Building Brand Equity
Diesel, Paul M., ABA Bank Marketing
Too often, banks, market on the basis of high deposit and low loan rates. This is the wrong approach, If you think you have no choice you are precisely the person who should read on.
While this may sound like one of those "lose weight pill" ads promising something too good to be true, I submit that you actually can learn how to:
1. Remove the need to sell on time basis of rates.
2. Spend fewer marketing dollars.
3. still enjoy stable and glowing business.
These three things are made possible by marketing your brand based on other elements of the customers' bank selection and decision to-stay process.
No, I haven't lost touch with reality. Yes, there are rate shoppers who will tread over their own grandmother for 5 basis points. But: Do you really want them? (It costs money to process them in and then back out.) Besides, successfully selling oilier than on the basis of low loan rates and high deposit rates means much more profits.
Permit me, please, to proceed to discuss the following items:
* Why not sell on the basis of price?
* What is brand equity and why seek it?
* As proof of my thesis, let's consider your (and my) brand preferences and how they affect you and time provider.
* What tools, besides price, are at your disposal to create brand equity?
* Summary and conclusion.
Why not sell on the basis of price?
Consider the following real (not concocted for this article) balance sheet, Table No. 1, from a community bank. (The numbers are not rounded because it is, in fact, real.)
What should jump out and impress you about this statement is that the largest asset by far--it's not even close--is total interest bearing funds. And the largest liability by far--again--is total purchased funds.
Therefore wheal you look at the corresponding income statement for the same bank for the same time period, you would expect the largest income item by far to be interest income and the largest expense item by far to be interest expense And you're right on both counts. (See Table No. 2, below.)
Note that net interest margin of $39,566-21,610 = $17,956, means that the difference (that wonderful thing called spread) pays the bills and that non-interest margin of $4,396-15,454 = ($11,058) is a losing proposition. With all due instruct to those who provide non-interest income, and we do need it, it is the difference between interest income and interest expense that makes or breaks a commercial bank. Interest income of $39,566 absolutely dwarfs non-interest income of $4,396, and interest expense of $21,610 exceeds another expense combined by over $5 million!
So the answer to the question posed by the title of this section is that selling on the basis of price raises interest expense and lowers interest income, reducing spread, which is the very lifeblood of a commercial bank. The practice is widespread, I think, for two reasons:
Marketers don't appreciate the importance of, order of magnitude and impact on profits of spread and thus how critical it is to preserve it.
They think they have to do rate marketing when the fact is that many things beside a few basis points--while nothing to a customer and possibly millions to a bank--can bring and keep customers to a bank that is not the rate leader or even number two or three.
Let's look at the order of magnitude of the spread issue, using the same bank, to see how dangerous rate marketing can be and how profitable nonrate marketing can be. I call this 'The Power of the Basis Point," for obvious reasons. Please reference the balance sheet and income statement (Tables No. 1 and 2) as you look at this.
* 1 percent of $382,880,000 (interest-bearing funds) is $3,828,000.
* 1 basis point (1/100 of 1 percent) on $382,880,000 is $38,828.
* 1 percent of $389,754,000 (total purchased funds) is $3,897,400. …