When it comes to retail checking accounts, a premier or elite account usually tops the list in terms of profitability. The mix of performance characteristics and the larger balances fuels the product to produce better than a 20% ROE at many banks. Here at CenterState Bank, for example, our premier interest checking is more than three times the profitability of our standard checking account. Average balances per account are greater than $30k, or almost 10x the balances of our standard retail checking account. This finding is pretty consistent at most banks we reviewed, and while the numbers and performance characteristics vary, the premier checking account is usually always a retail winner.
Analyzing the Premium Account
We have looked at more than 110 account structures across the nation, tested rate and fee sensitivities and have researched what attributes consumers and businesses want most. The result is what we believe is a great starting point to offer the product or to take a look at an existing product to make some changes for an interest rate environment that may see rates rising.
Below we break down the details:
Name: Like all bank products, it starts with solid branding. While the most common name is “premier,” “elite,” “platinum,” “gold,” “VIP,” “premium,” “signature,” “advantage,” and “performance” were also popular. The word cloud below highlights the relative popularity of certain account names.
While we have tested various names, our data shows that there is little difference to what you name the account so feel free to let your creativity run wild. Our only constraint is to name your accounts so when your customers see a product line up they can easily distinguish between retail and business and clearly see the position or purpose of each account.
Rate: If you want to attract lots of accounts and balances, pay an attractive rate. The top 10% of rates are between 0.40% and 0.85%. However, keep a couple things in mind. While banks like Ally and Capital One can afford to pay a high rate because of their margins, most community banks can’t. When banks pay a high rate, performance suffers. While the degradation of performance is less than in a CD, money market account or savings, it is still vividly present. Paying a high rate erodes the positive convexity of the account and shortens duration. What you end up with is an account that subtracts franchise value instead of driving profitability. For banks that pay over 25bp, most likely profitability ends up being below a regular checking account. We suggest a rate of 5bp. Your premium account should be about service and not rate. The trick is to use other deposit attributes to increase performance and attract balances. As such, if you want to attract rate sensitive deposits, do so in a high-interest checking account with limited features. By this method, you will not end up cannibalizing your premier checking performance and confusing customers and employees on what the difference is between rate and service.
Rate Tiers: This is an area that many banks overlook, but can be critical when building deposit balances. The trick is to set the tiers to make sure your most common account balance categories are just slightly below your tier levels. In this manner, your bank will have something to market to provide a reason to increase balances so that customers can reach the higher tiers (the main objective). So many banks just set tiers without regard to distribution which causes us to ask – why even have tiers? If you can’t look at the data or don’t have the history, then we would start with three tiers that we designed for the average metro market - One set at $4,999, one at $19,999 and one set at $49,999. Maybe the associated rates are 0.03%, 0.05% and 0.07%, respectively. Move these tiers up if you are in a more affluent area or down for areas that have below average household income. The reality is that given how low rates are, your bank probably will not be doing a whole lot of tier-based marketing or management so we would not spend too much time on this now. However, in the future, tiering will allow much better balance management and more efficient marketing.
Opening Requirements: While $50 is the average in the nation, we suggest a much higher level of around $500 to weed out accounts that have lower balances. In testing, if you move the initial requirement up, you help support the brand as a premium account and tend to attract depositors with larger balances. Also, a higher opening balance also tends to attract customers that want to use the premium checking as their primary account.
Fees and Fee Waiving Levels: The amount of fees you charge will, of course, be dependent on what perks you attach to the account. The goal is to create value, so be sure to take your costs into consideration. Assuming the recommended attributes below, we suggest a $27 monthly fee waived if balances are over $20,000. Move the minimum balances up or down to adjust for the demographic target in your area and what perks you offer. 80% of the banks have premium checking fees between $10 and $30 per month.
Perks: Online banking; bill pay; debit card; mobile access; free foreign ATM usage (important); no charge for money orders or cashier’s checks; throw in a free safe deposit box if you are under capacity and consider two free overdraft waives. This bundled product creates a potent package to compete with almost any bank in the country. While some banks allow paper statements, free paper checks or don’t include mobile, we think these are mistakes. These perks drive up your cost and will gain your bank little. If you have not started to downsize your branch footprint, you will, and you’ll want to move as many customers as you can now online and to mobile. Giving free paper checks and statements just slows down the transition to a lower cost structure. The other popular perk is discounts on loan fees such as home loans or special rates on other deposit accounts such as savings. While both are nice, we always hate to use rate as a reward because of the behavior it teaches.
Referral Perk: Consider allowing each premium checking customer to refer one new premium checking customer and if they do, they are to get a fee waiver for 12 months. While this is controversial, accounts will either not use this perk or use it to refer accounts with enough profitability that it doesn’t matter.
Special Attributes: There are a handful of banks that put some creativity into their premium checking accounts. Our hats are off to these banks, as that is an excellent way to differentiate and drive additional value. Giving away a free community membership (library, local service club, etc.), free ID theft protection, free access to meeting space, providing additional discount packages to local merchants, delivering special events (speakers, parties, book signings, etc.), financial reviews, white papers or similar are highly recommended. Your bank wants to market to this class of customers anyway so why not create some synergistic marketing opportunities and combine it with premier checking?
Putting This into Action
Of course, the above attributes may or may not be right for your bank depending on the goals, demographics, competition and core system capabilities, so adjust accordingly. The important point is that by having a premium retail checking offering, you segment your customer base and better align capital with value.
In addition, if you are looking for marketing ideas, Bank of the West, has a premium checking promotion that is a good starting point for which other community banks can build a promotion (below). Offering $600 for a limited time to open the account for an average monthly balance of $50,000 has proven to be both profitable and one of the most effective conversion rates of any premium promotion. If you have an effective premium checking promotion, we would love to know about it. Until then, Bank of the West (Chase also has a similarly structured promotion) presents one of the highest converting campaigns.
A premium checking account is one of the most profitable retail account types and should be in every retail bank’s account line up. Use some of these ideas and take another look at your own to see where you can upgrade your account bundle to make it more effective and more profitable.
Submitted by Chris Nichols on July 06, 2016