The Mortician s Guide to Retail Banking. David W. Furnace President

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1 The Mortician s Guide to Retail Banking David W. Furnace President December 3,

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3 Mom s Funeral Called the local funeral home told to call back Called the next closest Set time for a meeting with Roy Showed up and herded into a very cold room Roy never showed Receptionist said it was my fault Met with Amanda who clearly didn t know her products 3

4 Talking Death 4

5 Is CW Etched in Stone at Your Bank? 5

6 A bold statement I believe 7 out of 10 participants at this MBA Conference today can double the rate of core retail and business customers acquired, and it can be done very profitably 6

7 Measure market share a different way FDIC data does it based on deposit $ Instead, do some research and see how many rooftops and how many business are around your branches Compare to the number of unique addresses you have in your portfolio EVERY YEAR: 10% - 15% of those are changing banks You can get a bigger piece of the pie! 7

8 Things we can learn from a Mortician 8

9 The Mortician s business model A nice, big, expensive facility is required The facility is frequently empty (underutilized) His customers make an emotional decision He generally gets one shot to close the deal The service he offers is a commodity that is difficult to differentiate He thinks he differentiates on service, but no one can tell from the outside they all look the same until you experience it. 9

10 A Funeral Home Business Plan People remembering people Average cost of a funeral: $5,884 75% of deaths result in a funeral 1 st year projected: 29 funerals About 1 every other week Source: Funeral Home Business Plan, Evergreen Life Memorial Center 10

11 Banker Think ROA, ROE, NIM, NII, NIE, efficiency ratio global, macro measures We don t tend to think about same store sales, factory utilization, etc. How much revenue do you get per widget? How much revenue will you get from selling one more widget? What does it cost you to process one more widget? How utilized are your factories? 11

12 Let s dive into that Revenues per widget what is an average core customer worth at your bank? Costs per marginal widget differentiate marginal costs from fixed costs Do we have excess capacity in the factory? 12

13 What are customers worth? 13

14 Computing value We monetize core customers in 3 key ways: Relationships (i.e. deposits and loans) Non-interest income So what is an average current customer worth at your Bank? 14

15 Consumer Portfolio Cross-Sell Account Group Haberfeld Ratios Haberfeld Balances Checking $ 4,798 Savings ,403 Money Market ,174 CD ,766 IRA ,937 HSA ,947 Consumer Loan ,427 Line of Credit ,584 HELOC ,972 Mortgage ,106 Business Checking ,702 Total Relationships: Total Deposits: $ 17,136 Total Loan Volume: $ 9,527 15

16 Business Portfolio Cross Sell Account Group Haberfeld Ratios Haberfeld Balances Business Checking $ 23,676 Business Savings $ 9,787 Business Money Market $ 131,471 Business CD $ 56,576 Business Loan $ 124,561 Business Line of Credit $ 46,409 Business Real Estate $ 426,474 Retail Checking $ 8,715 Retail Savings $ 6,457 Retail Money Market $ 92,336 Retail CD $ 26,196 Retail IRA $ 15,016 Retail HSA $ 2,399 Retail Consumer Loan $ 14,093 Retail Line of Credit $ 4,399 Retail HELOC $ 46,335 Retail Mortgage $ 168,808 Business & Business Only Retail Total Relationships: Total Deposits: $ 45,129 $ 63,341 Total Loan Volume: $ 61,059 $ 77,656 16

17 One recent example 17

18 One recent example Current client, 15 offices, pretty rural Were at net zero (openings = closings) the portfolio of accounts was not growing Openings of new consumer and business accounts more than doubled First year: portfolio grew by over 1,000 consumer accounts and 150 business accounts Added from the new households $12MM in new checking deposits $6MM in new loans $11MM in other deposits (Savings, CD s, etc.) 18

19 Computing Value Their yield on loans is 5.05%, the checking deposits cost an average of 5 b.p. $6MM x 5% / 1,150 new accounts = $260/year What are the other deposits worth? $6MM in checking $11MM in Savings, CD s, etc. Not much today, but what about over an 8 year average life? 19

20 Non-Interest Income They have an average NSF frequency of 5 and an NSF fee of $30 Their average account yields about $40/year in interchange income NSF income + interchange income = $190/account/year 20

21 Let s recap Yield: Fee Income: Total $260/customer/year $190/customer/year $450/customer/year 21

22 And, they stay a long time! Haberfeld client average attrition: 12.22% Meaning average life is > 8 years!!!!!! 22

23 But we haven't talked about people yet How many new hires if we get one more marginal customer? How many new hires if we double the size of the portfolio? Let s put this in context, though: The typical community bank is opening about 3/branch/week 23

24 What does the next customer cost? So you add one more PFI customer: Issue a debit card ($5?) Send a statement ($12?) A little more data processing ($???) Write off a little principal from overdrafts on some ($5?) What else? Our clients report average direct marginal costs are about $30- $50/customer/year 24

25 Marginal profitability is key If we get one more core customer $300 - $500/year in revenue $50/year in costs They stay 8 years That looks VERY profitable to us! 25

26 Net Present Value of the Relationship Retail: $2,730 Business: $9,321 26

27 A Foundational Belief Growing and serving more core customers is a good thing over time do you believe that? 27

28 Capacity Your branches and the big guy s branches look the same to me. They service 6,000 customers per branch and the typical community bank services about 1,500. Question: Do you have excess capacity? Could you handle more customers? 28

29 But Wait! If you actively market for new PFI customers, you will get the dregs of society! 29

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31 Actually The new customers you get will look pretty much like the current customers you are getting. You can t make them look much different. If you want a different looking customer move your branch! 31

32 Unprofitable customers will clog our lobbies!!! First, your lobbies aren t clogged most of the time I could fire a cannon off and not hit a customer! There is no perfect filter just get twice as many that look like (on average) the ones your getting today. You will get you a LOT more unprofitable customers In about the same ratio that you are getting them today. 32

33 Conventional Wisdom Fully allocated cost model: Estimates in the $200-$300 per year range With that analysis firmly implanted, we start to make a lot of decisions without questioning the premise or the business model: Marketing and Targeting: we have to get the perfect customer in order for them to be profitable Products: we have to structure our products so that we can t have an unprofitable customer Fees: we have to raise them in order to cover all these huge costs 33

34 Can you imagine this? 34

35 What happens if he doubles? Say he moves from 29 funerals/yr. to 58? What happens to marginal costs vs. marginal revenues? 35

36 Fundamental structure in banking We think banking is a business of high fixed costs, low marginal costs (for the next core customer) and high marginal revenues relative to the cost, on average. We think you have TREMENDOUS excess capacity Getting more core customers is a very strategic, profitable undertaking 36

37 Business Models: Marginal Revenues vs. Marginal Costs There are many businesses like ours with high fixed costs and low marginal costs that monetize customers well at the margin Movie Theaters Convenience Stores Paypal Even funeral homes! 37

38 Doubling? Really? Understand the emotional dynamics of switching You can t get anybody to switch but you can get twice as many to pick you. Must do effective marketing. Have good product: good product is easier to sell then bad product. Close the business when it comes in. More to come on this 38

39 His Customers make an emotional decision When do you become the PFI? When customers give your name in response to this question: Where do you bank? They are telling you where they have their primary operating checking account. The checking account is the beach head to PFIdom How do prospective customers choose? 39

40 Getting New Customers in a Fixed Marketplace The emotional dynamic 40

41 In every Market In a given year, about 10% - 15% of the households change banks. When you start getting new customers, by definition, your competition is getting fewer. We call this system net zero when FIs are trading households back and forth 41

42 The good news! Believe it or not but it s counter-intuitive A fixed market is an infinite pipeline of opportunity

43 Approach and Message You can t get anyone to switch, but you can do something profoundly different You can get a lot more of them to pick you after they have already decided to switch! 43

44 Changing Banks Switching is really, really hard People only do it if they have to Certain events beyond our control create the opportunity, you rarely get people to switch, it s just too hard Be there when they decide to switch Set the right conditions for them to notice and pick you! 44

45 Why do people change FIs? Mad at the old FI (70%) Moved Changed Jobs Got married Got divorced It is largely event driven 45

46 When do people change FIs? When they have money When do they have money? When they get paid When do people get paid? Weekly or bi-monthly About every 6 weeks you get a double-whammy payday 46

47 Marketing 47

48 My Opinion Bankers will spend money for acquisitions and to build new branches in order to grow But they severely under-invest in marketing to fill up the branches they already have. 48

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51 Convenience Is Still #1 For 35.00% Account Openings R 2 = % 25.00% % of Open Accounts 20.00% 15.00% 10.00% 5.00% 0.00% < 1 mile Total 1-2 miles 2-3 miles 3-4 miles 4-5 miles 5-6 miles 6-7 miles 7-8 miles 8-9 miles 9-10 Miles Proximity 51

52 Electronic Marketing It s changing!!!! In 2014, 68% of ad requests online included location-based data but few banks use that! Do you do any PPC? Map where you are already getting customers and do PPC there, not everywhere 52

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55 Getting a lot more people in the door What do people want when they are changing banks? Simple, easy to understand products No cost Low hurdles (if any) Question: Can we make money delivering this? 55

56 He gets one shot to close the deal Do your policies recognize that? Does my wife need to be here? What forms of ID do I need? Do you pre-screen customers in order to qualify for an account? Do you have consistently applied questions that get the customer into the account that is right for them? Does your front line staff ask for the business every time? 56

57 Is Screening effective? Category ChexSystems Users ChexSystems Non-Users NSF Frequency Principal Losses $3.24 $4.69 Net Fee Revenue (after losses) + $28.29 Accounts Opened (per branch/yr)

58 Is Screening effective? Category ChexSystems Users ChexSystems Non-Users Cross-sell Ratio Cross-sell Deposits $ 18,425 $ 16,059 Cross-sell Loans $ 5,060 $ 7,778 DC Take Rate 75% 80% BP Take Rate 16% 36% estatement Take Rate 14% 20% 58

59 Take the emotion out when they actually come in, too. 59

60 The service he offers is a commodity You differentiate by giving better service, but If they aren t a customer, they haven t experienced your service! You can make service a competitive advantage. How? Leverage your existing customers for referrals. Well run banks can get 1/3 of new openings from customer referrals 60

61 Leverage Referrals

62 Conclusion There are at least a few similarities between the mortician s business and ours. I hope you have enjoyed this whimsical comparison. We think community banking is alive and well. The death that needs to occur is that of conventional wisdom. With good marketing and effective execution, you can double your current results (well, most of you can)! And finally 62