Software-enabled analysis takes the guesswork out of serving top customers

Northwestern Financial Review, Dec 1-Dec 14, 2004 by Hilgert, Jackie

Move'em up or move'em out.

It's a big-bank mantra that doesn't much resonate in rural northeast Nebraska where Security National Bank operates four branches, all in communities of fewer than 1,600 people. Then again, the $100 million family-owned community bank is very much concerned with how each and every customer - retail and commercial - ranks on the scale of profitability. And, it's made great strides in assessing and ranking customer relationships in order to price smartly - and boost its bottom line.

The bank started the process nearly two years ago by simply trying to find a way to measure customer profitability. "You think you know who your best customers are," said Keith Knudsen, the bank's executive vice president. "But, without some kind of system, you also think you might be missing some."

The bank turned to IPS-Sendero's Customer Profitability System, a software program that extracts customer data from the bank's core processing system, (in this case Information Technology's Premier suite) and analyzes it for profitability to the institution. The bank pulled monthly profitability reports for a full year to gain a historical perspective, or rolling data, on net income to the bank in dollars, return on assets and return on equity. They analyzed by account type, by customer entity and by relationship, and then with IPS-Sendero's technical assistance, were able to plug that analysis back into their core processing desktop.

Initially, the bank just wanted to figure out what its customers looked like. "The first thing we learned was we were probably charging our large borrowers more than we would need to in order to maintain good profitability," Knudsen said. "Then, we saw that the top 10 percent of our customers were generating about 130 percent of our revenue." The bank immediately started to think about retention strategies. But first, they had to tell the staff who those top customers were.

Business intelligence typically has been used mostly by the analysts at the bank, said IPS-Sendero's Danny Baker. "The problem is connecting the value you get out of analysis with the people who really need it, the people who work with the customers," Baker said. IPS-Sendero has tried to bridge that gap by funneling its profitability intelligence right to the core processing desktop whenever the customer identification number is plugged in.

The desktop is where it all happens, Baker said. "That's where the whole definition of the customer relationship is," he said. The key to getting the knowledge to the desktop is putting it on the same desktop as the core system. "You can't have bankers switching between two screens for information.

"ITI had been moving toward a more dynamic desktop, with a browser-based front end," Baker said. One of the advantages to browser-based technology, he said, is being able to drop a lot of data onto a single screen, although that data may have come from multiple back-end systems. "So, when a banker at Security National does an inquiry on a customer, the ITI system sends off requests for information on that customer and one of those requests goes to the IPS-Sendero system, which grabs the profitability information and sends it back to the desktop."

It's a portal approach that's even changing things at the teller line. "Right now, tellers get net profit figures, ROA and ROE, so if an issue about a fee conies up, they can make a waive decision right on the spot," Knudsen said. The bank hopes to implement a customer star rating on the desktop by January or February.

Security National also discovered ways to link related customers when talking about retention strategies. "We found our most profitable relationship was actually four or five individual entities," Knudsen said. There was a farming operation, an elevator business, a trucking business, and a father and a son with individual accounts; all the entities were tied together by family ownership. When analyzed separately, one or two of the entities would line up on the low end of the profitability scale, Knudsen said. "All of a sudden, we see them linked and we can say to our people, 'Hey, this is our most profitable relationship.'" Today, when a member of that family or an employee of one of those operations comes into the bank to discuss a fee or negotiate an interest rate, the employees know how to respond. They know how to protect the relationship; it's all on their desktop.

The bank isn't only concerned about their top customers, however. "We went to the bottom of the list," Knudsen said. "If someone shows up as not profitable, that does not mean we don't want them as a customer," the community banker stressed. They've tried to communicate to their staff that every customer relationship is valuable, even if it's just the potential.

Knudsen admitted that the reason some customers cost the bank money is problematic internal pricing. The bank has been successful renegotiating CD rates for some of these customers thereby moving them from a net loss to a net gain of several hundred dollars per year.