10 Resolutions Banks Should Make in 2012

BOSTON (MainStreet) -- The past few years have been challenging for the banking industry, and 2012 looks to be filled with continued challenges.

"As we all know, growth is hard to find, revenue is under intense pressure and the cost of doing business continues to increase," says the 2012 Financial Services/Retail Banking Industry Perspective issued by Booz & Co., a global management consulting firm.

"Four forces are shaping this reality: the economic climate, with high levels of unemployment, low interest rates and a feeble housing market; consumers, who are borrowing less; regulators, who are both curbing fee-based income and increasing the cost of compliance; and technology, which is enabling nontraditional, low-priced competitors in areas such as payments," the report says. "Since the financial crisis, many in the industry have assumed or just hoped that these revenue challenges would be a cyclical phenomenon. But there is a creeping realization that this is not the case."

"It's our belief that a structural, secular shift is under way," it says. "The industry is transitioning from a high-margin business to a lower-margin one."

That makes it a good time for the industry -- from big players such as Bank of America ( BAC), Citigroup ( C), Chase ( JPM) and Wells Fargo ( WFC) to smaller community banks and credit unions -- to commit to 10 resolutions for the New Year.

1. We'll work to rebuild trust.
"Obviously the industry as a whole and most institutions need to rebuild trust with their consumers because right now it is very, very contentious relationship most of the time," says Corey Yulinsky, a partner in Booz & Co.'s Financial Services practice.

Marketing and advertising may help, he says, but are no substitutes for "what kind of customer experience you provide day to day" in-branch and online.

"At a very profound level, it is as simple as 'Are they doing what I am asking them to do quickly, transparently and for reasonable economics?'" he adds. "That day-to-day experience is where trust is either built or destroyed. At some level, consumers know that you have to pay for a value-added service. Suddenly being told you have to pay for services that have been free breaks trust."

There was a time banks didn't have to match revenues and costs directly, he adds. "There was a lot of cross-subsidizing going on, and that led to things like free checking, which then led consumers to go, 'Oh, they are giving it away for free, it can't be worth anything,' when, actually, being able to move my money to pay you something does actually have value. But banks have never really communicated even that basic service in a way that people can see that."

By not emphasizing their value, banks will continue a vicious circle.

"Unless you can really demonstrate what the tangible value is, so that people understand why they are paying, there is going to be this constant to-and-fro," he says.

2. We'll bring back the toasters.
This is related to No. 1 and, no, does not mean banks should literally start giving away kitchen appliances again. But steps are needed to win back consumer loyalty and enthusiasm.

"I don't think the environment is going to get a whole lot better for banks this year," Yulinsky says. "They are going to continue to have to push very hard and historically have been really, really weak at demonstrating the value they provide for consumers. One of their resolutions this year should be to be much more explicit and convincing in how they add value to consumers' lives."

3. We'll think small ... as in small business.
Small businesses may be a key driver of the economy, but they are often inadequately served by banks of all sizes.

"The small-business customer segment represents an opportunity for community banks to grow much-needed deposits and fee-based revenue, but capitalizing on this opportunity is no easy task," says a recent report by Aite Group, a Boston-based independent research and advisory firm focused on the financial services industry. "While U.S. small businesses spend more than $400 billion on financial products each year, understanding their needs continues to challenge many financial institutions -- this shows in small-business customers' satisfaction levels."

An Aite report last month makes the case for improving online banking for small-business customers -- approximately 90% are served via online-banking platforms actually made for individual consumers, with most "left with unmet needs and a perception that banks do not understand their business requirements."

Community banks and credit unions are already figuring this out.

"Even the 1,000 largest U.S. credit unions, which tend to be more commercially focused than their smaller credit union counterparts, often offer limited business-member services," another study by the firm concluded. "This is slowly changing as a growing number of credit unions have begun to view winning the small-business segment as critical to their future success."

4. We'll strike back against new rivals.
Banks can no longer turn a blind eye to nontraditional competitors -- new online models, smaller institutions and credit unions -- homing in on their business.

The prepaid debit and payroll card market are also "emerging as a formidable force in U.S. consumer financial services," according to Aite Group research, possibly worth $164 billion by 2014. And key challenges include a payroll card program by Wal-Mart ( WMT) launched back in 2009 (the retail chain's MoneyCenter has also been moving into financial services in other ways, such as check cashing) and IPOs of Green Dot ( GDOT) and NetSpend ( NTSP).

5. We'll pursue the unbanked aggressively.
There are reasons prepaid debit and payroll cards are looming so large.

"Multiple factors over the past few years -- including the housing market bust, financial crisis, economic downturn, surge in unemployment and large numbers of consumers defaulting on their debt -- have contributed to the elimination of mainstream financial institutions in the low end of the market," Aite Group says in a study. "Prepaid debit and payroll cards represent a compelling alternative to consumers shut out of checking accounts and credit cards."

Banks have been stepping up efforts to attract the unbanked, notably through financial literacy programs and educational outreach. But it won't be easy to reverse the trend. The FDIC estimates there are roughly 30 million households in the U.S. classified as "unbanked" and "underbanked."

6. We'll think "big picture," not just "short-term."
"Given the challenging revenue climate, most banks are tempted to raise fees on customers to compensate," Booz & Co.'s industry perspective says. "But imposing new or higher fees without extreme care is a recipe for trouble. First, and perhaps most obviously, higher fees risk alienating customers. The industry's attempt to raise debit card fees offers indisputable proof of this danger. The outcry was intense, from consumers and politicians."

How about instead reassessing the services an institution can provide?

"Banks often provide skills and information to customers, particularly in commercial and small-business sectors, as bundled add-ons or even as loss leaders," Booz & Company says. "Some of these can be 'unbundled' in a way that provides value to customers and more effectively monetizes the bank's existing capabilities."

"For example, banks could aggregate information for the marketing and sales efforts of middle-market and small businesses; leverage deep financial and operational risk management expertise for middle-market and small businesses; offer white-label analytics for other financial institutions and business-to-consumer companies; or perform white-label outsourcing and transaction processing services. Banks need to evaluate these ways to create new revenue streams by leveraging their existing information, expertise, and distribution capabilities and assets."

"Banks have tons of information that they do very little with," Yulinsky says. "They have lots of expertise that they have never really figured out ways to get paid for except through standard banking products."

7. We'll focus on growth, not just cost-cutting.
Or look at it this way:

"Everyone is talking about costs and getting your cost structure leaned out and aligned as a critical imperative," Yulinsky says. " But the industry's problem is not a cost problem, it is a revenue and growth problem. In the short term, and long term, most banks can still have upside again if they can create a greater value to their existing customer base ... Most of them are really only skimming the surface of their existing customers' wallet. The Holy Grail has been figuring out why banks haven't done a better job of that."

"Figuring out the short-term revenue issue is critical, but the bigger issue is what the long-term revenue profile look like, what are the ways to open up new doors -- and then you can figure your costs."

8. We'll understand our customers better.
Banks often try to be all things to all people, focusing on Main Street customers, wealth management for the affluent and the needs of businesses ranging from mom and pop to mammoth. All banks might not want to everything; some banks may want to target their customers.

"Over the next year to 18 months, most banks really have to determine what their 'way to play' is going to be," Yulinsky says. "What that means is which customers you are going to compete for and with what value proposition, business model and operating model. Investments, where you take costs out, which capabilities you build -- all of those things get aligned around these decisions."

"With limited avenues for growth, the banking sector will be hypercompetitive for the next three to four years," Booz & Co. says. "In this environment, it's critical for each bank to be very clear on how it will compete and win in the market ... Adroitly targeting specific customer segments, creating products that go beyond deposit and checking accounts and delivering those products through highly competitive (physical and virtual) sales forces will be competitive necessities."

9. We won't abandon mainstream customers for the affluent.
Yulinsky says many industry statistics would lead one to believe "the only place it looks like there is going to be real growth is in the affluent and wealthy consumer side."

"The real question, however, is what business models are out there that let you serve the middle class and others in a way that's profitable," he says. "What I think is going to happen, for the first time in a while, is that we are going to see a real battle of business models. I think the credit union and the small bank plays are sort of the harbinger of that, but I think the real issue is that when you look at what Wal-Mart has done, and you look at some other nonbank players, you start to wonder if there are other ways to skin this cat and is there money out there to be made with the right business model and cost structure."

10. We will tear down the walls.
The modern bank has been a world unto itself. This may be the year to pave the moat and throw open the fortress doors.

"One of the things we talk to our clients about is how to start managing in a much more collaborative way, both internally across all your silos and then with external partners," Yulinsky says. "Big banks have not really distinguished themselves as being great players in partnerships, but going forward the winners are going to be those who understand how to work with others, whether it is for technology, product or distribution. A whole host of opportunities are out there and, given how expensive it will be to develop some of these new capabilities, partnering will emerge as more important."

Banks will need to invest in these technological advances -- specifically, cloud computing, analytics, broadband, and social tools -- to "meet customer expectations, which are increasing as innovative nonbanks step into the space and solve common, long-standing customer 'pain points,'" according to Booze & Co.

These partnerships can work both ways, and banks may find new revenue opportunities from packaging their expertise.

--Written by Joe Mont in Boston.

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