For many banks, offering fewer products to fewer types of customers will be the path to increased revenue growth and larger profits. This may seem to be counterintuitive in a world in which banks are pushing to grow revenues and sell more to whomever they can. But, the great banks don’t use a scattershot approach. Instead, they select their targets and determine what they want to sell and to whom. The concept of all things to all people is anathema to them.
Recently, we have had several conversations with clients who are reassessing their product set. In one case the bank offers eight or nine checking products to consumers. Another provides seven DDA account choices to its small business targets. Similarly, on the lending sides banks sell multiple and often overlapping consumer and business loan products. However, the facts are that most of these products generate poor returns while making the sales process too complex:
- In virtually all cases the 80/20 rule dominates; that is, the vast majority of revenues and profits come from a relatively small number of products. Several of the products lose money, primarily due to low volume
- More products also often mean increased costs in the origination process as the sales staff stumble to understand product characteristics. Excessive choice results in internal bank staff and customer confusion. The customer experience slows down and its quality erodes as he/she tries to evaluate the many choices, balancing costs with features
- We have seen instances in which the number of small business products that a bank offers causes branch staff to avoid selling any of them. Complexity scares branch staff that already views itself as overburdened
- Operational costs increase with additional product complexity
- Marketing impact can be diluted as the marketing message becomes unclear
- Product development and support costs exceed the value they provide as staffs grow to support the product array.
Frankly, the list could go on. But, why do banks tend to offer too many products? First, they are trying to capture as much revenue as possible and, therefore, some think the more products the better. Further, the product development group is frequently more skilled at creating products than the sales force is at selling them. Oftentimes, products are introduced without a buy-in from a sales staff that believes it has enough to sell. The desire for increased wallet share and concern over competitive activities understandably can drive product proliferation.
If you have not defined who your customer is, it is impossible to determine the optimal product set that you should be offering. Most banks fail to articulate whom they wish to bank versus those they would prefer to avoid. On the business side banks need to limit their focus to those companies from certain industries, a particular stage of the business life cycle, and/or with specific product needs. Industry specialization has been long established as one winning strategy but so too has limiting one’s focus to life stage companies ranging from start-ups to those being readied for sale. Some banks focus on owner-occupied real estate or in the case of nonbanks, companies with card receivables that allow for a merchant advance product. The customer targets are specific and so are the products that the targets require. On the consumer side banks must deal with economic pressure as well as even more powerful regulatory concerns. However, compliance issues make simplicity and transparency even more important and support the bias toward fewer “cleaner” products.
But, doesn’t focusing on fewer targets with fewer customers narrow the revenue pool and limit growth opportunities for banks? Based on our client experience, no. First, a bank must specify whom it wants to target based upon its current customer base, the bank’s strengths, risk appetite, and competitive activities. Once determined, it can assess their deposit, loan, and investment requirements. This approach allows a bank to narrow its product selection rather than trying for a shotgun approach.
However, even the best banks will find that over a period of years they add products due to perceived customer need or market opportunity. As banks look to reduce operating expense while positioning themselves for growth, one area of focus should be assessing the current product set, eliminating or fixing those products that are low volume or low margin, and determining the critical products for the next five years. That product selection needs to be made in light of shifting demographics, whereby, baby boomers are declining in number to be replaced by less loyal and more technologically savvy and demanding Gen X, Gen Y, and Millennials. What was once called an alternative delivery channel (that is non-branch) is no longer an alternative and, therefore, channel management and product development are more closely linked than ever before.