Strong signals are coming out of banking circles that their lending and capital market businesses are going to be soft in 2012 putting a major dent in revenues and hence profitability. At the same time, the banking institutions are being encouraged to tighten up on lending criteria and to increase consumer and small business rates. Naturally, this kind of pressure further compounds the retraction in interest revenue and net interest margins. Obviously, the banks will not sit still and will be looking for ways to replace lost income from lending activities.
First, the consumers and businesses will see increased fees and new charges, even though costs have not grown significantly for service activities since the recession began. The banks have millions of customers so even a twenty five cent service charge bump means millions upon millions of incremental revenue. On the other hand the smaller competitors, such as credit unions, can not undertake the same strategy and hope to see sizeable income improvements. Second, and the preferred route from our perspective, is adding new products, services and value propositions to generate the needed funds flow. In the past, this has been done by adding insurance businesses and wealth management services or in some instances innovative products and collaborative services, especially through Internet options.
Consumers and businesses do realize that there are options for no fee services or more economical arrangements. So, expect more customer shopping and commoditizaton psychology which will erode revenues and create more relationship churning, which has a costly impact with no gain. The first strategy described above does not demonstrate customer-centricity. We find it amazing that many of the large banks say that they focus on the customer but their actions and organizations promote a product-centricity in actuality. This time, don't go to more "nickel and diming" but to added-value revenue tactics.
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The 3 D's have been a continuous topic over the past two decades but still some FI's are not making the necessary transformations. Let's summarize the evolution again:
The deregulation of the various pillars in the financial services industry in most countries has attracted many more competitors to disintermediate your business. Plus, more continue to emerge as virtual-Internet entities or product-line extensions of well-known retail brands such as WalMart, Canadian Tire, etc. At the same time the middle class has not kept pace with economic progress in terms of wealth, wages and well-being particularly since the recession started a few years ago. Therefore the mass market is not increasing its demand for financial services and they are encouraged to rationalize their debt loads by governments (who can't get their own spending in order). The younger people, or Gen Y, who are not tied to traditional channels are even more difficult to target market. Consequently, the wealth management segment receives an over abundance of relationship competition while the rest are in a commodity competition mode. Naturally margins shrink and outlooks are bleak!
Now comes the need to diversify revenue streams, which the large banks have done well with their deep investment pockets to grab even larger wallet shares from the consumers. Our assessments of small and medium sized FI's point to real inertia when it comes to diversification. Other operating revenues, or non interest revenues are relatively stagnant or demonstrate no new streams of income. There is a self-defeating complacency rather that an aggressive collaborative outreach to expand the value propositions offered. In a lot of cases the knowledge and skills of the people in these institutions are not relevant to the revenue innovation challenge which exists and the Boards are not demanding more contemporary results from their leadership who tend to use the recession as their excuse. Expanding revenue with complimentary product offerings is an imperative and innovation needs to be a strategic priority which results in quantifiable new income annually
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In the 90's call or contact centres matured into important sales and service channels for many financial institutions 7/24/365. In fact their effectiveness attracted many companies into the space to the point that consumers were irritated at the many "supper-time marketing calls". Then the governments in many countries introduced the "no-call list legislation" to screen out unwanted solicitations. Yes, some relocated their centres to other countries to try and avoid the no call barrier. Also many consumers forgot that they had to renew the no call requests periodically and couldn't understand why the calls escalated again. Consequently, call centres lost some of their luster for a few years and some FI's lost sight of their evolving value in the distribution business.
This week I spend an enjoyable couple hours brainstorming the exciting new role that these distribution channel intergration centres are emerging to become, with a long time friend and change catalyst in this area. Without a doubt the new integration centre is the hub for all distribution channels i.e. branches, mobile devices, homepreneurs, partners, etc. Today's IP capabilities combined with emerging software is allowing consumers and businesses to truly receive the seamless service that we have talked about for over two decades. Relationship management is now possible and value creation can be customized to each and every customer. Finally, with data base management and preference research, proactive, real differentiation can take place when, where and how the consumer or business chooses. The innovators will eliminate the product organization structure and become the customer-centric distributors in highly competitive markets.
Unfortunately, an organization cannot attain this integration level if their vision is not based on virtual customer-centricity and connectivity. Small and medium sized institutions will need to find wholesale partners who will offer the integration solutions that the market will demand. Is your contact centre ready for its reinvention?
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Last week the newspapers highlighted Ottawa's claim that the banks have to tighten up their lending especially around mortgages and lines of credit. Bureaucrats pointed to the high levels of personal debt and the commodity competitions taking place on mortgages e.g BMO's 2.99% variable rate.
First of all the Bank of Canada and the marketplace establish the base interest rates in our economy, not the chartered banks.
Secondly, I never met a bank or credit union that didn't have strict lending and approval criteria. Many also do sensitivity analysis on interest rates to ensure customers understand and can meet interest rate escalations. Also some of these financial institutions have encouraged consumers to get rid of their credit card burdens through lines of credit covered by collateral mortgages.
On the other hand, consumers need more education on debt management and responsible credit, which is provided by many FI's. Ottawa should look closer at mortgage and lending brokers plus monoline credit card companies who do handle a significant volume of personal debt and find alternative financial firms to book the mortgages.
One chartered bank has now announced that they will "toughen-up" on entrepreneurs declared income acceptance in their lending criteria. Another example of how some banks run hot and cold supporting small business in our country even though they are our "job creators". Be careful when turning the tap off on these important economic catalyst!
Canadians do have high personal debt but let's not treat the symptoms, look at the causes- consumer knowledge, spending habits and multiple sources of funds everywhere including retailers and others. Our banks should maintain quality standards and consumer values in the open marketplace. We need to help people manage their financial obligations and avoid the pitfalls of high interest, alternative credit.
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We hear many people in the financial industry saying that they don't know their individual branch contributions or that they only measure sales! Both of these comments trouble us as we wonder if they really understand the customer-centric role of branches and how they inter-related to the other delivery channels.
First, it is easy to estimate a financial contribution if you have branch assets, liabilities,other revenue, non-interest expenses and an estimate of Head Office overhead (e.g. 30%). Take your total assets and liabilities and use a 1% spread which you add to the other revenue. Deduct non-interest expenses and Head Office overhead and the net is the proxy for branch contribution. Additionally you want to evaluate if revenues are growing faster than costs and that your net sales are positive.
Second, consider the role that branches play for customers and the organization in an integrated set of multiple choices:- online, mobile, contact centre, mobile representatives, ATM's, partners and others. Approximately 15% of customers visit a branch monthly but how is the branch rated in terms of sales, advice, or service dependence by key segments- consumers and businesses. Also if you have a strong sales culture, your branch staff are key sales lead generators supporting all channels. To ensure that branches continue an overall positive contribution, they have to evolve in their design and multi-facet, proactive and reactive roles. For example, a small branch or start-up can use the "universal employee" concept effectively.
The bottomline is you need to know the total value contributions of your stores and evolve their dynamics as market trading areas dictate.
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