Online shopping is taking a huge sales bite out of retail brick-and-mortar stores. The owners of Gap, Old Navy and Banana Republic have reported seven straight quarters of sales declines, Sears is on its last legs and mega-retailer Walmart is scrambling to keep up with Amazon. If legacy retailers are in trouble, can legacy banks be far behind?

So far, the only reason banks haven’t experienced the same dramatic sales decline as retailers is because of the banking industry’s tightly controlled regulatory environment that limits market entry. However, protective policies will only slow down competition; they won’t stop it. Banks must prepare now for what could become significant threats to their bottom lines.

Already, innovative banks and fintech companies are gradually short-circuiting the protective barriers by offering customers cheaper and more convenient purchasing alternatives than what incumbents offer. Bank customers are responding by bypassing their primary institution and going directly to online providers for other products and services. As a result, the concept of a primary bank that satisfies most customer needs is becoming a relic of the past — a transformation that will have serious implications for traditional institutions with revenue models that hinge on selling checking account customers multiple products.

Banks, after all, often lose money on checking accounts; however, the losses have been subsidized by institutions’ success in selling profitable customers lucrative credit cards, automobile loans and commercial products. But increasingly, customers are looking beyond their current bank for cheaper and more convenient financial providers.

According to a 2016 report from Accenture, consumers are purchasing low-margin products from their primary bank but shopping around for higher-margin services. For instance, the majority (61%) of consumers indicated they choose other sources for brokerage accounts, 70% choose other sources for auto loans and 52% choose other sources for home mortgages.

Stickiness, in other words the hoops customers have to jump through trying to change banks, is losing its effectiveness at keeping customers tied to their primary financial institution. In the same Accenture survey, 40% of customers felt they were less dependent on their primary financial services provider and reported going to nonbank providers in the previous 12 months.

Customer satisfaction doesn’t seem to be as big a retention factor as was once thought either. A 2017 study by J.D. Power found that customer satisfaction has reached record highs since the financial crisis; however, the industry is still seeing an increasing number of accountholders shift to more convenient, lower-priced alternatives.

Another indication that customers are looking outside their bank for products is seen in the area of nonbank lending. For the first time in more than 30 years, banks accounted for less than half of all mortgage loan dollars extended to U.S. borrowers in the third quarter of last year. Nonbank lenders — such as Quicken Loans and PennyMac Financial Services — were responsible for 51.4% of the loan dollars for the third quarter, up from 9% in all of 2009.

As customers flee to lower cost-providers, banks will take a double hit. Revenues from high-profit products will decline, and banks will see minimal lift from additional product purchases.

National banks are largely immune from the trend. Big banks, which appeal to such large audiences, are so driven by economics that they manage fees like a hatchet, poised to chop off customers whenever they become unprofitable. Community institutions, on the other hand, have stronger customer relationships, smaller bases and reputations to worry about when hiking fees or shedding customers. Nonetheless, community institutions must determine if their current strategy of subsidizing unprofitable customers is tenable in the long–term.

Initially, the shift will be hard to detect unless marketers dig deep into service usage. Clients, after all, won’t close an account. They will simply open a new one elsewhere.

Banks can respond to the trend in several ways.

First, look closely to see if your institution is being affected. Create alerts for any drops in deposit balances or account inactivity, monitor customer sentiment through periodic surveys and watch your services-per-account ratio to see if it’s dropping. Calculating your service ratio over the entire customer base could make recent customer departures imperceptible. Consider establishing a rolling service ratio of your best or most active accounts over the past twelve months. It may help you spot a trend earlier.

Second, think about introducing a series of low-cost products that appeal to discount shoppers. Just strip away some features in the higher-priced line. You will keep customers who are seeking discount-priced alternatives without cannibalizing profits generated by high-margin customers.

Third, let unprofitable customers leave. A study from professors at George State University found that one in five customers are unprofitable. They divide unprofitable customers into four categories: service demanders who overuse service in various channels; revenue demanders who request fee reversals and frequent overdrafts; promotion maximizers who seek special rates and extra services; and spending limiters with small, unprofitable accounts at many institutions. Identify the accountholders who drain your income and you’ll see a big impact on your bottom line.

Kevin Tynan

Kevin Tynan

Kevin Tynan is senior vice president for marketing at Liberty Bank for Savings in Chicago.

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