Last week, Suntrust introduced their new savings platform called e-Savings that allows customers to open multiple subaccounts tied to their regular checking account. What is basically a modern redesign of the Christmas Club account, the platform allows bank customers to segment their funds for specific purposes thereby giving savers more control and accountability. The innovation comes in that customers can name each “bucket” of funds and get subtotals without having to open up, and pay for, multiple accounts.
e-Savings does not require a minimum monthly balance, charges $2 per month if you want paper statements and pays a yield of 0.01%. The account bundle comes with bill pay, online banking, mobile banking and transfer capabilities into checking (subject to Reg E).
While the account is presumably targeted at a Millennial demographic, the account has a variety of uses including a small business and corporate application. Since the buckets or target goals don't expire like with some account structures, the e-Savings has the potential to gain larger balances and better performance characteristics than a regular, low interest retail savings account for a similar cost structure. For example, for employees that get reimbursed mileage from their employer, a subaccount can be opened and mileage expense reimbursement can be put in this account on an ongoing basis to offset the next car purchase. Once a car is purchased, the account can remain open and gather funds for the next car. This structure gives the account some great performance characteristics.
Attractive Due to the Trend
According to a recent Harris Poll, 73% of consumers plan on using their savings account to pay for memorable life events in 2014 compared to 21% that plan on using a credit card and 12% that plan on taking a loan. Given these statistics, an updated savings account makes sense. While the e-Savings account does not have the duration nor the positive convexity of a goal-oriented account, which is a single account that pays a bonus interest or cash amount should certain balances be obtained by a certain time, the e-Savings comes close and is cheaper to administer.
What the Account Looks Like On a Modeled Basis
We modeled the account on a projected basis for use with a 20-something customer. The findings are the account should exhibit average balances of $1,460 within the first 24 months given its appeal to a younger demographic and flexibility in segmenting savings for items like cars, vacations, down payments and clothing. The modeled account performs with a duration of 5.7 and a convexity of 1.8, which is better than the average checking and savings account today. Administration costs are only higher due to the additional software layer to provide this account to customers, so an e-Savings account comes in slightly more profitable than an average Millennial targeted account. Unfortunately, this account is still a money losing proposition at a 6% negative return on equity, a loss of some $3 per year per account, but we will quickly add that this performance is better than most other similar deposit accounts due to administration expense, acquisition cost and capital allocation.
The Best Reason for This Account
Taking into account the lifetime value of the relationship, a 4 product cross-sell path and strong upward wealth creating indicative of this demographic cohort, the product has a projected lifetime profitability of better than 23% return on equity. Equally important, because the account can handle multiple goals and subaccounts, engagement is almost three times that of a normal savings account, as customers check their balances more often. Thus, the reason to consider an account like this is to attract a younger client base with the least cost as possible and help them grow – two things this account does exceedingly well.
While Suntrust could do a better job at marketing this account, which would help balances and performance; and the deposit structure has a variety of other applications rather than just targeting a younger demographic, the concept of subaccounts is one that we have been large proponents of for years and we believe will be commonplace in the next five years. If you are looking for a new deposit account to increase future performance, this might be a consideration that some core system providers could pull off. At a minimum, the concept of savings subaccounts is worth discussing at your next product meeting as it may inspire other similar products.
Submitted by Chris Nichols on May 12, 2014