5 Focus Areas To Improve Banking Profitability

Improving banking profitability is about more than chasing growth in new deposits. It requires rethinking processes and adopting an entirely new mindset.

Long-term success requires an approach centered on efficiency and effectiveness that accounts for many factors. By focusing on the following five areas of opportunity, banks can meet the challenges of the evolving landscape.

Modernization and transformation

Streamlined, parallel, and automated processes can help banks push past operational obstacles and reduce organizational swivel, particularly through technology integration.

Banks can move away from manual efforts, hand-keying, and multiple handoffs by:

• Automating many applications, reviews, and decisions
• Centralizing and connecting disparate systems
• Providing customers with the ability to initiate and conduct most banking transactions and other activity on mobile devices

Organizational risk tolerance

All risk can’t be eliminated, but organizations can control how tightly they manage it. Protections taken to the highest degree could result in diminishing returns and lost opportunities, especially if they aren’t aligned to strategic considerations. After all, risk is not static. It evolves over time, which means an organization’s tolerance limits need to be able to respond.

Innovation, experimentation, and repositioning can move the needle on risk, but a bank’s risk tolerance should accommodate necessary organizational growth and change within a diverse portfolio of products and services.

Single view of the customer

Acting on assumptions doesn’t lead to consistent success, and branch traffic can’t tell the whole story of what’s going on with a bank’s customers. Enterprisewide data collection, management, analytics and reporting, and customer relationship management have become essential. These efforts can offer important insights when setting a course for individual and organizational success. Following are a few key areas in which banks can improve customer service:

• Customer behavior. Banks have to understand where, when, and how customers interact with their services and what customers are doing with their accounts. Banks should capture, organize, and centralize data to present a daily dashboard to all key front-office and line-of-business personnel.
• Customer profitability. Discipline in loan and other product pricing is critical to enterprise profitability. Up-to-date data on revenues and costs associated with products, accounts, and customer-level activity can help banks decide when to hold fast, such as on loan rates or fees, and when to be flexible.
• Customer incentives. Better analytics can support incentives that contribute to improved performance, such as when, where, and how to use teaser pricing or relationship pricing to help avoid incentives that support only individual success.
• Customer life cycle. A clear picture of individual customers – based on demographic data, personal information, and history of accessing certain financial products – can help banks suggest targeted offerings at times when they are most likely to be interested.

Optimizing the human side of banking

Digital banking and the unbundling of services are taking on larger roles, but they’re hardly the end of traditional banking. Quite the opposite: As banking grows increasingly digital, the human side of the industry becomes even more critical.

Optimizing the human element of banking means rethinking how branches function in their communities, how talent is cultivated and supported, and how organizations build a workforce capable of supporting long-term growth.

Branches themselves aren’t merely stores waiting for customers. They should be effective, decentralized outposts of the organization in the community or key market areas. One large, central building that houses a whole lending team might not make as much sense as a strategic network of smaller locations from which personnel can operate to form key relationships, foster in-market visibility, and establish a solid presence in neighborhoods and communities.

Additionally, banks need to think about their talent pipeline. The next generation of bankers wants technology and data that can empower them to think critically and perform effectively. Attracting and retaining new talent means banks should be ready to support it. Innovative, engaged people who continue to add value to the business and move up in the succession line can help keep cost-effective growth and banking profitability on track over the long term.

M&A and cross-industry partnerships

In a time of market turbulence and great change for the banking industry, we’ve seen an uptick in consolidation, with more expected to take place in the next few years. Connections between banks and other financial services companies – most notably fintechs – likely will continue to strengthen over the same period. Banks on the asset thresholds of $50 billion and $100 billion could face heightened standards and, hence, additional costs. As a result, they would look to go well past these thresholds.

Banks will have to approach M&A with caution, thinking through all kinds of pre- and post-acquisition issues. In spite of the complexity involved, M&A can be one of the more effective ways for banks to tap into new types of customers and expand into new geographies.

Partnerships across industries are another potential avenue for expansion, and they also can be a means to reach current customers in new and interesting ways. Banks partnering with fintechs and other companies will need to undertake rigorous third-party risk management and set up risk and compliance frameworks so that both their business and their customers are protected.

Improving and sustaining profitability

These five focus areas can help position banks for better execution as well as improved and sustained profitability, but changes that must be made won’t happen in a vacuum.

When an organization shifts its entire mindset to take fresh perspectives on risk, business models, and decision-making practices, it can transform for the better.