Making Interest Checking More Interesting

June 26th, 2015

Retail-banking-6-26-15.pngFor consumers, having an interest checking account these days is, well, uninteresting.

Financial institutions only pay a few basis points of an interest rate at most, which requires a significant balance to generate meaningful interest income to customers. Even high-yield checking accounts average just 1-2 percent, but with qualifying balances capped around $10,000, customers annually make barely enough to go out for a nice dinner for two.

What can your financial institution do to make interest checking more interesting? In most cases, you can’t afford to pay a lot more interest than you’re paying today. And while you understand that, many customers don’t (just ask them).

So you have to think differently about what a checking account that pays interest delivers to customers. 

The essence of interest checking is that it lets your customers experience “making money on their money.” When this happens, it increases personal net worth. With increased net worth, customers now have more effective purchasing power (in terms of reinvesting and spending capacity).

When you think of interest checking as just “making money,” here’s a typical case of what your customer experiences today: The average balance of an interest checking account from StrategyCorps’ CheckingScore database tracking nearly four million checking accounts is almost $12,546. Earning two basis points of annual interest, the account makes the customer a whopping income of about $2.50. Not a great financial or emotional experience for your customer.

However, when you think of extending the essence of an interest checking account to include providing money-saving benefits, the financial and emotional experience a $12,546  average  balance checking customer has is much more relevant and meaningful.

So what are these money-saving benefits that can be offered in a checking account and how much can they typically save? Our experience in providing in-store local merchant discounts easily generates at least $10 per month for places everyone spends money—the dry cleaners, auto maintenance shops, restaurants and grocery stores. Offer travel-related discounts on hotels, rental cars and theme parks for an annual trip, and at least $100 can be saved. Add discounts for prescriptions and vision care, and saving another $50 is not difficult. And providing in-demand services like cell phone insurance ($120), roadside assistance ($70) and identity theft protection ($120) to replace what nearly one in three consumers already pay directly to companies providing these services, and that’s another $310 in total savings.

Now let’s compare customer experiences. A traditional interest checking account rewards a $12,546 DDA customer $2.50 in interest income. A modernized interest checking rewards the same customer with $2.50 in interest income and $580 in easily realized savings on things that a customer spends his/her hard-earned money on every day, resulting in $582.50 of effective yield or about 4.6 percent instead of .02 percent.

Said another way, to earn $582.50 with a .02 percent interest rate would require an average balance of just over $2.9 million, which isn’t realistic except for very few customers per financial institution. But wouldn’t it be a positive experience if many more of your customers could feel like they were being offered a product that provided the potential reward to be treated like a multi-million dollar relationship customer.

Granted, a customer has to use these benefits to earn the savings yield, but all of these benefits have mass market appeal with spending situations that are frequent and common. They also are delivered via a mobile app or a website, which are the preferred channels that your customers want to bank with you anyway.

If you’re wondering how to improve the user experience of your interest checking customer, pay them as much interest as you can afford so they’re able to make as much money as possible, but also provide the tools to let them save as much money as possible on things they have to buy. Until interest rates recover to levels to generate material amounts of interest income, the money-saving ability of these kinds of benefits will make interest checking more interesting.

Smart, top performing financial institutions are already successfully employing this to retain and grow interest checking customers. If you want to keep your interest checking uninteresting, then keep paying your $12,546 checking balance customer $2.50 in interest.

mbranton

Mike Branton is the managing partner of StrategyCorps. You can reach him at mike.branton@strategycorps.com or on LinkedInLinkedIn_Logo30px.png