HOW HEALTHY IS YOUR BRAND? - Novantas Banking ... HEALTHY IS YOUR BRAND? Rise of the Thin-Branch...

VOL. 6 NO. 1 | 2015

Building Distinctiveness in the Digital EconomyHOW HEALTHY IS YOUR BRAND?

Rise of the Thin-Branch Ready:Strategies as Shopping Goes Digital

Segment-Tailored Approaches forRestarting HELOC Growth

Small Business Cross-Sell:Analytics and the Household Connection

Managing Credit Events forCommercial Performance Improvement

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CONTENTS

Digging Deeper for Commercial Growth

Branch Staffing: Reflective of Local Sales Dynamics?

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4

14

2520

Rise of the Thin-Branch Ready HELOC Growth Drivers: The Case for Segment-Tailored Customer Strategy

Managing Credit Events for Commercial Performance Improvement

Analytic Keys to SME Cross-Sell

Consumers have a stronger digital center of gravity, but most do not want to completely sever branch ties. The situation calls for a new type of “Digital First” strategy.

Finally there are signs of life in the home equity line of credit, but a Novantas survey shows that a multi-faceted effort will be needed to revive the business.

For better coordination between the origination and credit risk management teams, banks need to adopt an event-driven management approach for underwriting.

By improving data, analytics and multi-channel targeting, banks can digitally identify and pursue opportunities that otherwise could not be spotted or profitably served.

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Chris Musto

Rick Spitler and Kevin Travis

Lee Kyriacou, with Jenny Cheng

Michael Rice, Chevy Marchosky, and David Zwickl

Tony Coretto

VOL. 6 NO. 1 | 2015

The new synthesis of branch and digital channels is forcing a redefinition of brand strength, especially now that online shopping has become prominent.

HOW HEALTHY IS YOUR BRAND?

3March 2015

LETTER FROM THE EDITOR

What happens when the branch not only loses most of its relevance for daily banking transactions but also falters as a marketing and shopping channel? Though the scenario may sound dramatic, recent Novantas research reveals new levels of branch erosion as mainstream retail banking customers adopt more of a digital center of gravity.

As detailed in our cover story, “How Healthy is Your Brand?” a major implication is that banks no longer can rely on the basics of local presence and nearby convenience to anchor their brands. Recognizing this reality, a handful of players have seized the initia-tive to build digitally-grounded brands that can win on the basis of perceived convenience — with or without the support of a thick branch network.

A companion article, “Rise of the Thin-Branch Ready,” documents the ongoing shift in consumer channel preferences. Based on the 2014 edition of the Novantas Multi-Channel Preference Study, it shows that while many customers are willing to loosen ties with the branch in favor of digital, few are willing to do without it entirely. This calls for a new type of “digital first” strategy that balances online marketing and shopping with a narrowed branch mission centered on sales fulfillment, advice and complex service.

In a separate national consumer survey recently conducted by Novantas, a number of barriers and opportunities surfaced with the home equity line of credit, a former superstar product in retail banking that is looking to grow off a sharply reduced base. In “HELOC Growth Drivers: The Case for Segment-Tailored Customer Strategy,” the authors delve into segment-related issues that need much fuller attention at many banks.

Another growth-oriented article, “Analytic Keys to SME Cross-Sell,” explores the role of data, analytics and targeting in tapping the high sales potential of small and medium-sized enterprises, including principals and their households. There is a marked contrast between best-in-class players and the way that most banks pursue SME cross-sell today.

We round out the issue with two articles on commercial banking — the area that had to shoulder the burden of balance and revenue growth for several years now — one piece on managing credit events for performance improvement, the other on growth drivers for 2015–2016.


Steve Klinkerman Editor-in-Chief

EDITORIALEditor-in-Chief

Steve Klinkerman

DESIGNDesign and Production

Brigid Barrett

CONTRIBUTORSRick Spitler

Jenny Cheng

Tony Coretto

Dale Johnson

Lee Kyriacou

Chevy Marchosky

Bryon Marshall

Chris Musto

Michael Rice

Kevin Travis

David Zwickl

MARKETINGSenior Marketing Associate

Katharine Davis

312-924-4467

[email protected]

Marketing Associate

Amelisa Dzulovic

NOVANTAS, INC.Co-CEOs and Managing Directors

Dave Kaytes

Rick Spitler

Corporate Headquarters

485 Lexington Avenue

New York, NY 10017

Phone: 212-953-4444

Fax: 212-972-4602

[email protected]

SUBSCRIPTIONS [email protected]

212-953-4444

Letter from the Editor

4

The new synthesis of branch and digital channels is forcing a redefinition of brand strength, especially now that online shopping has become prominent.

As customers retreat from branches and convenience and shopping shift to digital devices, banking is increasingly becoming a branded consumer business. But by that standard most bank brands today are unhealthy, with vulnerabilities including low consumer awareness, limited favorability and few clear points of distinction — if any.

A major hang-up is that banks have relied so long on branch density to do the hard work of sales that many over-look the need to build new perceptions of convenience into their brands. Also a self-defeating attitude of cost control has arisen with marketing spend, leading to budget cuts at pre-cisely the moment when more resources will be needed to build presence in the minds of consumers and grow sales. Then when marketing teams finally do take action, there is a lot of confusion about how to proceed.

The result is that a powerful competitive tilt has begun to emerge. A handful of brand-heavy players, including both national and niche banks, are gaining inroads among the growing ranks of mainstream retail customers who have sig-nificantly reduced ties to the branch in favor of a strong digi-tal center of gravity.

As highlighted in the 2014 edition of the Novantas Multi-Channel Preference Study, the ranks of “thin-branch ready” customers swelled from 25% of the retail base to 39% in just two years. Strongly oriented both to online convenience and to online shopping, these customers repeatedly show up in our research as demonstrating outsized allegiance to banks that can establish brand advantage in regional markets.

To cope with this changing environment, bankers need to pursue three priorities:• First, banks need to track and measure brand health

to ensure distinctiveness, favorability and perceived convenience. Novantas consumer research shows that many regional banking companies have varying degrees of handicap in all three areas. Yet these factors can be

improved once identified and addressed.• Second, network planning objectives need to be

reconsidered. With former paper-based branch transaction services largely shunted to digital channels, the network’s primary function is narrowed to sales and complex servicing. In turn, the bank needs to ensure that its progressively focused local networks have the right “sales value” based on visibility and marketing lift.

• Third, a locally-flavored digital presence is needed, both to reinforce the brand and local stance and to drive favorable consideration and perceived convenience. The online team should not view itself as being on a separate journey, but rather should be collaborating on the market-by-market branding agenda.The new synthesis of branch and digital channels is forc-

ing a redefinition of brand, especially now that online shop-ping has become prominent and online account origination likely will eventually surge as well. The careful integration and reinforcement of emotional and functional brand elements is now a top marketing priority.

BRAND DRIVERSSo what are today’s brand drivers and how do they make a difference?

Certainly trust remains a foundational brand attribute in banking. While the industry took a huge hit during the bank-ing and economic crisis, our consumer research shows that public trust has largely been restored to pre-crisis levels. But competitively, trust lands in the category of table stakes – not a point of differentiation.

Elsewhere, service and advice are often touched on as major brand attributes, interwoven with convenience. But these factors do not drive sales, rather influencing customer retention and word-of-mouth referrals.

This turns the question to convenience itself. Now, as it

BY RICK SPITLER AND KEVIN TRAVIS

HOW HEALTHY IS

COVER STORY

YOUR BRAND?

5March 2015

6

has been for a long time, convenience is the primary differen-tiating brand value. The catch, however, is that the definition of convenience is rapidly changing.

In the fast-receding world dominated by physical pay-ments, an ability to easily get cash and deposit checks was paramount in the customer’s selection of a bank. Market share was largely a function of branch share. Today, however, the dematerialization of banking and its merger with other forms of digital and remote commerce online (particularly on smart-phones) means that convenience is being reinvented.

Being perceived as convenient now matters as much as having branches nearby, and perceived convenience is driven by a number of factors beyond brick-and-mortar pres-ence, including digital capabilities and ease of use, overall local visibility, etc.

In a multi-bank, multi-market study that evaluated which factors influence the final purchase decision after consumers narrow down their shopping consideration to a few banks,

we found that customer rankings of perceived convenience explained 75% of the variability in the local purchase rate. That compares with a 50% explanatory power of local branch share relative to the local purchase rate. (Figure 1: Purchase Drivers — Branch Share vs. Perceived Convenience). And over time, we would expect the statistical relevance of branch share to fall, implying a need for ongoing attention to the perception of convenience in a bank’s value proposition.

Most banks are struggling to adapt, with brand aware-ness lagging even in markets with dense networks. In our regional consumer research, only a slice of survey respon-dents assign highly favorable ratings of brand strength for most banks in their market. And when consumers are asked to select from a list of potential differentiating factors for a particular bank, one of the most frequent responses is “none of the above.”

By contrast, a few national banks and regional innova-tors are breaking the mold, cultivating favorable perceptions

How Healthy is Your Brand?

Figure 2: Purchase Drivers — Branch Share vs. Perceived Convenience

Among customers who are actively considering certain banks and ready to buy, the image of convenience is a better predictor of purchase pull-through than branch share alone.

*Data points represent bank/market combination scores, reflecting feedback from 1,350 surveyed customers who recently switched checking accounts. Includes 20 different banks operating in 21 different markets.Source: 2013 Multi-Channel Sales Preference Survey, Novantas, Inc.

Local Branch Share for 20 Different Banks Across 21 Different Markets (Some Data Points Omitted)

50% Explanatory Power 75% Explanatory Power

0% 0%

10% 10%

20% 20%

30% 30%

40% 40%

50% 50%

Individual Convenience Ranking Relative to the Composite Ranking for Each Surveyed Market*

PURC

HASE

RAT

E

CONVENIENCE RANKING VS. PURCHASE RATEBRANCH PRESENCE VS. PURCHASE RATE

of convenience at levels that materially exceed the heft of the local branch network. In a few high-density markets, for example, one new entrant has been able to gain meaningful traction with just a sprinkling of high-visibility banking centers that do not even have teller windows, succeeding largely on the strength of marketing and online appeal.

If marketing-led organizations are allowed to build on their leads unchallenged, the brand disadvantages of more tradition-bound players will only grow. A case could even be made that some degree of further erosion is inevitable, given the throttling of marketing budgets and confusion about the proper role of the marketing team (keepers of the brand; sales drivers; or just glorified product campaign managers?).

STOPPING THE ROTBuilding a healthy brand starts with knowing which factors are foundational to success, and in the banking industry right now, the critical factor is building perceived convenience. The bank must learn how to boost convenience appeal without relying simply on branch share.

Take automated teller machines, for example. In many cases, four well-located standalone and branded ATMs can capture the equivalent market presence of a branch.

Online presence is another. Through search engine

optimization and other tactics, the bank can bring its brand to the foreground as customers shop online for products or peruse local websites. This type of screen adjacency contributes to the consumer sense of accessibility. Product functions and features can also contribute to the perception of convenience. So too can local signage and even the tone of messaging in advertisements.

The factors and investments needed to create perceived convenience typically will vary market by market, depending upon physical presence, product positioning, messaging and the online presence a bank has in that market. In a market where the bank has a thin presence, for example, the conve-nience formula may call for a select group of high-visibility branches, supported by branded ATMs, with overall presence amplified by a blend of signage, advertising, online capabil-ities and localized online content.

It is not for marketing to do alone, but rather in concert with the other bank functions. Convenience used to be the province of network planners. But perceived convenience requires extensive internal coordination across network plan-ning, marketing, advertising, product management and, likely, segment management.

MAKING IT WORKEstablishing a market-by-market view of what drives perceived


In a sense, the logic of perceived convenience is a stopgap measure. Customers are still wedded to branches in a very fun-damental way, and most will remain so (in one way or another) for years.

But branding requirements will evolve as Millennials become the dominant segment of banking customers. In a digital-first world, perceived convenience may not be adequate to protect a franchise or a market.

The good news is that banks will become progressively more able to specialize by segment, and reach segments across the country, in a much more efficient way than they could ever hope today, either in a region or nationally. The implication is a steady expansion of branding possibilities as banking embraces the dig-ital economy.

Not all possibilities have to wait for the future, even though banking today is largely a commodity product (in terms of funda-mental product features and functionality) differentiated mainly by local competitor mix.

There are some distinct brand positions available by region, with community commitment being an example. Another is price leadership, or low cost. There are even some anti-establishment

brand positions being effectively used by several banks today.Banks that adopt such positions (and demonstrate their com-

mitment to them with valid proof points) can create distinctive awareness, if not favorable consideration. But they tend to be tweaks to the underlying convenience argument.

In the future, banks that appeal less to the functional compo-nents of banking and more to the emotional factors should emerge. While there may not be enough of a segment in, say, Atlanta to allow a bank to specialize, nationally there certainly will be.

This may be a silver lining for regionals. It gives them a chance to specialize in particular segments and not necessarily have to take all comers out of a need to fill the branches (although differ-entiating an entire organization by specialized brand will be dif-ficult, with limits on the number of clearly distinct propositions).

In time, there could be banks (or branded subsidiaries) that tout social responsibility, simplicity, recognition, even hipness. Branding values that lie buried in the attitudes and preferences of the next generation, and even unappreciated in the current ones, could be discovered and exploited in a more complete digital world.

— Rick Spitler and Kevin Travis

Silver Lining: Where Branding May Go

7March 2015

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convenience is only the first step. The new reality requires substantial change in how bankers think and build out their brand. Perhaps the hardest thing is to create the cross-func-tional coordination necessary to balance the various levers.

It is simply no longer the case that each organizational unit can succeed independently of the others. All must work in harmony to achieve the cross-functional branding objec-tive. This requires planning coordination, budgeting flexibility and, equally important, the willingness to pull up mid-year and readjust. Doing so requires a new mindset, as well as different measurements and incentives.

First and foremost, a bank needs a good compass to make sure it is going in the right direction. Typically this is embod-ied in measures of the brand health. Too many banks either fail to even track the performance of their brands, or they rely on more shallow assessments that may highlight general symptoms but shed little light on the kinds of specific remedial actions that can or should be taken. Many syndicated track-ers of brand health are too focused on generic qualities found across industries, whereas the specifics of banking require sharply focused health indicators.

Unaided awareness (or the extent to which consumers say they recognize a brand without being prompted) is a founda-tional strategic metric that drives bank sales success. Branch networks drive unaided awareness, but so too can marketing spend and digital capabilities. These attributes will always need to be tailored to a bank’s specific strategy and value proposition, and should be tracked at the market level, not the network level.

Ideally, switchers, prospective switchers, and current customers should be tracked separately. Each group may have radically different views of a bank, and driving new-to-bank sales and cross-sales likely will depend on very differ-ent sets of attitudes.

Second, network planning needs to be re-thought. In particular the decision process for branch locations needs to change, given the shifts in channel preferences.

Historically, planning for branch locations and formats was heavily biased toward transactional service delivery. As customers frequented the branch for cash and deposits, branches could sell additional products and provide person-alized complex services.

In the new world of minimal transactional traffic, branches should be located to support the sales agenda. Success should be measured in terms of the network’s impact on unaided awareness. If a bank were to enter a market de novo, it should locate branches to maximize sales, not to optimize servicing economics.

In using this as the primary design principal, we have

found in various markets that about 30% of the branches in a typical local network are not needed at all, and another 20% should be relocated. Clearly banks cannot implement such massive changes suddenly. It will take time. But the design objective should be well understood. It is to optimize sales.

Finally, digital channels and strategies for online presence need to be tailored for optimal “perceived convenience.” This includes careful positioning to reinforce the brand, build local presence and drive favorable consideration.

INTEGRATED APPROACHOne management challenge is that the internal digital bank-ing group is too often on a separate journey to build an online and mobile business. While necessary for the long-term, this focus often comes at the expense of short-term needs to proj-ect localness and perceived convenience in each market across the network footprint.

The role of digital must be integrated into the overall mar-ket-by-market plan and branding agenda, with capabilities that are easy to use and an image that projects localness and con-venience. Web-based technologies allow banks to tailor con-tent to local events. Product and marketing messaging should be simple and easy to comprehend. The dollars spent on online advertising need to be adjusted to the level of awareness and consideration the brand has in a particular market.

These changes in establishing a distinctive local brand are just some of the more salient needs. The future point of arrival in branding will be market-by-market plans that are optimized though a strategic brand management process and integrated across organizational boundaries.

Branding for banks has never been so difficult, nor so important. Banks need to respond to the transformations wrought by virtualization. That implies focusing on translating “convenience” into the new multi-channel digital construct. But banks can’t stop there. They must think beyond the current local nature of the category to a more segmented and national mar-ket in which they attempt to attract particular segments.

Banks in many ways today resemble department stores — something for everyone to cover the huge fixed cost of local distribution. The future will be far more fragmented and tailored, reflecting the particular interests of segments and providing a much better fit with the functional and emotional needs of different types of customers.

Rick Spitler is a Managing Director and Co-CEO and Kevin Travis is a Managing Director at Novantas Inc., both in the New York off ice. They can be reached at [email protected] and [email protected], respectively.


Primary checking accounts remain the lifeblood of retail bank-ing, but the terms of competition are changing dramatically in the age of digital banking. Instead of making a clean leap from the branch to online and mobile channels, many core customers want it both ways — digital as the first option with the branch as a required standby.

As revealed by the 2014 edition of the Novantas Multi-Channel Preference Study, two in every five primary checking customers now fall into a group that turns first to digital for key activities — not only everyday banking but also shopping for products and providers — yet want at least some local physical presence as well.

Rising from a 25% concentration to 39% in just the past two years, these customers have developed a set of attitudes and behaviors that define them as “thin-branch ready,” mean-ing that a much leaner local branch network likely would work just fine for this group so long as other requirements are met.

Though not necessarily dissatisfied with their current bank, Thin Ready customers are in play for competitors that can provide the necessary elements of brand, product, digital con-venience and a convincing online shopping experience, sup-ported by a targeted physical presence. From a larger perspec-tive, these customers represent the likely future of retail banking competition as consumers adopt a stronger digital center of gravity but are only comfortable with lessening branch ties — not severing them.

The situation has opened a new front in the battle for core banking relationships, giving rise to a competitive approach based on “Digital First” strategy. Reflecting the fact that digital channels are a growing first instinct for many customers, this strategy has a value proposition based on a trusted brand, dig-ital tools and low, simple fees, backed by a thin, carefully-de-sign physical presence to win acceptance in target markets.

Some banks are already using Digital First strategy to win

market share in several major banking markets. But impor-tantly, this is not a pure distribution play. Winning relies on five principles: 1) fostering the perception of convenience; 2) positioning branches as a reliable fallback; 3) leveraging dig-ital and out-of-home marketing; 4) emphasizing digital ease of use; and 5) providing online decision support.

BRANCH SALES RELEVANCEWhile the general imagery surrounding digital banking is one of accelerating consumer adoption at the expense of the branch, our research underscores critical exceptions to the trend. Transaction activity is one thing; high-value sales and service is quite another.

At the transaction end of the spectrum, the most recent strong digital impact on the branch is with deposit-taking. The proportion of surveyed consumers preferring to use the branch to deposit paper checks fell from 54% in 2012 to just 35% in 2014. A major driver is the extensive deployment and mar-keting of mobile deposit capture, on top of the ever-increasing availability of image-enabled automated teller machines.

Meanwhile the proportion of consumers preferring to go into a branch to withdraw funds fell from 25% to 22% over the past two years, and the branch preference for transferring funds fell from 15% to 13%.

Viewed from a sales perspective, however, the branch trend is more robust (Figure 1: Branch Relevance in High-Value Transactions). Looking at account origination, 45% of respon-dents said they would go to the branch when opening an addi-tional deposit account with their current bank. And 55% said they would turn to the branch when applying for a home equity loan or line of credit. Both of these response rates exceed the corresponding preference scores for digital fulfillment, under-scoring ongoing branch relevance in sales.

The branch also remains the preferred channel for financial

BY CHRIS MUSTO

Consumers have a stronger digital center of gravity, but most do not want to completely sever branch ties. The situation calls for a new type of “Digital First” strategy.

RISE OF THE THIN-BRANCH READY

9March 2015

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advice. Compared with an 18% preference to use online or mobile banking, 44% of respondents said they preferred to deal “with someone in the branch” for financial advice.

Albeit reduced, service relevance is also a continuing branch strength. While the consumer preference to go to a branch to resolve a problem fell from 53% to 37% between 2006 and 2011, the preference level has stabilized since then, holding at 36% among 2014 survey respondents. For service issues that really matter, people still value face-to-face interaction in the branch.

The twist in the story is that sales and service relevance is something different from shopping relevance. This is where dig-ital is exerting a powerful new level of influence. Including peo-ple with a stated preference to shop purely online and those who prefer to shop both online and in the branch, banks are now in a position where roughly 80% of the origination stream for new checking relationships is partly or heavily influenced by digital shopping.

The situation places the branch in an increasingly nar-row role. It is still prominent in booking sales but increasingly dependent on digital to drive traffic. People want to be able to come by to solve an occasional problem but are generally quite happy “not to have to go to the branch” for daily transac-tion services that now can be fulfilled digitally.

SEGMENT BREAKOUTIn balancing the new marketing and sales dynamic between the branch and digital channels, it is clear that channel pref-erences vary among major customer groups — but few would prefer to use a branch solely or avoid the branch altogether. Even the most diehard branch-centric segment shows a sub-stantial preference to include online channels in the shopping mix, and few online customers are ready to cut all branch ties.

To segment checking customers, we scored each survey participant on two axes: branch dependence and branch attachment. The dependence ranking reflects the frequency of branch visits and the intensity of on-site banking activity. The attachment ranking reflects the extent to which respondents agreed or disagreed with sample statements about the value of the branch in a primary banking relationship (Figure 2: Checking Customer Segmentation).

Thin Ready customers emerged as the largest customer group in this schematic. These are people who visit the branch infrequently but still affirm the branch’s value to some degree (e.g., legitimizes the bank; is a valuable resource; is expected from the provider of the core checking account).

Online shopping is warmly received by individuals in this group and is much more likely to be cited as the most valu-able shopping method (Figure 3: Top Channel Preference for

Rise of the Thin-Branch Ready

Figure 1: Branch Relevance in High-Value Transactions

Digital channels have absorbed huge chunks of banking activity. But for things that matter most — issue resolution, advice, deposit account opening, loan applications — many people still prefer the branch.

1 Includes desktop, laptop, smart phone and tablet. Source: Novantas 2014 Multi-Channel Preference Study

TRANSACTION TYPE DIGITAL1 BRANCH/IN-PERSON PHONE ATM NO PREFERENCE

Information 3%

New credit card 9%

Transactions 8%

Service Issues 13%

Financial advice 23%

New deposit account 12%

New home equity credit 4%

Preferred Transaction Channels

76% 7%

8%

3%

23%

13%

6%

8%

64%

41%

24%

18%

35%

33% 55%

45%

44%

38%

23%

19%

7% 4%

25%

2%

2%

2%

Shopping among Recent Purchasers). As they shop online, Thin Ready customers tend to orient themselves to a certain cluster of brands competing for their attention, and then search among them to understand the product options — a sharp contrast with the traditional approach of going to the most convenient nearby branch and sitting at the desk of a platform banker to see what is available on the spot. While these customers are more likely to cite a preference to open accounts online, few actually complete the account enrollment process in that manner.

Taking one step closer to the branch center of gravity, the Mass Market segment comprises 29% of the survey set. These checking customers visit the branch more often, express a bit more attachment to the branch and more strongly prefer to use the branch for specific tasks, such as requesting a new ATM/debit card. Compared with Thin Ready, their online preference is a third lower, while the branch preference among this cus-tomer group is 25% higher.

Finally, with the highest preference for in-store shopping, Branch Traditionalists have the strongest remaining branch loy-alty. They have retreated into a corner of the customer base, however, representing only 15% of the survey set.

These customers exhibit above-average branch attachment

and dependence. Yet even among the holdout Traditionalists, digital is having a visible influence, with 18% of survey respon-dents in this group citing online channels as the most helpful for shopping.

Putting these findings together, it is clear that the branch, in some shape or form, remains vital to the acquisition of new pri-mary checking relationships. But given the widespread impact of digital, it is equally clear that the new optimal branch count and experience is far different than what most national and regional banks offer today.

DIGITAL-FIRST STRATEGYFrom the competitive perspective, a pressing question is how to win new business in the changed environment. Consumer sentiments and decision processes now are subject to the eclec-tic influences of both physical and electronic distribution, with implications for marketing, product design and presentation, sales and network configuration.

Five competitive principles are already being used by some players to gain market share, and a fuller industry embrace is all but inevitable as pressures mount to engage the growing ranks of customers with a digital center of gravity. To win with a Digital First strategy:

Figure 2: Checking Customer Segmentation

As measured by branch transaction dependence and emotional attachment, a sizeable chunk of the checkingcustomer base is now “Thin-Branch Ready,” generally preferring digital with the branch as a backstop.

Source: Novantas 2014 Multi-Channel Preference Study


Innovation Seeker (10%)People in this segment use the branch more often than they would prefer, citing perceived shortcomings in the bank’s other channels.

Internet Ready (7%)Use branches rarely and do not see value in them. A small segment, not growing quickly and tending toward middle-aged customers with higher household income.

Branch Traditionalist (15%)Use the branch often and for a variety of transactions and prefer it that way.

Thin-Branch Ready (39%)Use branches rarely but see at least some value in them. The largest and fastest-growing segment, with broad demographic reach.

Mass Market (29%)Tend to visit the branch at least once a month and show strong attachment, commonly older or younger customers with low to moderate household income.

11March 2015

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Appear bigger than you are. The goal is to create a per-ception of physical convenience among shoppers who will use the branch only rarely once they open their accounts. This approach favors a smaller number of large, visible and attrac-tive stores located near high-traffic nodes. Coverage gaps for local transaction services can potentially be filled with large-for-mat ATMs, providing additional market visibility.

Position branches as a reliable backstop. The primary basis for branch attachment among the thin crowd is a desire for standby help to resolve problems. The value of the branch in dealing with contingencies can be part of the promotional message. Then as customers come on-site, branch staffers gain opportunities to coach people on how to solve current and potential future problems online.

Emphasize digital and out-of-home marketing. Effective multi-channel marketing is critical in establishing presence in a new market and in offsetting a lower branch count, but not all marketing is created equal. Out-of-home advertising, such as bus-stop wraps, billboards and subway signage, will help to establish and sustain local market resonance.

Digital marketing benefits the bank in two ways beyond direct demand generation: First, as Novantas has found, dig-ital marketing creates perceptions of convenience in a way that other forms of advertising do not. Second, social media in particular can allow the bank to selectively participate in the community dialogue on topics of local interest. Finally, there is direct mail.

Emphasize digital convenience. Customers who are

Thin-Branch Ready rely heavily on online banking, especially mobile, but are not especially swayed by special applications such as account aggregation and person-to-person payments (at banks that offer P2P, less than 2% of active online/mobile banking customers use it today).

With feature innovation less of a swing factor in conve-nience, the promotional emphasis turns to providing superior renditions of digital capabilities widely in use. In many cases a bank may already be fielding a strong suite of core digital capabilities but simply is not winning commensurate customer recognition in the marketplace.

It is important to review applications with an eye toward reliability and ease of use, and then turn those strengths into marketing advantages. Easy-to-use mobile banking, marketed heavily even around features already offered widely elsewhere (e.g., mobile check deposit), often matters more than P2P and other secondary features.

Provide attractive, simple choices. Especially when shop-pers first arrive at the bank web site, it is important to simplify decision-making. At the web site of one of the largest U.S. banks, the checking landing page that comes up when people click on search engine links presents just two accounts, accom-panied by short, needs-related descriptions displayed in large font. Another national brand is pursuing a thin-branch strategy on the back of just one checking product.

Also with self-directed online shoppers, banks need to be cautious about posted fee arrangements. Consumer hot buttons with checking fees include cost, complexity and fairness, and

Figure 3: Top Channel Preference for Shopping Among Recent Purchasers

Already dominant in terms of checking customer representation, the Thin-Branch Ready segment displays a strong preference for digital shopping, which is destined to become the most relied-upon channel.


CUSTOMER SEGMENT DIGITAL1 BRANCH/IN-PERSON PHONE REFERRAL PRINT/OTHER

Thin-Branch Ready 10%

Mass Market 4%

Branch Traditionalist 9%

Innovation Seeker 6%

Internet Ready 6%

Preferred Shopping Channels

33% 4%

6%

8%

1%

4%

21%

18%

31%

64% 13%

42%

52%

45%

32% 21%

24%

13%

20%

13%


CUSTOMER SEGMENT DIGITAL1 BRANCH/IN-PERSON PHONE OTHER

Thin-Branch Ready

Mass Market

Branch Traditionalist

Innovation Seeker

Internet Ready

click-search capabilities allow people to instantly re-direct their online consideration, so simple and low fee structures are best.

Streamline online account opening and fulfillment. The unvarnished reality today is that, when switching banks, most Thin-Branch Ready customers shop online but then open accounts in the branch. But the rate of online account-open-ing varies inversely with a bank’s physical density, which will be low in a Digital-First strategy. For sales success in thin-ly-branched markets, the road that leads from digital shopping to digital purchase needs to be well-paved.

Today, however, some digitally-oriented shoppers wind up feeling forced to seek branch origination following a failed attempt to complete an application online, either because of a poor online experience in general or a lack of decision support in particular. As the bank streamlines these elements of its digital presence, online applications in its thin-branch markets will flow (Figure 4: Top Channel Preference to Open New-to-Bank Checking).

MARKET DISRUPTIONDespite the popularity of mobile banking and the rise of digital shopping as a driver of checking origination, banks are find-ing that checking acquisition is still a market-by-market battle. For some players, the digital/local dynamic provides multiple avenues for growth. For others it presents multiple forms of exposure. Often today, mid-size regional players are at the greatest risk of market disruption.

It turns out that the very largest U.S. banks have natural

appeal to Thin Ready customers, both because of brand strength and because of the outsized investments these players are able to make in digital channels and capabilities.

In some markets, this appeal has enabled one bank to scale back expensive branch presence while preserving service and customer relationships through a combination of web and mobile banking and imaging-enabled ATMs. Elsewhere, this same bank is capitalizing on the decoupling of branch density and perceived convenience to penetrate expansion markets at low cost, using a small number of highly visible branches.

Nimble small players also are putting Digital First strat-egy to work. Our research confirms that in some high-density markets, one new entrant has been able to gain meaningful traction through a blend of marketing, online appeal and a sprinkling of high-visibility banking centers that do not even have teller windows.

Developments such as these underscore the point that a tipping point has been reached in checking competition. The branch is less of a foundation and more of a multi-channel com-ponent, and meanwhile digital is becoming a swing factor in customer awareness and purchase consideration. The situation clearly calls for a different strategic orientation going forward — is your bank prepared?

Chris Musto is a Managing Director in the Boston office of Novantas, Inc. He can be reached at [email protected].

Figure 4: Top Channel Preference to Open New-to-Bank Checking

Across segments, preference for digital when opening new-to-bank checking sharply exceeds actual behavior today. Boosting digital opening requires effective decision support.


Preferred Channels for Checking Account Applications

52% 3%

3%

3%

3%

4%

25%

21%

52%

89% 7%

45%

75%

72%

44% 1%

1%


13March 2015

14

BY LEE KYRIACOU, WITH JENNY CHENG

Finally there are signs of life in the home equity line of credit, but a Novantas survey shows that a multi-faceted effort will be needed to revive the business.

After an extended post-recession era of painful contraction, the home equity line of credit business is finally showing more signs of life. But will all lenders see a revival in both volumes and profitability? The answer is not as clear as many retail bankers might hope.

On the bright side, a recent two-year spike in origination growth eventually may pay off handsomely for the industry, given that this type of surge preceded hefty balance expan-sion 10 years ago. Property values are rebounding along with the job market, fostering an increasingly positive con-text for family borrowing.

However, current progress is still being restrained by payoffs and write-offs of residual recession-era credits, which caused net balances to again shrink in 2014, by 3.4%. Large banks with nonperforming HELOC loan ratios of at least 1.5% mostly accounted for the contraction, while a pool of smaller, less encumbered lenders managed to eke out some progress.

Meanwhile the pool of eligible borrowers is smaller going into the next expansion phase, and credit line uti-lization has lately slumped a bit. Also recent Novantas consumer research raises questions about the ultimate

usefulness of some of the accounts being aggressively sold in the branch, and about the level of bank responsiveness to various accountholder groups, which view and use the HELOC quite differently.

In combination, these factors have left many institutions running in place. Account growth may look good in contrast with the recent rock-bottom, but balances are either growing with only weak profitability or not growing at all (Figure 1: Modest Outlook for HELOC Balance Growth).

The situation reinforces the point that banks will need to make a multi-faceted effort to revive the HELOC business. As highlighted by the Novantas 2015 HELOC Consumer Survey, many banks face three major performance challenges:

Marketing and sales. The HELOC product typically is over-pushed in the branch and to affluent segments, foster-ing idle accounts and raising questions about sales incen-tives. Elsewhere digital opportunities are lost through insuf-ficient attention to online channels. Meanwhile many new customers remain uncertain about the range of applications of this type of credit, limiting its usage.

Product design. Many potential borrowers would respond to additional flexibility in financing projects, for example,

HELOC GROWTH DRIVERS: The Case for Segment-Tailored Customer Strategy

converting a HELOC-funded appliance purchase into a fixed-rate installment loan. Meanwhile banks need to revise fee and usage provisions to help them cope with the expense of maintaining a growing mountain of unused accounts.

Pricing. Recent Novantas consumer research highlights the need for differentiated pricing strategies — online vs. branch channels; with customer segments; and with credit usage scenarios (e.g., steady borrower vs. rare contin-gency). Overall, improved pricing skills are needed to drive volume in high-value segments while safeguarding margins.

CUSTOMER PERSPECTIVETo flesh out the customer perspective, Novantas conducted a national consumer survey that included established HELOC customers, recent purchasers and prospects (Sidebar: HELOC Survey: By the Numbers).

Parsing current customers by frequency of draw and bal-ance carry, one growth challenge became clear — more than a few people are holding accounts with no specific borrowing purpose other than standby credit. Comprising 14% of the survey set, these “Emergency Only” accoun-tholders seldom use their home equity lines of credit, which are mostly originated for contingency use only. Even when lines are drawn upon, these customers try to quickly retire

balances, with no intention of further borrowing (Figure 2: HELOC Customer Segmentation).

Many of these accounts are originated in the branch, fueled by cross-sell efforts with affluent checking custom-ers. Reflecting the limitations of “push” sales in the branch, among survey respondents who said they had not been con-sidering a HELOC but opened one anyway at the suggestion of the bank, fully 30% said they never use their lines. One implication is a need for a better customer dialogue on bor-rower intentions and purposes.

Also banks should be considering which pricing and fee levers would help to address these effectively dormant emer-gency accounts, which, with new liquidity and capital charges, are even less profitable. While utilization among emergency users is low, so too is price sensitivity, with implications for the terms under which this type of backup credit is provided. For some banks, modest fee provisions may be appropriate for accounts that sit unused for extended periods of time.

A different set of priorities apply to the “Revolver” cus-tomer segment. Comprising 28% of the survey set, these HELOC customers draw regularly on their lines, evocative of a credit card relationship, and generally carry significant balances. Generally profitable relationships, these tend to be younger borrowers with mixed credit ratings. Their financial

HELOC Growth Drivers: The Case for Segment-Tailored Customer Strategy

Figure 1: Modest Outlook for HELOC Balance Growth

The home equity line of credit outlook is a combination of robust origination growth on a lower base with continued older HELOC runoff and writeoff.

Source: Federal Deposit Insurance Corp., Inside Mortgage Finance, industry analysis by Novantas Inc.

‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12 ‘13 ‘14 ‘15E ‘16E

$33 $33

$36

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ES

% G

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Yearend Balances

Balance Growth Rate

Origination Growth Rate

$0 B

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$600 B

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50%

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Novantas Projection

15March 2015

16

frame of reference tends toward cash management, which presents a different set of possibilities for marketing, product design and cross-sell.

Revolvers shop the product before buying and use more online research, shifting more emphasis to the web and mobile experience. Survey respondents from this seg-ment expressed more confidence that they got a good rate, reflecting price sensitivity, yet from a bank perspective this discount orientation must be balanced with solid-but-less-than-perfect credit profiles that call for somewhat higher risk-adjusted pricing.

In a framework that considers borrowing frequency and balance carry, “Pay-Downs” comprise the smallest segment, about 8% of the survey set. These are people who have either worked down previous large balances or taken only modest draws over the life of the account relationship.

Largely derived from older customers and more stable households, these account relationships at best are only modestly profitable. Building awareness of non-housing-re-lated HELOC uses, such as college tuition and auto finance may help, but the larger opportunity may be expanding other aspects of the banking relationship.

Finally, the heart of the traditional HELOC business

revolves around “Periodic Borrowers” — 50% of the survey set. These are customers who carry higher balances, typically used for major home renovations but also for event-related needs such as emergency repairs, replacing major appli-ances or perhaps replacing a car. They represent a mix of older and younger borrowers and are profitable accounts.

In marketing, product promotion and sales, banks often act as if Periodic Borrowers comprise 100% of the accoun-tholder base, when in fact they do not. This has extensive implications, but for the purposes of this article suffice it to say that segment-tailored strategies increasingly will be needed to rebuild the HELOC business, both in customer acquisition and to optimize various categories of accoun-tholder relationships.

THREE PRIORITIESConsidering the various consumer profiles and behavioral patterns illustrated by the Novantas survey, banks should look to improve HELOC performance in three areas:

Marketing and sales. While the survey clearly shows that the branch continues to play a major role in attracting new accounts, the online space is having more influence on product research, particularly with younger customers. The

Figure 2: HELOC Customer Segmentation

Periodic Borrowers come first to mind with HELOC, but may constitute only half of the customer base.To make the most of the business, it is important to understand the full range of customer profiles.

Source: Novantas 2015 Home Equity Survey


Pay-Downs (8%)Marginally profitable. Includes people who have worked down prior large balances or who never borrowed much. May respond to education about the many borrowing purposes HELOC supports, fostering consolidation of balances held elsewhere.

Emergency Only (14%)Unprofitable. A large set of dormant accounts, some held by people who have latent borrowing potential, many others held by people who passively responded to a sales offer but likely never will use their lines. Questions about sales, pricing, fees, terms.

Periodic Borrowers (50%)Traditional HELOC customers who carry higher balances. They borrow mostly for home renovation, but also for other big-ticket items. A profitable segment that skews somewhat to older customers, but includes many younger ones as well. More oriented to the branch.

Revolvers (28%)Generally younger customers with more of a cash management orientation. They borrow more frequently, shop online and are more price-sensitive. Credit ratings are mixed but the potential for long-term relationship profitability is high. Will respond to greater product flexibility.

Novantas conducted a national consumer survey centered on the home equity line of credit, including established customers, recent purchasers and prospects.

In terms of demographics, HELOC users break into a larger set of older users and a growing set of younger users. Among current customers, almost three-fourths are at least 45 years old, yet younger accountholders are more likely to draw on their lines.

The under-45 segment represents only 12% of seasoned accounts (more than three years old), but more than 40% of newer HELOCs on the books. This group skews toward higher income and more cash on hand, but credit ratings are mixed.

Looking at credit line utilization among households with more than $100,000 of annual income, 62% of the under-45 group had a line balance of more than $25,000. That compares with 44% of the more affluent 45+ group, and a low 30s range for either age group with income less than $100,000.

Among survey respondents who specified a purpose for borrowing, 42% said they expect to use HELOC funds for home-related purposes. Within this group, the breakout was 35% for home improvement and 7% for the purchase of an additional property.

An equally large group (43% of the total) said they were using their HELOC for purposes other than dwellings them-selves. Here the breakout was 25% for event-based large bor-rowings (such as tuition, a car or a major contingency), with an additional 18% citing cash management purposes. The remain-ing 15% of purpose-associated respondents said their HELOCs were for emergency — just in case.

Importantly, utilization differs sharply by stated purpose of acquiring a HELOC: 44% of emergency-designated HELOCs remain unused, compared with 6% to 12% idle rates for credit lines associated with other purposes (clearly, pushing HELOCs with “just in case” marketing will lead to low utilization). Overall, substantial subsets of each group cited multiple actual uses for line draws.

As more fully detailed in the main article, a simple split of

HELOC users by the frequency of draw (regular, occasional, never) and size of draw (over $2,500, some amount less than that, none) reveals four behavioral groups. These include Revolvers (28% — oriented to cash management); Periodic Borrowers (50% — traditional users with higher balances); Pay-Downs (8% — limited or dwindling balances); and Emergency Only

(14% — strictly for standby purposes). More than any other financial product,

HELOCs are linked to the demand deposit account. They are not heavily shopped and sales are branch-driven. Fully 72% of HELOCs are originated at the consumer’s primary (DDA) bank, so the first-mortgage originators are not automatically winning the business. DDA loyalty should not be taken for granted, however: banks should work harder to understand and influence how prospects arrive at their consideration set for HELOC providers.

More than 60% of users said they shopped at only one bank before applying, with another 24% shopping at only two banks. In terms of which channels were used to shop (multiple channels permit-ted), 53% of respondents cited the branch, compared with 23% going to the bank’s website and 14% using an online compar-ison service.

There were identifiable differences in price sensitivity among surveyed HELOC users. Emergency users – while their utilization rates are low – are less price-sen-sitive. Conversely, frequent-using Revolvers shop the product before buying, use more online research and are more confident they got a competitive rate. This makes younger HELOC users somewhat more price sensitive, but also with somewhat higher credit risk pricing.

Lastly, the survey respondents who identified themselves as prospects roughly shared the same demographic profile as younger current accountholders. Many of these prospects said they were hesitant to use HELOCs, however, with the domi-nant reason (cited by 40%) being a concern about putting their home at risk with such borrowing.

—Lee Kyriacou and Jenny Cheng

HELOC Survey: By the Numbers

“Fully 72% of HELOCs are originated at the consum-er’s primary (DDA) bank, so the first-mortgage orig-inators are not automati-cally winning the business. DDA loyalty should not be taken for granted, how-ever: banks should work harder to understand and influence how prospects arrive at their consideration set for HELOC providers”


17March 2015

18

purchase funnel that leads from online awareness, research and consideration to branch transaction fulfillment needs to be understood and carefully nurtured, including the prepara-tion of branch staff (Figure 3: Online Preferences).

Educating prospects on HELOC’s value for cash man-agement and event-based borrowing is useful in all cases, but especially helpful with younger borrowers. Attracting younger, cash management-oriented Revolvers will help to boost utilization and foster longer balance duration over the life of the relationship.

In sales conversations with Revolvers, a strong selling point is that the HELOC offers a far more attractive rate than credit card or consumer installment financing. However, care must be taken in the sales dialogue to respect strong borrower sensitivity about not wanting to put their homes at risk, suggesting a balanced presentation that emphasizes attractive credit availability within a responsible context.

Also in branch sales conversations, asking about the pro-spective use of the HELOC helps to identify Emergency Only users whose utilization potential is quite low.

Product design. Enhanced options for debt control have the potential of attracting and expanding Revolver usage of the HELOC. Many banks already offer the ability to convert

a HELOC to a fixed-rate installment loan and should explore options to provide additional financing flexibility.

But to make reticent borrowers truly comfortable with using equity in their home without risking their home, banks need to incorporate both control and flexibility in the prod-uct feature mix. Examples include borrowing for new fur-niture and specifying both the payment and the number of months to pay off, or an ability to place balance limits on cash management draws from a HELOC credit card.

Turning to design adjustments for little-used accounts, an up-front annual fee may chase away Emergency Only users. More feasibly, a modest fee following a full year of account inactivity may help to shore up account economics without dis-affecting the true emergency users with latent potential for utili-zation (as opposed to those who never intend to use the line).

Another approach to limiting the cost of maintaining idle accounts is a dynamic line. Under this arrangement, a rela-tively low initial line is offered to those expecting to use the HELOC only in emergencies, but with an automatic review of the credit limit following a draw. This way the bank reduces the capital charge required to support standby credit while assur-ing customer responsiveness when circumstances change.

Turning to usage incentives, introductory rates can help,

Figure 3: Online Preferences

HELOC prospects prominently include online research as they shop for providers and products. There is a growing preference to submit applications online as well, especially among younger prospects.

1 Includes computer, tablet and smartphone. Source: Novantas 2015 Home Equity Survey

Lenders’Websites

Comparison Websites

Branch Out-of-Branch Signage

Phone Family & Friends

Mail

DIGITAL1 BRANCH

0%

15%

30%

45%

60%

76%Ages 21–34

Ages 35–54

Ages 55+

22%

58% 36%

39% 52%

Preferred Shopping Channels among Prospective Purchasers(Survey Breakout, Multiple answers permitted)

Preferred Channel to Make an Application for HELOC

Products Providers


especially in the first months after a line is opened. Such offers can include controls to manage pay back, and hence need not look like credit card balance come-ons. While the objective is to encourage balance formation, these relationship expansion tools can also help with customer acquisi-tion, particularly with Revolvers.

Pricing. Along with low utilization potential except in unusual circum-stances, Emergency Only borrowers have relatively lower price sensitivity, hence the very lowest rate offer should be avoided. By contrast, price sensi-tivity is much more likely with poten-tial Revolvers, as well as with Periodic Borrowers who may be shopping around for credit to meet immediate needs.

For online HELOC shoppers, highly competitive pricing is more likely to be required, as with mortgage shopping. Prominent displays of “rates as low as” make a difference online. In the branch, by contrast, the emphasis is on consul-tative sales.

A pricing balance needs to be struck with younger users, who may be some-what overburdened with debt and not quite as meticulous in meeting repayment schedules (impacting credit scores), yet offer the potential of higher HELOC utilization and longer balance duration. Offering better risk-adjusted rates, whether online or in the branch, often is well-justified given the poten-tial for extended relationship profitability.

KEY MANAGEMENT QUESTIONSIn translating these findings into business line priorities for 2015, HELOC executives should be asking five key questions:

Are we on top of portfolio dynamics? Origination volume may be rosy, but progress in booking profitable accounts might be something different. Based on a deeper look at portfolio trends, it may be time to revise customer acquisi-tion strategies to more accurately target prospects who have true utilization potential.

Idle accounts may need a deeper review as well. There may be ways to re-engage Pay-Downs to borrow again, per-haps by identifying needs as reflected in product balances held elsewhere. Also mechanisms are needed to manage the origination volume of Emergency Only accounts and rationalize their economics once booked.

Are branch sales reps fully up to speed? Branch sales productivity is fundamental to profitable HELOC growth, with

a huge chunk of today’s originations still occurring on-site. A well-prepared platform banker can identify high-potential prospects; market the product in accordance with the bor-rower’s intended purpose for the line; and provide appropri-

ate guidance to cultivate line utilization. HELOC-specific training programs and analytic support are needed.

Are we prepared for digital custom-ers? Though still dominant today, the branch role in HELOC marketing and sales is fated to shrink as customers flock to online channels for product research and gain increasing confidence to pur-chase more banking products remotely. A convenient and compelling online shopping experience is an increasing requirement for marketing success, par-ticularly with younger customers.

Do we understand borrower pur-poses? As illustrated by Revolvers, Periodic Borrowers and Emergency Only accountholders, the home equity line of credit is viewed and used quite differ-ently among major customer groups. These differences have important impli-

cations for needs-related product design and positioning, utilization potential, risk and price elasticity of demand. A superior ability to assess customers holistically and structure products accordingly confers competitive advantage. Banks will need to reflect these differences in their sales process.

Do we have the right tools for precision pricing? The three fundamentals of precision pricing are: 1) refined prof-itability modeling assumptions; 2) improved pricing segmen-tation; and 3) an approach based on elasticity of demand.

Profit models should reflect the new liquidity and capital adequacy guidelines required by regulation, and be grounded in behavioral economics. To assure profitable growth, pricing needs to move from one-size-for-all to segment-specific price points, supported by an optimization framework that includes calculations of segment-level price elasticity of demand. As with other areas of retail banking, some HELOC players are taking fuller advantage of advanced pricing capabilities to capture profitable market share, while others fall further behind.

Lee Kyriacou is a Managing Director in the New York office of Novantas, Inc. Also contributing was Jenny Cheng, a Senior Associate in the New York Office. They can be reached at [email protected] and [email protected], respectively.

“Origination volume may be rosy, but progress in booking profitable accounts might be something differ-ent. Based on a deeper look at portfolio trends, it may be time to revise customer acquisition strategies to more accurately target prospects who have true utilization potential.”


19March 2015

20

BY TONY CORETTO

By improving data, analytics and multi-channel targeting, banks can digitally identify and pursue opportunities that otherwise could not be spotted or profitably served.

As the quest for growth resumes in 2015, one priority is unlocking more of the cross-sell potential with small and medium-sized enterprises (SMEs), specifically those already doing at least some business with the bank. This includes capitalizing on the lucrative interplay between business and personal accounts among small business principals.

While the collective opportunity is large, however, it is fragmented among myriad smaller clients, making it difficult to justify a direct outreach with expensive sales talent. The vast spectrum of customer profiles and needs complicates the outreach, moreover, and many marketing and sales

opportunities now are specific to different delivery channels (web, mobile, ATM, etc.).

The situation presents a clear call to improve customer analytics, targeting and lead generation in the SME space. The goal is to harness customer information to digitally iden-tify and pursue opportunities that otherwise could not be spotted or profitably served. These skills can assist cross-sell revenue generation in three ways:• The first is broadening and deepening single-service rela-

tionships to improve profitability and customer retention;• The second is optimizing full-service relationships to

ANALYTIC KEYS TO SME CROSS-SELL

include more high-value offerings; and• The third is reaching the many SME principals who have

consumer accounts with the bank but are not yet using its SME products and services.While these cross-sell goals are compelling, many

banks continue to stumble in the analytic pursuit. Data gaps are widespread, leaving banks unable to paint a full picture of the combined SME/household relationship. The problem spreads from there to insight gaps — antici-pating high-value customer needs to drive additional busi-ness. Then there is the perennial action gap — translating

abstract opportunity into specific strategies for marketing, sales and product alignment.

These challenges need to be tackled with renewed vigor in 2015, and the good news is that the state of the art in SME cross-sell now can provide a clearer path to progress for committed players.

A typical SME banking relationship holds at least three times the potential of a typical mass consumer rela-tionship, and banks should not resign themselves to a con-tinued struggle to realize the tremendous opportunity in this segment.


Figure 1: Addressing the Data Challenge in SME Banking

In an environment where success increasingly hinges on data, analytics and targeting, many banks will need to comprehensively review and improve their capabilities.

Source: Novantas, Inc.

CURRENT STATE FUTURE STATE TRANSITION PRIORITIES

Fragmented Source DataCustomer data is incomplete and scattered across business silos and operating systems, limiting the possibilities for segmentation and targeting

Limited HouseholdingNo clear understanding of the total customer relationship, including business and consumer accounts

Weak ModelingOnly rough guesstimates of business relationship potential, sub-optimizing marketing and sales resources and returns

Limited Data AugmentationLimited use of 3rd party data, either to flesh out client profiles or for targeted acquisition

Consolidated DataHoused in a central repository, including firmographics, contacts and account and channel behavior

Comprehensive Householding Profiles specific to SME/consumer relationships, adjusted for multiple contacts and addresses, and varying corporate structures

Full Modeling of PotentialRelationship potential clearly identified via sophisticated wallet modeling for improved segmentation and targeting

Integrated 3rd Party DataUsed to enhance customerprofiles and support targetedacquisition campaigns forhigh-potential prospects

' Conduct a “data inventory” of all available internal data sources pertaining to SME/consumer clients (checking, deposits, loans and applications, business services, investments, leasing, etc.)

' Audit householding and account aggregation methodologies currently in use, identify gaps versus future state

' Review strategies, techniques and data used for segmentation and targeting, especially on relationship potential

' Review current usage and gaps in 3rd party data; vendors; possibilities

21March 2015

22

MISSED OPPORTUNITY There is a marked contrast between best-in-class players and the way most regional banking companies pursue SME cross-sell today:• Most banks are still wedded to a product-centric ap-

proach, pushing the “flavor of the month” based on product sales goals. By contrast, best-in-class marketing is informed by customer profiles and behaviors, includ-ing changes over time. It anticipates customer needs and bases offers on those needs.

• Most bank marketing is calendar-driven and channel-fo-cused. Messages tend to be based on external events (end-of-year, tax season, etc.), with efforts only loosely coordinated among mass media, direct response, digital and internal channels. By contrast, best-in-class bankers consider both the progression of customer needs and the progression of the customer relationship with the bank (i.e., customer journey). Guided by this compass, they

use multiple channels to reach various target customers and groups, with messaging relevant to customers’ calen-dars and channel preferences.

• Many targeted cross-sell campaigns are based on only a rudimentary understanding of the current relationship. By contrast, best-in-class marketing uses data and analyt-ics to understand not just the current status of the client relationship but also the future potential, or “total wal-let” (Figure 1: Addressing the Data Challenge in SME Banking). As targeting of high-potential relationships is improved, marketing and sales activities become more focused and effective.Putting all of this together, it is clear that best-in-class

marketers approach SME cross-sell from a distinctly different center of gravity. The emphasis is on using data-driven tar-geting to prioritize opportunities within the current customer base, permitting a much more effective pursuit of revenue and growth targets.


Figure 2: Building the Total SME/Consumer Relationship

Many small business owners only have consumer accounts with a particular bank and are targets for commercial cross-sell. Others have both commercial and consumer accounts and are targets for relationship expansion.


Relationship Expansion Opportunity: Consumer customers who own small businesses and also have commercial relationships with the bank (typically 45% of the SME/consumer subset)

Cross-sell Opportunity: Consumer customers who are small business owners but do not yet have a commercial relationship with the bank(typically 55% of the SME/consumer subset)

SME/CONSUMER CLIENTS AND PROSPECTS

(TYPICALLY 15%)

PURE CONSUMER CUSTOMERS

(TYPICALLY 85%)

HIGH-VALUE TARGETSThough many banks still face a lot of foundational work with data and analytics to reach the next level in SME cross-sell, this effort can be pursued within the context of unlocking high-value opportunity. A prime example is targeting current household banking customers who also own businesses.

Within the typical retail bank, about 5% to 15% of cus-tomers are small business owners, but usually less than half of the people in this group also carry their business accounts with the same institution. Consolidating their entire bank-ing relationship across both retail and commercial prod-ucts represents a tremendous opportunity, especially since business owners tend to be far more affluent than typical retail customers (Figure 2: Building the Total SME/Consumer Relationship).

This is where data roadblocks quickly get in the way. Challenges range from capturing basic information; to assembling business/household composites; to compiling time series information on payments and channel and prod-uct usage. Lacking this kind of holistic customer view, it is difficult for banks to discern the value of the entire customer relationship, project emerging needs and set marketing and sales priorities.

To begin to turn things around, business-related data should be systematically captured at retail account opening

(for example, when a consumer lists her personally-owned business as her employer). Then when such relationships are captured (often on consumer credit applications), they should be leveraged elsewhere — few on the small business side are alerted when a proprietor applies for consumer credit, for example.

An all-important step is creating composite business/household profiles, which are critical in helping the bank to identify the top targets for cross-sell. Third-party data provid-ers can help to plug the gaps in customer information.

Then the bank must consider product alignment. Many lack true bundled products that bridge the SME/consumer divide, which discourages small business owners from consol-idating their banking relationships. One answer is to create “pseudo-bundles” of products and services (see Sidebar).

Finally, winners in SME/consumer cross-sell employ a multi-channel direct-response approach. Channels include direct mail, e-mail, statements, automated teller machines and online login pages. Messages include clear calls to action and are supported by effective follow-up from various sales staff as appropriate.

Following through on these concepts, one Southeastern regional bank sorted through its consumer customer base to identify people who also owned businesses but were not yet using the bank’s business-related offerings. For solicitations

Many SME clients take a combined view of their household and business finances. They are receptive to banking offers that support this holistic orientation, plus they see bargaining advantages in swinging more business to the bank in exchange for a good deal. Many banks, however, see product develop-ment as a barrier.

One answer is to create “pseudo-bundles” of products and services that do not rely on costly and complex changes to either underlying technology product platforms or customer service requirements. For example:• Core small business checking plus a commercial credit

card, with the option to use bonus points earned in the card loyalty program to offset fees on the small business check-ing product.

• Consolidated small business plus personal savings, allowing a small business owner to count consumer-side balances along with business-side balances to meet thresholds for better rates on tiered savings products.

• SME-targeted home mortgage financing concessions on rates and fees, depending on the overall level of patronage at the bank.

These “pseudo-bundles” can be implemented via a much simpler “rules engine” that sits on top of underlying technology product platforms — far less costly and time-consuming than revising the underlying platforms.

Such offerings can be marketed both from the business side (to cross-sell relationship consolidation, wealth management, or other HNW-type offerings to affluent business owners) as well as from the consumer side (to cross-sell business products for the owner’s business).

They allow the bank to meet a broader set of business and personal needs, and specifically convey to the client how consol-idation supports both business growth and success in managing personal wealth.

— Tony Coretto

“Pseudo-Bundles” for the SME/Consumer Client


23March 2015

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on new checking accounts, the response rate was roughly double that of proprietors with no current ties to the bank, and the average acquired balance was roughly double as well. Campaigns for business loans and lines of credit were similarly favorable.

A spin on this is to cross-sell business-only customers into consumer accounts.

FUTURE STATEReturning to one of the main complications in improving SME cross-sell, a lot of opportunity resides with myriad smaller customers and transactions: it is not cost-effective to use sales representatives to individually pursue this business. In this instance, winning hinges on targeted channel com-munications that evoke the feel of one-on-one attention and motivate prospects to become buyers, either online or often by going to the branch to complete transactions.

This leads to an important set of interrelated manage-ment questions:

Do we have a full view of the customer? Many banks have further work to do in understanding the full SME/house-hold relationship. The state of the art includes an in-depth understanding of account- and product level attributes (e.g., balances, fees, revenues, profitability, etc.); behavioral characteristics (including channel usage); and dynamics of the overall banking relationship. There is also more to be done with “firmographics” — understanding the traits of the businesses that customers own (such as industry type, annual sales, number of employees and year started).

Novantas multi-bank research indicates that analytic data structures remain fragmented and unwieldy at many institutions, with an average 45% of analytic department time spent just on accessing and assembling data. The prob-lem is exacerbated as banks struggle to collect and interpret ever-higher volumes of more granular data from ever more varied data sources.

Are we able to anticipate high-value customer needs? Sophisticated data modeling is essential in understanding the total customer wallet and potential for relationship expansion, both at the segment and customer level. Considerations include likely purchase propensity for various offers; likely “next prod-ucts” on the customer’s consideration list; and also attrition risk.

This is a continuous, ongoing process throughout the customer journey. The goal is to respond both to the cus-tomer’s business lifecycle stage (new business, growing business, mature business) as well as the business’s stage in customer journey with the bank (new client, activation, relationship-deepening, cross-sold).

Do we have a multi-channel action plan? Both in their business and personal lives, SME principals are following the general customer trend in paying a lot more attention to electronic channels when researching products and consid-ering providers and specific transactions. Marketing cam-paigns need to be matched with the channel(s) of choice for target customers. An effective multi-channel direct response program can also include direct mail and messages in monthly statements and on ATM screens.

There is also the question of sales fulfillment. In many cases, cross-sell success will entail driving more customers to the branch to fulfill transactions. Careful preparations are needed to progressively engage online shoppers as they become more interested, and to assure smooth transitions to live interaction in the branch. In other instances, proactive sales follow-up will be needed.

STRONG FOUNDATIONAll of the preparation in gathering and analyzing data will help to lay a strong foundation for SME cross-sell, including expansion of single-service relationships, optimization of fuller established relationships, and tapping SME principals via their consumer banking relationships. The key is better prioritization of effort via an improved understanding of the profiles and needs of client sub-segments within each target population.

Ultimately, a well-developed targeting strategy can tran-scend incremental cross-sell to improve the focus and effec-tiveness of SME sales teams overall. The same data and analytics can be used to foster relationship development and sales productivity across the spectrum of client profiles and marketing and sales settings.

Tony Coretto is a Managing Director in the New York office of Novantas, Inc. He can be reached at [email protected].


“Ultimately, a well-developed targeting strategy can transcend incremental cross-sell to improve the focus and effectiveness of SME sales teams overall. The same data and analytics can be used to foster relationship development and sales productivity across the spectrum of client profiles and marketing and sales settings.”

BY MICHAEL RICE, CHEVY MARCHOSKY AND DAVID ZWICKL

For better coordination between the origination and credit risk management teams, banks need to adopt an event-driven management approach for underwriting.

A perennial issue in commercial lending is that the under-writing process seems to defy attempts at systematization. Inevitably, it seems, contingencies get the best of procedure in a complex business that depends on fast-paced negotia-tions between clients, relationship managers and internal decision-makers. Can the chaos be tamed?

Urgency is rising to address the issue. Commercial banks are essentially running in place right now, with loan growth being undercut by shrinking margins. As of the fourth quarter of 2014, commercial loan spreads had fallen by 100 basis points from their post-recession peak. There is a pressing need to streamline the customer experience to capture share in an intense market. Taming internal complexity is essential to progress.

Commercial banks also know they need to protect them-selves by tightly managing credit standards and risk-adjusted returns. The regulatory community is hammering on this issue as well, insisting on a more cohesive and better-documented process for credit origination and management. The Office of the Comptroller of the Currency, for example, is circulat-ing proposed guidelines for a risk governance framework that requires banks to maintain “three lines of defense” that directly apply to commercial lending, including front line sales, credit risk management and internal audit.

Perhaps hitting closer to home for executive teams, pre-cious time is being chewed up in endless micro-discussions about deals. Managers are not managing a process. Rather, contingencies are managing the managers. Sales productiv-ity and customer responsiveness are compromised as atten-tion is diverted to the details.

To cut through this mess, some banks are adopting an event-driven management approach that introduces standards

and streamlining techniques for major aspects of the under-writing decision-making process. These “credit events” include formal and informal staff interactions in meetings, reviews and conversations.

The goal is to clarify and expedite the major deci-sion-making categories in the commercial deal pipeline, including portfolio fit, deal structure and deal approval. The ongoing review process for outstanding loans and lines of credit also needs to be cleaned up. Myriad contingencies will continue because that is the nature of the business, but an effective decision framework can make a big difference in dealing with the crush (Figure 1: Balancing the Workload for Credit Approval).

FRACTURED PROCESSESEach commercial banking team will have its own set of war stories about fractured underwriting decision-making pro-cesses, but here are two disguised examples that speak to common challenges across the industry:

Deal proposal. In one instance, a seasoned commercial banker independently advanced a client conversation to the deal proposal stage, going so far as to work up a full loan presentation. The banker put his skills to work in structuring proposed deal terms of mutual benefit to the client and the bank, assuming that the energy sector credit likely would meet the institution’s portfolio criteria (at least based on career experience).

The banker was crushed, however, when the deal was shot down during the first conversation with a senior leader in the credit organization. Though the proposal was solid, the banker had proceeded unaware that the bank had already reached its self-imposed portfolio limit on energy sector


25March 2015

26

concentration. The credit officer was disappointed to see the fruitless investment of time, and meanwhile the banker was blindsided by the portfolio constraint and embarrassed in front of the prospective client.

Viewing the incident in terms of credit events, the problem began with poor management communication on portfolio fit, which left the banker to over-rely on word-of-mouth informa-tion and personal experience. Even after the failure to proac-tively convey screening criteria, there still should have been a process-related safety net in the form of routine early banker communication with the credit team. With the benefit of an early conversation, the banker could have tabled the deal and moved on to other things.

From the regulatory perspective, incidents such as this highlight the need for front-line sales teams to “own the risks associated with their activities” and act as a strong first line of defense. Bankers are understandably focused on growing portfolios to meet performance objectives but must become

more cognizant of managing the risk profile of the line of business as well. The early involvement of credit risk manage-ment is crucial in heading off deals that fall outside the credit parameters of the institution.

Credit approval. At another bank, an overloaded senior executive decided to review her meeting calendar to under-stand where her time was going. It quickly became apparent that her office had become a lobbying destination for bankers wanting to pre-sell their individual deals before presentation to the credit committee. She asked around and heard similar stories from other members of the management team.

The upshot was that the formal credit committee meeting had largely become a rubber stamp exercise, with most dis-cussion occurring beforehand in office-to-office side meetings. Bankers were tending to shop their loan presentations with direct managers and every single member of the credit com-mittee as well — an enormous diversion of time, both for management and for banking officers.

Figure 1: Balancing the Workload for Credit Approval

The credit committee is often over-burdened in the evaluation of commercial deals in progress and subject to intense personal lobbying. A more balanced staff involvement is needed going forward (illustration).



42%

% OF DEAL VOLUME

CREDIT COMMITTEE LESS BURDENED

Breakout of Activity Relative to Total Management Time Devoted to Credit Approval

TODAY FUTURE

CHIEF CREDIT OFFICERS MORE FOCUSED ON EXPOSURE

SENIOR & LINE CREDIT OFFICERS FAR MORE INVOLVED

LOB OFFICERS SOMEWHAT LESS INVOLVED

% OF DEAL VOLUME

% OF DEAL VOLUME % OF DEAL VOLUME

% OF DOLLAR VOLUME % OF DOLLAR VOLUME

% OF DOLLAR VOLUME % OF DOLLAR VOLUME

11%

25%

8%

79%

9%

56%

14%

12%

35%

38%

29%

8%

4%

28%

2%

Viewing the incident in terms of credit events, the core issue was that the commercial bank’s credit approval pro-cess was ill-defined. Absent a clear and consistent procedure, relationship managers fell back on the obvious, which was promoting their individual projects. Amid the disorder, efforts to systematically balance risk and client responsiveness were being compromised.

Again from the regulatory perspective, the situation speaks to the second line of defense — independent risk man-agement. Splintered talks and deal “pre-selling” can detract from objective evaluation. In fact, regulators questioned this institution, wondering why nearly all deals reviewed by credit committee were ultimately approved.

Along with objectivity in risk evaluation, structured credit events help to support transparency in decision-making, so that both regulators and front-line bankers can see consistent, understandable patterns in deal acceptance and rejection. This helps to maintain rapport with the sales team through the ups and downs of credit evaluation.

CREDIT EVENT FRAMEWORKTo properly organize the underwriting and credit manage-ment process, it is necessary to carefully map out the major types of events that drive it. This includes the people involved in the decision-making chain; the right sequence of activities; and the types of documentation required at various stages.

The logic may sound obvious. But the push from the orig-ination side is so strong that deal preparations often reach an advanced state before the credit risk management team is brought into the loop. The answer is to reorient the workflow along four dimensions — fit, structure, approval and review — specifying the collaboration between the origination and credit teams that will be needed at each stage (Figure 2: Credit Event Framework).

Fit. An early review of portfolio fit allows the team to get a collective jump start on promising deals while minimizing wasted effort on proposals that are “outside the strike zone.” The discovery starts with client financial statements, basic company information, industry data and preliminary spread estimates supplied by a credit analyst.

In a discussion of portfolio fit, the relationship manager will typically review the client’s qualitative and financial pro-file, going from there to sketch out a preliminary deal structure with the direct manager. The focus is on making a yes/no determination of whether to proceed in developing a term sheet. Senior leaders are brought in as needed depending on the client or deal magnitude.

Structure. With a go-ahead on the basis of fit, structure-re-lated questions begin with a fuller review of client needs and preferences, plus a collective evaluation of how the working proposal aligns with the bank’s credit criteria. The objective in this phase is to craft a balanced term sheet that will meet hurdle

Figure 2: Credit Event Framework

A robust credit event framework for commercial lending specifies the collaboration between the origination and credit teams that will be needed at each stage.



FIT STRUCTURE APPROVAL REVIEW

Preliminary joint evaluation of deal

suitability relative to portfolio standards

and objectives

Joint formal review of client profile,

needs and potential risk-adjusted

returns, leading to creation of initial

term sheet

Business Unit SignatureApproval

CreditCommittee

Review

CreditSignatureApproval

Quarterly and annual reviews of outstanding loans and lines of credit, including updated client information and reassessment

of risk

27March 2015

28

rates of return, protect the bank from downside risk and win internal approval, ready for delivery to the client.

Approval. The preliminary approval meeting includes the relationship manager, senior bankers and credit staff, and it culminates in the release of the term sheet to the client. Upon client approval, a formal internal loan presentation is pre-pared. The formal approval meeting includes a deeper eval-uation of the company’s financial condition and underwriting considerations. Once the credit terms are finalized, the client is notified and legal documentation commences.

Review. The credit team continues its involvement with outstanding loans and lines of credit via periodic reviews, either quarterly or annually depending on the type of facility. Updated client financial information typically is required for these meetings, and risk factors are recalculated to ensure a continuing fit within the original credit terms. The review pro-cess also extends to renewals, although the level of required effort typically is lower since the institution already has com-plete customer information.

Again from a regulatory perspective, periodic reviews can accomplish many of the best practices prescribed for the third line of defense, even though they are not conducted by an internal audit group. Once a uniform review structure is in place, the internal audit group can monitor the process, help-ing to quickly identify and mitigate risk. A robust review pro-cess also encourages strong data governance, given require-ments to update customer financial data and risk profiles at regular intervals.

Across all of the credit event dimensions — fit, structure, approval and review — each of the three regulatory lines of defense must work in tandem to balance the return on the port-folio with the credit risk appetite of the institution. Left untended, weak governance practices will inevitably lead to lapses in credit risk management, with potentially severe consequences, both regulatory and financial.

HAPPY MEDIUMWhile credit events need to be well-defined, this does not imply an underwriting straightjacket, as both RMs and the credit staff need flexibility in responding to the unique require-ments of each transaction.

Banks tend to veer to the extreme, either imposing a restric-tive, one-size-fits-all process or having little apparent structure at all. The key is to find a happy medium, tailoring process and documentation standards for major deal types, sizes and lines of business, supported by a general framework.

Well-structured credit events provide three main benefits:Improved customer experience. Promising opportunities

can all too easily evaporate in the face of long cycle times,

miscommunication on key aspects of a negotiation, or unsat-isfactory dealings with individual bankers. Structured events provide a common foundation for the origination and credit teams, permitting deal creativity and quick responsiveness while protecting underwriting standards.

Risk/growth balance. Structured credit events facilitate the proactive co-involvement of the origination and underwrit-ing teams. Often today, growth is emphasized at the expense of the formal review process. In the future the two factors must be much better balanced, with credit risk screening providing a more timely and effective line of defense.

Regulatory compliance. Commercial banks are experi-encing new levels of regulatory scrutiny and compliance pres-sure, as reflected in the OCC’s three lines of defense and in stress-testing prescribed by the Fed’s Comprehensive Capital Analysis and Review (CCAR) and the Dodd-Frank Act Stress Test (DFAST). Strong data management is critical in compil-ing the more lengthy internal data series, generating more the more detailed credit loss analytics, and drafting the more thorough documentation that regulators are requiring.

Credit events provide an audit trail for each transaction and assure data capture by specifying required inputs and outputs at each stage in the process. They also provide a new level of process transparency, valuable for executive manage-ment, business line management, risk management, compli-ance, audit and financial management.

QUEST FOR CLARITYThere is no single solution for implementing efficient and effective credit events. Organizational styles differ, for exam-ple, with some institutions placing a heavy emphasis on credit committee approval, and others using signature approval for the vast majority of loans. Each bank will need to clarify the processes that will best support its preferred approach, and then follow through with a determined effort to instill the appropriate credit event standards into the origination and underwriting workflow.

One requirement is constant across banks, however, which is that the framework for credit events needs to be well-de-fined. This is essential in streamlining origination, underwrit-ing and portfolio management processes for improved cus-tomer responsiveness in an intense market; protecting the risk profile; and meeting regulatory expectations.

Michael Rice is a Managing Director, Chevy Marchosky is a Principal and David Zwickl is a Manager in the Chicago off ice of Novantas, Inc. They can be reached at [email protected], [email protected] and [email protected].


As commercial bankers push further into 2015, they again are facing internal pressure

for outsized performance contributions that will help to offset still-lagging results on the retail side. Happily, they have been able to do just that in recent years, rebounding from the Great Recession to deliver a sustained expan-sion of loan balances and profits.

U.S. commercial and industrial loans on bank balance sheets grew by a whopping $530 billion during the four years ended December 31, 2014, for a compound annual growth rate of 9.7% (versus a $100 billion drop in consumer loans). But can the momentum continue? The question is becoming more pressing as intense lending competition steadily drives down spreads (Figure 1: Contrary Trends in Growth and Margins).

Novantas research shows that among 12 of the largest public-ly-traded players, the combined net interest margin on commercial loans has fallen by more than 100 basis points since the 2010 peak. While four of the institutions still managed to post a collective 9.3% expansion in commercial line of business net income in 2014, four others straggled across the finish line with a collective 2.2% increase. Four others actually lost ground, together experiencing a 7.4% contraction (Figure 2: LOB Net Income Growth Challenge).

And while profitability remained generally strong in 2014 (hover-ing at a combined 1.5% return on assets for the 12-bank study group), ROA continued to slide from its post-recession peak.

Adding to concerns, commercial deposits are losing value and useful-ness as new regulations restrict the use of certain categories of deposits in funding loans. Responding to require-ments of the Liquidity Coverage Ratio (LCR), some banks already are making headlines by intentionally scaling back categories of deposits deemed more flight-prone in times of distress. Then when rates begin to rise, as is expected later this year, commer-cial banking units will face the dual challenge of paying more for deposits while trying to contain runoff as clients seek better returns in the marketplace.

The situation calls for a review of management levers that can help to shore up performance in an unfolding era of intensifying condi-tions in commercial banking. From the Novantas viewpoint, there are three major avenues of response, corresponding with short-term, medium-term and long-term impact.

The largest and most immedi-ate lift can come from an improved ability to price commercial loans, and banks also need to re-think pricing and product bundling in the deposit/treasury management space. In the

medium-term there are opportunities to improve relationship cross-sell and sales force design. Longer term, some banks are overhauling the end-to-end credit origination process.

DIMINISHING RETURNSIn recent times commercial bankers have done extraordinarily well by turning full attention to the market, feel-ing less need for system-wide projects that would help to refine performance in areas such as pricing, sales and efficiency. It has been a rare era of sunshine for a line of business often known for its volatility.

While the onset of the down-turn saw originations plummet and write-offs skyrocket, recovery came comparatively quickly. Charge-offs for commercial and industrial loans nor-malized and loan growth rebounded to drive balance sheet expansion for multiple years. Commercial deposits also rose handsomely. Both income and profitability were nicely on the mend by 2010.

By contrast, the retail banking line of business has gone through a protracted struggle. Mortgage origination and home equity lending collapsed along with the real estate market and are only limping back to life; consumer loan demand has yet to fully rebound; and deposits are far less valuable to banks in an envi-ronment of low rates and depressed

BY LEE KYRIACOU AND MICHAEL RICE

In an era of margin pressure and intensifying competition, commercial bankers will need to step up to maintain profitable growth and differentiate themselves in the marketplace.


COMMENTARY

29March 2015

30

margins. Small business lending has also been slow to recover.

But now the commercial side is having more difficulty in shoulder-ing results for the full bank holding company. For eight out of the 12 major banks in the commercial line of business study, growth-fueled expenses rose at a faster rate than revenues in 2014, portending diminishing returns from continued expansion.

The fourth quarter of 2014 was particularly unkind, moreover, with zero collective loan growth among the 12 commercial business lines (with diminution among half of the players offsetting growth among the other half). Net income suffered the same fate, with mixed results among the 12 players, and limited collective growth.

Executives are worried about spread compression; about the sus-tainability of growth; and about the

potential for deposit runoff starting later this year. There are also questions about the quality of business being booked as relationship managers run flat-out to generate additional loans. Add new regulation to the list as well.

AGENDA FOR 2015–2016The upshot is that if commercial banking executive teams did not feel the urgency to tackle larger perfor-mance improvement projects before, they certainly should be feeling it now. For 2015 going into 2016, five types of initiatives should be on the radar screen:

Commercial loan pricing. In a world of opaque negotiations with individual clients, commercial loan pricing typically is subordinate to relationship considerations. Through improved clarity on market pricing and borrower willingness to pay, adept

players can gain some insulation from the overall trend of spread compres-sion. In proper combination, enhanced pricing techniques, superior analytics and technology will enable higher performing banks to stay at the higher end of loan spread and fee ranges.

Deposit/treasury management pricing and bundling. Winners will repackage deposit and TM offers for more effective engagement with core customer segments. Opportunities to adjust pricing to attract preferred customers and expand balances should be carefully balanced with opportunities to improve profitability.

Relationship cross-sell. Well-calibrated relationship profitability models are needed to support targeted relationship strategies, not only for cross-sell, but also for profitability enhancement and retention. To align these relationship strategies with


Figure 1: Contrary Trends in Growth and Margins

While commercial loan growth has continued at a healthy clip, loan spreads have steadily declined amid intensifying competition.

1 Spread between the effective (compounded) annual interest rate on U.S. commercial bank loans and the intended Federal Funds rate. Source: Federal Reserve, Federal Deposit Insurance Corp., Novantas analysis.

4Q10 2Q11 4Q11 2Q12 4Q12 2Q13 4Q13 2Q14 4Q14

BALA

NCE

GROW

TH

LOAN

SPR

EADS

Commercial Loan Spreads1

Year-to-Year Balance Growth

-5%

0%

5%

10%

15%

20% 3.50%

3.25%

3.00%

2.75%

2.50%

2.25%

key segments and identify cross-sell opportunities, banks must understand customer potential (based on propen-sity and usage modeling of the cus-tomer banking wallet). Understanding the “white space,” knowing what business to ask for and how to price for it, will provide better results.

Sales force design. While many banks have made significant progress in streamlining the sales process, sales force design remains an overlooked source of top- and bottom-line perfor-mance improvement. When properly implemented, it is highly motivating to the sales force. The key is to be purposeful on structure (roles, respon-sibilities, specialization and reporting organization) and deployment (how

many, where and gearing), and follow through with the right performance measurements and incentives.

Credit origination process. We hear anecdotally that competition is so intense that some deals are lost while the credit origination process is underway. And when measured, the commercial loan application process is often long and variable, as well as costly.

The process has proven difficult to redesign given its complexity and broad base of constituencies (credit administration, back and middle offices, coverage). Winning banks will find a way to address business and regulatory require-ments across these groups while

enhancing the client experience.While commercial banking units

will continue to perform well relative to the rest of the bank, the inexorable march of loan spread compression has taken some of the luster off the business. Commercial bankers will need to step up to maintain profitable growth and differentiate themselves from competitors.

Lee Kyriacou is a Managing Director in the New York off ice of Novantas Inc., and Michael Rice is a Managing Director in the Chicago off ice. They can be reached at [email protected] and [email protected], respectively.


Figure 2: LOB Net Income Growth Challenge

Among the 12 largest publicly-traded banks for which commercial line of business data is available, few posted strong LOB net income growth in 2014.

Net Income Growth, 2014 vs. 2013

Bank L

Bank K

Bank J-7.4% Weighted Average

Bank I

Composite

Bank H

Bank G

Bank F

Bank E

Bank D

Bank C

Bank B

Bank A

Source: Public company earnings releases, SEC filings, Novantas analysis

2.2% Weighted Average

9.3% Weighted Average

31March 2015

32

For all that has been written about branches succumbing to the dig-ital onslaught, it seems clear that

banks will be clinging to the majority of their street corner outlets for some time to come. But it would be a big mistake to cling to antiquated branch manage-ment practices as well, particularly with regard to the all-important sales staff.

Essential in generating revenues yet costly to deploy, branch sales repre-sentatives have seen wave after wave of system-wide initiatives to encourage their productivity, including stringent staff count targets per branch and the rigid imposition of sales goals. Yet, Novantas research indicates that fully one fourth of the typical branch network salesforce does not generate breakeven returns, relative to the cost to deploy.

A major hang-up in addressing the situation is that many banks still love their cookie-cutter management tools. In vast multi-regional networks with hundreds or thousands of outlets, results are loaded into corporate spreadsheets that pivot on system-wide averages, driving homogenous projections and goals that become the Law of the Land.

This collides with the reality that sales and profitability dynamics differ sharply among major branch categories. Among units best with customer acquisition, for example, more than 60% of sales come from new-to-bank customers, compared with 25% for branches best with cross-sell to current customers (Figure 1: Differences in Branch Sales Profiles).

Instead of ignoring such differ-

ences, the new-form staff management approach seeks to capitalize on them by tailoring branch sales skill emphasis and staff count according to opportu-nity. This entails detailed projections of local sales dynamics, which are also used to support a new generation of market-informed performance targets. Leaders base their decisions on mar-kets and customers, not spreadsheet averages based on operating results.

DIFFERING SALES DYNAMICSTypically there are major categories of outlets in a branch network, and each branch archetype captures value differently and provides different levels of return. Mapping these differences is a crucial first step in correcting sales underperformance:

Acquisition branches. Based on our review of more than 10,000 branches nationally, nearly a fourth of all branches derive more than 60% of sales from new-to-bank customers (less than 90 days’ ten-ure). These units attract lots of new checking customers, but staff-ad-justed sales profitability is lower as reps build the book of business.

For management, this translates into a sales staffing emphasis on driving further acquisition while minimizing new customer churn. Given that acquisition branches will skew towards relatively simple, lower value prod-ucts, there is more leeway to deploy reps with more basic skills. They can do a good job yet are less expen-sive, better supporting the economics

of acquisition-focused branches.Cross-sell branches. Representing

nearly a fifth of the total, cross-sell branches distantly lag in new cus-tomer acquisition but lead the pack in cross-sell with current relationships. These outlets have the highest sales productivity, as measured by sales per full-time-equivalent employee (FTE) per branch, and also the high-est staff-adjusted sales profitability, reflecting superior results in generating high-value account originations.

High cross-sell branches benefit most from the deployment of higher skilled, highly active sales staff. Along with mining the current customer portfolio for cross-sell, seasoned reps can drive the outreach to acquire high-value customers as well.

Cross-sell branches better justify the investment in more experienced staff having a deeper understanding of complex products, both in terms of meeting customer needs and also in terms of potential returns generated by successful cross-sell. High cross-sell branches can also benefit from the assignment of specialized sales personnel (e.g., wealth, small business, mortgages) to deepen product com-petency in the branch. These skilled sales representatives have a priority need for effective customer analytics and lead qualification/generation tools, supported by a strategy for targeted relationship expansion.

Mixed branches. The remainder of branches — more than 55% of the total — are closer to an even split in sales

BY DALE JOHNSON AND BYRON MARSHALL

Branch staffing decisions should be based on markets, customers and local sales dynamics, not spreadsheet averages driven by operating results.


COMMENTARY

coming from new-to-bank customers versus cross-sell with current relation-ships. The mixed branch archetype comes closest to the traditional “cookie cutter” view of branch banking and, at least in the short term, requires the least change. This allows a strong focus on the more bifurcated acquisition and cross-sell branches, where the oppor-tunity for specialized sales staffing is greatest because of the customer mix.

THREE PRIORITIESThe urgency to improve sales productiv-ity, branch staff deployment and sales target calibration has steadily risen in recent years, with no end in sight. Even

with firming consumer demand in a recovering economy, the branch will be walking tightrope economics given the steady encroachment of web and mobile banking.

Thus the performance influence exerted by differing branch sales dynamics will only grow in impor-tance. Many management teams will have three priorities in augmenting branch staff management in 2015: anchoring decisions in market dynam-ics; revising sales targets to better reflect local opportunity; and align-ing sales staffing models with sales targets and productivity benchmarks.

Market reconnaissance. The bank

needs to be able to look across the markets within its network footprint and understand the shape and scope of opportunity in each. In some instances network scale will exert a pronounced influence on market share. In other instances trade area dynamics and customer demographics will matter most. Many banks are losing signifi-cant opportunity by under-nourishing high potential markets while over-in-vesting scarce sales and marketing resources in less promising locales.

Goals and incentives. Uniform sales goals and incentives do not work well in a setting of high variability among local markets. In high-potential mar-kets representatives wind up coasting, while in weak markets they face futility because the bar is set too high. Goals should be driven by market opportu-nity per-product set, independent of legacy staffing decisions. Banks will also need to get comfortable with variable incentive structures based on the return that can be generated by the sales teams in different locales.

Staffing models. The time has come to base staffing decisions on local market opportunity, not only for sales reps but also for the full branch staff. Along with considering “acquisition” vs. “cross-sell” sales dynamics, this includes innovations such as cross-trained “universal bankers” and the selective use of specialized sales talent.

Market-driven branch staff man-agement is not just an interesting idea for retail banking’s extended “off-season” following the reces-sion, but rather a foundational concept for future competition.

Dale Johnson is a Managing Director and Byron Marshall is a Principal in the Chicago office of Novantas, Inc. They can be reached at [email protected] and [email protected], respectively.


Figure 1: Differences in Branch Sales Profiles

“Acquisition branches” need sales staffing to support a high volume of new business, while “cross-sell branches” need a staffing emphasis on skilled relationship expansion.

* Sales archetypes are based on a review of more than 10,000 branches nationally. Source: Novantas 2014 SalesScape Branch Productivity Study.

ACQUISITION MIXED CROSS-SELL

% of branches 24.4% 57.2% 18.4%

Return on sales force (RSF) 2.6 2.8 3.4

Average NPV of sales production

per FTE per year$220,027 $235,310 $228,040

Sales per branch per month 51 57 63

% of total sales derived from

new-to-the bank customers

62% 43% 25%

% of total sales derived from cross-sell

to current customers38% 57% 75%

Sales FTE per branch 2.2 2.5 3.0

BRANCH SALES ARCHETYPES*

33March 2015

Novantas Review is published quarterly by Novantas, Inc., 485 Lexington Avenue, New York, NY 10017.

© 2015 Novantas, Inc. All rights reserved. “Novantas Review” and “Novantas” are trademarks of Novantas,

Inc. No reproduction is permitted in whole or part without written permission from Novantas, Inc.

ABOUT NOVANTASNovantas, Inc. is the leader in customer science and revenue management strategy for the financial industries. A FinTech 100 Company, its Management Consulting, Solutions, Data, and Research divisions specialize in investigating and interpreting customer needs, attitudes, and behaviors in ways that help banks refine marketing decisions, customer strategies, and sales and service activities, and to accelerate their immediate and ongoing economic performance.

For more on these topics, view our multimedia at: www.novantas.com

Integrating the Deposit Analytic Ecosystem Treasury, risk and business line executives are facing a dual challenge in financial management: preparing for a rising rate environment while adapting to complicated new regulatory requirements, some of which will change industry performance dynamics.

Consumer Wildcard: Loan Growth Ahead?As banks look to differentiate performance in 2015, a major question is whether consumers are finally ready to pick up the pace of borrowing.

Branch Sales Productivity: Four Keys to ImprovementIn a crisis era for branch sales, banks need forward-looking strategies that can anticipate changing conditions, accommodate local markets and adapt to a multi-channel climate.

With Onboarding, Cash Management RulesMany retail banks are missing the chief goal of onboarding, which should be to establish the bank as the customer’s primary cash management provider.

Commercial Deposits and Liquidity Management: Strategies for an Era of ChangeTo preserve deposit momentum in a future season of rising rates, commercial banks will need to refine products, pricing and sales force structure. Analytics will be key.

Liquidity Coverage Ratio: More Challenges AheadNew regulatory liquidity standards will force significant changes in how banks manage their balance sheets, impacting both the treasury group and the business lines.

HOW HEALTHY IS YOUR BRAND? - Novantas Banking ... HEALTHY IS YOUR BRAND? Rise of the Thin-Branch...

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