Creating a Cool and Profitable Bank

In an American Banker article, Creating a Bank that's Both Cool and Fair, Chris Skinner poses a question, “What does ‘cool’ mean in banking?” The question I would ask is, “How do you create a ‘cool’ and ‘profitable’ bank?”  Transaction fees, interchange fees and other non-interest income are often the difference between bank or credit union profitability and losing money. Regulators, neo-banks, new competitors and educated consumers are quickly forcing the end of traditional banking non-interest income.

Becoming "cool and profitable" in banking will involve a complete rethinking of how a bank or credit union operates and the business they are in.

Let’s Start with Profitability

Banking is no longer about money, it is about data and how that data is used. We hear the term “big data” and study after study has shown North American banks and credit unions have failed to realize or capture anything close to the potential that big data poses to offer. Why? Data is meaningless in its raw form. Instead of trying to capture all your data and then try to do something with it, try focusing on a specific goal that requires limited data. Start small and as you gain experience, understanding and positive results, expand the use of data.

For example, you could start by using data to help you identify profitable customers and more importantly, non-profitable customers, and what it will take to get them profitable. According to Bank Director 40% of retail bank customers and credit union members are not profitable. Optirate says, as many as 80 percent of customers at community banks or credit unions generate operating losses, with nearly all profits attributable to only 10 to 20 percent of customers.

Can your bank or credit union sustain subsidization of 40% to 80% of your customers or members? Regardless of what number is correct, there is no doubt subsidization is occurring, which will ultimately lead to your profitable customers and members being at risk.  

Simple data can be used to start a profitability analysis. Even if your bank or credit union chooses not to act on the information, CEOs, CFOs and board members should know the results of a profitability analysis so a conscious decision can be made.

What is Cool in Banking?

Banking generally operates according to systems and legacy technology that were developed in the 1970s to meet the needs of the market at that time. Is there any denying the market today is not the same as in the 1970s? Yet banking remains siloed, operates around products, account numbers and is internally focused for plenty of outdated reasons. That environment is slowly changing, but can it change fast enough to preserve the thousands of banks and credit unions that exist in the United States. Virtually every country in the world is dominated by a small number of large “too big to fail” national banks. The US financial services market is quickly moving in that direction.

North America’s national banks are investing tremendous resources into technology, Fintech startups, and technology incubator programs. Resources North American community banks and credit unions cannot compete with. So what is the alternative?

Create a “cool” bank or credit union. That means re-inventing how your bank or credit union does business. That means trying new ideas and recognizes they all will not work, but the organization learned something. It means positioning your bank or credit union to be able to adjust and move quickly. It means developing a niche that can be supported by your technology solutions. It means having agile technology.

Silos have to be eliminated, organizational structure must change and the focus must be “what is right for the profitable customer”. It means finding creative ways to deal with Know Your Customer and lending regulations. The banks and credit unions that can deliver frictionless, instant account opening, instant loan approvals and disbursement, and predictive analytics will emerge as market leaders. It means leaving no rock unturned and allowing no sacred cows. It means “re-inventing” your bank or credit union to meet the changing expectations consumers demand in all other areas of their life in this digital age.  

For example, why offer separate checking accounts, CDs, savings accounts, and credit cards? Why not let your customer or member build the products they want in real-time through a one-step instant approval process? As they add features and new services, pricing is adjusted based on real-time profitability analytics.

When I buy a car, I never buy the basic stripped down model. The low price may get me to the car dealership, but I do not end-up buying that model. Instead, I convince myself I need this "must have option" and "that must have option" to the point that pricing becomes less important to me and the dealer's profitability goes up. The same thing applies to new home buyers when they are purchasing a house from a new home builder.

If banks and credit unions take a similar approach by allowing customers to build products unique and customized to their situation, instead of offering a pre-defined menu of pre-built products my belief is customers and members would focus more on the customizable solutions that meet their exact needs, and less on the pricing that goes with it. Through relationship pricing and relationship analytics, banks and credit unions can improve product margins and provide pricing transparency.

Agile Technology for an Agile Bank and Credit Union

The problem bank and credit union executives face is that in most cases their legacy core banking systems are not capable of supporting this type of innovative thinking. Core banking systems are built around silos, products and account numbers. They are not built around customer relationships, and data analytics.  

Fortunately, there are options. The best part is that these options:

• Come with far less enterprise risk than a core banking system conversion; and
• Will add long-term functionality and architecture that will allow your credit union or bank to move into the world of real-time processing, transactions and data management, and personalization.

Components, APIs, standards, and the cloud offer banks and credit unions the opportunity to explore true alternatives to the zero-sum game of a core banking system conversion. Componentization, APIs – along with emerging standards such as BIAN (banks) and CUFX (credit unions) – and internal or external cloud environments allow banking systems to more effectively communicate with each other and allow banks and credit unions an opportunity to create their own service-orientated architecture (SOA). An SOA approach modernizes the technology environment by allowing credit unions and banks to “mix and match” technology solutions they need to adjust and drive their business model, as well as the ability to quickly adjust and implement new solutions.  

The most advanced banking technology environment is only as good as the vision, mission, and strategy it is designed to support.  This contrasts with the old days of banking IT when IT departments often unwittingly held the bank or credit union hostage by their antiquated systems, and were obstacles to innovation and change.

Banks and credit unions now have an opportunity to improve agility by becoming more invested in their technology strategy and its execution. The CIOs of today’s banks and credit unions needs to be savvy business leaders that are actively involved in shaping the direction of the bank or credit union, then putting in place the solutions necessary to achieve the corporate goals. They need to have a seat at the executive table and be like the orchestra conductor, pulling all the pieces together to create symphonic harmony.

Well-chronicled are the changes that have occurred in retail banking – and will continue to occur at an exponential pace – coupled with the increasing expectations of today’s retail financial service consumers. Some banks and credit unions have taken steps to adjust their business models and technology solutions to meet these opportunities. Other banks and credit unions want to change, but do not know how or even where to start. Others are sitting idly by and hoping that digital banking, omnichanel and bi-direction channel banking is a fad that will soon pass.  

Before your bank or credit union considers a core banking system change, formulate a technology strategy that supports the vision and mission of your bank or credit union. Evaluate alternatives and opportunities, which will likely be less expensive, have a lower enterprise risk profile, higher ROI, and can be operational much faster than a core banking system conversion. With these guiding principles in mind, you can position your bank or credit union as an agile player in the quickly evolving retail financial services market.