Private Banking &amp: Relationship Profitability

We have a client bank that does a series of loan, deposit and cash management promotions around the upcoming World Cup Soccer tournament. The game will be played on all branch plasma screens and education pieces will discuss teams and current standings. There will be a soccer ball giveaway for the kids, T-shirts for the adults and deposit promotions that pay a higher rate for each game the U.S. wins. The marketing effort reportedly triples branch traffic and increases both loan and deposit production by an average of 20% for the month. Today, the bank will be holding a separate drawing for registered private clients for an all-expense-paid trip to Europe (complete with two tickets to the semi-finals). The promotion got us thinking about the nature of private banking. There is a myth in banking that having a special department or division that caters to the wealthy or affluent customer is profitable. The fact is that looking at FDIC data, this is no more profitable than other mainstream lines of banking. The distribution of profitable departments almost mirrors that of the banking universe. For some banks, having a private client group is a necessity (due to the competition or demographics composition of the service area), while for other banks it is a method of diversification or a marketing tool. The irony of private banking is that it often results in profitable customers being moved into a special department that entitles them to greater customer service and benefits. This process turns once profitable customers into unprofitable customers. In looking at the latest survey data, while most private banking programs are profitable, the distribution is very close to other lines of business, with only 65% of clients producing positive economic value. Among the well-heeled, there are some customers that will squeeze every dime of value from an institution, while others are competitive and still others are highly profitable. Many banks make the mistake of assuming everyone in their private banking division is a sought after customer. Surveys reveal that very few customers are ever removed from private banking groups once they are admitted, including at many of the major banks. Statistically, this should not occur, proving that few banks actively manage profitability within groups. The reality is that many mainstream customers are more profitable. Customer profitability should be irrespective of net worth or length of relationship. Perhaps banks would be better served by basing private banking membership on profitability instead of net worth? One of the great myths of private banking is that these customers are also the best ones to cross-sell. This may be true in theory, but if private banking customers are unprofitable in general, they are most likely also unprofitable along additional product and service lines. While private banking can work, basic rules of customer profitability and marketing still apply. For banks that don't have in-house tools to track profitability, BIG has a low cost, outsourced solution that can help on either a 1x or quarterly basis. Better capturing and actively managing relationship profitability allows banks to continually shout "GOOOAAAALLL!"