Customer profitability in banking is an important measure for understanding whether individual customer relationships contribute enough revenue to justify the costs required to maintain them. While businesses in many industries routinely evaluate customer value as part of their long-term planning, community banks and credit unions have been slower to incorporate this type of analysis into their strategic decision-making.
Understanding profitability at the customer level can help financial institutions look beyond broad measures such as deposits, loan balances, and product ownership. The cost of servicing an account, the channels customers use, the products they hold, and the revenue generated by the relationship can all influence its value. For smaller financial institutions in particular, understanding these differences can help executives make better decisions about where to invest limited resources.
Customer value has been a key metric in most industries when assessing the value received by the business from customer relationship. Businesses in most industries have understood that long-term viability and long-term profitability are completely dependent on customers generating value in excess of the costs required to support their relationships.
This concept, while certainly not new or novel, has failed to permeate into Community Banking and Credit Union sectors. It appears that very few Community Bank and Credit Union executives fully understand customer value, and more specifically, the customer value for their organizations. And perhaps, more importantly, the effect of customer value has on the long-term profitability and likelihood of their institutions continuing as ‘going-concerns.’
Assessing customer profitability continues to be a challenge for banks and credit unions. While such evaluations can require a significant amount of time and effort, the results can yield valuable insight. In addition to providing information about desired customer attributes, analyses can provide visibility into promising channel and segment opportunities.
A stronger understanding of customer profitability can give community banks and credit unions valuable insight into which relationships, products, channels, and customer segments contribute most effectively to their financial performance. Rather than assuming that every customer relationship creates similar value, institutions can identify the characteristics associated with their most profitable relationships and use that information to guide future strategies.
This analysis can also reveal opportunities to improve relationships that currently generate insufficient returns. Financial institutions may discover that certain service channels are disproportionately expensive, that customers could benefit from additional products, or that particular segments offer greater potential for profitable growth. Those findings can influence decisions involving marketing, product development, pricing, technology investments, and customer service.
For community banks and credit unions facing continued competitive and financial pressures, customer profitability in banking should be viewed as more than an accounting exercise. Understanding both the revenue customers generate and the costs required to serve them can provide a clearer picture of the institution’s underlying economics. That knowledge can help management allocate resources more effectively, pursue promising customer segments, and build a business model capable of supporting sustainable long-term profitability.