Saturday, June 01, 2019

Bankers: Is It Worth Buying Checking Accounts

At least somebody noticed. Noticed that I might be a valuable checking account customer. Aside from credit cards, I don't get much attention from bankers or financial advisors. Maybe the "do not call" list is more effective than I thought?

So when I opened my mailbox and received the bribe, I was interested. Interested to see how much a bank was willing to pay for my business. The answer: $300 (see picture). Thanks Santander! Or should I say, gracias! I should note that Santander has a branch in my town. Courtesy of their Sovereign Bank bailout, ummm… acquisition.

I've heard opinions on whether a community bank should buy checking accounts. Sure, the big banks seem to be on the bandwagon. Jeff For Banks readers likely get these offers. One bank controller opens accounts for all offers and gladly takes the cash. A community bank head of consumer lending recently told me he did the same with a Key Bank offer. Five hundred bucks! Key Bank values him more than mi banco values me.

Is It Worth It?

If you're a regular reader, you know me. And my philosophy that it all comes down to a spreadsheet. So I ran the numbers to see if offering me trescientos dolares was worth it to Santander. Below are the results.

The analysis is assumption driven. For example, I assumed that the annual marginal cost of my checking account to Santander was $100, which included items fees and per account fees charged by their items processor and core processor. A guess, of course. But one based on my experience and my own checking volume.

I also assumed the credit for funds, which is also the spread for a non-interest bearing account, which this offer was for, was the same spread as for all community banks that subscribe to my firm's profitability outsourcing service. The spread of 2.52%, taken from an FHLB yield curve, would be the equivalent of 5.75 years duration based on FHLB Boston's spot rates at the time of printing.

Sorry for the technical stuff, but my finance readers would want to know.

And 5.75 years seems like a reasonable duration for such an account. In other words, the bank thinks they can keep that account for that amount of time. Also, I used the average balance per account for my firm's profitability clients. You can calculate your own bank's average balance for similar accounts.

So, Is It Worth It?!

The above spreadsheet would indicate yes. But wait!

It does not include the cost of the campaign. And that cost must be spread over the number of accounts opened. So, if the campaign went to 50,000 households, with a 2% success rate, that would equate to 1,000 net new accounts. And I'd like my marketing friends to chip in, but 2% seems a stretch. 

If the campaign cost $50,000, and you opened 1,000 accounts, then it cost $50 in incremental cost per account. Still worth it. But if you solicited 10,000 households, and experienced a 1% success rate, you would only open 100 accounts. If that campaign, which sounds more realistic for a community bank, cost $25,000, then it would cost $250 per account, erasing the present value of all profits.

This is why, in my opinion, you see large banks doing larger campaigns to generate economies of scale in terms of fixed acquisition costs (cost of the campaign). And it is much less common in community banks, which do not enjoy the benefits of scale of campaign.

So, my answer is... it depends. But it is all about the math.

Does my math work for you?

~ Jeff