If most customers are unprofitable, as studies indicate, how does a bank retain the profitable ones encouraging the rest to use delivery channels that are less costly than branches?

The question reverberated as a constant theme at the American Banker retail banking forum here last week, and the discussions led in one direction: information.

Everyone seemed to agree that banks must make rapid advances in data gathering and warehousing if they are to keep their best customers from defecting to brokerage firms and mutual fund companies.

"It's a matter of targeting the right customers and measuring the right things," said Steven L. Reich, a principal at Treasury Services Corp., a technology consulting firm based in Santa Monica, Calif.

Underscoring the difficulty of measuring the right things, David B. Kelso, executive vice president of First Commerce Corp., said the New Orleans-based bank had spent three years collecting demographic and behavioral information to identify specific customer segments.

"We're just now getting good, reliable information at the household level," Mr. Kelso said. He added that banks need to incorporate all these customer data into good predictive models, lest they end up doing hit-or- miss mass marketing for a small return.

He estimated that 10% of the industry has created the requisite marketing data bases, but that only half of this group is using them effectively. He recommended that bankers develop proxies based on balances or other information, because "we can't wait for nirvana to get started."

Nigel W. Morris, president and chief operating officer of one of the renowned data base marketing practitioners, Capital One Financial Corp., warned that progress can be slow and painful.

He noted, for example, that it took three and half years for exhaustive market testing to pay off in higher oustandings for Capital One, a spinoff of Richmond, Va.-based Signet Banking Corp.

The same approaches can now be applied to other areas of consumer banking, Mr. Morris said. "People who use customer information profitably will have a massive advantage."

The perceived need for better customer information derives from research findings that 60% to 70% of bank customers are either unprofitable or marginally profitable. Retail banks typically depend on an elite 5% to 10% of customers for 90% of their profits.

Several speakers said this cross-subsidy will become untenable with nonbank financial companies coveting banks' best customers.

"How are we supposed to retain and build loyalty with those same customers who are being targeted by specialized competitors without the regulatory burdens and excesses that we've got and with much lower cost structures?" asked Marion R. Foote, senior vice president of First Chicago NBD Corp.

One solution is to reduce costs by encouraging the marginal customers to use automated teller machines and telephone services. First National Bank of Chicago claims to be reaping the rewards of its aggressive repricing last year - but only after taking a public relations flogging for the now infamous $3 teller fee.

Ms. Foote said First Chicago "had a sense of urgency" to grapple with the problem of customer profitability. "We saw, earlier than the industry, that in fact we weren't making an adequate return," she said. "We provided too many free services to the wrong customers."

First Chicago built into its fee structure an incentive for "transaction hounds" to use ATMs and the telephone. Ms. Foote said the program spurred a 30% increase in ATM usage and an even greater surge in ATM deposits.

"We are not now making every customer profitable through our new structure," Ms. Foote said. "But we've cut the losses. We limited the call customers have on unlimited, free, high-cost services."

Jeffrey Kutler contributed to this article.

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