The Mortician`s Guide to Retail Banking David W. Furnace President

The Mortician’s Guide to
Retail Banking
David W. Furnace
President
June 23, 2015
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Mom’s Funeral
• Called the local funeral home – told to call back
• Called the next closest
–
–
–
–
–
Set time for a meeting with Roy
Showed up and herded into a very cold room
Roy never showed
Receptionist said it was my fault
Met with Amanda…who clearly didn’t know her
products
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Talking “Death”
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Is CW Etched in Stone at Your Bank?
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A bold statement
• I believe 9 out of 10 participants at this LBA
Retail Conference today can double the rate of
retail customers acquired, and it can be done
very profitably
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Things we can learn
from a Mortician
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The Mortician’s business model
•
•
•
•
•
A nice, big, expensive facility is required
The facility is frequently empty (underutilized)
His customers make an emotional decision
He generally gets one shot to close the deal
The service he offers is a commodity that is
difficult to differentiate
• He thinks he differentiates on service, but no
one can tell from the outside – they all look the
same until you experience it.
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A Funeral Home Business Plan
•
•
•
•
“People remembering people”
Average cost of a funeral: $5,884
75% of deaths result in a funeral
1st year projected: 29 funerals
– About 1 every other week
Source: Funeral Home Business Plan, Evergreen Life Memorial Center
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Banker Think
• ROA, ROE, NIM, NII, NIE, efficiency ratio – good
global, macro measures
• We don’t tend to think about “same store sales”,
“factory utilization”, etc.
• How much revenue do you get per widget?
• How much revenue will you get from selling one
more widget?
• What does it cost you to process one more
widget?
• How utilized are your factories?
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Let’s dive into that
• Revenues per widget – what is an average core
customer worth at your bank?
• Costs per marginal widget – differentiate
marginal costs from fixed costs
• Do we have excess capacity in the factory?
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Computing “value” –
Haberfeld’s view
• We monetize core customers in 3 key ways:
– Non-interest Income
– Balances in checking
– Cross-sells
• So…what is an average current customer
“worth” at your Bank?
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What are customers “worth”?
Average customer value:
a recent analysis
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Quick, high level math – fee income
•
•
•
•
NSF income:
Interchange income:
Regular service charge income:
TOTAL
$655,205
$526,930
$ 90,465
$1,272,600
• Divided by 6,471 consumer and business
checking accounts = $197/account average
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Balances
• Total non-interest bearing deposits: ~$81MM
• Divided by 6,471 = $12,517 X some “rate” for
value
• Haberfeld client averages (new accounts):
– Consumer:
– Business:
$ 3,625
$16,223
• Math we can debate: $5,000 x 2.0% = $100
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Consumer Portfolio Cross-Sell
Account Group
Haberfeld
Ratios
Checking
Savings
Money Market
CD
IRA
HSA
Consumer Loan
Line of Credit
HELOC
Mortgage
Business Checking
1.552
0.520
0.033
0.091
0.037
0.017
0.065
0.009
0.036
0.062
0.113
Total Relationships:
2.535
Total Deposits:
Total Loan Volume:
$ 17,136
$ 9,527
Haberfeld
Balances
Let’s debate this!
$
Deposit balances (not
including checking):
x effective rate credit
4,798
5,403
63,174
26,766
17,937
1,947
9,427
7,584
31,972
124,106
14,702
Loan balances:
x effective rate credit
$9,691
x 2.0%
$194
$9,527
x 2.0%
$191
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Business Portfolio Cross Sell
Account Group
Haberfeld
Ratios
Haberfeld
Balances
Business Checking
1.544
$
23,676
Business Savings
0.079
$
9,787
Business Money Market
0.049 $
131,471
Business CD
0.024
$
56,576
Business Loan
0.178 $
124,561
Business Line of Credit
0.066
$
46,409
Business Real Estate
0.084 $
426,474
Retail Checking
0.835
$
8,715
Retail Savings
0.463
$
6,457
Retail Money Market
0.058
$
92,336
Retail CD
0.075
$
26,196
Retail IRA
0.038
$
15,016
Retail HSA
0.023
$
2,399
Retail Consumer Loan
0.050
$
14,093
Retail Line of Credit
0.038
$
4,399
Retail HELOC
0.037
$
46,335
Retail Mortgage
0.083 $
168,808
Total Relationships:
Total Deposits:
Total Loan Volume:
Let’s debate this!
Deposit balances (not
including checking):
x effective rate credit
Loan balances:
x effective rate credit
$8,573
x 2.0%
$171
$61,059
x 2.0%
$1,221
Business &
Business Only
Retail
2.02
3.72
$
45,129 $
63,341
$
61,059 $
77,656
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Let’s recap
•
•
•
•
Fee Income:
Balances (checking):
Cross-sell (conservative):
Total
$197/customer/year
$100/customer/year
$200/customer/year
$497/customer/year
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And, they stay a long time!
• Haberfeld client average attrition: 12.22%
• Meaning average life is > 8 years!!!!!!
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Costs: mostly fixed…
• Per their 12/31/14 Call Report:
– FF&E
– DP Expense:
– TOTAL
$ 524,000
$ 445,000
$ 969,000
• Questions:
– How much does that go up if you add one customer?
– How much does it go up if you add 5,000 customers?
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But we haven't talked about
people yet
• How many new hires if we get one more
marginal customer?
• How many new hires if we get 5,000 more
marginal customers (over a long period of time)?
• Let’s put this in context, though:
– They are opening about 3/branch/week (total)
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Decisions, decisions…
• $969,000 in costs over 6,471 customers
– Average customer costs $150/year
• Analysis: we ONLY make money if customers
give us more than $150/year on average.
• Conclusion: we must design products and
activities to insure we ONLY get these types of
customers.
• But…is that the right way to think?
• Good analysis…faulty conclusion.
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What does the next customer cost?
• So you add one more PFI customer:
–
–
–
–
Issue a debit card ($5?)
Send a statement ($12?)
A little more data processing ($???)
Write off a little principal from overdrafts on
some ($5?)
– What else?
• Our clients report average direct
marginal costs are about $30$40/customer/year
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Marginal profitability is key
• If we get one more core customer…
– $500/year in revenue
– $40/year in costs
– They stay 8 years
• That looks VERY profitable to us!
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Net Present Value
of the Relationship
Retail: $2,730
Business: $9,321
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Monetizing Customers
Today and Tomorrow
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Non-interest Income is driven by transaction fees
consumers willingly pay rather than “account” pricing.
Accounts
Profit
6+ NSF
10%
20%
70%
20+ Debit
$239/acct
All Other
$24/acct
88%
of
Total
Fee
Rev.
For every $100k/year in
regular service charge
income, a typical bank makes
> $800k in Interchange
Income and NSF income.
12%
of
Total
Fee
Rev.
Why don’t we double
those, instead?
Source: Proprietary Haberfeld Holding Data; over 400,000 PFI
This could change in the future and we may all have to adapt!
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Monetizing customers in new ways
• Regular monthly service charge?
– If the CFPB whacks 50% or more of NSF’s, that is
how we think the entire industry pivots
– That doesn’t scare us: as long as the playing field is
level, effective marketing and superior execution will
still win
• Balances/Rates?
– In a normal rate environment money will have value
again
• New ways – we will discuss that in the next
presentation
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Capacity
• Your branches and the big guy’s branches look
the same to me.
• They service 6,000 customers per branch and
the typical community bank services about
1,500.
• Question: Do you have excess capacity? Could
you handle more customers?
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Industry Backdrop
Big banks vs. Community banks
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Total Number of Financial
Institutions
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“Too Big To Fail”
Top 4 Banks vs. Rest of Financial Institutions
Top 30 Market Share
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But Wait!
If you actively market for
new PFI customers, you will
get the dregs of society!
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Actually…
• The new customers you get will look pretty much
like the current customers you are getting.
• You can’t make them look much different.
• If you want a different looking customer…move
your branch!
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Unprofitable customers will
clog our lobbies!!!
• First, your lobbies aren’t clogged – most of
the time I could fire a cannon off and not hit a
customer!
• There is no perfect filter…just get twice as
many that look like (on average) the ones
your getting today.
• You will get you a LOT more unprofitable
customers…
• In about the same ratio that you are getting
them today.
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Conventional Wisdom
• Fully allocated cost model: Estimates in the
$200-$300 per year range
• With that analysis firmly implanted, we start to
make a lot of decisions without questioning the
premise or the business model:
– Marketing and Targeting: we have to get the perfect
customer in order for them to be profitable
– Products: we have to structure our products so that
we can’t have an unprofitable customer
– Fees: we have to raise them in order to cover all
these huge costs
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Can you imagine this?
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What happens if he doubles?
• Say he moves from 29 funerals/yr. to 58?
• What happens to marginal costs vs. marginal
revenues?
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Fundamental structure in banking
• We think banking is a business of high fixed
costs, low marginal costs (for the next core
customer) and high marginal revenues relative
to the cost, on average.
• We think you have TREMENDOUS excess
capacity
• Getting more core customers is a very strategic,
profitable undertaking (even with possible
regulatory changes from the CFPB)
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Business Models: Marginal
Revenues vs. Marginal Costs
• There are many businesses like ours with high
fixed costs and low marginal costs that monetize
customers well at the margin
–
–
–
–
Movie Theaters
Convenience Stores
Paypal
Even funeral homes!
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Doubling? Really?
• Understand the emotional dynamics of switching
• You can’t get anybody to switch…but you can
get twice as many to pick you.
• Must do effective marketing.
• Have good product: good product is easier to
sell then bad product.
• Close the business when it comes in.
• More to come on this…
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His Customers make an
emotional decision
• When do you become the PFI?
• When customers give your name in response to
this question: “Where do you bank?”
• They are telling you where they have their
primary operating checking account.
• The checking account is the beach head to “PFIdom”
• How do prospective customers choose?
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Getting New Customers
in a Fixed Marketplace
The emotional dynamic
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In every Market…
• In a given year, about 10% - 15% of the
households “change banks”.
• When you start getting new customers, by
definition, your competition is getting fewer.
• We call this system net zero—when FIs are
trading households back and forth
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The good news!
Believe it or not…but it’s counter-intuitive
A fixed market is an infinite
“pipeline” of opportunity
Approach and Message
• You can’t get anyone to switch, but you can do
something profoundly different…
• You can get a lot more of them to pick you after
they have already decided to switch!
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“Changing Banks”
• Switching is really, really hard
• People only do it if they have to
• Certain events beyond our control
create the opportunity, you rarely get
people to switch, it’s just too hard
• Be there when they decide to switch
• Set the right conditions for them to
notice and pick you!
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Why do people change FIs?
•
•
•
•
•
Mad at the old FI (70%)
Moved
Changed Jobs
Got married
Got divorced
• It is largely event driven
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When do people change FIs?
• When they have money
• When do they have money?
– When they get paid
• When do people get paid?
– Weekly or bi-monthly
• About every 6 weeks you get a
double-whammy payday
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A Unique Point in History
Those emotional decisions are
abundant…
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Consumer Opinions
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Consumer Opinions
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Consumer Opinions
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Effective Marketing
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Concepts…
•
•
•
•
“Bad at haiku”???? What????
How about a compelling offer.
Delivered to the right prospect.
Delivered at the right time – double whammy
paydays.
• Designed to steal market share.
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Convenience Is Still #1 For
Account Openings
35.00%
2
R = 0.9824
30.00%
% of Open Accounts
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
< 1 mile
Total
1-2
miles
2-3
miles
3-4
miles
4-5
miles
5-6
miles
Proximity
6-7
miles
7-8
miles
8-9
miles
9 - 10
Miles
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Electronic Marketing
• In 2014, 68% of ad requests online included
location-based data…
• …but few banks use that!
• Do you do any PPC? Map where you are
already getting customers and do PPC there, not
everywhere…
• I will talk more about this in the next session.
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Product
Do you like to fish?
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Most banks are afraid that you are only going to catch these…
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…so they design there products to try to catch these…
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But there are a lot of these out there! (and a lot of
room in the tank)
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Getting a lot more people in
the door
• What do people want when they are changing
banks?
• Simple, easy to understand products
• No cost
• Low hurdles (if any)
• Question: Can we make money delivering this?
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It isn't what
we don't
know that
gives us
trouble,
it's what we
know that
ain't so.
Will Rogers
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He gets one shot to close
the deal
• Do your policies recognize that?
– “Does my wife need to be here?”
– “What forms of ID do I need?”
• Do you pre-screen customers in order to qualify
for an account?
• Do you have consistently applied questions that
get the customer into the account that is right for
them?
• Does your front line staff ask for the business
every time?
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Is Screening effective?
Category
NSF Frequency
Principal Losses
Net Fee Revenue (after losses)
Accounts Opened (per branch/yr)
ChexSystems ChexSystems Users
Non‐Users
3.64
4.62
$3.24
$4.69
+ $28.29
+ 43
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Is Screening effective?
Category
ChexSystems
Users
Cross-sell Ratio
ChexSystems
Non-Users
2.58
2.57
Cross-sell Deposits
$
18,425
$
16,059
Cross-sell Loans
$
5,060
$
7,778
DC Take Rate
75%
80%
BP Take Rate
16%
36%
eStatement Take
Rate
14%
20%
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Take the emotion out when they
actually come in, too.
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The service he offers is a
commodity
• You differentiate by giving better service, but…
• If they aren’t a customer, they haven’t
experienced your service!
• You can make service a competitive advantage.
• How?
• Leverage your existing customers for referrals.
– Well run banks can get 1/3 of new openings from
customer referrals
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Leverage Referrals
Conclusion
• There are at least a few similarities between the
mortician’s business and ours. I hope you have enjoyed
this whimsical comparison.
• We think community banking is alive and well.
• The “death” that needs to occur is that of “conventional
wisdom”.
• With good marketing and effective execution, you can
double your current results (well, most of you can)!
• And finally…
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