Actionable Insights From APT's Retail Practice

Overdraft Limits: Learn from Credit Cards

March 2nd, 2012 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on Overdraft Limits: Learn from Credit Cards)

Banking Strategies featured an article recently describing how banks need to move away from fixed overdraft limits and develop a more nuanced approach.  Many are still using the same overdraft limit for all customers.  As a result, the limit is too high for some customers making them more likely to default while the limit is too low to properly serve other customers.

Smart credit card providers have become adept at finding the right limit for each type of customer.   They test different limits with thousands of prospective customers and compare against random control offers.  By measuring the impact of different limits and segmenting the result by criteria like credit scores, they can determine the right limit for each type of customer to maximize revenue and minimize default.

Finding the right overdraft limit is a tougher problem.  Banks do not have the luxury of sending offers to tens of thousands of random prospects, and there is risk of losing customers by not getting the limit right.  Banks also have a wealth of information about each customer, and it is challenging to know what is important in setting overdraft limits.  Is prior balance fluctuation the most important indicator or do factors like tenure or demographics matter more?

To find the optimal dynamic overdraft strategy, banks need to find a way to try different approaches with a limited number of customers.  It will be important to both measure the impact of each strategy and to also identify which factors matter most in setting the overdraft limit for a customer.  With overdraft revenue squeezed by regulation, banks need to be innovative and rigorous in their approach to maximize revenue and minimize default.

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…)

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.

Are Banks the Villains and Wal-Mart the Hero?

November 21st, 2011 | Posted by retailblogadmin in Financial Services | Uncategorized - (Comments Off on Are Banks the Villains and Wal-Mart the Hero?)

The New York Times published an article last week about Wal-Mart gaining traction for its banking services because of customer dissatisfaction with bank fees. If you missed it, it’s available here.

A banker reading the article must have thrown up her hands in disbelief. Wal-Mart, the company everyone usually loves to irrationally bash, is lauded for offering a debit card for a $3 monthly maintenance fee, while Bank of America is teetering on a Congressional inquiry for its $5 monthly fee! Moreover, customers love the $3 fee per check cashed that Wal-Mart charges. We can only imagine what would have happened if B of A announced that same fee.

How could banks see such a maelstrom for the same fees that Wal-Mart and other entities would charge? More importantly, what should banks do about it? (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.

The Writing is on the Wall: Some Customers Shift to Exclusively Mobile Banking

October 4th, 2011 | Posted by CLepine in Financial Services | Uncategorized - (Comments Off on The Writing is on the Wall: Some Customers Shift to Exclusively Mobile Banking)

Market research firms comScore and Nielsen report that, in 2011, the number of customers using mobile banking rose 54% over last year to 30 million. comScore also explains that in a recent study of ~1,000 customers, only 10% report accessing their financial accounts by visiting a brick and mortar branch.

As part of this shift, exclusively online banks, for instance ING Direct and Ally Bank , have seen growth over the past year, a result due in part to increased use of smartphones, streamlined data plans, and a backlash against higher fees at traditional banks. Because of their lower overhead costs, these online banks are able to offer expanded services, like a surcharge free ATM network, accounts with higher checking and savings yields, and lower fees.

Traditional banks need to be proactive in order to be competitive with exclusively online banks, rather than scrambling to react to it after it’s already in place. (more…)

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…)

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…)

More Banks Hopping on the Cost Cutting Bandwagon

July 25th, 2011 | Posted by Will Weidman in Financial Services | Uncategorized - (Comments Off on More Banks Hopping on the Cost Cutting Bandwagon)

The Wall Street Journal recently reported an increasing effort across banks to cut costs amidst declining loan volumes and the effect of Durbin and other regulations.  This is of course a reasonable and necessary response to the challenging external environment.  The challenge lies in understanding how deep to cut before the cost cutting does more long term harm than it’s worth. 

It can only take one interaction with an overwhelmed teller or one call with a 15 minute hold to lose a customer’s support.  Banks have the data and should be able to know in advance what will happen if they cut various customer facing functions, or even entire branches.  If they look, what they should see is that the customer sensitivity to these pull backs vary greatly by channel, by customer type, and by geography, but these variations are also predictable.   Bank should know where the low hanging fruit is and be to know in advance where and how deep they can cut with minimal negative customer response.