Fis strategic insights vol 5 january 2012

FIS ENTERPRISE STRATEGY VOLUME 5 • JANUARY 2012

Driving Efficiency at IN THIS ISSUE

Financial Institutions • Driving Efficiency at

through Outsourcing Financial Institutions
through Outsourcing
• Mobile Payments:
In the First Inning
By Fred Brothers
EXECUTIVE VICE PRESIDENT, ENTERPRISE STRATEGY
• Overcoming the
Demographic
Disadvantages of
Last month, I talked about how financial institutions’ Community Banking
Efficiency Ratios improve as scale increases and how
banks can leverage customer data to drive efficiency on • Achieving Profitable
the revenue side of this equation. I also discussed some Customer Loyalty
of the game-changing reasons why business-as-usual
• November Survey Results
operating approaches will not bring efficiency back to
pre-recession levels. Financial institutions must seek
ongoing improvements to achieve cost efficiencies and
remain competitive in the rapidly evolving landscape.
This month, we discuss improving the noninterest expense side of the efficiency equation.

Wide variation in efficiency within a peer group
Size matters, but if you look through the Efficiency Ratios of thousands of financial institutions, you quickly discover wide
variation in them among banks with similar asset sizes. Excluding the FIs that have the scale economies of a multi-bank
holding company, we examined 15 banks of around $1 billion in assets with Efficiency Ratios averaging 67 percent, but
ranging from 43 − 95 percent (Figure 1). The lowest ratio handily beat the average of the megabanks (60 percent) in
2010. In fact, four of the 15 banks on the chart proved more effective than the megabanks at managing overhead and
other operating expenses to generate revenues and another two were even with the megabanks. That’s impressive.

FIS STRATEGIC INSIGHTS • V 5 JANUARY 2012 ©2012 Fidelity National Information Services, Inc. and its subsidiaries.

1

The three biggest noninterest
expenses for banks are:
Figure 1: Salaries and benefits have a large impact on banking efficiency ratios but
1) salaries & benefits, 2)
don’t necessarily lead to higher revenues
technology, and 3) premises &
fixed assets. Salaries & benefits
are typically the largest part of 100% $4
FIS ENTERPRISE STRATEGY on
noninterest expenses and, VOLUME 1 • JULY 2011

e a ve C
90%
average, represent about half of $2
80%
noninterest expenses among the
15 banks examined. 70%
$0

e a
60%
Salaries & benefits have a large 50% -$2
impact on banking efficiency,
40%

Ex e e (M
but higher salary & benefits costs Average -$4
don’t necessarily lead to higher 30%
revenues. The most efficient 20%
-$6
banks have the lowest relative
10%
compensation expenses. They
are getting more revenue for 0% -$8

)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
their buck. The average salary
& benefits per employee for
the most efficient banks was Sources: FDIC Call Reports, December 31, 2010 and SNL Financial 2010
about $4,000 less than poorer
performers, but one of the
best performers also had the
highest average salary & benefits
per employee among the 15
banks. That bank has 100 fewer
employees than the average in
the $1 billion segment, which
mostly offsets its higher salaries.
Quality over quantity can be a
winning formula.

BPO/ITO projected to grow
One strategy for keeping overall salaries & benefits expenses in line without sacrificing quality is to employ business
process outsourcing (BPO). BPO has become increasingly important for remaining competitive, especially in an economic
environment that can limit revenue growth opportunities. Mid- to large-size banks have already outsourced numerous
nonstrategic IT functions such as network and hardware maintenance, disaster recovery and item processing. Some
smaller banks will be required to follow to remain competitive.


2

The most recent forecast from Gartner
Figure 2: IT spending in the U.S. by FIs on consulting and business process shows the projected growth rate on IT
outsourcing is projected to outpace internal spending spending for consulting and business
process outsourcing by U.S. financial
institutions at nearly double the growth
$25
rate projected for internal spending
I
FIS ENTERPRISE STRATEGY ter a S e d CAGR 2 8% (Figure 2).VOLUME 1 • JULY 2011
$20
Particularly within small towns and
cities, outsourcing customer-facing
$15 CAGR 5 4% operations can pose a threat to
community relations. However,
$10 augmenting customer service with
C u g a d BPO English-speaking call center operators
S e d who handle after-hour inquiries (to
$5 quote one of our clients “during time
periods when we have trouble finding
quality people who will work those
$0 hours”) and supplementing current
2009 2010 2011 2012 2013 2014 2015 staff with operators with multi-lingual
capabilities can improve service quality
without putting the brand’s reputation
at risk.
2009 – 2015,” April 2011

These days BPO has matured to become much more than overflow and call center outsourcing for activities such as:

• Timely filing of regulatory and compliance reports, which have increased with the constant stream of new regulations
being imposed
• Outbound targeted call activities that support marketing campaigns. Imagine if you could obtain cold calling
assistance to increase the effectiveness of prospect campaigns and if hot leads were routed directly to your
personal bankers.

Returning to our sample of 15 banks in the $1 billion asset segment, we also found a fairly high relationship between
premises & fixed asset expenses and Efficiency Ratios− significant but not as notable as the relationship between salary
& benefits and Efficiency Ratios. On average, better performers have four fewer branch locations than poorer performers,
but the percentage of noninterest expense represented by premises & fixed asset expenses is roughly the same (13 – 14
percent) for both groups. Better performers also have nearly 50 percent more assets per branch. Of course, the big cost
of keeping branches open is the people expense, not the premises & fixed asset expense.

As always, we’d love to hear about your experiences. If you have thoughts on outsourcing that you are able to share,
please let us know about them.


3

Mobile Payments: In the First Inning
Interview with Doug Brown
FIS ENT RPRISE STRATEGY
FIS ENTERPRISE STRATE SENIOR VICE PRESIDENT, EBANKING
ENTERPRISE T ATEG
TE PR VOLUME 1 • JULY 2011

The mobile lifestyle has gone mainstream. An increasing number of consumers regularly
engage in mobile banking, which allows them to manage their finances from any mobile
platform – phone, smartphone or, increasingly, tablet. As remote deposit capture (RDC) apps
become available, consumers are expanding their mobile banking behavior. Consumers also
are increasingly using mobile phones when shopping – e.g., comparing prices and virtually
“clipping” coupons. The natural next extension of mobile banking and mobile-assisted
shopping is mobile payment at point-of-sale.

The mobile payment territory includes diverse stakeholders and is changing so rapidly that it
currently resembles the Wild West. In our conversation with Doug Brown, Senior Vice President, eBanking, he explains
how financial institutions should prepare for the expansion of mobile banking into mobile payments. The following
discussion should allay any concerns that small- to mid-sized financial institutions aren’t well positioned to leverage future
opportunities in the mobile payment ecosystem.

The First Inning of Mobile Payment
Where are we in the evolution of mobile payments?
Doug Brown: We are only in the first inning of a nine-inning game. Currently, there are many competing technologies
and models from various stakeholders testing solutions to add value to the payments process. The field is packed
because barriers to introduction of innovative products and services have never been lower than they are now.

Companies come into the market and may look promising, but can fade as quickly as they arrived. Look at Bling
Nation – a prominent example that has now collapsed and retreated. In retrospect, you can see that Bling Nation
wasn’t really built for high scalability and a seamless customer experience.

The evolution of mobile payments is going to be impacted by a broad spectrum of events that will affect when there
will be enough critical mass to see widespread rollouts. From a planning perspective, we think the next 12 − 18 months
will be a period of testing and pre-commercialization of phone-based wallet applications. We expect to see multiple
models emerging during the time period. Then we anticipate between a year and three years for fast-growth adoption
by consumers as the model(s) matures. We won’t see mainstream mobile wallet users in 2012, but we think that level of
penetration is likely to accelerate rapidly beyond 2012.

What criteria need to be met for mobile payment to gain traction?
Doug Brown: Three major events will push mobile payments past the experimental stage of the lifecycle. First, consumers
need to be ready, willing and able to use mobile payments. The payment method needs to be convenient, secure and
fun to use. And, it needs to have a compelling advantage over the very mature infrastructure that’s been the standard for
more than five decades. That advantage could be realized in a variety of ways, such as merchant-funded rewards where
consumers recognize significant savings or the ability to manage and control their finances in real time, for example.

Second, merchant participation is critical to success. Retailers need to be prepared to manage the checkout process with
these new technologies. They need to be able to handle basic functions such as returns, credits and coupon redemption.
Plus, the economics for retailers have to be worthwhile. Some prominent merchants have NFC readers in place, but they
won’t accept contactless payment for Visa because they don’t like Visa’s rate structure. Best Buy, Walmart and Target are
the merchants that can change the game because of their scale but they have to be provided with an incentive to change.


4

Third, if you believe that NFC will be the standard, then Outcome of the Game
it needs to be integrated into more handsets than the
current limited number of Android phones. The landscape Which players are most likely to win the game?
could change radically with the release of an NFC-enabled Doug Brown: The model that delivers a solution that
iPhone. That would be a major catalyst accelerating the provides value foremost to consumers and then to
time table. merchants and financial institutions will survive as the
FIS ENTERPRISE STRATEGY
industry sorts itself out. The VOLUME needs JULY 2011
solution 1 • to be easy
Game On to use, convenient, offer value and meet consumers’
expectations of security.
How should financial institutions prepare for a shift
toward mobile payments? Security in the mobile payments construct is critical for
a number of reasons. We do not want to experience an
Doug Brown: Our clients need to stay focused on what’s
increase in fraud associated with the new mobile payments
relevant and important to their customers. Initially, they
system. We need to ensure that authentication standards
need to focus on building an active mobile banking base,
for mobile are as good as, if not better than, alternative
because those are the customers that will ultimately
payment systems. Not only is this an industry requirement,
extend their mobile banking behavior into mobile
but consumers also express security concerns regarding
payments. They also need to stay current with the
their funds and their identity. The No. 1 reason consumers
technologies capable of delivering on their customers’
don’t participate in mobile or even online banking is
expectations. It’s critical to stay abreast of what customers
concern about security.
expect from mobile banking and extensions of mobile
banking such as emerging RDC apps and mobile payment What can smaller banks do to stay on top of the game?
capabilities when they become commercially viable.
Doug Brown: First, smaller FIs need to rely on a trusted
From the banker’s perspective, you need to provide technology- and business-savvy partner that understands
mobile banking services to retain your customers. If you the mobile environment. Second, they need to consider
don’t, your customers are going to find mobile banking engagement − either through partnerships or their own
either at the larger financial institutions or at this whole development − with multiple payment models because no
host of new competitors that can now serve most of the one can determine right now how mobile payments will
customers’ financial needs. play out. Third, they need to be very active in the industry
with entities such as NACHA to stay informed about the
What “curve balls” should FIs watch out for? technologies, activities and standards that surface as
Doug Brown: The ecosystem of payments includes players mobile payments are introduced into the marketplace.
that can be both FI partners and competitors − e.g.,
It’s really challenging to have the right focus and
the telecommunications carriers that are participants in
interpretative lens to understand which models fit the
Isis. Isis will provide banks with a vehicle to distribute
criteria necessary for sustainability. It’s our intent at FIS
their credit card credentials via the telco wallet. But,
to provide marketplace-ready solutions along with
Isis will own the customer experience and set terms
guidance around what’s critical to those really important
around its business model. In that way, Isis will compete
strategic decisions.
for future monetization opportunities that could help
FIs develop new revenue streams from sources such as The advantage that banks have in the ecosystem is the
merchant-funded rewards. This also applies to some of trust of their customers. That is the one asset that’s not
the aggressive digital technology players such as Google, reproducible. No one will own trust more than the FIs and,
Facebook and potentially Apple and Amazon. These knowing that, they need to carefully consider potential
players represent potential allies but, importantly, a new partnerships. Before acting, they need to ask: Could this
competitive threat. partnership jeopardize the trust our customers have in us?

For additional information about how FIS can help financial institutions best meet their mobile needs, please contact your
Sales Account Manager.


5

Overcoming the Demographic
Disadvantages of Community Banking
FIS ENTERPRISE STRATEGY VOLUME 1 • JULY 2011

By Paul McAdam
SENIOR VICE PRESIDENT, RESEARCH & THOUGHT LEADERSHIP

In my September 2011 article, I talked about how community banks are at a disadvantage
in terms of customer relationship expansion mostly because the community bank customer
base has less income and future earnings potential. This month’s article continues that analysis
and examines the influence of customer demographics and location on both the composition
and the financial behaviors of community bank customers. All analysis cited in this article was
generated from primary research of 3,345 consumers conducted by FIS Enterprise Strategy in
August 2011.

The affluence gap between the community bank customer and the average bank customer results in community bank
customers holding lower-than-average investable assets and loans overall, with correspondingly less opportunity. This
means the community bank has to capture greater shares of available financial resources to compensate for the thinness
of their customers’ wallets. Community banks do a good job of getting their fair share of available deposits, but they still
fall short of the average deposit amount because their customers have fewer assets. On the loan side, community banks
get less than their fair share of loans and fall even shorter of the average loan amount.

While geography has a significant influence on the composition of community bank customers, it would be wrong to
assume that community bank customers are purely “small town folks.” Overall, community bank customers are more
likely to live in a large city than a small town. Among all consumers who identify a community bank as their primary
DDA provider:

• 29 percent live in rural areas or small towns (defined as fewer than 50,000 residents)
• 34 percent are in small metro areas (between 50,000 and 500,000 residents)
• 37 percent live in mid-sized to large metro areas (more than 500,000 residents)

However, less than 10 percent of U.S. consumers live in rural/small towns while nearly two-thirds live in towns with more
than 500,000 residents, so there are striking differences in the concentration of community bank customers between
each of these markets (see Figure 1). Within rural/small towns, consumers are three times more likely to identify a
community bank as their primary DDA provider (index = 319). In small metro areas, consumers are about one-third more
likely to bank with a community bank (index = 136), while in mid-sized/large metro areas consumers are about half as
likely to identify a community bank as their primary DDA provider (index = 56). Of course, demographic and competitive
dynamics significantly influence these concentrations as rural and smaller markets tend to have older residents on
average and a lower concentration of large national banks. The opposite is true in big cities.


6

Community bank customers, as a
whole, have a number of demographic Figure 1: Community bank customers are significantly more concentrated within
characteristics that put community banks at rural and smaller towns
a competitive disadvantage in retail banking
long term. Community bank customers are: Concentra on of community bank customers by market
(average = 100)
FISOlder
1. ENTERPRISE STRATEGY VOLUME 1 • JULY 2011
3 *
2. Less likely to be employed
(i.e., a higher portion are retired)
3. Have less education

36
As a result, they have less household income
despite the fact they are more likely to be verage

married, thereby providing two potential 6

sources of income. Nearly two-thirds (65
percent) of community bank customers are
Rural / Small metro Mid-size /
married regardless of where they live − far small town large metro
more than the national average.

So what happens when we examine
community bank customers who live in rural
and small towns versus those who live in big
cities? Most key demographics that drive
income and future earnings potential
don’t shift:

• Community bank customers are just as likely to be retired or unemployed regardless of where they live.
• They also are just as likely to be older, which can be a positive for investment and deposit-related revenue but not
for loans.
• Community bank customers are just as likely to have less education regardless of where they live. Even in big
cities (where the population as a whole tends to have a higher level of education), the portion of community bank
customers with only high school or less education is above the norm (by 24 percent) while those with a college
degree or higher is below the norm (by 8 percent).

A troubling pattern emerges when we examine the average incomes of community bank customers who live in small
towns versus those who live in big cities (see Figure 2). As one would anticipate, the average annual household income
of banking consumers’ increases with the size of the metro area. But unfortunately for community banks, the incomes of
their customers fall signiﬁcantly short in larger markets.

• In rural and small towns, the average incomes of community bank customers and all other bank customers are
statistically equivalent.
• In small metro areas, community bank customers have an average annual income 12 percent lower than that of all
other banking customers.
• In mid-sized and large metro areas, community bank customers have an average annual income 13 percent lower than
that of all other banking customers.


7

The pattern of community bank customers having
lower income and earnings potential results in Figure 2: The average income of community bank customers falls
them owning investable asset balances (deposits short in larger markets
and non-IRA investments) 12 percent lower than
the national norm. As demonstrated in Figure 3, Average annual income of DDA households by market
consumers who hold their primary DDA relationship
FIS ENTERPRISE STRATEGY
with a community bank have lower incidence of VOLUME 1 • JULY 2011
deposit and investment product ownership with $ $
their primary bank in all products but CDs.

Despite these disadvantages, community banks
do an admirable job of capturing their customers’
available deposit balances. For some deposit Rural / Small metro Mid-sized /
Small town large metro
products, community bank customers − especially
those in rural areas and small towns − show a
higher-than-average propensity to consolidate their
assets with their primary DDA provider. And on an
overall basis, community banks capture 74 percent
of the deposit balances available from their primary
DDA customers, compared to a norm of 70 percent
for all other financial institutions.

But clearly there’s an opportunity for community
banks to do a better job of cross-selling to existing Figure 3: Community banks are missing out on investment and
customers. “Investment-oriented” services (money consumer lending opportunities
market and non-IRA investment accounts) are Percent of consumers owning accounts with their primary DDA provider
specific opportunities (see Figure 3). Community (among consumers who own each type of account)
banks capture money market relationships with *
6 *

only 44 percent of primary DDA customers versus
6
a cross-sell rate of 60 percent achieved by all other 6 6

financial institutions. Similarly, community banks
capture a non-IRA investment relationship with 11 3

percent of primary DDA customers compared to 21 3

percent for all other financial institutions.
Savings Mone C Non-IR IR invest Credit card First Home uto loan
Mar et invest revolving mortgage equit loan
On the loan side of the ledger, the combination
of a customer base that is older with lower
earnings potential contributes to community
banks capturing total loan balances from their
primary DDA customers that are 10 percent below
the national norm. As demonstrated in Figure 3,
the percentages of community bank customers
holding first mortgages and auto loans with their
primary DDA provider is roughly the same as that
of other financial institutions. But the percentage
of community bank customers with primary DDA-
provider credit cards and home equity loans is significantly below the penetration achieved by other financial institutions.
While closing the cross-sell gap in home equity lending probably isn’t feasible or advisable in the near-term given the
real estate market crash, community banks are missing opportunities with their current customer base in the form of
revolving credit card programs.


8

Many community banks have exited the
Figure 4: Obtaining status as the primary DDA and credit card
consumer credit card-issuing business
provider yields a tremendous profitability advantage over the past couple decades, but some
are reconsidering it in the advent of
Community bank customers who… Durbin debit interchange regulation.
Have primary DDA
Regardless of an institution’s legacy view
FIS ENTERPRISE STRATEGY Have primary DDA with the community
VOLUME 1 • JULY 2011
of credit cards, our research suggests
and credit card with bank but primary
the community bank credit card with that community banks should look
another provider
beyond the economics of credit cards
Num er o deposit and loan products held with
primar provider
3 as a standalone offering and consider
nnual customer pro ta ilit to primar provider $ $ 6
the value that a “primary” credit
card relationship can bring to overall
eposits alances held with primar provider $3 $ 6
customer relationship profitability (see
eposit wallet share captured primar provider Figure 4). Consumers who designate
Loan alances held with primar provider $ 3 $ 6
their community bank as the “primary”
DDA and credit card provider generate
Loan wallet share captured primar provider
profitability, deposit and loan balances
that are 3.5 – 4 times higher than
customers who maintain their primary
DDA with a community bank but hold
their primary credit card relationship with
another financial institution.

In summary, community banks do
have a disadvantage inherent in the
demographics of their customer bases.
Community banks in rural areas and
small towns are holding their own and competing well, however. They capture strong retail consumer market share
and those consumers are more likely to consolidate with the community bank. Stagnant or declining underlying market
growth is a key problem faced by many of these banks. Community banks that compete in small-to-large metro markets
also have disproportionately older and less educated customers and face the added challenge of customer bases with
household incomes 12 − 13 percent below market norms.

Regardless of the size of market served, the research suggests that community banks should strongly consider strategies to:

1. Attract new and younger DDA customers with desirable characteristics
2. Cross-sell to deepen relationships with existing customers − particularly in investment-oriented products and credit
card programs

To be fair, there are certainly a number of community banks in both rural and urban markets that outperform their larger
bank brethren in cross-sales and other relationship expansion metrics. It’s also the case that some community banks don’t
place a primary strategic emphasis on retail banking and focus instead on middle-market and small business − and also
compete very effectively with larger banks.

But taken as a whole, our research reveals an urgent strategic priority for the community banking industry. Given the
current anti-big bank climate, the timing for such initiatives is right.

I will continue to explore this topic of community bank competitiveness in future newsletter editions. In the meantime,
feel free to contact me at paul.mcadam@fisglobal.com with your questions or comments.


9

Achieving Profitable Customer Loyalty
By Mandy Putnam
DIRECTOR, RESEARCH & THOUGHT LEADERSHIP

A long-term customer isn’t necessarily a loyal customer. And a loyal customer may not even
be a profitable one. In fact, more than six out of 10 loyal customers are unprofitable, and
about one-quarter of loyal customers are unlikely to ever be profitable.

According to my Facebook profile, I “like” my bank. I “like” my bank because it ran a
charitable campaign promotion to get people to “like” it. I’m inclined to participate in such
things if only to see what happens. But, am I loyal to my bank in the way that I’m loyal to the
neighborhood restaurant I often frequent on Friday evenings? Heck, no.

Customer loyalty is more difficult to measure for banks than products and services for which switching is a relatively
easy process. Slightly more than two-thirds (68 percent) of FI customers agree that “switching my primary checking
account to a different financial institution is more hassle than it’s worth.” But our research with 3,000 consumers shows
that many customers who stick with their FIs due to inertia aren’t loyal and don’t keep a large share of their deposits
and/or loans with their primary checking account provider.

Customer Loyalty: Multi-dimensional and Overlapping
First, let’s look at three dimensions of loyalty:
Figure 1: FI Customer Loyalty Is Multidimensional and Overlapping
• Functional loyalty, which is typically created
by offering superior products and/or services
that consumers trust and are willing to Mix of loyalty types

recommend to others Func onal
only
• Transactional loyalty, which is reflected in 10%
concentrated spending with a brand and
repeat purchasing behavior Func onal
• Emotional loyalty, which is generally the most and
sought after but the least attained by branding Transac onal
18%* Func onal and
gurus; customers who exhibit emotional
All Emo onal
loyalty identify with the values that the brand three 1%
conveys and view the brand as differentiated Transac onal
3%
Emo onal only
sufficiently from others in its class to pay more only 2%
for its products and services 12%
Transac onal and
Emo onal
<1%
1
Forty-five percent of FI customers exhibit at least
one dimension of customer loyalty. FI customers
often have functional and/or transactional
loyalty, but few have emotional loyalty (Figure
Source: FIS Enterprise Strategy, August 2011; n = 3,000
1). The fallout of limited emotional loyalty can
be extreme price sensitivity − as exhibited by
reactions to a few FIs’ recent attempts to charge
fees for debit cards.

10

Introducing Customer Loyalty and Profitability Segments
Loyal customers aren’t necessarily profitable ones. Among higher-asset customers, loyalty to the primary DDA provider
is positively related to the percentage of assets they keep with that FI and, in turn, their profitability to the FI. But among
the majority of customers − 61 percent − there is either no relationship between loyalty and profitability, or it is an
inverse one. Research findings suggest that a lot of FIs have bought loyalty vis-à-vis “free checking” but are sacrificing
FIS ENTERPRISE STRATEGY Loyal customers pay less in fees.
profitability in the process. VOLUME 1 • JULY 2011

Segmenting FI customers based on the dimensions of loyalty − functional, transactional and/or emotional − and
profitability produces six customer segments. Goals and tactics differ depending on which segments the FI wants to
target. (Figure 2):

Figure 2: FI Goals Differ According to Segment

Unpro table Loyals Poten ally Pro table Loyals Pro table Loyals
9% 18% 17%

pro tabi ity

Unpro table Non-loyals Poten ally Pro table Pro table Non-loyals
10% Non-loyals 22%
24%

Break even

Low High

Source: FIS Enterprise Strategy

Goal: Maintain and deepen relationships with Profitable Loyals
Profitable Loyals (17 percent) tend to be well-educated married couples with higher incomes
and positive net worth. This group has proportionately more Matures (born prior to 1946) and
self-employed individuals. Of all the segments, they are most confident about enjoying a
comfortable retirement.

Profitable Loyals already have larger shares of their financial wallets with their primary DDA
provider than most of the other segments. But there is still opportunity to identify cross-sell
opportunities through data mining and analytics.

Currently, larger banks are capturing more loans from Profitable Loyals than smaller FIs, which underscores the
opportunity for smaller banks and credit unions to deepen their credit relationships with Profitable Loyals.


11

A package configured for this segment could look like: Goal: Increase profitability of
Potentially Profitable Loyals
• “Premier Checking” package bundled with other
Potentially Profitable Loyals (18
deposit and investment services. Preferred interest
percent) tend to be females with
rates and other rewards for high minimum balances
lower levels of education and low-
• Customized loyalty card program with preferred
to lower-middle incomes.
FIS interest ratesSTRATEGY
ENTERPRISE VOLUME 1 • JULY 2011
• Preferred interest rate incentives and advisory services Potentially Profitable Loyals don’t
for moving more assets/loans to primary checking have a very large financial wallet
account provider and most of it is composed of debt − most commonly
credit card debt and auto loans. Very little of their debt
Goal: Increase loyalty to retain is held by the primary DDA provider, which is the main
and deepen relationship with reason they aren’t currently profitable.
Profitable Non-loyals
Another reason Potentially Profitable Loyals aren’t
Profitable Non-loyals (22 percent) profitable is they don’t pay very much in fees. Half of them
also tend to be well-educated selected their FI because free services were offered.
married couples with higher
incomes and positive net worth. A package configured for this segment could look like:
Profitable Non-loyals often lack the
time and knowledge to manage • “Basic Loyalty” checking /savings with minimum
their financial affairs, which − along with their positive net balance required and/or self-service option for
worth − make them desirable targets of financial advisors. lower fees
• Loyalty program incentive to consolidate revolving
Profitable Non-loyals have smaller shares of their financial credit card debt to bank card
wallets with their primary DDA provider than Profitable • Assistance with loan refinancing (if qualified)
Loyals. Increasing loyalty within this segment could boost
the amount of assets or loans held with their primary FI.
Goal: Increase loyalty and
Profitable Non-loyals’ primary DDA provider is more likely profitability of Potentially
to be a large national bank, which is only capturing about Profitable Non-loyals
two-thirds (68 percent) of their deposit balances (vs. 82 Potentially Profitable Non-loyals
percent for Profitable Loyals) and 45 percent of their loan (24 percent) have average incomes
balances (vs. the same 45 percent for Profitable Loyals). but above-average educations. This
group has proportionately more
Profitable Non-loyals are more likely to deepen their students in it.
relationships with providers whose benefits emphasize
financial rewards (e.g., cash back on loyalty programs, Potentially Profitable Non-loyals, like the Potentially
preferred interest rates) and convenience (e.g., free Profitable Loyals, don’t have a very large financial wallet
online/mobile banking, ATMs at convenient locations). and most of it is composed of debt − most commonly
credit card debt and auto loans. And, like their loyal
A package configured for this segment could look like: counterparts, very little of their debt is held by the primary
DDA provider, which is the main reason why they aren’t
• “Premium Checking” package bundled with other
currently profitable.
deposit and investment services. Preferred interest
rates and other rewards for high minimum balances Unlike their loyal counterparts, Potentially Profitable Non-
• Customized loyalty card program with preferred loyals have substantial future earning potential, reflected
interest rates or cash back rewards by their above-average educations and higher-than-
• Preferred interest rate incentives for moving more average student status.
assets/loans to primary (e.g., mortgage refinancing)
Like Potentially Profitable Loyals, they don’t pay very
much in fees. But, this segment could more easily migrate
to self-service banking to retain their low fees.


12

A package configured for this segment could be similar to one offered for Potentially Profitable Loyals but place more
emphasis on self-service banking channels.

Goal: Break even with unprofitable segments
Unprofitable Loyals (9 percent) have very limited means to become profitable to
FIS ENTERPRISE STRATEGY the FI. They have the lowest incomes and education levels and 1 • JULY 2011
VOLUME an above-average
percentage of them (one-quarter) are retired.

Unprofitable Non-loyals (10 percent) have lower levels of education, low incomes
and the highest unemployment rate among the segments.

Unprofitable segments are unlikely to become profitable for a financial institution. The best the FI can hope is to: 1)
reduce their higher-than-average channel usage, and/or 2) collect fees that are sufficient to cover incremental costs of
servicing them.

A package configured for these segments could look like:

• “Basic” checking/savings with minimum balance and self-service and/or checkless checking required to earn
reduced fees
• Revolving credit tied to checking/savings balances
• Prepaid card program

Final Thought
Appeals that usually do the best job of engaging some customer segments are often viewed as irrelevant or even “turn-
offs” by other segments. The FI must determine whether it needs to be “all things to all people” or home in on specific
segments that could produce a more profitable outcome in the long term, but alienate non-targeted segments to the
point of attrition in the short term.

This article is derived from an FIS Enterprise Strategy research brief, which features recent research with 3,000 FI customers on elements that drive
customer loyalty and insights into how FIs can leverage the findings to foster loyal relationships that, in turn, can increase the percentage of profitable
patrons among their customer bases. The full report can be downloaded from http://www.fisglobal.com/solutions-insights.


13

November Survey Results
In November’s edition of FIS Strategic Insights we
FIS ENTERPRISEon four diverse topics: 1) initiatives
polled readers STRATEGY VOLUME 1 • JULY 2011
Figure 1: Readers are pursuing multiple initiatives to reduce
they are pursuing to manage or reduce operating operating expenses
expenses, 2) plans for increasing checking account
fees, 3) engagement with customers via social vendor contracts 65%
media, and 4) content for upcoming newsletters.
Reducing internal use of paper
Thanks to all who participated in our survey. The and electricity 56%
following four charts present the results:
branch 50%

42%

Business process outsourcing or
right-sourcing 40%

38%

23%

Other 4%

None 4%

Source: FIS Strategic Insights survey, November 2011

Figure 2: About one-half of the surveyed FIs have no current plans to
increase checking account fees

We have no plans to increase checking
account fees 52%

We’re currently considering increasing
checking account fees, but have not 13%
yet made our nal decision

We plan to increase checking account
fees but have not yet determined ho 6%
fee increases ill be applied

We have already increased or plan to
increase checking account fees for a 8%
minority of our customer base

We have already increased or plan to
increase checking account fees for a 4%
majority of our customer base

Don’t kno 17%



14

Figure 3: Only one-third of readers are actively engaged in social media with
their customers

We ac vely communicate with our
33%
customers through social media

We are only monitoring social media
23%
communica ons at this point

We have not launched social media
19%
yet, but are in the planning stage

We are doing nothing and have no
25%
immediate plans to use social media


Figure 4: Newsletter subscribers would take the time to read articles about…

Impacts of regulatory issues 68%
Mobile banking 60%
Community bank di eren a on strategies 56%
Fraud detec on and management 56%
Mobile payments 54%
Con nuous e ciency improvement 54%
IT and opera ons management 40%
Lending and credit risk management 40%
Economic insights and analysis 38%
P2P (person-to-person) payments 38%
Core system upgrade or replacement 38%
Payments migra on from paper to plas c 36%
Managing unpro table customers 34%
EMV (chip & PIN) 34%
Prepaid cards 32%
Rela onship banking services 28%
Channel migra on 26%
Merchant-funded and other types of rewards 18%
Implica ons of “Occupy Wall Street” backlash 16%



15


Strategic Insights is a monthly newsletter that provides research, thought leadership and strategic commentary on recent
events in banking and payments. The newsletter is produced by the Enterprise Strategy team at FIS. FIS is one of the
world’s top-ranked technology providers to the banking industry. With more than 30,000 experts in 100 countries, FIS
delivers the most comprehensive range of solutions for the broadest range of ﬁnancial markets, all with a singular focus:
helping you succeed.

If you have questions or comments regarding Strategic Insights, please contact Paul McAdam, SVP, Research & Thought
Leadership at 708.449.7743 or paul.mcadam@ﬁsglobal.com.


16

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