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The Many Ways for Banks and Credit Unions to Measure Profitability

Having a clear, accurate understanding of overall profitability is essential when making strategic business decisions in any industry. It can be particularly difficult for the financial industry to gain this insight, as a 2018 survey from Temenous and Accenture found that profitability was the biggest challenge facing banks today.

One reason this can be challenging is because there are many different areas across which a bank or credit union can evaluate profitability, including individual accounts, customers, relationships, products, officers, and branches. When and how you measure profitability for each of these will depend on your organization’s business priorities.

There are few questions to ask yourself when determining profitability on a macro level, and for specific segments of your business.

1. What should be considered when determining customer profitability?

When determining a customer’s profitability, it’s important to determine the parameters of the relationship. For instance, do you want to know how profitable his or her personal accounts are? Or, do you also want to evaluate the profitability of his or her business accounts? Do you want to look at families as a whole, or just individuals, or just businesses? What customer relationships are you considering such as households, loan guarantors, account signers and other personal-to-business relationships.

By defining these parameters, you’ll be able to compare customer accounts and relationships in a way that makes sense, and implement changes based on the highest areas of opportunity. In terms of corporate customers, Bain & Company recommends segmenting customers into profitability tiers, and using these tiers to determine actions at each stage of the customer lifecycle, from onboarding through ongoing client management. For example, banks could price deals and create account plans for customers according to their tier levels. This is known as customer-centric pricing.

2. Are products priced appropriately and competitively?

Measuring product profitability is essential for determining if you have the right pricing structures in place, or if you need to readjust to be more competitive in your market. By viewing and assessing the profitability of each of your products, you can identify which ones need to be priced higher or lower, or any other changes that should be made.

For example, if you find that a particular product is underperforming compared to others in your offering, you may implement new service charges to grow revenue and increase overall profitability for the product. You can also make the choice to eliminate products that are not profitable in order to make space for new products and services.

3. How do the branches stack up against each other?

According to data from Peak Performance, 48% of bank branches today are not profitable, and of those, almost 60% are operating at a loss. That’s why it’s important to keep an eye on all of your branches; a comprehensive profitability comparison can shed light on key differences between each.

You can then create an action plan to address the shortcomings of your low performing branches so they’re more in line with your high performing ones. Take a look at your top branches: what are they doing right? How can you take some of their strategies— in terms of pricing, product offerings, customer service, etc.— and apply these to your bottom branches? But, know that what works for one branch may not work for another; you’ll also need to take into consideration the geographic location and customer demographics of each.

4. What is the profitability timeline?

Over what period of time do you want to evaluate your bank’s profitability? Do you need a monthly, yearly, or multi-year report? This all depends on your bank’s goals and cadence for implementing strategic business changes. If you’re looking to identify gaps in products and accounts over the year, a monthly or annual report will be most helpful, but if your shareholders need to see how the bank performs from year to year, you’ll need a bigger picture report showing multiple years.

Either way, profitability data doesn’t have value if it is isolated; if you’re looking at a customer’s profitability in 2018, be sure to compare it at least to 2017. When your team is aligned on the timeline you’re evaluating, you’ll have a cohesive understanding of business goals and the strategies for achieving them.

5. What marketing tools can be used to improve profitability?

It can be tough to know where to start after you’e identified profitability areas of improvement. That’s where marketing tools can come in handy. The 360 View growth platform includes a profitability module that provides reports ranking customers, products, and more, according to profitability. It also includes a segmentation feature that can be used to group customers with similar profitability levels and assign them to specific marketing initiatives and loyalty programs. We give you the data you need to take the right actions to improve profitability across all your business areas.

Using Profitability Insight in Real Life

Want to know more about the profitability capabilities of the 360 View growth platform? Check out this case study on how Providence Bank & Trust used our platform to gain profitability insight and implement real, positive change within the organization.