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Echo Partners Community Bank Blog

    Raddon reports sticky deposits

    Time for Good News Handwritten by White Chalk on a Blackboard. Composition with Small Green Chalkboard and Cup of Coffee. Top View. 3D Render..jpegGreat summary from Andrew Vahrenkamp of the top 3 trends in the #Raddon Annual Deposit Study.

    Here are the top 3:

    1. Consumers are not tracking rate moves
    2. Consumers require significant premiums to take action
    3. Consumers save for a variety of reasons

    I’ll focus on the first 2 items…Consumers not tracking rate moves and requiring significant premiums to take action.

    Consider these rate-related statistics…

    • Only 7%of Americans are actively tracking rate moves and will move to get a better rate.
    • 32% watch rates but rarely find a rate that is worth it to switch.
    • Only 16% of large depositors (>$50k) actively track rates and will move.

    Now combine that with stats on what motivates a move…

    • 41% of consumers will not move to a new institution at any price.
    • Just 11% will move for anything less than a full 1% rate increase
    • 19% would move only to a new account at the same institution for less than 100bps.

    So what’s the moral of this story?

    First, drag your heels on rate hikes and keep your betas low.

    Second, treat your best customers well and they’ll stay with you forever.

    Third, don’t let fear of defections stop you from improving deposit profitability.

    What this is all about is the stickiness of deposits. And that has huge #DepositProfitability implications.

    Adding no fee deposit accounts does not make sense.

    Research on Business Folder in Multicolor Card Index. Closeup View. Blurred Image..jpegAdding no fee deposit accounts does not make sense.

    That’s the conclusion from a great article about eliminating free checking by Ron Shevlin of Cornerstone Advisors.

    Shevlin sees 2 reasons to offer free deposit accounts:

    • Earn other fees like NSF, OD or interchange
    • Higher chance of cross sell into other products

    Cornerstone surveyed 2,015 checking account consumers and found free deposit holders referred friends and family less frequently than holders of fee-based accounts.

    They also added non-deposit products at a significantly lower rate. Plus banking on a future based upon driving up NSF, OD or interchange doesn’t seem promising.

    If you’re keeping score, that’s 0-2 on the common reasons behind offering free accounts.

    Do you expect accounts without revenue to deliver profits? Maybe you’ll be the lucky exception to the rule?

    So if free deposit accounts don’t work, what’s a bank to do?

    Start with calculating deposit profitability to see where you are (how deep the hole you dug is) and then apply the proper strategy to improve your deposit profits.

    If you take the #DepositProfitability path use our “Four Ds” segmentation to guide your implementation. See exactly how you can turn every segment of your deposit base into profitable relationships.

    Making decisions based on account balances is a bad idea.

    Closeup of woman's hands measuring bar graph with tape on blackboard.jpegMaking decisions based on account balances is a bad idea.

    Account balances don’t predict profits…Although in a perfect world they could.

    Practically speaking 3 things get in the way.

    • Transaction volume and delivery channels used.

    Deposit profitability highlights volume and channel usage stats. Look and you’ll find customers overusing your resources just because you don’t monitor or charge for them. People always waste “free” stuff.

    • Efforts by larger depositors to “get the best deal”.

    Let’s face it, some of your larger depositors like to throw their weight around. Sometimes it’s psychological, others it’s just plain old self-interest or greed. They work hard to keep you from earning a profit.

    • Bank staff rushing to offer concessions and sweeteners.

    When the only metric you have is balances don’t be surprised that staff misuse it. You get what you measure and right now that’s balances…At almost any price.

    There’s only one way out of this and that’s to measure #DepositProfitability directly using instrument-specific, transaction detail from your core system.

    Once you measure profit (and combine it with balances) you’ll have a roadmap to significant profit growth. You’ll see exactly where the low hanging fruit is in your deposit base, and know how to get it.

    Why bother with segmentation?

    green apple with the red one standing out from the crowd - over a white background with reflection.jpegWhy bother with segmentation?

    We just jumped through hoops to calculate individual instrument-specific deposit profitability P&L. Now we’re grouping them together again. What gives?

    That’s a good question. The difference comes from using that individual profit number as the basis of our segmentation. Profit is our focus.

    We know segmentation works best when you use profit to drive the process.

    One powerful way we use it is to compare Q1 (low balances, doesn’t meet our profit target) with Q3 (low balances, meets our profit target) accounts.

    Bankers often have the mistaken notion that we just can’t make money off of small balance accounts. That’s just not true, and Q3 is the proof.

    So what we do is segment Q3, totaling up all the relevant stats about balances, fees, interchange, delivery channel transactions and expenses, and profit. Then we compare these same stats from Q1 accounts.

    What we typically find is that while many stats are almost identical a few diverge significantly. They’re driving the Q1 and Q3 #DepositProfitability differences.

    And once we isolate the specific behavior differences between our profitable and unprofitable smaller balance accounts we have a corrective roadmap for profit improvement.

    And the same process is used when we compare Q4 and Q2 accounts.

    Segment by performance not demographics

    Red gate at college football stadium, telephoto view.jpegSegment by performance not demographics…

    …It’s the only way to accurately identify deposit profitability performance groups.

    And accurate grouping is required for proper and insightful use of averages. Let’s look at a football example.

    Each game one team wins, one loses. That means, without segmenting, the average win/loss record of all teams is 6 wins and 6 losses. Not very helpful.

    Now consider Alabama and the U of Mississippi (Ole Miss). Demographic grouping would be lump them together as both are members of the SEC West division. That’s like their zip code.

    If you grouped this way you’d see these 2 schools had an average record of 8 -3 this past year. Sounds pretty good doesn’t it?

    But averages mask the fact that while Alabama was 13-1 and won the NC, Ole Miss was 3-5, on probation, fired coach, lost schollys, etc.

    The problem here is that we’re only using demographics (conference) for our segmentation instead of performance (win/loss).

    Your #DepositProfitability averages can also be deceiving.

    You've got a good selection of Alabamas in your deposit mix. Make sure you reward them. Don't overlook the Ole Miss deposits because the average is OK. They need corrective action.

    If you don’t segment using actual profitability you'll just water down your effectiveness.

    Can deposit profitability help you reach your ambitious profit growth targets?

    Orange Improve Your Performance Button on Computer Keyboard. Business Concept..jpegCan deposit profitability help you reach your ambitious profit growth targets?

    There are only 4 ways to grow profits:

    • Increase interest income
    • Decrease interest expense
    • Increase non-interest income
    • Decrease non-interest expense

    The top 2 items form net interest income, and community banks already lead in NIM. Sure, work hard on NIM, but further big gains are unlikely. You’re competing with yourself on NIM.

    That leaves non-interest income and expense.

    Unlike NIM, community banks lag on both non-interest measures. That’s not great but it does show where you can realistically achieve greater profit growth.

    So how can #DepositProfitability help you grow noninterest profits?

    The obvious answer (deposit fees) is just part of the solution, and perhaps a small part.

    Often the bigger impact comes from identifying and reducing excess transactions in expensive delivery channels that feed into noninterest expense.

    The complete answer usually includes both fees and changing customer behavior patterns. That’s the easy part.

    The hard part is how do you know which to use to grow your deposit profits?

    Insist on behavior changes from the wrong customers and you won’t get traction. Push blanket fee increases and expect to lose deposits. You must use data to decide.

    Cell phones, airlines and deposit profitability

    Top view of successful businessman standing near the entrance of labyrinth.jpegCell phones, airlines and deposit profitability…

    …What can we learn about deposit profitability from mobile phones and airlines?

    Something quite important.

    According to a DCFS survey, in a year 12% of consumers changed mobile phone providers to lower their monthly bill…

    …While 44% changed the airline they flew on due to baggage fees.

    People don’t fly all that often and the cost to switch is not very high. Click the link to the other airline and you’re done. Same credit card, same airport, different gate. A minor inconvenience.

    Mobile phones?

    It’s still pretty easy to switch, and you keep your number so it’s seamless to others. They transfer your phone data and many apps are smart enough to automatically reinstall on your new phone.

    Slightly more hassle, still pretty easy. But because mobile phones are an everyday item, and you’ll have some minor transitional overlap, significantly fewer consumers switch.

    Have you switched banks recently?

    You’ve got the whole account application/setup process. Then you need to update & change all of your electronic bill pay settings plus learn new security protocols and a new system. Relearn ATM locations, change branches/timetables, change any direct deposits.

    It’s a nightmare.

    But it’s a sticky nightmare.

    Don’t kid yourself. People might complain but very few are going to change banks over deposit fees.

    Not if handled properly and imposed on the proper segment. But you better know what you're doing.

    If you could choose your depositors which would you pick?

    Happy business group poiting at the camera.jpegIf you could choose your depositors which would you pick?

    I’d line them up and you could pick and choose. Would you pick the biggest individual balances, focus on certain industries or maybe look for a diverse set of different characteristics?

    For some reason it’s easier to see bank niches on the lending side. But there’s no reason you can’t do the same on the deposit side of things.

    That’s the hidden promise of deposit profitability.

    More specifically it’s the unique leverage that #DepositProfitability can bring to your marketing quest for attracting more of your ideal customers.

    Note that I said ideal customers, not best.

    Best customers all have 7 figures on deposit. Sure every market has some outliers but that’s not who you market towards. Striving for more of those outliers isn’t marketing, it’s hoping.

    Ideal customers on the other hand might have more modest balances but also have characteristics that result in consistent profitability. But how do you find them?

    In terms of my “Four Ds” segmentation, they typically live along the Q3/Q4 border. You identify them and then hone in on the quantitative evidence of exactly how they bank.

    Use those specific characteristics in your marketing (and account types) and watch your deposits and profits grow effortlessly.

    How do you balance deposit growth with deposit profitability?

    Pretty young lady taking a decision with scale above her head.jpegHow do you balance deposit growth with deposit profitability?

    The answer is easy…Just drop the word “deposit” and re-read the sentence…

    How do you balance growth with profitability?

    Most banks accept the notion that higher growth is often associated with temporarily lower profitability.

    Want to grow loan volume? Run a promotion to drop rates and ease terms.

    Want to grow deposits? Raise rates and liberalize your account terms during the promotion.

    Temporarily lowered profits are seen as the fuel for higher growth. Makes sense, doesn’t it?

    Then after the promotion has run its course, raise your prices and tighten back your terms.

    That’s how every business runs a sale.

    But what if the lowered profits were permanent? Would you still be as anxious to pursue growth if it meant a permanent drop in your profit potential?

    Unfortunately that’s what often happens with deposit promotions.

    You set up the promotion, add new accounts and then never return your account terms to normal. You let the promotional terms last pretty much forever.

    And in the case of #DepositProfitability you often lock in unprofitable accounts.

    Most banks have about 50% unprofitable deposits and some as high as 70%!

    It’s not because you don’t care about deposit profits.

    It’s because you aren’t looking.

    All deposits are not created equal

    Risks Concept. Word on Folder Register of Card Index. Selective Focus..jpegAll deposits are not created equal…

    …What do I mean by this?

    Funding is fungible but deposits are not.

    There is absolutely no difference in your funding regardless of the source of that funding.

    Funding from equity is the same as from debt or time deposits or transaction deposits or brokered deposits. One dollar is one dollar.

    But the characteristics of the funding…things like interest rate risk (IRR), profitability or permanence…shift among the various sources.

    For example, IRR differs based on fixed or floating or average life. You adjust for it based on your IRR sensitivities. Otherwise you’d just pile on the lowest cost short floating.

    But you know that’s too risky.

    The deposit profitability of various sources differs based on rates and the volume/frequency of underlying transactions as well as the specific delivery channels used. All of these features impact #DepositProfitability at your bank.

    Two questions:

    • If this concept is so obvious with respect to IRR why resist it concerning profitability?
    • What are you going to do about it?

    Once you accept the idea that deposits differ in their underlying characteristics and profitability what do you do?

    The next step is to measure and manage these differences using deposit profitability.

    Anything else is too risky.

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