Bank of America (BofA) is currently running an offer that will pay new customers $500 to open an interest bearing checking account set up to receive two qualifying direct deposits of $2,000 or more within 90 days AND open a money market savings account with an initial $20,000 deposit. That $24,000 in deposits will net BofA approximately $397 of value according to the current forward curve, the account’s expected lifetime value, BofA’s average beta and net of interest expenses. Considering the fact that in addition to the $500 payment, there is an additional estimated $210 dollars of acquisition cost (marketing, account opening, etc.), the Bank is seemingly slated to lose $313 per customer. How can this be? We will also add that BofA isn’t the only bank with this promotion as Chase, Ally, NY Community, Huntington, Johnson Bank and Santander are all in the market with similar offers.
The reasons behind how this account is profitable should be understood by every bank deposit manager, product designer and marketing executive as the reasons hold the key as to why the large banks are more effective at customer acquisition than many community banks. While some aspects are evident, others are only utilized by the most seasoned chief deposit officer. Having your executive team understand the reasons why this account can be profitable will give your bank an edge in all aspects of bank competition including loans and service lines.
The most obvious reason is the fact that while the account requires a minimum of $24,000 requiring a direct deposit most likely means balances will be larger. In fact, given the demographics that are being targeted, the average expected balances are more than double at $56,000.
When accounts pay an upfront bonus instead of a high rate, you get a slightly different type of customer with different performance. The average interest bearing rate on this account is between 3 and 10 basis points so rate sensitivity for this type of customer is present but low. Seasoned deposit managers know that it is not the cost of funds that it is important, but the beta or sensitivity to rates. Having a direct deposit automatically makes the account less interest rate sensitive and more likely than not leads to higher balances in a period of rising rates. As such, depending on the market, a direct deposit feature is usually a predictor of positive convexity.
The Companion Account
BofA requires both an operating account (hence the direct deposit requirement) and a money market account. When combined, the combination is the greater than the sum of its parts. The pairing together gives the account flexibility that is usually correlated to a longer lifetime value and larger balance. The customer has less reason to go elsewhere for their short-term money market liquidity needs and is more likely to build balances. The requirement to stake the account with $20,000 ensures that it is usually a material account and not just “staked” to qualify for the $500 bonus. Creating a companion account doesn’t always enhance the performance of the aggregate balances, but for a higher net worth customer, it is more likely too.
Demographics and Marketing
The key to account profitability for a high rewards account is accurate account targeting. This was not a general offer, but an offer to a select group of existing credit card customers where BofA had the data. This is key, and banks that just try to copy a $500 offer without understanding marketing strategy are asking to gather a bunch of unprofitable accounts. BofA’s whole strategy was predicated on the fact that not only did it go after a desired account demographic, but a subsection of that demographic that will have a tendency to leave higher balances and have a higher lifetime value. BofA likely targeted a particular customer persona that was correlated to not only card usage, but also geography and buying patterns. Banks without credit cards can duplicate this analysis by looking at balance changes and levels for accounts they do have or look at other correlative factors such as political donations, country club membership or social media attributes.
BofA has some of the best product designers and deposit managers in the world. As can be seen above, their $500 offer was well thought out and most likely will result in a customer that brings in well in excess of $1,500+ of lifetime value. Make sure your bank doesn’t just blindly copy the promotion, as without some of the above attributes or creating a goal-oriented savings account, the promotion is likely to be a net loser.
Submitted by Chris Nichols on May 25, 2015