If you know me, you probably know I like to reduce complex things to simpler, more easily understood basics. In that vein, I'd like to talk about the "ABCs" of deposit profitability analytics.
A stands for Activity.
Activity is important in deposit profitability work. And by activity, I'm talking about transaction activity.
Often times, activity is the single biggest distinguishing factor between 2 otherwise identical deposit accounts. It just stands to reason that if 2 accounts have the same balances, the one with less activity is more valuable to us.
But why is that? Mainly it's because we need staff and other resources to process transactions, and more transactions quickly translates into more expense. But it's also true because fewer transactions means less funding volatility.
B stands for Balances.
This one is "a gimme" for bankers. We all know that more balances are better than fewer balances.
The key here is to keep in mind that balances are a fine starting point, but they are clearly not the ending point, for determining account value.
C stands for Costs.
Costs, in this context, refer to the costs of handling all of those "A = Activity" transactions we talked about earlier. Each transaction has specific costs associated with it.
The key for deposit profitability success is to accurately assign costs to each activity type and then to aggregate the actual dollar cost of them.
Going back to my earlier example of 2 identical deposit accounts (type and balance), the next extension to make concerns distinguishing between the cost of various transaction channels.
So even if they both had 3 deposits and 12 withdrawals for the month, that information alone is not sufficient for us to decide which is more profitable.
To do that, we need to understand which type of deposits (direct deposit vs cash at the teller window, for example) and withdrawals ( checks, ACH or ATMs perhaps) occurred in which quantities.
Now it's true that this gets into a lot of detail quickly, but the good news is that this work is tailor made for today's IT environment and deposit profitability analytics. Just let me know if you're interested and I'll be glad to explain further.