What now? What practical, near-term actions can banks take to spur growth and profits in an increasingly rocky economic environment? Improved account alignment provides an opportunity for banks to unlock an increased revenue stream while better matching per-account profitability and costs.

 

Why Misalignment Occurs: Banker Self-Interest
Example:  Analysis of retail banking portfolios reveals that, typically, 10-20 percent of supposedly “consumer” customers are, in fact, businesses. Another group (probably 5-10 percent) belongs in private banking or wealth management due to the balances they provide.

 

Example: Middle market portfolios often include a high number of clients that by the bank’s definition should be part of the small business area or a central servicing group. We have seen these percentages range from 10 to 50 percent plus.

 

Example: Small business groups house accounts that, again by the bank’s own definition, should be part of the middle market.

 

In short, all bank groups appear to allow and in some cases encourage a situation in which account misalignment occurs. Why? Retail does not want to lose the revenue from its business customers and, usually, receives no incentives for moving them to another group. The Middle Market wants to hold on to any revenue it can. In addition, individual Relationship Managers frequently want to handle as many accounts as possible so that they can keep busy administrating rather than being forced to sell. Small Business, like Retail, also wants to keep bigger, higher revenue names.

 

Why Misalignment Matters: Misalignment Destroys Value
The retail and small business bankers offer the argument that the customer wants to remain with them rather than be moved to another unit. In 99 cases out of 100 (at least), this is a false argument. These bankers can effectively move customers if they want to. Why should they?

 

1.      It is better for the customer. The fact is that retail bankers do not possess sufficient private or commercial banking (including cash management) expertise to meet the requirements of a more sophisticated customer. There should be no shame there; rather retail bankers need to be able to focus on their priorities, namely, the broader consumer market.

 

2.      It is better for the bank. Frankly, I am surprised at the tolerance of bank management for account misalignment. Allowing retail and small business bankers to keep larger accounts is likely costing the bank money in products not sold, both to high net worth individuals and companies. Allowing middle market RMs to maintain small business accounts costs money: the bank is placing a relatively high-cost RM resource against a low revenue generator; the banker is remaining behind the desk rather than selling more to higher potential customers and prospects.

 

The economic opportunity that results from realigning accounts is huge. Based on client experience, they include:

 

• 50 percent increases in revenue per account for consumer clients shifted from retail to private banking

 

• 20+ percent revenue increases for businesses moved from retail to small business or the middle market

 

• 25+ percent revenue increases for business accounts moved from small business to the middle market

 

• 20+ percent increases in middle market RM selling time

 

 

Cost reduction opportunities can further expand this list, but even as is, the opportunities should be hard to ignore.

 

3.      It should be better for the banker. Should be, but today probably is not. The dysfunctional incentive systems operating at many banks encourage actions that undercut a bank’s growth and profitability. And, while bankers will eloquently state reasons why the customer should remain with them, the real reason usually has something to do with the incentive and compensation structure. Ideally, management would change the compensation structure to encourage bankers to do the right thing for the customer and the bank. However, even without changing compensation, management can achieve better account alignment

 

What to Do: Act Now for Bottom Line Impact
Banks should execute on a straightforward process to uncover and address misalignment.

 

1.      Dimension the problem. Start with developing a fact base that quantifies the number of misplaced accounts and estimates the revenue gains and cost savings from realigning accounts. That should get the bank’s attention and focus.

 

2.      Make it a senior management priority. Appoint a well-respected leader to run this effort; have him/her report to the COO/CEO level. Otherwise, the initiative will be picked apart by internal special interest groups and be marginalized into oblivion.

 

3.      Select a small leadership group to drive the process. Each of the bank units involved needs to have representation in the process and its personnel need to know that they are expected to focus their creativity on determining how best to execute on realignment, rather than focusing their creativity on developing reasons for why things should remain the same.

 

4.      Set a date for account moves. Setting an end date concentrates attention and signals that change will occur.

 

5.      Create a detailed transition plan. Realigning accounts can be a huge success or a big failure. Success is tied planning and execution.

 

6.      Develop a customer value and communications plan. What is in it for the customer? Typically, any inconvenience will be ignored or forgiven in light of improved service and attention. Obviously, that is easier to say than do. However, if a customer is being moved to private banking or small business from retail, or to the middle market from small business, a deeper product suite and increased banker value-added should be demonstrable.

 

The tougher customer sell occurs when you are shifting a client “down,” for example, to small business from the middle market or to a central operations center from another bank area. In some cases, the less said to the customer, the better. The good news is that telephone-based RMs are providing smaller customers with levels of service that they may not have been receiving previously. This handoff needs to be particularly well-planned to avoid an exodus of small but contributing customers.

 

7.      Alter incentives. People will more likely “do the right thing” if they are paid to do so. If bankers are expected to shift revenues out of their worlds, they will more likely cooperate if they are kept whole from a pocketbook perspective.

 

8.      Monitor compliance and success. It is remarkable how often banks launch efforts and then fail to track their success rigorously. This type of initiative requires follow-through, with senior management continually keeping aware of execution issues they need to address.

 

Concluding Thought
Realigning accounts provides banks with a piggy bank that they can access to increase revenues and productivity. As comments such as in this week’s The Wall Street Journal indicate, there seems no more appropriate time than today for banks to access that opportunity.