By Michael Deely
At your retail bank, your bottom-line is the beating heart of profitability. If your financial institution doesn’t turn a profit, you’re out of business.
So, when it comes to your customers, you need a profitability analysis to ensure your banking operations aren’t just driving you nearer to closing day. The three types of customer profitability analysis include: Retail customer profitability, business customer profitability and customer lifetime value. Today, we’ll be covering customer profitability for retail banking.
Retail Banking Customer Profitability
Most middle-market bankers are surprised by the results of a retail profitability analysis, because most of them don’t expect so many of their customers to be unprofitable. In fact, the truth might surprise you: Only about 20% of your customers are driving 80% of your profits. Another 20-40% of your customers account for the remaining 20% of your profits. And the most shocking fact of all is that
40-60% of your retail banking customers are unprofitable.
However, once you determine the precise figures for your retail bank, this knowledge empowers you to turn the situation around by identifying various customer segments, differentiating the customer experience for each segment and then moving each customer up the profitability scale.
A customer profitability analysis enables to you increase your bottom-line growth in a number of different ways, including:
- Segmenting and categorizing customers to identify and differentiate between profitability levels
- Acquiring new, profitable customers by pinpointing the attributes of existing profitable customers and applying those filters to sales and marketing activities
- Cross-selling products to existing customers to move them into more profitable segments
- Providing differentiated services to customers based on their profitability
- Determining prices that make products and relationships more profitable in the long run
By Michael Deely
It’s every middle-market bank’s worst nightmare: Not having enough liquid assets on hand to meet daily obligations.
Fortunately, this nightmare doesn’t have to happen to your bank if you take the right steps to reinforce your liquidity risk management planning and practices.
Liquidity (according to the Basel Committee on Banking Supervision) is the ability of your bank to meet all regular financial obligations when they come due without suffering undesirable losses. Because banks convert short-term deposits (such as checking and savings accounts and other assets) into long-term loans, they are more vulnerable to liquidity risk than other financial institutions. As a result, they’re susceptible to not having enough liquid assets on hand when deposits need to be withdrawn or other commitments come due.
Nearly every transaction has implications on your bank’s liquidity, so you need a liquidity risk management strategy that ensures your cash flow is sufficient and you’re prepared for external market shifts or changes in depositor behavior. Especially with unstable financial markets in the past decade, liquidity management has become more complex than ever before – so it’s essential that you understand the driving principles behind a robust strategy.
Here are the four most essential principles of robust liquidity risk management that you should consider and implement at your middle-market bank:
1. Identify Liquidity Risks Early
A liquidity deficit at even a single branch or institution has system-wide repercussions, so it’s paramount that your bank be prepared before a shortfall occurs. This means your bank needs to have a rigorous process for
identifying and measuring liquidity risk
Your liquidity management process should include a forward-looking framework to project future cash flows from assets, liabilities and items not on your balance sheet. This framework should include:
- The ability to conduct risk analysis on extreme, hypothetical situations
- The maintenance of liquid assets to serve as a cushion in case of a possible shortfall
By Michael Deely
Every middle-market bank wants to achieve operational efficiency and greater profit margins, but making that happen at your financial institution is sometimes easier said than done.
In order to actually improve your banking operations, you need to not only find problems but also fix them without spending enormous amounts of time and money.
Here are three simple-yet-effective ways to identify issues in your banking operations – and then fix them efficiently:
By Michael Deely
Improving processes at your financial institution doesn’t have to involve a complete overhaul of your core banking operations. In fact, business process improvement is as simple as small, everyday changes – with significant long-term results.
These process improvement techniques require that you change your routines and your outlook, especially when it comes to problem solving in your corporate bank setting. While some changes might seem to be too minor or insignificant to be worth the effort, their long-term return on your operational efficiency is invaluable.
Here are eight simple-yet-effective ways to improve processes and enhance operations at your middle-market bank, from the most everyday items to long-term process control:
By Michael Deely
No other person at your bank is under so much pressure as the Chief Financial Officer. Not only are you, as the CFO, responsible for keeping your bank in business, but you have to keep your financials afloat amidst a turbulent economy and a tempestuous regulatory environment.
However, you don’t have to be troubled about these economic pressures or compliance changes if you have the right framework for addressing and overcoming challenges at your bank: the lean banking framework.
How does lean banking help you manage and monitor your bank’s financials more efficiently? Here are just three components of lean banking that help you as a Chief Financial Officer achieve your goals without being held back by banking compliance regulations or continually compressed margins:
CFO Essential #1: Maintain A Balanced Efficiency Ratio
Your bank’s efficiency ratio is one of the most important metrics in determining your future profitability and long-term financial health as an organization. This is why a low efficiency ratio is an essential component of lean banking, especially for CFOs.
Many CFOs focus too much time and energy on either one side of their bank’s efficiency ratio or another (such as reducing non-interest expenses, or increasing non-interest income). But, in order to keep your bank running most efficiently, you need a balanced methodology for efficiency ratio management.
A lean banking approach combines both cost reduction (such as streamlined workflows, process improvement and value-stream mapping) and rallying the revenue side of your ratio (through improved sales processes and growing share-of-wallet with current customers). By balancing both sides of your ratio, you ensure that new regulations or unexpected costs won’t catch your bank by surprise – or put you out of business.