Characteristics of High-Performing Financial Institutions

November 12, 2020  |  Marcus Rothaar

In the current pandemic environment, what are the keys to maintaining high performance for your organization? To help answer this question, let’s look at the some of the key characteristics of high-performing financial institutions and which of their traits are most critical right now.

Raddon recently recognized the 2020 Crystal Performance Award winners during a virtual awards ceremony, celebrating the successes of 22 high-performing credit unions. See the full list of winners, along with a video highlighting some of the strengths of each organization.  Winners were selected based on an analysis of key performance metrics focused on service, member relationships, sales and other areas as observed within the Performance Analytics program.

Over the 12 years since we began presenting these awards, several common characteristics of high-performing organizations have emerged. To highlight these traits, we’ll use the Raddon Performance Index as our proxy for overall performance. This index is a composite score blending growth and earnings metrics for each organization participating in the Performance Analytics program.

The charts below represent institutions performing in the bottom half of the group, in the top half of the group, and in the top 10 percent of the group on the Raddon Performance Index. For reference, Crystal Performance Award winners are generally in the top 3 percent of their asset tier – truly the best of the best.

Strong Growth Is a Hallmark of High Performers

Financial institutions with the better overall performance are significantly more likely to experience growth in households, deposit balances and loan balances. Critically, this growth is profitable growth, as evidenced by the earnings metrics that follow.

High Performers Are Much Less Likely to Subsidize Unprofitable Households

At the typical financial institution, only 32 percent of households have a positive profit contribution to the organization. That leaves 68 percent of households defined as unprofitable, meaning they are not generating enough margin income or non-interest income to offset the institution’s expenses for servicing their accounts (including both direct and indirect costs). While high-performing institutions still have a higher percentage of unprofitable households than profitable ones, the level of subsidization is much lower, with 42 percent of households being profitable.

High Performers Are Better at Cross-Selling and Developing Deeper Relationships

The more optimal profitability at high-performing institutions is driven by their ability to develop deeper member or customer relationships. This is evidenced by stronger performers controlling a larger percentage of consumers’ deposit and loan balances than their peers. For example, at the high-performing institutions, nearly four out of 10 (39 percent) of their consumer households’ total loan balances are with the institution, with the remaining 61 percent assumed to be with competitors. In contrast, the loan share of wallet is only 30 percent for organizations in the bottom half of the overall performance scoring.

Similarly, strong performers are more effective in cross-selling to their existing accountholder base, ultimately resulting in larger average household balance levels.

Non-Interest Income Sources Have Diversified

High-performing institutions generate more non-interest income from each consumer household. However, the key to this revenue advantage is not necessarily having more fees or higher fees, but rather it’s a reflection of stronger consumer engagement and more diversified sources of non-interest income. For example, high-performing institutions are more likely to have a higher percentage of households using the organization for investment services.

As shown earlier, stronger levels of checking penetration and more products per household present more opportunities for high performers to generate non-interest income. As a result, nonpunitive non-interest income such as debit card and credit card interchange revenue are stronger. In fact, high-performing institutions generate 56 percent of their non-interest income from nonpunitive sources, compared to the 50 percent mark experienced at organizations below the median level of overall performance.

Revenue Generation Drives Efficiency

The growth and revenue strengths shown thus far for high-performing institutions allows these organizations to operate more efficiently than peers. Top-performing organizations enjoy an efficiency ratio of 63 percent, which is a significant advantage from the 80 percent efficiency ratio shown for institutions in the bottom half of overall performance.

The efficiency ratio is simply total expenses as a percentage of total revenue, which means there are only two levers to pull to improve efficiency – reduce expenses or increase revenue. The high-performing institutions actually carry more expenses on a per household basis than peers, but they generate significantly higher levels of revenue for each corresponding household. These organizations follow the adage that you can’t cost cut your way to growth and profitability.

Journey to High Performance

In addition to the performance metrics highlighted in this article, high-performing financial institutions also often exhibit the following traits:

  • Data-driven – leverage data to understand customers/members and to measure performance
  • Brand-focused – employees, customers/members and market are all part of brand
  • Integrated delivery with digital at the center – right-size branch network and integrate all channels
  • Embrace market discipline – continuous feedback leads to continuous improvement
  • Entrepreneurial – continuous innovation in processes and products

Why It Matters Today

As the economy and consumers struggle to emerge from the pandemic, financial institutions are forced to operate in a unique environment characterized by uncertainty and unexpected challenges. Concerns over earnings are paramount as another low-rate environment threatens already stressed margin income, coupled with the potential for increased loan charge-offs. For most organizations, expenses can be reduced by only so much before the reduction has an impact on service levels or growth opportunities. Deposit rates can be cut by only so much before cost of funds hits a virtual floor. Traditional sources of non-interest income are also challenged as consumer spending habits change.

So, what’s an organization to do? Take a lesson from high-performing institutions and focus your efforts on deepening consumer and business relationships. Improving balances per household is a path to success in any operating environment, but it’s even more critical today.

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