Academic journal article ABA Banking Journal

Some of Your Customers Are Unprofitable. OK, Now What?

Academic journal article ABA Banking Journal

Some of Your Customers Are Unprofitable. OK, Now What?

Article excerpt

He has been described as "head of customer segmentation," but Dave McVay's official title is vice-president of personal market segments. Not a familiar job title in the wanted ads. McVay, who has been 25 years with Bank of Montreal, agrees that his latest job description reflects a change in bank culture, a newfound introspection.

McVay is one of several executives charged with formulating a response to a profitability analysis database recently compiled by the bank. He explains profitability analysis as follows. "It's mapping how people use the system to determine the importance of each of the points in the value chain. The old approach was to ask `How profitable is this branch, based on the assets and liabilities in the branch?'" The limitations of such an approach quickly become obvious once you track where transactions are done, he explains. For instance, you find 75% of a branch's customers now bank elsewhere, but never bothered to close their accounts. Conversely, you find that a stripped-down branch in a mall gets lots of customers. However, it appears far less profitable than it could be because only relatively unprofitable services are made available there.

It no longer makes sense to aggregate profit at the branch level when the branch has become but one distribution channel for banking services. The profitability question is substantially a technology question. First, it takes the right technology to amass transaction information for analysis. Second, there's divided opinion on whether automated banking methods--from ATMs and Touch-Tone phones, to PC and Internet banking--are inherently more profitable.

That presumption of technoprofitability seems evident in conference sessions, media coverage emphasizing the cost differential between automated and nonautomated transactions, and in the behavior of banks regarded by their peers as having pushed the edge of the electronic envelope. The most notable examples in the U.S. have been Wells Fargo closing traditional branches and First Chicago instituting fees for teller services.

But banks identified by profitability experts as among the "handful" advanced in profitability analysis don't necessarily share in this presumption. Interestingly, success in improving profitability is claimed both by banks that have acted on the assumption automation is central to profitability, and by banks acting on the assumption that automation is incidental.

First Chicago worked on the assumption that tellers were the most expensive way for the bank to service checking accounts. After searching for the common trait among its unprofitable customers, said Marion (Robin) Foote, former senior-vice president, the bank found "the profitable went for self-service." Foote was speaking at a conference about her work on repricing First Chicago's checking and savings accounts. She recently moved to Bank of America, where she could not be reached for comment on how close First Chicago is to its goal of saving $18 million on branches and $2 million in operations. A spokesperson said First Chicago's acquisition of National Bank of Detroit subsequent to the repricing would make it impossible to break out First Chicago's savings.

NBD is to institute teller fees next year, once it moves onto the same computer system as First Chicago, allowing it to track teller transactions. NBD extends First Chicago's franchise into Michigan, where Old Kent Bank just this month became the state's first bank to introduce teller fees.

Banks are uniform in disassociating their profitability-probing behavior from First Chicago's, which some consider to have been "PR suicide." "They fired their marketing people the next day [after the teller-fee story broke]," said a source, who preferred not to be named. However, it is widely conceded that First Chicago has had material success. It reportedly lost less than 1% of customers, not the 10% predicted--despite some other Chicago-area banks advertising against it--while branch staff decreased 30% and ATM activity "skyrocketed. …

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