Sunday, 13 January 2013

Should Banks Jettison Unprofitable Customers?


I will tell you why in a moment, but first why I thought of this question.

Alan Weiss of Summit Consulting penned a book called The Consulting Bible (see my bookshelf if interested in the book). In it, Weiss suggests you jettison the lower end of your client list when you win new clients. His reasons:

  • The client is no longer profitable.
  • You are bored with the work.
  • The client is troublesome.
  • The work is unpleasant.
Financial institutions rarely go through such an exercise. In fact, I am currently preparing for a meeting with a client to discuss what to do about unprofitable branches. It has always been challenging to advise clients to reduce rather than to add. But to add value to customer interactions in banking, we have to dedicate time to making our customers situation better, in some way. Continuing to rely on having a nearby branch or a mobile app to add value will solidify our position as a commodity, in my opinion.

Instead, what we can offer customers is hassle free banking, improved financial condition, and peace of mind. To do that, we need talented employees with time. Time cannot be expanded. Giving 110% of your time only makes sense on a t-shirt.

But unlike consulting, financial institutions make most of their revenue on the spread. If an unprofitable customer keeps $10,000 in deposit balances with you and you can re-deploy that money at a 3% spread, then you generate $300 in revenue on very little marginal cost. Letting that customer go to a competitor will not reduce employee or occupancy expense. In fact, you would experience very little cost reduction (FDIC insurance and possibly a small data processing savings). 

But what you can do is push customer service to the appropriate level based on the value of the customer to you. Keep your most talented employees reserved for your most profitable and strategically important customers. Because those customers have the greatest potential to appreciate the value your FI brings to their situation. Growing high value customers while properly serving commodity customers is critical to improving your FI's relevance and breaking the commodity cycle.

Any stories out there about identifying and serving high value customers appropriately?

~ Jeff

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