What if Amazon Offered a Checking Account?

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Amazon Prime, Video, Music, Fresh, Alexa—all loved by many, but would consumers also care for an Amazon checking account? One recent survey says that, yes, a subscription based, value-added checking account is the best thing since free two-day shipping.

In a study conducted by Cornerstone Advisors, consumers were asked about their banking attitudes and behaviors and presented with this account option:

“Amazon is thinking of offering a checking account. For a fee of $5-10 a month, the service will include cell phone damage protection, ID theft protection, roadside assistance, travel insurance and product discounts.“

Forty-six percent of “Old Millennials” (ages 31-38) and 37 percent of “Young Millennials” (ages 22-30) say they would open that account. Of those who say they would open the account, almost a quarter say that they would close out their existing checking accounts—most likely with a traditional bank.

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When the same responders were asked about a free checking account from Amazon, without the bundled services, interest in opening the account is lower.

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“This is music to Amazon’s ears,” says Ron Shevlin, Director of Research at Cornerstone Advisors. “Why would they want to offer a free checking account when they can bundle the services of various providers on their platform—merchants and financial services providers—and charge a fee for it. A fee that consumers are willing to pay for.”

When asked about the hypothetical Amazon account stated above, 73 percent of 30-somethings say they would definitely switch or would consider switching accounts if their primary financial institution offered a checking account with those valuable services. Sixty-four percent of 20-somethings said the same.

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Which of the age segments has the most fee based accounts—millennials, Gen Xers or boomers?
About three in four (77 percent) of all survey respondents have a free checking account. Of the millennial segments, 31 percent have a fee-based account. That number is actually less among Gen Xers and boomers—22 percent of Gen Xers are in a fee-based checking account, and boomers report in at only 12 percent.

As loyal users of subscription services, millennials are accustomed to—and willing to pay for—value in order to get something valuable in return. They recognize that you usually get what you pay for, so what you get for free probably isn’t worth much. Even worse, many associate free accounts with the fine print fees you’ll inevitably end up with anyway. And customer reviews on hidden fees will always be 0 out of 5 stars.

Turns out, among those surveyed with a free checking account, nearly every account holder paid at least one fee in the prior year.

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When survey respondents were asked how many friends and family they have referred to their primary FI over the past year, results show that more people with fee-based checking accounts are referring their primary FI than those with free checking accounts. This is true across each generational segment as well as each type of institution (megabank, regional bank, community banks and credit union). Plus, they grew their relationship by adding non-deposit products.

“Among fee-based account holders, 58 percent referred friends/family, and 43 percent added non-deposit products,” says Shevlin. “In contrast, among free checking account holders, 44 percent referred friends/family, and just 27 percent added non-deposit products.”

In short, the results of customers’ relationships with fee-based accounts are positive, for them and the bank:

  • Nearly half of the millennial age segment say they’d opt for a fee-based account with value added services from Amazon.
  • Less say they’d open a free account from Amazon.
  • Almost 75 percent would at least consider switching accounts if their primary FI offered this same Amazon-type checking account.
  • Millennials beat Gen Xers and boomers in having the most fee-based accounts.
  • More people in fee-based accounts are referring their bank than those in free accounts.

According to Shevlin, “The prescription for mid-size banks and credit unions is simple: Reinvent the checking account to provide more value to how consumers manage their financial lives.”

For more insights about how to reinvent your checking accounts and thrive in the subscription society, download Shevlin’s free white paper, commissioned by StrategyCorps, at strategycorps.com/research.

Should the Wells Fargo Board Resign?

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resign-5-5-17.pngWhat’s the minimum percentage of votes a director should get at the company’s annual shareholder meeting?

At San Francisco-based Wells Fargo & Co.’s recent shareholder meeting held April 25 in Ponte Vedra, Florida, nine of the 15 directors won re-election with less than 75 percent of the vote, even though there were no other candidates. Three of them plus the current chairman, Stephen Sanger, won with less than 60 percent of the vote, following last year’s revelation that thousands of employees had sold customers more than 2 million unauthorized accounts over several years to meet aggressive corporate sales goals. Then-CEO John Stumpf lost his job, and as did Carrie Tolstedt, the head of retail banking.

The question now is whether directors will lose their jobs as well. Sanger acknowledged that the vote last month wasn’t exactly a home run for the board.

“Wells Fargo stockholders today have sent the entire board a clear message of dissatisfaction,’’ he wrote in a statement. “Let me assure you that the board has heard the message, and we recognize there is still a great deal of work to do to rebuild the trust of stockholders, customers and employees.”

There was no word on whether Sanger intends to step down soon, but he did tell reporters after the meeting that he and five other directors would retire during the next four years when they reach the board’s mandatory retirement age of 72. Sanger turned 71 in March.

Directors on other bank boards have taken the hint when shareholder votes showed a loss of confidence. Following JPMorgan Chase & Co.’s London whale trading scandal, two directors stepped down in 2013.

Receiving less than 80 percent of the vote in a no-contest election is a pretty clear sign of discontent, says Charles Elson, a professor of finance at the University of Delaware and the director of the John L. Weinberg Center for Corporate Governance. (He also happens to be a Wells Fargo shareholder.) Most directors garner more than 90 percent of shareholder votes, he adds.

Some of Wells Fargo directors could barely get support from half the shareholders. “The vote is significant,’’ Elson says. “It’s probably time to refresh that board.”

The board’s own conduct may have raised further questions about whether members were fit to meet their responsibilities. A report compiled by Shearman & Sterling LLP, a law firm working for the board, said in April that the board wasn’t aware of how many employees had been fired for sales-related practices until 2016.

The Los Angeles Times first reported on the extent of the problem in 2013 in a series of investigative stories. In 2015, the city of Los Angeles filed a lawsuit against Wells Fargo related to the practices. [For more on how “Wells Fargo Bungled Its Cross-Sell Crisis,” see Bank Director’s first quarter magazine.]

“Sales practices were not identified to the board as a noteworthy risk until 2014,’’ the board’s investigation found. “By early 2015, management reported that corrective action was working. Throughout 2015 and 2016, the board was regularly engaged on the issue; however, management reports did not accurately convey the scope of the problem. The board only learned that approximately 5,300 employees had been terminated for sales practices violations through the September 2016 settlements with the Los Angeles City Attorney, the [Office of the Comptroller of the Currency] and the [Consumer Financial Protection Bureau].”

The report blames senior management, such as former CEO John Stumpf, a decentralized organizational structure and a culture of deference to the business units for missed opportunities in handling the problems sooner.

But the report also notes that the board could have handled things differently, by centralizing the risk function sooner than it did, for example. A decentralized risk framework meant the company’s chief risk officer was reduced to cajoling the heads of the different business units for information, each of whom had their own chief risk officers reporting to them. Also, the board could have required more detail from management.

Wells Fargo has lost unquantifiable sums in reputational costs and damage to its brand. It has paid about $185 million in settlements with regulators and recently paid out $142 million in a class action settlement with customers. It still is grappling with the loss of new customer accounts.

At this point, a board refresh—starting with the directors who polled less than 60 percent of the shareholder vote—might be the right signal to send.

A Quicker Way to Get Debit and Credit Cards to Your Customers

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credit-cards-11-30-16.pngAs consumers continue to embrace online and mobile banking channels, financial institutions are reevaluating the branch’s role in modern banking. Historically, branches have served at the forefront of the financial institution and customer relationship. Even though digital account solutions provide new levels of convenience and flexibility, the branch remains a vital channel facilitating interpersonal interactions between financial institution and customer, and fosters greater in-depth communication between the two.

Instant issuance is establishing itself as a proven program to attract more customers to the branch. Instant issuance systems allow financial institutions to print credit and debit cards on-demand inside the branch, for new customers or when an existing customer needs a replacement card. When branches enable on-demand printing of credit and debit cards, both issuers and customers win. Banks that take the additional step in providing permanent payment cards on the spot realize a much stronger return on investment in terms of customer acquisition, satisfaction and loyalty.

New programs, like instant issuance, draw customers, especially millennials, because it reduces the wait time in receiving access to their funds. Contrary to common perception, cash is a large draw for millennials. According to a GoBanking Rates survey released in 2016, 60 percent of millennials still prefer to be paid in cash, which means the millennial reliance on debit cards will remain strong, presenting a natural opportunity to actively engage millennials more effectively in their branches.

While millennials may appear to operate much differently than prior generations, their core expectations are much the same. They seek convenience and want their financial institutions to provide new and innovative technologies that keep pace with the technologically driven world in which they live.

In today’s world, where bank customers are subject to card data breaches with alarming regularity, protecting customer data is paramount to the success of any financial institution initiative. Instant issuance provides an opportunity for financial institutions to lead the conversation around EMV® integration and security. EMV provides heightened security by embedding microprocessors inside debit and credit cards, replacing the magnetic stripe card.

Financial institutions that implement scalable, cost-effective solutions that are EMV-enabled are better able to educate customers on changes to the transaction process. As EMV adoption has been a source of uncertainty and concern for financial institutions, retailers and consumers alike, instant issuance provides a convenient method for providing much-needed knowledge around the shift.

Instant issuance proves to be a secure and affordable way for financial institutions to realize the value of their branch investment. By drawing customers into the branch and getting credit and debit cards to market quicker, issuers are keeping payment cards top-of-wallet and increasing interchange revenue.

As the branch continues to reassert itself as a strategically important banking channel, financial institutions that leverage instant issuance as a strategic differentiator and recognize its role in driving customer activity within their branches will be better positioned to exceed customer expectations.

To learn more about millennial payment trends, download the whitepaper, “What Small-to-Midsize Financial Institutions Can Learn From Millennials.”

EMV® is a registered trademark or trademark of EMVCo LLC in the United States and other countries.

What to Do About the 65% of Checking Customers Making You Money

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In a previous article, I wrote about the challenge of how to handle unprofitable customers, headlined “What to Do About the 35% of Checking Customers Costing You Money.” The logical follow-up question is what to do with the remaining 65 percent.

Below is the composition of a typical financial institution’s checking portfolio, based on the relationship dollars (both deposits and loans) each of these segments represent, and the revenue generated by household by segment.strategycorps-chart-5-11.png

Super: household produces annual revenue over $5,000. Mass Market: produces $350 to $5,000 in revenue. Small: produces $250 to $350 in revenue. Low: produces less than $250 in revenue. Figures are based on the average bank in StrategyCorps’ proprietary database of more than 4 million accounts.

It is commonly thought that the 80/20 rule applies to relationship dollars and revenue for checking customers, where 80 percent of each is generated by 20 percent of customers. However, if you were to add up the Super and Mass columns for the relationship dollars and revenue segments, the “rule” is closer to 98/2 and 97/3, respectively.

Although they make up just over 10 percent of customers, Super households generate the highest percentage of both, 63 percent of relationship dollars and 57 percent of checking revenue for a typical financial institution. Mass households represent the largest relationship segment at 55 percent of customers, but generate less than their pro-rata share of relationship dollars and revenue.

Clearly these two segments, especially the Super segment, are what other financial institutions are looking to steal away with all kinds of marketing messages and incentives, and even some very targeted, prospective individual sales efforts.

A deeper dive into the profile of each segment reinforces why these customers are so sought after by competitors.

Segments Super > $5,000 Mass $350-$5,000
Distribution 10% 55%
Per Account Averages Averages
Relationship Statistics    
DDA Balances $28,079 $5,746
Relationship Deposits $63,361 $6,323
Relationship Loans $68,250 $4,542
Total Relationships $159,890 $16,611
Revenue Statistics    
Total DDA Income (NII + Fees + NSF) $1,349 $448
Relationship Deposit NII $2,367 $231
Relationship Loan NII $2,654 $171
Total Revenue $6,370 $850
Account Statistics    
Have More Than One DDA 73.2% 52.8%
Have a Debit Card 46.2% 65.1%
Have Online Banking 26.0% 29.6%
Have eStatement 16.0% 17.5%
Debit Card Trans (month) 8.4 15.7
Have a Relationship Deposit 74.3% 52.8%
Have a Relationship Loan 56.3% 25.4%
Have Both a Deposit and Loan 44.4% 15.8%
Average Age of Account 5.4 3.8
Average Age of Account Holder 57.0 51.2

The challenge: What should your financial institution do to retain these Super and Mass relationship segments that make up 65 percent of customers and yet are responsible for nearly 100 percent of relationship dollars and revenue?

A common response from bankers when asked this question is their stated belief that people in these Super and Mass segments are long-term customers who are already well-known. However, the data in the next to last row of the chart shows that the average age of the accounts in these two segments is only about five and a half and nearly four years, respectively, so they really aren’t long-term customers on average.

Another popular view is that these customers are already being taken care of. When asked to clarify, the response is typically something general about customer service. Rarely is the response that these customers are being provided with the best products and top level service at the financial institution, or that investments are being made in these customers that are above and beyond what is invested in overall retention efforts. And in too many cases, many community financial institutions don’t have the information organized to even identify which customers are in what segment.

It’s understandable that with today’s tight interest rate margins, compressing fee income and rising operating costs, it’s difficult to make a business case for above average investment in customer retention. However, with an overcrowded competitive marketplace and the commoditization that’s occurring from digitizing retail banking, taking for granted that Super segment customers won’t move is riskier than making the incremental financial investment to do something extra to retain them.

The math on this is straightforward—losing one average Super segment household that generates revenue of nearly $6,400 would require investing in the acquisition of 7.5 average Mass segment households, 29 Small segment households or 88 Low segment households.

The biggest banks know this and are, on a relative basis, out-investing community financial institutions through better mobile and online products, more attractive acquisition incentives and aggressive pricing campaigns in the Super and Mass segments.

While it may feel nearly impossible to invest more in existing Super customers, the cost of not doing so will be much more.

For consumer checking financial performance on all the relationship segments (Super, Mass, Small and Low), a more detailed executive report is available if you’d like more information.

What to Do About the 35% of Checking Customers Costing You Money

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Consumer checking, while the simple hub product for most retail deposit and loan relationships, produces some not so simple challenges related to financial performance.

Here’s the composition of a typical financial institution’s checking portfolio, based on the revenue generated by a household relationship. “Super” customers generate the highest percentage of a typical bank’s revenues although they make up only about 10 percent of its customers. Super customers also make up the highest percentage of overall relationship dollars, meaning they have more combined deposit and loan balances with the bank.strategycorps-chart-5-11.png

Super: household produces annual revenue over $5,000. Mass Market: produces $350 to $5,000 in revenue. Small: produces $250 to $350 in revenue. Low: produces less than $250 in revenue. Figures are based on the average bank in StrategyCorps’ proprietary database of more than 4 million accounts.

The challenge: What to do with the Small and Low relationships that make up 35 percent of customers yet represent only 1.6 percent of all relationship dollars and 2.9 percent of revenue?

A deeper dive into the profile of these segments is enlightening.

Segments Small $250-$350 Low <$250
Distribution 9% 26%
Per Account Averages Averages
Relationship Statistics    
DDA Balances $1,561 $682
Relationship Deposits $444 $117
Relationship Loans $161 $32
Total Relationships $2,166 $831
Revenue Statistics    
Total DDA Income (NII + Fees + NSF) $160 $62
Relationship Deposit NII $16 $4
Relationship Loan NII $6 $1
Total Revenue $182 $67
Account Statistics    
Have More Than One DDA 28.9% 14.5%
Have a Debit Card 71.4% 57.1%
Have Online Banking 27.3% 22.0%
Have eStatement 17.1% 13.9%
Debit Card Trans (month) 13.3 5.0
Have a Relationship Deposit 31.5% 17.9%
Have a Relationship Loan 7.1% 2.7%
Have Both a Deposit and Loan 2.5% 0.7%
Average Age of Account 3.1 3.4
Average Age of Account Holder 48.9 48.8

Obvious is the lack of revenue generation from these segments given average demand deposit account (DDA) balances and relationship deposit and loan balances on an absolute dollar basis and a comparative basis to the Mass and Super segments.

Less obvious is that the other revenue-generating (debit cards) or cost-saving activities (online banking, e-statements) of the average customer in the Small and Low segments is not materially different from the Mass and Super relationship segments. For some products, like a debit card, the percentage of customers in the Small and Low segments who have one is higher than Mass and Super segments.

The natural response from bankers when confronted with this information is, “let’s cross-sell these Small and Low relationships into more financial productivity.” This is well-intentioned, but elusive and arguably impractical.

First, for many consumers in these relationship segments, your FI isn’t their primary FI, so they are most likely Mass or Super segment customers at another institution. Second, if you are the primary FI, these segments simply don’t have financial resources or the need for additional financial products beyond what they already have today. At their best, these are effectively single service, low balance and low or no fee customers. Therefore, traditional cross-selling efforts either compete unsuccessfully with the primary FI’s cross-selling efforts or don’t matter because there aren’t available financial resources to be placed in other products.

How then does your FI competitively and financially engage with these Small and Low relationship segments to improve their financial contribution by increasing the DDA balances, relationship balances or generating more fee income? The answer is to relevantly offer them a product that impacts how they bank with your institution.

More specifically in today’s marketplace, this relevant offering is accomplished by being a bigger part of your customers’ mobile and online lifestyle. Consumers of all types are in a relationship with their smart phone, tablets and computers. A FI’s checking product has to be a bigger part of that relationship. It can’t just be another online or mobile banking product they can get at pretty much any FI. For the unprofitable customers who have a primary FI somewhere else, the mobile and online offerings have to be engaging and rewarding enough to move deposit balances to your bank or buy more products from your bank to generate more revenue.

For those unprofitable customers who simply don’t have the financial resources to aggregate deposits or be cross-sold, the mobile and online banking solutions have to include value worthy enough to willingly pay for. Why? Because generating recurring, customer-friendly fee income based on non-traditional benefits or functionality is the only way you’re going to make them more profitable. Top retailers like Costco, AAA, Amazon and Spotify understand this retailing principle, which is transferable to FIs if they will design and build their checking products like a retailer would instead of a banker.

For consumer checking financial performance on both the Small and Low relationship segments as well as the Super and Mass ones, a more detailed executive report is available if you’d like more information.

The Traditional Community Banking Model is Dead

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retail-banking-2-12-16.pngConsumer banking needs have not changed all that much over the last decade. However, the way those needs are met are going through transformational change. As such, community banks must find ways to shed the traditional ways of delivering banking services and morph into the new reality. Those banks that embrace the change will win, big. Those that do not will be acquired by those that do.

So what is the transformational change? It basically boils down to two key thoughts. The industry is now all about customers, not products, and it’s all about relationships, not transactions. Although fundamental in concept, these are dramatic changes from the traditional community banking model.

Historically, banks have focused on products, not customers. This is reflected in the fact that banks organize themselves along a product orientation. This results in numerous employees chasing the same opportunity. Even worse, it results in banks spending resources chasing certain customers with a product basis they will never use or buy. For example, older baby boomers are saving for retirement. As such, they need savings, investment, trust and advisory services. Trying to sell them a 30-year mortgage has a slim chance of success. Trying to sell retirement services to a millennial also will be met with failure. Banks need to focus on customers. We need to learn from our retail brethren and listen to the customers’ needs and then bring forward our products and services that meet the customers’ needs. This greatly enhances the likelihood of success, as we are giving customers what they want and need as opposed to what we want to sell. Selling hot soup in the middle of the summer is not a sustainable business model. It may get some limited sales, but is the wrong product at the wrong time.

Banks have also focused on transactions as opposed to relationships. This made sense when we had a product orientation. However, customers breed relationships and so we need to build and maintain them. Banks need relationship managers to be the primary point of contact with customers. They will act as a traffic cop, directing customers to in-house expertise that meets the customers’ needs. Their job is simple: Know the customers, their needs, their business and their personal situations and then meet and exceed those needs.

To shed the traditional model, banks must embrace a different culture. This means we need to:

  1. Adopt customer segmentation across all silos within the organization
  2. Reorganize into a customer-centric model
  3. Hire relationship managers (call them whatever you want)
  4. Establish strong calling programs 
  5. Create affinity with various customer segments

Integrating these concepts into a bank’s culture requires a commitment from the board and CEO. They will need to accept change and be willing to change the business model accordingly. They will need to break down the traditional silos inside the bank and integrate all departments into a customer-centric mode.

The following list is proven to aid in this endeavor.

  1. Create relationship managers and have them report directly to the CEO. Banks will still have product managers, but they must coordinate through the relationship managers.
  2. Integrate customers into your budgeting and planning process. This means plan on getting customers and their relationships as opposed to various non-related products.
  3. Build product bundles that fit targeted customer segments.
  4. Target and track market share of customer segments.
  5. De-emphasize brick and mortar and emphasize targeted delivery by segment.
  6. Track family, friends, neighbors and acquaintances as sources of new business. Leverage off affinity.
  7. Proactively identify opportunities and chase them. Do not wait for customers to knock on your door or call you.

Banks can continue to whine about falling spreads, lack of core business, high expenses and low fee income, or they can change with the times and shift to a customer-friendly, relationship-oriented culture. Banks who do thrive and become acquirers. Banks who do not will wither and likely become acquired. We have numerous case studies of banks that are shedding the traditional models in favor of the new on and all of them are winning in their markets.

What Bankers Should Know About Consumer Checking Financial Performance

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Every financial institution (FI) is trying to optimize the financial potential of a checking account customer. Mega banks are paying up to acquire a checking customer from another institution. And all FIs are pursuing the elusive cross-sell to round out a checking account customer that is inherently unprofitable on a single product basis.

StrategyCorps actively tracks, quantifies, ranks and analyzes nearly 4 million checking account relationships of primarily community FIs (below $10 billion in assets) related to our CheckingScore analytical solution in a database that we affectionately call “The Brain.” Each checking relationship is scored by the total annual revenue it generates on a household basis (the total of demand deposit account fees plus estimated net interest income on DDA balances and related deposits and loans) and then ranked into four relationship segments:

  1. Super: annual revenue over $5,000
  2. Mass Market: annual revenue of $350 to $5,000
  3. Small: annual revenue of $250 to $350
  4. Low: annual revenue less than $250

Based on our experience as well as the research of industry groups like the American Bankers Association, the Federal Deposit Insurance Corp. and banking consultants, we have determined that those relationships scoring below $350 don’t generate enough revenue to cover the FI’s cost to service the relationship. (Click here for some advice on how to make checking relationships profitable again.)

The distribution of these relationship segments by customer count, dollars of relationships and revenue is a much skewed one:

  • 35 percent of Low and Small relationship customers represent only 1.6 percent of all relationship dollars and 2.9 percent of revenue
  • 10 percent of the Super relationship customers represent 63 percent of relationship dollars and 57 percent of revenue.

Below are some more key performance benchmarks that show the average financial performance of all four relationship segments combined for a typical financial institution, according to The Brain database.

Key Performance Benchmarks—All Segments Combined  
 Percentage of Accounts That Are Profitable  65.1%
 Percentage of Accounts That Are Unprofitable(e.g., Sale, IPO)  34.9%
 Average DDA Balance  $6,367
 Avg Deposit Relationship Balance per DDA  $10,081
 Avg Loan Relationship Balance per DDA  $9,563
 Total Relationship Balance per DDA  $26,011
 Annual DDA Service Charges  $8.92
 Annual NSF/OD Fees  $81
 Annual Miscellaneous Fees  $7.26
 Average Estimated Annual Debit Interchange Income  $50
 Average Monthly Debit Card Swipes  12.0
 Percentage of DDAs That Are Non-Interest Bearing  75%
 Single Product Households  32%
 % of DDAs with a Relationship Loan  21%
 % of DDAs with Both Deposits and Loans  14%
 Average Age of Primary Account Holder  51
 % of DDAs with Primary Account Holder Over Age 50  51%
 Average CheckingScore  $1155

It’s no surprise that not all checking products and their associated relationships are alike in terms of financial performance, but which products perform better than others?

In summary, based on the CheckingScore per product type and the percentages of a product type in the Super and Mass Market relationship segments, below in rank order are the most financially productive checking account products:

  1. Interest Accounts
  2. Value Added Flat Fee per Month Accounts
  3. High Interest Checking Accounts (reward checking)
  4. Basic Checking (non-interest, non-totally free)
  5. Senior Checking (mostly free to 50+ to 65+ year old customers)
  6. Free Checking (totally free)
  7. Student Checking
  8. Second Chance Checking (for unbanked or underbanked)

The consumer checking account remains the hub account for a customer identifying which FI is “my FI,” especially with the popularity of mobile and online banking, which are now essential components of checking.

So FIs must have a well considered consumer checking strategy in terms of which and how many products to offer, knowing the reality of checking economics. FIs can’t just “wing it” when it comes to checking and expect to win, given competitive and financial performance challenges.

More specifically, the challenge goes beyond just generally acquiring and retaining customers in a super-competitive marketplace. Protecting the Super and Mass Market relationship segments of customers from being stolen by competitors cannot be best accomplished  if those customers aren’t in the best checking products that provide optimal customer engagement. FIs must also fix and grow the Small and Low relationship segments of customers by successfully offering them better financially performing checking products like Interest and Value Added checking and not the lower performing and less engaging ones like totally Free and Senior checking (which place sixth and fifth out of eight account types), and more effectively cross-selling other non-checking products.

These performance-based statistics are what bankers must know about the financial reality of consumer checking. Not understanding or avoiding this reality is a how-to guide for designing and building a chronically underperforming lineup.

A more detailed executive report on consumer checking financial performance is available if you’d like more information.

How Many Mobile Wallets Are Too Many?

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mobile-wallet-12-22-15.pngFor many years, the mobile wallet landscape was filled with small niche offerings that tested some important ideas, but never really gained much national traction. However, over the past 15 months, four major players have introduced their wallets and the tipping point for widespread mobile wallet adoption appears close. Apple Pay, Android Pay, Samsung Pay and Chase Pay have extended the technology and functionality of those early wallets and have started to close the gap on a wallet that would deliver value to the trifecta of stakeholders: consumers, merchants and the wallet providers.

Should every bank be preparing to support one or more of the existing mobile wallets? CG sees five prerequisites for widespread adoption of mobile wallets.

  1. Better security. Consumers have well documented doubts about the security of mobile payments versus more traditional payment methods. Mobile wallets must implement improved authentication processes (e.g., biometrics, account number tokenization) to allay these fears as the price of admission.
  2. More large-scale mobile wallet providers. The recent addition of providers (including Chase Pay) offers the market a wide range of mobile wallet options and a key move toward critical mass for merchant acceptance.
  3. More smartphones. By 2020, there will be 6.1 billion smartphones in the global market (most with biometric security features). That’s a stark difference from the 2.6 billion smartphones in today’s market—most of which do not have biometric capabilities.
  4. More merchant acceptance of contactless payments. Many of the new terminals that merchants are implementing support both contactless payments and the EMV chip.
  5. A good reason to keep using the mobile wallet. The new wallets either have or are planning to implement rewards programs into their product, which will give consumers a compelling reason to habitually use their mobile wallets.

Each of these prerequisites to mass adoption is trending in the right direction, which means every bank should be working to support one or more of the large mobile wallets as part of their future strategy.

Many banks seem content to support the provisioning of their card accounts into Apple, Android and Samsung. The announcement of Chase Pay at the payments-focused conference Money20/20 in Las Vegas in October sent shock waves through the 10,000 conference participants. If Chase felt it needed its own proprietary wallet, will other large banks follow?

The decision to invest in a proprietary wallet should be based on three key elements in each bank’s strategic direction.

  1. Does the bank have a customer profile that wants a mobile wallet offering and would that group prefer a proprietary wallet over a large national wallet like Apple or Android?
  2. Does the bank have the internal resources or external partnerships required to develop and sustain a wallet in a very dynamic environment? (The wallet of 2020 is likely to be very different from the wallet of 2016).
  3. What are the banks’ competitors inclined to do and how will their actions affect the banks’ customers?

Each bank must consider its own strategic differentiation when determining whether to build or borrow. What distinguishes it in the marketplace and how might that change in the future? What will draw new customers to the bank in the next five or ten years?

One feasible strategy is to let others pave the way in developing new products and then figure out when and how to offer them to your own customers. It’s an approach that can minimize risk without necessarily jeopardizing the reward.

The bottom line is, mobile wallets are coming. (We really mean it this time.) Most banks must allow their card accounts to be provisioned into at least some of them. Some banks (but not most) should offer a proprietary wallet, but only if it fits into their larger strategy. Add the wallet to fit your strategy; don’t change your strategy to fit the wallet. Focus on your strategic differentiator and ensure that most of your future effort and investment are focused on the differentiator and not spread across all the possible initiatives in which you could invest (including wallets).

Making Interest Checking More Interesting

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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.