By Steve Reider
Who owns this account?
In the days when the branch was the only channel for account opening, branch accounting and profitability measurement were simpler. New accounts were booked at the branch where the consumer established the relationship—and typically re-domiciled at another branch only based on specific consumer behaviors, generally involving the establishment of subsequent accounts or the performance of a preponderance of transactions at a separate branch.
Regardless, even if a bank reassigned accounts to different branches, the account never left the branch system, and the sum of deposits across all branches equaled the total deposits of the institutions. (Loans were often treated differently, with indirect, mortgage and commercial loans domiciled in non-branch cost centers at many institutions.) For deposits, only the occasional private-banking deposits could escape the branch orbit.
Today, consumers enjoy additional channels in which to open new accounts, primarily the call center and online, raising the question of how to most appropriately allocate balances from remote-channel accounts.
At first, the thought may be to treat those accounts similar to indirect or commercial loans, establishing the call center and the online channels as separate, independent channels. However, those loan products require minimal servicing once established, and thus will not place any significant cost burden on branches for servicing.
In contrast, deposit accounts carry the potential to impose material servicing costs upon branches. Keep in mind, even when a consumer establishes an account through the call center or online channels, there are rarely requirements precluding branch use for subsequent transaction needs. (Some institutions offer electronic-only accounts that impose fees for any branch transaction activity.)
Thus, the separate-channel approach that banks can use for indirect loans with few adverse consequences could occlude true branch profitability levels if applied to deposit products, in that branches would carry the cost burden of servicing customers of all channels without deriving the revenue benefit of housing those balances. This raises the key question of how financial institutions should domicile accounts that originate in remote channels, and in addressing that question, several options merit consideration.
- The simplest method is to create separate cost centers for each remote channel and credit those channels with the balances from the accounts that they open. However, as noted above, this imposes servicing costs upon the branch network without giving the institution’s branches credit for the balances they are servicing. Further, this method fails to realize the branch network may have created the initial awareness of the institution, serving as the primary prompt for the call or web transaction.
- Alternately, the institution might allocate a remotely opened account to the branch nearest to the customer’s residence, or, if the customer already maintains another account at the institution, at the branch housing that relationship. This method recognizes the role the physical network plays in creating awareness, and also the servicing burden branches may incur. However, it brings the drawback that some accounts will transact entirely remotely, effectively rewarding the branch despite no relevant action by the branch; and similarly disrupting sales-incentive systems that measure growth in the branch’s new-account volumes or balance levels. Further, the transition of the call center to a profit-and-loss center with balance-sheet accountability should encourage sales in that channel, but this branch-allocated model would negate such incentives.
- To resolve the above issues, some institutions have added “shadow-accounting” systems, wherein all accounts are booked to a branch but a parallel series of reports tracks the same balances as if they were booked to their originating business line. In this way, the systems recognize the servicing burden that branches carry and the role of the branch network in spurring new-account sales—but also allows incentive systems to recognize call-center and online-channel managers with true profit-and-loss tracking.
- Finally, a more complex approach can domicile new accounts at the originating business line so the call center and online channels maintain true profit-and-loss accountability—but also charge that channel for transactions processed on behalf of remote-booked customers. In this activity-based pricing model, a branch receives a credit (and the owning business line a cost assessment) any time the branch processes a transaction for a remote-booked account. The adjustment can either reflect a fixed per-transaction cost or some proportion of the account’s total revenue. Either way, this recognizes the costs the branch incurs with a corresponding revenue benefit, while also allowing the remote channel to reap some benefits from its new account recruitment. As noted above, each method holds benefits and drawbacks, and the ultimate decision of how to book remote-originated balances may also be constrained by the limitations of current reporting systems. Still, the issue merits consideration, as failure to properly quantify the branch channel’s role in driving and supporting remote-channel opens could prompt improper branch-channel-management decisions.
Steve Reider is president of Bancography, based in Birmingham, Ala. Bancography provides consulting services, software tools, and marketing research to financial institutions.