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 into their overall profitability.
According to Bank Director the “small but rising” number of unprofitable community banks rose to 5.2% at the end of 2023, up from 3.5% a year prior, according to the FDIC’s 2024 Risk Review.
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 want to evaluate the profitability of his or her business accounts? Do you want to look at families as a whole, individuals, or 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, Amsive recommends an opportunity-based approach towards existing customer bases. Increase customer loan growth and reduce acquisition costs. Instead of using the "spray and pray" approach. you can successfully build deeper and stronger relationships with your existing ones. Through effective modeling, you will get a much better sense of which customers are truly unprofitable — and which ones are seeds of potential profitability that have yet to bloom.
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 the FDIC, community banks reported a net income decline of 7.1% for the 2023 year. 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 2023, be sure to compare it at least to 2022. 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've 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.