A business checking account is one of the most profitable accounts a bank can have. This is why it is perplexing that some banks put more thought into their break room coffee selection than the attributes of their business checking lineup. Many banks either fail to put proper thought into the pricing and design of the business checking account or evolve their offerings over time never stopping to restructure the offerings and attributes to meet their current customer targets. In this article, we focus in on the three most common pitfalls of transaction limits and discuss how banks can boost both revenue and deposit performance by getting this one factor right.
The Importance of Transaction Volume and the Single Biggest Mistake Banks Make
Next to setting the minimum account balance, setting transaction volume limits is the next single biggest factor influencing account profitability. Get it right, and you have an optimized checking account lineup for the accounts you want to target. Get it wrong, and you are either not appealing to a large group of small and medium-sized businesses or are leaving money on the table by not segmenting your business account base enough. While we have covered how to structure a high transaction volume account (HERE) in the past, in this post we focus in on the impact of transaction volume on the entry level and intermediate business checking account customer.
It is fairly common for banks to set their transaction limits based on competitive surveys. This is a huge mistake as it not only assumes you have the same customer base as your competition (you likely do not), but it also negates any competitive advantage that could be had.
Furthermore, if you have the same account tiers and pricing as your competition, then it is difficult to position yourself. If the competition has 100 free transactions, but you have accounts that have greater transaction volume, then starting your basic checking at a 200 transaction level may give your branch and business develop officers a tangible marketing angle in which to differentiate your bank.
Problem 1: Optimizing Your Line Up – Missing The Low End
The most common and detrimental mistake banks make by setting their basic checking account volume too high. Most banks that make this mistake offer a basic checking account that is either free or at an approximate $10 monthly charge and allow somewhere between 200 and 300 transactions free per month. While this is fine for a typical retail business-to-consumer business such as dry cleaners or grocery store, it leaves an estimated 40% of small businesses as non-optimized. Small office professionals such as lawyers, graphic designers, contractors, and others may not have anywhere near that volume. If a bank is going to offer free business checking, then this is the group you want to offer it to as these accounts likely have low costs to maintain and offer favorable risk/return profiles. Furthermore, business-to-business customers may have limited check, ACH, and wire activity and may benefit from a cheaper account with a small transaction limit.
To solve this problem, most banks would benefit from a $10 per month account with 100 or fewer items on the low end. Banks like BBVA, KeyBank, and others do this very effectively as their basic account have around 50 items as a minimum with some as low as 5. By moving your basic checking account down market, it allows banks to charge more for the intermediate level account.
For example, below is a typical distribution of account transaction activity for business checking customers that have fewer than 200 transactions per month. As can be seen, the bulk of these accounts have little activity. By creating a 100-minimum transaction tier, these banks can increase the pricing/minimum balance for those accounts that have between 100 and 200 items per month. In a typical case, that is moving 41% of these accounts either into the $10 per month range from a free business checking option or moving these accounts from a $10 to a $15 per month level.
The net result is not only more revenue, but better balance and interest rate sensitivity in these accounts. The higher balance requirements to waive fees or the larger monthly charge either self-select more profitable accounts or cause accounts to consolidate balances from other institutions.
Problem 2: Not Matching Distributions
Where you set your minimum transaction limits is a derivation of the geography and types of accounts your bank is going after. Unfortunately, many banks have given this little thought and have tended to haphazardly set transaction levels. A 300 transaction level maximum may be completely appropriate for a country club but may not fit a small accounting firm. It is common for community banks to have an entry level checking tier at 100 maximum transactions per month and then have the next tier at 500 transactions per month. This is a much wider than normal distribution so unless these banks have some specialty account focus or are in some skewed geographical area, they would most likely benefit from either having another checking account level or bringing their 500 minimum limit down to 200 or 300 free transactions per month.
In a similar vein, some banks have three business checking options with 100, 200 and 500 transaction limits. This likely makes little sense as if the customer base follows a normal distribution, 100 and 200 transaction limits are too close together and are suboptimal. In this case, the bank should most likely move the intermediate checking level from 200 limits up to 300. Alternatively, if this bank was going after more mature, faster-growing accounts, then it might be best served to move the 100 transaction limit for its basic checking product up to 200, increasing the monthly fee and then having a 400 transaction level for their intermediate option.
When structuring business checking it is important to set your limits to match the distribution to the customer base you have, BUT WITH THE CUSTOMER BASE YOU WANT. In future articles, we will discuss the set of algorithms that can best do this, but in general, the rule of thumb is to set your levels to where your desired customer base at so you can best match balances, fees and transaction volume to the appropriate level of activity. This should be done so you have a balanced number of customers in each segment.
Problem 3: The Analyzed Checking Gap
For some high transaction volume accounts, analyzed checking is the best option. However, community banks often short change themselves and their customers by not having an analyzed checking option. Almost as bad is the bank that has their high-end business checking account with a low transaction volume threshold with the mid-sized commercial business account option being an analyzed checking account. For example, generally, banks have a 500 or 1,000 item transaction volume tier as their top end small business offering before offering an analyzed checking option. However, similar to missing the low end, going from 250 free items per month to an analyzed checking option may leave a set of very profitable accounts to seek a bank with a 500 free transaction monthly limit.
Putting This Into Action
Step one is to take a look at the distribution of your business checking activity and see if you can’t better fit transaction tiers to customers. By adjusting transaction levels, pricing and balance requirements, banks can dramatically increase business checking profitability while increasing sales. Every bank’s geography and targets are different, so it is important to have a clear view on what customer segments and geography the bank wants. A rural-agriculturally centered bank will be completely different than a metro bank. A bank that is largely commercial real estate focus will be different than a bank that wants to grow more C&I business.
There is no better place to spend your time and analytical firepower than when it comes to business checking. As one of the most profitable products a bank has it pays to spend the extra time and testing to get this account offering right. The back half of the year is an excellent time to restructure your account line up in order to be ready for the first quarter of 2018, a time when many businesses choose to switch accounts and banks. Set yourself apart from the competition and have a better business checking line up.
Submitted by Chris Nichols on June 12, 2017