By Kristopher Lazzaretti
Checking accounts may not be the most glamorous of financial products. But ask any banker or regulator to identify the cornerstone of a strong, stable institution and most will say it is a portfolio of retail checking balances. The inherent stability of FDIC-insured accounts, with low or no interest expense, are highly impactful to an institution’s overall soundness and even better for its bottom line.
Checking products almost always pay lower interest rates than high-yield products like money market accounts and CDs. Thus, from a pure expense perspective, it is clearly more favorable economically to grow checking balances, and especially non-interest-bearing checking balances.
Also to consider is that some customers who put money in higher yielding products are rate shoppers and will move from one institution to another as soon as a better rate comes along. Checking balances are less sensitive to such market forces. Here are three key ways banks can drive core checking deposits
Understand what drives consumer decisions
When consumers switch banks, the reasons are many and varied. But the leading drivers that move customers from one institution to another are negative experiences, high or unexpected fees and life events.
The latter driver is an especially powerful force according to the excellent Path to Purchase Study published by Oliver Wyman. Their research found that nearly 75 percent of consumers who switched banks did so after experiencing a life event. In our experience, the top life events driving switching behavior include listing a home for sale, moving, getting married and having children.
Now, with technology enabling the ability to aggregate data on such events quickly and efficiently, banks can promote relevant products and offers to prospective switchers in near real time, at scale, in ways that were previously not possible.
Our internal analysis shows life event marketing typically generates 1.5 to 2.5 times the response of traditional marketing tactics. And when you consider that over a million life events occur in the U.S. every week, the opportunity for banks to grow their checking base is evident.
Recognize opportunities to optimize your offers
The reality is, almost all checking account marketing today is accompanied by the offer of a cash incentive, which means if you don’t have a competitive offer you’re not in the game. Unfortunately, the expense of these offers can be considerable and without proper analytical tools, a meaningful portion of newly acquired checking relationships can be quickly lost as those who were only interested in the incentive close their accounts (“gamers”).
The most sophisticated marketers are systematically testing multiple incentive amounts to develop offer elasticity curves, finding that after developing such curves, they can optimize account production vs. cost-to-acquire. Many find they end up paying a higher incentive up front ($400 or $500 vs. $300) but end up enjoying a lower overall acquisition cost thanks to better overall conversion rates.
Case in point: A super-regional bank found that by increasing their cash incentive on premium checking accounts by $100, they ultimately ended up lowering their incremental (or net-of-control) pre-incentive marketing cost-to-acquire by over $200, more than offsetting the additional offer expense.
To complement offer optimization programs, banks are also adjusting their targeting approaches to avoid those who are looking to close their accounts as soon as they receive the incentive. By systematically training marketing models to analytically remove these “gamers” from direct response marketing initiatives, banks are enjoying significant improvements in first-year retention.
With an elasticity curve and a targeting approach trained on quality response, further levers become available, such as optimizing offer stipulations by segment and implementing progressive offer designs (e.g., progressively offering higher incentives to high-potential households who have yet to convert).
Aim at small businesses
Banks are winning with the segment of businesses with annual revenues less than $10 million. One of the most powerful factors here is the average size of small business checking accounts. Marketing campaigns targeting established small businesses regularly generate average business checking balances of $15,000-$25,000 per account, far exceeding the $3,000-$4,000 average consumer checking balance generated in typical consumer campaigns.
And similar to consumers, small businesses experiencing milestone events can be good targets for business checking marketing. In fact, we’ve found that new-to-world businesses are four times more responsive on average to checking marketing than other small business segments. And with over 5 million new businesses formed over the last 12 months according to the U.S. Census Bureau, the market opportunity is material.
A common concern with these newly formed businesses is their capacity to fund accounts at attractive levels. To explore this concern, we monitored marketing-acquired checking accounts established by both mature businesses and new-to-world businesses for an 18-month window. We observed that, while average checking balances from mature businesses were 28 percent higher upon acquisition, the checking relationships generated by the new-to-world segment grew at a far more rapid pace, 131 percent, eventually converging with the mature segment, which grew by 86 percent over the same timeframe.
The clear fact is winning with the small business segment can be central to your overall success.
Kristopher Lazzaretti is president of data solutions at Deluxe, a full-service data, analytics and marketing services company.
