For many in the banking industry, the new regulatory environment has created an enormous strain on banks to maintain profitability, sustain revenues, and ideally, grow. The recent recession has created an environment of higher unemployment and sluggish home sales, only recently appearing to be on the mend. It would seem that banking, as an industry, has been dealt one setback after another and has failed to thrive in many areas over the past several years.
The recent regulatory mandates and initiatives have created seismic challenges for banks in their attempts to maintain profitability. One of the most significantly affected areas is non-interest income generated by checking products, and a few of the factors playing into this equation include:
- Reg E Overdraft Amendment
- More Overdraft Income Pressures
- Durbin Amendment of Dodd-Frank
- Consumer Financial Protection Agency
The banking industry has clearly become increasingly dependent on noninterest income, and the need to maintain profit margins in these sectors will certainly lead many in the banking industry to increase their creativity in determining new revenue streams. Expansion into these new areas will ensure stability if any of the new regulatory changes affect existing revenues. The situation has become more a mandate of survival than a mandate of growth, particularly for midsize banks where the margin of error is smaller.
So what are the options for a banking executive in these profitability challenges? Dependent upon the current situation of any given bank, the pressures to maintain and grow revenues may lead to numerous outcomes, some desirable in some not desirable. Acquisition is one method of growth, but not all banks are in a position to utilize this tactic. Other banks may be facing the option of cutting expenditures to compensate for the losses in revenues. Lastly, banks will likely look at any and all opportunities for increasing revenues. A few examples of methods for increasing revenues are as follows:
v Restructure Products and Services Offerings
- Defining revenue streams through quantitative impact analysis can enable optimization of products and services in order to align revenue growth and improve a bank’s competitive position. Understanding the banks existing segments of customers and any high-value new markets will facilitate development of highly effective marketing strategies and attractive product lines.
v Maximize and Improve Fee Collection
- Banks must be aware of all existing fees collected in the bank, and knowing where to look for uncollected fees can be accomplished through comparison to another financial institution or by utilizing the services of a fee collection subject matter expert.
v Value Pricing Tactics
- Every bank has varying goals when it comes to pricing strategies. Some banks elect to price services based on customer’s perception of value while others choose cost-based pricing. Analysis of pricing should evaluate service fees with each individual bank’s initiatives in mind; some may choose to focus on commercial services and/or treasury management while others may look to overdraft pricing and/or automation tools.
v Launch New and Desirable Products/Services
- A bank looking to provide customers with value-added products and services can also position themselves as innovators and leaders in the banking community while growing revenue base. Marketing research that qualifies targeted users and revenue streams, as well as planning for future profitability of new products by evaluating launch costs and future reduction in internal expenses, should be done well in advance of any R&D or product introduction, naturally. A few examples of these new products and services are:
v Grow into New/Expand Existing Markets
- For many banks, establishing loyalty programs or expanding its existing services and product lines offer opportunities for increased revenue. The physical expansion into a new market is an obvious method of revenue growth. Within an existing market, banks should evaluate opportunities for the un-banked and under-banked and should assess each branch location for any inconsistencies in the bank’s current share of the market vs. demand of that area.
v Optimize Sales and Marketing Effectiveness
- Implementation of best practices and the experience of successful sales individuals and teams should be applied to both online and in-person sales. Maneuverability of a bank's response to industry trends or competitive impacts has become integral and mandatory. A marketing team should not only provide targeted marketing strategies for key growth sectors and for existing revenue streams, but they should also provide added value with insights on current industry trends relative to banking (i.e. rewards programs, overdraft products, line of credit products, retail checking accounts, etc.).
The Graduate School of Banking at LSU offers several courses that relate to this information. Should you be interested in developing your talents or furthering your knowledge base in this arena, you may be interested in attending GSB LSU for the following courses:
- Strategic Bank Marketing – Rex O. Bennett (Year 1)
- Sources of Non-Interest Income - Dan M. Harbison (Year 2 and 3)
- Treasury Management Practices – Mark J. Krawczyk (Year 2)