This second post in my series on bringing profitability back to DDA will focus on the importance of become the primary account. In the first post, I discussed decreasing the costs of data and fraud losses as the first initiative to enhance profitability. Achieving primary relationship account status is the next initiative I want to consider in enhancing profitability of demand deposit accounts (DDAs).
GOAL: Establish your bank’s DDA offering as every customer’s primary relationship account.
This goal has several important implications, but first the definition. Your customers should transact their daily business through this account, it should be their debit account of choice, and receive the bulk of their direct deposits. However, there are several factors that increase the likelihood of becoming a primary account. Many have been talked about at length, including:
- attractive product features and pricing;
- nearby branch locations;
- interesting promotional campaigns;
- helpful customer service representatives;
- positive customer experience across traditional channels;
- easy-to-use, self-service channels ie: online and mobile; and
- access to new services like personal finance management (PFM) tools.
In the past it was much simpler to become the primary account, banks just required a direct deposit. Today many consumers split their deposits across several accounts. Which begs the question, why do we have so many checking accounts anyway? The free toaster was too hard to resist? It’s too hard to close an old account? The slightly higher promotional CD rate is going to allow me to retire 10 years earlier? This will need to be the topic of a future blog post. For now, I want to focus on why being the primary account is so necessary.
A statistic I read recently stated, “On average, 85% of revenue per DDA is directly related to debit card usage.” The article by Bob Giltner, reported that as a result of primary status and increased usage, “relationships per household and retention ratios also increase with debit card use, as well as all other sources of revenue such as foreign ATM fees, NSF fees, lost card fees, and research fees.”
Revenue is driven by customer usage of their primary account. Even if Durbin’s price controls remain, debit transactions will still generate more revenue than other account features. More importantly, the more transactions, the better. Consumers place the majority of their debit transactions on their primary account. It comes down to this simple formula: increased usage = increased revenue over the short and long terms.
Customer friction is being created by banks considering charging fees on the same accounts customers were using for free for so long. Alternatives are available to those unhappy customers like Paypal, credit cards, or mobile payments and worse, other banks still offer free accounts or accounts that charge but add more value. Having the correct product fit is also important to enticing usage. Some banks are creating different accounts based on how the consumer prefers to interact with the bank including usage features. Some fee-based accounts offer waivers if the customer uses the account in a low-cost way including: maintaining a high balance, utilizing self-service (non-branch channels and paperless statements), using PFM tools, or linking multiple accounts/relationships together. Bank of America appears to be an early leader in redefining their account structure, although only time will tell if consumers will accept the change.
Ultimately, the important point is that pricing for DDA should not be driven by LOB profitability. The purpose of DDAs is to deepen customer relationships and incent debit card usage. In other words; to increase revenue, relationships and retention.
If you are interested in learning more about building DDA products that appeal to consumers, I encourage you to contact Bob Hunt with TowerGroup. His extensive research on deposit accounts is invaluable to anyone tasked with managing their DDA portfolio. If you are not a TowerGroup member, you should at least join their mailing list and attend webinars on the topic.
How does your bank establish itself as the primary relationship account? Leave me a comment below.
Nice post Eric. Another important factor to establish the primary account is to get the account holder setup with checks. Certainly checks are decreasing in usage, but they still offer a nice complement for debit cards. Checks are used more frequently for high dollar amounts (like rent) while debit cards are used for convenience with low dollar transactions.
–Bob