TRENDS IN RETAIL BANKING

TRENDS IN RETAIL BANKING 2Q2007

Twice a year I offer my perspective on trends in banking's major lines of business. Here is what I see unfolding in the Retail business, and commercial banking and wealth management will follow.

Banking the unbanked
In their quest for fee income and DDA balances, banks are flocking to the unbanked space. Early entrants, such as Republic of KY and Riverside of FL, have created innovative, highly profitable and attractive products to serve the unbanked in ways that offer win-win for customers and shareholders alike. Both product offerings create a path for unbankable customers (for any reason: banckruptcy, no credit history, etc.) to rehabilitate themselves and work their way back into the "bankable" segment.

Key elements in ensuring successful entry into this customer segment include:

• Product design that precludes the need for branch service
• Rehabilitation features (e.g., a year without overdrafts will enable the customer to upgrade into a free checking account)
• High fees that can be reduced with persistent positive behaviors
• Simplicity
• Product design that had "built-in" profitability in it

Neglecting the plastics
The mega-banks have largely realized that plastic is quickly replacing the checking account as the core relationship vehicle for retail consumers, especially Gen X and Gen Y members. They are working hard on solidifying their "first in wallet" position among their customers for both transactions (debit card) and credit (credit card), supporting the effort with enhanced product features, attractive reward programs that include BOTH plastics and strong cross-selling both in and outside the branch. Meanwhile, many SuperCommunity Banks are still mulling over whether re-entering the credit card business makes sense, and most have low debit card penetration and activation on their checking bases. This is a mega-trend that is happening as we speak. Just ask your kids (if you have any children age 18-35) when was the last time they balanced their checkbook, or whether they even know where their checkbook is.

Key elements in re-entering the world of plastics with a "bang" include:

• Consideration of mass-reissue of all outstanding ATM cards as debit cards
• Ceasing to issue ATM cards except on special request
• Developing effective reward programs (watch out for the profitability, though; the prizes must be achievable but they also must be profitable for your shareholders)
• Routinely offering activation campaigns for your debit cards
• Exploring the economics and risks associated with instant issue of debit cards in your branches
• Making it easier for your customers to activate their debit cards and select their passwords
• Rethinking your credit card strategy (assuming there is one&)

Back to service
SuperCommunity Banks often claim they differentiate themselves on the basis of service. They continue doing mystery shops to demonstrate how service is improving, and feel much better as the shop scores climb. My question is: how can those score rise while customer retention behavior doesn't change? My answer: the shops are a placebo, and reality is different. In many banks, service is not truly differentiatable. The larger banks have recognized that and are doing their best to improve service through various initiatives. While admittedly they have many limitations in effectively executing these drives, they also are not as bad as they used to be, and some have met with success in refocusing their retail workforce on operationalizing service. SuperCommunity Banks need to look in the mirror and ask the question: is my service truly excellent, as my mission statement and strategic plan say? And, if not, what can I do to build a true service culture without compromising sales growth and operational efficiency?

Some thoughts involve:

• Identifying a handful of service elements you want to be recognized for (e.g. making your customers feel a sense of belonging at the branch)
• Specifying key behaviors that are associated with such differentiators (e.g. recognize them by name; start a conversation; make eye contact as soon as they enter the door, etc.)
• Be sure behaviors are not simply mechanical but leave enough open-ended aspects to allow your staff's personality to shine through
• Reward your sales force not only on new sales and net growth but also on retention improvements

Niche marketing
More banks than ever, including the big guys, are identifying specialty customer segments they go after, and dedicate employees with specific expertise to prospect and service these segments. They range from churches and funeral parlors to home owner association and engineering companies. Some niches are more deposit-rich than the mass market, and, through focus and industry knowledge, banks are making inroads in capturing more than their fair share of such segments.

Key success factors include:

• Focus on 3-4 segments, no more
• Develop specific industry knowledge in each segment (what are their key issues; what do they worry about; how can you help them be more successful)
• Institute specific prospecting expectations (how many calls, appointments, sales)
• Expect both the business and the personal accounts of the owners and the employees

Bank-at-work/group banking Again, the burning need for deposits, coupled with the almost universal decline in interest free DDAs as a percent of total deposits, is rekindling banks' interest in group banking. The idea is simple: take your current products, package them nicely, and then offer to the employees of your commercial customers. The opportunities are huge! Yet again, the mega-banks are already onto this opportunity, but, as always, execution effectiveness is sporadic.

A successful group banking program typically has:

• Someone whose job is to ensure the program success; expecting folks to do this part time without leadership is bound to fall short of expectations
• Beautiful packaging, brochure etc.
• Calling the HR director as the point person for the target company
• Calling on mid-size and small employers vs. the mega-employers, who are already being phished by the large banks (there are exception to this, as all other, generalization)
• Setting clear and distinct expectations for growth that are not included in other deposit goals
• "Double counting" deposits for both the program and the branch, to eliminate competition between the two
• Strong perception of value, even if it's only a perception, by the customer

Internet banks
The success of ING and City Direct, followed by Emigrant's performance, has left others salivating for internet deposits. Countless banks in the SuperCommunity Banking range are thinking about building internet banks, or in the process of doing so, or have launched them. It's a hot topic. There is a lot to be said abuot the subject, but, as it's not strictly a retail banking initiative, I'll leave it to another time. It is, though, a hot trend among banks. My only comment at present is: beware of the LILO principle (last in, last out)