retail banking challenge: Can bankers move marginally-profitable customers into the lucrative category?, The

Northwestern Financial Review, May 15, 2001 by Crews, Jennifer Goepfert

One of the oldest cliches in banking is that 20 percent of the customers account for 80 percent of the profit. In the competitive, low-margin world of retail banking, financial institutions are forever looking for ways to reduce delivery costs and increase the number of products each customer uses. A new report published by the Bank Administration Institute in Chicago and The Cambridge Group says banks may be missing the boat if they focus too much attention on the obviously profitable customers.

"Banks assume that the top 20 percent of customers who account for the majority of the profits should be dictating how the business is led. That is a bit like a man going to eat a steak at a steak house and then designing a McDonalds after that experience," explained Navtej S. Nandra, a principal at The Cambridge Group. "The wallet and profits associated with the other 80 percent is actually quite significant but they have very different needs. Banks are overlooking a great opportunity."

"We explored the attitudinal view of what is important to customers," BAI's Paul McAdam said of the study. "The underlying attitudes and motivations are what have shaped financial services behavior. These attitudes strongly influence how people behave where they bank, what types of products they want and whether they are selfservice or in-person oriented."

By focusing on the "other 80 percent," banks can target a segment that is likely to contribute significantly to today's bank profits, the study suggests. Focusing on that segment means redefining the marketplace, Nandra said.

BAI's study shows that people who typically fall into the 80 percent category considered less profitable do not show the same degree of interest in technologically sophisticated services as the bank's most profitable customers. They prefer human interaction, which doesn't necessarily have to be in person, Nandra said. These consumers are happy to talk to someone over the phone. The key for them is the comfort of dealing with an individual instead of a machine, the study reveals.

Many customers want simplicity. Financial services seem complex to them, so these consumers seek a bank that makes banking easy, Nandra said.

McAdam said banks need to know their customers thoroughly in order to be relevant to them. An institution cannot survive by providing "the same offerings to all people." Banks that offer the same services to everyone fail to align themselves with any particular consumer segment and generally can't compete with banks offering more focused product lines. Product Packages

Nandra said banks can appeal to the majority of their marginally-profitable customers by bundling services.

He offered an example from outside the financial services industry: "When you go to buy a wireless telephone, you can get two kinds of options. One is called the 'menu offerings' and you can pick and choose from those services. The other is called the 'digital one-rate.' It was actually what created the growth for AT&T's wireless business because they took out all the complexity of thinking about the products and the services and said, `If you buy digital one-rate, here are all the things that come with it."'

Nandra suggested there is a way to bundle services, keeping the packages simple. Then, he said, align those bundles to the consumer according to their needs. Consider the average baby boomer, he suggested. They are approaching retirement, and so their financial goals and products tend to focus on retirement options. A family that is just starting out, however, is worried about mortgage loans and saving for their children's education. Each of these consumers has different goals, Nandra explained. By designing bundles aligned to the specific goals of each of these segments, you can generate interest in a wider array of products.

"What banks do today is what I call the 'Sears catalog' approach," said Nandra. "We throw everything and the kitchen sink at them and then tell them to decide and figure out what they want. Everything we do as financial institutions is in our lingo and our words. So yes, we are trying to sell them products, but we are telling them to go through the experience of selection. What we aren't doing is bundling and aligning it to their needs."

By bundling services, a bank is alleviating confusion and bringing to light products or services the consumer might not have otherwise known about or considered.

Another approach for catering directly to customers is based on the Customer Relationship Management model, or CRM. Using this premise, a banker would be trained to identify the customers' needs and bundle services for them without the software and databases normally associated with CRM strategies.

Greg Evans, vice president/director of marketing at Merchants National Bank, Winona, Minn., said knowing and catering to customers is the key to the bank's retail success.

"Our business philosophy is one that is a commitment to personalized service and we take a relationship approach to everything we do," said Evans. "We have a strong community banking presence in our market. We look at retail banking as certainly an important part of our business."