Residential mortgages are the bedrock of most small community banks in Massachusetts. They’re pretty good products for banks looking to make fee income (and some interest income for the few loans that get portfolioed). Mortgages tie the bank to the real estate in the community.
But what they don’t do is tie the bank to the actual people in the community. And that’s a pretty big problem.
“Mortgages,” says Kimberly Clay, marketing research director at the consulting firm Bancography, “are not a gravity product.”
Clay was speaking a few days ago to attendees of the spring conference of Watertown-based New England Financial Marketing Association. She was taking bank and credit union marketers through pages of data that show what’s important to bank customers, what keeps them and what drives them away – and how banking institutions can make them more profitable.
Giving them a mortgage was nowhere on the list.
Although customers like the idea of having a mortgage with a hometown institution, they’ve gotten smart enough to realize that if they get in trouble, that lender isn’t going to be able to do jack about it, because someone else will own the note. So mortgages don’t build customer loyalty, even when the bank has tied the mortgage payment to a checking account at their institution. When those customers smell a better deal elsewhere, they’ll be refinancing out of that bank in minutes.
No, what banks and credit unions need to do to bring in more customers, to cross-sell them on multiple products, and thus to weave their financial dealings tightly into the bank, is simple. They need to build more branches.
Cost Containment
Of course, that’s not what bank CFOs want to hear. Some 60 percent of a bank’s costs are tied up in running its branch network. Those Excel Wizards suggest that, by putting more emphasis on online banking products, they can snag customer dollars and reduce the cost of running physical branches.
But what that MBA-driven focus on cost-reduction doesn’t take into account is what happens in the online world. If banks are successful at training consumers to search for banking products and services online, to open their accounts online, to do all their banking online, then they will have succeeded in simply commoditizing banking services. After all, to hark back to mortgages, that’s what happened there (anyone ever use Lending Tree?). And if that happens, it won’t be community banks that win the day.
This doesn’t mean that community depository institutions shouldn’t be working up great online opportunities for customers. It’s clear that consumers like the advantages of online convenience. But even simple financial products are complex to most consumers. They need to be sold on their options.
And the best place to do that is in the bank branch.
When Bancography surveys banking customers, on average 24 percent of consumers say they chose their primary financial institution based on convenience of location. It’s the highest-rated factor given. Service quality (which comes up most frequently in branches) is the next highest, at 11 percent. Nothing else even comes close.
The key for banks is in training customer service reps to fully cross-sell products to customers. Yes, a bank’s offerings are frequently commoditized, low-excitement products – Kleenex rather than iPads. But consumers may not know what kind of checking account best serves their needs. Do they need a no-fee checking account, or one that comes with more fees, but gives them a better return on their money? Do they need to know about money market funds, and should they have a discussion with the bank’s Trust Officer?
In Person Is Personal
The thing about physical locations is that people like knowing there’s a bank, stuffed with knowledgeable employees, near them. They want to be able to come in and ask questions. And when customers ask questions, CSR’s eyes should light up, because questions are a buy signal.
Although the average bank branch in the U.S. costs about $2.5 million to build, banks can bring those costs down by looking at alternative branch locations. Supermarket branches cost about half what a normal branch does, and are often some of the most profitable because of the high traffic. Non-traditional branches at colleges, in hospitals and other venues also help.
There’s no simple answer for community banks. They’ve got to do it all. But one of the most important things to keep in mind is that bank branches can actually help level the playing field for many of them.
“Where we don’t compete is in the online experience. The big banks are killing us there, and we’ve got to put resources into that,” Stephen Lewis, president of Thomaston Savings Bank in Connecticut, told the NEFMA group. But he prefaced that statement with this observation: “I will argue that when we get a customer into our branch, we are as good if not better than the big banks.”
As Steve Jobs recognized when he launched Apple retail stores against the advice of his board of directors, giving customers a place they can go, where they’ll get expert and sincere customer service, will translate into higher customer loyalty and a better bottom line. You can buy an Apple product from thousands of online vendors, and hundreds of physical-store vendors. Apple stores had no right to succeed, except that consumers love them. CNNMoney estimates that Apple stores are the highest value retail chain in the nation, with each store producing $4,709 worth of sales per square foot.
There’s a lesson in that for bankers. Online is one very valuable channel for your offerings. But while your real estate loans may not be the tether you hope they are, the real estate your branches sit on can be.
Branch banking, it seems, is indeed a gravity product.
