Do Banks Deserve What’s Coming to Them?

Recent legislation has created an environment where a "must-have" for any bank to have in its playbook is how to maximize revenue collection and identify revenue replacement opportunities. At CAST Management Consultants we have seen many of our clients become vigilant in what we term ERR or Revenue: Efficiency, Recovery and Replacement. We believe banks that most effectively execute strategies to bolster ERR will greatly enhance their chances of survival in these economic times. Essentially, these pillars form the foundation of our Revenue Enhancement Practice, which enables financial intuitions to identify new and innovative ways to increase and maintain revenue across their enterprises.

From our experience in working with many of the top 25 banks in the US.., banks can experience revenue leakage through various outlets. With all the merger activity over the past 10 years, it's not uncommon for the combined organization to suffer revenue leakage due to the integration or transition to new internal operating systems. Often billing codes are not properly mapped, volume is not captured or client profiles are simply not transferred to the surviving platform. And we seldom, if ever, hear from our banking clients that a customer called to let their banker know they weren't being charged for a particular service. Additionally, over the past several years, the industry has seen a morphing of retail and business banking products that has led to further unintentional loss. In many cases, products were not properly positioned and priced, which led to the client choosing the less-expensive and often less-feature-rich product simply because it was cheaper or in some cases free.

Now some might say that banks have no one to blame but themselves for these inefficiencies and lost opportunities, and in many cases, I would agree. However, over the past three years of working with clients to identify gaps in revenue collection, CAST has seen a heightened sense of urgency around closing the cracks in the armor. There must be continued vigilance around ensuring operating processes, procedures and controls are in place to maximize revenue efficiency and recovery.

Now turning to another juggernaut the banks must deal with, over the past few years Congress has intervened and is now more aggressively regulating what banks can charge for particular services. The "spirit" of the Durbin Amendment was to shift much of the revenue from the banking sector to the retailing sector in hopes that retailers would lower prices, and pass the savings on to consumers. To date, there is little to no evidence this dynamic has occurred (nor will occur), and to make matters worse, the Durbin Amendment has forced banks to identify new ways to make up for lost revenue, including considering new fees such as the controversial monthly debit card fee. Let's not forget banks, like any other corporation in the U.S., are accountable to shareholders and expected to make a profit and pay dividends. Earnings announcements can often present a double-edged sword, as the same consumers who are shareholders and cheer robust earnings also cringe as they contemplate being overcharged by their bank. So when many of the top-20 banks are forced to retract a proposed monthly debit card fee due to a tidal wave of consumer backlash, it is a shining example of how difficult it may be for banks to implement new fees.

All that being said -- yes, the financial services industry has gone through a seismic shift over the past three years, and yes, banks must innovate to survive. This brings me to the third pillar of a coordinated revenue strategy related to revenue replacement. One avenue that many banks have not explored or too few have implemented is related to Alternative Financial Services (AFS). Targeted to both the un-banked and under-banked, a well-coordinated and executed AFS strategy can be a rich source of new customers and new revenue streams. Often these products offer the potential for high-margin interest and non-interest (fee) income, a fact not lost on many savvy retailers that have aggressively entered, and now dominate, this space. A recent report from the Center for Financial Services Innovation indicated the under-banked consumers are 60 million strong and they spent an estimated $45 billion on banking fees and interest in 2010. Most of these consumers are untapped by the banking sector. This lever of revenue growth represents a new, profitable revenue stream, from an untapped, plentiful market segment that better services the broader consumer market.

We believe the time is right for banks of all sizes to be pursuing concurrent, complementary strategies focused on revenue efficiency, recovery and replacement. The combination of market conditions, coupled with legislative restrictions, compel every financial institution to be steadfast in its pursuit to realize revenue earned and innovate for new revenue growth. We believe the confluence of these forces, if properly understood and managed, will create a positive growth event for the banking sector as a whole.

Jack Leach is Executive Vice President and Principal of CAST Management Consultants, which provides management consulting services to companies within the financial services industry.