Sunday, April 25, 2010

Customer Cash Flows: behaviour to bank on

It is no secret that new money deposits and loans and retention are the keys to portfolio growth. Yet many banks don’t actually measure or manage to these simplest of performance objectives. Are they chasing the wrong goals?

It is actually true…most banks don’t have clear dashboard metrics for the basic drivers of portfolio growth and diminishment. Instead an array of proxies are more common, things like gains and losses in the number of customers, accounts and products and perhaps the balance changes associated with them. Many banks also have good predictive models for these behaviours and use them to guide marketing, sales and retention programs, but there remains one simple problem: more customers, more accounts and more products are not the key drivers of portfolio growth ! What most managers are looking at are changes in things that are correlated to growth, but are once-removed from measuring actual portfolio drivers and results. To get to the core, you need to be measuring flows of dollars.
 
There is a good reason that we use proxies, and that is the reality that the real numbers we need – how much new money flowed in, how much old money flowed out at the account level – are not recorded in legacy information systems. The silo systems architecture has prevented banks from being able to relate flows that occur in one system to those in another, fragmenting understanding of customer relationships, product performance and even basic things like sales management because flow of funds is obfuscated.
 
To right this deficiency in legacy systems is a mammoth task, since the information would need to be captured on virtually every transaction at the time it was created. That kind of infrastructure change, while a meaningful architectural goal, is not going to get funded in any bank we know.
 
This leads us to the next option: analysis. And the good news is you can certainly derive flows of funds at the account level if you have a data warehouse or data mart with a good Customer Information File (CIF). You don’t have to spend tens of millions of dollars to see your key portfolio growth drivers. You don’t have to use statistical proxies or models to approximate what is happening. You can actually derive flows at the account level that are meaningful customer behaviours:
  1. Adding new money
  2. Moving money from one account to another (incl. across products)
  3. Taking money out of the bank

Each of these metrics can be predicted and measured, agreed to portfolio change and analyzed in multiple dimensions: location, product, staff member, etc. Doing so can increase marketing, sales and retention lift by 30%, just by targeting new and lost money instead of product and account substitution (cannibalization).
 
Bankers we talk to seem to understand the power of flow of funds analysis, but very few have actually done anything about it. Perhaps marketing departments are reluctant to see the real cash on the barrel-head results of campaigns. Perhaps sales forces don’t want to give up getting paid to churn deposits and loans. Perhaps product managers don’t want to know how much of their performance has come from shifting flows of customer money inside the bank. Whatever the objections may be, we believe that if your bank wants to outperform the market, you really ought to be driving resources towards the right objectives….and that means getting a handle on flows of funds.

 

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