In an American Banker article, Creating a Bank that’s Both Cool and Fair, Chris Skinner poses a question, “What does ‘cool’ mean in banking?” The question I would ask is, “How do you create a ‘cool’ and ‘profitable’ bank?” Transaction fees, interchange fees and other non-interest income are often the difference between bank or credit union profitability and losing money. Regulators, neo-banks, new competitors and educated consumers are quickly forcing the end of traditional banking non-interest income.
Becoming “cool and profitable” in banking will involve a complete rethinking of how a bank or credit union operates and the business they are in.
Let’s Start with Profitability
Banking is no longer about money, it is about data and how that data is used. We hear the term “big data” and study after study has shown North American banks and credit unions have failed to realize or capture anything close to the potential that big data poses to offer. Why? Data is meaningless in its raw form. Instead of trying to capture all your data and then try to do something with it, try focusing on a specific goal that requires limited data. Start small and as you gain experience, understanding and positive results, expand the use of data.
For example, you could start by using data to help you identify profitable customers and more importantly, non-profitable customers, and what it will take to get them profitable. According to Bank Director 40% of retail bank customers and credit union members are not profitable. Optirate says, as many as 80 percent of customers at community banks or credit unions generate operating losses, with nearly all profits attributable to only 10 to 20 percent of customers.
Can your bank or credit union sustain subsidization of 40% to 80% of your customers or members? Regardless of what number is correct, there is no doubt subsidization is occurring, which will ultimately lead to your profitable customers and members being at risk.