Banking profits are up. Back in the summer, banks like HSBC and BNP declared record profits. Lloyds bank returned to profit promising the UK government a return on its investment, and the U.S. banking industry earned $14.5 billion during the third quarter of last year. The FDIC went on to declare that absent a “$10.1 billion quarterly net loss at one large institution that had a $10.4 billion charge for goodwill impairment,” the industry’s third-quarter earnings “would have would have represented a three-year high.”
In just about all these cases, there is one common feature. Large reductions in loan loss reserves are flowing directly to the bottom line. In the case of both HSBC and BNP, those provisions fell by around 50% and were declared to be back close to pre crisis levels.
It is perhaps not much surprise, therefore, that at a recent sit down with several retail banking CRO’s from the leading banks in the UK, bad debt and risk prediction wasn’t top of mind. Of course, they haven’t stopped worrying about it, but it wasn’t seen as the “next wheel to fall off the bus.”
Two things are weighing on their mind. One is no surprise: regulation. Perhaps more specifically, the uncertainty of new regulation and the hoops banks will be asked to jump though in supplying data and information as regulators become more inquisitive.
The second relates to the problem that falling provisions hides: increasing revenue—especially because the temporary relief from lower provisions is fading fast. In retail banking, this largely boils down to growing balances, which naturally leads into a conversation about marketing and cross-sell; somehow you know the answer isn’t another credit card or instalment loan campaign. It means that banks must get cleverer in the way they communicate with customers.
Retailers have long known this. The holy grail of individual marketing is to provide the right incentive to the right person to induce a purchase—and ideally one that might not have happened without the incentive. At the heart of the problem is the intelligent use of data to understand both what a person might buy and when. A recent report on the US PBS channels about Sam’s Club makes interesting viewing (starting around minute 21).
What lies behind the sentiment that Sam’s “understands me” is the use of purchase data to predict the what and when, and then either just bring the low price to the person’s attention or offer an incentive. Now banks also have lots of data. They might not have detailed purchases like Sam’s, but equally Sam’s doesn’t know how much you earn or how much you might also spend at Costco.
In other words, banks have lots of interesting data that can be used to anticipate customer needs. The leap that I think needs to be made is to move from selecting you or I for a card offer to encouraging me to use the cards I already have. Retailers love to build loyalty; so should banks. Wouldn’t a communication that offers better pricing or other reward for a hardware purchase over $300 seem like a more valuable and relevant offer if that event could be predicted—and it can be. Just like it can be predicted that you might need a car repair in the next 3 months. Which might be cause for a car loan offer.
FICO’s work with clients to explore these types of events has shown that many are eminently predictable. That means you can build a campaign around them in the same way that Sam’s does, using the same technology to reward its customers. And there is no reason to limit the thinking to credit; the same logic could apply to any other personal finance product. Who would have thought it!
What’s clear is that if banks are going to rebuild retail profits, it isn’t going to happen only because there is a surge in new products take-up. In part, they are going to have to figure out a way to get customers to use what they already have, fighting for market share just like their colleagues in retail do.