How Banks Use Profitability Analysis
by Arthur Middleton Hughes

 

Banks have come a long way towards Customer Relationship Management in the past five years. In the 1980ís most banks had not yet created a consolidated Marketing Customer Information File (MCIF). Their credit card accounts were kept on one computer, checking accounts on another, and home mortgages on a third. By 1990, most banks had figured out how to group all customer accounts together on an MCIF, even if they were maintained separately.

The next step was determining the profitability of each customer. This is not easy.  Modern profitability software adds up the revenues from each account, and subtracts the bankís costs on a monthly basis. The costs include the cost of the funds, provision for losses, overhead, deposit insurance, and customerís usage of bank services. Profitability software is still in its infancy. It offers a real challenge for software providers to deliver an outstanding product. It will be particularly useful for advanced data applications.

Once the software has determined the profitability of each account each month, each customerís total profitability has to be computed by adding together the profits or losses from each of his accounts. When banks first do this calculation, it often comes as quite a shock. Some, like the Fleet Bank, have found that as many as half of their total customers are unprofitable. Many will never be profitable. Their marketing staffs are busy working to acquire and retain people who destroy value for the bank!

With knowledge of profitability, banks begin to classify their customers into profitability segments so that they can understand and modify customer and employee behavior. Here is the way one bank classified its customers in a recent month:

The top two segments, representing 16% of the bankís customers, were responsible for 105% of the bankís total profit. The bottom 28% represented a loss of 22% of the profit. This picture is typical of many banks.

What are banks doing about this situation? In the first place, few banks have reached the this stage yet,  and most of those have not developed any conscious strategies to deal with the problem. Those that have developed a plan, however, have come up with some innovative ideas.

Most are working very hard to retain the customers in the top two groups.  These are designated as Gold customers. Banks try to extend special services to them. Gold customers call in on special toll free lines. Branch managers are furnished with the names of their top customers, and are instructed to meet and greet them when they visit a branch. They are assigned personal bankers, who call and introduce themselves.

The customer access screens used by bank personnel include a profitability code, so employees can know whether they are dealing with a 5, 4, 3, 2, or 1.  When the loans for the 1s come up for renewal, they are renewed at a higher rate, to try to nudge them into profitability, or possibly to get them to take their business elsewhere.  The software does something else which is quite sophisticated. The software determines which bank products should be suggested to the customer during customer contacts on the phone or in person. These products are selected by formulas that determine what bank products the customer currently uses, and what his current balances would indicate that he might be eligible for and want to use next.  The software also suggests the appropriate rates for loans or CDs based both on the current market, and the customerís profitability level. The bank software is often tied to the customer service call director, which routes Gold customer calls to special Gold Service teams, and provides only minimal service for unprofitable customers.

Customers who visit branch offices cost the bank considerable money. It is much more economical for customers to use an ATM, mail, or PC banking.  For this reason, some banks have tried to discourage branch visits by charging a fee. Profitability analysis shows that such policies may be a serious mistake. As the above chart indicates, branches are visited most by two groups: the most profitable and the least profitable. Policies that turn away unprofitable customers may also turn off Gold customers.

Beyond Profitability

Profitability only measures the past. Lifetime value projects this into the future, and looks at what each customer can do for the bank in the coming years. Fleet Bank, for example, determines customer profitability and lifetime value each month, and also computes potential lifetime value if the customer can be talked into purchasing the most likely next products. In this way, Fleet manages its customer relationships in a highly professional manner. We will be covering lifetime value in a future article.

What are marketerís roles in this revolution in banking customer management? Database markering analysts should:

  • Have profitability computation software available

  • Assist banks in creating marketing customer profitability customer segments

  •  Help to create ďNext best productĒ software

  • Have the results of these program appear on customer contact screens throughout the bank

  • Assist banks in moving their customers towards profitability, using these new techniques.


Arthur Middleton Hughes is Vice President of The Database Marketing Institute. Ltd. (Arthur.hughes@dbmarketing.com) which provides strategic advice on relationship marketing. Arthur is also Senior Strategist at e-Dialog.com (ahughes@e-Dialog.com) which provides precision e-mail marketing services for major corporations worldwide. Arthur is the author of Strategic Database Marketing 3rd ed. (McGraw Hill 2006). You may reach Arthur at (954) 767-4558 .


The articles on this web site are available to the general public to read, enjoy and for limited business use. If you want to reprint more than one or two of them for resale or use in a business or educational environment, send an email to Arthur Hughes at arthur.hughes@dbmarketing.com. He will give you permission by return email. The cost, depending on the number of copies you want to reprint, is very inexpensive.