One thing we love about the banking industry is the patriotism and respect for the armed services. On this Veteran’s Day, like many banks, we want to personally thank all those that served or serve protecting our great country, our ideals and, most importantly, our freedom. We also want to highlight all those banks, like CenterState, that actively recruit and train Veterans as bank employees as they tend to make above average bankers. Finally, we want to highlight those banks that have specific military product offerings. It is here, that we can use those offering to highlight an important point on banking when it comes to affiliate banking.
For us, our Community Hero is our military-related product offering that honors those that serve by basically making our product suite available for no cost and has the added benefit of paying interest. In terms of profitability, the account type ranks on the lower end of our account line up but still produces a very low single digit return on capital. This is probably right where the account should be as the goal is to transfer value to our Veterans, but still be sustainable as to not hurt other account holders or shareholders at the bank. The beauty of our Community Hero Account is that not only does it have larger balances compared to many of our deposit accounts, but the administrative costs are lower and the funds are less interest rate sensitive. As a result, profitability exceeds our free checking offerings (both regular and VIP), our regular interest checking and our teen/children deposit accounts.
Of course, there are financial institutions that almost exclusively focus on those that serve or have served in our military. USAA, Navy Federal Credit Union, Air Force Federal Credit Union, Pentagon Federal Credit Union and Armed Forces Bank are those that focus exclusively on the military while many banks such as Bank of America, Wells Fargo, PNC, US Bank, Fifth Third, First Citizens and others have dedicated divisions. In terms of profitability, these banks produced about a 1% ROA for the third quarter 2014, which is about the national banking average and just slightly above the average 0.96% ROA for non-military community banks.
The profitability of a bank is a function of the profitability of its customer segments and its product portfolio. As we have written about before, and as the data shows, there is nothing inherently profitable or unprofitable about most retail affinity groups. The profitability of the military, Georgia Tech alumni, Hispanics, African Americans, Asians, Italians, union workers, Jews, Christians, the LGBT crowd or any other segmented focus almost exactly mirrors that of the general population. To the extent a bank targets higher income parts of a particular segment or has some profitable specialty products, then that bank can expect higher profitability. To the extent a bank focuses on the opposite end of the economic spectrum, that bank can expect lower than average profitability. In other words, while the military may have lower acquisition costs and maybe better credit (in some cases), there are other characteristics that offset it such as less products per customer, higher cost of funds lower lifetime value, higher servicing costs, etc.
USAA, for example, drives its above average return due to its retention, cheaper delivery structure and product mix. Armed Forces Bank, for example, drives its profitability through fee income. Navy Federal CU produces its profitability by a combination of all of the above.
If your bank is thinking about offering or expanding its military product offerings, do it because it is the right thing to do and not because of profitability. That said, military products give bankers an excellent way to better understand segmentation as whenever a bank goes after a certain affinity group, designing the right pricing, marketing, product offerings and delivery is the key to success.
On this Veteran's Day, we thank those that have served and their families, as without you all we would not have the greatness that is America. As our favorite Veteran, George Washington said, "The willingness with which our young people are likely to serve in any war, no matter how justified, shall be directly proportional to how they perceive veterans of early wars were treated and appreciated by our nation."
Submitted by Chris Nichols on November 10, 2014