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

American Demographics, Feb, 1997 by Bill Stoneman

Consultants such as First Manhattan's Kuenne and Delta Consulting's Jamison encourage banks to take both routes. Rather than impose fees on all unprofitable customers, they urge presenting customers with a choice: pay more, or use certain services less. This may be the best way to go because it doesn't alienate any one group of customers. A slight majority of adults say they would be very likely to forego teller transactions to avoid fees, 57 percent, according to Gallup/Bank Advertising News. But those aged 18 to 34 and 55 and older are slightly more reluctant to do so, at 49 and 55 percent, respectively.

To show how banks might nudge their customers toward new behaviors, consultant jamison describes two fictional checking-account holders who both avoid paying a monthly service charge by meeting a $1,500 minimum balance requirement. The first writes 70 checks a month, makes four visits to a branch, uses an ATM six times, and calls twice for balance information. Not only is that person a transaction hog, she uses the most expensive delivery system. The second writes fewer checks, rarely visits a branch, and uses a voice-response system at 11 p.m. because that is when he likes to balance his checkbook.

While the second customer is obviously more profitable than the first, the bank has opportunities to improve its business with the first, Jamison says. For example, since she is willing to use the ATM and phone system, tellers should encourage her to use those less expensive routes more often.

For customers who are hesitant to try high-tech banking, demonstrations could help. To be sure the approach is effective, says ActionSystems' Foster, a mature person rather than the youngest staffer should give a demonstration to an older customer who may be particularly hesitant about adopting new-fangled technology.

If education and subtle hints don't do the trick, blatant premiums might help motivate those wary technophobes. Foster suggests motivating ATM use by giving away a $20 bill with every 100th transaction or holding a dinner-for-two drawing for customers who bring in three ATM receipts to the bank, publicizing the events, naturally.

Staff incentives and staff training also are critical to making the least profitable customers profitable, says Banc One's Hartfeil. He notes that most customers are mainly savers or mainly borrowers, but not both. "If you incent your sales force to sell savings accounts and they sell to borrowers, you don't make money," he says, because borrowers don't bring profitable deposit business to the bank.

At the same time that banks are seeking to discourage excessively expensive use of their services, they are looking at pricing to encourage customers, who typically have relationships with two or even several institutions, to consolidate their business. For example, Keith Patten of Camden National says he might offer reduced-cost or free personal checking to a person with $2,500 in a money market account, certificate of deposit, or savings account.