Jan 022013

Net Interest Margin (NIM) woes facing Banks and Credit Unions will continue following the trend established in 2012, especially given that the FED announced that the period of ultra-low rates will continue until unemployment rate falls below 6.5%.  An optimist will tell you that is at least 3 years away; a realist will set your expectations closer to 2018.

The challenges facing Banks and Credit Unions will remain similar (hopefully not worse) than what we experienced in 2012 until the economy recovers, until rates climb again, and until the loan demand returns.  Shrinking Revenues, including NIM, is driven by lackluster loan demand and ever greater competition for the business resulting in lower rates, and lower loan fees (and less restrictive loan covenants).

Like never before, Bankers are forced to find alternative revenue generating sources and many are struggling… resulting in weaker Community Bank and Credit Union brand values, less attractive value propositions to potential acquirers, and ultimately, perilous financial condition that threatens the very survival of organizations.

The challenge facing Community Banks and Credit Unions is one of demand!  Most customers do not want or need products & services that generate revenue (and profit) for Banks and Credit Unions.  The needs of most Bank and Credit Union customers are fully met by the standard checking account, debit card, direct deposit and maybe bill pay package… yet, this set of products results in deep operating losses for traditional financial institutions.

Achieving revenue growth, profitability and customer loyalty, unsurprisingly, depends in great measure on sound strategy and effective execution.  Banks and Credit Unions must develop a new appreciation for customer focus, starting with an unambiguous view the current and desired customer segments, customers’ needs & wants, as well as the mapping of the relationship and benefit to each party.

While the precise recipe will vary for each institution, it is clear that one of the most attractive customer segments includes the Affluent. Why the Affluent?  The Affluent are one of the few demographic classes that are financially secure, and able & willing to spend.  It isn’t by accident that the large Banks have devoted significant effort to growing this customer demographic, resulting in net losses for Community Banks and Credit Unions.  This is so despite the fact that most Affluents switch Banks primarily for pricing related issues.  Although at first glance this seems counter-intuitive, we believe that Community Banks and Credit Unions are loosing largely because they are invisible, and most have not made the effort to attract Affluent consumers.

The fact that so many Community Banks and Credit Unions continue to ignore the Affluent demographic is only hurting their franchises.  A 2010 MetLife study found that more than 50% of Affluent consumers invested some of their holdings in Savings and/or Money Market Accounts and nearly 40% had investments in CDs.  65% of invested in Equities / Mutual Funds, which of course provides a great opportunity for Banks and Credit Unions to increase customer loyalty (the proverbial relationship “stickiness”) but also generate non-interest fee income.

A recent Cerruli Assoc survey found that many Affluent consumers engage Financial Advisors for a variety of financial services products including Annuities, Retirement Accounts (IRAs and Roth IRAs), Education Accounts (529s), ETFs, Municipal Bonds, etc..

We believe that virtually every product outlined below can be sold by a Bank or Credit Union – either directly or through a partner Financial Advisor.  Doing so not only enhances the relationship between the Bank (or Credit Union) and the customer, but also generates significant (non-interest) revenue for the organization.

Financial / Banking Products Demanded by Clients

Financial Advisor Magazine, November 2012

When was the last time a customers engaged your Community Bank and Credit Union in a discussion regarding these products?  If the answer is ‘Never’ or ‘It doesn’t happen often enough’ then it ought to be obvious what your immediate next steps ought to be.
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Serge Milman

Serge Milman is the Principal Partner of San Francisco, CA based SFO Consultants which provides Strategy, Finance and Operations Management Consulting services. He is also the Principal of Optirate – a blog dedicated to growth and profitability strategies for Banks and Credit Unions. Serge can be reached at info@SFOconsultants.com.

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