The retail industry may provide financial services with a near-term approach for increasing customer and employee satisfaction, addressing regulator concerns, improving risk management, and increasing productivity.

Many banks continue to offer too many products in loan, deposit, cash management, investment, and many other areas. Largely ignoring the 80/20 rule (in most cases 80 percent or more of profits come from 20 percent of products), new products continue to proliferate. While the pace of new offerings has recently declined in the face of the recession, few banks have used the current period as one in which to rethink the type and number of products they sell.

Retailers Lead the Way
Last week’s Wall Street Journal featured an article titled, “Retailers Cut Back on Variety, Once the Spice of Marketing.” The article begins: “For years, supermarkets, drugstores and discount retailers packed their shelves with an ever-expanding array of products in different brands, sizes, colors, fragrances and prices. Now, though, they believe less is more.” Stores such as Wal-Mart, Walgreen, and Kroger all expect “to slice the assortment of products in their stores by at least 15%.” Similarly, consumer goods companies like Church & Dwight are reducing the number of new product launches this year from 50 to 25. Auto makers are following a similar path.

Why take what some may consider a counter-intuitive step? Customers, under budget pressure, want to simplify their shopping. One Walgreen exec commented that their customers have said, “Help me figure out what I need,” similar to what bank customers often ask. In addition, “Retailers have found that eliminating certain products can lift sales and profits.” As we discuss below, banks can benefit from a similar shriving process.
 
Bank Customers and Employees Want Simplicity
Offering fewer bank products is certainly a concept that many customers and employees will welcome. Product complexity and lack of transparency drive many of the recent consumer complaints against banks. Further, many retail, small business, and middle market bankers simply do not understand the product set they are supposed to be selling. Like everyone else, bankers are comfortable selling what they know. In part, that is why some commercial bankers continue to flog loans rather than fee-generating products such as deposits and wealth management.

Several banks we know have systematically reviewed their product set to eliminate low-value (and low-use) products or packages. For example, until recently one client offered seven types of small business operating accounts. Customers and bank sales staff had difficulty understanding the differences between them. In addition, to some degree these distinct but overlapping product offers required specific systems and marketing support, increasing their cost structure. However, most customers selected only two of the seven offers; several of the seven achieved minimal sales and were not missed when they disappeared.

Given customer and regulatory concerns, part of product simplification also requires eliminating what some may consider misleading offers. For example, in my view some banks have exploited “free” checking, in effect wanting customers to generate overdrafts rather than encouraging them to manage their finances more effectively. In the short term, “free” checking was a profitable offer for many banks, however, it mis-served the customer and for many eroded the trust position that banks need to maintain. Others found it to be simply a bad product, often attracting customers who had no loyalty or failed to pay their NSF and OD fees.

Even though product proliferation should end, new product development will continue to play a critical role in serving customers. American Banker recently quoted Terry Zink of Fifth Third as saying fees for NSFs and ODs created a $17 billion revenue stream but are “also the part of our business that is most susceptible to legislation.” (More on that below.) The good news is that bankers like Zink are trying to replace complex or controversial products with others that will be fully understood and welcomed by the client base. In the article, Zink mentioned creating and proactively selling a “direct deposit advance” product to replace reliance on OD charges. Initiatives like that demonstrate that the industry can respond effectively to customer and government demands.

The Government May Demand Simplicity
Customers, employees, and a bank’s expense base will all benefit from product simplicity. In addition, the U.S. Treasury appears ready to push banks hard in the direction of “plain vanilla” products. Press reports indicate that new product guidelines will cover mortgages, credit cards, car loans, payday loans, and bank ODs. Products that are not vanilla in nature may require what are in effect warning labels and set hurdles for eligibility.

While the industry may fight against this, the regulatory tide is difficult to fight, given the abysmal market image of banks and the number of consumers and small businesses that feel let down by the banking industry. Simplicity and vanilla likely mean lower per-product profits. Product management personnel, who at many banks are some of the most creative people in the institution, face the challenge of working with line bankers to structure products that meet customer, regulatory, and profit hurdles.

Concluding Thought
While the move to simplicity and transparency is appropriate, it also poses challenges for bank profits. Many of the areas under review by Treasury have driven the bottom line. Restricting those products may reduce margins and returns, at least in the near term. While Treasury may be implicitly pushing toward increased product commoditization, bank management needs to explicitly determine how to position itself as a value-added provider to its chosen customer base… and get paid for doing so.