Strategies for Banks to Make a Profit in a Low Interest Rate Economy

A low interest rate economy can be challenging for the banking sector. After all, if banks earn profit by lending out money and they can't charge as much for the money they lend, it's harder to maintain the same level of profitability. However, low interest rate markets still offer opportunities for banks to do extremely well. These strategies are as open to small community and business banks as they are to the largest institutions.

Fee Revenue

Instead of earning money by borrowing and lending money, banks can turn to fees to boost profits. For example, banks can charge overdraft fees when customers try to draw money that they don't have from their accounts. One $35 overdraft fee per year generates as much revenue as lending out $1000 at 3.5 percent for the year. Banks can also charge ATM usage fees, account maintenance fees, statement copy fees and just about anything else they can imagine.

Origination and Turnover

Another option for banks is to continually recycle their money, such as in the mortgage market. Instead of making a traditional 30-year mortgage loan and tying up their income for a long period of time, banks can make and sell loans. When the bank makes the loan, it ties up a portion of its capital in the loan at a low interest rate. However, the bank can turn around and sell that loan to an investor and, hopefully, realize a profit on the sale. The bank then has the money back to lend again so that it can continue flipping the funds.

Changing the Spread

When the rate that a bank can charge plunges, it creates an opportunity for them to increase their profit by charging a little bit more relative to the market. For example, if mortgage rates should go from 8 percent to 4 percent, it's unlikely that a customer would complain or even notice if the bank dropped its rate to 4.25 percent instead. After all, the customer is still saving a great deal of money relative to previous rates. Doing this helps to cushion the blow of low rates and protect or even increase bank profits.

Rates Don't Matter

A low interest rate market cuts both ways. While banks can't charge as much for loans, they also don't have to pay as much to attract deposits. Historical data from the Federal Reserve comparing the prime rate to the rate on a three-month certificate of deposit shows that they trade in a relatively tight band. Between 1995 and 2012, the average difference between the two rates was 275 basis points, and the spread varied between 212 and 320 basis points. When you take out the highest and lowest spread years, the range narrows to 267 to 297 basis points -- which is just over a 10 percent difference during 16 years of the 18 year period.
For comparison, during that same period, the prime rate fluctuated from 3.25 to 9.25 percent and CD rates fluctuated from 0.28 to 6.46 percent. In other words, while rates change, the bank's profit, which comes from the difference between the deposit and loan rates, remains roughly similar.

Increase Your Small Business Sales by Improving Customer Relationships

Increase sales in your small business by improving your relationship with customers, so they return to buy again and again. Closing sales in a small business begins with establishing relationships with sales prospects, whether online, in person, or by phone, mail, or e-mail.

Increase your small business customer conversion rate

Here’s an amazing fact: Fewer than half of all people who enter a retail outlet make a purchase. What’s more, as customers increasingly treat the bricks-and-mortar outlet as a showroom before buying at discounted prices online, the percentage of shoppers who become buyers at a bricks-and-mortar store continues to decline.

The percentages are way higher in supermarkets and convenience stores and far lower in exclusive boutiques and galleries. But across the board, the conversion rate — the number of prospects who become buyers — is ripe for improvement.

No matter what kind of business yours is — business-to-consumer, business-to-business, bricks-and-mortar, or online — you can calculate a conversion rate by counting the number of people who enter your business (or land on your website) and the number who make a purchase. Divide the number of purchasers by the number of shoppers or visitors to get your looker-to-buyer conversion rate, and then set a goal for improvement.

The rate you aim for depends on your business. Retailers that attract shoppers who arrive with a clear need that a purchase can fulfill experience higher conversion rates than those who attract people who are just shopping.

Publicly available web analytics from Fireclick show average online retail conversion rates in the range of 2 to 3 percent, and other reports show Amazon converting 8 percent of visitors. In the bricks-and-mortar world, research shows conversion rates between 20 and 40 percent, with fashion retailers on the low end and electronics retailers on the high end.

Interact with shoppers at your small business retail store

Especially in physical retail settings, the best way to grow retail conversions is to increase the number of prospects who have contact with your staff. It sounds too simple to be true, but retail scientists (they do exist) have validated the fact. They’ve also proven that staff contact increases the time a prospect spends in a retail setting, which directly affects spending levels.

Adopt these proven approaches:

• Use displays and personal contact to intercept shoppers upon arrival.
• Offer a shopping basket, explain a special offer, or give a quick store orientation to increase interaction and shopper involvement.
• Enhance comfort by pointing out refreshment and sitting areas, play areas for children, and fitting rooms for shoppers.
• When you see signs of shopper uncertainty, step in to reinforce decisions, suggest complementary items or alternative choices, or make other recommendations to both facilitate and increase the sale.
• Don’t prejudge prospects. Watch, listen, and respond to prospect cues instead of letting first impressions limit your sales expectations.

Paco Underhill has researched and verified how people shop and buy in every kind of physical retail setting. Among his findings:

• Shoppers race through the entryway “decompression zone” before slowing down and turning right. That means the space that’s 5 to 15 paces beyond and to the right of your front door is your most valuable store real estate.
• They buy more if you free their hands by giving them a shopping cart or bag.
• They leave, abandoning intended purchases, if they see long lines at your cash register.
• Women make an immediate U-turn and leave an aisle if it’s so narrow that another shopper gives them a “butt brush.”
• Store cleanliness matters, especially to female shoppers.
• Change drives sales. New windows and reorganization on the floor give your retail space a sense of evolution and excitement.
• In small retail shops, owners need to be visible and to interact with customers.
• Shoppers are conscious of what they see, taste, smell, touch, and hear, so engage them through all five senses. Use knowledge of your shopper profiles throughout the day to adjust music mixes and experiences accordingly.

Convert online visits to online small business sales

A company called 3dcart provides complete shopping cart solutions for online stores of all sizes, which all share one common goal — to get customers to complete the order and make the purchase. Here's how to overcome the common enemy of online sales success: shopping cart abandonment.

• Save shopping cart data even if the customer doesn’t complete the form. The shopper’s browser may have crashed or the person may have navigated away from the checkout page. Make sure your site’s cookies save form data so customers can easily pick up where they left off, upping your conversion rate as a result.
• Give your customers a one-page checkout. When you go to the grocery store, you don’t pick the longest line. The same holds true online. A one-page checkout ensures that customers won’t lose interest or get frustrated partway through the checkout.
• If a shopping cart is abandoned by a return customer, reach out with an e-mail reminder to reignite interest. If the customer ditched his cart right when the shipping fee was added, include a coupon code or discount with the e-mail. A few shopping carts even have built-in modules that save you time by sending automatic reminder e-mails.
• Gain trust with security certificates. A little peace of mind goes a long way, so reassure customers that their personal data is safe. Post security certificates in visible areas of the checkout process, clearly identifying security programs like McAfee and SSL certificates to show customers that you care about their privacy. The result: Higher trust, better conversion rates, and fewer abandoned carts.
• Offer support resources without making customers navigate from the checkout page. Assume that customers will have questions and put the resources they need right at their fingertips. Place links and contact information for customer support right on the checkout page. Live chat is another great feature for addressing questions.

Banks must improve online services to retain customers

More than half of British people cite online financial services as vital to bank loyalty in the face of the account switching reform.

Digital banking services 

A third of those online say they have experienced frustrations with their digital banking services in the past year, suggesting that banks need to work harder than ever to improve their digital services in order to retain customers.

Eleven per cent of customers said the devices needed to access accounts online, such as mini PIN generators or card readers, proved too inconvenient to use, according to research by Intelligent Environments, a financial software provider.

Some 13pc of customers said they struggled to remember and keep track of the passwords needed to access their online accounts.

Four per cent claimed a lack of consistency between digital and offline services was the cause of their banking headaches, while a further 3pc said services were not adequately tailored to their needs.

Many people now manage their finances entirely online and do not visit their branch very often. Less than half, or 45pc, of people with a bank or building society current account visit their local bank branch once a month or more.

Online banking

This figure is compared to a massive 81pc who use online banking and 20pc who use mobile banking once a month or more. One in four UK adults access their bank account online every single day, compared to just 3.5m who made use of online banking in 2000.

These findings come in the wake of new legislation recommended by the Vickers report, which stipulates that the switching of customer bank accounts and redirecting of customer direct debits will reduce from 31 days to just seven, starting from September 2013.

Consumers will find switching banking services more straightforward and less hassle, so banks will need to capitalise on the provision of digital services more than ever, in order to stop their customers looking elsewhere.

Mobile banking 

Good online and mobile banking are intrinsic to keeping custom, as the research found that an effective online or mobile banking service makes 51pc of customers loyal to their main bank or building society.

David Webber, managing director of Intelligent Environments, said: “A rapid pace of technology evolution has created a variety of digital channels for organisations to reach and manage relationships with their customers.

"The Vickers legislation only adds to the myriad of regulatory and consumer pressures that banks must now respond to in the bid to attract and retain customers."

How Banks Can Increase Profits Without Raising Fees on Poor Customers

The topic of banks increasing fees on unprofitable "low balance" (ie, low income) customers is back in the news.

Here’s an idea for the banks: Don’t. And never do.

Instead, think about the issue in a completely different way:

Increasing your returns for shareholders

Think of the provision of basic banking services as a valuable public and community service you provide for some group of these low-income individuals.

Think about it, categorize it, quantify it, analyze it, talk about it….heck, crow about it….in the same vein as the (very significant) donations you make to non-profits and the community service days you organize your employees to participate in (but without the matching bank t-shirts and the annual report photographer on hand).

Think about it as a return you provide to taxpayers for the explicit and implicit public support banks receive.

And think about it as a means of bringing your formal “Corporate Value Statements” – the part about making the communities in which you operate better places – to life in a tangible fashion.

The good news: Don’t think about it as costing you much, as the fixed costs for your banking infrastructure are already in place. And the profitability on these customers is already low.

(The bad news: Increasing your returns for shareholders, in this interest rate environment, likely isn’t going to be as easy as just charging the same customers more for the same services. Yes, you can cut costs. But at some point, it’s also going to require the hard work of great customer service and innovation.)

Providing financial education and financial guidance

One other thought: those community service days you organize are good. It’s hard to argue against cleaning up parks and helping build homes. But an even greater impact could be to help with one of our country’s greatest needs by doing what you do: providing financial education and financial guidance….in this case not to the wealthy, but to struggling families. If every bank and Wall Street employee contributed just one day a year to this, the impact to low-income families could be life-changing, and the impact to our country could be extraordinary. And, check your internal employee surveys: your employees want to be part of the solution.

Let’s face it: the big banks are not one sharp advertising campaign away from restoring their reputations. Instead, the smart management teams will reframe the issue. They will fundamentally rethink how they can employ their unique attributes – their branch systems, the expertise of their employees – to tangibly improve their communities and help with the challenges those communities are facing, thus improving their own standing. While I understand the pressure of the quarterly earnings cycle (yes, learned the hard way), I’ve also seen that making long-term investments of this type can pay off surprisingly quickly