Understanding Your Customers to Drive Profitability

Today, most financial institutions do not know the profitability of their customers – and they need to. To weather the economic downturn, banks and credit unions need to understand their profitability.

On average, only one out of every three customers is profitable. Moreover, roughly 10 percent of a financial institution’s customers are driving nearly 40 percent of the institution’s net income. Relying on a small segment of customers for nearly half of your net income could lead to trouble down the road.

Understanding the profitability of your customers is crucial and can position financial institutions more competitively. Banks and credit unions can target current customers who may not be as profitable with relevant products. They can also identify trends and similarities, such as what products are resonating with which types of customers, enabling them to target similar consumers who are not already customers. It also allows institutions to know how to properly price products in a way that attracts the right customers – the ones that are most profitable.

Having a good pulse on profitability can also help with targeting customers more strategically. For example, credit cards are often one of the least profitable products, but it also happens to be the first loan product a Millennial gets, leading them to other, more profitable products. In this case, offering a less profitable product may be advantageous to attracting this market, allowing an institution to grow market share. This, however, requires understanding the overall profitability.

Additionally, by knowing the profitability of customers, financial institutions can also gain a better understanding of its losses. In turn, they can make appropriate changes, like adjust pricing or shift marketing efforts.

Finally, banks and credit unions can see trends over time. Perhaps there is a shift in the community, making some products less relevant than they were before. This may warrant a change in the product or marketing approach, or the product may no longer be one that appeals to customers.

The Path to Understanding Customer Profitability

All of this seems obvious – know your customers better to determine where to focus your efforts and become more profitable. But where should an institution start?

Uncovering the profitability of customers can be easily accomplished through intelligent use of a financial institution’s most valuable asset – consumer data. The intel that data provides empowers banks and credit unions to better understand their customer base, have a better pulse on what is most profitable and what is not, and then strengthen relationships with the most profitable segments by targeting them with more relevant messages and products. In turn, they’re able to drive ROI and revenue growth.

It is clear that customer data analysis and personalizing marketing efforts will be key in remaining competitive, however, implementing a solid data analytics strategy can be difficult, especially for a smaller, community financial institution that may not have the internal expertise or bandwidth to tackle such a project.

To make it even more challenging, the amount of data generated by consumers has increased exponentially in recent years due to the shift toward digital channels, like mobile and online, which has upped the number of interactions a consumer has with their financial institution. But it is possible for financial institutions of all sizes to harness the power of customer data to position the institution for sustained growth and profitability.

Eliminating a Fragmented View of Data

The biggest hurdle for the majority of financial institutions when it comes to data analytics is consolidating data across the enterprise. Organizational silos pose this problem for 57 percent of institutions, preventing data from being pooled for the benefit of the entire institution.

Currently, most financial institutions house data in various systems that are focused on specific functions like CRM or loan servicing, which means these institutions lack a seamless 360-degree view of the customer.

Furthermore, many financial institutions only use a portion of their internal data, like transactional data from a specific channel to gain insight on customers. Very few financial institutions analyze external customer data, such as online behavior, social media activity and even figures like home values. To make it worse, rigid legacy systems hinder data integrations, preventing financial institutions from gaining a comprehensive, holistic view of the customer.

Banks must redirect their focus to the customer instead of products and reorganize their systems and culture to minimize silos. This involves using underlying technology that supports a customer-centric strategy and can be integrated across distribution channels.

As a whole, financial institutions should commit to unifying data. To ensure an accurate, integrated view of the customer, banks and credit unions must utilize systems that support constant collection of data across product lines, channels and business departments.

Additionally, this data must be supplemented with relevant second-party and third-party data to truly gain a view of customers and the community’s demographics. Thanks to modern, cloud-based systems, financial institution employees can achieve this in real-time and gain access to quality data, enabling them to meet customer needs quickly and effectively remain profitable. Ultimately, without knowing your customers’ profitability, growth will be difficult.

Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions.

Explore our solutions below for more information on how to generate sustainable growth, minimize risk and increase profitability.