Author: Dan Roderick, email@example.com
The old “80/20 Rule” is dead. Today in the community banking industry that rule has become the “230/20 Rule” – a pretty startling prospect. ProfitStars has found that 230% of the typical bank’s profit is generated by the top 20% of customers. Looked at from the opposite end of the profitability spectrum, approximately 70% of community bank clients lose money.
Knowing that the top decile of the client base yields 2X the bottom line underscores the importance of protecting these crucial relationships – and identifies the need for focus when sourcing new opportunities. Finding more top 10 percentile clients will have a geometric impact on bottom line results. Possibly just as important, strategy also must reflect the fact that up to 70% of clients actually lose money. In most cases, substantial change in strategy is needed to “grow” these relationships in a way that increases profitability. The $64K question is: what strategic changes are needed and how do we quickly and efficiently implement those changes across the organization?
Pricing Impact on Portfolio Profitability
Looking at current community bank pricing practices provides insight into one main reason why customer profitability has become so concentrated. There are three very important strategic priorities to highlight that have a major impact on bank profitability.
- Strategic Priority #1: implement tactics to increase volume of large commercial loans – The average loan balance of all commercial loans at community banks range from a low of $149 thousand for banks with total assets less than $150 million to over $220 thousand for larger banks. Average commercial loan sizes reflect the fact that larger commercial loans – loans in excess of $1 million – represent a very small proportion of the overall loan portfolio. In fact, less than 7% of loans are larger than $1 million. Not only are these loans highly profitable from an ROE perspective, they are also important in terms of the gross volume of net interest income dollars they bring to the table. Customers with loans in this size range are typically “top 10 percentile” clients.
- Strategic Priority #2: implement tactics to increase volume of “bread and butter” loans – Loans referred to as “bread and butter” are loans that fall in the $150 thousand to $750 thousand size range. These are loans that offer two key advantages: 1) they are typically very profitable, and 2) there are many more opportunities in this size range vs. the larger loan category. Most every community bank commercial lender has the experience and relationship contacts to source loans like these; however, our statistics show that only 19.5% to 25.8% of commercial loans – depending on asset size – fall in this size range. “Bread and Butter” commercial loan customers are also typically in the top two deciles of a bank’s customer profitability distribution.
- Strategic Priority #3: implement tactics to price up small commercial loans – Pricing for size is a key concept that is often overlooked. Small commercial loans – loans smaller than $50 thousand – represent anywhere from 40% to 53% of community bank commercial loan portfolios. All of these loans are marginally profitable or lose money. Many customers that fall in this size category are those among the 70% that lose money for the bank.
What is your bank doing to address these strategic priorities?
Author: Jackie Marshall, Director of IT Regulatory Compliance, Gladiator Technology, firstname.lastname@example.org
As we close out the year and head into 2012, I am finding that many financial institutions (FIs) are considering a “new,” or “renewed,” approach to social media with hopes of reaping the benefits of this exciting communication channel. Competitive pressure and the desire to differentiate continue to be the top reasons why FI’s set up a Facebook Fan Page, or start tweeting.
While working with FIs to set up social media campaigns, I have found that banker’s concerns are changing in respect to social media strategy. Fear of risk and compliance were the top issues a year ago. Now the concerns are shifting to: “How do we keep the conversation going?” Many bankers are finding that social media efforts start off with great momentum, only to stall or backfire after a short period of time.
Consider this common scenario: your bank launches a Facebook Fan Page, talking about all the great new features and inviting the community to leave feedback, interact, and check in on a regular basis. You quickly engage a few hundred fans and then brag to your senior management team about the terrific decision they made to get into social media! A couple of months or even a few weeks later, the page is eerily quiet because of little to no new content or updates, and a few remaining users are left wondering why their questions and concerns are going unanswered.
Here are some common reasons why I’ve seen this happen:
• Social media accounts don’t get used consistently
• Social media accounts are used too much
• You’re not interactive with your followers and friends
• Employees aren’t encouraged to promote the social media sites
• Employees are allowed to say whatever they want on social media accounts
• There is no commitment from senior management
Before taking the plunge into social media, or as you reflect on recent experience, re-assess your strategies and address a full commitment to your social media campaign. In reality, taking a half-hearted approach to your social media campaign can do more harm than good for your Facebook Fan Page, blog, or tweets. To ensure social media efforts create an actual return on your financial institution’s time and resource investment, practice sound planning and consistent, targeted implementation.
Author: Lee Wetherington, Director of Strategic Insight, email@example.com
I remember the day I discovered the truth about Santa Claus. I was with my Dad raking pine straw off the roof of our house when I noticed two small holes atop our chimney. Odd, I thought. How’s a big guy with a big bag of gifts going to fit into one of those little holes?
When I put this question to my Dad, he referred me immediately to my Mom. After a little hemming and hawing, she fessed up, and that’s when I began to question everything.
Easter Bunny? Nope. Tooth Fairy? Busted. Big Foot? Big lie.
You might assume that your adulthood minimizes your gullibility. From time to time, however, it’s good to get back on the roof, take a look around, and see whether what you’ve been told checks out.
The Specter of Remote Deposit Fraud: The Cause for Pause
Since the advent of remote deposit capture (RDC) in 2004, we’ve been repeatedly warned about its potential risks, especially duplicate presentment and fraud. The specter of RDC fraud risk, reinforced by compliance fears surrounding the 2009 FFIEC Guidance on RDC Risk Management and the 2010 FFIEC Exam Manual, have had a major and sustained chilling effect on RDC deployments.
According to Aite Group’s recent report, Small-Business RDC: Strategies for Success, while over 55% of U.S. banks offer RDC and 42% of credit unions plan to begin offering it in the next two years, less than 5% of small businesses have RDC. The reason? According to Celent’s State of Remote Deposit Capture 2011, “the FFIEC guidance on RDC risk continues to cause institutions pause.”
So let’s climb up to the roof to get a better view and truth test what we’ve been told about RDC. Just exactly how much RDC fraud has materialized? According to the Financial Crimes Enforcement Network’s (FinCen’s) latest SAR Activity Review released in October:
• While over 13% of checks are now remotely deposited, RDC items comprise only one tenth of one percent of Suspicious Activity Reports (SARs) related to check fraud, check kiting, and counterfeit checks reported to FinCen between 2005 and 2011. Yes, that’s right, RDC-related SARs comprise 0.1% of all SARs related to check fraud. Or, in other words, 99.9% of SARs related to check fraud stemmed from paper checks that were manually deposited.
• There were “no real differences in the various fraud and money laundering schemes perpetrated through the RDC check deposit channel when compared with the check deposits completed through more traditional means.”
• “Overall, RDC-related filings have been minimal,” and they “comprise a miniscule portion of all check-related bank SARs.”
“Minimal” and “miniscule.” According to the FinCen numbers, remotely deposited checks are actually less fraud prone than paper checks.
But just as you begin to get more comfortable with RDC, along comes a new compliance deadline (January 1, 2012) for the FFIEC’s revision to its guidance on Authentication in an Internet Banking Environment. To comply, financial institutions must identify “high risk transactions” and ensure appropriate authentication controls and security layers are in place.
So, Are Remote Deposits “High Risk” Transactions per the FFIEC?
The new 2011 supplement reaffirms the original 2005 guidance’s definition of what constitutes a “high risk” transaction: “…electronic transactions involving access to customer information or the movement of funds to other parties.” This rather broad definition, if read strictly, doesn’t allow for the very real differences in risk between remote deposits on the one hand and ACH/wires on the other.
Based on conversations with lead examiners, RDC transactions are not as “high risk” as ACH and Wires. Nevertheless, the key is the financial institution’s payments risk assessment and how RDC transactions are qualified in that assessment. Since RDC systems can’t be used to distribute funds (as ACH and Wires can) and since RDC fraud has been “miniscule” according to FinCen, the financial institution could designate RDC transactions as “moderate risk.” As such, for RDC, multi-factor authentication (MFA) and reasonable velocity controls should satisfy the FFIEC guidance without need for additional “anomaly detection” layers.
Understanding, explaining, and stipulating the differences between low, medium, and high-risk payments in your risk assessment is the key off of which examiners will base the rigor of your exam. If you designate remote deposits as high risk as ACH and wires, your examiner will oblige your designation by requiring similar authentication controls and layers across all three payment types, even though such controls/layers may be unnecessary overkill for remote deposits.
Reason and Rooftop Truth
Remember, as long as the risk designations in your assessment can be proven to be “reasonably calculated,” your institution will be in good stead. If your examiner seems to lack reason, however, hand him a rake and head to the roof.
The truth is clearer up there.
Source: Aite Group survey of 291 U. S. small businesses, August 2011
Author: Milton King, firstname.lastname@example.org
Having been born in 1968 I have to be careful with referring to the late-sixties as being the “old-days,” “stone-ages” or “prehistoric.” This would make each of those adjectives uncomfortably self-referencing. In researching this posting I discovered that the ATM and I are products of the same period of time, so it was only fitting that I would spend much of my life working with them.
The first ATM was deployed in the UK in 1967 at Barclays Bank. There were several prototypes and predecessors like the Bankograph (circa 1965) and a similar Japanese machine in 1966. For the sake of our discussion, we’ll start in 1967 with the Barclays unit as it is most similar to what we see today.
In the 44+ years that the ATM has been in existence it has had, arguably, as much or more impact on the financial industry than any other technology. Even today, it is the primary way a consumer physically interacts with his/her bank.
Let’s fast-forward to 2011. There are an estimated 2.2 million units deployed worldwide. That means there have been, on average, 55,000 units deployed every year since 1967. That’s impressive by any measure.
It would seem that 40 year old technology would be eclipsed by more modern options: not in this case. Like stated above there are more than 2.2 million of them being used every day. That is one for every person in the state of New Mexico or the city of Houston, Texas.
Why? The answer is simple: convenience. The convenience of a magic machine that gives you money, any time you need it, is hard to beat. I would submit that the addition of image technology represents the rebirth of the ATM. Now the magic machine will not only give you money, it will take it from you too, pay your mortgage, access the internet, and be available 24/7. Wow! That’s awesome! I’ll take one!
The ATM is unique as it is cross-generational. The boomers are very comfortable with it, Gen X has never known the world without it. Gen Z (or whatever the heck we’re on now) will likely never walk into a branch. Their experience with their financial institution will be virtual and the ATM will be the only physical representation of the bank they may ever experience.
While the days of 55,000 new units a year may be behind us, the rebirthing of the existing 2.2 million units is well underway. Financial Institutions of all sizes are investing in this 60’s era platform. Customers, young and less young, still expect their FI to offer abundant access to this forty-something year old piece of hardware. You see them when you buy gas, groceries or attend a ball game. Simply stated, where there are people there are ATMs.
Consider your personal ATM usage. Has it changed in the past five years? I asked myself the same question. I was surprised to realize that since my bank introduced Image ATMs (about 2 years ago) I have not been in a branch. Is this good for the FI or bad? Time will tell.
For those of you who have been accepting ATM deposits for some time: how has customer usage changed? Have the technology changes (i.e. Image Capture) changed customer usage? Are those changes what you wanted? What would you do differently?
For those of you contemplating a technology change: why? What does success look like? What if your customer never steps in the branch again? What does it mean to your business if he doesn’t? These are all questions that are being answered (sometimes without being asked) everyday.
Every year for the past 44 years organizations have had to make both strategic and tactical decisions regarding the ATM. With all of the technology available today, 2012 may require more planning around the ATM than in any recent year. What ATM decisions do you face?