If your bank is half full, why not fill it up?

Big or small, a business has fixed costs. If you’re already spending that capital, doesn’t it make sense to do what you can to not just look for the right customers, but more customers?

By Bryan Easley

Recently, I was going over account profitability assumptions with the management team at a prospective client’s office. This bank had about 850 checking account customers per branch and was opening about 100 new checking accounts per branch per year – both numbers far below average among its peer community financial institutions.

When I asked why they thought their numbers were so low, the CEO stopped me and said, “They may appear to be low in quantity but they are very profitable.” The bank, he said, was attracting a certain quality of customer that they thought were the ideal households they wanted at that bank.

As we looked out the conference room window into a barren lobby, I asked if that model made any sense. Since the bank was already sinking fixed costs into this empty branch, perhaps it made sense to change thinking; instead of looking for a few of the “right” customers who may be profitable, why not go after more customers who are profitable in a number of different ways to a community financial institution as well.

The Fixed Cost Conundrum
Next time you drive by a Chase branch – or Wells, BofA or even a larger regional bank branch – imagine it without its signs or branding. What does it look like now? How about inside? Does the lobby look like that at a community bank or credit union? Of course it does because when a building is stripped of what makes it unique, it’s just a building.

Look at it this way: If it were a factory, the big bank would be operating at capacity with 4,000 to 6,000 customers per branch. A typical community FI, which averages around 1,000 to 1,500 accounts per branch, would be running well below capacity. That’s an expensive, underperforming factory.

Since all banks – national, regional or community – occupy the same type of brick and mortar buildings (for the most part), they all have similar fixed costs per branch. In fact, you could say community banks and credit unions have higher fixed costs per branch because they don’t have the luxury of scale that their bigger competitors enjoy.

Look at it this way: If it were a factory, the big bank would be operating at capacity with 4,000 to 6,000 customers per branch. A typical community FI, which averages around 1,000 to 1,500 accounts per branch, would be running well below capacity. That’s an expensive, underperforming factory.

What’s the right way to determine fixed costs?
I like to ask clients, “What does it cost you to acquire your next core customer?” The prevailing thinking is to figure fixed-cost allocations by throwing branches, staffing, supplies, etc. together and dividing that by the number of customers. By that method, acquisition costs are typically looked at as around $300 to $500 per customer per year. So, unless a customer yields that much a year, they would not be deemed profitable. In an attempt to make them profitable, many banks develop new products, policies or sales processes.

At Haberfeld, we have a different view. Our data shows that on the margin (core system, debit card, paper statement, back-office expenses, etc.) the next core customer will cost about $30 per year and generate about $300 to $500 in revenue each year. Under the notion of excess branch capacity, we don’t look at the next core customer as a fixed cost but a marginal investment that can spin off multiples in revenue in their time with our clients.

If you’re not a big bank, why follow their model?
Even when we overhaul or just tweak a client’s product lineup, or discuss changing some polices or the account-opening process, their new accounts look like the accounts they already have. What’s the difference? Our clients are getting a lot more customers. The type of customer you get is really determined by where your branches are located. Want to know what type of customer you’re attracting? Stand on the roof of your branch and look around; that’s who you serve.

If you had two or three times as many customers per branch, how would that impact your FI considering most of your fixed costs are already sunk? If you have a lot of excess capacity today, you can view the next prospective customer as a fixed cost, or as a marginal expense compared to high marginal revenues.

So, what happened with the prospect?
I have not been invited back, but I know this: they started thinking about things differently that day. In fact, looking at some changes to their website they may have taken to heart some things we discussed that day. There are a number of ways to generate money in this business of banking, and it’s not always more and better. But, at Haberfeld, focusing on maximizing the number of households banking with you while optimizing profitability has been working for our clients for than 34 years.

Bryan Easley is a vice president at Haberfeld Associates in Lincoln, NE. He has more than 10 years experience focused on retail banking, consumer lending, and financial technology. Bryan works with many financial institutions across the country, providing strategies to acquire significantly more profitable account holders and engage new and existing customers to use more products and services. You can reach him by email or at 402-475-1191

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