Companies often look to their financial systems for a better understanding of their most and least profitable customers. What they may not realize is that these financial systems are not set up to accurately measure the drivers of customer profitability. What are they missing?
What everybody is missing
The assumption that the bank’s financial system provided information on customers is incorrect. Financial systems are not designed to do that. They lack a profit analytics model of customers, processes and activities consumed by customers, the products and services they buy, and the channels through which they buy them. In contrast, a profit model is specifically designed to provide the 360 degree view of customers needed to determine the most and least profitable customers.
Financial systems also lack information about the reasons why a customer is profitable or unprofitable. These reasons may include pricing, products mix, channels utilized, marketing activities, or high operating costs. The profit model reveals all of these items as well as the underlying variables such as the cost of customer direct and supporting activities such as teller activities, customer relationship management, ATM deposits, loan processing and so on across the bank. Smart banks use this profit model as an analytic and behavioral tool to focus attention on the critical aspects of banking profitability and the best ways to improve that profitability.
Why we need to focus on the details
The major benefit of recording all aspects of profitability is the ability to drill down to the factors that determine the causes of differences in customer profitability. If the key factors impacting customer profitability are transactions and channels, it is possible to focus on the customer facing activities that drive customer profitability. This focus leads to an understanding of areas of high cost or process inefficiency or customer behavior that need to be fixed. These insights can then be used by managers to make strategic decisions improving customer and bank profitability.
Although the profit analytics solution requires design, implementation, training, and maintenance resources, the payoff is well worth it. Profit analytics yields a wealth of information on all the dimensions of profitability and the underlying operating costs and highlights key areas for improvement.
One of the main improvements, is banks are able to identify customers who yield the highest return on investment with mathematical certainty. They can confidently make decisions with that are consistent with the prediction of the profit analytics model.
Until now, banks have been out-and-out guessing when it comes to what services their customers want, and how to make money on those services. Digital expansion into new channels such as online banking and mobile apps by itself costs the bank money and requires analysis to ensure customers are profitable in these new channels. Banks are expanding into the frontier of new services and channels while including new customer segments such as millennials without analyzing and forecasting customer segment profitability.
To grow healthily, financial leaders need to “pause” and use the research and insight that profit analytics can provide when setup correctly. Banks and credit unions MUST evaluate their strategies and model the most profitable approach. As a result, the customers who are engaged will be more likely to stay with their bank, and generate more profits over their lifetime.
Benefits of modern profit analytics implementation:
- Retention of profitable customers
- Customer development model based on risk adjusted lifetime value
- Optimal pricing of banking services
- Development of new products and services
- Profitable channel strategies including mobile and Internet
- Restructuring of branches based on profitability
- Process improvement and cost reduction at the corporate and branch level
- And much more!