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Echo Partners Community Bank Blog

    A deposit profitability mystery

    Business man pointing to transparent board with text Why?-1A deposit profitability mystery…

    …The biggest mystery in your bank has to do with big balance accounts that fail to meet your profit targets. In my “Four Ds” segmentation of profits (vertical) vs balances (horizontal) this is Quadrant 2 (Q2).

    Q2 accounts should be profitable. Those big balances should result in big profits. But they don’t. And there are usually 2 explanations:

    1. Bank staff sees those big balances and rushes to offer fee waivers and price concessions. That’s right; we make them unprofitable ourselves with self-inflicted profit leaks. This happens more frequently than you think especially when balances are all you have to evaluate. No one wants to be the reason you lose the account so they err on the side of generosity lavishing freebies on the account.
    2. Your customer works hard to keep you from earning a profit. He is a shrewd businessman. That’s how he got those big balances and he’s going to do his best to keep them. He knows a good deal when he sees one and he’s willing to push a little bit to get one. Usually he’s dumping excessive transactions on you.

    In both cases you need to go to your core system and read the instrument specific tea leaves. See who’s unprofitable and learn why. Then you can fix it without upsetting the apple cart.

    Account types: Less is more

    business man stressed out because he has too many things to do - over whiteAccount types: Less is more

    Let me tell you a story about an older established bank I recently worked with that has 112 different account types. This bank is about $1bb asset size.

    This bank never saw an account type they didn’t like. Any new initiative or promo was worthy of its own account type. Special deals were cut for unique situations. Each demanded its own new account type. And once created account types were never deleted. Years later, active accounts stagnant, dwindling or in some cases completely gone, those account types still lived on.

    It’s not hard to imagine that so many account types can be a training, operations and compliance nightmare.

    No surprise then that this bank has almost 60% unprofitable accounts. The good news is that they’ve seen the light and are working to change.

    There is another simpler way.

    Create a basic set of 5 or 6 account types each for business and personal. Add another half dozen specialty accounts to cover all the bases and stop right there. Sounds simple doesn’t it?

    The key is setting the terms of those few account types to profitably cover your bases. Deposit profitability helps you do this.

    Customers don’t want more gimmicky account types. They want solid and dependable financial transactions at a fair price.

    Deposit Profitability Stats

    Colored Seating rows in the stadiumDeposit Profitability Stats

    Here are a few common statistics that can help you conceptualize what deposit profitability can mean for your bank:

    • 50% of your deposit accounts are unprofitable.

    As we examine banks the range of unprofitable accounts is usually between 30% and 75%. Most banks are around 50% or a bit higher. As hard as it is to accept half of your accounts are unprofitable, it’s even worse to acknowledge you don’t know which half.

    • These unprofitable accounts often drive about 50% of your deposit delivery costs.

    So that’s 50% of accounts driving 50% of costs. Makes sense, doesn’t it? It does until you dive deeper into the data and see that these 50% of accounts driving 50% of costs are often less than 4% of your average collected balances.

    • 12% of your depositors are responsible for 80% of your deposit profits.

    Your best accounts really are responsible for your profitability. I’m sure you know the top 10 but wouldn’t you want to know all of them?

    When you put these relationships together typically you find the best and fastest path to profit growth in the underperformers. Once you can identify specifically who is most unprofitable and the exact factors causing those losses you can then formulate a clear strategy to change their profit profile.

    Remember when banking was simpler?

    close up of a calendarRemember when banking was simpler?

    Or maybe when the bank was smaller? You could look at a list of customers and know off the top of your head who was a great customer and who was getting too good of a deal.

    It’s hard to do that today. Products have multiplied, customers have come and gone and the bank has grown. Sure, you still probably have a pretty good handle on your best customers. It’s the rest that are difficult to categorize.

    It’s just like keeping up with your calendar. You used to keep a written appointment diary or Daytimer by hand. Now you’ve got an executive assistant and an electronic calendar filled with obligations but you still only have 24 hours in the day.

    You’ve got this sneaking suspicion that some (many?) of your depositors are getting too good of a deal but how do you know? You can’t tell by looking at balances. Balances are just part of the equation. You need to examine transaction volume and delivery channels. You need instrument specific deposit profitability as your modern day cheat sheet.

    Deposit profitability helps you sort and sift all those customers into meaningful segments while giving you another way to systematically grow your profits. It’s a natural stepping stone into optimizing your account types and terms.

    Let’s talk about how to make this happen for you.

    The easiest way to change your deposit profit profile

    Surgeon incising the stomach of a patient in close-upThe easiest way to change your deposit profit profile…

    …Is to change your account type terms. It doesn’t matter exactly how you wish to change things. You can accomplish it via your account type terms. You can change pretty much anything.

    Just think of the possibilities.

    Need to grow overall deposit fees? Increase the minimum required balance to avoid fees. It’s a win/win – either customers grow their balances allowing you to earn more reinvesting deposits or they pay more fees.

    Do you want to grow your interchange? Then increase the number of swipes needed to qualify for a fee waiver.

    Want to discourage excessive transactions, particularly in your most expensive channels? Revise the number of included transactions in your allowed item counts.

    It’s easy…But here’s the rub.

    Because it’s easy it’s also easy to oversteer and drive customers away or drive profits into the ditch. You can’t eyeball these sorts of changes and hope to get them right.

    How would you even know what to change, and by how much? It’s not a cookie-cutter process.

    This is why you need instrument specific, transaction-detail deposit profitability. You need detailed deposit P&Ls on each and every account to identify problem areas (they’re often not where you think) and to give you the road map to profit growth.

    Account types drive deposit profitability

    Close up image of hands connecting puzzle elementsAccount types drive deposit profitability.

    It’s that simple. They’re the rules that apply to determine fees, minimum balances, item count, and waivers. And all of these factors drive your deposit profitability.

    But it works the other way too. Deposit profitability is the key to your account types.

    Did you catch that? The rules determine your profitability and at the same time your profitability should determine your rules. Check your understanding by answering a couple simple questions:

    Do you have the right account types?

    and

    How would you know?

    You can go with your gut feel and take a chance on guessing how not to run off clients or ruin your deposit profits. Feeling lucky?

    Or you can apply deposit profitability to scientifically determine your optimal account structure. Here’s how:

    1. Calculate an instrument specific P&L for each and every deposit.
    2. Add them up to establish your baseline deposit profitability.
    3. Segment deposits into similar buckets.
    4. Model proposed changes using your actual customer behavior.
    5. Optimize based upon profits.

    It all boils down to determining 2 simple things.

    • These are the customers it impacts.
    • This is what it does to our revenue stream.

    Using deposit profitability lets you ask “What if“ now instead of saying “Oh no“ later.

    A different way to look at your deposits

    Science student looking through microscope at the universityA different way to look at your deposits.

    Typically bankers look at deposits and see 3 things: Balances, Funding and Expense. All banks need funding. It’s like oxygen for banking. But what about balances and expense?

    Deposit profitability challenges you to look beyond balances via instrument specific transaction data, while transforming expense into profit opportunities. Here’s what I mean.

    We use balances as an easy to measure yardstick to evaluate deposits. But the aggregate concept of balances lacks important attributes. It only tells us about the quantity of deposit, not the quality or profitability of the deposit.

    The bottom line is that all deposits are not the same. And if deposits are not fungible then aggregate measures are insufficient.

    To look beyond quantity requires us to use instrument specific data from the core system to look at both the type and frequency of transactions. Together these allow us to construct a detailed P&L statement for each and every account.

    And once we calculate deposit profitability it’s a short step back into familiar territory allowing us to better manage and optimize those profits. Just like everything else in the bank, having better deposit profitability data lets us make better decisions and that means more profits.

    The deposit profitability silent majority

    A confident young elegant salesman with briefcase facing a wall, looking at his strong, weight lifting shadow conceptThe deposit profitability silent majority…

    …Lurks quietly in the background providing solid if not spectacular profits and key insights into your bank’s natural profit profile. And who is this silent majority? They’re the overachieving and profitable low balance holders who we commonly refer to as Q3.

    Our Q3 accounts (top left quadrant in “Four Ds” segmentation) deliver results that meet our profit targets while holding small deposit balances. They set the standard for customer profitability by providing real life proof of just how profitable the average ordinary deposit account can be within your bank’s business model.

    Here are 3 ways you can leverage the Q3 segment:

    1. Focus promotions and cross sell efforts on Q3. They’ve already proven their profitability. Now help them grow their balances.
    2. Find more just like them. Use the detailed activity, balance and behavior characteristics of Q3 to determine your new account marketing targets.
    3. Dive deep into Q1/Q3 differences. Subtle but significant differences between these 2 segments highlight likely paths to bring Q1 to profitability.

    Using Q3 to inform and guide your deposit profitability approach is just good business. And it’s proof positive that our “silent” customers don’t need a survey to provide us with critical feedback.

    Deposit profitability: How to get started?

    Man using map app on phone against blurry new york streetHow to get started?

    When bankers ask me about getting started with deposit profitability they expect me to talk about data extracts and algorithms. Instead I talk about what you’re trying to accomplish.

    Just like going on a car trip, you need to start by talking about your destination before you plan your route. And with deposit profitability that means talking about your deposit profit target.

    Now since setting a profit goal for individual deposit accounts is usually a new concept, we do this in stages. And we start with plotting breakeven profit vs balances using “Four Ds” segmentation. Here’s a quick quadrant review:

    • Q4 (top right) has both big profits and big balances.
    • Q3 (top left) meets profit target with small balances.
    • Q2 (bottom right) fails to meet profit target despite big balances.
    • Q1 (bottom left) has low profits and small balances.

    Since we’re starting with breakeven, Q1 and Q2 contain our money losing accounts. Just identifying them is a big step forward.

    For most banks a good next step is examining Q3 profitability. Q3 contains small balance money-making accounts. They’re real life proof of what profit target is realistic at your bank.

    Once you reach this point you are well on your way to deposit profitability success.

    Pin the tail on the donkey…The banking version

    Blindfolded senior businessman trying to catch dollar bills banknotes flying in the air on gray wall background. Financial corporate success or crisis challenge concept-1Ever play pin the tail on the donkey? You get blindfolded, spun around and then stagger off trying to put the tail on the right spot. Almost no one gets anywhere close. Everyone laughs.

    That’s a lot like deposit profitability. You can’t see what you’re trying to accomplish, you’re disoriented by the events around you and you’re wildly guessing at the right answers.

    While that’s fun as a child’s party game, it’s serious business in your bank. Not getting close with deposit profitability is no laughing matter.

    In both cases it would be a lot easier if you weren’t blindfolded. If you could see the target you just might get close enough to win. Even if it meant you had to adjust your approach a bit.

    That’s what deposit profitability does. It takes off your blindfold and lets you see your profit target. Once you can see who’s profitable and who’s not you can adjust your deposit approach too.

    Deposit profitability delivers a detailed P&L statement for every deposit account. When you combine profits with balances you’re well on the way to powerful segmentation using the “Four Ds” method.

    And just like the party game when you can pinpoint the right targets you’ll hit them more often. That’s how you win with deposit profitability.

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

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