5 Profitability Analysis Myths: The Final Recap

Posted by Haley Locklier on Dec 8, 2020

FInal Recap Design

Over the past several months we debunked five common myths in the financial services industry about profitability analysis projects. Let’s take a look back at the truths we revealed.

Myth #1 
“Our Own Team can Conduct a Profitability Enhancement Project as well as an Outside Consulting Firm.”

Conducting an internal profitability enhancement initiative is not uncommon for financial institutions, but the benefits of partnering with an outside firm should be considered prior to deciding to go at it alone.

Consider the visibility, speed, efficiency, scope and depth, and the fresh perspectives an outside firm will bring forward for your institution. No one is immune to having blind spots in their data and information, but with the help of a third-party consulting firm, you will drastically reduce the likelihood of overlooking pertinent information.

In addition, it is also important to remember how time-consuming a profitability enhancement project will be. An extraordinary number of hours is required to gather the data and information needed to complete a successful in-depth analysis. This inevitably pulls internal employees away from daily responsibilities and other projects. Working with an outside consulting firm not only ensures that this initiative is prioritized and handled in a timely manner, but also guards against decreases in employee productivity in the normal scope of their role.

The financial services industry continues to change rapidly through the adoption of new technology as banks and credit unions and compete for business with non-traditional institutions. An experienced third-party consulting firm can quickly identify and evaluate best practices and emerging trends which is critical in helping financial institutions devise strategies to maintain or enhance profitability for the long term in a post-pandemic world.

Myth #2
Increasing Non-Interest Income Produces Customer Attrition

The common fear expressed by many banks and credit unions is that increasing non-interest income, or fee income, will inadvertently lead to customer or member reduction. The fact is many financial institutions often struggle to take advantage of current market conditions or leverage concepts that can generate additional non-interest income for their organizations. Profitable opportunities are uncovered through an extensive revenue analysis, and once implemented, we have found little to no connection between increasing non-interest income and a decline in customers or members. Let’s consider the following ideas:

Competitive Intelligence is the process of collecting, analyzing, and understanding your financial institution’s markets and competitors. if you are competitively priced in your markets and you have developed solid brand equity, your customers or members will see your value and remain loyal to your bank or credit union.

Product Positioning is the process of designing and marketing your products to shape the minds of your customers or members to distinguish your products and their unique value from that of your competitors.

Price Elasticity is the degree to which the effective consumer desire, behavior, or demand changes in relation to the change in price of a particular product or service. Understanding the elasticity of your products is a critical element when devising or re-evaluating your product pricing strategies.

Revenue Scope and Channels - Most banks and credit unions have approximately more than 360 revenue areas that could be analyzed and leveraged throughout the organization as part of an overall non-interest income strategy that spans across both sides of the balance sheet, including loan products, deposit products and ancillary services, for both consumers and businesses.

Always remember that while fee income can improve your profitability, you do not have to sacrifice your corporate strategy, community-centric culture, brand, or customer satisfaction to do so.

Myth #3 
Staffing Reduction Promotes Greater Efficiency

When bank and credit union executives hear “improve operational efficiency, their minds typically go straight to staff reduction. While staffing generally accounts for 50% to 60% of a financial institution’s cost, cutting staff members does not guarantee greater efficiency. Operational efficiency is much more than employee head count. Another way to promote greater efficiency is allowing your financial managers more access and responsibility for their budgets. This gives them a better understanding of the institution’s financial goals from a staffing and operational perspective and empowers them to make decisions that increase efficiency. Even small changes to incremental costs, such as expensive customer or member incentives, office supplies, or coffee and snacks can add up significantly over time.

Myth #4 
Industry Benchmarks Yield No Meaningful Insights

Many community banks and credit unions believe benchmark data does not give them an accurate comparison to their competitors. Benchmark metrics can yield meaningful insights because in most cases, the data can be scaled downward or upward. When scaled appropriately, these metrics can provide enough of an apples-to-apples comparison financial institutions are looking for, providing relevant information for staffing and productivity.

The greatest benefit of a benchmark analysis is to understand how your financial institution compares to others. This data is a reliable source for financial institutions to use as a signifier of their overall health, productivity, and stance in their local market. Couple this information with an analysis of processes that drive your benchmark numbers, and your organization can build a roadmap for better performance over time.

Myth #5 
Change Leads to Immediate Productivity Gains

Changes to operational efficiency processes do not always result in immediate improvements in efficiency and productivity. Most financial institutions are not performance focused, but sales driven. While there’s nothing wrong with being sales focused, it’s important to understand the four main drivers that impact overall performance.

Sales is the main driving factor and managers are often reviewed on their sales performance with metrics such as number of loans sold, number of accounts opened, and number of deposits.

Productivity refers to the management of the logistics and the pace of the organization using metrics such as number of teller transactions completed per hour, how many loans can be originated in a given day or month, etc.?

Quality of work is critical to overall performance. If excellence and accuracy is the standard, then you will spend less time with rework which creates waste and hinders productivity. Consistent quality operational performance leads to improved productivity and better financial results.

Financial goals are important to executives, but they should also be important to cost center managers. Allowing your managers access and responsibility to financials often pays off in better performance and lowers overall operational costs.

Organizational change requires small adjustments over time, but these incremental changes add up along the way to create measurable impact. An abrupt change within an organization can create chaos. That’s why a measured approach with slow, methodical changes will better benefit the financial institution’s performance in the long run.

 

If you want to learn more about the truth behind these myths, check out our Profitability Enhancement Playbook, a 3-step guide to increasing your profitability and improving your efficiency ratio by leveraging competitive intelligence and business intelligence to optimize income, enhance operational performance and productivity, and minimize costs.



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Haley Locklier

Senior Consultant
Hometown: Suwanee, Georgia
Big fan of all things outdoors, Mexican food, Fleetwood Mac, and a good glass of Merlot.

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