• Good Customers Are Not Always Profitable Customers

In general, how would a bank or a credit union define a ‘good’ customer or member? One that does not overdraw their checking account on a regular basis? One that makes their loan payment on time, every time? One that has their primary relationship with the institution and uses multiple product offerings? One that takes advantage of new technology that benefits both the customer and the institution? All of these are possible descriptions and many other definitions could be offered. When the question was posed to one bank, results varied and were summarized into 12 different responses (https://csbcorrespondent.com/blog/who-are-best-customers-your-bank), and many were related to the profitability of the customer to the bank.

The next question would then be defining a profitable customer or member, and while the answer there would seem to be obvious, measuring such can give a different result than expected. One marketing metric used to measure customer profitability is Customer Lifetime Value or CLV. Using actual data and the cost to acquire/keep a customer, their value can be calculated and even used to make predictions about the profitability of future and/or similar customers (http://www.customerlifetimevalue.co/).

When looking at both perspectives, good and profitable, a good customer/member may not always be a profitable one, and this dilemma is faced by all providers of goods and services. Using some of the definitions above, a customer that has a single checking account, makes physical deposits that are enough to cover his checks written and never overdraws his account is a good customer but not very likely a profitable one. The average annual core processing cost for that account alone could be greater than the value of the funds that are on deposit for the account, even more so if the checking product has a balance requirement, and the account always has just enough funds to avoid the monthly fee. Likewise, a member that rarely uses her ATM/Debit card will generate little interchange income for the credit union that incurs expenses to provide and service the card.

For financial institutions, the types of products and services offered can drive the degree of profitability. For those offering trust, wealth and investment management services, for example, the likelihood of increased profitability is greater, sometimes higher than that of the rest of the institution. Clients with the amount of assets to utilize these services may well use other products and services that have a favorable overall profitability, but some areas, including trust, wealth and investment management itself, can suffer from a fee income perspective. These services generally have stated fees, but it is not uncommon for these to be negotiated, especially the higher the value of the portfolio. The possibility exists that one client with $5,000,000 will generate less fee income than four clients with $1,250,000 due to negotiated fees.

Likewise, commercial relationships are generally profitable from an overall standpoint but can impact fee income for certain areas. Due to the competitive nature of the business, commercial loan fees are typically negotiated, even if a fee structure is in place. Securing these loans can lead to other products and services being used but the possibility of hard-coded fee waivers and other refunds, to retain the relationship, can have an impact. For instance, an officer may request that all checking account and service fees be waived, regardless of why the fee would have been assessed, in order to ensure the customer relationship is not negatively impacted.

So, banks and credit unions should review accounts on a regular basis to determine which ones are costing more in expenses than they are generating in profits, review products and/or services that may be available but not in use by the customer or member, and then contact them to discuss these offerings for potential use, with the goal of turning as many good ones into profitable ones as possible.

Barry Payne

Hometown: Kennesaw, Georgia
Alma Mater: Kennesaw College and Georgia State University
Fan of Georgia Bulldogs football, Atlanta Braves and Falcons. Loves Italian and Mexican food.