Another Tip on Improving Non Interest Income and Margin

Obviously the fewer the waivers the more the income. Easily said, but how can a bank lower the waiver rate? Yes senior management’s lead sets the tone for the bank, but anyone who has served as a senior manager has figured something out – just because you are a senior manager doesn’t mean you have a magic wand. A manager cannot and should not control every decision maker in the bank. Here are some ideas to help relationship managers reduce waivers and special rates.

Establish and communicate an overall pricing strategy for fees and rates that is fair to the customer and the bank, including the cost of competitive salaries and an acceptable return to the shareholders. Be consistent as much as possible. Bank employees want to do “the right thing,” but inconsistency confuses what the right thing is. It also breaks their confidence and makes them hesitant, something the customer picks up on. For highly profitable relationships that warrant special pricing, establish a structure that is systematic and not situational. Guidelines for when, why and for whom pricing can be modified will provide consistency and ensure the truly appropriate exceptions remain few and are clearly distinguishable.

Banks sometimes offer incentives for meeting pricing and waiver targets. While this works well in some cultures, in others, it sends the message that compliance is optional, only applies if the employee wants more money and therefore is somehow unfair to the customer. Other banks clearly communicate the strategy and exception guidelines making it a fundamental expectation of the job description. We have also seen banks create a waiver pool or percent of targeted pricing for the relationship managers. This leaves them empowered in applying the exceptions and therefore may reduce push-back. Each bank will want to choose what fits its culture and management style.

Measure pricing exceptions. The statement, “what is measured gets attention” applies only if management follows through. Once a pricing strategy and the exception guidelines are established, measuring, monitoring and communicating results are essential. If NSF, Analysis, Loan Origination, Late Fees, etc. are not a necessary and fair component of the bank’s business model, then eliminate them. Making a commitment to consistently follow the pricing strategy and exception guidelines will help ensure the bank meets its financial goals.

About the Author

Kelly Karns is President of Karns Profit Improvement®, an independent Oklahoma-based financial consulting firm that has specialized in growing the profits of community banks in a multi-state area since 1986.

In Order for Customer Service To Be Great, It Cannot Be Free

Community banks are known to give attentive and personal service. For the most part, these banks have attracted and developed employees who have an authentic and genuine concern for the well being of others. Helping others is often what attracts individuals to work at a bank. Employees readily understand the contribution that great customer service makes to a bank, its customers and its community. Unfortunately many bank associates have created a culture that confuses “great service” with “waived fees” or “special rates.” Given the current economic pressure on banks, it is critical for employees to learn this distinction.

Bank associates who deliver genuine customer service expect and should be paid competitively. If the bank does not properly charge for its services, it cannot afford to properly pay the associates who deliver the service. On a larger scale, if the bank is not adequately compensated and the bank owners do not receive the level of income they seek, they may eventually find it necessary to sell the bank. The result has the potential to reduce the service levels to customers and will likely eliminate important well paying jobs in the bank. No community will want to lose a bank’s home office.

Banks should be sure their pricing is reasonable and then confidently and expectantly collect the revenues for ongoing services. When necessary, employees can connect the concepts for the customer by explaining that the rate or fee is what actually pays for the employee to be available to consistently give premium service.

For example, no reasonable consumer would expect a car dealer to give them free or consistently discounted repairs (non warranty) because they purchased the car there and might buy one in the future. The payment for the car covered the purchase transaction and warranty – that’s it. The dealer has to be compensated for the parts and service going forward. Banks can change their culture to one that will sustain competitive salaries and the bank’s longevity when the associates learn their diligent and caring service deserves and requires compensation.

About the Author

Kelly Karns is President of Karns Profit Improvement®, an independent Oklahoma-based financial consulting firm that has specialized in growing the profits of community banks in a multi-state area since 1986.

When bank employees accept that the bank’s rates and fees are fair and commit to maximizing the bank’s financial success, holding fast on pricing becomes a cultural norm. Yes there are key relationships and other unique circumstances, but at these banks they stay exceptions. It also goes without saying, senior management sets the tone by example and expectation.

Although we all want “the best deal” we can get, most of us understand the concept of having to pay for a product or service. When there is an ongoing relationship with continued interaction and service, there is an added ingredient to our definition of “the best deal”. Banking is very much about these kinds of relationships and on-going interaction. As such, customers choose to deal with a bank they trust and who they believe will treat them fairly. While the price must be reasonable, having the lowest possible price becomes less important.There is a dynamic most of us have noticed as a parent or a child. When a child asks for something, a caring, calm and confident “no” is usually not resisted with much intensity. On the contrary, when the parent is wavering internally with himself/herself, wondering if he/she should say “yes,” the child reads it immediately. At that point the child is like a shark smelling blood and goes after the parent with a barrage of convincing arguments.

Customers are not children and should not be controlled. However, the issue of seeking something from someone who can grant it is the same. When a bank employee and customer discuss a rate or a fee, the customer can readily tell if the employee is hesitant about the fairness of the price. When the customer sees a calm, confident employee who believes it is a fair and equitable price for both parties, the customer usually thinks like this: “I trust him/her to treat me fairly, and if he/she thinks this is a fair price and is what the bank needs, I am ok with it.” On the contrary, when an employee is hesitant about the price, the customer readily picks up on it and wonders why the employee would charge them so much if the employee doesn’t even think it is fair. They feel taken advantage of and show resistance. Even if they accept it, the trust relationship begins to break down.

This is not about manipulation. It is truly about fairness. It is the employee believing the customer receives a valuable service and that the bank must receive adequate compensation to pay its employees and owners. Banks thrive when they set reasonable prices that are fair to both parties and then expectantly and confidently charge the customers. It keeps the trust relationship intact and provides a necessary income stream for employee salaries and shareholder returns. Whether it is an interest rate, loan fee or service charge, bank employees who develop confidence that the price is reasonable and who stay committed to the bank’s financial success will see dramatic declines in special pricing.

If the bank has a major cultural problem in this area of special pricing, senior management will have to give employees permission to lose a few relationships that are dragging down the whole bank. Most banks with a higher ROE adopted this concept along the way. In the end, confidence and commitment make a big difference.

About the Author

Kelly Karns is President of Karns Profit Improvement®, an independent Oklahoma-based financial consulting firm that has specialized in growing the profits of community banks in a multi-state area since 1986.

Changes to Bank Account Pricing Structures Are Inevitable

Continued low interest rates and the high cost of technology are causing banks to restructure deposit account pricing. Here is what you have been able to find fairly easily with a local bank:

Free checking with no minimum balance and unlimited check writing, free debit/ATM card, free internet/mobile banking and free unlimited on-line bill payments. Why must that change?

Let’s say you have a checking account with all of the above services and that you average a $1,000 balance in the account. (That is an “average” balance, even after you pay the mortgage, car payment, etc.) For the last several years, the bank has earned as low as one tenth of one percent on this $1,000 but let’s say they averaged earning 3.5%. That is a total of $35 per year, less than $3 per month. A typical community bank will have hundreds of accounts that average less than $250 and earn them 75 cents or less per month. How then do the banks pay all the expenses for the buildings, employees, technology, audits, compliance exams, etc? Historically it was partially from overdraft fees and payments from retailers when you use your debit cards. The banking service and pricing structures are evolving as they do over time in all industries. Why now and what caused it?

In this soft economy, customers have dramatically reduced the number of “hot checks” on over drawn accounts. In addition, new legislation is reducing what banks can charge retailers for processing your debit card. This along with extremely low interest rates has greatly reduced bank revenues. At the same time, customers look to banks to provide increasingly expensive technology (mobile banking, remote deposit capture, on-line payments). Since 2008 community bank costs have also been impacted by additional regulatory mandates. For these reasons, banks simply cannot continue to offer all of their deposit transaction services for free.

The evolution has started and will take a few years to work its way through the banking industry. Pricing will come in a variety of forms. Some banks may continue to offer a “free” basic account but you will pay for each of the additional services you choose to use (debit cards, mobile banking, etc). Other banks may bundle services with a single price. You are also seeing the return of minimum balances to avoid fees. When the changes affect your account, just know your bankers are local business people trying to run a profitable enterprise just like the restaurants, cleaners, farmers, plumbers and auto mechanics. Some well meaning “advisors” will tell you to flee your greedy bank and find one who will treat you better. But do you really expect all of these services to be “free”? Banks will and should keep prices competitive. However, to survive and give you quality service, they must also be fairly compensated. The alternative is that you may eventually lose a valuable asset to your community.

About the Author

Kelly Karns is President of Karns Profit Improvement®, an independent Oklahoma-based financial consulting firm that has specialized in growing the profits of community banks in a multi-state area since 1986.

Do You Really Think Your Local Bank is “Evil”?

For the last three years everything you have heard about banks has been negative. The criticism is all over the board. Banks: ruin lives by lending to people who cannot pay it back; mislead borrowers; gouge deposit customers with fees; pay themselves huge bonuses; refuse to lend money to anyone; take your tax money because they are broke and are in most respects just lousy cusses.

Stop and think. Does that really describe your experience with the people that work where you bank? Probably not. The local bank employees are your neighbors and friends. In addition to serving you at the bank, you see them serving on local civic boards and volunteering all over town. You also find your bank to be very generous in supporting local charities and events. The negative stereotype given your local community bank is not just an unfortunate label put on their employees. It has caused your community and our country real financial harm. Here is how.

First, most of us are rightfully of the opinion that there has been irresponsible and wrongful behavior by some financial institutions. However, the media and politicians have made little effort to make the important distinction between your local community bank and the “banks” making all the news. Insurance companies and brokerage firms were never thought of by the average consumer as “banks”. However, they were given this label during the 2008 financial crisis. In addition, states that the ten largest banks in the United States held 84% of total assets for all banks in the U.S. as of December 2010. The other 7,647 banks held only 16% of banking assets. The local community banks simply do not have the size or ability to impact national markets or ruin the economy. They generally compete in smaller markets where customers readily distinguish between honorable and dishonorable behavior. Your local community bankers are known by you. You see them around town and interact in many circles with them. This alone discourages them from being tempted to mistreat you as a customer.

Having been included in the same category as these larger institutions, some of which were never “banks,” your local community bank is now forced to operate under greater legislative and regulatory requirements that actually take away their ability to make loans they would otherwise like to make. The financial industry is increasingly becoming nationalized and is taking your local community bank along for the ride. Having the government run banking, or any industry, gives the business less freedom to be innovative and apply judgment to decisions that impact you, the customers. It means their ability to be profitable is also impaired which in turn makes it more difficult for them to remain independent. If this continues, there will be fewer local bankers to respond to your service and lending needs, fewer well paying jobs at home and the loss of a major source for charitable giving in your community.

Here is what we can do to help our communities and our national economy. Do not take all the news at face value. Dig a little. Ask questions and think independently. Take personal responsibility for our financial and other decisions. Looking to our government to protect us from financial loss will actually diminish our economic opportunity. More importantly, it is a path that will eventually erode our freedom.

About the Author

Kelly Karns is President of Karns Profit Improvement®, an independent Oklahoma-based financial consulting firm that has specialized in growing the profits of community banks in a multi-state area since 1986.

The Pro’s and Con’s of Rewards Checking Programs

Because we have had the opportunity to evaluate the results of several Rewards Checking programs, banks occasionally seek our opinion. Many banks offer the product, and some well-managed banks will tout its success. Like most services and products, results vary depending on cultures and markets. That said, our experience indicates Rewards Checking programs have many pitfalls that we think the banks can and should avoid.

It is important for a bank to be very clear how the program meets specifically defined goals. Banks will be told that the program will increase core deposits, bring new relationships, increase fee income and increase profits. As nice as that sounds, it is ambiguous. In our opinion, combining all of the program’s typical features into one account is fundamentally flawed. One major vendor reports the collective average balance for 55% of the accounts in the program is only $800. Attempting to raise NSF and interchange income in a product that highlights high rates is not an optimum combination. To the extent that regulators will continue to allow banks to do so, NSF income is more profitably acquired through other products and programs. If the goal is to raise deposits, it can be done at lower rates with special promotions or enhanced Money Market accounts without paying a vendor. Free ATM’s are important to some targeted customers but can be accomplished with less expensive strategies. If the goal is to attract specifically identified customer niches, energize the sales force or strictly play defense, elements of the program may be a fit.

Using rewards checking as a panacea to the hard work of a focused and effective marketing plan will prove to be expensive. In attracting new relationships with the program, you will want to know the type of customer you are trying to attract and specifically what about this product will make them choose your bank over another. Features of the product that are not essential to those specific objectives should not be included. Since the cost is high, it is also important to identify and minimize the features that will make existing customers migrate from current products to this one. The challenge is to find the balance of treating existing customers fairly and incenting new ones.

Because they did not have clear objectives and modify the program accordingly, we have observed executive teams reflect buyer’s remorse. Some bankers already under contract cannot articulate the current goals of the program. We have also seen some delay the program for months after signing and had one CEO say his cheapest out is to just pay the monthly fee for the term of the contract and never actually offer the product. It is especially common for banks to dramatically lower rates and tiers after they are in the program for a period of time, and some freeze it altogether. Sadly, this is after having converted a high volume of existing accounts and deposits to the more expensive product.

Even though some will not “qualify” for all the benefits, typically every customer is eligible for this higher cost checking account without barriers to prevent migration. The typical analytics and standard reports we have observed do not isolate the real and identifiable increased cost for higher interest, additional vendor expense and lost fee income on the balances and accounts that migrate. These costs dilute the marginal profitability of the newly acquired relationships. The standard reports typically do not include calculations reflecting how the new program impacts ROA and ROE. Our research reveals the programs generally have a dilutive impact on these ratios as a result of lower margins, fewer fees and increased expenses, especially from the migration of existing balances. It is typical for existing accounts to make up at least 50% of the total at the end of a year and still 30% at the end of three. Although nominal net income does increase, there is a major difference between increasing nominal income and increasing the return on equity. Attracting large deposit balances on which the bank receives any amount of net income from the spread and fees improves nominal net income. However, when capital to support large balances with low margins is taken into account, the returns often do not look nearly as attractive. Deploying excess capital for positive nominal income would not be bad if it were a temporary event. But when you consider it comes with a long-term contract and was made with a big marketing splash, it can result in an inefficient use of your capital for an extended period.

If you feel this product will profitably attract new core customers, some additional terms will help you mitigate the negatives while achieving your goals. These would include establishing minimum balances to qualify for the ATM fee benefits or other services such as mobile banking or bill pay as well as minimum balance fees. This and requiring direct deposit will reduce migration. Because a product based on a high interest rate should be primarily designed for new relationships with more than minimal balances, these modifications will not serve as a deterrent to customers seeking the higher rate. It will prevent you from having low balance accounts with higher expenses from an additional vendor payment and rebating ATM fees with limited offsetting income. It is especially important to find the minimum balance tier and rate that will enhance sales efforts for the targeted market without migrating substantial existing accounts to the new product. You may even find you have the resources to build your own product internally and deliver the majority of the important benefits without the cost of a new third-party vendor.

Although the vendor agreements and pricing seem to have improved over time, they still have some language you may want to negotiate. Most agreements lock a bank into this program and have penalties or restrictions against a bank’s ability to discontinue the product or substitute it with similar ones. For all of these reasons, this is a decision banks will want to get right.

About the Author

Kelly Karns is President of Karns Profit Improvement®, an independent Oklahoma-based financial consulting firm that has specialized in growing the profits of community banks in a multi-state area since 1986.

Our Local Bank Is More Important To Our Community Than We Realize

Our local community bank is a key pillar in our community’s prosperity and quality of life. Even though we can perform so many transactions electronically from our homes or smart phones, most individuals and businesses find great value in being able to walk into a bank for transactions or to meet a financial service need. We rely on the convenience of numerous payment services (checks, debit cards, online payments), cash availability at the bank and ATM’s, and a safe place to hold and protect our money. Our community bank gives us knowledgeable employees to help us choose from and structure a variety of accounts (individual, business, trust or retirement account) and offers us choices in types of accounts to maximize our interest income and/or lower our costs.

The community bank is also our primary source of funding for our cars, homes and businesses. Although we may get turned down from time to time, if it really is smart for us to borrow the money and we can predictably pay it back on time, the bank usually lends it to us. In particular, our community bank is the best source for our business loans since they know us better than anyone. It has always been a source for reliable financial advice.

What is probably most overlooked are the rewarding and desirable jobs the community bank provides our neighbors and friends. Quality jobs in a community lift all other businesses and preserve property values. The community bank’s educated and skilled employees routinely give their personal time to local civic, educational and charitable organizations. Local banks not only encourage their employees to serve their community, but the banks also allow employees time off to do so. In addition, community banks are consistently among the highest financial contributors to local events and charitable needs. Whether it is the little league team or the largest local foundation, when we make a list of donors, who doesn’t put the community bank at the top of the list?

Yes the local bank gets paid by us, the customer, and they appreciate having our business, but this goes deeper. A family banking heritage that dates to the 1920’s, having been a banker for over 20 years and now working as a banking consultant have allowed me to see dozens of banks from the inside out. I have first-hand knowledge of bank employees and owners personally lending or giving money out of their pocket when they knew a customer in extreme need would not be able to pay the bank back on time or at all. I have seen bank employees and owners personally fund and personally labor to remodel an indigent customer’s home. Bank trust officers are notorious for meeting customers’ personal needs in the middle of the night or over the weekend when no family was available. I have seen community banks give and raise substantial sums of money for schools, hospitals, recreation and the under privileged.

If you really think about it, our local bank is one of our community’s most valuable assets. It is said that what is rewarded is repeated. If we believe this, then maybe we should tell our local bank employees and owners how much we appreciate what they contribute to our community. It just might make a difference to our on-going quality of life.

About the Author

Kelly Karns is President of Karns Profit Improvement®, an independent Oklahoma-based financial consulting firm that has specialized in growing the profits of community banks in a multi-state area since 1986.