Innovation | 12.04.19
BISA, Kehrer Bielan Quantify Impact of Investment Relationships
The Bank Insurance & Securities Association (BISA), in conjunction with Kehrer Bielan Research & Consulting, has published research that backs up what bank and credit union investment program leaders have said for years regarding the positive impact of such services on core income.
The report, "Smart Investment: Evaluating the Total Return on Investment Services to the Banking Enterprise," serves to "confirm, empirically, that investment programs help drive larger, more profitable and more loyal, institution-wide relationships," said Michael Miroballi, president of Huntington Investment Co. and chair of BISA’s Research Committee.
A new tool released in conjunction with the report allows executives to run their own scenario plans while budgeting for the launch or expansion of efforts to garner investment assets.
The research report and accompanying estimator currently are available exclusively to BISA members.
The easy-to-use core income spreadsheet-calculator that accompanies the research converts the findings into a customized context.
"The calculator can be used by senior banking executives to explore the value that increased investment services penetration brings to the core business of deposits and loans," said Kenneth Kehrer, principal at Kehrer Bielan and co-author of the report.
The research-based estimates of the impact of the investment relationship on deposit and loan balance increases provide a starting point for bank executives, who can input their own key variables (including numbers of household customers, percentage with an investment relationship and the bank’s own profitability estimates of those products) to estimate the potential impact of adding more investment relationships.
For example, consider a bank with 100,000 customers, 7% of which have some investment with the bank, in addition to a checking account. When run through the calculator (using net interest margin assumptions provided by some BISA members) the 7,000 relationships measurably impact revenue in the form of incrementally higher money market, credit card and mortgage loan activities.
In this example, the total increase in the bank's income is roughly $13,540. Adjust that example to 8%, and the bottom line impact, in hard dollars, jumps to more than $15,000.
Explore the Value
Translating the increases in deposit and loan balances attributable to investment services into an impact on the institution’s income is problematic, the report says. That's because of fluctuations in interest rate spreads, differences in profitability by product and customer usage.
The experience of some BISA member institutions suggests that an incremental $1 million in deposits increases top line revenue by $15,100. Meanwhile, an additional $1 million in loans generates revenue of $18,400.
Experimentation with the core-income calculator suggests that growing the share of the institution’s customers with an investment relationship by 1% increases the income from deposits and loans by 14% above the current contribution.
More Key Takeaways
Many more households report owning an investment purchased where they bank than the banks believe they have penetrated, according to the report. While customers who purchased investments at their bank some time ago do not drive current business performance, they still contribute to the stickiness of bank customers and the share of customer household assets held at the bank or credit union.
This study reconfirms the impact of investment relationships on overall banking relationships.
Households that have an investment relationship with their bank or credit union exhibit greater loyalty to the institution, use more banking products, remain customers longe, and are much more likely to say they would not consider switching banks and somewhat more likely to recommend their bank or credit union than households without an investment relationship.
“It appears that a customer becomes ‘stickier’ after establishing an investment relationship with the bank, not that loyalty encourages a customer to establish an investment relationship,” the report says.
Banking customers who own an investment purchased where they bank use almost four more core banking products and services, and the products they use generate higher deposit and loan balances. Altogether, these households hold more than twice the share of their assets at their primary bank than households without an investment relationship.
The increased customer loyalty also translates into lower customer attrition: The average investment client has already been a customer of the bank for two and a half years longer than other customers. Thus, the bank or credit union is earning profits on these enhanced relationships for longer.
“The upshot is that establishing an investment relationship with a banking customer changes the landscape for overall financial advice going forward,” Kehrer said. “The bank is now much more likely to be the primary provider of financial advice.”
The relative profitability of investment services is far less than banking, which is why factors beyond the more traditional focus on profit margin need to be considered if banks and credit unions are to prioritize resources for investment services, the report says.
Several factors reinforce this situation. Bank- and credit union-affiliated brokerages were latecomers to advisory services and deliver more holistic advice; therefore, they are viewed by financial institutions as more transactional revenue opportunities.
“They used performance metrics, such as efficiency ratios, better suited to mature businesses, to assess the contribution of investment services and to allocate resources,” the report said.
As a result, senior management would sometimes view consumer deposits and investment assets as a fixed pie, while “mindful that deposits are more profitable to the bank than the brokerage assets under administration,” the report says. “So, investment services have been stuck in a classic chicken-and-egg conundrum.”
“Growth is constricted because the institution under-invests in the business, and the institution under-invests in investment services because it is not meeting growth expectations.”
It is understandable that in a resource-constrained industry, and with margin pressures, this cycle would continue to play out, Miroballi said.
"In the past, banks have been reticent to promote investments based on the long-held perception that doing so might cannibalize deposits," he said. "While that perception may not be as prevalent, it still exists to some degree.”
Except now, he added, “there is at least some evidence suggesting there could be a short-term trade-off from the balance sheet, but long-term benefits of fee income from investments and more bank products by far outweigh it."
To learn more about becoming a member of BISA and obtaining the report, contact bisa@BISAnet.org.