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 averagechecking 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.
If you think about the people in your life that you are closest to, chances are they’re the ones that you’ve shared the most experiences with. Those experiences build the involvement needed to grow relationships—between people and also between people and brands. Because there are few things as personal as money, banking is an industry that has a huge opportunity to engage people in experiences that build lasting and mutually rewarding relationships. Yet it’s a segment that has low satisfaction rates (44 percent were extremely or very satisfied with their bank in an October 2011 Harris Poll).
To better understand the opportunity, we commissioned a study on people’s attitudes toward their bank and most importantly, how they felt their bank felt about them.
One big discovery is the difference between the way people feel about their bank and how they perceive their bank feels about them. About 39 percent of people surveyed feel indifferent toward their bank—they neither like, love nor loathe it. But when asked how they feel their bank feels about them, 54 percent feel their bank is indifferent toward them and another 6 percent feel their bank loathes them. I doubt there are many human relationships that could survive under that scenario.
When asked how open to switching banks people were, 30 percent said they are very likely or indifferent/open to switching—that means nearly a third of customers are vulnerable on any given day. A Harris Poll looked even worse for the bigger banks: 46 percent of JP Morgan Chase & Co., 40 percent of Bank of America Corp. and 54 percent of Wells Fargo & Co. customers are extremely or very likely to change their bank. When you consider an American Bankers Association study found that it’s seven times more expensive to replace a customer than to keep them, it seems that the opportunity and the need to build stronger relationships is very real.
Here are five ways banks can build mutually rewarding customer relationships and become a champion for them:
Champion customer needs by focusing conversations on “what they want to do” rather than “what we have to sell you” which just furthers the feeling that the customer doesn’t matter. Banks can rewrite the language used by everyone in the bank to reflect the needs and the power of their customers. One example is Opus Bank. The bank was founded on the belief that strong businesses build strong communities and everything they do supports people with the vision to drive job growth, including their tagline, which is a call to “Build Your Masterpiece.”
Give people credit for knowing how they like to use their money by creating a culture of choice that allows people to customize their accounts and services. While many aspects of financial products are regulated, banks could let people choose the other services they value. Where one person might value free wire transfers, another might prefer something entirely different.
Be a valuable resource that champions people’s desire to do something with their money. Think Nike+ for money. Offer financial management tools that help people set goals, track their progress using their account data, and get rewarded for their achievement. This could be a great opportunity to tie in commercial banking partners like retailers and restaurants in each geographic area. We are beginning to see new banks (e.g., Simple) emerge that leverage technology to not just make transactions easier but to actually empower the consumer.
Create communities for customers to share financial advice with each other and with the bank. Banks can show that they embrace customers as people (not just their money) by adopting the behaviors of sociable people, i.e. by being accessible, interested in what people have to say, and providing inspiration to help them achieve what they want to with their money. Regional banks like Umpqua Bank have done a great job of using technology to create a personal touch outside the bank. In contrast to the 98 percent of social media commentary about banks that is negative, theirs is 99 percent positive and almost to the point of fostering a “my bank is better than your bank” pride.
Empower employees to act in the best interest of their customers and reward them based on their personal contributions to the relationships they have. This is particularly important as customers switch to online banking and each interaction takes on more importance.
While creating these kinds of experiences may not directly sell more banking products, they have real business value. They build involvement with your customers and that involvement will lead to deeper relationships that are more mutually rewarding and profitable.
Hybrid seems to be the new word these days. Hybrid cars get better gas mileage. Why not apply a hybrid to your business model? As many of you, I grew up hearing that I didn’t need something new every time I asked, and I could make do with what I had. I guess those core values stuck because I don’t necessarily think that you have to have an all or nothing proposition for your lockbox product offering. You may already have an established customer base with a group of talented people who do a great job—so why would you take all of that and outsource it? If you have the desire to enter into new markets such as healthcare or property management and don’t want to incur the expense of building out a new facility, an option exists and is in play today. By taking a hybrid approach, a blended style of outsourcing, financial institutions have more options than ever to consider.
With a hybrid approach, you decide what you want to remain in control of and what you want a partner to help with. Here are a few examples of hybrid outsourcing to consider:
1. The healthcare market is a large revenue opportunity for financial institutions. There are hundreds upon thousands of healthcare providers right outside your door, but processing those payments can be complex. There is everything from high tech scanning and data recognition to fully compliant with HIPAA (Health Insurance Portability and Accountability Act) archive and data exchanges. Don’t be overwhelmed and walk away from this potential revenue. By partnering with an organization that has the expertise you need, and will be your product innovator, marketing department, billing and finance and operational arm, you are able to offer a new service to a new customer group without changing anything within your core operations.
2. Accept all payment channels. We all know there are several new and emerging payment channels that customers prefer using—but can your financial institution accept them all? With an integrated receivables hub, offered through an outsourced model, now you can.
3. Expand your geographical footprint. Do you want to grow your financial institution without the expense of brick and mortar costs? Your financial institution can gain access to a unique capture network that allows you to capture and process payments from just about anywhere.
By simply adding on to what you have today, a new hybrid approach can give you happier customers, more revenue, expanded geographic footprint and a happy chief financial officer.