Bankers who argue that the greatest potential for increased customer profitability can be found among the private banking wannabes haven't taken a close enough look at their customer base. If they did, they'd see a wealth of opportunityoand social responsibilityoin the lower income lending market.

It's not that bankers ignore this market segment; they just haven't used the right management approach and profitability analysis tools to fully realize its potential, says Ned Brown, president and managing partner of New York-Based Financial Modeling Concepts (FMC). "Most banks assume that people living in lower income areas aren't profitable. There are enough studies that have been done to show the exact opposite. Customers in this (segment) tend not to contest fees, where as middle-class (customers) might come down and argue about them."

In the mortgage securitization market, low- and moderate- income mortgages sell for a premium. Why? Because these consumers tend not to refinance, so buyers of the mortgage-backed securities know that this is a steady, predictable flow of revenue for 20 to 25 years, instead of seven years.

So why the lapse in serving this market? Bankers lack the information and empathy required to efficiently and profitably do so. This is a far cry from, say, Ford'soand later, Chrysler'soLee Iacocca, who had what Brown witnessed in his employ to be an "incredible sense" of where the market was going in terms of product development. "Most senior bank marketing and line of business executives only have cursory information that they're using about segments of the market," he says. "And they certainly don't have empathy for people in lower income, minority areas. It's not a sin of commission; it's one of omission."

When it comes to marketing, Brown, whose company has the largest data repository for low-income lending, says that most banks are not set up by their executives to understand a diversified marketplace. How can bankers better understand this as-yet untapped market segment? Visit the branches that are trying to serve these neighborhoods. "You can't be an effective senior-level marketer cocooned in a corporate office, spending little time on the street, and expect to succeed," he says. "Guys like (Wendy's) Dave Thomas and (McDonald's) Ray Kroc built their organizations by spending a lot of time at the stores."

In conjunction with branch visitation, banks need to be able to pull information from their legacy systems and push it out to branches and product groups; inability to do so means that there's little interactivity and intelligence to make marketing decisions.

Since 1994, FMC has been working with banks to streamline data mining efforts to determine the institution's lending potential and create greater efficiencies in loan processing, portfolio arbitrage and portfolio profitability analysis. While Brown says that no bank should pursue an unprofitable business, the lower income lending segment isn't always undesirable.

Brown say the data that banks are using to understand lower income areas are, for the most part, arcane. Most use cluster data products, which are satisfactory for general understanding, but ineffectual for targeting purposes. The real objective is to be able to call up customer prospect segmentation information, put it into a mapping format, and measure marketing programs on a real-time basisonot three months down the roadoto see what's being spent against a campaign, who's responding and what business is booked. Says Brown: "This enables banks to use that information to adapt programs and be agile in the marketplace."


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