They are, of course. But it isn’t the looming issue that it was in the recent past.
We are still in tabulating responses to our Banking Outlook Survey but one conclusion is clear: regulation and compliance cost is no longer top of the list of concerns. In fact, it is one of lowest ranked factors – either #7 or 8 — when compared to other issues expected to impact earnings over the next 12-18 months. This low ranking surprised us since banks are still investing more in compliance expense. For example, M&T Bank had extensive discussion about the cost of regulatory compliance in it’s 2014 Annual Report. More recently, Wells Fargo reported that regulatory and compliance costs were one of the main culprits behind a 6% increase in expense during the first quarter.
As we probed further into the comments and conducted follow up interviews with senior bank managers, it was apparent that they consider regulatory issues to be a known constraint. Predictable. Their banks have been through several post-Dodd/Frank examinations and have made the adjustments necessary to keep the regulators satisfied. Likewise, the CFPB’s priorities are known. They may not like the regulatory regime, but this is now “business as usual”, and its impact is generally understood.
Additionally, some of the concern about future regulation has moderated. The CFPB has pushed back release of draft rules further restricting overdraft fees, and therefore they are unlikely to take effect before mid-2016. The complaint management process does not seem as threatening as it once did. And the political winds have shifted in Washington and the sins of the banking industry are no longer burning issues. Even the FDIC is talking about regulatory relief to institutions considered low risk or highly capitalized. According to the proposal, this would impact 94% of all banks.
But there will be more regulation and it will impact revenue. It is inevitable that the CFPB will impose further constraints on consumer fees, in particular overdraft fees from debit card usage. At a minimum there will be requirements for more standardized disclosures and procedures (check or debit order presentment, minimum “forgiveness” amount, etc.). More likely, there will be limits on total annual charges, focused on the 8.3% of accounts that pay 73.7% of all fees. A limit of 25 total overdrafts per customer per year, which is considered at the high end of potential restrictions, is estimated to result in a 60% loss in NSF income. A more restrictive policy would have even greater impact.
The complaint management process did not concern most bankers as it applies to their institution specifically. “We will have heard it all on Yelp or Twitter before anyone contacts the CFPB”, was one comment we heard. The impact is more likely to be longer term. The CFPB advertises itself as a “data-driven, evidence-based agency”, and will use the Consumer Complaint Database to frame future regulation. According to their website, “We analyze complaint data to help with our work to supervise companies, enforce federal consumer financial laws, and write better rules and regulations.” As the database of complaints grows so to will their ability to mine it for trends and insight.
The data is public and the full dataset is downloadable, which means that the industry can see the trends and respond to them – but it also means that public interest groups can obtain the database and use their analysis to pressure specific institutions, and to lobby for additional industry limits.
Moving forward, improved data management is the key to both better compliance policy and reduced compliance expense. Regulators have determined that bad data is at the heart of bad risk management. Banks should be looking for ways to fix their data, which is often inconsistent, insufficiently documented and poorly governed within lines of business, and therefore difficult to use cross-functionally to compare lines of business within the enterprise. Unsurprisingly, business units are hesitant to disrupt front-line processes in favor of an enterprise definition of variables that creates no short term benefit to them. But ultimately regulators will insist they do.
Banks are blessed with substantial customer information. One way to use that information to drive sales is to categorize customers into groups with similar product demand. Why do that? To compare the performance of sales people on an apple to apple basis. That type of comparison holds employees accountable and guides the action of sales managers. Let’s look at an example of that.
The financial services industry is facing a host of challenges. Although overall earnings are up, ROE and ROA remains low. Going forward, the industry still has to deal with the headwinds of increased regulatory burden, low interest rates, and changing consumer behavior and channel usage.
These challenges put pressure on financial institutions to develop more focused strategies in order to create sustainable growth.
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As consumers and small businesses shift to alternative channels, it is critical that financial institutions improve the operational and sales efficiency of the brick and mortar channel. That means fine tuning every point of contact to optimize effectiveness.
Financial institutions of all sizes are facing challenges to their retail branch system. Technological innovation, starting with the introduction of ATMs, then internet banking, and most recently mobile banking, has resulted in declining branch usage. Consumers and businesses don’t need to go to the bank as frequently as they did in the past now that routine monetary and service transactions can be easily handled on a personal computer or smartphone.
Consumers want branches, but declining usage is reducing sales opportunities and revenue growth. As routine servicing and monetary transactions continue to migrate out of the retail branch, the fundamental nature of bank branches must undergo a dramatic transformation.
The bottom line is that, with fewer teller transactions, branches must become more efficient as sales and marketing centers. This can be achieved through greater micro-market targeting of marketing messages in order to maximize the sales opportunity from limited branch traffic and to optimize trade area sales penetration.
Up to now, many financial institutions have employed a one-size-fits-all strategy. Branches are often similar in size and style with limited differentiation. More importantly, marketing strategies are frequently implemented uniformly across the network with limited variation of messaging based on unique branch or trade area characteristics.
Improve Revenue with Targeted Strategies
According to American Banker, 82% of the top 50 banks in the US offer workplace banking. Most community and regional banks also have a program, but few banks are successfully cross-selling Workplace Banking into their Commercial and Business Banking client base. Instead, many banks resort to branch discretion for targeting accounts. Branches often default to calling on local targets, such as retailers and other companies with a high mix of lower wage, more transient employees.
The net result is in smaller average account balances, acquired with discounted bank-at-work pricing, which is not a prescription for success.
So here’s the question: Why do we so many of us settle for a “Two Bank” approach when it comes to Workplace Banking when the benefits of “One Bank” are so clear? Maybe we need to baseline why “One Bank” is worth striving for.
This article, by Peak Performance Consulting Group senior consultant Guenther Hartfeil, was originally published in BAI Banking Strategies on November 10, 2014
Even simple segmentation approaches can yield substantial results if implemented with disciplined execution.
We live in an age of “big data” but sometimes this amounts to data overload. What we really need is more usable data that can translate into better customer service, improved sales, and greater profitability. One very effective way to organize data is to group customers or prospects into segments.
The old saying “birds of a feather flock together” is a simple way of describing the dynamic that people tend to group together with those of like interests and similar behaviors. Segmentation is just a way to find people (or businesses) with common behaviors so that marketers and salespeople can then approach each segment in an appropriate manner. These different approaches may show up in product design, media used, pricing or distribution design.
Bankers can gain tremendous benefits from even simple segmentation schemes that can help answer questions such as: How much time should be spent with a customer or prospect? How should the customer or prospect be contacted? And, when contacted, what should be communicated?