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Four Billion Dollar Community Bank Identifies 40% Profit Improvement Opportunity.
Like many banks, Bank R, with $4.6 billion in assets, and 400,000 accounts, had no idea how profitable their customers or their products were. Seeking improved returns
through knowledge based product and pricing decisions, they undertook a profitability study using RMH Associates and their ProfitLine software.
RMH proposed a three step process to bring clarity to their analysis in just under three months. Step 1 involved data collection. This would include joint review of what
data was available from source files, and identify specific transaction, spread, and fee income fields to be used. Step 2 is the data analysis phase, where members of the Bank R team work with RMH and the ProfitLine
system to identify profit and loss dynamics within the customer base, validating those scenarios with the financial group. In Step 3, profitability evaluation would occur, where RMH would present specific profit
improvement recommendations.
The project was sponsored by the head of the Retail Banking Group, who assigned a three person team to work with RMH. The team included senior employees from Retail
Finance, Marketing, and Data Processing. RMH provided a single direct interface to their company so that each of the Bank's team members knew exactly whom to contact at any time during the project.
In Step 1, the team identified 6 application files to be used, which included all the products sold through the retail franchise. Two additional transaction files would be
added to get the full cost picture, and household numbers and demographic indicators were passed from the MCIF. Using the bank's existing house holding system would allow them to create profit segments by
demographic variables and match up to platform systems in the future.
A key component of Step 1 was the identification of cost, spread, and fee income data. Cost data at the transaction level was not available from the bank, so RMH's
database of costs were used for banks in the $1 -$5 billion asset category. There are over eight hundred unique transaction costs in this database, developed over 15 years experience working with leading banks and
consulting firms. The costs are fully loaded and were intended to foot to the bottom line expenses to run the Retail Bank.
Spread income was available through the bank's transfer pricing tables dating back 15 years for home equity loans and 7 years for time deposits. Current spread was used
for demand, savings, and money market accounts. Fee income was reported directly on the transaction files, including collected and waived charges.
The data collection phase for this project took about forty five days. This included all the steps described above, final sign-off by the bank's team, and any programming
and extract work by the data processing staff onsite or at out sourced locations. RMH converted all files to run on their ProfitLine software. This proprietary system allows users to calculate and analyze
profitability across a host variables. Bank R elected to delay the installation of the software on site until RMH ran detailed analysis that could be validated by the bank's financial team.
With the data loaded in the ProfitLine system, including the application of the bank's house holding codes, Step 2 could now be undertaken. Transaction and maintenance
costs were matched, and quality assurance was completed with the help of the bank's team. Top line reports were produced for Senior Management review. Chart A revealed a disturbing trend at Bank R, which is found in
most banks. The bulk of the retail profits were being received from a small portion of customer households. In this case, 5% of households delivered 85% of all profits to the institution, while a disturbing 25% (the
bottom four tiers) eroded most of that profit.
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