No matter what size bank you are or what your experience level is, there are simple things you can do to improve performance. Today, we will look at an example of how data, marketing, and deposit building can work together to build shareholder value and improve customer engagement at the same time. To pull this off, all it takes is about two hours of time, an Excel spreadsheet and some email marketing to create long-term franchise value. In this article, we explore a technique that can be used for almost any product to drive profitability.
The HSA – Improving Profitability
At many banks, the health savings account (“HSA”) is one of the lowest performing accounts. Now, HSAs should be one of the more profitable accounts in a bank’s liability line-up as it has high duration and high positive convexity. When market rates go up as they are now, balances are not interest rate sensitive and even tend to rise to create value for the bank. When interest rates drop, HSA rates can be reduced, and balances tend to stay stable. Despite these performance characteristics, on average, many banks lose about $10 per month on each account due to the reporting and maintenance expense compared to their balances. One issue impacting bank profitability is that they offer a bundled solution to include a debit card, bill pay, no fee, 0.50% interest on balances and other attributes.
The knee-jerk reaction would be to simply cut back on the interest rate, charge a monthly fee or reduce the bundled products. While this might improve profitability, this strategy may not be optimal, particularly in some markets like Florida, where demographics, the news cycle and calendar timing make consumers hyper-sensitivity to HSA marketing. The second conclusion that you could jump to is that the lack of profitability is also largely tied to low balances in the account. This is the case for many banks out there, as HSA’s are notorious for producing low balances.
Better Product Management
For a more optimal path forward on how to improve the profitability of these accounts, we turn to the data for answers. The first stop is to extract the data of all accounts into a database or an Excel spreadsheet. Once in the spreadsheet, we can produce a pivot table that aggregates and sums the categories. Here, we find out that the average balance of individual HSA product is a respectable $1,350 per account, per person, which is pretty good compared to the industry average. We look at the standard deviation of balances and find out that it is $2,600, higher than we would predict for this type of restricted account. The standard deviation indicates that there might be more going on here, so we download the distribution, and the solution becomes more clear. Check out the main graph of a histogram of the distribution.
The Deadly “No Engagement Profile”
In looking at the distribution of balance frequency, two things become immediately apparent: the first, and most obvious, is HSA balances do not follow a normal distribution, as there are a huge number of accounts between $200 and $300. The bucket holds 36% of the accounts. In bank marketing, this pattern is called the “No Engagement Profile” and often turns up in a variety of products. The No Engagement Profile appears when a bank initially markets a product such as mobile banking, bill pay or other product and a certain number of customers respond to the offer, but then fail to utilize the product after the initial marketing halo has worn off. To prevent this, banks should always include a post-sign up campaign that supports continued use until the product is part of the customer’s routine. At a minimum, this usually means enough marketing so that the customer uses the product at least three times.
Using “Look-Alike” Marketing For Performance
The other aspect that jumps out is the second “hump,” or larger number of accounts clustered around the $3,000 to $5,000 bucket. Statistically, this is called a binomial distribution and is an indication that something else is going on with these accounts. It also, gives us a question to answer – what can our bank do to help the lower balance buckets look more like the higher balance bucket?
We then can go to work and append our dataset with all sorts of additional data to see if we can come up with an explanation. Maybe all the lower balance accounts come from one branch. Maybe from one area. Maybe from one age group. We also can look at account holder’s age, occupation, net income, homeownership, home value, distance to a branch, social media activity and some other items. It should be noted that we don’t have to even have the above information in our databases as there are a variety of publically available datasets to incorporate to help draw statistical conclusions easily.
This is a derivation of a technique called “look-alike marketing” and is usually used to find customers to use a given product. Here, however, we use look-alike marketing to find the top performing customers within a given product.
The Simple Solution – More Marketing
What we have found is that most of the factors mentioned above actually do impact HSA deposit balances, but one of the most relevant is simply the number of times these accounts receive a marketing message. In other words, while the lower balance accounts may never be $5,000 balanced accounts, increasing the number of times the bank interacts with any HSA account holder will tend to increase balances.
A simple linear parametric model can be built that is nothing more than an upward sloping straight line that says if you increase marketing - say emails to these customers - both usages of the HSA account balances will increase, as will balances. We can now take all those accounts below $1,000, divide them into two groups (a control group and a test group) and send half a series of emails that will educate the customer on using their HSA. In fact, we may go one step further and utilize birthdate information to send an age-appropriate email centered on preventative medicine and how to best use your HSA.
This is the first level of “anticipatory banking” and is what your customers likely crave. In almost every focus group or customer survey that we conduct, we are repeatedly told some derivation of - “we want our bank to help prepare us for the future.”
If you received an email about how you can use your HSA for genetic screening, additional blood work, body fat analysis or similar to prevent health problems, then that would likely be met with a higher-than-average satisfaction rating. If you are middle-aged, then it is likely you already have these issues on your mind but have not thought about your bank. Through a little marketing, you can add value while helping engagement.
In similar fashion, if you are a couple in your 20’s and thinking about having a child, then a simple planning/savings tip reminding the lucky couple that they should either budget for two health benefit deductible payments, or plan on conceiving the child in December through March, is usually a well-received financial tip (as most couples never consider).
Putting This Into Action
While we are not advocating that banks start dispensing health advice, we are advocating if you have an HSA offering, then it is perfectly natural to take a thought leadership position to dispense financial advice related to healthcare. A very conservative rule of thumb put forward by the Center For Disease Control and Prevention puts forward the notion that spending $1 now saves $4 later. This is made even better when you consider that $1 could be tax-free!
Our model tells us that by conducting four email distributions, over the course of three months, HSA balances should increase by 37%, thereby helping profitability, extending our customer’s lives, reducing health care cost for local employers and society, and making everyone happier in the process. It is highly likely that if you have an HSA offering, the above holds true for your bank as well. Regardless, the methodology of combining data and marketing is a simple one and can be applied to a variety of accounts.
If you are looking to increase profitability with minimal effort, then utilizing techniques such as these is a good first step to healthy customers, healthy deposit balances and healthy shareholders.
Submitted by Chris Nichols on October 31, 2018