Online Account Opening

Online account opening remains the wild west for most community banks. In so many strategy sessions, I hear from bankers that it is a bust. They get more fraudsters than customers.

This was the background as I attended Bank Director's Acquire or Be Acquired (AOBA) conference. And naturally I was keenly interested in how to solve this problem, or even diagnose what exactly is the problem, for community banks and online deposit account opening, either retail or business. 

Narmi, a key player in this space, had a presentation titled Leveraging Digital to Drive Core Deposits, and had two partner banks, Berkshire Bank and Community Savings on the stage with them. Berkshire Bank, a $12.3 billion in asset bank based in Pittsfield, Massachusetts, launched Berkshire One for online customers. 

It boasts of account opening in less than two minutes. Otherwise, it has features such as a one-time payment of $200 to open a checking account, and an intriguing APY for opening a money market account. The small print disclosures look pretty much like all such disclosures. Oh, and the Boston Celtics Derrick White is a brand ambassador. We measure product profitability for our clients and the average annualized operating cost per retail interest-bearing checking account was $448 in the third quarter 2024. I suppose it would be more for Berkshire having hired Derrick White.

More impressive than Berkshire's two-minute opening claim was Community Savings of Caldwell, Ohio. As a Notre Dame fan it pains me to type Ohio. And I just did it twice. Community Savings impressed me more for their size and therefore resources to execute on online account opening than the much larger Berkshire. The bank, although established in 1885, was only $270 million in total assets at year-end 2024. And their growth did not come linearly. They were only $68 million in 2021. 

According to the AOBA presentation, Community Savings, once they turned on online account opening using the Narmi solution, acquired $2.5 million in new core deposits in the first month, and $22 million in the first 120 days. Average deposit size per account, according to the presentation, was $57,000. Deposits, which stood at $53 million in 2021 now stand at $198 million. Cost of funds did rise from 78 basis points in 2023 to 3.13% in 2024. So it did come at a cost. Community Savings had a >100% loan-to-deposit ratio. Banks that needed the money tended to pay more for the money. Makes sense.

Online deposit account opening is more prominent today than it was yesterday and will be even more so tomorrow as today. First Internet Bank in Indiana was opened in 1998. It now has $5.7 billion in total assets. Grasshopper Bank, a Narmi customer, opens hundreds of business checking accounts per month online. You read that right. Hundreds. Per month. Business accounts. Grasshopper has 96 full-time equivalent (FTE) employees. Community Savings launched its online account opening tool in 49 days. They have 59 FTEs. 

According to Susan Bui Bergen, CEO of Infinite Potentiality and 30+ year bank marketer for banks $1 billion - $30 billion in total assets, "The shift to online account opening represents a significant opportunity for community banks to enhance their reach and operational effectiveness."

Totally agree. Because many banks are struggling today with their funding. Funding strategies should be perpetual and strategic. If your bank is flush with liquidity you should encourage your relationship officers and marketing personnel to keep it rolling. Turning the spigot on and off is an ineffective funding strategy, in my opinion, except for wholesale approaches to fill gaps. When is a good time to deepen depositor relationships and grow core deposits? Always.

I don't believe branching is dead. Neither does Jamie Dimon, so I'm in good company. But I do believe that each location, be it physical or virtual, should deliver profit to the bank. And banks have struggled with their virtual branch. 

According to Mantl, a Narmi competitor, low-performing banks in online account opening experience a 30% submission rate, meaning if 100 people start an online checking application only 30 complete it. And then experience a 30% approval rate of the 30 that completed the application. Meaning, out of 100 people who started an online deposit account application, only 10 get opened and funded. 

High-performing banks in online account opening had a 55% submission rate and a 65% approval rate. Meaning out of our hypothetical 100 people, 36 get opened and funded. I'm not sure "initial funding" is a good stat because it would make sense that new customers would seed a new account with maybe $100 until they moved everything over. Online account balances are notoriously lower than in-branch opened accounts, but becoming less so. 

According to Bergen, "To succeed, it's vital to meet customer expectations by making the process straightforward, intuitive, and secure. By focusing on user-friendly interfaces and strong fraud prevention, banks can achieve continuous improvement and truly benefit from digital advancements. Those who excel will set themselves apart and flourish in the competitive landscape."

The challenge remains core deposit growth at a reasonable cost. Many banks, like Berkshire and Community Savings, tend to offer higher online rates to encourage people to move. The branch or a relationship with a banker likely does not exist, although I wouldn't discount that customers who are in towns where you have branches will open accounts online. So a branch could play a factor although the prospect does not have to enter it.

Here is the profit performance of retail interest-checking for all banks that we measure this for on an outsourced basis.

Let's say that an online account experiences half the average balance of a traditional account. In this case, $7,255. Total income is 4.14% in the 3Q24. So revenue for our hypothetical online account is ($7,255 x 4.14%) just over $300. Not enough to cover the annualized cost per account (for acquisition and maintenance) of $448. Adding to the challenge is that the traditional account represented above is only paying 35 bps interest expense. So if you must juice that number to incentivize that person sitting at home to open an account, the total income of 4.14% will go down. 

Online account opening solutions providers would likely argue that acquisition and maintenance costs are lower for the online account opener. Perhaps true. Then, as your online branch grows and becomes a greater proportion of all accounts opened, that annualized cost per account should also go down. Banks should build this discipline into their accountabilities.

Flipping on the online account opening switch does not end the project. It has only just begun! There must be marketing, internal education, and continuous improvement to make sure you are not blocking legitimate prospects out by having overly conservative triggers in your account opening solution. This happens when a bank's risk appetite for fraud is zero. They tighten the screws so tight that their local minister can't get an account. And the bank becomes low performing as described above based on Mantl's numbers.

Online account opening is here to stay. The tools have evolved to surpass ease of use of our in-branch account opening tools. In fact, I don't know why Fiserv users still use BPM to open accounts. Use the online account opening tool. According to Berkshire Bank, it takes two minutes!

But as you make progress in your online account opening journey, measure the profitability of those products and that virtual branch. Just like you should do with your physical branch. How else would you know if it is successful?

~ Jeff

Bankers Need to Encourage, Even Compel Employees to Use Tech Tools

Chris Cox, the head of Regions Bank eBusiness unit, was quoted in Bank Technology News on how personal financial management (PFM) tools will soon be part of a customer's everyday interaction with their bank once they login. I believe him.

But will they do it through your financial institution? In a separate article, Jim Marous of The Financial Brand, opined that Mint, a PFM tool that "screen scrapes" financial information from various financial institutions and aggregates it into their tool, is a serious threat to banks, thrifts and credit unions. I believe him, too.

PFM tools have been dogged by low adoption rates. Woe to the retail banker or IT manager in convincing the CEO that PFM is a must-have . If it was so critical, why are so few people using it? I doubt this will surprise you, but I have my opinions.

First, the likely adopters of bank technology tools are probably younger customers. I'm 49 years old and I have not demanded that my bank have a PFM tool because I don't think I would invest the time to learn and use it. In fact, I don't know if my bank has a PFM tool. My daughter is more likely to want and use such a tool. And guess what? She doesn't have any money... yet. 

Bank profits are driven from balances, and expenses are driven by number of accounts and gizmos attached to those accounts. So effectively implementing a technology gizmo that is targeted to younger customers that currently generate little revenues does not make for a solid business case.

Secondly, I believe that PFM and other customer-facing technology tools have low adoption rates by your employees. Don't believe me? Why don't you poll them. Let me know how it turns out.

People sell what they know. When I was a branch banker, I sold the heck out of home equity loans and retail checking accounts. Why? I knew them much better than business checking or a commercial line of credit. So my branch had a lot of retail deposits and loans. It was what I knew and was most comfortable.

I read an industry article, and I apologize that I can't recall where I read it or I would link to it (although I suspect it was a Jim Marous piece again), that a bank required their employees to open accounts using the same online account opening tool that customers would use if they did it themselves in their pajamas. The employees didn't have to wear pajamas, but you get my point.

It forced the employees to know the tool that was available to customers. And why wouldn't you do it this way? You invest the money in developing or purchasing an intuitive online account opening tool and then saddle your employees with opening accounts using a clunky core processor user interface (UI) or tool? Why do we need both? 

And if choosing, you should choose the one available to customers so your employees are subject matter experts on it. Imagine a customer calling the nearby branch for help using an online tool and the branch employee guides them through it, instead of transferring them to your call center or eBanking unit.  

Don't stop at account opening. Transfer the logic to other customer tools, such as PFM. First, get your employees on it and using it via their own personal accounts. Only by repetition will they achieve the subject matter expertise to enroll their clients into it, train them on how to use it, and answer "how-to" questions about it. 

And don't stop at retail banking tools. Many if not most community banks are focused on the business segment, and there are plenty of available tools to help harried business owners make their financial lives simpler. Since employees are typically not business owners, this will take a little more diligence in giving them the needed training and repetition to be fluent in the available tools. Perhaps you can set up a "test account" at a "test bank" and require employees to use the tool a certain number of times prior to crowning them "cash flow management" qualified.

Mint, Yodlee, Moven, and other technology platforms are working hard to win the loyalty of your customers via their "cool" platforms. Many, such as Geezeo, focus on helping community financial institutions offer cool tech solutions and yet retain customer loyalty through the FIs own brand. To win the loyalty of those that demand such technologies now, and when they have the wealth to drive profits, financial institutions must develop front line staff to be fluent in what is available. Only then will they enthusiastically demonstrate the technology (go into an Apple store and have a "genius" demonstrate the Apple Watch and you'll know what I mean), describe features and benefits and their own experience with the tool, get customer adoption rates higher, and build greater loyalty to your brand.

Or you could let Mint do it.

~ Jeff

Bankers Tell Me Their Top Industry Game Changers

If you were asked what one industry trend will change the face of banking forever, what would you say?

I did that very thing to dozens of bankers that attended their respective state banking associations' Executive Development Programs (EDP). And their answers gave me a more positive outlook for our future.

I teach Bank Profitability for the Washington, Utah, and Montana Bankers' Associations EDP programs. Each year I make pilgrimages to Seattle, Salt Lake City, and Helena to meet future leaders of our industry. Each state has its unique flavors of banking. Washington has a more traditional mix of very large and community financial institutions. Utah has many Industrial Loan Companies (ILC's), which are FDIC supervised financial institutions that can be owned by commercial firms not regulated by a federal banking agency, like a utility company. Montana has many small, closely held financial institutions. 

As part of the day-long curriculum, we discuss trends facing our industry and at the end of this discussion, I asked for their opinion regarding our top industry game-changers. Their answers are summarized in the chart below.

This should not be surprising to anyone. Neo banks are investing and moving quickly into creating a banking experience not based on personal relationships or locational convenience. Moven, a banking application that was seeded with $4-5 million, and subsequently raised $8 million more last summer, aspires to remake banking through the smart phone. They see their IT department as a profit center. 

Traditional community bankers see it as a support center, and staff it accordingly. Oddly, if you look at top IT projects for financial institutions, Online, Mobile, and Product Development reigned supreme (see chart). So why do we continue to view the IT Department as a cost center staffed with techies that have little feel, responsibility, or accountability for acquiring customers and improving their experience?

In 2013, I wrote a blog post on a job description for an EVP of Distribution and Service Excellence. Not that I've experienced such a position, but that does not mean it should not exist. Readers of my blog know I like to dabble in how things should be, rather than how they are. Two years and I still haven't seen this position.

There should be no more debate that customers interact with your bank more frequently with technology than any other distribution point. That ship has sailed. It is not only how it is, but I believe it is how customers prefer it. As a society, we are becoming increasingly accustomed to self service, and by our actions deem it more desirable to get a task done on our own time rather than wait for another human being to help us. There are exceptions of course, but in the main, don't you agree?

If you do, then here are some ideas on what to do next:

- Build a technology platform with the right partners that makes our customers' lives simpler that has a distinctive look and feel, even though we are likely to use the same platform that hundreds of other financial institutions use.

- Create a separate profit center for your online/mobile banking center. That means you have a center manager that is responsible for growing customers and balances, and generating profits via your technology platform.

- Implement a rational costing scheme to charge branches for their customers use of the mobile/online banking platform, and for your mobile/online center customers' use of branches. Keep it simple and understandable.

- At the top of the Mobile/Online Banking Center, put an executive with customer acquisition and customer experience know-how. Not a former FORTRAN programmer that wears a pocket-protector that is more comfortable discussing circuits and switches than how to acquire more customers.

Do you think the time to treat our mobile/online banking centers as support centers should end?

~ Jeff