After a bestselling book and new Netflix special, Marie Kondo has tens of millions of people around the world organizing their homes and businesses. The key to the methodology is not minimalism but mindfulness. It is asking yourself - does this procession “spark joy”? If the answer is yes, you neatly put a trifold in it and put it in your drawer or closet in such a way that you can see it. If the answer is no, you thank the object for its years of service and then promptly donate or trash it. Banks should do the same thing.
These Money Market Accounts, Do They Bring You Joy?
Many banks have grown up with a variety of loan and deposit products that are rarely used, and if they are, they are used for little reason. Take two of the most popular products in banking – the money market and savings account. Both carry interest, both are subject to the ridiculous, archaic Federal law of six transfers a month, both are often tiered, and both can be connected to a checking account sweep. The only perceivable difference is most banks, for whatever reason, do not allow transfers to and from a money market account via ATM.
Now if you are one of those rare banks that have gone out of their way to proactively distinguish their savings account and money market account by offering starkly different rates and attributes with the intent on differentiating the accounts, then fantastic. However, the other 4,000+ banks deserve to undergo a little introspection.
The Cost of Carrying An Account
For starters, having confusion over your interest-bearing checking account, savings, money market, and other accounts creates customer confusion. It slows down the sales process, forces the customer to make more choices, increasing the training cost of employees and extra time to track and manage on behalf of the customer. From just a bank cost perspective, we conservatively estimate that explaining the various accounts in person, in print and over digital plus including training time, costs a bank roughly five minutes of time per customer per year. If you assume that a bank has 50,000 customers that are in a particular product that is a cost of over $130,000 per year. A large community bank with 300,000 accounts would have an associated expense of close to $800,000.
Then there is a cost of delayed decisions. By our estimation, making a customer decide between a money market, savings, interest checking and CD options cause the customer to further research or delay their decision in 15% of the cases. A large portion of those, some 45%, require further follow-up costing the bank time and employee expense.
Then there is the cost of managing these various accounts on the core system and general ledger plus the cost of marketing, compliance, auditing, daily reconciliation, marketing, and management. As a general rule of thumb, most community banks calculate the organizational cost of having a single deposit account at a minimum of $100,000 per year with a median cost of around $260,000.
In our small community bank example above, the annual cost is roughly $388,000. If a bank is spending between $300,000 and over $1mm to have a product, it should at least be clear on that product’s purpose. The reality is that if you ask most banks why they have their current account line-up, the answer is usually somewhere along the lines of “tradition.”
More Confusion – Tiering, Channel Management & Data
Creating different price breaks or tiers for loan and deposit accounts further creates confusion and increases operational cost. Providing a customer better pricing for a loan above $1mm or for deposits above $50,000 is fine if you are going to use the tiers to incent the behavior you want, in this case, more volume. Unfortunately, most banks don’t effectively use their tiers and if they do usually its fairly passively and usually just at the time of account opening or origination.
Your tiers should match the distribution of balances for your bank and your customer set and then be actively used for marketing and operations to drive the behavior you want. If you are not going to use your tiers, then they will only serve to get in your way.
Aside from confusion and operational cost, having more accounts than you need, more tiers, unused product attributes, and general product complexity has two often overlooked consequences in banking. These complications are difficult to articulate across channels and influence the data.
As banks expand from the branch to online to mobile to voice and to wearables, the more products you have and the more complexity you have in your products, the harder it is to execute. If have five deposit products each with five pricing tiers, and then grow to expand over three regions with slightly different pricing sensitivities – you are now managing 75 pricing tables. Entirely new applications have arisen over the last five years that do nothing but manage this added complexity. This new layer of product and pricing tables start at close to $1mm in cost plus need technology resources to integrate.
Putting This Into Action
To survive, community banks need to improve operating margin and drive incremental cost down. Most high performing banks now have their efficiency ratio in the 50s for 2019. That means that community banks need to increase revenue while decreasing cost.
If your products are clearly articulated, your savings and money market accounts have a defined purpose with a clear pricing strategy, and that line up is showing success, then great. However, this is rare in banking and having redundant products with confusing tiers, attributes and delivery channels does nothing but create additional operational drag.
Go through every product, hold it in your hands and ask yourself – “Does this product bring our bank, and our customer’s joy?” If not, it may be time to thank the product for its service and move it out.
Submitted by Chris Nichols on January 14, 2019