Actionable Insights From APT's Retail Practice

Author Archives: Will Weidman

Strategies to Make In-Store Branches Successful

April 29th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Strategies to Make In-Store Branches Successful)

American Banker recently featured an article which reported that some smaller banks are doubling down on in-store branches while larger banks are pulling back from them.  This cycle of investment and retrenchment with in-store branches seems to have been occurring for the past twenty years without a clear consensus on the value of this distribution model. 

One thing should be clear, however.  These in-store branches will not be successful if the staff hide behind their desks all day without making an attempt to engage passing customer traffic.  The in-store model requires a different mindset than a traditional branch – one in which staff are actively initiating conversations with potential customers.  (more…)

Surviving the Bank of Wal-Mart

April 13th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Surviving the Bank of Wal-Mart)

Walmart crossed the 1MM banking customer mark in Mexico, and will likely reach such levels in the US eventually.  When they do, Wal-Mart will cause serious displacement, as they have in each new retail vertical they’ve entered.  The way to survive and thrive against Walmart is to understand what value proposition you can provide customers that they cannot or will not.  For example, Circuit City made the fateful decision to fire all its high cost / high service sales people and replace them with low cost hourly people in order to mitigate their cost disadvantage.  In doing so, they removed one of the primary reasons customers would come to a specialty retailer for electronics instead of Walmart.  Best Buy, on the other hand, understood that their differentiator was their advice and service and doubled down in this area. 

Banks likewise need to understand what services they provide their customers that are actually perceived as differentiated in order to understand where to place their bets.  For example, TD Canada Trust has built a differentiated brand around convenience.  But what investments will reinforce that brand in a positive ROI manner?  TD Canada Trust is currently testing whether keeping branches open on Sunday will do so. 

We don’t know if Sunday hours are the answer but we applaud the approach of experimenting with an idea to validate whether and where it works instead of assuming it will.  Other banks would be advised to do the same quickly so that they are better positioned to fend off new competitive threats like Walmart.

Strike the Right Balance in Raising ATM Fees

April 7th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Strike the Right Balance in Raising ATM Fees)

APT was featured in American Banker with the following article on ATM fee strategy:

Banks received a lot of negative press when ATM fees started hitting $3 a few years ago. ATM fees have continued to increase in recent years, but the ceiling has been at $3 across major banks, and fees have largely been the same or lower at regional banks.

ATM fees are now back in the spotlight. Several leading banks made waves by announcing changes to their surcharge policy. JPMorgan Chase is testing $4 and $5 fees, and other banks are no longer paying foreign ATM fees, as American Banker reported.

The main impetus is the quest to replace lost fee income because of increased regulation. There are certainly opportunities to increase ATM fee income, but there is also a lot of risk. The key is finding the right balance. It is important to know how much to raise the fee and to find the right fee level for each ATM instead of raising fees across the board. Banks not paying foreign ATM fees need to consider the impact on retention and determine whether some types of checking accounts should keep this service.

When a bank’s ATM fees are below the market rate (e.g., below $3 today), raising fees to the market rate is typically profitable across most ATMs. However, going above the market rate is a different story. The impact depends on a lot of factors, including how many competitor ATMs are nearby, what rates they charge, demographics of the area and strength of your brand. Some ATMs can support going above the market rate, but others can’t. Banks therefore need to test the higher rate at a subset of ATMs that are spread throughout the network to identify the right strategy for each ATM.

Not paying foreign ATM fees for your customers can affect account generation and retention. The response will also vary widely by customer and by market. While it isn’t feasible to have a different policy by customer and challenging to have a different policy by market, it is easy to implement a policy where the payment of foreign ATM fees depends on the type of product a customer has. A basic checking customer may have a very different reaction than a premium checking customer.

It is tempting to raise fees to make up for lost income, but banks cannot go into these decisions blindly. Banks also need to be smart about testing. Chase is testing higher ATM fees in Texas and Illinois, but these markets may react very differently than the rest of the country. Make an informed decision before putting new account generation and customer retention at risk. Try new ideas first with a subset of customers or markets, and test in a representative sample of your entire network.

Creating Opportunities for Customer Engagement

March 30th, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Creating Opportunities for Customer Engagement)

It is no secret that customer are interacting less frequently with bank branches.  More and more, customers transact at the ATM and online.

A recent Banking Strategies article argues that despite this shift, customers will still need to go into the branch in some cases.  These customers “are typically prompted by lifestyle changes,” and the interaction can provide a major opportunity to strengthen and build the customer relationship.  Banking Strategies highlights the importance of understanding customer needs, having the right staff in place, and training staff appropriately to take advantage of these opportunities.

It is important to be well-positioned to take advantage of these opportunities.  However, banks also need to be able to create these opportunities.  Interacting with customers only when they come into a branch for a more complicated transaction will not be sufficient to build engagement across a large number of customers.

After putting in place the right staff with the right training, banks should also have these employees proactively reach out to high opportunity customers.  The key is to know who to target.  With limited resources, branch staff can’t effectively reach out to all customers.

Determining who to target is not easy, though.  Is it best to focus on those with the largest relationships, those with the most room to grow, or customers who have (or don’t have) a particular type of product? 

When implementing this type of program, try targeting a variety of different types of customers.  Then measure the impact on key metrics such as retention, cross sell, balance, revenue, and customer satisfaction relative to similar customers that weren’t targeted.

It will be vitally important for banks not just to take advantage of customer engagement opportunities but also to create them.  Branch staff will need to be more focused on relationship banking to effectively interact with customers that use the branch.  But fewer branch transactions will also provide branch staff with the opportunity to proactively reach out to customers.   Determine which customers have the most opportunity and take advantage of relationship bankers in the branch to engage those customers.

How to Optimally Expand Branch Staffing

March 18th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on How to Optimally Expand Branch Staffing)

While banks cut back on staff during the economic downturn, many are now investing to increase branch staff levels. JP Morgan Chase, TD Canada Trust and Wells Fargo, among others have already added staff. The Washington Post reported that “Wells Fargo plans to hire 1,000 employees for 404 branches in its Mid-Atlantic region.”  The new staff members will include “tellers, managers, and personal bankers.”  This is a major increase in staffing levels, amounting to 2.5 additional employees per branch and  ~4 additional employees per branch in the Washington, D.C. area.  Other leading banks have announced their own investments into their branch networks and staff.

We observe many banks investing in additional branch personnel to accommodate the changing ways in which their customers use the branch.  But this can be a sizable bet, potentially increasing operating expense by tens of millions of dollars at a time when the economy and regulatory changes are still impacting the top line.

Banks considering a sizable staffing investment need to make sure they understand whether they will get a return and which branches and sub-markets would most benefit from additional resources.  Branch needs are not uniform, and employees should therefore not be added uniformly.  Factors such as branch size, characteristics of the current customer base, local demographics, and competition are all potential factors that can influence the optimal staffing complement by branch.Also, it is important to focus on getting the right staffing mix at each branch.  Some branches may need more personal bankers, while needs may be more aligned to tellers in other branches.

Staffing models should be supplemented by testing to determine optimal staff allocation.  Some leading banks are trying different staffing approaches in different types of branches, then measuring the impact relative to branches with constant staffing, and using the findings to refine the staffing strategy by branch.

3 Steps to Improve Fee Testing & Strategy

March 1st, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on 3 Steps to Improve Fee Testing & Strategy)

Well into 2011, new fee strategy testing continues to make headlines in major publications. The Wall Street Journal recently has published another article on the topic, recapping the checking account fee testing at Bank of America and JP Morgan Chase, as well as some of the first testing around debit card fees.

As banks move into uncharted territory, testing is certainly the best way to inform difficult decisions, like refining fee structures.  However, we feel there are three challenges and opportunities to improve fee testing. (more…)

5 Testing Principles for Retail Banks

February 23rd, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on 5 Testing Principles for Retail Banks)

It is critically important that banks actually test in market their big ideas to ensure that they really will work.  This can help de-risk big decisions and provide empirical information about how to proceed with the idea.  (Think for example of USAir’s announcement that it would charge for soda and subsequent embarrassed back-pedaling as an example of the harm of not testing.)  Experimenting in market to de-risk ideas is one that is increasingly accepted as common practice. 

However, while testing is important to do, it is very hard to do well.  Retail banking is a noisy environment, making it hard to isolate whether a tested idea caused a change in performance.  As a result, too many banks roll forward every idea they pilot, a sign that they aren’t really learning from the pilot. 

Below are 5 recommendations to test more effectively and maximize value from testing.  

1)  Test the right ideas

Testing resources are limited.  There are only so many tests that a bank can devote attention to at a given time, and there are a limited number of branches and customers available for testing.  Focus testing on ideas that meet at least these two criteria:  (1) is this a big enough idea to matter to the business, and (2) will testing help us make the decision (i.e., have we not already decided we are proceeding regardless but truly want test results before we make the decision). 

2)  Agree on success criteria in advance

A frequent reason banks struggle to decide on whether to roll forward a tested idea is lack of clarity on the definition of success.  Advocates of the idea then latch on to any indicators of success and resistors find data to support that the test is a failure.  The two groups then waste time talking past each other.  By defining success in advance, banks can simplify the decision process and take some of the emotion out of the ultimate decision. 

3)  Design the test well

Tests need to be designed properly to provide accurate results and inform go-forward decisions.  First, the test needs to have the right number of customers, branches, or markets.  If a test is too small, then it will be challenging to confidently measure the impact, and tests that are too large can be more expensive and impose more risks.  It is important to find the sweet spot, which will vary depending on the nature of the action tested.

Second, test customers or branches need to be selected to be representative of the network as a whole across key dimensions.  If the test is biased in some way (e.g. we only test in city center locations), the results won’t hold when we extend the idea across the network.

4)  Measure impact across the household, branch, and business as a whole

Understanding the true impact of a test requires additional measurement beyond the specific product and metric tested.  For example, when testing a new fee strategy, you should measure not just fee income but also the impact on other products, retention, new account generation, customer satisfaction, and more.  Any given action can have broad consequences, and test measurement should examine the impact on the business as a whole.

5)  Identify drivers of success and target rollout

Testing should not only produce a go/no-go decision.  Any initiative will work better with some customers than others or in particular types of branches or markets.  Some ideas need to happen across the business to maintain a consistent brand and customer experience.  However others, such as where to add staff or invest capital or increase marketing do not require uniform treatment.  By only extending the idea to the locations or customers where it will work, banks can generate substantial profit gains over an all or nothing approach.

Kmart Joins Wal-Mart in Move into Retail Banking

February 4th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Kmart Joins Wal-Mart in Move into Retail Banking)

The Washington Post recently reported that nearly 30 million households do not have bank accounts. These “unbanked” customers are looking to their local big-box retailer for basic banking services, such as check cashing, money transfers, and prepaid cards. In addition to Wal-Mart, which is already expanding into retail banking, the Chicago Tribune details how K-Mart is now testing new financial centers in 23 stores “where shoppers can cash checks, pay bills, place money orders, and transfer money.”

Banks should have two key takeaways from retailers’ moves into the financial services space. First, additional competitors will put pressure on fees.  Many banks have significantly increased fees in response to regulation, resulting in attrition and lower account generation. Additional competition will only exacerbate this problem, and banks will need to decide if and how they want to compete for accounts.

However, retailers are actually providing banks with a unique learning opportunity.  Banks should determine the impact of competitor actions by measuring the number of accounts lost at nearby branches, as compared to other similar branches where retailers have not opened a financial center.

The number of accounts lost should be looked at in comparison with the profitability of those accounts to determine how to best respond to competitor actions.  If the accounts lost were not profitable to begin with, then no action is required.  However, if profitable accounts are being lost, banks may need to consider new fee structures or other incentives to keep those accounts.

A second key takeaway is to learn from how retailers rigorously test new ideas before rolling them out.  K-mart is testing these new financial centers in 23 locations before rolling the idea out more broadly.  Wal-Mart has been slowly expanding its own financial center program, and as of a September article in US Banker, money centers were still only in 40% of stores. (more…)

Should Banks Be Nicer About Overdraft Fees?

February 1st, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Should Banks Be Nicer About Overdraft Fees?)

US Banker wrote an article on Huntington Bank’s unique policy of allowing customers one day to fix an overdraft before charging the customer a fee.

Huntington’s Director of Products and Pricing, Dave Schamer, has said that this policy has hurt fee income but driven an increase in new account generation and customer retention.  Huntington reports that the policy is successful and overall generating more income.

We think this is a great idea, and Huntington is right to focus not just on fee income but on overall profitability and customer lifetime value.  Other banks are not moving in this direction, though.  Most are focused solely on making up for lost fee revenue due to regulation and have been implementing new fees without thinking about the impact on attrition or new account production.

We recommend that banks try new policies like this in a few well-selected representative markets and measure the impact on attrition, fee income, production, and total revenue.  This will allow banks to focus on long-term profitability instead of being short-sighted and trying to replace fee income at any cost.

Banks should also find the best ways to market these new approaches, as much of the benefit in account production and retention is driven by the positive impression the policy causes.  These benefits will not be realized if customers aren’t aware of the new policy.

Finally, as the US Banker article highlights, customers might also be willing to pay for these types of services, which would provide fee income in addition to other benefits.  For example, to avoid a $39 overdraft fee, customers may be happy to pay a $5 servicing fee to fund the account within 24 hours and waive the overdraft.  Banks should also be testing to determine which services customers are willing to pay for and how much they are willing to pay.

Top Banks Cut Staff – Effective Cost Reduction or Growth Killer?

January 22nd, 2011 | Posted by Will Weidman in Uncategorized - (Comments Off on Top Banks Cut Staff – Effective Cost Reduction or Growth Killer?)

The Wall Street Journal reported that many top banks, including PNC, Fifth Third, and Wells Fargo, are planning significant staff cuts.  In recent years, efficiency ratios have skyrocketed due to loan write-offs and lack of growth.  The challenge highlighted by the Wall Street Journal is that loan demand remains weak, and fee income is under pressure with regulation.  This leaves some banks with no choice other than to cut staff.

While staff reduction may be unavoidable, banks need to be extremely cautious in how they go about this.  Cutting staff in the wrong places could further reduce growth, increase attrition, and ultimately not end up improving efficiency ratios.

Banks need to determine precisely where staff can be cut with minimal impact to KPIs.  This means understanding optimal staffing by channel, by position, and by location (for example, which specific branches are currently overstaffed).

The best way to do this is to look back at prior changes in staffing and learn from those changes.  For a variety of reasons, there are constantly changes in both staffing levels and staffing mix.  Measuring the impact of those changes can inform where staff should be reduced in the future.  The challenge is to measure only the impact of the staffing change and minimize noise from economic factors, competitor actions, and anything else that affects performance.  This requires finding a comparable set of control branches that are similar in all ways except for the staffing change.  Comparing to this control group isolates the impact from the change in staff level of mix.

Too few banks learn from the impact of past staffing changes.  Well executed analysis of those changes can inform staffing decisions going forward and minimize risk and maximize efficiency gains from those decisions.