Fis strategic insights vol 5 january 2012

FIS ENTERPRISE STRATEGY VOLUME 5 • JANUARY 2012

FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries.

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By Fred Brothers EXECUTIVE VICE PRESIDENT, ENTERPRISE STRATEGY

Last month, I talked about how fi nancial institutions’ Effi ciency Ratios improve as scale increases and how banks can leverage customer data to drive effi ciency on the revenue side of this equation. I also discussed some of the game-changing reasons why business-as-usual operating approaches will not bring effi ciency back to pre-recession levels. Financial institutions must seek ongoing improvements to achieve cost effi ciencies and remain competitive in the rapidly evolving landscape.

This month, we discuss improving the noninterest expense side of the effi ciency equation.

Wide variation in effi ciency within a peer group

Size matters, but if you look through the Effi ciency Ratios of thousands of fi nancial institutions, you quickly discover wide variation in them among banks with similar asset sizes. Excluding the FIs that have the scale economies of a multi-bank holding company, we examined 15 banks of around $1 billion in assets with Effi ciency Ratios averaging 67 percent, but ranging from 43 − 95 percent (Figure 1). The lowest ratio handily beat the average of the megabanks (60 percent) in 2010. In fact, four of the 15 banks on the chart proved more effective than the megabanks at managing overhead and other operating expenses to generate revenues and another two were even with the megabanks. That’s impressive.

Driving Effi ciency at Financial Institutions through Outsourcing

I N T H I S I S S U E

• Driving Effi ciency at Financial Institutions through Outsourcing

• Mobile Payments: In the First Inning

• Overcoming the Demographic Disadvantages of Community Banking

• Achieving Profi table Customer Loyalty

• November Survey Results

FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011


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The three biggest noninterest expenses for banks are: 1) salaries & benefi ts, 2) technology, and 3) premises & fi xed assets. Salaries & benefi ts are typically the largest part of noninterest expenses and, on average, represent about half of noninterest expenses among the 15 banks examined.

Salaries & benefi ts have a large impact on banking effi ciency, but higher salary & benefi ts costs don’t necessarily lead to higher revenues. The most effi cient banks have the lowest relative compensation expenses. They are getting more revenue for their buck. The average salary & benefi ts per employee for the most effi cient banks was about $4,000 less than poorer performers, but one of the best performers also had the highest average salary & benefi ts per employee among the 15 banks. That bank has 100 fewer employees than the average in the $1 billion segment, which mostly offsets its higher salaries. Quality over quantity can be a winning formula.

BPO/ITO projected to grow

One strategy for keeping overall salaries & benefi ts expenses in line without sacrifi cing quality is to employ business process outsourcing (BPO). BPO has become increasingly important for remaining competitive, especially in an economic environment that can limit revenue growth opportunities. Mid- to large-size banks have already outsourced numerous nonstrategic IT functions such as network and hardware maintenance, disaster recovery and item processing. Some smaller banks will be required to follow to remain competitive.

Figure 1: Salaries and benefits have a large impact on banking efficiency ratios but don’t necessarily lead to higher revenues

Sources: FDIC Call Reports, December 31, 2010 and SNL Financial 2010

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The most recent forecast from Gartner shows the projected growth rate on IT spending for consulting and business process outsourcing by U.S. fi nancial institutions at nearly double the growth rate projected for internal spending (Figure 2).

Particularly within small towns and cities, outsourcing customer-facing operations can pose a threat to community relations. However, augmenting customer service with English-speaking call center operators who handle after-hour inquiries (to quote one of our clients “during time periods when we have trouble fi nding quality people who will work those hours”) and supplementing current staff with operators with multi-lingual capabilities can improve service quality without putting the brand’s reputation at risk.

These days BPO has matured to become much more than overfl ow and call center outsourcing for activities such as:

• Timely fi ling of regulatory and compliance reports, which have increased with the constant stream of new regulations being imposed

• Outbound targeted call activities that support marketing campaigns. Imagine if you could obtain cold calling assistance to increase the effectiveness of prospect campaigns and if hot leads were routed directly to your personal bankers.

Returning to our sample of 15 banks in the $1 billion asset segment, we also found a fairly high relationship between premises & fi xed asset expenses and Effi ciency Ratios− signifi cant but not as notable as the relationship between salary & benefi ts and Effi ciency Ratios. On average, better performers have four fewer branch locations than poorer performers, but the percentage of noninterest expense represented by premises & fi xed asset expenses is roughly the same (13 – 14 percent) for both groups. Better performers also have nearly 50 percent more assets per branch. Of course, the big cost of keeping branches open is the people expense, not the premises & fi xed asset expense.

As always, we’d love to hear about your experiences. If you have thoughts on outsourcing that you are able to share, please let us know about them.

Figure 2: IT spending in the U.S. by FIs on consulting and business process outsourcing is projected to outpace internal spending

2009 – 2015,” April 2011

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Interview with Doug BrownSENIOR VICE PRESIDENT, EBANKING

The mobile lifestyle has gone mainstream. An increasing number of consumers regularly engage in mobile banking, which allows them to manage their fi nances from any mobile platform – phone, smartphone or, increasingly, tablet. As remote deposit capture (RDC) apps become available, consumers are expanding their mobile banking behavior. Consumers also are increasingly using mobile phones when shopping – e.g., comparing prices and virtually “clipping” coupons. The natural next extension of mobile banking and mobile-assisted shopping is mobile payment at point-of-sale.

The mobile payment territory includes diverse stakeholders and is changing so rapidly that it currently resembles the Wild West. In our conversation with Doug Brown, Senior Vice President, eBanking, he explains how fi nancial institutions should prepare for the expansion of mobile banking into mobile payments. The following discussion should allay any concerns that small- to mid-sized fi nancial institutions aren’t well positioned to leverage future opportunities in the mobile payment ecosystem.

The First Inning of Mobile Payment

Where are we in the evolution of mobile payments?

Doug Brown: We are only in the fi rst inning of a nine-inning game. Currently, there are many competing technologies and models from various stakeholders testing solutions to add value to the payments process. The fi eld is packed because barriers to introduction of innovative products and services have never been lower than they are now.

Companies come into the market and may look promising, but can fade as quickly as they arrived. Look at Bling Nation – a prominent example that has now collapsed and retreated. In retrospect, you can see that Bling Nation wasn’t really built for high scalability and a seamless customer experience.

The evolution of mobile payments is going to be impacted by a broad spectrum of events that will affect when there will be enough critical mass to see widespread rollouts. From a planning perspective, we think the next 12 − 18 months will be a period of testing and pre-commercialization of phone-based wallet applications. We expect to see multiple models emerging during the time period. Then we anticipate between a year and three years for fast-growth adoption by consumers as the model(s) matures. We won’t see mainstream mobile wallet users in 2012, but we think that level of penetration is likely to accelerate rapidly beyond 2012.

What criteria need to be met for mobile payment to gain traction?

Doug Brown: Three major events will push mobile payments past the experimental stage of the lifecycle. First, consumers need to be ready, willing and able to use mobile payments. The payment method needs to be convenient, secure and fun to use. And, it needs to have a compelling advantage over the very mature infrastructure that’s been the standard for more than fi ve decades. That advantage could be realized in a variety of ways, such as merchant-funded rewards where consumers recognize signifi cant savings or the ability to manage and control their fi nances in real time, for example.

Second, merchant participation is critical to success. Retailers need to be prepared to manage the checkout process with these new technologies. They need to be able to handle basic functions such as returns, credits and coupon redemption. Plus, the economics for retailers have to be worthwhile. Some prominent merchants have NFC readers in place, but they won’t accept contactless payment for Visa because they don’t like Visa’s rate structure. Best Buy, Walmart and Target are the merchants that can change the game because of their scale but they have to be provided with an incentive to change.

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Mobile Payments: In the First Inning



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Third, if you believe that NFC will be the standard, then it needs to be integrated into more handsets than the current limited number of Android phones. The landscape could change radically with the release of an NFC-enabled iPhone. That would be a major catalyst accelerating the time table.

Game On

How should fi nancial institutions prepare for a shift toward mobile payments?

Doug Brown: Our clients need to stay focused on what’s relevant and important to their customers. Initially, they need to focus on building an active mobile banking base, because those are the customers that will ultimately extend their mobile banking behavior into mobile payments. They also need to stay current with the technologies capable of delivering on their customers’ expectations. It’s critical to stay abreast of what customers expect from mobile banking and extensions of mobile banking such as emerging RDC apps and mobile payment capabilities when they become commercially viable.

From the banker’s perspective, you need to provide mobile banking services to retain your customers. If you don’t, your customers are going to fi nd mobile banking either at the larger fi nancial institutions or at this whole host of new competitors that can now serve most of the customers’ fi nancial needs.

What “curve balls” should FIs watch out for?

Doug Brown: The ecosystem of payments includes players that can be both FI partners and competitors − e.g., the telecommunications carriers that are participants in Isis. Isis will provide banks with a vehicle to distribute their credit card credentials via the telco wallet. But, Isis will own the customer experience and set terms around its business model. In that way, Isis will compete for future monetization opportunities that could help FIs develop new revenue streams from sources such as merchant-funded rewards. This also applies to some of the aggressive digital technology players such as Google, Facebook and potentially Apple and Amazon. These players represent potential allies but, importantly, a new competitive threat.

Outcome of the Game

Which players are most likely to win the game?

Doug Brown: The model that delivers a solution that provides value foremost to consumers and then to merchants and fi nancial institutions will survive as the industry sorts itself out. The solution needs to be easy to use, convenient, offer value and meet consumers’ expectations of security.

Security in the mobile payments construct is critical for a number of reasons. We do not want to experience an increase in fraud associated with the new mobile payments system. We need to ensure that authentication standards for mobile are as good as, if not better than, alternative payment systems. Not only is this an industry requirement, but consumers also express security concerns regarding their funds and their identity. The No. 1 reason consumers don’t participate in mobile or even online banking is concern about security.

What can smaller banks do to stay on top of the game?

Doug Brown: First, smaller FIs need to rely on a trusted technology- and business-savvy partner that understands the mobile environment. Second, they need to consider engagement − either through partnerships or their own development − with multiple payment models because no one can determine right now how mobile payments will play out. Third, they need to be very active in the industry with entities such as NACHA to stay informed about the technologies, activities and standards that surface as mobile payments are introduced into the marketplace.

It’s really challenging to have the right focus and interpretative lens to understand which models fi t the criteria necessary for sustainability. It’s our intent at FIS to provide marketplace-ready solutions along with guidance around what’s critical to those really important strategic decisions.

The advantage that banks have in the ecosystem is the trust of their customers. That is the one asset that’s not reproducible. No one will own trust more than the FIs and, knowing that, they need to carefully consider potential partnerships. Before acting, they need to ask: Could this partnership jeopardize the trust our customers have in us?

For additional information about how FIS can help fi nancial institutions best meet their mobile needs, please contact your Sales Account Manager.



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By Paul McAdamSENIOR VICE PRESIDENT, RESEARCH & THOUGHT LEADERSHIP

In my September 2011 article, I talked about how community banks are at a disadvantage in terms of customer relationship expansion mostly because the community bank customer base has less income and future earnings potential. This month’s article continues that analysis and examines the infl uence of customer demographics and location on both the composition and the fi nancial behaviors of community bank customers. All analysis cited in this article was generated from primary research of 3,345 consumers conducted by FIS Enterprise Strategy in August 2011.

The affl uence gap between the community bank customer and the average bank customer results in community bank customers holding lower-than-average investable assets and loans overall, with correspondingly less opportunity. This means the community bank has to capture greater shares of available fi nancial resources to compensate for the thinness of their customers’ wallets. Community banks do a good job of getting their fair share of available deposits, but they still fall short of the average deposit amount because their customers have fewer assets. On the loan side, community banks get less than their fair share of loans and fall even shorter of the average loan amount.

While geography has a signifi cant infl uence on the composition of community bank customers, it would be wrong to assume that community bank customers are purely “small town folks.” Overall, community bank customers are more likely to live in a large city than a small town. Among all consumers who identify a community bank as their primary DDA provider:

• 29 percent live in rural areas or small towns (defi ned as fewer than 50,000 residents)• 34 percent are in small metro areas (between 50,000 and 500,000 residents)• 37 percent live in mid-sized to large metro areas (more than 500,000 residents)

However, less than 10 percent of U.S. consumers live in rural/small towns while nearly two-thirds live in towns with more than 500,000 residents, so there are striking differences in the concentration of community bank customers between each of these markets (see Figure 1). Within rural/small towns, consumers are three times more likely to identify a community bank as their primary DDA provider (index = 319). In small metro areas, consumers are about one-third more likely to bank with a community bank (index = 136), while in mid-sized/large metro areas consumers are about half as likely to identify a community bank as their primary DDA provider (index = 56). Of course, demographic and competitive dynamics signifi cantly infl uence these concentrations as rural and smaller markets tend to have older residents on average and a lower concentration of large national banks. The opposite is true in big cities.

Overcoming the Demographic Disadvantages of Community Banking



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Community bank customers, as a whole, have a number of demographic characteristics that put community banks at a competitive disadvantage in retail banking long term. Community bank customers are:

1. Older2. Less likely to be employed (i.e., a higher portion are retired)3. Have less education

As a result, they have less household income despite the fact they are more likely to be married, thereby providing two potential sources of income. Nearly two-thirds (65 percent) of community bank customers are married regardless of where they live − far more than the national average.

So what happens when we examine community bank customers who live in rural and small towns versus those who live in big cities? Most key demographics that drive income and future earnings potential don’t shift: • Community bank customers are just as likely to be retired or unemployed regardless of where they live.• They also are just as likely to be older, which can be a positive for investment and deposit-related revenue but not

for loans.• Community bank customers are just as likely to have less education regardless of where they live. Even in big

cities (where the population as a whole tends to have a higher level of education), the portion of community bank customers with only high school or less education is above the norm (by 24 percent) while those with a college degree or higher is below the norm (by 8 percent).

A troubling pattern emerges when we examine the average incomes of community bank customers who live in small towns versus those who live in big cities (see Figure 2). As one would anticipate, the average annual household income of banking consumers’ increases with the size of the metro area. But unfortunately for community banks, the incomes of their customers fall signifi cantly short in larger markets.

• In rural and small towns, the average incomes of community bank customers and all other bank customers are statistically equivalent.

• In small metro areas, community bank customers have an average annual income 12 percent lower than that of all other banking customers.

• In mid-sized and large metro areas, community bank customers have an average annual income 13 percent lower than that of all other banking customers.

Figure 1: Community bank customers are significantly more concentrated within rural and smaller towns

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The pattern of community bank customers having lower income and earnings potential results in them owning investable asset balances (deposits and non-IRA investments) 12 percent lower than the national norm. As demonstrated in Figure 3, consumers who hold their primary DDA relationship with a community bank have lower incidence of deposit and investment product ownership with their primary bank in all products but CDs.

Despite these disadvantages, community banks do an admirable job of capturing their customers’ available deposit balances. For some deposit products, community bank customers − especially those in rural areas and small towns − show a higher-than-average propensity to consolidate their assets with their primary DDA provider. And on an overall basis, community banks capture 74 percent of the deposit balances available from their primary DDA customers, compared to a norm of 70 percent for all other fi nancial institutions.

But clearly there’s an opportunity for community banks to do a better job of cross-selling to existing customers. “Investment-oriented” services (money market and non-IRA investment accounts) are specifi c opportunities (see Figure 3). Community banks capture money market relationships with only 44 percent of primary DDA customers versus a cross-sell rate of 60 percent achieved by all other fi nancial institutions. Similarly, community banks capture a non-IRA investment relationship with 11 percent of primary DDA customers compared to 21 percent for all other fi nancial institutions.

On the loan side of the ledger, the combination of a customer base that is older with lower earnings potential contributes to community banks capturing total loan balances from their primary DDA customers that are 10 percent below the national norm. As demonstrated in Figure 3, the percentages of community bank customers holding fi rst mortgages and auto loans with their primary DDA provider is roughly the same as that of other fi nancial institutions. But the percentage of community bank customers with primary DDA-provider credit cards and home equity loans is signifi cantly below the penetration achieved by other fi nancial institutions. While closing the cross-sell gap in home equity lending probably isn’t feasible or advisable in the near-term given the real estate market crash, community banks are missing opportunities with their current customer base in the form of revolving credit card programs.

Figure 2: The average income of community bank customers falls short in larger markets

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Figure 3: Community banks are missing out on investment and consumer lending opportunities

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Many community banks have exited the consumer credit card-issuing business over the past couple decades, but some are reconsidering it in the advent of Durbin debit interchange regulation. Regardless of an institution’s legacy view of credit cards, our research suggests that community banks should look beyond the economics of credit cards as a standalone offering and consider the value that a “primary” credit card relationship can bring to overall customer relationship profi tability (see Figure 4). Consumers who designate their community bank as the “primary” DDA and credit card provider generate profi tability, deposit and loan balances that are 3.5 – 4 times higher than customers who maintain their primary DDA with a community bank but hold their primary credit card relationship with another fi nancial institution. In summary, community banks do have a disadvantage inherent in the demographics of their customer bases. Community banks in rural areas and

small towns are holding their own and competing well, however. They capture strong retail consumer market share and those consumers are more likely to consolidate with the community bank. Stagnant or declining underlying market growth is a key problem faced by many of these banks. Community banks that compete in small-to-large metro markets also have disproportionately older and less educated customers and face the added challenge of customer bases with household incomes 12 − 13 percent below market norms.

Regardless of the size of market served, the research suggests that community banks should strongly consider strategies to:

1. Attract new and younger DDA customers with desirable characteristics2. Cross-sell to deepen relationships with existing customers − particularly in investment-oriented products and credit card programs

To be fair, there are certainly a number of community banks in both rural and urban markets that outperform their larger bank brethren in cross-sales and other relationship expansion metrics. It’s also the case that some community banks don’t place a primary strategic emphasis on retail banking and focus instead on middle-market and small business − and also compete very effectively with larger banks.

But taken as a whole, our research reveals an urgent strategic priority for the community banking industry. Given the current anti-big bank climate, the timing for such initiatives is right.

I will continue to explore this topic of community bank competitiveness in future newsletter editions. In the meantime, feel free to contact me at paul.mcadam@fi sglobal.com with your questions or comments.

Figure 4: Obtaining status as the primary DDA and credit card provider yields a tremendous profitability advantage

Community bank customers who…

Have primary DDAand credit card withthe community bank

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eposits alances held with primar provider $3 $ 6

eposit wallet share captured primar provider

Loan alances held with primar provider $ 3 $ 6

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By Mandy PutnamDIRECTOR, RESEARCH & THOUGHT LEADERSHIP

A long-term customer isn’t necessarily a loyal customer. And a loyal customer may not even be a profi table one. In fact, more than six out of 10 loyal customers are unprofi table, and about one-quarter of loyal customers are unlikely to ever be profi table.

According to my Facebook profi le, I “like” my bank. I “like” my bank because it ran a charitable campaign promotion to get people to “like” it. I’m inclined to participate in such things if only to see what happens. But, am I loyal to my bank in the way that I’m loyal to the neighborhood restaurant I often frequent on Friday evenings? Heck, no.

Customer loyalty is more diffi cult to measure for banks than products and services for which switching is a relatively easy process. Slightly more than two-thirds (68 percent) of FI customers agree that “switching my primary checking account to a different fi nancial institution is more hassle than it’s worth.” But our research with 3,000 consumers shows that many customers who stick with their FIs due to inertia aren’t loyal and don’t keep a large share of their deposits and/or loans with their primary checking account provider.

Customer Loyalty: Multi-dimensional and Overlapping

First, let’s look at three dimensions of loyalty:

• Functional loyalty, which is typically created by offering superior products and/or services that consumers trust and are willing to recommend to others

• Transactional loyalty, which is refl ected in concentrated spending with a brand and repeat purchasing behavior

• Emotional loyalty, which is generally the most sought after but the least attained by branding gurus; customers who exhibit emotional loyalty identify with the values that the brand conveys and view the brand as differentiated suffi ciently from others in its class to pay more for its products and services

Forty-fi ve percent of FI customers exhibit at least one dimension of customer loyalty. FI customers often have functional and/or transactional loyalty, but few have emotional loyalty (Figure 1). The fallout of limited emotional loyalty can be extreme price sensitivity − as exhibited by reactions to a few FIs’ recent attempts to charge fees for debit cards.

Achieving Profi table Customer Loyalty

Figure 1: FI Customer Loyalty Is Multidimensional and Overlapping

Source: FIS Enterprise Strategy, August 2011; n = 3,000

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Introducing Customer Loyalty and Profi tability Segments

Loyal customers aren’t necessarily profi table ones. Among higher-asset customers, loyalty to the primary DDA provider is positively related to the percentage of assets they keep with that FI and, in turn, their profi tability to the FI. But among the majority of customers − 61 percent − there is either no relationship between loyalty and profi tability, or it is an inverse one. Research fi ndings suggest that a lot of FIs have bought loyalty vis-à-vis “free checking” but are sacrifi cing profi tability in the process. Loyal customers pay less in fees.

Segmenting FI customers based on the dimensions of loyalty − functional, transactional and/or emotional − and profi tability produces six customer segments. Goals and tactics differ depending on which segments the FI wants to target. (Figure 2):

Goal: Maintain and deepen relationships with Profi table Loyals

Profi table Loyals (17 percent) tend to be well-educated married couples with higher incomes and positive net worth. This group has proportionately more Matures (born prior to 1946) and self-employed individuals. Of all the segments, they are most confi dent about enjoying a comfortable retirement.

Profi table Loyals already have larger shares of their fi nancial wallets with their primary DDA provider than most of the other segments. But there is still opportunity to identify cross-sell opportunities through data mining and analytics.

Currently, larger banks are capturing more loans from Profi table Loyals than smaller FIs, which underscores the opportunity for smaller banks and credit unions to deepen their credit relationships with Profi table Loyals.

Figure 2: FI Goals Differ According to Segment

Source: FIS Enterprise Strategy

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A package confi gured for this segment could look like:

• “Premier Checking” package bundled with other deposit and investment services. Preferred interest rates and other rewards for high minimum balances

• Customized loyalty card program with preferred interest rates

• Preferred interest rate incentives and advisory services for moving more assets/loans to primary checking account provider

Goal: Increase loyalty to retain and deepen relationship with Profi table Non-loyals

Profi table Non-loyals (22 percent) also tend to be well-educated married couples with higher incomes and positive net worth. Profi table Non-loyals often lack the time and knowledge to manage

their fi nancial affairs, which − along with their positive net worth − make them desirable targets of fi nancial advisors.

Profi table Non-loyals have smaller shares of their fi nancial wallets with their primary DDA provider than Profi table Loyals. Increasing loyalty within this segment could boost the amount of assets or loans held with their primary FI.

Profi table Non-loyals’ primary DDA provider is more likely to be a large national bank, which is only capturing about two-thirds (68 percent) of their deposit balances (vs. 82 percent for Profi table Loyals) and 45 percent of their loan balances (vs. the same 45 percent for Profi table Loyals).

Profi table Non-loyals are more likely to deepen their relationships with providers whose benefi ts emphasize fi nancial rewards (e.g., cash back on loyalty programs, preferred interest rates) and convenience (e.g., free online/mobile banking, ATMs at convenient locations).


• “Premium Checking” package bundled with other deposit and investment services. Preferred interest rates and other rewards for high minimum balances

• Customized loyalty card program with preferred interest rates or cash back rewards

• Preferred interest rate incentives for moving more assets/loans to primary (e.g., mortgage refi nancing)

Goal: Increase profi tability of Potentially Profi table Loyals

Potentially Profi table Loyals (18 percent) tend to be females with lower levels of education and low- to lower-middle incomes.

Potentially Profi table Loyals don’t have a very large fi nancial wallet

and most of it is composed of debt − most commonly credit card debt and auto loans. Very little of their debt is held by the primary DDA provider, which is the main reason they aren’t currently profi table.

Another reason Potentially Profi table Loyals aren’t profi table is they don’t pay very much in fees. Half of them selected their FI because free services were offered.


• “Basic Loyalty” checking /savings with minimum balance required and/or self-service option for lower fees

• Loyalty program incentive to consolidate revolving credit card debt to bank card

• Assistance with loan refi nancing (if qualifi ed)

Goal: Increase loyalty and profi tability of Potentially Profi table Non-loyals

Potentially Profi table Non-loyals (24 percent) have average incomes but above-average educations. This group has proportionately more students in it.

Potentially Profi table Non-loyals, like the Potentially Profi table Loyals, don’t have a very large fi nancial wallet and most of it is composed of debt − most commonly credit card debt and auto loans. And, like their loyal counterparts, very little of their debt is held by the primary DDA provider, which is the main reason why they aren’t currently profi table.

Unlike their loyal counterparts, Potentially Profi table Non-loyals have substantial future earning potential, refl ected by their above-average educations and higher-than-average student status.

Like Potentially Profi table Loyals, they don’t pay very much in fees. But, this segment could more easily migrate to self-service banking to retain their low fees.



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A package confi gured for this segment could be similar to one offered for Potentially Profi table Loyals but place more emphasis on self-service banking channels.

Goal: Break even with unprofi table segments

Unprofi table Loyals (9 percent) have very limited means to become profi table to the FI. They have the lowest incomes and education levels and an above-average percentage of them (one-quarter) are retired.

Unprofi table Non-loyals (10 percent) have lower levels of education, low incomes and the highest unemployment rate among the segments.

Unprofi table segments are unlikely to become profi table for a fi nancial institution. The best the FI can hope is to: 1) reduce their higher-than-average channel usage, and/or 2) collect fees that are suffi cient to cover incremental costs of servicing them.

A package confi gured for these segments could look like:

• “Basic” checking/savings with minimum balance and self-service and/or checkless checking required to earn reduced fees

• Revolving credit tied to checking/savings balances• Prepaid card program

Final Thought

Appeals that usually do the best job of engaging some customer segments are often viewed as irrelevant or even “turn-offs” by other segments. The FI must determine whether it needs to be “all things to all people” or home in on specifi c segments that could produce a more profi table outcome in the long term, but alienate non-targeted segments to the point of attrition in the short term.

This article is derived from an FIS Enterprise Strategy research brief, which features recent research with 3,000 FI customers on elements that drive customer loyalty and insights into how FIs can leverage the fi ndings to foster loyal relationships that, in turn, can increase the percentage of profi table patrons among their customer bases. The full report can be downloaded from http://www.fi sglobal.com/solutions-insights.



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In November’s edition of FIS Strategic Insights we polled readers on four diverse topics: 1) initiatives they are pursuing to manage or reduce operating expenses, 2) plans for increasing checking account fees, 3) engagement with customers via social media, and 4) content for upcoming newsletters. Thanks to all who participated in our survey. The following four charts present the results:

November Survey Results

Figure 1: Readers are pursuing multiple initiatives to reduce operating expenses

Source: FIS Strategic Insights survey, November 2011

4%

4%

23%

38%

40%

42%

50%

56%

65%

None

Other

Business process outsourcing orright-sourcing

branch

Reducing internal use of paperand electricity

vendor contracts

Figure 2: About one-half of the surveyed FIs have no current plans to increase checking account fees


52%

13%

6%

8%

4%

17%

We have no plans to increase checkingaccount fees

We’re currently considering increasingchecking account fees, but have not

yet made our nal decision

We plan to increase checking accountfees but have not yet determined ho

fee increases ill be applied

We have already increased or plan toincrease checking account fees for a

minority of our customer base

We have already increased or plan toincrease checking account fees for a

majority of our customer base

Don’t kno



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Figure 3: Only one-third of readers are actively engaged in social media with their customers


25%

19%

23%

33%

We are doing nothing and have no immediate plans to use social media

We have not launched social media yet, but are in the planning stage

We are only monitoring social media communica ons at this point

We ac vely communicate with our customers through social media

Figure 4: Newsletter subscribers would take the time to read articles about…


16%

18%

26%

28%

32%

34%

34%

36%

38%

38%

38%

40%

40%

54%

54%

56%

56%

60%

68%

Implica ons of “Occupy Wall Street” backlash

Merchant-funded and other types of rewards

Channel migra on

Rela onship banking services

Prepaid cards

EMV (chip & PIN)

Managing unpro table customers

Payments migra on from paper to plas c

Core system upgrade or replacement

P2P (person-to-person) payments

Economic insights and analysis

Lending and credit risk management

IT and opera ons management

Con nuous e ciency improvement

Mobile payments

Fraud detec on and management

Community bank di eren a on strategies

Mobile banking

Impacts of regulatory issues



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Strategic Insights is a monthly newsletter that provides research, thought leadership and strategic commentary on recent events in banking and payments. The newsletter is produced by the Enterprise Strategy team at FIS. FIS is one of the world’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries, FIS delivers the most comprehensive range of solutions for the broadest range of fi nancial markets, all with a singular focus: helping you succeed.

If you have questions or comments regarding Strategic Insights, please contact Paul McAdam, SVP, Research & Thought Leadership at 708.449.7743 or paul.mcadam@fi sglobal.com.

Fis strategic insights vol 5 january 2012

Business

Transcript of Fis strategic insights vol 5 january 2012