Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Grow From Within


Published on

A Practical approach to increasing Checking Account
and Debit Card profitability in an economic downturn

Published in: Business, Economy & Finance
  • Be the first to comment

Grow From Within

  1. 1. Grow From Within A Practical Approach to Increasing Checking Account and Debit Card Profitability in an Economic Downturn By Ben Colvin and Michele Tucci Executive Summary Banks can expect fewer new retail at the moment. The best way, then, at the full range of products that a customers in a steep economic downturn to drive net account growth and gain customer uses, measuring customer like this one, as consumers struggle wallet share appears to be focusing on engagement, and forecasting the lifespan with unemployment, wage cuts, falling those current customers with potential of each relationship. This article is aimed home values, and diminished savings. to contribute strongly to your institution’s at showing retail banks a practical Even in the best of times, attracting bottom line. approach to generate net account growth a new customer is at least five times through improved account retention more expensive than getting increased Accurately understanding each customer’s and the deepening of relationships with revenues from an existing one,1 and the lifetime value to your bank begins with current customers who can bolster your cost–return ratio is even more exorbitant taking an enterprise perspective—looking institution’s bottom line. 1 Emmett C. Murphy and Mark A. Murphy, Leading on the Edge of Chaos, 2002. Profit from Our Perspective™
  2. 2. Manage from the Core their behavior and increase their use of prompts many customers to reconsider The current or demand deposit account debit cards at the point-of-sale instead their banking behaviors. Consider three (DDA) is at the core of the relationship of using cash, they may see a direct recent trends that have put a damper on between banks and their customers. It boost in revenues through increased new customer acquisition: drives cross-sell opportunities for other fees generated by the transactions and • First, people often switch banks when financial products as well. Banks would incremental net interest income. they change jobs. But with weak labor do well to adopt a “whole customer” Customers who stop withdrawing large markets around the world, fewer profitability framework similar to one amounts of cash at the beginning of each workers are moving into new jobs. developed by MasterCard Advisors in its week, and instead increase their debit payments strategy practice (Figure 1). You • Second, home buyers often move the card usage may increase the average daily can determine the value each customer bulk of their banking business to an balance in their DDAs, thereby generating segment contributes to your business by institution that has just given them a higher net interest income for the bank. adding debit card revenue, net interest new mortgage. But with home sales When this more profitable behavior is income, and cross-sell revenue, while still flagging, fewer new mortgages are spread across the entire customer base, subtracting expenses, such account service being written. the bottom-line impact can be substantial, and maintenance, check processing, ATM and the bank can acquire a new more • Finally, investor anxiety about the maintenance, and the cost of rewards. stable source of low-cost funds for its security of their financial assets has led Figure 1 demonstrates the sizable lending business. people to withdraw substantial amounts portion of bank revenue—more than from the stock markets. U.S. banks a third in the U.S. and one quarter in New Needs Produce have derived some short-term benefit Europe—that comes directly from the New Behaviors from these worries because consumers DDA or current account. In addition, if Consumer banking needs are changing have sharply increased their deposits in banks can persuade customers to shift rapidly as the economic downturn FDIC-insured accounts. Much of that Figure 1: How Payments Optimization Can Impact Multiple Retail Bank Revenue Streams and Retail Bank Revenue U.S. Europe % of Total Retail % of Total Retail Bank Revenue Bank Revenue Credit Credit Cards 10 Cards 10 CROSS-SALES REVENUE % of Current CROSS-SALES REVENUE % of DDA Accounts Revenue Accounts Revenue Mortgages 31 20 Debit Card Mortgages 36 25 Debit Card Revenues Revenues Net Interest Consumer 6 Consumer 72 Loans Loans 20 Income Long-term 13 70 Net Interest Income Savings Long-term 8% Savings 14 Fees and Other Income DDA Accounts: 5% Current Checking 34 Accounts: and Fees and Other Income Checking 25 Saving and Saving Sources: U.S.: Retail Bank Revenue Federal Reserve Bulletin, profits and balance sheet developments at US commercial banks in 2007, June 2008. Current Account Revenues: MasterCard Advisors estimates on Federal Reserve data. Europe: European Commission Retail Banking Survey, 2005–2006. GROW FROM WITHIN MASTERCARD ADVISORS 2
  3. 3. increase, however, may be due to the Figure 2: An Accurate Assessment of Engagement Helps Retail Banks government’s temporary boost in FDIC Make More Informed Investments in Customer Segments deposit insurance—to $250,000 per account from the previous $100,000. Changing needs and concerns like + these create ample opportunity for banks to deepen and broaden customer relationships by implementing timely Payments Engagement marketing strategies that engage current PRIMARY customers and generate incremental SECONDARY revenues from the most promising segments. CONVENIENCE Begin with a Disciplined Approach to Customer Segmentation SAVERS Through close analysis of customer activity and engagement, banks can segment relationships according to the number, – combination, and cost of products and services used by each customer. The bank – Account Relevance & Engagement + also can identify the behavioral paths most likely to lead to cross-sell opportunities on By tracking checking account debits, credits, and average balances as well as debit card payment behaviors, one hand—or attrition on the other. We customer segments can be plotted across the engagement continuum. Depending on debit card usage patterns, recommend a two-pronged segmentation Primary and Secondary segments could be found anywhere along the payments engagement axis. Source: MasterCard Advisors. approach: First, look at how customers use their checking accounts; and second, look at how they spend their funds. • Convenience users – those with Once banks understand their customer The first type of analysis measures such accounts held for pensions or salary relationships, they can identify important basic factors as checking account debits, deposits, with singular or regular large customer payment behaviors—such as credits, and average balances to track withdrawal amounts spending at point-of-sale (POS), check- customer engagement and distinguish writing, direct debits, ACH transactions, primary from non-primary customers: • Secondary users – those using their ATM withdrawals, and so on—and use accounts for specific, limited purposes, Primary customers are those with the data to track deposit and payment such as paying for utilities, emergencies long-established relations with the bank, preferences. These preferences can or unexpected bills; or those with more liquid assets, and more frequent identify further sub-segments into attrited primary accounts that they transactions compared to the average which customers are divided and can choose to downgrade due to such customer. Primary customers may also be used as a basis for offering more factors as a bad service experience or have a salary mandate or use direct tailored products and services. Sub- increased costs deposit; bank in close proximity to home segment examples might include: cash or office; have a mortgage or other loans; None of these segments are unprofitable dependents; branch lovers; ATM users; and hold investments with the bank. by nature, but Savers who park transactors; low debit card users and high considerable funds in their accounts for debit card users. Non-primary customers are all those long periods may be more profitable customers who don’t regard the bank Once a bank has gained in-depth than Primary customers who require as their primary financial institution of knowledge of its debit cardholders’ high levels of service. The old 80/20 choice. They usually fall into one of the attitudes, behaviors, and preferences rule usually applies: Primary customers following categories: and determined which changes in typically generate most bank revenues cardholder behavior are most profitable, • Savers – those who use their accounts and non-primary segments contribute it can turn that knowledge into primarily to keep funds, not to transact considerably less (see Figure 2). actionable marketing strategies. GROW FROM WITHIN MASTERCARD ADVISORS 3
  4. 4. STRATEGy ONE: Encourage Convenience customers Deepen Customer Relationships to increase usage – Salary mandates or Figure 3: Why Debit Cardholders Strengthening and cultivating customer direct deposits typically produce one large Become Dissatisfied relationships requires ongoing effort at monthly deposit to the checking account each point of interaction. Such efforts and an equally large monthly withdrawal must become habitual—part of business or transfer. Banks can employ a variety of 18% as usual—and not a random, last- tactics to further engage such customers. 28% resort strategy in response to customer For example, an estimated 1.5 million complaints. customers opened new savings accounts when Bank of America launched its 26% Retain existing customers – The first Keep the Change program.2 Consumers step is to review the existing customer 28% embraced this simple savings program— experience as well as your anti-attrition which transferred the “change” from a and retention strategies, processes, debit purchase to a customers’ savings and performance metrics. Among account. With every debit card purchase, Non-existent the common solutions to improving rewards program the customer was also making small, retention: incremental transfers to their savings Overdraft fees • Employ models to monitor changes in account, which might easily add up spending behavior—say, a drop in POS to $500 or more in savings in a year.3 ATM surcharge fees transactions or an increase in outflow Programs that help consumers save in this economy could be very popular—and Poor rewards program balances—to detect early indicators of attrition and take preventative measures demonstrates that their bank is trying to help them. Reasons for dissatisfaction with their debit issuer. • Put a Quality Assurance team in place Source: MasterCard Advisors, Comparative Cardholders Dynamics, Debit and Payment Choices to identify issues and anomalies in Make a compelling offer to Secondary Study, 2009. customer relationships before problems users – Customers who use their are reported checking accounts for only limited purposes need some compelling reason STRATEGy TWO: • Make use of a specialized retention unit to increase their business with the Up-Sell and Cross-Sell that is trained to manage disputes and bank. Using segmentation models, your Leverage the DDA or current account service problems and to retain valuable bank can gain better understanding by migrating valuable customers to the customers of Secondary users’ payments needs, products and services that are most • Consider developing a rewards program attitudes, and behaviors. Based on relevant to them. Customer needs and if one is not in place these insights, you can design relevant desires change over time as customers offers—from savings accounts for experience different life stage events. • Proactively score and offer an overdraft parents of children bound for university Banks that respond to these changing line of credit to customers who to small business accounts rewarding needs with relevant product offerings experience frequent overdraft fees, or business owners for their debit card increase the potential for customer include an application for an overdraft spending through promotion of category satisfaction and engagement at each stop line of credit in overdraft notices expansion education and promotions. along the engagement continuum. For • Customers using another bank’s ATMs Each customer is unique, and example, you should periodically evaluate should be provided easy ways to segmentation is the key to finding the customers who consistently maintain locate your own ATMs; MasterCard’s right value proposition for each. higher balances in entry-level checking online ATM Locator—now available accounts. If your bank offers a higher- on Apple iPhones—lets banks embed tiered relationship product with better offers in the location information to services, proactively offer to upgrade prompt customers to in-store promos at them. For customers who accept such an merchant partners upgrade, quickly follow-up with a cross- 2 Bank of America, Press Release August 28, 2008. 3 TowerGroup, Brian Riley, “Just Rewards: Adapting Credit Card Loyalty Feature to a Debit Card World,” June 2009. GROW FROM WITHIN MASTERCARD ADVISORS 4
  5. 5. sell offer to ensure that they continue Stimulate recurring payments – STRATEGy THREE: to maintain and grow their checking Online bill pay and recurring payments Increase Debit Card Usage account balances, as required for that (RP) have been shown to increase spend Another way to deepen engagement higher-level product. and loyalty. A bank may reward the is to understand customer preferences debit cardholder who signs up for RPs in for POS, cash, and branch transactions Savers may have limited migration such categories as telecommunications, and then use that understanding to potential – While a more effective insurance, utilities, and satellite/cable/ help increase debit card usage. The savings product may attract increased TV by offering a credit on their next most effective kinds of offers vary with deposits, the bank may find that statement. MasterCard has seen a lift in each region and with each region’s optimization of this segment is more overall card spend whenever cardholders specific debit-card revenue dynamics. In likely to come from growth in net interest use debit cards for recurring payments building the business case, it’s important income (NII) or through increased or or set up RPs through a merchant. Debit to consider the broader benefits of retained balances than from any new cardholders who use their debit card to debit cards, such as increased balances, product offerings. Depending on the make recurring payments also spend improved retention, and cost savings customer’s age and estimated wealth, 36 percent more with their debit cards associated with reducing costly ATM, a Saver may turn out to be an affluent than those who don’t make recurring cash, check, and branch transactions. customer trying to diversify his or her payments, and they also are much less portfolio. One common tip-off: the likely to stop using their cards in the customer in question does not have future (6 percent vs. 11 percent).4 or use a debit card because they don’t feel they need to. Alternatively, a customer may simply regard the account in question as a “piggy bank.” Such Figure 4: Cross-Sales to Customer Segments Moves Them customers often welcome financial Up the Value Chain planning and retirement advice from an in-branch advisor. Offering them liquidity MIGRATION PATH TO INCREASED VALUE AND ENGAGEMENT, solutions to help manage their affairs WHERE DEBIT IS THE ENTRY POINT can often lead to increased deposits and Debit Credit Personal Auto Investment Cards Cards Loans Loans Mortgage Account growth in net interest income. Find the sweet spot for Primary Primary users – With customers who already are frequent users of their current accounts, CUSTOMER SEGMENTS the secret to cross-selling is determining Secondary what drives their engagement with your financial institution. For budget- minded consumers who spend primarily Convenience on essentials, merchant discounts on everyday products may be compelling. For the more affluent household, rewards Savers offering unique experiences may be the strongest motivator. Configuring the right offer and the right marketing message Potential For Customer Adoption for each customer segment will help expand your customer relationships and Best Worst Source: TowerGroup stimulate profitable payments behaviors. 4 MasterCard Advisors, Comparative Cardholder Dynamics: Debit and Payment Choices, 2008. GROW FROM WITHIN MASTERCARD ADVISORS 5
  6. 6. Position the debit card as the smart Encourage debit usage through Conclusion way to pay – Those accustomed loyalty or rewards programs Economic uncertainty and growing to spending cash or who make few Customers averaging just a few solvency concerns are changing what debit card purchases may respond to transactions per month might be offered consumers want from banks. The well-crafted educational messages and promotions or rewards with specific historical drivers of account switching— incentives that encourage debit card merchants in exchange for increasing their a new job or new home—are less usage. During this global economic card usage—to, say, five times per month. relevant in this environment. downturn, banks may want to capture as Advisors propensity models can help Today, generating net account growth much non-discretionary spend as possible. identify which offers may appeal to certain is about nurturing commitment and Banks can promote debit cards as a better debit-inactive cardholders. Cardholders engagement among key client segments. way to control spending and stay within can then be invited to use their debit cards Savvy banks that want to build long- budget, and emphasize their convenience for eligible purchases in order to qualify term relationships will measure each over making multiple trips to the ATM for a reward. By making a $15 debit card customer’s lifetime value and use for cash. In addition, such POS migration purchase in a participating department tools to understand their “migration efforts can boost the profitability of ATM or hardware store, for example, the likelihood”—the probability of that users—especially when they are coupled cardholder might qualify for a $10 gift customer moving up the value chain with special offers, or expansion of card, with further purchases qualifying and welcoming a wider variety of bank contactless terminals and cards, to capture for additional gifts. Such programs have products. Only with such customer more of the spend that might otherwise resulted in 1.5-to-5 percent opt-in rates, insights can the bank pursue the cross- be made in cash. with spending lift of up to 60 percent sell and up-sell strategies that are most (over control) and a spending increase of meaningful to each customer segment. 15.5 percent (over control) for customers who received the offer but did not opt in. Ben Colvin is a Global Practice Leader at MasterCard Advisors’ Retail Banking and Debit Practice. He and his team help global client banks leverage their payments platform to drive the profitable growth of their retail banking value proposition. Based in Purchase, N.Y., Mr. Colvin can be reached at Michele Tucci is a Managing Consultant at MasterCard Advisors’ Retail Banking and Debit Practice. He advises global client banks on strategies and implementation tactics that promote revenue growth and drive point- of-sale debit usage. Based in Purchase, N.Y., Mr. Tucci can be reached at © 2009 MasterCard. All Rights Reserved.