Customer profitability - IBANK
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  • 1. Banks in search of growth increasingly are targeting the small- and medium-business (SMB) market, an extremely large segment offering tremendous profit and growth potential. However, as many banks have discovered, SMB customers also are more difficult to attract, retain and serve. In our experience, many banks typically have struggled to grow their SMB business due to a lack of sufficient insights on the needs and value contribution of this highly diverse market. Accenture can help banks make the most of their SMB opportunities. We pair our analytics capabilities and assets, extensive banking experience, and industry-leading practices with advanced analytics software to reduce the time, cost and risk associated with cultivating a highly profitable SMB customer base. Through the combined power of Accenture Analytics and market-leading technologies, banks can create and sustain a rich 360-degree view of SMB customers, understand the true value of each customer and customer segment, and tailor interactions accordingly to drive profitable growth. Determining Customer Profitability How Analytics Can Help Banks Profitably Serve Small and Medium-Size Businesses
  • 2. 1 The SMB Market: Significant Promise as Well as Pitfalls The SMB market is a study in contradiction. On the one hand, it offers tantalizing promise for banks. The SMB market accounts for more than 90 percent of businesses in most countries and, after some contraction during the recession, is growing once again.1 In the United States alone, there are 8 million small businesses (those with sales between $100,000 and $10 million) and 160,000 medium-sized business (those with sales between $10 million and $500 million).2 The SMB market also can be very lucrative: Small businesses can use up to seven banking products; medium-size businesses can use up to 113 . Furthermore, research has shown that in banking, a 1 percent increase in SMB market share is worth $580 million annually.4 For these reasons, the SMB market is widely seen as offering significant growth opportunities for banks seeking to expand their sales and revenues. Yet with that promise come challenges and risks. One of the most significant is attrition, which is common among SMB customers. For instance, almost 20 percent of SMBs are at risk of changing their primary bank in the next year and, even more concerning, 48 percent of small businesses and 42 percent of medium- size businesses report they will likely use another bank for their next banking product purchase.5 SMB customers also tend to be more costly to serve, as they are frequent users of higher-cost channels−especially the branch. And despite many banks’ tendencies to treat all SMB customers as basically the same, the market is actually highly diverse and customers behave quite differently across products and channels (as illustrated in Figure 1). Annual Profitability Estimate* Avg. Liability (Credit/Loan Balances) Avg. AUM (Deposits/Investments) Avg. Annual Fees No plan to change primary bank in next 12 months Very likely use primary bank for next purchase Avg. Monthly Contacts (for the last 12 months) $8,719 $12,974 $368k $117k $300k $865 60% 85% 28% 64% 18 21 27% 28% 90% 80% 40% 23% $1,230 $626k Future State Value Profile Cost Profile Current State Value Profile % Account officers users % Branch Users % Call Center Users *This is an estimate based on self-reported assets and deposit balances combined with consistently-applied industry averages for net spreads, transactions and maintenance costs. Barlow Research - National Business Banking Study, 2012 Dissatisfied Personal Bankers Full Service High Value Bankers Figure 1: Selected Attitudes, Needs and Behaviors across SMB segments
  • 3. 2 Banks Continue to Struggle to Realize the SMB Market’s Potential Given the promise and pitfalls associated with SMB customers, banks pursuing this market must be able to not only deeply understand what these customers want and need from their banking provider, but also to determine the value or profitability of each customer. Doing so is instrumental to increasing the revenue banks can generate from the market while minimizing the costs and risks associated with SMB customers. Banks continue to struggle to realize the SMB market’s potential because of several significant internal challenges. Organizational challenges: Banks’ “siloed” organization structures, featuring multiple profit centers, makes it difficult, if not impossible, to calculate SMB customers’ profitability and overall value to the bank. Technology and talent challenges: Banks often have trouble giving the right people access to the most relevant, up-to-date cost information and lack a strong processing capability to make sense of that information. Operational Deployment challenges: Even if a customer’s profitability can be determined with some accuracy, most banks do not routinely use those insights to drive tailored treatments for individual customers throughout the bank. Definitional challenges: In many banks, customer profitability is based only on customers’ current profitability and does not include customers’ lifetime value. Both dimensions are critical. Accenture Helps Enable Leading Practices in Determining SMB Customer Profitability To successfully—and profitably—penetrate the SMB market, banks must overcome the challenges that impede their ability to more meaningfully segment their SMB customers and more accurately determine the profitability of those segments. Accenture pairs its deep banking and analytics experience with market-leading technologies to create a customer profitability calculation and reporting capability that enables banks to more effectively “run the SMB business.” This capability forms the foundation of five leading practices−identified through Accenture research and client engagements−that drive a greater understanding of customer profitability and more effective use of that understanding in customer treatments. 1. Collecting the right data Often, critical data needed for profitability analysis resides in many different legacy applications and product data base silos across the enterprise. We help banks to identify, cleanse and aggregate all relevant data in a centralized environment. Then, we make the data available for analysis through a Customer Analytic Record (CAR). Often developed in a matter of weeks, a CAR enables banks to create a 360-degree view of a single customer for use in subsequent analytics and modeling, and provides a framework to standardize and automate analytics processes. 2. Determining the right revenue and cost methodologies With the right data cleansed and aggregated, Accenture works with banks to determine the proper revenue and cost methodologies to calculate the profitability of each customer or segment. Our approach considers related interest income, fees, transactions, and expenses. We then identify the appropriate formulas for calculating net interest income, and attributing variable and fixed costs at the individual account level for all retail products. Several Accenture accelerators help streamline this process, including comprehensive leading practice methodologies for Revenue Sharing, Funds Transfer Pricing, Economic Capital and sample activity-based unit costing models and cost transfer/allocation designs. 3. Calculating the profitability Once the right data is collected in the CAR database and the cost structures of various SMB customer segments are determined, Accenture rapidly calculates profitability along various dimensions—such as product, pricing relationship, customer, household, segment, branch, district, region, and retail bank, or time period. A multidimensional view of profitability is critical to identifying the most appropriate treatment strategies for each type of customer and customer segment. 4. Using analytics to model scenarios Customer profitability is not static. It can change in response to a variety of factors or stimuli. Accenture can help banks create propensity models that explore how potential changes to factors including interest rates, pricing, and cost allocations could affect customer profitability, as well as how a customer’s lifetime value could change over time due to changes in customer behavior or other important factors. 5. Communicating profitability information and treatment recommendations to the organization Data-driven insights are insignificant if an organization cannot capitalize on them. That’s why Accenture helps banks turn an understanding of customer profitability into appropriate actions. We leverage leading business intelligence and data visualization technologies to feed the output of the profitability and propensity models directly to the bank’s customer-facing functions. Doing so enables bank employees to create more compelling offers for SMB customers and determine an interaction approach that is consistent with each customer’s profitability profile and value to the bank. Working with Accenture, banks can quickly gain a more accurate, deeper understanding of SMB customer profitability and make it easy for the enterprise at large to access and act on customer profitability insights to create tailored customer interactions. The result can be a substantial increase in SMB market share and revenue, as well as more profitable long- term SMB customer relationships overall.
  • 4. For more information To find out more about how Accenture can help banks tap into the significant potential of the SMB market, or to discuss your business needs further, please contact: Tony LoFrumento Managing Director – Accenture Analytics Financial Services North America, Enterprise Analytics lead anthony.lofrumento@accenture.com Marianne Seiler, Ph.D. Senior Manager – Accenture Analytics marianne.seiler@accenture.com Reference 1-6 Barlow Research - National Business Banking Study, 2012. About Accenture Accenture is a global management consulting, technology services and outsourcing company, with approximately 261,000 people serving clients in more than 120 countries.  Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments.  The company generated net revenues of US$27.9 billion for the fiscal year ended Aug. 31, 2012.  Its home page is www.accenture.com. Copyright © 2013 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture. 13-1285/ 11-6458