You probably just agreed with me. Line of business management isn’t customer friendly, but we’ve built an entire system around it, and it’s not likely to go anywhere. So, what are we to do with managerial accounting? More on that later.
Customers make decisions every day about what to buy, and what not to buy (or more often, what to ignore). A wise marketer once explained the greatest challenge in getting customers to buy (or buy more) of your product:
"Most people don't care about most products."
To you, me, and just about everyone else, most marketing messages are just noise. In 2018, the United States Postal Service delivered 77.3 Billion pieces of “marketing mail” to approximately 150 Million US households. While the percentage of junk mail originating from financial firms is hard to nail down, we intuitively know how aggressively banks, credit card companies, and in the last 10 years, personal loan companies have become in direct mail solicitations.
But the noise doesn’t end in the mailbox.
Social media, traditional media, digital media, direct response, paid search, the list goes on. There are more marketing channels and methods than ever before, and the result of all this distribution is simple: there are more ways for your competitors to reach your customer before you do.
How are we defining when a consumer is “your” customer? A long-time reliable indicator was the percentage of clients selecting you as their “PFI”, or Primary Financial Institution. Historically, that meant you could count on payroll or direct deposit coming in, checking account fees and swipe revenue, and a loan or two, maybe even a credit card or mortgage.
Let’s examine today’s environment. A customer may still use your bank as the hub of their financial world, but the revenue streams associated with that cashflow-centric model are shrinking. Customers are bombarded daily with solicitations to move their financial life elsewhere. Try this mental exercise: For each category, think of a competitor that has no brick-and-mortar presence that is soliciting your customer (or you for that matter) daily, weekly, and/ or monthly basis:
Auto loan/ lease___________________
High-yield Savings/ MMA/ Term deposits____________________
Demand Deposits/ Peer-to-Peer____________________
Retirement/ Wealth/ Long-Term Savings_____________________
It should not have taken you more than 10 seconds per category to name 1-2 market leaders who are eating your lunch every day. If it took longer than 10 seconds, then stop reading this blog now and go survey your co-workers with the same question, then Google the names of the companies in their responses.
More likely than not, you are already acutely aware of the tide of disruption and disintermediation aimed squarely at your customers, be they loyal or casual in their relationship with your bank.
For your customer, setting up money movement from their checking account to their mortgage servicer, credit card company, or student loan company is easy. In fact, moving money across financial firms has become so painless that your customer no longer has an incentive to bundle their financial lives at one institution based on convenience alone.
Consider the following… is it easier for your customer to set up automatic monthly withdrawals from a checking account at your bank to a captive auto finance company, or to set up a recurring monthly transfer from their checking account to an auto loan if both are at your bank? This should be an easy question, but in many cases the former is actually easier than the latter. The friction in our legacy core and digital delivery systems mean it’s easier to give an alternative company a routing and account number and set up monthly ACH than it is to link accounts, sign disclosures (customers probably have to visit the branch for that) and send money monthly.
As an industry we are pouring dollars into solving the digital friction issue, but ultimately, we will only end up at parity status with outside competitors. That means customers will demand more than an easy user interface before they give preferential treatment.
So what is a besieged bank to do about it? Let’s return to managerial accounting.
Banks are organized around lines of business, each with a discreet annual budget, goals, transfer costs, allocations, etc. It’s an incredibly complex system and it works well as an incentive management and accountability platform. Unfortunately, the system that was built to serve the enterprise does a terrible job in serving the customer.
If your business model succeeds when customers deepen their share of wallet and broadens their product adoption at your bank, then it’s time to start thinking horizontally. Customers have financial lives, not financial products, and the banks that can establish managerial accounting structures and internal systems that not only allow but facilitate customer rewards across product lines will win.
Start with a simple exercise, create an ongoing (i.e. not a limited time promotion) bi-lateral reward system between two lines of business (say credit card and mortgage, if those are growth areas for your bank). Start with the customer incentive to bundle, giving an incentive on both products, then work backward on the internal transfer costs, the marketing messaging, cost allocations, etc.
When you start with the customer, you are doing what your competitors are doing every day- figuring out how to win. Your customers don’t care about your legacy systems, your P&L, your annual bonus, or your compliance and legal constraints. Consumers will inevitably follow the path of least resistance, which means you and your teams will need to do the hard work of paddling upstream in your organization to make a horizontal, customer-centered rewards system into reality.