Maybe Bank Of America Has A Plan

Maybe — just maybe — Bank of America has a well-thought out plan behind its debit card fees.

Maybe it actually WANTS customers to leave.

Crazy talk, you say? Not sure about that. After all, ING Direct has been lauded for “firing” customers. Bank Technology News wrote this a while back:

“To promote customer homogeneity and keep costs down, ING Direct won’t hesitate to fire customers who demand too much. Better to win over customers with shrewd marketing and good rates wrought by the cost efficiencies of doing business online.”

So, rather than flat out telling unprofitable — or potentially unprofitable — to close out accounts, BofA figures, “hey, we’ll slap a fee on them, and if they don’t like it, they’ll leave. And if they stay, they become more profitable.”

And wouldn’t you know it, but Durbin opens his mouth, and HELPS BofA by telling those customers to “walk with their feet.” Talk about effective word-of-mouth marketing!

So what happens if 1 million customers leave BofA?

If they’re truly the least profitable customers, BofA’s average customer profitability increases. And with less unprofitable customers to serve, the bank can more easily shrink to a more manageable size.

But you know what else happens?

Unprofitable — or potentially unprofitable — go join credit unions or open accounts at community banks. The credit union folks think this is great because it probably means the average age of members goes down. Hooray!

But oddly, the credit union’s profitability is adversely affected. Because if it’s low balance accounts  walking in the door, the income accelerator — the revenue generated on deposits beyond the spread and fees — is diminished. (This by the way, is one of the key reasons why high-yield checking accounts are more profitable than no-interest accounts. See my report on Why High-Yield Checking Accounts Trump Free Checking).

Let’s look at a  scenario: Assume you have 100 customers, equally split across 4 segments. Assume that the average profitability per customer of segment 1 is $1, segment 2 is $2, segment 3 is $3, and segment 4 is $4.

You’re making $250 in profits with average customer profitability at $2.50/customer.

If, thanks to BofA, 25 new Segment 1 customers walk in the door, profits go up to $275, but average profitability declines by 12% to $2.20/customer.

If the four segments represent the generations, it’s possible that you will lose Segment 4 customers (Seniors) over time. So let’s say 25 new Segment 1 customers come in thanks to BofA, but 10 Segment 4 customers are no longer with you. Profitability still goes up, to $255. But average profitability declines to $2.13, a 15% drop.

And if the ratio of customers in the four segments doesn’t change — that is, if segment 1 customers don’t become as profitable as segment 2, 2 as profitable as 3, and 3 as profitable as 4 — over time, then your FI is in trouble.

Oh sure, you can hold hands and sing cumbaya and hope those customers become more profitable over time. But smart firms don’t do that.

———-

So maybe BofA’s plan is to drive out customers it doesn’t think are — or can be — profitable, and let some other FI deal with them.

I’m sure many credit union marketers are thinking that this is great, that they would love to have those relationships, and grow with them over time.

Maybe they can. But if the BofA rejects….oops, I mean defectors….are the younger, less affluent, Gen Yers, then it may take some time for them to have a material affect on the CU’s profitability.

I’ve heard CU cheerleaders talk about being more open to extending credit to younger and less affluent consumers, and finding ways to help those consumers manage their financial lives without the high rates and fees that the big banks charge.

But there’s a reason why those consumers either don’t get credit or have to pay higher rates and fees to get credit, loans, and accounts. They’re higher credit risks, and they bring less funds to the table, resulting in less profits.

Seems to me there are a number of people in credit union land ignoring those realities.

——–

But, back to BofA, maybe the imposition of fees on debit cards is a smart move for the bank. I wouldn’t have advised the bank to do what it did, instead, I would have told them to levy fees on writing checks.

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Why Google Won't Become A Bank

Search Engine Watch published an article titled Why Would Google Become A Bank? and basically answered the question in the first paragraph by saying “Because that’s where the money is.” The article goes on to list a more specific set of reasons including:

  1. Increased value for AdWords ads.
  2. The power of the coupon just got better.
  3. Further diversification of revenue streams.
  4. Data.
  5. Android and Chrome usage increases.

My take: Don’t hold your breath waiting for Google to become (or launch) a bank. It isn’t going to happen. Here’s why:

1. It’s not where the money is. The prospects for mobile payments is certainly bright. But the question that remains to be answered is: Who’s going to make money from these payments? If you, your bank, or anyone else thinks that consumers will pay a fee or a premium for the “privilege” to make a mobile payment, you (and they) are sorely mistaken. Banks’ ability to make money from transactions — mobile or not — has seen its ups and down in the past few years (up on credit cards, then down on credit cards, up on debit cards, then down on debit cards). Retail banking is simply NOT “where the money is.”

2. Nobody in their right mind wants to be regulated to the extent that banks are. For the past few years, regulatory changes have hacked away at banks’ ability to make money. The Card Act, Regulation E, Durbin’s Folly, the list goes on. From a new entrant standpoint, it’s simply too risky and unpredictable to enter the industry. Firms like BankSimple and Movenbank are getting into the industry by either leveraging other firms’ bank charters or by avoiding the need for one altogether.

3. They don’t have the support infrastructure. Google isn’t a B2C company, it’s a B2B company. It has no competency — let alone capability — to provide transactional customer support. So I hear you say,”but they’ll outsource that.” No, they won’t. Outsourcing a critical business function doesn’t absolve you of the need to know how to manage and integrate that function into your business

4. It doesn’t fit with the firm’s business model. Even if you argue my three previous points away, the most important reason why Google won’t become a bank is that it just doesn’t fit with its strategy and business model. Google’s strategy and business model is unique and ambitious: It aims to be the center of the universe in INFLUENCE.

Why did Google acquired Zagat? To influence your choice of restaurants. Why did Google launched Google Advisor? To influence your choice of banks.

Google doesn’t want to process mobile transactions, open bank accounts, and deal with your stupid little banking questions.Google wants to influence who you do business with. And not just in banking and financial services, but everywhere.

When Google is influencing all of your day to day decisions, then every provider in the world will be kissing Google’s shiny black boots looking to participate. And THAT’S how Google will make money. Not by becoming a bank.

More Likely To Purchase: Quantipulation In Action

How many times this week have you heard about some research study that found that one consumer segment is XX% more likely to purchase your products than another segment?

These studies and claims come out every day. And every one of them is a shining example of Quantipulation: The art and act of using unverifiable math and statistics to convince people of what you believe to be true.

The problem with these “more likely to purchase” claims is that they’re leading you to make bad marketing decisions.

For example, it’s popular these days to claim that Facebook fans are an important segment of your customer base because they’re “more likely to purchase” than other customers are. DDB (a very reputable advertising and marketing services firm) conducted a study last year and found that:

“Facebook users who like a brand’s page on the site are thirty-three percent more likely to buy a product, and 92 percent more likely to recommend a product to others. “Fan status is indicative of high purchase intent, especially when compared to any traditional form of advertising, and is an even greater predictor of advocacy with over 90% noting that being a fan has a positive impact on recommending a brand to friends,” said Catherine Lautier, Director of Business Intelligence at DDB.”

The implication of this is that: 1) If marketers can drive up their brands’ Facebook fan count, then more customers will become more likely to buy, and 2) Marketers should focus their marketing efforts on Facebook fans because of higher purchase likelihood.

But there are a few problems here:

1. What does “more likely to purchase” mean? If in a survey Customer A (Facebook fan) says he’s “very likely to purchase” and Customer B (non-Facebook fan) says he’s “somewhat likely to purchase”, what does this really tell you? How much more likely is “very likely” than “somewhat likely”? Isn’t timeframe important? Is that very likely to buy in the next 2 weeks or very likely to buy at some point in the future? Even if Customer B says “not likely”, does that mean we should give up on marketing to him? Really? People don’t change their opinions? After all, he’s already a customer — and isn’t the cost of acquisition 5x higher than the cost of retention?

2. The absolute numbers might not be compelling. In the DDB study, only 36% of Facebook fans said that they were very likely to purchase. Which means that 27% of non-Facebook fans were very likely to purchase (you do the math). Assume that your company has 10 million customers, of which 1 million are Facebook fans. That means you’ve got 360,00 Facebook fans who are very likely to purchase, and 2, 430,000 non-Facebook fans that are very likely to purchase. Which group do you want to market to?

3. Causation versus correlation. Do Facebook fans become “more likely to purchase” after becoming Facebook fans, or did the fact that they were already “more likely to purchase” lead them to become Facebook fans? Granted, their act of becoming a Facebook fan helps marketers better identify them out of the pack. But if — as the numbers above indicate — the differences in likelihood to purchase aren’t that compelling, then it’s simply not a very helpful segmentation tool.

Bottom line: Don’t be quantipulated into believing these “more likely to purchase” claims.

Quantipulation: ROI Versus Success

[This is a follow-up post to Quantipulation. I thought I could get away with just floating a few ideas out there, but some comments I’ve seen suggest that there’s a lot more to quantipulation than I wrote about, and those comments are correct.]

Quantipulation — the art and act of using unverifiable math and statistics to convince people of what you believe to be true — is commonplace in the marketing world, but perhaps nowhere more so than in the social media environment. Especially when it comes to everyone’s favorite topic: Social media ROI.

Whenever I use the term ROI in my reports, the editor where I work asks me to spell it out. As she rightly says, there may be people who aren’t familiar with the term. I don’t tell her this, but if you don’t know what ROI is, I don’t want you reading my reports.

There’s another reason why she’s right: There may be people who define ROI differently than I do. I won’t tell her this, either, but those people don’t deserve to read my reports.

ROI = return on investment. It doesn’t mean return on influence or any other “I” word you can dream up. And despite what some quantipulators would have us believe there’s only one formula for ROI: Financial return divided by financial investment. The only “variable” piece to the formula is the timeframe you use to quantify these variables.

That won’t stop some people from trying to redefine the formula, however.

The most egregious example comes from a firm called Digital Royalty. I won’t besmirch my blog by linking to the offending post. Instead, I’ll point you to Anna O’Brien’s brilliant (and very funny) critique of it.

Here’s another example of ROI quantipulation:

My bet is that tthe firm that put this chart together wanted to include other ROI components, but since it would have messed up their inverted hour glass figure, they decided to leave them out.

Then there’s attempt at redefining social media ROI:

This guy has decided that the ROI unit of measure should be “conversation”. He goes on to tell us that we can measure the “value” of conversation by looking at participation, engagement, influence, imagination, energy, and stickiness. But not increased revenue or decreased cost. Sweet.

There are (at least) two things going on with these attempts to redefine ROI. One is bad, the other is good. 

The bad: An annoying attempt to demonstrate thought leadership. Ugh. Not the way to do it. Anna O’Brien said it best in her blog post: “Random metric names and symbols is not an equation.” (Maybe she didn’t say it best, because it should be “are not an equation”).

There is a good aspect to what the ROI quantipulators are doing, however. They’re raising the very valid point that there are other measures of success beyond ROI. 

There’s a formula for that, too. The one I like is from Pat LaPointe who writes a blog called Marketing NPV. Pat’s formula says that success can be measured by dividing the value added by the resources used. And as this formula implies, “value” can take on the form of many of those measures that those other people wanted to use to calculate ROI.

But this isn’t the whole formula.

Pat added something on to this formula that, as far as I’m concerned, qualifies Pat as a marketing genius. Pat’s formula for calculating success is:

(Value Added/Resources Used) * Perception

What Pat recognized was that what you might consider to be “value” might not be viewed as valuable by other people. Other people like, say, your CEO or CFO.

We’re living in an ROI culture. Suggest that your company do something, and somebody will ask “what’s the ROI on that?” If you want to get up in front of your management team and suggest that your company do something because you “feel” it’s the best thing for the company to do, go for it. Just don’t send me your resume when you’re on the street. 

That doesn’t make your feeling wrong. But being right doesn’t make you successful. Persuading others to do the right thing does. 

This is why quantipulation is so important:  Quantipulation is an attempt to influence perception. To be a successful leader, innovator, or change agent, you have to shape, change, and confirm people’s perceptions.

There’s a reason I call quantipulation an art. Successful quantipulators know that it’s about more than just the data – it’s about logic and emotion. And there’s no formula or recipe for figuring out how much logic and emotion to mix in with the data.

The examples of ROI quantipulation shown above fail not because they’re wrong, but because they fail to influence perception. Those formulas simply confirm for the social media believers what they already believe. That’s easy. Converting the heathen is hard.

Had those social media ROI formulas made any attempt to link social media results to the conventional definition of ROI — financial return — they might have been more persuasive.

Last thought: Quantipulation is not inherently bad or evil. Yes, it’s a play on the word manipulative, which doesn’t have positive connotations. But I prefer to take a more realistic view: It is what it is. And it’s a necessary skill for today’s business world.

Quantipulation

A guy named John Wanamaker is famous for something he said 100 years ago. He said:

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”

Unfortunately, he’s wrong. I mean, if he didn’t know which half was wasted, how did he know it was half and not three-quarters or one-quarter of it?

He’s also wrong because it’s conceivable that 100% of his advertising dollars were wasted.

A century ago there were no ad ratings or measurement services. So how he could possibly know if ANY of his advertising spend was effective? It’s quite possible that any increase he saw in sales was due to exogenous factors like the weather, the economy, the competition raising prices or going out of business, or word of mouth among customers.

Ah, but hold on here a second. I guess it’s possible that 100% of his advertising spend was effective – or at least, not wasted – depending on what measure of success you use. If you don’t believe me, ask DeBeers.

Is it likely that the advertising he did had absolutely NO effect at all? Probably not. Just because someone didn’t make a bee line for the department store after seeing an ad, doesn’t mean the ad had no effect and should be considered wasted dollars. Some might have seen the ad and learned about the store, or the ad might have left others with a positive impression of the store.

Wanamaker thought half his advertising spend was wasted because he had no way to measure its effectiveness and didn’t even know what to measure.

Today’s advertisers have some measurement tools and services available to them, but none can claim to be totally accurate. And marketers are dreaming up new metrics every day, so you can be sure that no one measure is perfect, nor can we safely assume that even a group of commonly used metrics can truly give us a reliable picture of the effectiveness of advertising.

Bottom line: Any claim on what percentage of your advertising is wasted and what isn’t is just a random guess. We simply don’t know – and can’t know.

Here’s another claim to consider: Have you heard that its costs five times more to acquire a customer than to keep or retain one? How did they figure that? You could double the number of insurance, credit card, or mortgage customers you have by simply tweaking your underwriting guidelines, risk guidelines, or interest rates. No big cost associated with that.

But to retain those customers, you have to incur some big costs to keep branches open, provide call center support, and deliver service in an ever-growing number of channels. Many of the costs you incur to keep the business running are costs that help keep your customers  satisfied – and, hence, keeping them as customers. There’s simply no way the cost of acquisition is five times greater than the cost of retention.

But, wait, that’s not right either. Because all those costs you incur to retain your customers help to make your company the great company that it is. It’s what you’ve built your reputation upon. And without that reputation you couldn’t retain OR attract customers.

Bottom line: There’s simply no way to accurately calculate the cost of acquisition or retention. It involves making too many judgments and decisions on which activities contribute to acquisition and retention. It can’t be done.

———-

These claims – that half of advertising is wasted, or that acquisition costs are five times greater than retention costs – are examples of what I call Quantipulation:

The art and act of using unverifiable math and statistics to convince people of what you believe to be true.

The examples I just gave are just two examples of this widespread practice. In fact, the incidence of quantipulation has grown by 1273% compounded annually since 2003. And I have the math to prove it:

What’s driving this growth in quantipulative activity?

The false legitimacy that quantipulation provides gives quantipulators confirmation that the things they WANT to believe are really true.

In addition, there are many people who want to lay claim to having the secret sauce for marketing success, and sadly, many people who want that special sauce. Quantipulation provides the “scientific” proof that their sauce tastes best.

There are at a lot different flavors of this special sauce that people quantipulate about, especially about customer loyalty, influence, performance metrics and ROI.

I’ll be discussing those things in more detail during the conference. Hope you’ll be there.

Oh, and in the mean time, if I catch you doing anything quantipulative, I’ll be sure to call you out on it. 

How To Differentiate Your Credit Union

On the CU Water Cooler site, William Azaroff wrote:

“When I look at many credit unions, I’m troubled by their blandness, their inoffensiveness. They used to stand for something, but now they’re moving away from differentiation and towards sameness. And many credit unions are doing this at the precise moment when differentiation is a necessity. The question is: do some people hate your brand? If some do, then I would say you’re doing something right. If not, then I’m guessing your organization is trying to be all things to all people, and should take a stand for something and embed that into your brand.”

My take: To quote former President Clinton: “I did not have sex…” No, wait, that’s the wrong quote. I meant this one: “I feel your pain.”

William is spot on that many credit unions aren’t differentiated in the marketplace. What William didn’t get into, however, is why few credit unions are effectively differentiated. There are (at least) three reasons why undifferentiated credit unions are that way:

  1. They don’t know how to differentiate themselves.
  2. They think they’re differentiated, but don’t know better.
  3. They don’t want to be differentiated.

The last reason might surprise you, or strike you as wrong. But after 25 years of being a consultant, I can’t even begin to count the number of times I’ve made a recommendation to a client to do something, only to be met with the following question: “Who else is doing that?” Risk adversity runs deep in the financial service business.

There are also a fair number of CU execs who think that their CU is differentiated. Almost to a man/woman they give the same description of what differentiates their CU: “Our service.” This is often — I’m inclined to say always — wishful thinking. Why? First, service may be what your firm does best, but it doesn’t mean your service is comparatively better. And second, because service means different things to different people.

The most prevalent reason why so many CUs are undifferentiated, however, is probably the first reason: They don’t know how to differentiate themselves. 

I’m not looking to pick a fight with William — I suspect he would agree with me here — but approaching the topic of differentiation from the perspective “what can we do to tick people off and be hated by some of them?” is not the right way to go about it. 

And with all due respect to my friends in the advertising business, the last thing a credit union should do is bring in the advertising people to help them figure out how to differentiate the CU. 

Why? Because there’s a prevalent — but misguided — mindset among advertising people that differentiation comes from “the story you tell.” (If you need proof, go read Seth Godin).

But the story you tell doesn’t differentiate you. What differentiates you is the story that your members tell. That they tell to themselves inside their head, and that they tell verbally to their family and friends. And those stories only come from their experiences with the credit union, not the advertising. 

Which means this: Differentiation comes from something you do

That “something” must be meaningful to members. And that something must be something that: 1) only you do; 2) you do measurably better than anyone else; or 3) you do measurably more often than anyone else.

Differentiation doesn’t come from standing for something, and it doesn’t come from your branding efforts (your differentiation drives your brand, not the other way around).

William’s credit union Vancity “stands” for community development and improvement.  So do plenty of other CUs. What differentiates Vancity is that — time and again — they do something about it. They can count the number of times they’ve done something about it, and they can measure the impact of what they’ve done.

Differentiating on service is tenuous. What does that mean? That you fix your mistakes better than anyone else? That the lines in your branch aren’t as long as they are in the mega-banks down the street? That Sally at one of your branches greets everyone by name and with a smile when they come in?

If you’re going to differentiate your credit union, you have to do something. Different, better, or more. None of those options is particularly easy to do. Technology initiatives intended to gain a competitive advantage — mobile banking, remote deposit capture, etc — are often easily (I didn’t say cheaply) copied. Better is hard to prove. And “more” requires strong commitment from the management team for an extended period of time.

This isn’t to say that aren’t opportunities for differentiation, just that they require commitment — and a lot of it.

So what can you do to differentiate your CU? I think it comes from committing to differentiate in one — and only one — of the following areas:

1. Advice. Managing our financial lives is tough and getting tougher. People need help making smart financial choices. But the advice available in the market tends to be focused on asset allocation and stock picking for the relatively affluent, or focused at the very lowest end of the income spectrum for people who need help with serious debt problems. What about everybody else in the middle? What about providing help with all those everyday/week/year decisions that have to be made? PFM holds the potential to provide and deliver this kind of advice, but the tools aren’t quite there yet. If this is the path you choose, you’re going to have to make some investments to develop them and get them to point where they can deliver on this promise.

2. Convenience. There’s one bank in the Boston marketplace that advertises itself  as the “most convenient” bank. Hooey. Having extended branch hours and free checking isn’t “convenience.” Making people’s financial lives easier — i.e. more convenient — to manage is a complex and difficult proposition. But when you’re really doing it, people know it. And you’ll be differentiated.

3. Performance. You might not be the easiest FI in the market for me to deal with, and you might not provide me with any advice (maybe because I don’t want any), but if the performance of my financial life — that is, the interest I earn, the fees I pay, and the rewards I get and earn, are superior to everyone else out there, than I will consider you to be differentiated in the marketplace.

I didn’t say differentiation is easy.

The Cost Of Retention Versus Acquisition

Chief Marketer conducted a survey of more than 1,000 marketers across a range of industries and company sizes. I found the following comment — in response to the finding that nearly half of respondents plan to focus on acquiring new customers versus 26% that will concentrate on retaining and reactivating customers — particularly interesting:

“Customer retention and reactivation are less costly, but marketers may redouble efforts to reach new potential buyers”

This notion was recently echoed in an article in Insurance & Technology magazine:

“While the cost of retaining an existing customer is usually far less than the cost of acquiring a new one, all customers are not equal and different customers tend to have a different “cost of ownership.”

My take: Damn. It’s 2010, and this myth about the costs of acquisition versus retention still hasn’t been exploded. People, listen up: This notion that “it costs 5 (or 6 or 7) times more to acquire a customer than to retain one” is bunk.

If you’re in the banking world, put up a website, offer a 5% rate on a savings account, do some online advertising, bring on board an ex-Twitter exec, and you’ll acquire a bazillion customers. Very cheap (except, maybe, for the equity you’ll have to give to the Twitter dude).

Keeping those customers is another thing.

You’re going to have to build a damn good customer service delivery capability. Oh, and you’ll need to provide account access, and transaction support in what, like ten different customer-facing channels? Don’t forget the money you’ll need to invest in security and fraud protection.

And when the next genius comes along and offers 6% on a savings account, you’ll have to raise your rate. And the additional interest you have to pay out is a cost of retention, my friends, not a cost of acquisition.

Here’s the issue: There is no defined standard for what costs to include and which ones to exclude when calculating customer retention. Or acquisition for that matter.

The point is moot, of course. Why “of course”?

Because it doesn’t matter what the cost of acquiring a customer or retaining a customer is. The only thing that matters is how profitable the customer is. If you have a customer that will produce $100 of profit per year (that’s ongoing + incremental revenue less the cost of marketing to that customer and the cost of servicing her), wouldn’t you be willing to spend more to acquire her than a customer that will only produce $50 of profit per year?

Sure you would. But if you’re like many of the marketers surveyed, you can’t figure any of this out.

Among the Chief Marketer’s survey respondents, 63% don’t track customer lifetime value by channel. Now, that’s OK if those firms only interact with customers in one channel. But that’s unlikely. Bottom line: Those marketers have no clue what their real customer lifetime value/profitability numbers really are.

So marketers’ focus on acquisition versus retention has nothing to do with perceived costs, or even expected customer profitability. Instead, it reflects a philosophy that their best opportunities for growth come from new customers instead of existing customers.

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