Financial Services

Challenges in Retail Banking

 

A new wave of competitors has turned traditional banking products into commodities. Low interest rates combined with customer demands for more services have driven margins down.  Banks are constantly implementing the innovations required to meet customer expectations, putting strain on capital and margins.

 

This strain on margins is forcing banking executives to dig deeper into where profits are generated and where they are not.  Quantity based modeling with advanced costing explores product and customer profitability by attaching causal-based costs to revenue.

 

However, caution is in order as product profitability in banking is not one number but an average product profitability across all customers.  The profitability of a banking product is driven by how each customer uses that product (e.g., paper versus email statements).  A product’s range of profits is driven by customer behavior but often ignored, substituting the average profitability for decision making leading to sub-optimized results.

 

A good example of this is the profitability of retail checking accounts.  Many of the costs incurred to provide checking account products depend on customer behavior, such as how many times a customer visits a branch, uses an ATM and writes checks.  These activities incur costs, and each customer uses these services in varying degrees. Many banks when computing the unit costs of their retail checking product start with the total costs of servicing all checking accounts and then divides by the number of active checking accounts, arriving at an average cost for a retail checking account.  This approach assumes all retail checking customers use the bank’s services in the same amounts and proportions.  If the retail checking product shows (average) profitability, then it will be promoted by the bank’s sales channels and sold to profitable and unprofitable customers, creating sub-optimal results.

 

Banking executives also need a better understanding of customer profitability, which is woefully presented in many accounting systems by assuming each customer behaves the same., which is patently false.  Research based on advanced modeling has shown that two-thirds of an organization’s customers are break-even or unprofitable.  Knowing which customers are actually profitable, and which are not, is no longer an option for bank executives.

Alta Via’s quantity based modeling and advanced costing product, proEO, provides bank executives compelling analytics and deeper insights into products and customers, leading to informed decision making and optimized results.