In a discussion today, I asked a bank CEO and Chief Banking Officer: Why can't we design a business checking account that uses technology to determine the average balance that receives interest over a certain amount instead of this Analysis Checking product?
Instead of applying all of these transactions to burn down what would be interest paid to the customer. Since Dodd-Frank banks are permitted to pay interest on a business checking account. If a business has a lot of items, the average balance needed to receive interest would be higher. This should be easy to explain to the customer and easy to understand by operational staff. The average balance could be reset every year or more frequently based on actual activity. One answer I have received is that the bank would lose the fee income from Analysis Checking. I think if we did the math, we would lose very little.
Another challenge: Let's say we have $1 billion in money market deposits. The Fed raises rates 100 basis points. What do we do? Not all $1 billion are price sensitive and demand we raise rates lock step with the Fed or slightly below it. Some do. Some would like the money market to at least keep pace, maybe 50 basis points to the Fed's 100 or a 50 beta. Some just use the account to accumulate cash in an FDIC insured account with a convenient branch. The problem: we don't know who's who. What do we do? Nothing until customers start calling to see what's up. And with technology and easy money movement, many didn't call during the recent Fed tightening. They just moved their money.
We either have customers in the wrong accounts... savings versus money markets. Have sub-par onboarding by not identifying why the customer opened the account and their sensitivity to rate changes. Or lack the systems to identify price sensitive versus price interested versus disinterested. Does the bank split the difference and pro-actively raise the money market rate 75 bps? That's a $7.5 million reduction in net interest income.
I don't think these challenges would be nearly as troublesome if a bank had a product management culture. One where there is a head of product management, and up and coming middle managers close to the product would have the responsibility of continuous profit improvement of the product.
Let's take a retail money market product, like mentioned above. We make the VP and regional manager of the branch network the product manager tasked with its continuous profit improvement. See the profit levers below that he or she can press:
The product management committee meets quarterly to review trends in their products. They review the drivers to improve the profitability of the personal money market product. One solution is to improve KYC Q&A to include why the customer will use the account and their price sensitivity to rate changes. Perhaps those that want to park money are recommended a savings product. Perhaps there is a system designation when the account is opened on their price sensitivity. Perhaps we develop a new product, such as Money Market-Fort Knox and Money Market-Wealth Builder so we have a better idea price versus non-price sensitive. And we wouldn't have the decline in number of accounts and average balances per account that we saw during the 2022-23 Fed tightening. And we didn't test the loyalty of our customers by doing nothing until they called to complain.
But we didn't. And it happened. Product Management will create a culture of continuous product profit improvement that will cause modifications in products, onboarding, procedures and sales & marketing.
The challenge, as I see it, is banks don't measure the profit of products. And if they did it is uncommon that they assign a director of product management and product managers tasked with continuous profit improvement.
Should they?
~ Jeff
I will admit that my firm does this for banks on an outsourced basis. But I think all banks, particularly banks over $500 million in assets, should do this. With or without my firm. One basis point of net interest margin improvement at a $500MM bank is $50k in net interest income.
Contact Ben Crowley at our firm for more information. bcrowley@kafafiangroup.com
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