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Echo Partners Community Bank Blog

    Deposit Profits Are Leaking Out of Your Bank

    [fa icon="clock-o"]} [fa icon="user"] Howard Lothrop [fa icon="folder-open'] deposit profitability, analytics

    There's a silent assassin lurking within the walls of your bank.  And it's quietly killing off your depositWater running from tap in kitchen sink.jpeg profits.  Just like a slow, steady but quiet leak in your pipes.

    You see, I know it's doing this quietly, hidden in the shadows.  Because if it was doing it loudly in an obvious way we'd all have corrected it by now.  If we saw the rush of roaring expenses we'd have shut off the valve and repaired it.

    So where is it hiding?

    Deposit profitability analytics tell us it's hiding in the way we treat all of our deposit relationships the same.  Our depositors are not a monolithic, homogeneous group, but that's how we treat them.  That's so 1990s.

    Think instead about airlines, hotels, or even grocers.  They track your activity, looking at both frequency and profitability.  And then they give you different benefits depending on where you fall in the mix.

    They reward you based on your measured behavior.

    Banks do something that's both similar and different.  It's similar in that we give rewards.  It's different in that we use metrics that are too broad, not those based on specific behavior.

    Think about how this has evolved in banks.  First, we started by giving a toaster to someone who opened a new account.  It's a broad action, but account opening was easy for us to measure.

    Of course, we credit interest based upon collected balances.  That's certainly account and depositor specific.  It's a step in the right direction, but it's not nearly enough.

    The way we handle interest just serves to prove that the biggest objection (it's too hard to calculate) isn't really relevant.  It's not too hard...not with today's analytical tools.

    So what should we be measuring?  I'd start with deposit profitability.  

    Take that old standby, the collected balance, as a starting point.  Determine the quantifiable benefit the bank gets from having that balance available.  

    Here's a hint...different account types will have different benefits associated with them.  For instance, $10,000 in a low interest savings account is probably worth more to us than that same $10,000 if it were in a high-interest money market account.

    Next add in all the fees the account generates.  Not generic ideas about fees, but the specific fees paid by this specific account.  Don't forget to include interchange on swiped transactions.

    Finally, deduct the cost of every transaction.  After all, it costs the bank to process every transaction.  And the depositor who does a lot of transactions no doubt costs the bank more than the one who does almost none.

    Make sure you assess a cost based on not just the volume of transactions, but also the channel.  For instance, someone who comes into the branch and uses the teller line costs us more to process than someone who does the same transaction online, or maybe at the ATM.

    They might all be great customers, but you need to know how profitable each of them really is.  It's the only way you can accurately plan how your limited resources should be deployed.

    You need depsoit profitability analytics.

    Once you calculate deposit profitability you are well positioned to finally get a handle on recapturing your deposit profits.  If you need help, just let me know.

    Howard Lothrop

    Written by Howard Lothrop

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