The CTSO Report: Volume 2

There are still a number of concepts, tasks, approaches, practices, etc. that we either need to change or eliminate. In other words…Cut That Stuff Out.

Today’s report is a follow up to Volume 1. Banks are very interested in growing customer relationships and deposit accounts. This is mostly driven by profitability, but it is somewhat attributable to protecting the liquidity we have enjoyed for the past 7 years. It is important to understand how Deposit Account balances and relationships should be used in each bank’s strategy and tactics. It is also important to understand how account profitability affects the business case of any initiative to either grow accounts or improve customer profitability.

The basic banking model is to gather core deposits so they can be lent to customers. The interest earned on those loans represents the primary source of revenue and profit for a bank. It is easy to see then that a bank that can lend 90% of its deposits can maximize its revenue. On the contrary, if there are fewer deposits to lend, interest earned revenue is minimized.

The Deposit Account-based relationship is arguably the only true customer relationship—customers still see the checking account as their “homebase” of banking.  Therefore, there is value in knowing what Deposit Accounts need to earn in order to break even when there is not a lending relationship with the customer. After all, the only way to generate revenue from a deposit account is either spread or fees.

So, if a Deposit Account is going to stand on its own, how do we know when it is profitable? A simple calculation:
Net Interest Margin / estimated annual costs = average balance
For example: 3.7% / $300 = $8,108. In other words, your checking account (free or otherwise) needs a balance of $8,108 just to break even.

One important consideration when looking at Deposit Account spread revenue is to “scrub” your checking and savings account base before calculating any average balances. The CD money that is “parked” in these account types is distorting the average balances and should be adjusted out of the account type before any profitability consideration.

We know account profitability is critical to customer profitability. This makes it significant to the business case of any initiative to grow deposit accounts and customer relationships. In fact, it alone should be used to determine the approach or justification of such an initiative.

Branches have historically been part of a deposit gathering strategy. Unfortunately, branches cannot be counted on or used in that initiative today. Branches are still the touch point for managing our direct contact deposit customer relationships, but the excess capacity we have in our branches cannot be a business case factor when considering Deposit Account or customer relationship revenue.

When evaluating a vendor selling deposit account growth, or putting together your own program that strives to measure account or relationship profitability, consider the following questions:

  • Is cross sell included in profitability calculations?
  • Is Present Value included in profitability calculations?
  • Are PIN card rates for interchange included in profitability calculations?
  • Is account attrition rate included in profitability calculations?
  • Are there perpetual proprietary rights to account names and types?
  • Are the account balances calculated using total checking account balances?
  • Is branch capacity considered?

None of this should play into the measurement of your profitable deposit account growth strategy.