Tag Archives: Banking

Three Ways Retail Banks Could Benefit from Social (Media?)

On the FutureLab site, Ed Thompson shares some excellent ideas in an article titled 3 Ways Retail Banks Could Get More Benefit from Social Media. Read the entire article to see the details. In summary, Ed suggests that banks implement:

  • Social banking. To do this, Ed recommends that banks “create a current or savings account with interest rates individually tailored based on a customer’s ability to recruit more members to the bank.”
  • Social micro saving. Banks would do this by creating a savings account which encourages customers to micro-save via banks’ social platforms.
  • Social budget planning. As Ed puts it, “Mobile or social apps that let people compete over their personal budgeting targets could drive more careful budget planning and financial prudence.”

My take: These are excellent ideas, but they highlight a terminology problem that pervades the industry — and marketing, in general, for that matter (which should not take away from the value of Ed’s ideas, however).

The terminology problem here is using the term “social media” as a synonym for “social.” This is wrong. Something can be social without it being deployed on social media. Unless, of course, EVERY website and app is an example of social media.

Banks and credit unions can do — and have already done — some of what Ed suggests without relying on social media. There are non-social media-based rewards programs that reward customers for referrals. Bank of America’s Keep The Change program was an example of micro-saving that didn’t involve social media.And I strongly believe that gamification will become a part of many of the PFM platforms that are popular within the industry today

There’s no reason for banks and credit unions to assume that a social media site, like Facebook or…..um……ok. like Facebook, is the only place to implement a “social” tactic.

In fact, there are reasons why banks and credit unions should avoid social media to deploy social tactics:

1. PFM. Implementing social budget planning within a PFM platform should help drive use and engagement — which I would argue is a prerequisite to realizing ROI from PFM (and I would also argue that few banks or credit unions are truly achieving any meaningful from PFM today).

2. MFI. Over the next few years, merchant-funded incentives will become a more popular way for FIs to monetize the online channel, and to make more effective use of payments data. Driving traffic to their own sites, and to their mobile banking offerings, will become critical to the success of their efforts. Not to mention critical to the success of the FI’s own internal digital marketing efforts. If you push your customers to Facebook, Facebook decides which ads and messages they see (please let me know if I’m wrong on this assumption).

3. Apps. The impact of smartphones and tablets has yet to hit financial services. The prospect for FIs to deploy Ed’s suggestions through mobile apps is a greenfield opportunity.

Please don’t give me the “800 gazillion people use Facebook, so that’s where banks need to be” argument. People are very good at compartmentalizing, and people can be trained (ugh, that sounds terrible, doesn’t it?) to use certain sites for certain functions. Facebook doesn’t need to be the platform for everything.

Bottom line: Ed’s recommendations are all worth consideration. But don’t get caught in the social=social media trap.

You Can’t Market Financial Services To Women

Before you jump to conclusions — and all over my head — read first, and then let me have it if you’re so inclined.

There’s renewed talk these days in financial services circles about “marketing to women.”

Renewed, because I remember that 11 or 12 years ago, in the height of the dot-com boom, start-ups emerged dedicated to providing financial services to women (I still remember Jennifer Openshaw coming into our offices telling us about the Women’s Financial Network). I haven’t been involved in the financial services industry long enough to know if there was focus on marketing to women (specifically for financial services) before the dot-com era.

Recently, the topic has reappeared a number of times in the past few weeks:

  • In a CU Times article titled Marketing to Woman Require Cultural Change, Roger Conant writes that the reason why many credit unions’marketing programs don’t directly speak to women is that “the majority of the industry’s leadership are still primarily male…and most males are unable to transfer facts to actions when challenged to focus their attention on the growing power of women, both in the marketplace as well as the workplace.”
  • On her Marketing To Women blog, Holly Buchanan penned a post titled Marketing Credit Unions to Women which encouraged credit unions interested in marketing to women to (among other things): 1) Make them feel smart; 2) Use female-friendly language; 3) Create kid-friendly branches; and 4) Support her causes.
  • An email from Currency Marketing announcing its Money Mom marketing program.

My take: Marketing financial services products to “women” is doomed to fail, and simply not a very good idea.

[Put the gun (and keyboard) down, and keep reading before you shoot, and argue with, me]

In her post, Holly quotes a source that says women make 89% of the banking decisions for their families. In my research, which dates back a few years ago, I found that women were the primary financial decision makers in a majority of US households, so I have no reason to dispute the claim.

But, if 89% of the decisions are made by women, then pretty much ALL of the decisions are made by women, no? Which means, the ONLY people worth marketing to are women.

—————

But let me ask you marketers something: Imagine for a moment that you there was no way for you to know the gender of your customers and prospects. How would you segment consumers in order to learn their needs, attitudes, and preferences, as they pertain to the products they buy and how they buy them?

You would look at age, income, lifestage, channel preferences, etc., right?

If you did that you might find differences in behaviors and preferences between Gen Yers and Boomers, or differences between low income and high income consumers, or differences between people with young children and those (even of similar age and income) who don’t have children.

You would then use the segments you identified to learn how to best design products and marketing campaigns to reach consumers within each of those segments.

After doing all of the above, if I then came back and told you that all of your customers and prospects were of just one gender, what would you change? Answer: Nothing! You would have already learned what the real drivers of different needs and preferences were.

What I’m trying to convey here — and I’m worried that I’m not articulating this clearly — is that “women” is not a manageable, marketable consumer segment. It’s simply way too broad (oh geez, no pun intended).

—————

Roger’s comments bear some analysis here, as well. In the history of consumer products, many companies have successfully sold feminine (or female-oriented) products via male product managers. Marketing is about learning about consumer needs, designing products to meet those needs, and implementing marketing programs that reach and influence the target market(s).

Should Fisher-Price fire everybody over the age of six because they’re not the primary users and audience for the products (toys) they produce?

Of course not.

Roger goes on to quote Verity Credit Union CMO Shari Storm as saying ““I think the hardest part is to have the fortitude to carry this through.”

Shari is 100% correct. But her comment applies to ANY strategic marketing effort — it’s just as applicable if the focus was Gen Yers, people of specific ethnic backgrounds, or Martians.

—————

Verity’s “marketing to women” efforts (which are the model for Currency’s Money Mom campaign), also needs some more scrutiny here. Primarily because Verity’s Verity Mom marketing campaign is NOT an example of “marketing to women.”

Verity is focusing on “moms.”

Verity did what I advocated for above: It  identified the segment of the market they wanted to market to. Now, while the overall market of Moms is pretty large, effectively, Verity is really focusing on a subset of that “market”: Women in the their late 20s (at the younger end) to the early 40s (at the older end). In other words, mostly Gen Xers who are hitting the prime of their earning years, and the prime of their financial needs.

It’s also important to note (I’m talking to you, Roger) that Verity did this without firing the entire leadership staff, and replacing them with Moms. At least, I don’t think Verity did this.

What the credit union did do, was hire a Mom to blog, tweet, and be the “face” of Verity to this market segment. While certainly filling an important role, this person is hardly a senior manager in the organization.

In fact, as has been proven with other Young & Free marketing campaigns launched by a number of credit unions (which is, essentially, a similar model to the Verity Mom campaign, but focused on marketing to Gen Yers), this important role can be filled by many different people, a point proven by many credit unions who have replaced their “spokesters” after a one-year stint.

—————

Bottom line: “Women” is not a viable, realistic consumer segment for financial services firms to market to. There are other attributes and dimensions of the market that better determine how financial services firms should design products, and take those products to market.

You may now load your guns and take your shots at me.

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Wookin’ Pa Nub: Banks Are Looking For Growth In All The Wrong Places

In the history of Saturday Night Live, there might not be anything funnier than Eddie Murphy doing Buckwheat Sings:

Wookin’ pa nub in all the wrong places, wookin’ pa nub.

Based on a (unrepresentative) survey of bank execs, it appears that banks, too, are wookin’ pa nub in all the wrong places.

The 300 or so attendees of Bank Director’s Acquire or Be Acquired conference were surveyed about a number of things, including this:

More than half of the respondents expect to grow through organic loan origination, while just 7% plan to grow through new revenue sources. (And you wonder why there are no banks in the list of top innovators).

I’m discounting the “mergers and acquisitions” answer since this was a conference about acquisitions, and the attendee pool was probably skewed towards those banks with a hankering for acquisitions.

The 56% planning to grow through loan volume are wookin’ pa nub, however. Look at these quotes from conference attendees:

“I don’t see any reason to be optimistic on the horizon. It’s a struggle to keep loan volume up there.” — Bank CEO

“Housing prices in [my] area have dipped about 10-15% since the recession and loan demand is still low. There was too much excess and too much bubble. Everyone has to deleverage, the government and the private sector.” – Bank CEO

There’s some serious short-sightedness here. Over the past few months, my colleagues and I have written about a number of revenue-generating opportunities for banks (and credit unions):

  • Direct deposit advance. Banks could generate $500 million in revenue from marketing direct deposit advances to their customers who currently use payday loans.
  • Prepaid debit cards. By our calculations, a bank could recoup up to 20% of the lost debit interchange resulting from the Durbin amendment by marketing prepaid debit cards to existing customers.
  • Merchant-funded incentives. Aite Group estimates that FIs will reap $1.7 billion in revenue from merchant-funded incentives by 2015.

Sadly, a number of bank (and credit union) execs I’ve talked to about these opportunities choose to see only the risks and downsides associated with them. 

Granted, reaping the revenue from these new opportunities is no slam dunk. But putting your faith in organic loan origination…well, that’s just being una panoonah banka. More seriously, it’s a telling insight into the innovativeness (or lack thereof) within the industry.

Does this just reflect the views of an unrepresentative set of banks predisposed to growing by acquisition? 

There’s good evidence that it doesn’t. In a study done by The Financial Brand and Jim Marous, loan growth was listed as the top marketing priority by one-third of banks, and 60% of credit unions. Check out the data and the blog post on Bank Marketing Strategy.

[Thanks to BankDirector.com and Grant Thornton for publishing the survey results]

The Debanked: The $1.7 Billion Threat To Banks

In previous posts, I’ve alluded to an emerging segment of consumers I call the Debanked: 

Mainstream consumers who willingly opt out of the traditional banking system.

Today, Aite Group published the report I wrote on this segment, which is titled The Debanked: A US$1 Billion Prepaid Debit Card Opportunity.

The report, written for Aite Group clients, focuses on the business opportunities this segment presents, and how to capitalize on those opportunities. To avoid cannibalizing the contents of the report, this post focuses on the other side of the coin: The threat this segment represents to banks, and yes, to credit unions.

The Un- and Under-banked

There’s a lot of press these days that alludes to Unbanked or Underbanked consumers. Unfortunately (but not surprisingly, given the intentions of the mainstream press), the differences between these terms goes unnoticed.

The FDIC published a report a while back in which they defined the Unbanked as consumers without a checking or savings account. The Underbanked was defined as consumers who use “alternative” financial products — like payday loans, check cashing services, rent-to-own products, etc. — in addition to their checking/savings accounts.

The Unbanked, per the FDIC, account for just 8% of US households. The Underbanked, on the other hand, totals 36% of US households.

Look to your left, look to your right, look in the mirror — odds are you just saw someone who qualifies as Underbanked.

Yet the bank-bashing press go ahead and paint the Underbanked as underprivileged, down-on-their-luck consumers getting taken advantage of by “predatory” large banks.

To be fair, there are many consumers in the ranks of the Underbanked who are going through tough times, find themselves un- or underemployed, in debt, and paying way more for maintaining a checking account than they should be.

Introducing the Debanked

But there’s a growing subsegment of the Underbanked that doesn’t fit this description — the Debanked. They’re young, highly educated, employed (or employable) — and they’re choosing to manage their financial lives without the help of a checking account, thank you very much.

They already use prepaid debit cards (GPRs), and are highly satisfied with the cards. (So please don’t tell me about the weaknesses and downsides of these cards, because what you and I think don’t matter — these people are very satisfied with the cards).

The Threat

And when they close out their checking accounts, $30-40 billion in deposits is coming out, and more importantly to banks, nearly $1.7 billion in revenue (including overdraft fees, monthly fees, lending fees, and debit interchange) is coming off the banks’ books.

My boss suggested to me that, while $1.7 billion might sound like a lot, as a percentage of total revenues, isn’t this just a drop in the bucket?

Yeah, maybe it is.

But there are reasons why this threat is important:

1. These aren’t “bad” customers. Back during the Bank Transfer Day frenzy, I speculated that maybe Bank of America had done the analysis, and determined that the customers they would lose by imposing a fee for debit card use were unprofitable customers they could afford to lose. It’s hard for me to see how the Debanked are bad customers. A larger-than-the-national-average percentage of them are college educated. Many are employed, and of those who aren’t, it’s because they’re still students. They’re heavy debit card users. And they bank and pay bills online (remember when the industry believed that the path to retention and profitability was to get customers to pay bills online?).

2. They might not be coming back. This is where the threat to credit unions come in. While CUs love to gloat about the number of people leaving big banks, the reality is that not all are leaving for credit unions. Many are leaving the traditional banking system. Considering the relative young age of the Debanked, and the desire on the part of pretty much credit union out there to lower the average age of their member base, this doesn’t bode well.

The short-term response to this threat is to develop and deploy a prepaid debit card program to keep these customers in the fold. Once again, please don’t tell me about the downside of the product, and how poorly other cards are designed. The failures of the Kardashians and Suze Orman aren’t indictments of the product — they’re simply examples of poor implementation.

The longer-term response is to re-evaluate the role of the checking account in the product portfolio. For too long, the product has been seen as the anchor product of a banking relationship. This assumption should be re-thought.

The Quantipulation Of Bank Transfer Day

An article on GOOD News suggests that “with 5.6 million people and counting, the Move Your Money campaign worked.” According to an analyst quoted in the article:

“if we assume that the average American family has $3,800 in the bank, and we assume that only 300,000 of the 5.6 million people who moved had even that much, that’s more than a billion dollars divested from big banks. In the end, it won’t stop them from chugging along, but it proves that a concerted effort to change the status quo can be worth a lot, literally and figuratively.”

My take: There are a few statements here that might not stand up to scrutiny.

1.To say that the number of people that have switched account is 5.6 million and counting, suggests the “movement” is still active. It’s certainly true that people switch banks everyday, but there’s no evidence that the rate of switching is anywhere near the rate it was in the month leading up to BTD.

2. I’m having a little trouble with the claim that it was the Move Your Money campaign that worked. My understanding is that the MYM was started long before Q3 2011. Attributing the success of the late 2011 switches to this campaign seems disingenuous to me.

3. The comment that a billion dollars divested from big banks is “worth a lot, literally and figuratively” doesn’t hold water. As of the end of September 2011, the 5 largest U.S banks — or what the article despicably calls the “predatory” banks — had a little more than $4 trillion in deposits. A billion dollars is 0.03% of that. Let me put that in perspective for you: As a percentage of my annual salary, I spend more than 0.02% when I take my family out for dinner.  Even if $10 billion came out of the top 5 banks, we’re still not even talking a quarter of one percent of the deposits they have.

Why is this important?

Because credit unions are deluding themselves, and missing the more important picture.

While they obsess over painting large banks as Doofenshmirtz Evil Incorporated, the $1 billion leaving the big banks pales in comparison to the $30-40 billion leaving the system.

In an Aite Group report that I’ll be publishing next week, I’ll define a segment of consumers I call the Debanked: Mainstream consumers who willingly opt out of the traditional banking system, taking their $30-40 billion with them to alternative financial services providers.

These people aren’t just leaving big banks, they’re leaving all banks and credit unions behind. And these are not disadvantaged, uneducated consumers. They’re highly educated, employed, make decent money, and they’re young.

I don’t have the data to prove it,but I’m betting many of the Debanked aren’t aware of credit unions and the alternative they provide.

CU professionals can go on patting themselves on their backs for a supposed “job well done” regarding Bank Transfer Day (even though most credit unions didn’t actually do anything), but it’s all quantipulation as far as I’m concerned.

The Fat Lady Ain’t Singing To The Banks

American Banker ran an article titled Time to Face the Music On Disintermediation in which the author stated:

“In spite of all the regulation that helps prop up legacy business models and protect established companies, much of banking is ripe for digital disintermediation-and it’s starting to happen already. Fundamentally, banks connect those with money to those who need it. By limiting access to the systems that handle the transactions, banks have been able to charge big fees. But the walls are breaking down now, just like they did in the music business.”

My take: The banking and music industries aren’t analogous.

In response to the article, @dmgerbino tweeted “I disagree. Banks/CUs are embracing change. The music industry tried to stop it.”

David’s right, but there are a number of other reasons why the viewpoints in the article are off-base, and why the music industry suffered what it did:

1. The product form changed… Although the music industry saw plenty of change in product form from 1950 to 2000 (from vinyl to cassettes to CDs), one thing was constant: The product was a physical product. It wasn’t until music became a predominantly virtual product that the industry began to suffer.

2. …which caused the cost of production to plunge…. In and of itself, the digitization of music doesn’t explain that industry’s woes. Another contributor is that, as a result of this digitization, the cost of producing the product dropped. Virtually any musician could produce a high-quality mp3 file.

3. …and caused the cost  of distribution the plummet… In addition to making it easy to produce the product, musicians could easily do an end-run around the traditional distribution channels and go direct to their fans.

4….which exacerbated intellectual property rights….The fly in the ointment — illegal file sharing — became more like a mothra in the ointment thanks to Napster and subsequently other sites. This created a need for new approaches and new firms with the capability of protecting and enforcing these rights.

5….and resulted in new business models. iTunes and other companies emerged to fill the need. Today, people subscribe to music online. And it’s even getting worse for traditional players in the industry. Recently, I watched Bob Weir’s band Ratdog broadcast a live concert from his new TRI Studios in Marin County. It was free, and attracted about 100,000 viewers. They could have easily charged $5 and with even just 20,000 views grossed $100,000. The variable costs of touring from city to city can be avoided.

Now let’s look at the banking industry:

1. The product form hasn’t changed. I find it interesting that the author of the article says that banks “fundamentally connect those with money to those who need it.” That’s one part of the business. But payments — think of this as the “transfer of funds” — make up a pretty big portion of what a bank does, no?  When you write a check, or use your debit card against your bank account, you are fundamentally triggering a transfer of funds from your account to someone else’s. It’s certainly true that access mechanisms — how we check our balances, transfer funds between our own accounts, etc. — has changed, and become more electronic.  But the underlying form of the product has been electronic for some time now.

2. The need for security drives up costs. As far as I know, no one has tried to steal the music off my hard drive (it’s mostly Grateful Dead music, which is widely available on the Internet, anyway). But protecting the funds in my account is a pretty big deal. And as most banks know, it requires a lot of investment to ensure that accounts are protected from fraudulent activity. So-called disintermediators to the banking industry often seriously underestimate the cost of doing this.

3. Risk management is a requirement. Security and fraud are one thing, risk management is another. When a bank makes a payment it often assumes the risk of non-payment (something Dick Durbin can’t seem to understand). Any potential newcomer can design a fancy front-end website to disintermediate the banks. But that doesn’t alleviate the need for risk management.

4. Regulations create barriers to entry. While the bank haters love to point to regulations as something that keeps the barriers to entry erected, most bankers know that there are scores of regulations that drive up costs and eat into profitability (FYI: I’ve estimated — with the help of Continuity Control — that the largest 100 banks in the US spend $1 billion on compliance each year). Potential disintermediators looking to get into the industry must adapt to the regulatory environment.

————–

All of this is not to say that we won’t see new entrants into the industry. But what we’re not seeing — at least not right now — is the disintermediation of banks. New entrants are not creating radically new business models that are threatening the legacy players.

In fact, one of the author’s examples shows how banks’ role is strengthened, not disintermediated: Square. Today, many micro-merchants are forced to accept cash or checks from their customers because they haven’t been able to accept credit cards. By outfitting these merchants with card readers, more payments can actually flow through the banks that issue credit cards.

Another of the author’s examples — Simple — does create a new interface to banks, but doesn’t eliminate banks from the financial services equation.

Bottom line: There’s no doubt that the financial services will dramatically change in the next 10 years. But because of the complexity of moving money — including technological complexity, security concerns, risk management needs, and regulatory compliance — banks aren’t going to be disintermediated a la the music industry. The fat lady may be singing to the big music companies, but she ain’t singing to the banks. 

Will 2012 Bring A New Approach To Bank Marketing?

Aite Group published a series of reports on 2012 trends in financial services. The following is a summary of the idea I contributed:

As American football is gripped by Tebowmania, a new “Tebow” will become prevalent in the world of financial services:

Total Benefits of Ownership (TBO)

TBO will be adopted by many banks and credit unions as a new approach to marketing bank accounts in 2012 and beyond.

Banks’ and credit unions’ approach to marketing checking accounts has evolved over the past 10 to 15 years. FIs have evolved (if you want to call it that) from:

  1. Rational marketing (“We have higher rates/lower fees!”) to…
  2. Emotional marketing (“We help you achieve your dreams!”) to…
  3. Hysterical marketing (“Move your money away from the evil big banks!”).

2012 will bring a return to a more rational (i.e., quantitative) approach to marketing: Competing on the total benefits of account ownership.

The formula for TBO is simple:

TBO = Interest earned + Rewards redeemed – Fees paid

FIs’ and consumers’ current ability to calculate TBO is practically impossible, however.

Until recently so-called free checking accounts promised no fees, but through overdraft fees, foreign ATM fees, stop payment fees, wire transfer fees (need I go on?), consumers paid out plenty for their checking accounts — but could barely forecast those fees in advance.

If interest was earned in checking accounts, or affiliated savings accounts, few consumers could tell you how much interest they earned in a given year, nor forecast that amount looking ahead.

And if you think debit rewards are dead, tell that to UnionBank who’s giving 5% back on debit card spending to new account applicants.

Looking ahead, merchant-funded incentives will become more prevalent. I admit that calling an offer for a discount a “reward” is a bit of a stretch. But if you earn a discount based on your spending, the amount saved should be attributed to the benefits of account ownership.

As FIs continue to re-price their checking account offerings to motivate consumers to hold more accounts or higher balances, demonstrating the total benefits of ownership will become the way banks and credit unions will attempt to differentiate themselves.

As consumer activism continues to rise, the way for financial institutions to respond is by demonstrating the value they provide — by quantifying it, and compete on the basis of it.

Executing on this won’t be easy, however. FIs will need technology offerings that deliver the essence of TBO:

Enabling prospects to model their behavior to forecast expected TBO, and enabling existing customers to calculate actual TBO on a real-time basis.

FIs will need the ability to aggregate accounts (internally), compile customer activity across channels and products, and track rewards and merchant-funded offers.

Sound too complicated? Think it’s too much effort for consumers? You’re underestimating the increased desire among consumers to make smarter decisions about their financial lives, their desire for more transparency, and the ability of technology — particularly mobile technology — to make this a reality.

You’ll have to read the report to see which technology firms we think will be the leaders in the development of these capabilities, how TBOmania will play out, and the other trends Aite Group is anticipating.

Financial Spas

99.8% of the financial services world calls the physical dinosaurs that populate the real world “branches.” There’s .1% that refers to them as “cafes” (ING Direct) and .1% that calls them “stores” (Wells Fargo). 

Snooze. 

Banks and credit unions are missing a huge opportunity here. Namely, to transform those legacy physical structures into financial “spas.”

You know, the place where you go to get into “financial shape”. Kinda gives new meaning to the term “loan workout”, no?

Seriously though (OK, not too seriously), instead of trying to get people to hang out and drink coffee, if banks transformed their branches into spas, while women were getting their mani/pedis, they could be having meaningful conversations with financial reps about their financial lives. 

Open an account (or maintain a certain balance, number of accounts, etc., you get the picture), get the manicure for free. 

Think I’m being sexist? Screw that, everybody knows it’s women making the financial decisions in an incredibly high percentage of households.  It’s certainly no more sexist than slapping some pink colors on something and calling it “marketing to women” (and you know that there are banks and other types of companies that do that).

You don’t think this idea will fly, do you? That’s OK. Because cafes and high-tech, self-service gizmos aren’t the “branches of the future” either. 

Quantipulation: Online Banks’ Deposit Growth

American Banker ran an article titled Online Banks’ Deposits Grow at Quadruple Industry Pace which stated:

Among the nation’s largest stand-alone direct banks, deposits have increased by 70% since the first quarter of 2008 to a combined $330 billion as of Sept. 30, or roughly four times the industrywide pace. Even for ING Direct, the largest and most established Internet deposit business, deposit growth of 27% since the first quarter of 2008 to $82 billion at Sept. 30 was far ahead of industrywide growth of 17% to about $10 trillion.

My take: The online banks may have grown far faster than other FIs (70% vs. 17%), but given the smaller base of deposits, that’s not very hard to do. In fact, if AB wanted to further sweeten the online banks’ story, it could have mentioned that their market share of deposits grew from 2.3% in 2008 to 3.3% in 2011 — a 43% jump in market share.

Ah, but now I’m the one quantipulating.

There is another side to this story, however.

Based on the numbers presented by the article, the online banks captured just 9% of the industry’s total deposit growth from 2008 to 2011. Meanwhile the top 5 banks (JPMC, C, BofA, WF, USBank) captured 40% of the deposit growth (my estimate is based on adding Wachovia into the WF numbers, and Wamu into the JPMC total).

While AB points out that the online banks’ growth rate is four times greater than the industry pace, it fails to mention that the top 5 banks’ deposit growth ($, not %) is four times greater than the online banks’ increase. In addition, as the online banks’ share of the total market grew from 2.3% to 3.3%, the top 5 banks’ share remained constant at 41%.

What it means: 1) Despite the “safety scare” of 2008-2009, and the “move your money” and other negative sentiment toward large banks in 2011, the top 5 banks are weathering the industry’s storm, at least from a deposits perspective; and 2) The online banks’ gains would appear to come at the expense of credit unions and community banks.

Oh, and the other thing it means is that, if you’re going to quantipulate, remember that there’s probably another side to the story. 

How Profitable Are Checking Accounts?

How profitable are checking accounts?

There are a lot of differing opinions about that question, but I will give you the one correct answer: It depends.

American Banker recently reported on a study which found:

“The average checking account cost banks $349 in 2011. But the average revenue per account is just $268, implying a loss of $81.”

[Quibble: It doesn't actually "imply" an $81 loss, it "works out" or "produces" a loss of $81]

But, as the article states, the costs to maintain checking accounts can vary widely across institutions of various sizes:

“For the largest banks with assets greater than $50 billion, the average checking account costs between $350 and $450 a year. Overhead, or the institutional costs not associated with a specific division or service, is what weighs down some of the largest banks, making it more difficult to cut costs.”

This raises a problem (or two). Allocating overhead costs can be a very inaccurate science (a point that was brought up to me by Jim Marous in some DMs this week). It seems unlikely to me that an activity-based costing approach was used to allocate those overhead costs.  

And it also seems likely to me that large banks — by virtue of having a broader product line than smaller banks and credit unions — will have more overhead (i.e., “institutional” in the language of the article) costs to allocate in the first place.

And, in fact, the study indicates that “for some of the smaller banks with less than $5 billion in assets, the costs are much lower — around $175 to $250 a year.” At the lower cost level (and assuming the same revenue), that would make the checking accounts profitable.

This is consistent with the findings of a study Aite Group conducted.

There are, however, some nuances that are different in my study than the one reflected in the one cited by American Banker.

The most important difference is that the cost differential between big banks and smaller FIs — and, in fact, even across smaller FIs  – isn’t necessarily due to differences in allocated overhead costs. The differences can come from lower cost to serve.

In addition, profitability is driven not just by a lower cost to serve, but by revenue — which can be generated by interchange, cross-sell, and from the use of deposits for revenue-generating purposes (e.g., lending).

The Aite Group study is not necessarily representative of the overall market. With the help of Bancvue, we compared the performance of high-yield checking accounts (which are, technically speaking, “free” checking accounts) to non-interest bearing accounts (the more typical definition of “free” accounts) across 120 financial institutions (predominantly credit unions and community banks) from May 2009 through April 2011.

We found that free checking accounts were, on average, profitable for that time period, although this average profitability trended down. But we also found that the profitability of high-interest accounts were, on average, about 2.5 times more profitable than the free accounts.

The drivers of the higher level of profitability weren’t necessarily lower overhead costs, but lower operational and support costs — driven by online banking and e-statement adoption — and higher revenue produced by higher levels of interchange and asset deployment. Even with the associated interest payments, the high-yield accounts were more profitable.

What’s the “so what?” here?

The American Banker article claims that:

“The issue comes down to efficiency and economies of scale. The banks likely to fare best are those that are big enough to support a sizeable base of checking account customers, but which are not loaded down with ancillary costs.”

My take: I disagree. The FIs (banks or credit unions) that are likely to fare best are those that actively manage account holders’ behavior by creating incentives and disincentives for profitable behavior, and that make profitable use of deposits.

For a copy of the report, visit the Bancvue web site.