System Lets Banks Identify Most Profitable Customers

By EDMUND SANDERS

July 21, 2000 12 AM PT

TIMES STAFF WRITER

That friendly smile behind the bank window may signal more than just the teller’s cheery disposition: A computer behind the counter may have just flashed your profitability score.

Eager to goose revenue and hang on to their best customers, banks are turning to sophisticated behind-the-scenes technologies that rank individual customers based on how much income they generate for the bank.

Then banks are using these scoring systems to identify their most profitable customers and lavish them with personal-service extras, special discounts, fee waivers and other rewards.

At the same time, unprofitable customers can be nudged into more lucrative accounts, hit with higher fees or pressed into buying additional products and services.

“Every customer should get good service,” said Les Biller, chief operating officer at San Francisco-based Wells Fargo Bank. “But we also want to make sure that our best customers get even better service.”

It is a bold strategy for the tradition-bound banking industry, which in the past has offered two types of service: first-class for the rich and coach for just about everyone else. It is so unconventional that some bank employees say they are uncomfortable abiding by the policy.

At best, banks in the past have offered fee waivers to checking account customers who maintained high balances. By contrast, the new scoring systems will enable banks to adopt the kind of loyalty models widely used by airlines and retailers to pamper their best customers. And surprisingly, the new rating systems may end up rewarding many low- and middle-income customers, bank officers say.

This fall, Wells Fargo will begin dividing its California customers into four profit categories, ranging from “outstanding” (those who generate more than $1,000 a year in profit) to “potential” (the bank’s euphemism for unprofitable). When a customer visits or calls the bank, the new labels will appear on computer screens, discreetly advising employees how profitable the customer is.

At Sanwa Bank of California, it’s a literal letter grade--A, B, or C--just like back in school. An “A” grade at Sanwa entitles customers to a sit-down consultation with a branch manager every three months, faster resolution of problems and special fee waivers, while “C” customers may have a tougher time talking their way out of that late-fee on their credit card or convincing a teller to release the funds early for an out-of-state check.

Bank of America, the state’s largest bank, will soon begin offering its new “plus” customers a quarter-point discount on mortgage rates and an extra quarter-point interest on certificates of deposit. In addition, phone calls from “plus” customers will be routed to specially trained problem-solvers.

Possibility of Customer Backlash Noted

Scoring systems could spur a backlash by low-rated customers, bankers concede. But they fear that if they don’t deliver red-carpet treatment to their most valuable customers, those customers might flee to securities firms or online financial-services providers.

“If banks don’t target these customers, somebody else will,” warned Robert Hall, chief executive of Customer Analytics, a Dallas-based consulting firm that has helped several large banks rate customers by profitability.

Banking officers reason that customers who give them all of their financial business--mortgage, checking, investments and credit cards--should get better service and more perks than someone who simply maintains a small checking account.

Studies show that banks typically earn 80% or more of their profits from just 20% of their customers. Between one-third and one-half of most banks’ customers are unprofitable.

Wells Fargo calculates that 100% of its retail profits come from its top-two tiers of customers, totaling only about 24% of its entire customer base. The rest pretty much cancel each other out, Biller said.

But while consumers have grown to accept loyalty programs in other industries and haven’t objected to, say, a frequent-flier getting free upgrades or access to VIP airport lounges, the class-system is a sticky proposition for banks.

If some customers are getting better service, doesn’t that mean others are getting worse?

“I don’t want to be paying for somebody else to get lobster when I’m eating hamburger,” griped Pat Reilly, a Venice house painter who says cold customer service and rising fees are the reasons he recently moved his accounts from a big bank to a smaller community thrift.

Consumer groups worry that that the scoring systems will enable banks to cherry-pick customers, which could lead to higher fees and poorer service for lower-income households.

“As banks continue to divide their customers, we want to make sure that they don’t divide it in such a way that some people are left out, or left with bad service,” said Ed Mierzwinski, consumer program director at U.S. Public Interest Research Group, a consumer advocacy group.

Banks, however, insist the goal is to pamper the best customers, not brush off or weed out money-losers.

“This is not about providing better service for some customers on the backs of other customers,” said Liam McGee, head of Bank of America’s Southern California operations. “A large percentage of our customers are in the “basic” level. For us to just dismiss those customers is a silly business proposition.”

But unprofitable customers can expect to be pitched more fee-generating services.

Banks are first looking for ways to convert customers into profitability. The quickest and easiest method is to sell an unprofitable customer more products. A money-losing account can turn profitable overnight, for example, if the customer takes out a mortgage or transfers a big investment account.

Higher fees for basic services, however, are another option. Some banks, such as Bank One and Key Bank, have experimented with hiking fees or requiring higher balances from unprofitable customers.

Though banks are constantly repricing products, officers at Bank of America, Wells Fargo and Sanwa said they haven’t automatically raised fees for unprofitable customers based on scoring systems, and have no plans to do so. That’s partly out of fear of alienating customers, banks say.

Instead, many banks are encouraging unprofitable customers to move their money to less expensive accounts or change their behavior, such as reducing their branch visits or using automated-teller machines.

“If someone is a ‘C,’ that’s not the customer’s fault,” said Howard Gould, vice chairman at Sanwa. “That’s our fault. We need to find a way to make that customer an ‘A.’ ”

Washington Mutual Bucks the Trend

Not all banks are embracing the segmentation trend.

An officer at Seattle-based Washington Mutual, the nation’s largest thrift, rejected the idea after focus groups showed that the practice was a turn-off to customers.

“People don’t like differentiated service,” said Deanna Oppenheimer, president of Washington Mutual’s consumer banking unit. “If you’re trying to appeal to the top 5%, what does that say to the bottom 95%?”

In the front lines of banking, some tellers feel uneasy about treating customers differently, even if their bosses would like them to do so.

“I don’t know if Les [Biller, Wells Fargo’s chief operating officer] would like to hear me say this, but personally, I try to give all customers the same level of service, no matter how much business they do with us,” said Donna Boehm, a Wells Fargo branch manager in Cottage Grove, Minn.

Industry analysts say that attitude, though well-intended, may be short-sighted and drive good customers away if they fail to receive the kind of attention they feel they deserve.

“Customers today know when they are providing a lot of value and receiving little in return,” Hall said. “They expect more today. They expect to be recognized.”

Nevertheless, banks are clearly nervous about the stigma that might be attached to their ranking systems. “We’re definitely trying to stay away from a caste system,” said Gene Galloway, executive vice president at Sanwa. “But that’s the risk in a bifurcated system.”

Fearing its employees might subconsciously treat low-ranking customers with less respect, National City Bank in Ohio, the nation’s No. 10 bank, opted to only show its tellers the scores of high-ranking customers.

As customers become more aware of the scoring systems, it’s only a matter of time before they demand to know exactly where they stand, experts predict.

There’s been a similar outcry among consumers to pressure credit-scoring firm Fair Isaac & Co. to reveal the scores it calculates, which are widely used to determine whether potential borrowers should get loans or credit-line increases.

Bank of America, for one, is openly and explicitly marketing its different levels of service. Customers can decide whether the added benefits of “plus” are worth giving the bank more of their business, or whether they prefer to remain at the “basic” level and forego the perks.

“We’re trying to tell customers where they stand in our hierarchy,” McGee said.

Most other banks, however, are keeping scores secret and have no plans to release them to customers.

“I don’t know what the purpose would be of telling customers [their score],” Galloway said. “All customers like to think that they are your best customer. It would create animosity.”

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Profiting Off Customers

New computer software is allowing banks to calculate exactly how much profit they earn from each customer and then use the information to rank customers, giving their most-valuable customers the best service.

Revenue

When determining how profitable customers are to banks, computers first add up all the money the bank generates from the customer’s various accounts:

* Monthly checking account fees

* Late fees and bounced check fees

* Interest paid on mortgages and credit cards

* Brokerage commissions

* Money the bank earns on the customer’s deposits.

Cost

Next, the bank subtracts the costs of servicing the accounts:

* Interest paid on savings accounts or certificates of deposit

* Specific costs related to how a customer conducts business (People who visit branches cost more than those who use online banking)

* A pro-rata share of general operating costs, ranging from the bank president’s salary to the electricity bill.