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Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
Fis strategic insights   vol 5 january 2012
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Fis strategic insights vol 5 january 2012

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Strategic Insights is a newsletter published by FIS that provides research, throught leadership and strategic insights on banking and payments.

Strategic Insights is a newsletter published by FIS that provides research, throught leadership and strategic insights on banking and payments.

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  • 1. FIS ENTERPRISE STRATEGY VOLUME 5 • JANUARY 2012Driving Efficiency at IN THIS ISSUEFinancial Institutions • Driving Efficiency atthrough Outsourcing Financial Institutions through Outsourcing • Mobile Payments: In the First Inning By Fred Brothers EXECUTIVE VICE PRESIDENT, ENTERPRISE STRATEGY • Overcoming the Demographic Disadvantages of Last month, I talked about how financial institutions’ Community Banking Efficiency Ratios improve as scale increases and how banks can leverage customer data to drive efficiency on • Achieving Profitable the revenue side of this equation. I also discussed some Customer Loyalty of the game-changing reasons why business-as-usual • November Survey Results operating approaches will not bring efficiency back to pre-recession levels. Financial institutions must seek ongoing improvements to achieve cost efficiencies and remain competitive in the rapidly evolving landscape.This month, we discuss improving the noninterest expense side of the efficiency equation.Wide variation in efficiency within a peer groupSize matters, but if you look through the Efficiency Ratios of thousands of financial institutions, you quickly discover widevariation in them among banks with similar asset sizes. Excluding the FIs that have the scale economies of a multi-bankholding company, we examined 15 banks of around $1 billion in assets with Efficiency Ratios averaging 67 percent, butranging from 43 − 95 percent (Figure 1). The lowest ratio handily beat the average of the megabanks (60 percent) in2010. In fact, four of the 15 banks on the chart proved more effective than the megabanks at managing overhead andother operating expenses to generate revenues and another two were even with the megabanks. That’s impressive.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 1
  • 2. The three biggest noninterestexpenses for banks are: Figure 1: Salaries and benefits have a large impact on banking efficiency ratios but1) salaries & benefits, 2) don’t necessarily lead to higher revenuestechnology, and 3) premises &fixed assets. Salaries & benefitsare typically the largest part of 100% $4FIS ENTERPRISE STRATEGY onnoninterest expenses and, VOLUME 1 • JULY 2011 e a ve C 90%average, represent about half of $2 80%noninterest expenses among the15 banks examined. 70% $0 e a 60%Salaries & benefits have a large 50% -$2impact on banking efficiency, 40% Ex e e (Mbut higher salary & benefits costs Average -$4don’t necessarily lead to higher 30%revenues. The most efficient 20% -$6banks have the lowest relative 10%compensation expenses. Theyare getting more revenue for 0% -$8 ) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15their buck. The average salary& benefits per employee forthe most efficient banks was Sources: FDIC Call Reports, December 31, 2010 and SNL Financial 2010about $4,000 less than poorerperformers, but one of thebest performers also had thehighest average salary & benefitsper employee among the 15banks. That bank has 100 feweremployees than the average inthe $1 billion segment, whichmostly offsets its higher salaries.Quality over quantity can be awinning formula.BPO/ITO projected to growOne strategy for keeping overall salaries & benefits expenses in line without sacrificing quality is to employ businessprocess outsourcing (BPO). BPO has become increasingly important for remaining competitive, especially in an economicenvironment that can limit revenue growth opportunities. Mid- to large-size banks have already outsourced numerousnonstrategic IT functions such as network and hardware maintenance, disaster recovery and item processing. Somesmaller banks will be required to follow to remain competitive.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 2
  • 3. The most recent forecast from Gartner Figure 2: IT spending in the U.S. by FIs on consulting and business process shows the projected growth rate on IT outsourcing is projected to outpace internal spending spending for consulting and business process outsourcing by U.S. financial institutions at nearly double the growth $25 rate projected for internal spending IFIS ENTERPRISE STRATEGY ter a S e d CAGR 2 8% (Figure 2).VOLUME 1 • JULY 2011 $20 Particularly within small towns and cities, outsourcing customer-facing $15 CAGR 5 4% operations can pose a threat to community relations. However, $10 augmenting customer service with C u g a d BPO English-speaking call center operators S e d who handle after-hour inquiries (to $5 quote one of our clients “during time periods when we have trouble finding quality people who will work those $0 hours”) and supplementing current 2009 2010 2011 2012 2013 2014 2015 staff with operators with multi-lingual capabilities can improve service quality without putting the brand’s reputation at risk. 2009 – 2015,” April 2011These days BPO has matured to become much more than overflow and call center outsourcing for activities such as:• Timely filing of regulatory and compliance reports, which have increased with the constant stream of new regulations being imposed• Outbound targeted call activities that support marketing campaigns. Imagine if you could obtain cold calling assistance to increase the effectiveness of prospect campaigns and if hot leads were routed directly to your personal bankers.Returning to our sample of 15 banks in the $1 billion asset segment, we also found a fairly high relationship betweenpremises & fixed asset expenses and Efficiency Ratios− significant but not as notable as the relationship between salary& benefits and Efficiency Ratios. On average, better performers have four fewer branch locations than poorer performers,but the percentage of noninterest expense represented by premises & fixed asset expenses is roughly the same (13 – 14percent) for both groups. Better performers also have nearly 50 percent more assets per branch. Of course, the big costof keeping branches open is the people expense, not the premises & fixed asset expense.As always, we’d love to hear about your experiences. If you have thoughts on outsourcing that you are able to share,please let us know about them.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 3
  • 4. Mobile Payments: In the First Inning Interview with Doug BrownFIS ENT RPRISE STRATEGYFIS ENTERPRISE STRATE SENIOR VICE PRESIDENT, EBANKING ENTERPRISE T ATEG TE PR VOLUME 1 • JULY 2011 The mobile lifestyle has gone mainstream. An increasing number of consumers regularly engage in mobile banking, which allows them to manage their finances from any mobile platform – phone, smartphone or, increasingly, tablet. As remote deposit capture (RDC) apps become available, consumers are expanding their mobile banking behavior. Consumers also are increasingly using mobile phones when shopping – e.g., comparing prices and virtually “clipping” coupons. The natural next extension of mobile banking and mobile-assisted shopping is mobile payment at point-of-sale. The mobile payment territory includes diverse stakeholders and is changing so rapidly that itcurrently resembles the Wild West. In our conversation with Doug Brown, Senior Vice President, eBanking, he explainshow financial institutions should prepare for the expansion of mobile banking into mobile payments. The followingdiscussion should allay any concerns that small- to mid-sized financial institutions aren’t well positioned to leverage futureopportunities in the mobile payment ecosystem.The First Inning of Mobile PaymentWhere are we in the evolution of mobile payments?Doug Brown: We are only in the first inning of a nine-inning game. Currently, there are many competing technologiesand models from various stakeholders testing solutions to add value to the payments process. The field is packedbecause barriers to introduction of innovative products and services have never been lower than they are now.Companies come into the market and may look promising, but can fade as quickly as they arrived. Look at BlingNation – a prominent example that has now collapsed and retreated. In retrospect, you can see that Bling Nationwasn’t really built for high scalability and a seamless customer experience.The evolution of mobile payments is going to be impacted by a broad spectrum of events that will affect when therewill be enough critical mass to see widespread rollouts. From a planning perspective, we think the next 12 − 18 monthswill be a period of testing and pre-commercialization of phone-based wallet applications. We expect to see multiplemodels emerging during the time period. Then we anticipate between a year and three years for fast-growth adoptionby consumers as the model(s) matures. We won’t see mainstream mobile wallet users in 2012, but we think that level ofpenetration is likely to accelerate rapidly beyond 2012.What criteria need to be met for mobile payment to gain traction?Doug Brown: Three major events will push mobile payments past the experimental stage of the lifecycle. First, consumersneed to be ready, willing and able to use mobile payments. The payment method needs to be convenient, secure andfun to use. And, it needs to have a compelling advantage over the very mature infrastructure that’s been the standard formore than five decades. That advantage could be realized in a variety of ways, such as merchant-funded rewards whereconsumers recognize significant savings or the ability to manage and control their finances in real time, for example.Second, merchant participation is critical to success. Retailers need to be prepared to manage the checkout process withthese new technologies. They need to be able to handle basic functions such as returns, credits and coupon redemption.Plus, the economics for retailers have to be worthwhile. Some prominent merchants have NFC readers in place, but theywon’t accept contactless payment for Visa because they don’t like Visa’s rate structure. Best Buy, Walmart and Target arethe merchants that can change the game because of their scale but they have to be provided with an incentive to change.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 4
  • 5. Third, if you believe that NFC will be the standard, then Outcome of the Gameit needs to be integrated into more handsets than thecurrent limited number of Android phones. The landscape Which players are most likely to win the game?could change radically with the release of an NFC-enabled Doug Brown: The model that delivers a solution thatiPhone. That would be a major catalyst accelerating the provides value foremost to consumers and then totime table. merchants and financial institutions will survive as theFIS ENTERPRISE STRATEGY industry sorts itself out. The VOLUME needs JULY 2011 solution 1 • to be easyGame On to use, convenient, offer value and meet consumers’ expectations of security.How should financial institutions prepare for a shifttoward mobile payments? Security in the mobile payments construct is critical for a number of reasons. We do not want to experience anDoug Brown: Our clients need to stay focused on what’s increase in fraud associated with the new mobile paymentsrelevant and important to their customers. Initially, they system. We need to ensure that authentication standardsneed to focus on building an active mobile banking base, for mobile are as good as, if not better than, alternativebecause those are the customers that will ultimately payment systems. Not only is this an industry requirement,extend their mobile banking behavior into mobile but consumers also express security concerns regardingpayments. They also need to stay current with the their funds and their identity. The No. 1 reason consumerstechnologies capable of delivering on their customers’ don’t participate in mobile or even online banking isexpectations. It’s critical to stay abreast of what customers concern about security.expect from mobile banking and extensions of mobilebanking such as emerging RDC apps and mobile payment What can smaller banks do to stay on top of the game?capabilities when they become commercially viable. Doug Brown: First, smaller FIs need to rely on a trustedFrom the banker’s perspective, you need to provide technology- and business-savvy partner that understandsmobile banking services to retain your customers. If you the mobile environment. Second, they need to considerdon’t, your customers are going to find mobile banking engagement − either through partnerships or their owneither at the larger financial institutions or at this whole development − with multiple payment models because nohost of new competitors that can now serve most of the one can determine right now how mobile payments willcustomers’ financial needs. play out. Third, they need to be very active in the industry with entities such as NACHA to stay informed about theWhat “curve balls” should FIs watch out for? technologies, activities and standards that surface asDoug Brown: The ecosystem of payments includes players mobile payments are introduced into the marketplace.that can be both FI partners and competitors − e.g., It’s really challenging to have the right focus andthe telecommunications carriers that are participants in interpretative lens to understand which models fit theIsis. Isis will provide banks with a vehicle to distribute criteria necessary for sustainability. It’s our intent at FIStheir credit card credentials via the telco wallet. But, to provide marketplace-ready solutions along withIsis will own the customer experience and set terms guidance around what’s critical to those really importantaround its business model. In that way, Isis will compete strategic decisions.for future monetization opportunities that could helpFIs develop new revenue streams from sources such as The advantage that banks have in the ecosystem is themerchant-funded rewards. This also applies to some of trust of their customers. That is the one asset that’s notthe aggressive digital technology players such as Google, reproducible. No one will own trust more than the FIs and,Facebook and potentially Apple and Amazon. These knowing that, they need to carefully consider potentialplayers represent potential allies but, importantly, a new partnerships. Before acting, they need to ask: Could thiscompetitive threat. partnership jeopardize the trust our customers have in us?For additional information about how FIS can help financial institutions best meet their mobile needs, please contact yourSales Account Manager.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 5
  • 6. Overcoming the DemographicDisadvantages of Community BankingFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 By Paul McAdam SENIOR VICE PRESIDENT, RESEARCH & THOUGHT LEADERSHIP In my September 2011 article, I talked about how community banks are at a disadvantage in terms of customer relationship expansion mostly because the community bank customer base has less income and future earnings potential. This month’s article continues that analysis and examines the influence of customer demographics and location on both the composition and the financial behaviors of community bank customers. All analysis cited in this article was generated from primary research of 3,345 consumers conducted by FIS Enterprise Strategy in August 2011.The affluence gap between the community bank customer and the average bank customer results in community bankcustomers holding lower-than-average investable assets and loans overall, with correspondingly less opportunity. Thismeans the community bank has to capture greater shares of available financial resources to compensate for the thinnessof their customers’ wallets. Community banks do a good job of getting their fair share of available deposits, but they stillfall short of the average deposit amount because their customers have fewer assets. On the loan side, community banksget less than their fair share of loans and fall even shorter of the average loan amount.While geography has a significant influence on the composition of community bank customers, it would be wrong toassume that community bank customers are purely “small town folks.” Overall, community bank customers are morelikely to live in a large city than a small town. Among all consumers who identify a community bank as their primaryDDA provider:• 29 percent live in rural areas or small towns (defined as fewer than 50,000 residents)• 34 percent are in small metro areas (between 50,000 and 500,000 residents)• 37 percent live in mid-sized to large metro areas (more than 500,000 residents)However, less than 10 percent of U.S. consumers live in rural/small towns while nearly two-thirds live in towns with morethan 500,000 residents, so there are striking differences in the concentration of community bank customers betweeneach of these markets (see Figure 1). Within rural/small towns, consumers are three times more likely to identify acommunity bank as their primary DDA provider (index = 319). In small metro areas, consumers are about one-third morelikely to bank with a community bank (index = 136), while in mid-sized/large metro areas consumers are about half aslikely to identify a community bank as their primary DDA provider (index = 56). Of course, demographic and competitivedynamics significantly influence these concentrations as rural and smaller markets tend to have older residents onaverage and a lower concentration of large national banks. The opposite is true in big cities.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 6
  • 7. Community bank customers, as awhole, have a number of demographic Figure 1: Community bank customers are significantly more concentrated withincharacteristics that put community banks at rural and smaller townsa competitive disadvantage in retail bankinglong term. Community bank customers are: Concentra on of community bank customers by market (average = 100)FISOlder1. ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 3 *2. Less likely to be employed (i.e., a higher portion are retired)3. Have less education 36As a result, they have less household incomedespite the fact they are more likely to be veragemarried, thereby providing two potential 6sources of income. Nearly two-thirds (65percent) of community bank customers are Rural / Small metro Mid-size /married regardless of where they live − far small town large metromore than the national average.So what happens when we examinecommunity bank customers who live in ruraland small towns versus those who live in bigcities? Most key demographics that driveincome and future earnings potentialdon’t shift:• Community bank customers are just as likely to be retired or unemployed regardless of where they live.• They also are just as likely to be older, which can be a positive for investment and deposit-related revenue but not for loans.• Community bank customers are just as likely to have less education regardless of where they live. Even in big cities (where the population as a whole tends to have a higher level of education), the portion of community bank customers with only high school or less education is above the norm (by 24 percent) while those with a college degree or higher is below the norm (by 8 percent).A troubling pattern emerges when we examine the average incomes of community bank customers who live in smalltowns versus those who live in big cities (see Figure 2). As one would anticipate, the average annual household incomeof banking consumers’ increases with the size of the metro area. But unfortunately for community banks, the incomes oftheir customers fall significantly short in larger markets.• In rural and small towns, the average incomes of community bank customers and all other bank customers are statistically equivalent.• In small metro areas, community bank customers have an average annual income 12 percent lower than that of all other banking customers.• In mid-sized and large metro areas, community bank customers have an average annual income 13 percent lower than that of all other banking customers.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 7
  • 8. The pattern of community bank customers havinglower income and earnings potential results in Figure 2: The average income of community bank customers fallsthem owning investable asset balances (deposits short in larger marketsand non-IRA investments) 12 percent lower thanthe national norm. As demonstrated in Figure 3, Average annual income of DDA households by marketconsumers who hold their primary DDA relationshipFIS ENTERPRISE STRATEGYwith a community bank have lower incidence of VOLUME 1 • JULY 2011deposit and investment product ownership with $ $their primary bank in all products but CDs.Despite these disadvantages, community banksdo an admirable job of capturing their customers’available deposit balances. For some deposit Rural / Small metro Mid-sized / Small town large metroproducts, community bank customers − especiallythose in rural areas and small towns − show ahigher-than-average propensity to consolidate theirassets with their primary DDA provider. And on anoverall basis, community banks capture 74 percentof the deposit balances available from their primaryDDA customers, compared to a norm of 70 percentfor all other financial institutions.But clearly there’s an opportunity for communitybanks to do a better job of cross-selling to existing Figure 3: Community banks are missing out on investment andcustomers. “Investment-oriented” services (money consumer lending opportunitiesmarket and non-IRA investment accounts) are Percent of consumers owning accounts with their primary DDA providerspecific opportunities (see Figure 3). Community (among consumers who own each type of account)banks capture money market relationships with * 6 *only 44 percent of primary DDA customers versus 6a cross-sell rate of 60 percent achieved by all other 6 6financial institutions. Similarly, community bankscapture a non-IRA investment relationship with 11 3percent of primary DDA customers compared to 21 3percent for all other financial institutions. Savings Mone C Non-IR IR invest Credit card First Home uto loan Mar et invest revolving mortgage equit loanOn the loan side of the ledger, the combinationof a customer base that is older with lowerearnings potential contributes to communitybanks capturing total loan balances from theirprimary DDA customers that are 10 percent belowthe national norm. As demonstrated in Figure 3,the percentages of community bank customersholding first mortgages and auto loans with theirprimary DDA provider is roughly the same as thatof other financial institutions. But the percentageof community bank customers with primary DDA-provider credit cards and home equity loans is significantly below the penetration achieved by other financial institutions.While closing the cross-sell gap in home equity lending probably isn’t feasible or advisable in the near-term given thereal estate market crash, community banks are missing opportunities with their current customer base in the form ofrevolving credit card programs.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 8
  • 9. Many community banks have exited the Figure 4: Obtaining status as the primary DDA and credit card consumer credit card-issuing business provider yields a tremendous profitability advantage over the past couple decades, but some are reconsidering it in the advent of Community bank customers who… Durbin debit interchange regulation. Have primary DDA Regardless of an institution’s legacy viewFIS ENTERPRISE STRATEGY Have primary DDA with the community VOLUME 1 • JULY 2011 of credit cards, our research suggests and credit card with bank but primary the community bank credit card with that community banks should look another provider beyond the economics of credit cards Num er o deposit and loan products held with primar provider 3 as a standalone offering and consider nnual customer pro ta ilit to primar provider $ $ 6 the value that a “primary” credit card relationship can bring to overall eposits alances held with primar provider $3 $ 6 customer relationship profitability (see eposit wallet share captured primar provider Figure 4). Consumers who designate Loan alances held with primar provider $ 3 $ 6 their community bank as the “primary” DDA and credit card provider generate Loan wallet share captured primar provider profitability, deposit and loan balances that are 3.5 – 4 times higher than customers who maintain their primary DDA with a community bank but hold their primary credit card relationship with another financial institution. In summary, community banks do have a disadvantage inherent in the demographics of their customer bases. Community banks in rural areas andsmall towns are holding their own and competing well, however. They capture strong retail consumer market shareand those consumers are more likely to consolidate with the community bank. Stagnant or declining underlying marketgrowth is a key problem faced by many of these banks. Community banks that compete in small-to-large metro marketsalso have disproportionately older and less educated customers and face the added challenge of customer bases withhousehold incomes 12 − 13 percent below market norms.Regardless of the size of market served, the research suggests that community banks should strongly consider strategies to:1. Attract new and younger DDA customers with desirable characteristics2. Cross-sell to deepen relationships with existing customers − particularly in investment-oriented products and credit card programsTo be fair, there are certainly a number of community banks in both rural and urban markets that outperform their largerbank brethren in cross-sales and other relationship expansion metrics. It’s also the case that some community banks don’tplace a primary strategic emphasis on retail banking and focus instead on middle-market and small business − and alsocompete very effectively with larger banks.But taken as a whole, our research reveals an urgent strategic priority for the community banking industry. Given thecurrent anti-big bank climate, the timing for such initiatives is right.I will continue to explore this topic of community bank competitiveness in future newsletter editions. In the meantime,feel free to contact me at paul.mcadam@fisglobal.com with your questions or comments.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 9
  • 10. Achieving Profitable Customer Loyalty By Mandy PutnamFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 DIRECTOR, RESEARCH & THOUGHT LEADERSHIP A long-term customer isn’t necessarily a loyal customer. And a loyal customer may not even be a profitable one. In fact, more than six out of 10 loyal customers are unprofitable, and about one-quarter of loyal customers are unlikely to ever be profitable. According to my Facebook profile, I “like” my bank. I “like” my bank because it ran a charitable campaign promotion to get people to “like” it. I’m inclined to participate in such things if only to see what happens. But, am I loyal to my bank in the way that I’m loyal to the neighborhood restaurant I often frequent on Friday evenings? Heck, no.Customer loyalty is more difficult to measure for banks than products and services for which switching is a relativelyeasy process. Slightly more than two-thirds (68 percent) of FI customers agree that “switching my primary checkingaccount to a different financial institution is more hassle than it’s worth.” But our research with 3,000 consumers showsthat many customers who stick with their FIs due to inertia aren’t loyal and don’t keep a large share of their depositsand/or loans with their primary checking account provider.Customer Loyalty: Multi-dimensional and OverlappingFirst, let’s look at three dimensions of loyalty: Figure 1: FI Customer Loyalty Is Multidimensional and Overlapping• Functional loyalty, which is typically created by offering superior products and/or services that consumers trust and are willing to Mix of loyalty types recommend to others Func onal only• Transactional loyalty, which is reflected in 10% concentrated spending with a brand and repeat purchasing behavior Func onal• Emotional loyalty, which is generally the most and sought after but the least attained by branding Transac onal 18%* Func onal and gurus; customers who exhibit emotional All Emo onal loyalty identify with the values that the brand three 1% conveys and view the brand as differentiated Transac onal 3% Emo onal only sufficiently from others in its class to pay more only 2% for its products and services 12% Transac onal and Emo onal <1% 1Forty-five percent of FI customers exhibit at leastone dimension of customer loyalty. FI customersoften have functional and/or transactionalloyalty, but few have emotional loyalty (Figure Source: FIS Enterprise Strategy, August 2011; n = 3,0001). The fallout of limited emotional loyalty canbe extreme price sensitivity − as exhibited byreactions to a few FIs’ recent attempts to chargefees for debit cards.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 10
  • 11. Introducing Customer Loyalty and Profitability SegmentsLoyal customers aren’t necessarily profitable ones. Among higher-asset customers, loyalty to the primary DDA provideris positively related to the percentage of assets they keep with that FI and, in turn, their profitability to the FI. But amongthe majority of customers − 61 percent − there is either no relationship between loyalty and profitability, or it is aninverse one. Research findings suggest that a lot of FIs have bought loyalty vis-à-vis “free checking” but are sacrificingFIS ENTERPRISE STRATEGY Loyal customers pay less in fees.profitability in the process. VOLUME 1 • JULY 2011Segmenting FI customers based on the dimensions of loyalty − functional, transactional and/or emotional − andprofitability produces six customer segments. Goals and tactics differ depending on which segments the FI wants totarget. (Figure 2): Figure 2: FI Goals Differ According to Segment Unpro table Loyals Poten ally Pro table Loyals Pro table Loyals 9% 18% 17% pro tabi ity Unpro table Non-loyals Poten ally Pro table Pro table Non-loyals 10% Non-loyals 22% 24% Break even Low High Source: FIS Enterprise Strategy Goal: Maintain and deepen relationships with Profitable Loyals Profitable Loyals (17 percent) tend to be well-educated married couples with higher incomes and positive net worth. This group has proportionately more Matures (born prior to 1946) and self-employed individuals. Of all the segments, they are most confident about enjoying a comfortable retirement. Profitable Loyals already have larger shares of their financial wallets with their primary DDA provider than most of the other segments. But there is still opportunity to identify cross-sell opportunities through data mining and analytics.Currently, larger banks are capturing more loans from Profitable Loyals than smaller FIs, which underscores theopportunity for smaller banks and credit unions to deepen their credit relationships with Profitable Loyals.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 11
  • 12. A package configured for this segment could look like: Goal: Increase profitability of Potentially Profitable Loyals• “Premier Checking” package bundled with other Potentially Profitable Loyals (18 deposit and investment services. Preferred interest percent) tend to be females with rates and other rewards for high minimum balances lower levels of education and low-• Customized loyalty card program with preferred to lower-middle incomes.FIS interest ratesSTRATEGY ENTERPRISE VOLUME 1 • JULY 2011• Preferred interest rate incentives and advisory services Potentially Profitable Loyals don’t for moving more assets/loans to primary checking have a very large financial wallet account provider and most of it is composed of debt − most commonly credit card debt and auto loans. Very little of their debt Goal: Increase loyalty to retain is held by the primary DDA provider, which is the main and deepen relationship with reason they aren’t currently profitable. Profitable Non-loyals Another reason Potentially Profitable Loyals aren’t Profitable Non-loyals (22 percent) profitable is they don’t pay very much in fees. Half of them also tend to be well-educated selected their FI because free services were offered. married couples with higher incomes and positive net worth. A package configured for this segment could look like: Profitable Non-loyals often lack the time and knowledge to manage • “Basic Loyalty” checking /savings with minimumtheir financial affairs, which − along with their positive net balance required and/or self-service option forworth − make them desirable targets of financial advisors. lower fees • Loyalty program incentive to consolidate revolvingProfitable Non-loyals have smaller shares of their financial credit card debt to bank cardwallets with their primary DDA provider than Profitable • Assistance with loan refinancing (if qualified)Loyals. Increasing loyalty within this segment could boostthe amount of assets or loans held with their primary FI. Goal: Increase loyalty andProfitable Non-loyals’ primary DDA provider is more likely profitability of Potentiallyto be a large national bank, which is only capturing about Profitable Non-loyalstwo-thirds (68 percent) of their deposit balances (vs. 82 Potentially Profitable Non-loyalspercent for Profitable Loyals) and 45 percent of their loan (24 percent) have average incomesbalances (vs. the same 45 percent for Profitable Loyals). but above-average educations. This group has proportionately moreProfitable Non-loyals are more likely to deepen their students in it.relationships with providers whose benefits emphasizefinancial rewards (e.g., cash back on loyalty programs, Potentially Profitable Non-loyals, like the Potentiallypreferred interest rates) and convenience (e.g., free Profitable Loyals, don’t have a very large financial walletonline/mobile banking, ATMs at convenient locations). and most of it is composed of debt − most commonly credit card debt and auto loans. And, like their loyalA package configured for this segment could look like: counterparts, very little of their debt is held by the primary DDA provider, which is the main reason why they aren’t• “Premium Checking” package bundled with other currently profitable. deposit and investment services. Preferred interest rates and other rewards for high minimum balances Unlike their loyal counterparts, Potentially Profitable Non-• Customized loyalty card program with preferred loyals have substantial future earning potential, reflected interest rates or cash back rewards by their above-average educations and higher-than-• Preferred interest rate incentives for moving more average student status. assets/loans to primary (e.g., mortgage refinancing) Like Potentially Profitable Loyals, they don’t pay very much in fees. But, this segment could more easily migrate to self-service banking to retain their low fees.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 12
  • 13. A package configured for this segment could be similar to one offered for Potentially Profitable Loyals but place moreemphasis on self-service banking channels. Goal: Break even with unprofitable segments Unprofitable Loyals (9 percent) have very limited means to become profitable toFIS ENTERPRISE STRATEGY the FI. They have the lowest incomes and education levels and 1 • JULY 2011 VOLUME an above-average percentage of them (one-quarter) are retired. Unprofitable Non-loyals (10 percent) have lower levels of education, low incomes and the highest unemployment rate among the segments.Unprofitable segments are unlikely to become profitable for a financial institution. The best the FI can hope is to: 1)reduce their higher-than-average channel usage, and/or 2) collect fees that are sufficient to cover incremental costs ofservicing them.A package configured for these segments could look like:• “Basic” checking/savings with minimum balance and self-service and/or checkless checking required to earn reduced fees• Revolving credit tied to checking/savings balances• Prepaid card programFinal ThoughtAppeals that usually do the best job of engaging some customer segments are often viewed as irrelevant or even “turn-offs” by other segments. The FI must determine whether it needs to be “all things to all people” or home in on specificsegments that could produce a more profitable outcome in the long term, but alienate non-targeted segments to thepoint of attrition in the short term.This article is derived from an FIS Enterprise Strategy research brief, which features recent research with 3,000 FI customers on elements that drivecustomer loyalty and insights into how FIs can leverage the findings to foster loyal relationships that, in turn, can increase the percentage of profitablepatrons among their customer bases. The full report can be downloaded from http://www.fisglobal.com/solutions-insights.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 13
  • 14. November Survey ResultsIn November’s edition of FIS Strategic Insights weFIS ENTERPRISEon four diverse topics: 1) initiativespolled readers STRATEGY VOLUME 1 • JULY 2011 Figure 1: Readers are pursuing multiple initiatives to reducethey are pursuing to manage or reduce operating operating expensesexpenses, 2) plans for increasing checking accountfees, 3) engagement with customers via social vendor contracts 65%media, and 4) content for upcoming newsletters. Reducing internal use of paperThanks to all who participated in our survey. The and electricity 56%following four charts present the results: branch 50% 42% Business process outsourcing or right-sourcing 40% 38% 23% Other 4% None 4% Source: FIS Strategic Insights survey, November 2011 Figure 2: About one-half of the surveyed FIs have no current plans to increase checking account fees We have no plans to increase checking account fees 52% We’re currently considering increasing checking account fees, but have not 13% yet made our nal decision We plan to increase checking account fees but have not yet determined ho 6% fee increases ill be applied We have already increased or plan to increase checking account fees for a 8% minority of our customer base We have already increased or plan to increase checking account fees for a 4% majority of our customer base Don’t kno 17% Source: FIS Strategic Insights survey, November 2011FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 14
  • 15. Figure 3: Only one-third of readers are actively engaged in social media with their customers We ac vely communicate with our 33% customers through social mediaFIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011 We are only monitoring social media 23% communica ons at this point We have not launched social media 19% yet, but are in the planning stage We are doing nothing and have no 25% immediate plans to use social media Source: FIS Strategic Insights survey, November 2011 Figure 4: Newsletter subscribers would take the time to read articles about… Impacts of regulatory issues 68% Mobile banking 60% Community bank di eren a on strategies 56% Fraud detec on and management 56% Mobile payments 54% Con nuous e ciency improvement 54% IT and opera ons management 40% Lending and credit risk management 40% Economic insights and analysis 38% P2P (person-to-person) payments 38% Core system upgrade or replacement 38% Payments migra on from paper to plas c 36% Managing unpro table customers 34% EMV (chip & PIN) 34% Prepaid cards 32% Rela onship banking services 28% Channel migra on 26% Merchant-funded and other types of rewards 18% Implica ons of “Occupy Wall Street” backlash 16% Source: FIS Strategic Insights survey, November 2011FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 15
  • 16. FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011Strategic Insights is a monthly newsletter that provides research, thought leadership and strategic commentary on recentevents in banking and payments. The newsletter is produced by the Enterprise Strategy team at FIS. FIS is one of theworld’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries, FISdelivers the most comprehensive range of solutions for the broadest range of financial markets, all with a singular focus:helping you succeed.If you have questions or comments regarding Strategic Insights, please contact Paul McAdam, SVP, Research & ThoughtLeadership at 708.449.7743 or paul.mcadam@fisglobal.com.FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries. 16

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