Making the Checking Relationship Profitable Again

10-14-13-Strategy-Corps.pngIn April, I addressed the financial state of consumer checking. In summary, about 40 percent of consumer checking accounts are so “shallow” that they don’t generate enough income (net interest income and fees) to cover the estimated annual costs to maintain and service the account. Plus, this 40 percent only contributes 2.7 percent of all checking-related revenue and 1.4 percent of total relationship dollars.

Here are a few more numbers to define these shallow, single service, low balance, no/low fee relationships:

  • only 3 percent have a loan
  • the average checking account balance is $812
  • the average relationship deposits (other than checking) and loans total amount is $236
  • the average annual fees are $55 ($45 from overdrafts)

These shallow accounts occur with all checking account types—free, interest and relationship accounts with the overwhelming majority of these account types being free ones.

So at a time when financial institutions, especially community ones, need more core profitability from their retail products and services than ever before, what has to be done to deepen the relationship of checking customers?

Most financial institutions are focused on the cost-cutting angle—lowering the underlying costs to service these shallow customers to get more of the existing level of revenue to fall to the bottom line. This is a good start, but you can’t cost cut your way to prosperity.

Financial institutions also need to increase the revenue producing capacity of these shallow accounts as well. This means better cross-selling results and more fee income. So let’s take a look at each of these.

Cross-selling is as elusive as Bigfoot and the Loch Ness Monster. A recent study by Deloitte shows the numbers are stacked against cross-selling success because the actual number of customer candidates to be practically cross sold is significantly limited.

Eighty-one percent of customers average having only one product at their primary bank. These shallow relationships are challenging to deepen. Forty-two percent are identified as basic users. They are young or middle aged, have lower earnings, and simply don’t have the personal financial need to respond to cross-selling efforts. Value shoppers make up 39 percent of customers. They are aged 45-plus, moderate to high income, and they tend to shop for the best value to meet their mature banking needs. They don’t want to have all of their business at one institution due primarily to not trusting this primary institution. So they don’t have the behavioral motivation to respond to cross-selling unless they’re won over with active promotion and the best pricing deal possible, which strains profitability.

Should financial institutions then abandon cross-selling efforts to these groups? Of course not, but the arithmetic reality of the financial and motivational needs of these groups has to be factored in. When doing so, cross-selling is not the single source method to fix the 40 percent of total accounts comprised of unprofitable, shallow relationships.

So this leaves generating new fee income from these relationships. One popular technique is to just raise fees or impose more conditions on your customers to avoid a fee, but provide no additional value in terms of services or product benefits. Then you wait and see which customers stay and which ones leave from taking this action. This is not really fixing these relationships. Rather, it is effectively firing them, a practice employed primarily by the mega banks, which have much more diversified sources of non-interest income to cover the increased attrition. This technique doesn’t work well for community and regional institutions.

Another technique growing in popularity and employed by more progressive thinking and retail-focused institutions is to generate new fee income by actually enhancing the value of the benefits delivered in retail banking products, namely mobile and online banking and checking accounts. To successfully charge customers fees, these benefits must not be transaction-centric or branch-centric. Customers don’t like to pay for (and competitively don’t have to pay for) basic banking transactions. These benefits must be customer lifestyle-centric, meaning that they go beyond basic banking transactions and are centered on relevant things customers do in their daily lives, so they willingly pay for them.

When delivered in appealing, easy-to-use and convenient mobile and online platforms, customers have shown that they will gladly pay fees for these lifestyle-centric benefits (like local merchant discounts, travel savings, cell phone protection and roadside assistance). How much? On average, financial institutions we work with are generating about $60 per customer annually from 40 percent of the consumer checking portfolio. This means a lot of new customer-friendly fee income for these financial institutions.

And it is this additional $60 of customer-friendly fee income that not only deepens the relationship by providing services more relevant to customers’ lifestyles, but also adds more revenue to move these unprofitable, shallow accounts over or, if not over, at least closer to the financial break-even line.

So to make checking relationships more profitable, continue your efforts to cross-sell other services and products, realizing the customer-based realities of being successful. But also focus on making your mobile, online banking and checking products better by expanding beyond basic banking transactions and smartly charging a reasonable fee for value. The payoff will be more well-rounded and mutually beneficial relationships.


Mike Branton