Western Independent Banker - November/December 2008 - (Page 37)

By Bob Giltner Increasing Shareholder Value: Key Profitability Drivers AFTER YEARS OF great results, earnings growth is facing stiff challenges in today’s financial services business. Clearly, yesterday’s success is no guarantee of tomorrow’s performance. Consumer behaviors change. New competitors arrive on the scene. Sometimes they even come up with a better mousetrap. A significant challenge therefore is to understand what actually drives future profitability, not just what worked in the past. This is especially important in banking, where a wealth of available metrics makes it easy to mistake the trees for the forest. Asset-liability management, asset quality, compliance with federal requirements like those in the USA Patriot Act and dozens of other issues are vital to the success of a bank. They don’t, however, drive profitability. In the long run, earnings growth depends on growth in customer business. Four areas of the retail banking business are especially important to actively manage going forward, rather than leave to chance. Account Openings from Referrals The strategic relationship that provides entrée into a consumer’s wallet is the transaction account. And the key going forward is word-of-mouth referrals. The number of customers who refer other customers is a critical measure of your growth potential and market presence. Top performing banks get 40 percent of their total openings from referrals, and these accounts have higher balances, stay longer and bring in other accounts. In a nutshell, the best customers come from the referrals of satisfied customers. Referrals do not need to be left to chance, and a strategically managed referral process can leverage technology to make it turnkey and internet-savvy. Automated tracking of who actually recommends the bank provides a far richer return on investment than heavy-handed promotions. After all, customers who chase rates once will move again when they spot a better deal. People who move their business around for free toasters certainly aren’t likely to become loyal customers. based on the level of their card usage. On average, 80 percent of a bank’s customer base uses their debit card less than 10 times per month or not at all. Segmentation is key to effectively increase debit card use among the low to non-users. Successful banks are building incentives around the recognition that people who don’t use the card at all are most likely to respond to very simple offers, where the reward for immediate action is immediate itself. These simple actions can transform a non-user into a heavy user over just a few months. At the same time, these banks are making unique offers to heavy users that specifically recognize the volume of their activity. Non-Sufficient Fund Income Traditionally, bankers often have trouble getting their heads around the very positive role that NSF income plays, but they need to. NSF revenue provides nearly half of the transaction account revenue, and will be a key to banks for years to come. And with shifts to debit transactions, banks need new processes to sustain income. While returned paper checks generate NSF fees, for example, declined debit transactions do not. Though NSF policies and attendant revenue pose public relations challenges, the business is far too important to ignore or, worse, avoid. If board members are intent on keeping a finger on the pulse of a bank, they’ll keep careful track of NSF revenue per customer. And as with each other driver of retail profitability, they’ll demand that management nurture the business, Debit Card Usage It’s been fairly clear for some time that consumers’ primary banking relationships are with the banks that hold their checking accounts. But with aggressive marketing putting second and even third checking accounts into the hands of so many consumers, banks need to aim higher to be sure they’ve secured the fi rst spot in their customers’ hearts. The way to do that is by encouraging the use of their debit cards. Heavy debit card users generate an average of approximately $100 a year in interchange fee revenue. But even more importantly, heavy debit using customers have significantly more relationships per household with their primary bank than customers who do not use the card. And, their attrition is much lower. Banks that understand how debit card usage drives relationships are tailoring different offers to different customer groups, After years of great results, earnings growth is facing stiff challenges in today’s financial services business. Clearly, yesterday’s success is no guarantee of tomorrow’s performance. Western Independent Banker November/December 2008 37

Table of Contents Feed for the Digital Edition of Western Independent Banker - November/December 2008

Western Independent Banker - November/December 2008 Contents A Message from the President & CEO A Practical Approach to Director Evaluations Director Assessment: New Standards for a High Performing Director The Best of the West: Traits of High Performing Banks Best Practices Checklist for the Audit Committee The Real Performance Metric: It Takes a Balance of Profitability and Growth to Be Successful The Role of the Board in a Credit Crisis A Bank Director's Obligation to Be Aware of Regulatory Change Benefits Tied to Performance Receive Higher Approval Rating by�Board Members Increasing Shareholder Value: Key Profitability Drivers Board Portals Streamline Efficiency for 21st Century WIB Service Corporation Report WIB Calendar Welcome New Members Index to Advertisers advertiser.com

Western Independent Banker - November/December 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.