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Echo Partners Community Bank Blog

    Manage profits with account types

    Manage profits with account types.

    Don’t worry about how to manage your deposit profits. Your bank already has the best tool to implement & manage deposit profitability…Account types.

    Account types govern all aspects of your deposit profits. They cover fees, minimum balances, allowed item counts and so on. That makes account types ideal for adjusting and growing deposit profitability.

    You just need to know 3 things:

    • Your deposit profit target.
    • Current deposit profitability.
    • Transaction type and volume details.

    Your profit target gives you something to shoot at. It’s hard to hit a goal you don’t set, and it’s even harder if you don’t track your status.

    That’s where current deposit profitability comes in. Deposit profitability tells you who’s making the grade and who is coming up short. It also tells you who will be impacted by account type changes.

    Transactions types and volumes are the building blocks for modeling your outcomes. Take the involved accounts, determine the cash flow changes associated with various changes to account type variables and figure out the fee/balance changes needed to reach your profit goals.

    The best part of using account types is that it is a set-it-and-forget-it process. Get the underlying numbers right and the results are baked in the cake.

    Deposit profitability: What’s next?

    Deposit profitability: What’s next?

    So once you’ve calculated instrument-specific, transaction level deposit profitability P&L statements for each and every account what’s your next step? You could segment your accounts, refine your profit targets, or revisit your underlying deposit account type structure.

    Actually all of these answers are correct. And they all have a shared commonality and bias towards action. Deposit profitability is meant to deliver action steps for improving the quality of your deposits while simultaneously growing your profits. It’s not meant to be just another report gathering dust on your shelf.

    One quick win comes from identifying the extremes in your deposit profitability results. Identify the top (and bottom) 10% of your customers by profitability.

    We all know how to handle the top 10%. Give them lots of time and attention. Make them feel special and appreciated. They’re the crown jewels of your bank and it’s never too early to work on retaining them.

    But what about the bottom 10%? Your least profitable accounts will likely have a few surprisingly large accounts in it. You must drill down into why they’re unprofitable. Often surprisingly simple and easy changes can deliver outsized profit improvements…If you take the time to look.

    The deposit profitability foundation

    workingThe deposit profitability foundation

    Deposit profitability is the foundation upon which better bank profits are built. Just as you can build many different looking structures atop a construction foundation, different banks can build profits in various ways once deposit profitability is in place.

    Here are a few common examples:

    • Better customer relationships. Once you can accurately determine customer profitability you can give your best customers (and your lowest performers) the appropriate degree of attention and follow up. Handling fee waiver and price concession requests simplifies once you know how it impacts profitability on each account.
    • Increase structural profitability. Knowing transaction level behaviors and costs in addition to balances helps you optimize your account types. Adjusting account type limits, items and fees/waivers is much clearer once you know what you’re aiming for.
    • More effective marketing. All direct marketing should start with accurate understanding and insight into your best, most profitable accounts. Get this right and new account profits can soar. But if you get it wrong you risk funding a campaign designed to add more money-losers to your portfolio.

    There are many more ways to grow profits once you measure them more accurately.

    Irony behind deposit profitability segments?

    Irony behind deposit profitability segments?

    The root premise of deposit profitability is the need to calculate instrument-specific profitability for each and every deposit account or relationship. We do this so we can treat each deposit individually and accurately, based on their profitability and balances.

    So then what’s the very next thing we do? We take all our individual relationships and regroup them into segments. We calculate their individual values in order to combine them with other similar accounts.

    This might leave you scratching your head but it makes lots of sense.

    Why? Because the major control we exert over deposit profitability must be related to account types. Account types define deposits and profitability. While in theory we could create an endless number of account types this would create a compliance and operations nightmare.

    There’s also another reason to segment related to our mental processes. Our minds do a very good job of grouping and interpreting groups. It’s like a mental shortcut to understanding the key differences between the segments.

    There are lots of account differences to consider but only a few really move the needle. Those key priorities are what should drive our deposit profitability segmentation strategies. They’re the reason we segment.

    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.

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

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