Over the past years, Private Banks have heavily worked on adapting to the new MiFID II and FIDLEG regulatory environment and nevertheless feel the aftermath on their bottom line. In order to become more effective on the revenue side, Simon-Kucher & Partners has developed a Revenue Management Excellence (RME) program for Private Banking. By following this program, both banks and relationship managers are able to unlock untapped revenue potential.
The enforcement of MiFID II on January 3rd 2018 has had a strong negative impact on bank revenues, e.g. as fund retrocessions have almost completely disappeared. As an immediate action, almost all banks have adapted their offering and pricing to develop a sustainable business model that allows them to survive the regulatory changes in the industry without incurring substantial losses. Nevertheless, most of them are feeling the aftermath and see their revenues dangerously decrease. Therefore, Simon-Kucher & Partners has developed a RME program adapted to the new world that allows banks to expand revenues and profits to its full potential.
Three phases to set-up the Simon-Kucher RME program
1. Set realistic and customized targets for Relationship Managers (RMs)
Traditionally, most banks have revenue targets dictated by top management, which are then translated as such to RM targets (e.g. everyone needs to achieve 5% revenue increase). In turn, the latter is sometimes adapted by the superiors as seen fit. In fact, targets should be envisioned in a manner that fairly reflect an RMs current situation, individual performance on different KPIs as well as the potential for book revenue increase. It is therefore key to define clear client segments (see figure 1), where targets can be set for each of them on product mixes and respective RoAs based on internal strategy, market trends and external benchmarking. Then, individualized RM targets are defined based on the client composition of their respective books and according to very granular client segment targets. Finally, performance KPIs contributing towards variable salaries need to be aligned in order to not only incentivize net new assets (NNA) but also factors like revenues and profitability. Fair and achievable targets set the foundation for a sustainable revenue management process.
Figure 1: Illustration of a potential client segment
2. Enable RMs to achieve their targets
The key to a successful implementation of the RME program is to help RMs prioritize their efforts and activities to best achieve their targets. This can only be done by dedicated and customized tools supporting RMs on different levels of their daily businesses. On the one hand, the tool provides RMs with transparency on their book composition by showing them, which relations/clients/portfolios are not performing well according to client segment targets. Based on this, RMs can easily identify where action is needed (see figure 2). In a second step, the tool also suggests tailor-made opportunities for improvement based on sophisticated mathematical algorithms and direct impact simulations. These opportunities cover all potential actions regarding the 4 major revenue levers (net new assets, product mix, trading activity and pricing). Furthermore, the detailed, real life simulations support RMs in their decision process and make sure they use their time in the most efficient and effective way.
Figure 2: Illustration of a RME tool
Successfully building a comprehensive RME tool is not an easy task. It requires a client individual database with all margin relevant data from the past (minimum 12 months) that is flexible enough to crunch all types of data in real time. This includes behavioral aspects, transactional activities, client life cycle information as well as main pricing KPIs such as enforced margins, price enforcements and foregone revenues for all fee components. Despite this very detailed and difficult task, such tools present results in an easy way an are highly appreciated by both bankers and managers to structure and prepare their actions. They give RMs the confidence to better sell their ideas and ensure a fair value for money for the clients and acceptable profitability for the bank.
3. Compensate good performers and support those lagging
The final element to the RME Program is an adequate RM incentives and support system. Although monetary compensation based on individual performance on different KPIs is a great way to incentivize RMs, this is not sufficient. RMs need to be equipped by enough support in order to achieve the best possible results. For example, this could imply more freedom and flexibility in the discount management process during a certain period of time. Alternatively, having available additional product or pricing specialists and inviting them to certain client meetings can also be very helpful. By using RME tools, these support activities can be prepared and coordinated in a much easier and efficient way and therefore increase overall results significantly.
Implementing a RME program is a cultural change
Putting in place such a completely new management system is not self-evident and creates initially a natural reaction of resistance to change by the front staff. Therefore, it is essential to follow two key success factors: First, include the front staff in the development process to understand their needs and get their buy-in. Second, put enough emphasis on the internal communication and change management, conduct general presentations and provide personal assistance to make sure the program is well understood. Appropriate training is needed for both managers to set the right targets and RMs to achieve them throughout the year.
Adapting the offering and pricing is not enough to thrive post MiFID II
In light of the current downward revenue trends throughout the Private Banking industry, more needs to be done than purely adapting the offering or pricing. Based on the experience of hundreds of transformation projects, Simon-Kucher & Partners has developed a unique and comprehensive Revenue Management Excellence (RME) program. It consists of three major steps: 1) Set realistic and customized targets, 2) Enable Relationship Managers to achieve them, 3) Incentivize good performers and provide support to become better. Of course, cultural changes are difficult and require time. However, doing nothing, waiting for new competitors to enter the game and watching margins further decrease in the future seems to be a fairly risky strategy.