<img height="1" width="1" style="display:none" src="https://www.facebook.com/tr?id=815305791870634&amp;ev=PageView&amp;noscript=1">

Echo Partners Community Bank Blog

    The common denominator

    The common denominator

    Business team overlapping handsWhat do all bank marketing efforts have in common? The desire to grow profits. It might be short term or long term, but ultimately every strategic move we make revolves around the desire to grow profits.

    That’s why it’s so surprising to realize we do such a poor job measuring individual customer profits. Especially when you consider the adage “If you can’t measure it, you can’t manage it.”

    Ultimately we do a fine job measuring aggregate profits. But it breaks down when we try and attribute profits to smaller and smaller units.

    Typically we don’t get close to the individual customer level. That requires direct profit or marginal profit as we are seeking to identify how profit changes on a transactional basis. No room for overhead, bricks & mortar or general allocations here.

    And that’s a shame because once we can identify direct customer profit we then can improve every marketing and promotional effort in the entire bank. It all depends on an accurate assessment of customer profitability.

    Don’t believe me? Consider how virtually all marketing starts with the identification of your best customers. How do you perform this foundational task without customer profitability? You need individual instrument-specific P&L statements for each and every account.

    Bankers are driving blindfolded

    Close up of businessman throwing dice. Gambling conceptBankers are driving blindfolded.

    They’re in denial. And it’s our own fault. I’m talking about deposit profitability (or deposit unprofitability to be more precise).

    Deposits represent a little over 80% of banks total footings (and given 10%+ equity over 90% of liabilities) according to FDIC stats. Yet community bankers large and small seem oblivious to the risk and profit opportunities surrounding them in their deposit portfolio.

    Consider loans. They’re also about 80% of assets. Could you imagine a banker not caring about loan profitability? Or even securities. At 18% of assets they carry much less weight than deposits but bankers regularly obsess trying to snag an extra basis point here and there. Often by extending the maturity (and increasing the bank’s risk).

    All the while deposits quietly sit there just waiting for bankers to scoop up the profit that’s there for the taking. Let’s quickly review the size of the deposit profit opportunity.

    According to Deloitte’s six levers for improving deposit profitability you should expect 14-30bps in annual profit just from implementing deposit profitability analytics, with full implementation offering 50-66bps in annual profit growth.

    That makes those risky bond trades look like scrapping the old gum off the bottom of your desk.

    Leverage prospecting with demographics?

    New Markets Concept - Green Pushpin on a Map Background with Selective Focus.Leverage prospecting with demographics?

    Today’s data driven society gives bankers the opportunity to magnify their effectiveness by appending demographic data onto customer data. Not only can you identify likely opportunities within your existing customer base but you can also custom select more prospects just like those that deliver your biggest profits.

    And when I say “just like” I mean it. I was looking over a data dictionary today that had 1500+ data elements to it capturing every facet of a customer’s or prospect’s life and lifestyle. By carefully evaluating and selecting these data elements we can select prospects that absolutely mirror our best accounts. It’s not a guarantee but it’s definitely a more highly effective way to prospect.

    There’s just one problem.

    Without deposit profitability the chances of accurately identifying our best accounts have plummeted. Without deposit profitability we’re much more likely to scientifically select and optimize a set of prospects destined to be about 50% unprofitable. And remember we’re paying good money to be able to do this.

    Do yourself and your bank a huge favor and implement deposit profitability before you try using demographics. Get instrument-specific P&Ls on every account. Otherwise expect mediocre (and expensive) results.

    Adding new accounts?

    Business people welcoming new staff to workAdding new accounts? Better add deposit profitability first.

    Adding new deposit accounts is all the rage now. It’s like banks woke up from the low-rate slumber and en masse decided that raising deposits was once more a great idea. Armies of consultants and programs are out there peddling the notion that the path to greater bank profits is paved with new deposit accounts.

    Like acolytes all chanting a familiar mantra they suggest more deposits equals more profits. Profits supposedly grow from simply increasing account balances to provoking additional swipe revenues. Some even quantify their claims with one suggesting their own research shows over 80% more noninterest income compared to a free account.

    This testimony might be true but it’s not the whole truth.

    None of these “solutions” includes the total direct profitability of the added deposit accounts. The NIM portion of deposit profitability is fairly obvious (with a few twists). But you still must include not only the impact on noninterest revenues, but noninterest expenses as well. What happens when you include transaction volume and delivery channel costs?

    I’ll tell you what happens. You’ll find 50% of deposits are unprofitable, and if you’re talking about low-balance/high-cost balances it’s more like 70%+ unprofitable.

    Why growing inhouse profit demands deposit profitability

    Customer Targeting - Chalkboard with Hand Drawn Text, Stack of Office Folders, Stationery, Reports on Blurred Background. Toned Image. 3d Render.Why growing inhouse profit demands deposit profitability.

    Making more from what you’ve already got has long been a central theme of bank profit growth. “It’s easier to grow profits from existing customers than reaching new customers” is a common profit growth slogan.

    Bankers attempt this with strategies like cross-sells, growing wallet share, “Top 10”, segmentation or next best offers. All of these strategies depend on answering one underlying and fundamental marketing question: “Who are our best customers?”

    It’s a sound concept but there’s a basic and critical flaw in applying it. The problem is that bankers cannot accurately identify their best customers. It’s a fatal shortcoming that dooms all of the above strategies to limited effectiveness…

    …Unless you apply deposit profitability first.

    Instrument-specific deposit profitability accounts for transaction volume and delivery channel costs using core system data so you get an accurate P&L on each and every deposit account. It’s an absolute requirement if you want to accurately identify your best customers.

    Once you’ve correctly determined your true best customers you’ll find that all of your inhouse profit strategies work much better. That’s because having the right target improves everyone’s aim.

    Why profit enhancement requires deposit profitability

    math simple equation on chalk boardWhy profit enhancement requires deposit profitability.

    Most bankers are familiar with generic profit enhancement strategies. The basic concept suggests raising fees to make accounts more profitable. And if done correctly this can be a great profit building approach.

    The problem is that it’s almost never done correctly. Basic concepts are misapplied. Instead of raising fees only on unprofitable accounts what most commonly occurs is a blanket fee increase. We’ve all heard of a “win/win”. This is a “lose/lose”.

    This is almost guaranteed to deliver exactly the wrong result. Fees don’t go up enough to make unprofitable accounts profitable, but your best most profitable accounts are harassed and motivated to take their business to another bank. Wave goodbye to your best customers.

    But consider what happens when you add deposit profitability to the mix. Instrument-specific deposit profitability results in accurate individual P&L statements for each and every account.

    Now you know who should have fees raised (only unprofitable accounts) and who should not (profitable accounts). And with 50% of accounts typically unprofitable this is a huge difference.

    So when you’re looking for profit growth strategies make sure you get deposit profitability in place first. You’ll be glad you did.

    Deposit profitability: What’s stopping you?

    Business people ready to compete in a race isolatedDeposit profitability: What’s stopping you?

    We’ve seen many ways deposit profitability can improve your decision making, increase the effectiveness of your marketing and grow bank profits. So why haven’t you implemented it yet?

    Don’t think you can do the math? No worries. I run all the numbers for you. I’ve built the algorithms, process the data and personally deliver your results.

    Dread another huge data project? Not here. You have all the data you need right in your core system. And I’ve got templates to make it quick and easy to extract.

    Don’t need another unread report collecting dust on top of your file cabinet? That won’t happen with deposit profitability. I personally work with you and your team to help you implement and start growing bank profits.

    Not sure which profit-boosting strategy you should start with? You don’t have to decide up front. Let the data tell us where the low-hanging fruit is for your bank.

    Want to focus on growing deposits as well as profits? Great. We have 4 key strategies for growing your deposits at the same time as your profits. And our profit-boosting insights make all your other marketing efforts more effective.

    The year is slipping by but we still have time to grow your profits in a meaningful way. Let me know if you’re ready to get started

    Why deposits are the key to customer profitability

    Know Your Customer card with colorful background with defocused lightsWhy deposits are the key to customer profitability

    When I say deposit profitability it’s often in the context of customer profitability. Here’s why.

    The first reason is that deposit profitability is the single largest inaccurately and unmeasured part of customer profitability. We just use balances as if it somehow translated into profits. It doesn’t. Transaction volume and delivery channel matter a lot to profitability. You need instrument-specific measurement to create a P&L statement for each and every account.

    Next we often find we have about 5x+ as many deposit accounts as we have loans. We fool ourselves into believing that many of them will get a loan someday but that’s not very likely. Since we have so many more deposit accounts it’s that much more important to accurately measure their contribution to profit, if any.

    Finally, estimating customer profitability without accurately assessing individual deposit profitability skews our entire profit enhancement, cross-sell, new account and prospecting strategies. It’s a big deal if you’re hoping to grow profits.

    All of these critical marketing and profit building efforts rely completely on an accurate and detailed understanding of who is your best customer. Without measuring deposit profit you can’t possibly know this.

    The 4 levels of deposit profitability

    Outside spiral metal staircase on an office buildingThe 4 levels of deposit profitability

    When you run the numbers you’ll find 4 levels of deposit profitability. They are:

    • Unprofitable. These accounts actually lose money for the bank. I believe all accounts can be made profitable, but if not these accounts are candidates to be replaced with wholesale funding. Typically you’ll find about 50% of your accounts in the unprofitable category.
    • Breakeven. As the name implies these accounts just about cover their costs. They might make or lose $1 or $2. With a targeted effort you should have great success improving the profit profile of your breakeven accounts.
    • Marginally Profitable. Your marginally profitable accounts should deliver +/- $10 per account in monthly profits. Usually one small change is all that’s needed to grow profit here. The basics are in place just waiting for you to grow their profitability.
    • Normal Profitability. Normal profitability for the run-of-the-mill, average ordinary deposit account is about $20 - $30 per account monthly. Most deposit profit targets will be set in this range. This is what you’re shooting for.

    Imagine earning $20 - $30 more profit from 50% of your accounts…Each and every month. Do the math for your bank. It’s not flashy but this grit and grind foundation adds up to big money.

    Segment to get your deposit profit target

    Overhead view of decorative stones in lobby of office buildingSegment to get your deposit profit target

    To manage deposit profitability you must set a deposit profit target. It’s the most important step you take after deciding to manage your deposit profits. But if you’re new at deposit profitability you might not know how do you do this.

    There are many ways to set deposit profit targets. They boil down to 2 main approaches: a) Top Down (bank management decides on a profit target and imposes it) and b) Bottom Up (profit set based on actual profit earned by some depositors).

    I’m a big fan of the “Bottom Up” approach. But which depositors to use in setting your targets? The biggest surprise is we don’t want to use our most profitable accounts. Instead do this.

    Make a simple 4 quadrant segmentation based on a) profitable or unprofitable and b) big balances or small balances. Select the quadrant (I call it “Q3”) with profitable small balance accounts.

    The profitable small balance accounts will usually represent about 30% of your accounts. They are the core (and future) of your bank. They have demonstrated they fit your way of banking based upon actually being profitable despite having small balances.

    Most importantly they are a real life proof of concept that shows the profit level selected is attainable by your regular accounts.

    Do you want to grow your bank profits with little to no risk? Click Here to  Discover How

    Written by

    Subscribe to Email Updates

    Recent Posts