The bank down the street just did away with free checking and one of their upset customers closed the account and opened a free account at your financial institution. Good news, right?
Let’s look at this a little more closely. What balance did that customer bring? Did that person open any other relationship products? How many times does that person swipe a debit card per month?
Maintaining a customer’s checking account costs your financial institution money. The American Bankers Association estimates the annual cost to a bank to maintain a checking account is between $250 and $400 per year. For community financial institutions with less than $5 billion in assets, the average according to other researchers is closer to $250 to $300.
So what costs are included in these figures? The research shows printing, staff, legal and compliance, processing, fraud prevention, and other overhead costs are the main factors in the cost to maintain a checking account. Some argue overhead shouldn’t be included in the calculation since financial institutions will have branches, tellers, and ATMs no matter what their product mix may be—these are simply a cost of doing business. But think about the typical branch overhead for a moment. A great deal of these costs support those customers dealing with transactions and activities related to a checking account. Do you really think ATMs were invented for the loan customer?
So let’s objectively look at what the average consumer checking account looks like. According to StrategyCorps’ proprietary data on nearly 100 financial institutions and over 2 million demand deposit accounts during the last 12 months, we’ve found the average checking account balance is $5,600 with the following annual revenue contributions:
- Net interest income $252
- Service fees of $8.33
- Miscellaneous fees $7.12
- Overdraft fees $92.75
- Debit interchange revenue of $53.43
These averages total $413.63. That would seem to suggest the average checking account pays for itself, right? No. Averages don’t tell the real story. Of all the financial institutions analyzed by StrategyCorps, we found almost 40 percent to be unprofitable - not covering what it costs to maintain them.
What do unprofitable customers look like? They tend to have very low debit swipes, about six times per month. They have practically no other relationship other than checking. Only 17 percent have more than one demand deposit account, only 23 percent have a savings account, only 1 percent have both a savings and a loan product, and 3 percent have a loan. The average balance is $812. Total annual revenue contribution for all unprofitable accounts is $92. Overall, unprofitable customers comprise only 2.7 percent of all checking-related revenue and 1.4 percent of total relationship dollars.
Contrast this with profitable customers. Their average balance is $8,000, the average monthly debit swipes are 15, 54 percent have more than one DDA, 60 percent have a savings account, 30 percent have a loan and 20 percent have both. The average revenue contribution is $1,650.
Within this group is a sub-group we call the super-profitables. This group contributes over $6,200 each annually, makes up only about 10 percent of a bank’s checking account base, but not surprisingly, contributes 54 percent of the checking-related revenue and 67 percent of total relationship dollars. Super-profitable customers carry an average checking balance of $23,800, savings of $57,000, and loans of $68,000. More than 72 percent have multiple demand deposit accounts, 81 percent have savings, 59 percent have loans, and 46 percent have both.
Now let’s get back to that customer you’ve just landed from the financial institution down the street. The good news is that you now have the opportunity to develop a relationship that you didn’t have before. However, making that relationship meaningful to your bottom line means this customer needs to have large average total relationship balances, be a power user of the bank’s debit card, be an occasional or chronic fee generator, or be a combination of these. If the financial relationship is shallower than this, it’s costing you money.
So celebrate getting that new customer. Then realize the financial realities of the profitability of a consumer checking account and get to work doing the right things to make sure that that account is profitable to your financial institution, namely selling other products that they want to buy from you and, in some cases, gladly paying your financial institution a fee for doing so.