It is December, which means many travelers will be taking last minute flights in order to make sure they qualify for the next loyalty tier. Just as airlines have perfected customer engagement through loyalty tiering, so to can banks. While we have talked at length about how moving to a relationship deposit account structure has numerous advantages for both the customer and the bank (Here and Here), today, we discuss a variation on the theme and discuss how tiering a single account type can increase profitability. Instead of creating separate checking product for each level such as a silver, gold and platinum checking account, you combine this account set into a single product which we will call a “Core Account.” From there; we create 4 different “Levels” or “Tiers.” The end result is a single structure that allows for flexibility and for accounts to move up or down to various levels as their financial position changes.
Setting Your Levels
The first step is to name your tiers and we will go with “Level 1,”, “2,””3,” & “4”, but many banks prefer “Bronze,” “Silver,” “Gold” and “Platinum.” While there are pros and cons to the various naming conventions (to be discussed in a later blog), today we will keep it simple.
A very common mistake is for banks to set their levels where their current account distribution is today and not where you want it to be in the future. We have discussed how to figure out your account distribution shape and how to manage your tiers HERE, but the short answer is set your tiers where they will optimize profitability as you apply marketing to your current and future account base.
For the sake of discussion today, we are going to look at New Jersey and find it best to set the following tiers:
Setting Your Benefits
The basics of the account are $200 to open, use of bill pay (free with the account) or direct deposit. This ensures that this is a core account of the customer which boosts the probability of the account being profitable.
When it comes to setting benefits, we recommend getting creative and exploring new ways to entice your customers. However, for the sake of discussion, we are going to suggest some basic attributes that are very common among relationship-driven banks. These benefits can vary between locations and focus depending on your demographics and goals, but here is an example:
Customers would need to requalify for their tier level each year, based on the average over the past 12 months. Each tier is additive to the other tiers so customers in Level 4 get all the benefits of the lower levels. The goal is to get valuable benefits in for the customer, while benefiting the bank’s profitability profile for the account through cross-sell and extension of lifetime value. If done correctly, what you end up with is a simplified account structure that can easily grow with the customer. Compared to having a set of add-on services, this structure is much cheaper and easier to administer.
In addition, the bank can keep the communication open with the customer (either in-person or electronically) to keep the customer focused on moving up to the next level. This is a huge benefit of this account structure as the bank can track the customer’s progress and always have the next level’s goals prominently displayed in order to influence behavior.
If you are looking for a way to increase account profitability while boosting both customer engagement and satisfaction, moving to a relationship-based account line up is your best single move you can make as a community bank. If you already have a relationship deposit product, consider moving to a tiered product structure similar to the above in order to reduce operational costs while increasing marketing effectiveness. Finally, if you need a last minute flight, be sure to book and take your mileage run before December 16th, as pricing will go dramatically go up after.
Submitted by Chris Nichols on November 30, 2015