By Tom Richards

Deposits provide the majority of the profit for the consumer financial services industry. While transaction and savings deposits currently account for only 10 percent of consumer financial assets (down from 16 percent in 1993), they provide 40 percent of revenues and translate to almost two-thirds of total industry profits associated with managing consumers’ assets, based on studies undertaken by the Federal Reserve.

For banks, growing deposits is critical to profitable growth, and for all but the largest – who have invested heavily in a diversified portfolio of revenue sources – is the primary contributor to earnings, accounting for between 81 and 90 percent of total earnings. For these banks, no other fee-based services can salvage an eroding deposit base.

For bank managers, that’s not new news. It’s not to suggest that aggressive management of cost is no longer important, but reducing costs will not provide the fuel needed for growth. Only an increase in resources can do that, and the resources that fuel retail banking growth are consumer deposits.

The problem is that it’s been easier to gather them than to retain them.

The attrition rate of newly acquired deposit accounts averages 30 percent in the first year, but is double that in just the first 90 days of the relationship. Matching the customer with the wrong product, fulfillment errors in getting the account up and running, poor early service experience and negative surprises (those that may result from pricing or usage misunderstandings) all contribute to retention difficulties in the first critical 90 days. A drive to self-service has contributed to reducing the visibility on these problems. In general, the expected contribution of a new account in its first year is well below the cost of replacing that customer, and what you cannot retain, you must replace. The first 90 days are critical.

Practical experience confirms that multiple product usage is the number one contributor to retaining those relationships, even if the additional services provide little contribution by themselves. The amount of time that lapses before a second service is added to a new depositor relationship is what drives retention of new deposits according to Novantas, a New York based strategic consulting firm. Nearly 75 percent of all cross-sell opportunities for deposit and consumer credit products that will occur in the first two years of a new deposit relationship will take place in the first 90 days.

Banks will use a variety of strategies to gather and retain deposits, but after decades of concentrating on transaction efficiencies and squeezing cost out of the work flow, the choices are not coming easily. Once familiar bank marketing practices are now producing unexpected outcomes resulting in spiraling cost and disappointing results.

Could this be a turning point? Are we emerging from the banking industrial age, when any product could be sold (because that’s all there was) and when new products were merely extensions of old problems that reflected more the value to the organization than to the customer? Perhaps so. It surely is easier to define value from the inside than to try to figure out the preferences of an increasingly fragmented customer base.

In the industrial age, technology was used to drive down the cost of recurring transactions, and with operating ratios now dipping below 50 percent, we cannot argue with the outcomes. But the benefit accrued to the bank. What resulted for the customer was endless sameness, oftentimes apathy, and the commoditization of an industry.

Now what? When you’re dealing largely in commodities, and you’re up against a discerning, informed and sometimes skeptical customer with countless alternatives, how do you grow revenue? The answers aren’t as simple as some might have you believe. But one thing is now clear: you cannot shrink your way to profitable growth. Restoring growth likely will require rethinking the problem, and not simply reducing the loan-loss reserve.

We have seen a lot on this subject in recent years, and banks are now beginning to understand that the industrial age approach cannot fix it. If it could have, perhaps CRM would have been celebrated rather than expunged from management’s vocabulary.

The Crossroad Group ©

tom.richards@crossroadgroup.com