The little banks that could

Union National Community Bank (UNCB) has history on its side. With well-established roots in Lancaster County, the 149-year-old community bank in Mount Joy, Pa., has a reputation for old-fashioned customer service. The address of its headquarters -- 101 East Main St. -- says it all. But a few years back, it suddenly found itself competing not only with other well-established local and regional banks but also with giant conglomerates such as First Union/Wachovia and Fleet Bank. All were eager to grab a piece of the wallet in the affluent Lancaster area.

UNCB attempted to compete on price by lowering fees, discounting loan rates and inflating deposit rates while still offering its hands-on customer service. But it was a money-losing move. UNCB was fast becoming the Conestoga wagon of local banks, and Lancaster County locals were eyeing the more plentiful offerings of the larger banks, the Jeep Grand Cherokees of finance.

So in 2000, UNCB did the only thing it could do to retain its customer base: It turned to technology and a customer relationship management (CRM) system. The seven-branch bank spent about $250,000 on a CRM package that allowed it to segment its 37,000 accounts by profitability, drill down into individual household information to get a view of spending and account activity, and feed all bank transactions into a single data warehouse where they could be analyzed later to pinpoint the products most important to its clients. Since then, UNCB officials say, the bank has achieved $1 million in efficiency gains, stemmed customer erosion and seen substantial revenue growth.

Forced to compete in a consolidating industry dominated by big banks, many community and regional financial institutions are turning to CRM for help. Although these smaller institutions may be physically closer to their customers, multinational megabanks are using technology to simulate the proximity that was once the defining advantage of the small guys. Local institutions must play IT catch-up to survive.

"There is a certain me-too-ism about CRM technology, with the smaller institutions saying, 'We should be as technologically capable as the largest banks,'" says Kathleen Khirallah, a Los Angeles-based CRM expert at TowerGroup, a financial services IT consultancy in Needham, Mass. "At the same time, consumers are used to getting certain levels of service, whether they're dealing with Domino's Pizza or And banks of all sizes have to meet those service levels in terms of speed, accuracy and understanding the customer relationship."

Though they started behind the eight ball, local banks and other small institutions can use CRM to better do what they're uniquely qualified for: catering, communicating and cross-selling to their customers. In fact, smaller players in many industries -- from retail and communications to health care and hospitality -- can use CRM tools to once again capitalize on what historically has differentiated them from the big conglomerates in their markets.

Know Thy Customers

Like many small to midsize enterprises, most community banks and credit unions were run for years on little more than informed guesswork. The assumption that the little bank on the corner knows its customers any better than the bigger players is often incorrect. "While these smaller institutions are [closer to their customers] and have more of an inclination toward that kind of service, they really don't know their customers as well as you might think," Khirallah explains. Hard numbers on account balances were available from their core processing systems, but little more. With a limited amount of moneymaking business to go after and increasingly larger and better-funded competition, these smaller players have had to start thinking more seriously about where their revenue really comes from and who their customers are in terms of dollars and cents. With analytical CRM tools, many smaller banks are able to see for the first time which customers they're making money from and which customers are costing them money. They can then segment those customers and determine which products and fees to offer them.

UNCB had always prided itself on its customer focus, but the way it did business didn't reflect that. "A lot of our procedures, such as performance measures, training and compensation structures, were not aligned around the customer. And our products and pricing were in desperate need of review. But we were lacking the technology to do anything about it," says Michael Frey, a native of Mount Joy who joined UNCB in 1998 to oversee strategic technology initiatives and lead cultural change as executive vice president and chief operating officer. As a result of its antiquated approach to customer relations, the bank made a lot of decisions based on instinct, not data. For example, UNCB would discount loan rates in reaction to a similar move at the Bank of Lancaster County. Or it would waive a fee in response to a seemingly loyal but complaining customer, without any knowledge of whether his relationship with the institution was financially strong enough to merit special treatment.

Because of this nonstrategic approach, UNCB found that it had some of the lowest fees and rates in town, while at the same time, it offered some of the highest levels of service. "It was inconsistent," Frey says.

Two years ago, the bank, which has $307 million in assets, embarked on a colossal change in its processes, products and pricing in order to stay profitable and still retain its customer-centric reputation. At the cornerstone of the new strategy was the CRM suite from Milwaukee-based Metavante Corp. The system allows the bank to look more closely not only at its big-picture financials but also at profitability by customer. UNCB immediately realized that it was losing or barely making money on some customers while virtually ignoring others who were more valuable. "In community banking, the thinking has always been that all customers are created equal, and that's absolutely not true," Frey says.

UNCB is using Metavante's relationship profitability tool to calculate the net profit of all its bank customers by analyzing all associated costs and revenue associated with each customer's behavior. Did the customer visit tellers often or opt for less-expensive automated teller machine and Internet transactions? How many checks was she writing a month? Was there other revenue associated with her accounts from optional services or extra fees? By using this tool, the bank was able to segment its customer base into high-value and low-value buckets. So when it began to raise some of its rates and fees to pay for its consistently high-touch service, the bank was able to protect its most profitable customers from the increases. Bank officials also began to create incentives to make the less-valuable customer segments more profitable to the bank either by encouraging electronic banking or signing up customers for products that generated more revenue.

"[By using CRM], smaller banks can start to ask questions like, 'Who's asking for this product or price?' and 'Does it make sense for the future?' " explains Tom Richards, CRM research director at Meridien Research Inc. in Newton, Mass. "Signing up a customer for five new products just to make them more loyal doesn't necessarily get the job done if they're the wrong five products and don't make money for the bank."

The CRM system, together with digitization of record-keeping, has saved the bank $1 million since early 2001. More important, the bank says, assets grew 9%; revenue rose 11%, to $13.3 million; yearly noninterest income increased by 50%; and earnings jumped 35%, or $500,000, to $2.2 million in the year following the implementation. And Frey claims the bank's return on its CRM investment has only just begun.

The Right Cross

Community banks and credit unions are uniquely equipped to cross-sell to existing customers, primarily because customers like to do business with people they know, according to John Varricchio, a partner at Deloitte & Touche LLP in New York. "Our experience is that over 90% of people go to their primary financial institution when they need a new product," he says. "These smaller institutions already have strong customer relationships, and the ability to cross-sell represents a huge opportunity for them." But it helps if they have tools to segment their customer base and figure out what to sell to whom and how.

Surrey Metro Savings, a 50-year-old community credit union serving British Columbia's lower mainland, uses the database and analytical tools in its CRM software from NuEdge Systems LLC in Waukesha, Wis., to discover exactly what other financial products an existing customer may be in the market for. Prior to its installation, customers complained that they were approached about products they weren't interested in. "Now, when they do hear from us with an attempt to sell them something, it's something they may have been considering anyway," says Jerome Lengkeek, Surrey Metro's assistant manager of database marketing, who manages the CRM system. "We can do the targeting well so we won't be calling a 15-year-old about a mortgage or a 90-year-old about Internet banking."

The software also enables Surrey Metro to figure out what new products it can safely introduce without competing with existing offerings. The credit union, with $1.6 billion in assets, recently used the system to help roll out its new MetroMax savings account. It hoped that the high-minimum, short-term, high-interest offering would attract lucrative new customers who had more than $5,000 to invest. "But our biggest concern was that we would lose money that was sitting in our relatively low-rate savings and checking accounts into the higher-rate MetroMax," Lengkeek explains. In the past, Surrey Metro would have run a mass marketing campaign to introduce the savings account, crossed its fingers and hoped it wouldn't cannibalize its own assets. This time, the credit union was able to use its CRM system to figure out how many of its accounts contained more than the MetroMax minimum, the difference in rates of interest and the potential financial loss if some or all of them switched to the new, higher-rate account. Surrey Metro could then balance that potential loss against potential new revenue. The credit union's product manager was also able to see just how many sales he would need in order to make the launch profitable. Based on market conditions and previous product launches, he decided that it was doable. Although Surrey Metro won't divulge details, it says MetroMax is profitable.

Having customer account information close at hand also helps Surrey Metro Savings act immediately and independently on customer concerns and potential problems. When news reports came in about debit card fraud in the lower mainland area of British Columbia a year ago, Surrey Metro was able to generate a list of customers who might have been victimized, based on whether they had unusual activity on their accounts. It loaded that list into the bank's call center dialing software in less than an hour. "Now when we have a hot topic or an emergency, we can drop everything and pump out these reports and lists in a day or two," Lengkeek says. "Before CRM, we were very slow movers."

A Very Good Year

Thirty miles away, North Shore Credit Union sought to use its CRM solution to further engage existing members. The community credit union in North Vancouver, British Columbia, saw its assets declining before it decided to invest $1 million on the CRM suite from Pivotal Corp. in North Vancouver for sales, marketing and customer service in summer 2000. "Our board was very concerned about the size of the investment, but it was the only way to go," explains Chris Catliff, president and CEO. "If you don't implement this kind of system, your revenues are destined to slowly erode. Our backs were against the wall."

The software alerts member service representatives (who have been assigned to individual accounts) to life changes that may indicate an interest in another financial product from the 61-year-old credit union. Recently married? The service reps can alert the mortgage department. Nearing 65? It's time to adjust for retirement. The database analysis tools can also determine, based on historical analysis, which current accounts indicate a likelihood of interest in another product. Those people with North Shore mortgages, for example, are more likely to open a North Shore checking account. The CRM software also allows North Shore to remain on its customers' good side by asking them how and when they'd like to be contacted, increasing the likelihood of a positive response to a pitch. "In the past, you had direct mail, with a 1% to 4% response rate. Then there were call centers placing phone calls at 6 p.m., which were more successful but irritated the hell out of people," says Catliff. "But when you've picked out a product specifically tailored to the customer and have their member service representative e-mail it to them, they'll open it and read it."

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