Are Branch Customers Unprofitable?
Banking.com powered by Digital Insight recently published a report on 'Are Online Bankers More Profitable?' based on research covering 5 year up to 2014. The study found that 'customers that used multiple digital banking services are 51% more profitable than customers who do not actively utilize online or mobile banking'.
Customer profitability is increasingly complex to calculate and interpret. Costs can be attributed as overheads or usage based. The timeframe of analysis is also important as the profitability of a customer for this year ignores the lifetime value of the customer.
American Banker, in their article 'How Community Banks Can Win the War for Millennials' identified those people born between the 1980s and 2000s as a key segment as their propensity for savings and borrowings make them a profitable segment. These are also the segment most likely to engage with a bank’s online channels. American Banker also identified that 'Millennials view branch employees as trusted financial experts'.
Profitability is the margin between the revenue and the cost. The branch channel is expensive and many banks are consolidating their branch network and encouraging the use of self service channels. The Database Marketing Institute in their article 'How Banks Use Profitability Analysis' identified that 'branches are visited most by two groups: the most profitable and the least profitable'.
Many financial institutions that have excelled at the roll out of digital channels have done so because they have focused community engagement strategies. These extend beyond customer interaction channels to their branding, advertising, product management, community and social responsibility initiatives and most importantly their staff training. The question to ask may more appropriately be 'Are Engaged Bankers More Profitable?'.
Channels are only a tool to execute an engagement strategy.
For banks, the focus is to increase the number of profitable customers and reduce the number of customers that will never return a profit to the bank. Profitability is also important for the community banks and credit unions as it is the profitable customers and members that deliver the revenue that enables them to serve the disadvantaged and under-banked in their community.
The fact that customers that are engaged online are more profitable is not a justification for a reduction in branch investment. A similar type of analysis could be performed on products and would likely determine that mortgage customers are more profitable than customers who only have savings accounts. Analyzing your customers requires a holistic view of their products, needs and interaction channels.