompassing experience involves two perspectives: the customer’s perception of the institution as well as the institution’s perception of the customer. Banks often fall short on this aspect by taking a reactive approach to customer needs.

A more customer-centric approach would break-down functional silos within a bank and facilitate the sharing of customer information. Customer “ownership” (not to be confused with data governance) often becomes a barrier within organizations and prohibits information sharing that could allow for cross-selling opportunities. The lines of business are separated in such a way that customers can’t have a single experience with access to all banking services. By breaking down this barrier and allowing cross-functional collaboration, organizations can capture a greater share of wallet and drive noninterest income.

While this strategy makes sense from a cross-selling perspective, it’s important to take into account how technology has disrupted the traditional banking customer relationship. The world of a la cart banking products and services has created dispersed banking relationships where customers rely on multiple financial institutions to meet their needs. This shift has greatly impacted aspects of cross-selling efforts and thus fee-income opportunity.

To overcome this obstacle, the bundling of products and services could offer customers packaged solutions for a more comprehensive financial relationship. Offering discounts on specific products can add to the share of wallet and ultimately generate more noninterest income. For instance, offering a lower credit interest rate for checking and savings account customers deepens the relationship and opens the door for future cross-selling opportunities with the growth of the customer’s financial needs. Each interaction can be more impactful. If a bank is presented with an opportunity to interact with a customer, it needs to proactively market the full suite of services and effectively do so through customer segmentation.

Customer segmentation analysis provides insight on the volume and demographic of customers. When done properly, banks are presented with an accurate picture of their customer portfolio broken down into a manageable set of segments. Developing packaged solutions that speak to these segments allows sales staff to have more influential conversations that accurately market the appropriate services.

It is important to keep in mind that the modern customer no longer feels the loyalty that once existed in branch network community banking. While some financial institutions see this as an opportunity, it’s not a common differentiator seen among many banks. Banks are doing little to reward customers for their business, which only further enables them to seek out third-party services to meet their needs. Relationship banking is failing to adapt to the modern customer, and banking products and services are becoming commodities. As a result, the customer experience is being lost all together and both customers and banking institutions are missing out on valuable opportunities.

A comprehensive banking relationship, tailored to customers’ specific financial needs is the key to establishing trust and creating mutually beneficial customer relationships. This focus is an opportunity to stand out among competitors (most of which are lacking differentiation) and generate fee income where it is currently being lost on commoditized products.

The key to future fee income is the alignment of customer and technology strategies

While technology innovation over the past decade has created the digital customer and the disruption to traditional relationship banking, it has also opened the door for tremendous opportunity. After defining a comprehensive cross-selling strategy, the ability to execute requires supporting technology for success. Leveraging technology and data advancements can be used to drive fee income and assist in establishing deeper customer relationships rather than disrupting them.

It’s critical for banks to have a complete 360-degree view of customers’ activity across all internal products and services. By implementing a CRM (customer relationship management) tool into daily operation, this activity can be easily accessed and used. Typically, banks find themselves in a situation where their core platform doesn’t support the growing portfolio of noninterest income generating products such as wealth management, trust, prepaid cards and insurance. These products provide vital fee income to the retail banking side—a crucial and diversifying stream of income especially during slow loan-growth periods. While banks have found success by offering these products, the best-in-class institutions have enabled referral processes supported by data that facilitate influential customer conversations. At the very basic level, a robust and well-implemented CRM platform can meet the following needs of any bank:

–Provide a 360-degree customer view of all accounts, touch points and marketing.

–Automate referral and cross-selling workflows.

–Provide enhanced and flexible security permissions that meet regulatory requirements but allow for sharing of data across the enterprise.

–Automate case management workflow, activity and task tracking.

–Facilitate and provide visibility into the execution of customer experience strategy.

An equally important aspect of a customer experience strategy is the data and analytics that drive it. While CRM solutions play a role in creating and delivering these insights to the front line, the bank can’t forget the customers’ needs. Customers demand data as well. By proactively empowering customers with data, they’ll seek out additional opportunities with the bank and take advantage of more services and products. Solutions outside of the bank’s CRM need to be explored in order to create the two-way street that is necessary for banks to successfully sell to customers and for customers to identify their own needs and approach the bank.

Many banks have taken small steps in providing customers with tailored personal financial management, however, they continue to fall short because they fail to capture customer data in a manner that supports the customer’s needs. As younger customers quickly becoming more affluent, there is increasing demand to have their banks become more than payment processing engines.

To establish deeper relationships with these customers, banks need to transition into a role that sets themselves apart from third parties that are increasing penetration in areas such as payment space. There is opportunity for banks to adopt a proactive approach to customer service and reinvent customer-bank relationships that have been disrupted by digital innovation. The methods of acquiring and storing data need to progress and accommodate for digital channels and help restore relationship development and deliver new and greater insights targeted towards fee-generating services.

Personal financial management tools (such as Quicken or Yodlee PFM) have provided the ability to link cards and products from multiple financial institutions together but little has been done to help customers interpret the information generated by these products to encourage the use of other beneficial services they might be missing out on. 

Additionally, little is done to capture this information and use it for the bundled products and services packages previously mentioned. By analyzing this information, banks could identify trends in the market and discover new opportunities for both parties to benefit.

Another potential opportunity is the bank monthly statement, which has remained relatively unchanged over the past couple of decades. The statement still provides a monthly snapshot of transactions made but includes little analysis on past activity or prediction for future spending and savings. Other than minor branding or format differences, bank statements look fairly uniform among competitors. Spending analysis, savings plans, investment options and financial forecasting could easily become an opportunity to generate fee income by capturing monthly statement data that customers actually want and need to see.

Customers aren’t the problem, they’re the opportunity

While fee income may be declining because of the commoditization of traditional banking products, there is enormous potential for banks to leverage technology innovation to reshape the way they generate noninterest income. The problem lies in looking beyond charging for the use of products and services to a mindset of focusing on the customer and looking at ways of delivering value.

Customers are no longer willing to pay for commoditized products that can now be found for free but are more than happy to pay for personalized service. Additionally, with trust comes loyalty and by building loyalty you create trust. Adapting to the digital customer and reinventing relationships from their traditional roots is the key to standing out among the status quo. It all starts with delivering customer value.


About The Authors

Bryan Knops is a senior consultant at West Monroe Partners and Neil Hartman is a director in West Monroe Partners’ Banking Practice, Chicago.