Defending a Franchise

An eastern bank with a large share of its local Hispanic market was experiencing stagnant growth in this segment.  New competitors were attacking its Latino franchise, luring away customers with aggressive promotional pricing in checking and time deposits.

Findings

Our study revealed a troubling concentration of Hispanic customer liabilities: 15% of the customers contributed 85% of the deposits.  Consequently, most of the bank’s Latino customer relationships were not profitable.  Interestingly enough, price oriented competitors were relieving the bank of some of those unprofitable customers and although our client’s deposit volume was not growing, its average revenue per account was actually increasing.

More importantly, the bank knew little about their best Hispanic customers.  We found that they were mostly successful entrepreneurs in retail and service businesses.  We also learned that these customers, instead of price offers, would overwhelmingly respond to a certain relationship model and a specific set of product aggregations.

Recommendations

We proposed a segmented approach to the Hispanic market.  The bank would position itself as the ideal financial institution for the ambitious Latino businessperson.  To accomplish this, the bank would develop a series of packaged product offerings. A limited number of branches also needed to be reconfigured to create differentiated sales and service areas for this segment.  These areas would operate under the banner of the bank’s securities brokerage subsidiary and their staff would be bilingual, appropriately licensed and also possess credit skills.  In-branch and external solicitation personnel would combine to form sales units assigned to specific territories.

Outcome

Six months after our recommendations were implemented in three branches, revenue from Hispanic customers in those trading areas more than tripled.  Including the depreciation expense caused by the branch remodeling, actual delivery costs have declined due to a lower payroll burden in the traditional service areas of the branches.  This resulted from the migration of much transactional activity to the less costly, remote delivery channels which are preferred by busy business people.

A bank holding company acquired a west coast bank with 35% of its branches in areas with a high density of Mexican-Americans.  Despite this evident demographic eschew, previous management had made little effort to develop a Hispanic franchise and the profit contribution generated by those branches was conspicuously below average.  Closing locations in Latino neighborhoods was inadvisable because it would surely expose the institution to adverse CRA ratings.        

Findings

Our study of the trading areas with large Hispanic populations revealed a significant untapped potential for transactional, savings and retirement accounts.  Additionally, we found a thriving and solvent small business community looking for financial support and guidance in managing their money.  We also identified abundant opportunities for home financing because the vast majority of Latino households in these areas were headed by US citizens or legal residents with stable incomes.

Recommendations

We proposed the formation of a strategic business unit focused on the Hispanic consumer and entrepreneur segments.  This unit would develop and manage a suite of product packages for consumers and a set of cash management products for small businesses.  It would also assume the reorganization and management of branches in predominantly Mexican-American neighborhoods.  A specialized business lending group would also be part of this unit as would be a home mortgages sales organization.  In a second stage, the bank’s telephone banking, web site and ATM would offer Spanish language options.

Our recommendation also included a comprehensive marketing program.  Investment was mostly focused on branch merchandising, direct marketing, promotional incentives and customer education events.  Advertising in Spanish media was part of the mix but only to a limited extent.

Outcome

By all measures, the branches managed by the Hispanic business unit have surpassed the performance of all the other acquired branches.  Today, the institution has a healthy portfolio of loans to Hispanic businesses and is recognized as a leader in extending credit to Latino families.

Profits had been steady in the preceding years but earnings quality was deteriorating at a fast pace. A significant decrease in ROAA and ROE was ominous. Although its branches were heavily congested with customer traffic, a South American bank with one the largest distribution networks in its market was losing share of deposits and experiencing a drop in new account openings. Profits had been steady in the preceding years but earnings quality was deteriorating at a fast pace. A significant decrease in ROAA and ROE was ominous.

Findings

Despite real advantages in capitalization, product offerings and reputation, the bank was not perceived by consumers as meaningfully different from competitors of similar asset size.  Moreover, cross-sell was virtually nonexistent and customer dissatisfaction was reaching alarming levels.

Little brand differentiation, weak sales performance and poor service quality made it impossible to capture value from the burdensome expense of maintaining a pervasive branch network.

Recommendations

We proposed a new business model for the retail banking operation.  Prior to our involvement, the bank’s management viewed consumers mostly as a source of inexpensive funding for its corporate lending activities.  And in practice, the branch network was essentially operated as an intake channel for low cost liabilities.  Instead, we recommended that the bank reposition itself to pursue consumer revenues on both sides of the balance sheet and to capture fee income from off-balance sheet products. To accomplish this, we submitted a detailed agenda of major initiatives and specific actions to make the new business model a reality. This agenda covered five major areas:

• transforming branches into merchandising outlets for all consumer products offered by the bank;
• increasing the availability and functionality of the bank’s alternative distribution channels to provide unsurpassed customer access as well as greater time and place convenience;
• creating a far superior customer experience across all delivery vehicles but especially in the branches;
• implementing a sales process and CRM capability to translate every contact occasion into a sales opportunity;
• establishing performance metrics based on competitive benchmarks, precise goals and objective measurements that would determine compensation and career advancement.

To enable successful execution, we organized and intensively trained an internal, multi-disciplinary task force that would steer the bank along its transformation process.

Outcome

Our client is today the dominant consumer banking organization in its market and customers recognize the bank as an innovative institution that effectively responds to their needs.  Management continues to drive competitive improvements. As a result, the recommended agenda still serves as one of the cornerstones of the bank’s planning cycle.  The internal task force remains an important change agent.  It has renewed itself with new members while many of its alumni have assumed broader leadership roles in the organization. 

Breaking Into New Markets

A leading U.S. online broker wanted to reexamine its European expansion agenda and revise the criteria and entry strategies to penetrate new markets.  Previous attempts to broaden its customer franchise in Europe had produced scant results while smaller competitors had made inroads in key geographies.

Findings

Despite the high level of internet usage in all western European countries, most potential investors were reluctant to trade online using a broker without a physical market presence.  Competitors who experienced greater success had all established partnerships with highly visible local institutions.        

Recommendations

We proposed the formation of joint ventures with leading banks in four markets with the most trading volume potential.  Specific modes of entry were recommended for each targeted country. Marketing and sales competencies of potential allies were evaluated and negotiating parameters to establish the ventures were defined.

Outcome

Commitment to a narrow set of markets allowed the concentration of efforts and investment in the development of viable partnerships.  Results of the first implementation have exceeded volume goals and ROI objectives have been amply met.