A recent American Banker online survey asked what to do about unprofitable customers. Most responders said that bankers must be more "creative" and find profitable ways to keep these customers.
What a remarkably wrongheaded notion.
First, when bankers get creative, the consequences can be catastrophic. Auction rate securities were creative, as were structured investment vehicles. Most of the toxic mortgages were creative in their structure, underwriting and marketing.
With more than 6,000 financial institutions remaining, it would be enough for a few to be creative. The remainder need only have the good judgment to emulate whichever of the resulting creations — new products and pricing schemes — have lasting value.
If we surveyed bank CEOs, I doubt that many would say that creativity was always a key criterion in hiring managers. How about good judgment? How about deep understanding of customers, products and operations? How about integrity, assiduity and effective teamwork? The many who saw Jamie Dimon as our most admirable banker seldom accused him of being creative. How about Richard Davis?
Should we look to McKinsey or Visa to supply us with creativity? Should we obtain the relevant intellectual property from others? A very prominent recent example was banks' following the siren song of a firm that taught them to apply the day's debit card transactions from largest to smallest rather than first to last — to generate more overdraft fees. Whoops! Nine-figure liabilities.
By what miracle is creativity supposed to resolve the problem posed by unprofitable relationships?
For instance, most banks can't profitably serve customers who only want their paychecks cashed. For decades, non banks have offered check cashing more economically and conveniently than banks. Is creativity going to change this?
From time immemorial, banks did not undertake to serve less affluent people. That's how consumer finance companies such as Beneficial and Household prospered — lending money which they had largely borrowed from banks, but backed by their own equity. Many finance company customers got along without checking accounts, because the cost exceeded the value for them.
More recently, we've have been losing highly profitable customers.
Banks were able in the past to provide financing even to very large corporations — and to provide wealth management even to very wealthy families. Our gradual eviction from these highly profitable markets followed the growth of securities firms that are in some ways a uniquely or at least originally American phenomenon. But bank acquisition of securities firms over the last ten years hasn't led to integrated, super additive relationships with the high-asset customer groups. Combining does not generate added value.
There are other ways to lose profitable customers. Money market funds broke the unique checking account franchise, taking particularly profitable customers and balances away. Banks' countermove was to lobby state legislatures to pass laws prohibiting them. Didn't work even a single time!
Every now and then our most prominent defenders, the Fed and the FDIC(!) emit noises about making life harder for money market funds. It's happening again now. Yet, only one of these funds failed in the crisis, and, unlike banks, none of them got tangible government support. New regulations have already capped the sources of risk.
After the loss of core groups of highly profitable customers, those who remain with us are less profitable. It would be wise indeed to focus on these remaining profitable customers, retain them, sell them more and render them even more profitable — rather than worry about the allegedly unprofitable ones, or the long-term unbanked.
And, how many customers are actually unprofitable, so that if they went away then our profits would be higher? If they were numerous, we should raise prices enough for them so that they either become profitable or leave.
Every time I have analyzed at the individual bank level, I find that there is very little money to be made by getting unprofitable customers to pay more or leave. There is little money to be made by attracting customers and meeting needs that are presently being dominantly served outside banking.
Your best sources of added profit are your best current customers, and others like them. Grocery stores have to compete with other grocery stores, and super markets. Banks have to compete primarily against other banks. It's not us against the world.
Despite the ABA, it's us against each other, competing to capture the profitable customers and increase our share of their wallets. Focus on being more efficient and a better judge of risk.
Andrew Kahr is a principal in Credit Builders LLC, a financial product development company, and was the founding chief executive of First Deposit, later known as Providian. He can be reached at
