Actionable Insights From APT's Retail Practice

Author Archives: Will Weidman

B of A Takes On Groupon

February 8th, 2012 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on B of A Takes On Groupon)

The Washington Post recently wrote an article featuring a partnership between Bank of America and tech firm Cardlytics that brings forward a game changing idea. The new program will use past debit and credit card transaction data to offer B of A customers targeted discounts at relevant retailers.  We have highlighted in the past that B of A needed to improve its approach to debit cards; this is a great innovation and a big step in the right direction.

Most retailers have a loyalty program or something similar to strengthen and grow the relationship with existing customers.  Many offer cut-rate promotions made available to the general public, with the “deal of the day” being a recent extreme example.  With these promotions, retailers offer huge discounts to anyone who signs up, yet a large portion of redeemers are consumers that will take advantage of the offer and never shop again.

By leveraging past purchasing information, B of A is providing something much more compelling.  For example, an offer could be targeted just to consumers currently shopping with a competitor.   By targeting those with a willingness to spend in the category, this is more powerful for merchants and will presumably make the offers more relevant for consumers.

There are several important factors to make this a success.  (more…)

Testing New Ideas to Compete with Wal-Mart

January 17th, 2012 | Posted by Will Weidman in Uncategorized - (Comments Off on Testing New Ideas to Compete with Wal-Mart)

Wal-Mart has made big waves with its pre-paid debit card.  With over 4,000 locations that have a huge amount of traffic, any effort by Wal-Mart to offer financial products is instantly a serious threat to banks.  The $3 monthly fee for their debit card is highly competitive at a time when checking account fees have been rapidly increasing.  As a result, Wal-Mart has been stealing clients from traditional banks.

A recent American Banker article highlights how some credit unions have started to “embrace this trend by modifying their ATMs to sell fee-free stored-value cards.”  More banks should test these types of strategies to adapt to the rapidly evolving environment and compete against new threats like Wal-Mart.

This particular strategy may not be the silver bullet to win back or retain customers. (more…)

ATM Network Expansion

December 20th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on ATM Network Expansion)

JP Morgan Chase recently announced it will add 800 new ATMs in California and four other Western states. Many other banks have also been making investments to expand the ATM network. Investing in ATM expansion is a good idea in our current economic environment if done right and has two main potential benefits.

First, it could reduce the need for customers to transact in the branch. The branch is by far the most expensive channel of service, so this could help banks reduce costs. But to actually realize these cost savings, banks need to understand the impact to the branch on metrics like the total number of teller transactions and transactions by time of day. This could allow banks to reduce teller staffing or cut back on hours while still meeting customer needs. Without understanding the impact on the existing network, banks will simply be adding in more cost.

Second, having a more convenient network could bring in new customers or help retain existing customers. Major ATM network expansion should be accompanied by marketing campaigns to make current and potential customers aware of the bank’s investment. Ideally, banks would experiment with different marketing approaches (e.g. radio, local marketing, or social media) to find what is most effective.

Banks should also measure the impact on new account generation and retention for branches near the new ATMs and identify whether there are particular cases where the new ATMs are most effective to inform future investments. Do they have more of an impact when placed close to the branch or further away? Do demographics or competitive factors influence the effectiveness of the ATMs?

Investing in ATMs can be a smart idea as banks try to find the right service model and make the most of less expensive channels. However, just adding ATMs is not enough by itself and can simply be one more additional cost. To make ATM expansion successful, banks need to market the new ATMs, locate them in the right places, and identify opportunities for offsetting cost reductions in the branch.

Win the Business of Mass Affluent Customers

December 8th, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Win the Business of Mass Affluent Customers)

As banks struggle to maintain revenue and profitability with low rates and increased regulation, mass affluent is a segment where banks can achieve success in this difficult environment. For example, Bank of America recently reported strong growth in mass affluent despite the significant challenges in retail banking right now.

In fact, A relatively small percent of customers have always driven the majority of profit for banks.  However, this is even more true today as it becomes harder to make money from customers with smaller relationships (due to shrinking debit card and overdraft fees).  All banks are competing fiercely for these mass affluent customers and the larger, more profitable relationship they bring to the bank.

How can you win the business of these valuable customers?  With the current rate environment, banks cannot easily provide the special pricing that has worked in the past, and the offer would not be that compelling to most customers anyway.  For example, providing a significantly high deposit interest rate may only mean 20 basis points. But banks can still achieve success by focusing on excellent service for these customers and rewarding and recognizing their loyalty. (more…)

Avoid Being the Netflix of Banking

November 7th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Avoid Being the Netflix of Banking)

This past week, after significant backlash and immediate customer response, Bank of America announced that it will cancel its plans to charge monthly debit card fees. Several other banks with similar plans quickly followed suit.

There was no way to predict the magnitude of this outcome.  Banks have been increasing checking account fees, and while there has been some negative reaction, the response was not even close to what was seen with debit card fees.  The new fees also seem logical and defensible.  Banks have always provided this service for free but can no longer do so now that debit card transactions are unprofitable with lower interchange fees.

But the response was larger than most expected, and it will be very difficult to win back customers after they have left.  To see an extreme example of the cost of making just one bad decision, take a look at Netflix.  In a short amount of time, the decision to split the DVD and streaming business resulted in three million customers (over 10% of subscribers) leaving.

It is essential to de-risk the decision making process by trying new ideas in a very limited subset of the network.  JP Morgan Chase and Wells Fargo both tested new debit card fees in just a few markets before making any sweeping changes.  They decided not to roll out the new fees and have emerged largely unscathed.

Banks will continue looking for ways to plug revenue holes.  Some new tactics will work, while others will have drastic consequences.  These decisions are too important to be unsure of their precise impact before putting the business at risk.

Fiery Backlash from Debit Card Fees

October 15th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Fiery Backlash from Debit Card Fees)

Last Thursday, Bank of America announced it will begin charging a $5 monthly fee for debit card users with a basic checking account.  Many banks are still looking for ways to make up lost revenue due to the Durbin Amendment, which slashed debit card interchange fees.

This announcement was immediately followed by significant backlash. The Washington Post reported that “Bank of America got pummeled by investors and its customers Friday” and “saw its stock fall more than 2 percent in late-morning trading.”

We wrote about this topic two months ago, expressing that banks should follow the lead of Wells Fargo and Chase – testing new debit card strategies before implementing them.  While the initial press and stock price reaction may not have long term consequences, there is a real risk that these fees will drive customers away and ultimately hurt profitability.  This is why we argued that banks should try these new approaches first in a limited risk way to make sure it will work before rolling it out across the network.

Fee hikes are always difficult decisions to make.  Spread revenue is very low right now, and regulation is squeezing fee income.  But it is hard to anticipate the reaction to a new strategy and understand all of its potential consequences.  Despite the difficult environment, banks should be patient and test new ideas first to make the best decisions possible.

BoA Sells 700+ Branches: What Should You Do?

September 19th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on BoA Sells 700+ Branches: What Should You Do?)

The Wall Street Journal recently published an article discussing Bank of America’s announcement that it plans to cut $5 billion in expenses throughout 2012.  In addition to cutting a significant number of jobs, Bank of America will also sell over 700 branches and their attached assets.

Many large banks are beginning to look for ways to streamline their operations in an effort to deal with uncertain market conditions, increased regulation, and decreased or flat revenues. These banks may cut costs by reducing the number of branches, particularly as more customers are turning to online and mobile banking.  On the other hand, some banks may view this as an opportunity to grow their footprint and pick up valuable assets at reduced cost.

Banks looking to reduce branch count need to identify which specific branches to close or sell to minimize financial impact to the network. (more…)

Make the Most of Innovation in Channel Development & Channel Integration

September 6th, 2011 | Posted by Will Weidman in Retail | Uncategorized - (Comments Off on Make the Most of Innovation in Channel Development & Channel Integration)

Banking Strategies recently published an article on the need for financial institutions to innovate, as we discussed in an earlier article. One area of focus mentioned in the Banking Strategies piece is channel integration and the development of growing channels, for instance online and mobile.   In this particular area, banks are making significant investments, but opportunities to better target channel investments going forward also exist.

The Banking Strategies article highlights the idea that increasing customer engagement across channels, particularly digital channels, “can contribute significantly to enhance the customer experience.”  This is a commonly heard theme, but few banks actually know how increased engagement affects key metrics like retention and number of accounts per customer.  Do customers actually become more likely to stay with the bank or open additional accounts? (more…)

How to Maintain Debit Card Profitability

August 22nd, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on How to Maintain Debit Card Profitability)

In response to the passage of the Durbin Amendment, banks having been considering a variety of ways to offset lost interchange revenue.  CNN recently reported that some leading banks are now testing a monthly fee for debit card usage.

For example,  at the end of last year, JP Morgan Chase began a test “in which it charged customers in northern Wisconsin a $3 fee for using their debit cards.”  Now Wells Fargo is planning to test a $3 monthly debit card fee in select markets starting on October 14th.

JP Morgan Chase and Wells Fargo are taking the right approach by testing this new strategy to see how it works with a limited set of customers before rolling it out more broadly. (more…)

Pricing Strategy After the Fed’s Latest Announcement

August 15th, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Pricing Strategy After the Fed’s Latest Announcement)

A recent article in American Banker discusses how banks are now scrambling in the wake of the Fed’s announcement that rates will remain unchanged for two years.  While there is much uncertainty, a few things are likely to occur.  For example, American Banker points out that “banks may be unable to expand net interest margin until 2014.”  It is also likely that already low interest rates will be pressured even lower.

Banks need to be thoughtful about how they adjust rates.  One particular area of opportunity is relationship-based pricing to cross sell to existing customers.  Banks often talk about taking a more customer-focused view, and this is a great opportunity to put that into practice.

Relationship-based pricing is a way to provide a more attractive rate to customers who meet certain criteria.  For example, a customer who has maintained at least $10,000 in a checking account, has been a customer for over a year, and has a certain income level may qualify for the offer.  The offer could be an extra 25bp above the typical rate for a money market account or 25bp below the best advertised home loan rate.

Providing select customers with this type of offer has two key potential benefits – 1) the customer brings more money to the bank, and 2) the customer would have left the bank but now stays.  Even in the worst of rate environments, it is important to keep in mind that pricing can be an effective tool to keep customers and deepen the relationship with customers.

On the other hand, there are risks with offering special pricing to customers.  (more…)