What Bankers Should Know About Consumer Checking Financial Performance

January 25th, 2016

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.

mbranton

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

tspaid

Tyler Spaid is a financial analyst at StrategyCorps. He can be contacted at tyler.spaid@strategycorps.comor on LinkedIn. Visit www.strategycorps.com to learn more.