Ask the regulators and one of the first questions you will be asked these days is your percentage of uninsured deposits to total deposits. The concern is grounded in data as higher balance accounts are more interest rate and risk-sensitive than lower balance accounts. In this article, we will look at the data around deposit performance as it relates to balances and shows how community banks can dramatically value by just better-allocating marketing and sales dollars more efficiently.
Deposit Performance by Balance
By way of an example, below is our current decay data of money market accounts based on account size. As you can see below, without interventions, the average small balance account will stay with a bank for four-to-five years with an average life of almost 25 months. This is more than three times to life of a money market account that is over $1mm is balances.
Apply rising rates, externalities like increased social media advertising by national banks (which is currently happening) or a credit shock to the deposit holding institutions, and the average life numbers shrink dramatically. Further, as more and more banks promote online and mobile account opening, we also expect these numbers to shorten by at least 20%.
We also want to note that a money market account is fairly representative of a bank’s deposit base. Non-interest bearing accounts, of course, have much longer average lives, while CDs have much shorter average lives. Regardless of the type of account, the above balance sensitivities hold true for just about every account type, every geography and every customer demographic. For example, while banks in the Southeast and Mid-Atlantic regions of the U.S. have more competition for money market accounts thereby making the above numbers less than the above, they exhibit similar differences.
Putting This Data Into Action
This data suggests that if you were going to spend money on customer retention, you might want to start by targeting those customers with over $500k in balances. Some banks, for example, do nothing more than having their CEO call the largest depositors twice per year to check-in and thank them. This alone can have a material impact on retention and is fairly inexpensive.
Of course, one of the best moves is to cross-sell other services – other deposit accounts, alerts, mobile banking, cash management (2018 Definitive List of Treasury Management Services – HERE). For example, adding and connecting an operating DDA account to the MMDA account extends the average life significantly. Add other components, and retention shoots up even further. Below is an example of the before and after snapshot of a $1mm money market account once you start adding other product connections that boost account longevity.
That increase in retention by more than five times is worth almost $18,000 to the average bank in a static environment and multiple times that in a rising rate environment. Spending sales and marketing dollars on these accounts can provide one of the better returns in bank marketing.
Before you spend your sales and marketing resources haphazardly, all the while being concerned about slowing deposit growth, consider getting more focused on how you spend your effort. Targeting high balance accounts to improve their average life is one of the best uses of bank marketing dollars there is in a rising rate environment.
Submitted by Chris Nichols on March 26, 2018