Banking on customers: banks are becoming painfully aware that most customers cost more than they are worth

American Demographics, Feb, 1997 by Bill Stoneman

"Those of us who pay off the credit-card balance each month are unprofitable customers," says Foster, but this group accounts for less than 20 percent of all card holders, too small a group to worry much about. Those who carry a balance of $1,000 or more are quite profitable, she says.

THE ABCs OF PROFITABILITY

Comstock Bank of Reno assigns letter grades to its individual customers based on how profitable they are to the bank. An "A," "B," or "C" on a computer screen lets tellers and customer service staff know instantly how to treat each customer who walks into a branch office. "A `C' customer is going to get good service," says Jacqueline Entrekin, branch administrator for Comstock, a community bank with five branches and $140 million in assets. "But an `A' customer is going to get great service."

The process of segmenting Comstock customers into "A," "B," and "C" categories began with an examination of every account to determine exactly how much it costs to provide each product or service, says CEO Barone. Although the costs differ from one bank to another, there is virtually universal agreement that the teller window in a traditional full-service branch is the most expensive place to serve the customer. In fact, First Manhattan calculates that each teller-assisted transaction typically costs $2, versus 50 cents for processing an ATM transaction, 5 cents for a direct deposit, and 4 cents for a check. Automated voice-response telephone systems and computer banking are other inexpensive ways to deliver certain banking services.

Armed with information about the cost of providing each service and the profitability of each household, banks are rethinking what they charge and how they take care of customers at opposite ends of the profitability spectrum. Barone explains that Comstock Bank wants to do everything it can to keep its "A" customers happy. Its "B" customers might be "A" customers at another institution, since most people have relationships with several banks. His goal, he says, is to convert them to "A" customers at Comstock. "The objective with the `C' customer is to either make them pay their way or to move them up to a `B' customer," says Barone.

Taking care of the best customers at Comstock means personal phone calls from staff members when CDs are close to maturing and going easy on the fees. "If I have a customer with $50,000 on deposit, I don't care what they do on their checking account," says branch administrator Entrekin. "It's free." Banc Ones Hartfeil writes in Community Banker that the most profitable customers might be ",offered special services like gold or platinum frequent fliers, special toll-free numbers with shorter wait times, and more experienced service representatives."

"A" customers are worth special attention, bankers say, not only because they are very profitable, but because they are the most likely to be recognized as such by others and to be tempted away. ActionSystems, Foster says research indicates that it takes about seven contacts a year -- beyond routine teller transactions -- to maintain a secure relationship with the best customers. To that end, astute bankers are sending financial-advice articles to top customers, calling them from time to time, inviting them to seminars, and otherwise keeping in touch.