You create deposit products to segment behavior and you use tiering to drive performance within that behavioral group. While this used to be taught at banking schools, it is largely glossed over these days. Unfortunately, many banks get lazy and set their tiers based off the competition. The funny part is, in many areas of the country, whole markets under-utilize their tiering tactics because no one has looked at the data and everyone is following each other.
Depending on your geography, target customer segments, bank objectives and resources, banks can boost profitability by increasing their use of deposit account tiers. Setting your tiers at the proper level and rewarding off those tiers serves to increase retention, lower interest rate sensitivity, boost balances and sometimes even jump fees.
Tier With More Than Rate
Tiering has changed and has become more quantitative and more granular. Large banks are getting more out of their accounts by changing tiers more often. Look for banks to start evolving into moving away from using rate as a reward for tiers. Offering rate serves to make the customer more rate sensitive thereby hurting the very purpose of tiering. While banks can still grind out a net gain using rate, it is far better to use non-rate rewards such as fee waivers, reward points, access privileges, product additions or other reward. The cost may be about the same, but the customer will perform better over time thereby delivering more value.
Tier Off More Than Balances
Further, aside from moving away from rate, the next generation of tiering also moves away from rewarding off account balances. Balances are just one attribute that bankers have traditionally segmented their customers within a product type. However, if bankers reward on account longevity, stability (such as consistently building balances) or referrals, what you will find is even more profitability and a differentiated product type that can set you apart from the traditional-minded competition. While balances are important, it is just one of many attributes that drives deposit value.
The companion video steps through the hows and whys of tiering plus shows you how to quantitatively analyze accounts in order to set your tiers. In coming blogs, we will step through how to create specific deposit account products based around behavior that will further boost your tiering efforts.
Submitted by Chris Nichols on March 09, 2015