A Different Way of Looking at Your Deposits

If you’re using balances as a yardstick to evaluate deposits then you’re looking at your deposits all wrong. The aggregate concept of balances lacks important attributes. It only tells us about the quantity of the deposit, not the quality or profitability of the deposit. 

Using aggregate concepts presumes that deposits are fungible. One is as good as another. But the bottom line is that all deposits are not the same. And once you start using instrument-specific measurement you’ll immediately see the subtle differences that can make a big impact on your bottom line profitability.

Bankers make 3 big mistakes dealing with deposits.  Here they are:

  1. 1.  Using balances as a proxy for profits. Over time bankers came to rely on balances as a shortcut for deposit profits. Everyone understood balances and it was easy. Now in a perfect world, larger balances would translate to bigger profits. But with different transaction volumes and delivery channels, the balance/profit linkage is broken.


  1. 2.  Assume adding new accounts means adding more profits. At most banks about 50% or more of deposit accounts are unprofitable. Simply adding more new accounts isn’t likely to improve this ratio. You’ve got to target profitable accounts if you’re going to improve your deposit quality and profitability. Fix your profitability before launching new account initiatives.


  1. 3.  Treating everyone the same. The idea of treating everyone the same appeals to our sense of fair play, and it’s easy to implement. Unfortunately, it’s a very poor business strategy. You should reward your most profitable accounts and incent your least profitable ones to improve. That’s the way of the business world.

Consider two seemingly identical deposit accounts. Both are the same account type. Both have the same average collected balance, cash flow patterns and daily cash flow changes. On the surface, you can’t tell them apart.

But one could have vastly different profitability than the other.  How? It depends on transaction volume and delivery channel expense.

If one account used hundreds of high-cost transactions (like branch transactions or check deposits) to drive their cash flow changes while the other used just a single daily low-cost transaction (like online transfers) to move the same money, then it’s clear. The high-volume, high-cost account is definitely much less profitable than the low-volume, low-cost account.

And you can’t “eyeball” the differences between these accounts. You have to dig deep to uncover it. But, with deposits averaging around 80% to 85% of balance sheet footings, and the average profitability gain at up to 50 bps (0.50%) or more annually according to Deloitte’s six levers of deposit profitability, it’s well worth the effort.

And just like moving to instrument-specific IRR models improved your interest rate risk, instrument-specific deposit P&L statements on each and every account relationship will give you a benchmark to improve your profitability.

Here are the most frequently asked deposit profitability questions:

  1. 1.  How do you get the data to calculate and recover these lost deposit profits? You already have all the data you need.  It’s in your core system.  We know where the data is hidden, and we have experience with all major core systems (and some less common ones too).


  1. 2.  Will this require another huge and expensive IT project? No.  We give you a template to perform a simple extract from the core.  Since we have ongoing experience with the “Big 3” core systems providers, we have a template that fits your situation.  It’s quick, easy, and there’s no added expense.


  1. 3.  Is this just an excuse to run off unprofitable accounts? No. We never advocate running off accounts. You’ve spent good money to acquire your accounts and you’ve underwritten their ongoing losses month after unprofitable month. It makes much more sense to fix them and start realizing a profitable return on that investment. 


  1. 4.  How quickly can I realize profit gains? You could be up and running with our complete done-for-you service in as little as 2 weeks.  From the very first run, you can start using our profit score indicators to make better (and more profitable) customer facing day-to-day decisions.   Other profit gains depend on your targets and implementation timetable.


  1. 5.  What implementation assistance is available? You don’t want another report gathering dust on top of the file cabinet. You want results. So we have implementation calls scheduled monthly for the initial 3 months and quarterly thereafter. Plus you can always reach out with any related questions via email or phone at any time during business hours.


  1. 6.  If deposit profitability is so good why aren’t we already doing this? Until recently you just couldn’t calculate instrument-specific deposit profitability in a community bank. You didn’t have the computer horsepower, expertise or algorithms needed to make it work efficiently. It was strictly an expensive big-bank tool. But times have changed and it’s now available to every bank no matter your size.


  1. 7.  Couldn’t I get the same results with a blanket across-the-board fee increase? No. Overly simplistic solutions won’t work. How would you know exactly what to change? It’s not a cookie-cutter process. You’ll just end up driving away some of your best, most profitable customers.

If you have other questions, or if you just want to learn more about how deposit profitability can help grow profits at your bank, please visit www.echopartners.com to download a detailed written guide watch a or a brief 15-minute executive briefing. If you want to talk about how you can use deposit profitability to go to www.echopartners.com/quickstart to schedule a call.


//    Howard Lothrop, Echo Partners


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