By John J. Coffey, C.P.A. and Gene Palm, www.profitres.com, originally published July 2005, ABA Bank Marketing

Asking the Right Questions

            Life is all about making decisions.  Some decisions are crystal clear.  You have all the information you need and the decision is easy to make.  However, many times we must make decisions without having all of the information we want or need.  The information may be there to help us make a good decision, but it is not properly organized.

            This is especially true in the banking industry!  For instance, what if one of your customers comes into a branch and says that he wants a $150,000 unsecured commercial line.  He’s already done some shopping and he tells you that he can get a loan from your competitor for 2% less than your bank’s interest rate.  Should you give him the loan and not make as much income or should you tell him that you will not give him the loan and possibly lose all of his business?

You need a lot of information to make this kind of decision.  For instance, you need to know some things about your customer:

§        Is this a profitable customer?

§        How many relationships does this customer have with the bank?

§        How long has this customer been with the bank?

§        What are the total deposits and total loans the customer has with the bank?

You also need to know some things about the product the customer wants to purchase:

§        Is the product profitable?

§        What is the average balance and the break-even balance?

§        What is the weighted average interest rate?

§        What is the weighted average funds transfer pricing rate?

§        What is the average income generated by this product?

§        What is the average cost (non-interest expense and provision for loan losses) of maintaining this product?

Finally, you need to know what will happen to the customer’s profitability if you add this account to the customer’s portfolio of products.

Getting the Right Information

            Your CRM can help you aggregate information on your customer by householding the customer’s accounts.  The householding algorithms in your CRM may match the customer’s last name, address, Social Security Number, or any other linked field to develop a unique “household match key”.  Once this has been accomplished, you can find out reams of information about your customer, with the exception of one crucial question – are they profitable?

            To find out if a customer is profitable, you need to have the product profitability within your CRM reconciled back to your financial statements.  This involves the identification and assignment of various types of income and expenses to your products.  This is an art as well as a science!  A bank typically uses cost-accounting software and /or profitability consultants to help them accomplish this complex task.

Making the Right Decision

            Once you have those in place, your CRM has all the information it needs to help you make profitable decisions regarding customers’ portfolios.  The beauty about a CRM is that this information can be distributed throughout the entire bank!

In the case of the customer who wants a $150,000 unsecured commercial line for 2% less than your regular interest rate, you can use What-If analysis capabilities in your CRM to see that:

§        The customer is one of your most profitable customers, has been with the bank for 10 years and has 7 accounts with the bank, 6 of which are profitable.

§        An unsecured commercial line has an average balance of $38,664, a break-even balance of $11,328 and the weighted average interest rate is 1% more than what the customer wants to pay.

§        A $150,000 unsecured commercial line for 2% less than the bank’s current interest rate would still result in a profitable account.

§        If you added this account to the customer’s portfolio, the profitability of the entire portfolio would increase by 12%.

§        Therefore, it is a good decision to sell this product to this customer at this time with this interest rate!

With the right information to answer the right questions you can make the right decision!

John J. Coffey, C.P.A. and Gene Palm are the principals of Profit Resources, a consulting company that specializes in MCIF technologies.  © Profit Resources, Inc. 2006