tight margin environment makes it difficult for financial institutions to maintain
profits. Those that don’t understand the sources of that profitability will
continue to struggle the most.
Measuring the profitability of relationships is often deemed too difficult due to a lack of data and tools that accurately create and analyze these complex relationships. By compiling and leveraging this data, relationship profitability information moves from the back office to the front lines, where it can be used to make decisions that improve customer service and the value of key members.
this: Can you easily rank your client relationships from most-to-least
profitable? And does a client’s position on that list influence your
interactions with them? The answer to both questions should be “yes,” if you
want to ensure your institution and your clients receive maximum value from the
1% of Clients Drive Institutional
Industry studies show that an institution’s top 1% of clients
contribute the most value to overall profitability, which makes maintaining
each of these relationships critical to institutional health. To get an
accurate picture, an institution must understand the totality of the
Full relationship management should consider an individual’s scope
of influence, which includes his or her business and personal networks. Understanding
these ties can influence client loyalty and institutional profitability.
In a 2019 survey, 69% of CFOs and senior leaders in
North American financial institutions indicated they cannot view the total
value of any one relationship. Without knowing how to empirically value
relationships, an institution cannot make meaningful changes to boost
Understanding the value of each relationship offers important benefits
that impact profitability, including the ability to:
- Retain and expand relationships with your best clients, pricing loans and deposits appropriately and providing excellent service
- Identify sub-par clients, who represent improvement opportunities
- Market products and services appropriately to maximize success of cross- and up-sell efforts
Use Historical, Future Approaches to Measuring Profitability
Sixty-eight percent of survey respondents say their
institutions lack an automated means to analyze the profitability of complex
relationships. Respondents cite lack of data (45%) and lack of analytics tools
(55%) as top impediments to relationship profitability analysis.
Once your institution can effectively build and manage relationships, it’s
critical to use a robust calculation and modeling engine that measures both
historical and forward profitability.
A consistent approach between
historical and projected profitability is vital in how you analyze
profitability across the organization, products, branches, and relationships. Agree
on methodologies for calculating and accessing the source data across
dimensions, and define each calculation needed — i.e. the net margin
calculation, including the Funds Transfer Pricing (FTP) charges and credits; allocation
of non-interest income and non-interest expense; provision for loan loss; and
calculation of net profitability — to arrive at the Risk Adjusted Return on
Institution leaders can accurately predict future performance
based on factors such as runoff of the current portfolio and the effect of new
business. Additionally, performance by individual relationship managers can be
used to guide incentive compensation, inform coaching opportunities, and identify
best practices used by top performers.
By understanding how each relationship in a portfolio performs,
relationship managers can prioritize their business development and account
management efforts, focusing extra time on the top and bottom deciles.
Adding Value to the Relationship
Once you understand
your client’s sphere of influence and empirical profitability, each deal you
make should add value rather than dilute it.
to understand how proposed new business impacts profitability hurdle rates
(such as RAROC) and the ability to compare pricing scenarios before making a deal empower
relationship managers to achieve a win-win for the organization and for the client.
institution, value is created through:
- Enhanced earnings
- Retained or improved relationships
(especially those in the top 1%)
- Profitable growth
- An effective and efficient process
for loan officer and other relationship managers
For the client, you create value by:
- Delivering an increased level
of service appropriate to its magnitude of business
- Providing multiple options to
best structure deals to meet individual needs
- Promoting a strong
relationship with the institution, focused on long-term value
A Winning Strategy for 2020
institutions continue to face tight margins, challenges in growing loan and
deposit levels, heavy competition, and continued pressure on earnings. Understanding
the value of each relationship and the impact on profitability can help financial
institution leaders create more profitable growth.
Ken Levey is Vice President Financial Institutions Software, Kaufman Hall/Axiom Software