Boosting the Bottom Line
Pike, Kelly, Independent Banker
Considering reward offers to jump-start fee-income gains
Sifting through her mail one morning, a consumer gets an important looking letter from her bank. She assumes it's junk mail-the bank always seems to be sneaking sales pitches into envelopes that appear to be of dire importance- but she opens it anyway.
Inside she finds, to no surprise, a sales pitch. While she would normally toss it in the trash along with her weekly value coupon book of purported savings, this particular pitch catches her fancy-a free rewards program for her existing debit card. No extra costs, rewards like Starbucks gift certificates for making purchases, and she'll get 5,000 free points to start.
Intrigued by the offer, the consumer- who had been wondering what her bank had done for her lately-calls the toll-free number on the mailing and signs up. The bank succeeds in securing her business, including a credit card and a significant savings account, for a while longer.
This anecdote is true, but far from unusual. As many as 15 percent of customers are shopping for a bank at any given time, according to research by Mark Stenson, president of Stenson Management Consulting in Marshall, Minn. Many will be tempted by offers coming through the mail.
Attracting customers and, just as important, attracting them to products that will build a relationship with the bank and increase fee income, is a reality all community banks must contend with. Fee or non-interest income throughout the banking industry totaled $18 billion in 2004, but only a fraction of that money went to community banks. As the squeeze on net interest margins continues, fee income has become more important. It has also grown more competitive as banks expand their reward program offerings, often in ways that help anchor customers to the bank by increasing the number of products they use.
Making an Offer
For years, credit card issuers have offered reward programs allowing cardholders to rack up points toward goodies ranging from cash rebates and free gasoline to free airline tickets, hotel stays and bigscreen TVs-motivating customers to use their credit or debit cards more often and in turn, boosting the bank's interchange fee income. (See related story, page 91.) "Reward programs carry some cost," says Linda Echard, president of ICBA Bancard, ICBA's electronic payments services corporation, "but they're definitely advantageous for community banks. Most of the cost will be covered by increased usage, which also means greater interest income."
But reward programs are evolving to include a broader array of bank products, such as with Citibank's innovative "Thank You" program, which rewards debit cardholders with two or more additional services with the bank, such as a savings account or direct deposit, with extra points. And in March, National City Bank in Cleveland, Ohio, rolled out "points from National City," a program that takes the points concept to a whole new level by permitting individuals in the same household to pool their points and small-business owners to link their business accounts with personal ones to earn bigger rewards. As with credit card points, National City's points can be redeemed for a bevy of gifts. Other banks have followed suit.
While it's too early to tell how National City is faring under its new program, Citibank has earned favorable press and certainly retained and attracted a few customers. The genius behind such programs are their success in fostering cross-selling and loyalty, says James Gresham, CEO of Rennhack Marketing Services Inc., a firm in Grapevine, Texas, specializing in customer incentives.
"The basis of all these rewards programs is that the bank wants more hooks [into its customers], and if it can cross-sell and up-sell the consumer, the sticking power of the relationship is that much stronger," he says. Banks can also encourage customers to migrate to specific products and services by offering bonus points as an incentive to adopt a specific product the bank is pushing.
The average lifespan of a checking account is five to seven years. But when customers add online bill payment or direct deposit it increases the net present value of the customer because they are likely to have a longer relationship with the bank. And customers are more likely to feel happy about their relationship with the bank because they are being rewarded, Gresham says.
One of the benefits of a program that rewards customers for product use is that both new and existing customers see the value, although immediate, tangible giveaways remain the best way to attract a brand new customer to the bank, Gresham says. But even if a bank chooses not to adopt a bank-wide program awarding customers for using products and services, it should be cognizant of existing customers when extending incentives to new customers.
Consider the example of the giveaway for opening a new account, an area that has grown more competitive in recent months as Bank of New York offers up to $200 cash back to customers who sign up for a checking account and other bank products, and PNC Bank offers 10,000 bonus points to new customers who sign up for the bank's free debit card reward program. Existing customers may feel left out by such programs and wonder if the bank truly values their business.
In that case, a refer-a-friend program that awards the giveaway to a customer who gets a friend to sign up for a new account may be the answer, says Jeff DeWald, senior vice president of marketing for PBiz Inc. in Brentwood, Tenn. "A premium gift offer is an incentive to try a relationship with the bank," he says.
Incidentally, the most-wanted giveaway isn't cash, DeWald says. It's a DVD player.
In some lines of business, personnel referrals should be the main source of customers, and those doing the referring should be handsomely rewarded. When it comes to trusts, after the first five to 10 years in business 60 percent of new business should come from customer referrals, says Stenson. Since a large trust account can bring in significant fee income, compensation should reflect this. For staff members, directors and officers, Stenson recommends an incentive of 10 percent of the first year's fees. Such an arrangement is not necessarily appropriate for a customer though. It's better to offer a fixed referral fee of a few hundred dollars.
And while many banks choose to run CD specials to draw in deposits and new customers, it's a tactic that isn't very effective in bringing in permanent, profitable customers, DeWald noted at a recent ICBA National Convention workshop, "Don't Bet Your Bank's Future: Profitability and the Disappearing Yield Curve." CD customers park their cash, for which the bank pays a premium, but don't bring any other business. Alternative products, such as tiered interest checking accounts, can be an attractive alternative by helping build a core relationship at a lower cost of funds while helping build multi-faceted relationships.
While the average free checking customer has an average deposit of $905 and a free checking with interest customer averages $1,400, tiered interest checking accounts, which offer higher levels of interest for larger account balances, draw in an average of $4,255 by attracting wealthier, savvier customers. Compared with a CD account where customers deposit their cash and don't touch it for months or years, tiered interest customers are more likely to write checks or use debit cards and bring other products to the bank, DeWald says.
Incentives have repeatedly demonstrated their value in attracting and retaining customers, but the reason they are effective isn't limited to consumers' desire for an airline ticket or a DVD player, says Gresham. "You have to be convenient, offer the right products and services and have good customer service. The gift is the final value-added piece that creates a tipping point for the consumer."
That's one way to keep cynical but profitable customers at the bank.
Did You Know?
February through June is the time of year with the highest response rates for direct mail, including those mailings touting bank promotions, according to Jeff DeWald, senior vice president of marketing for PBiz Inc. in Brentwood, Tenn. July and August, the worst months, generate a 50 percent lower response rate.
ICBA Services Network
The ICBA Services Network, through four of its five subsidiaries, offers community banks the opportunity to retain customers and increase fee income.
* ICBA Bancard, a full payments provider, helps community banks earn interchange fee income along with finance charges by issuing cards, among other services.
* ICBA Mortgage provides access to the secondary market, allowing community banks to originate a variety of home loans. A mortgage life insurance program enhances fee income opportunities.
* ICBA Financial Services enables community banks to provide retail investment products, including discount brokerage and wealth management, which are increasingly critical to retain a bank's most valued customers.
* ICBA Reinsurance offers credit life reinsurance options that help increase fee income while offering the potential to earn dividends.
To learn more, visit www.icba.org or call (800) 242-4770.
In Trusts We Trust?
Trust services can contribute a lot to fee income, but they can also be a drag to the bottom line-especially if a bank enters the trust arena for the wrong reason.
"If you're simply looking at trusts to provide a service and not make a profit, then you shouldn't get into it," warns Mark Stenson, president of Stenson Management Consulting in Marshall, Minn.
Stenson's logic is simple. If the bank isn't making money, it won't be motivated to offer the latest, newest and best services, and may do a poor job serving some of the bank's best customers.
To break even in trusts, and later on reap some significant fee income, a trust department needs to manage least $100 million in assets. High-performing community bank trust departments should be guided by the 20-20 rule, which means 20 percent annual gross revenue growth and a 20 percent profit margin, Stenson says.
And as in all of community banking, a trust department shouldn't try to be all things to all people. "Profit comes with efficiency and a trust officer can't be an expert on eight or nine different types of complicated trust relationships," he says.
Banks should focus on investment agencies, living trusts, and IRAs and eschew corporate trusts, municipal bonds and employee benefits unless they can get into them in a big way. Likewise, probates aren't profitable because they are one-time events.
And while it's expected that early on customers will come from the bank's board of directors, customer referrals should make up 60 percent of new customers after five to 10 years in business.
Building a Sales Culture
Customers aren't the only ones who respond well to incentives. Banks can also boost fee income by rewarding bank employees who open new accounts or attract new customers. While laws regarding commission vary from state to state, Jami Ehring, a trainer with AIG American General offers the following tips:
* Set goals and keep it simple. Employees need to know what is expected of them to be rewarded.
* Provide training. Refresh employees' product knowledge at least every six months to one year so they represent product and service lines well.
* Promote incentive programs. If employees aren't reminded of the program, they won't be eager to participate.
* Offer incentives. Whether it's a percentage of the commission or a referral fee, the extra cash will motivate.
* Hold contests. If you can't give out cash, have a contest that awards a high performer with a trip, electronics or extra vacation days. Contests should last no longer than three months or run the risk of losing steam.
Kelly Pike is assistant director of publications for ICBA. Reach her at firstname.lastname@example.org.…
Questia, a part of Gale, Cengage Learning. www.questia.com
Publication information: Article title: Boosting the Bottom Line. Contributors: Pike, Kelly - Author. Magazine title: Independent Banker. Volume: 56. Issue: 5 Publication date: May 2006. Page number: 52+. © 2002 Independent Banker. Provided by ProQuest LLC. All Rights Reserved.
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