Page 22 - Summer 2024 - 2.pub

Here is The Math Behind the High-Yield Account

BY CHRIS NICHOLS

smartly cross-sells them a
There have been many a banker who has said they want to offer
savings account and pays them
a high-yield account because the “higher interest expense is just like the current na onal average of
paying marke ng costs.” This banker may even be thinking of star ng 59 basis points. They put
a completely new digital bank using a high-yield account as its flagship $40,000, which is the na onal
product. The logic that “rate sells itself” is true. It is also true that the average for this type of account,
tac c is self-reinforcing as this banker will undoubtedly have success on deposit to save for an
and be lauded for the balances they can build. However, is this the
emergency capital expense,
best move? In this ar cle, we explore the tac c of a high-yield deposit
such as if they must replace a
account.
forkli or cargo van.
The Cost of New Customers
The economics look something
The reality is that opening a new account is expensive. Customers like the below.
rarely walk into your branch or through digital doors, ready to move
The a ribu on to interest
the business to you. Occasionally, due to geographic loca on, that
income is impressive, but it is Chris Nichols is Director of
happens. If you bank in a fast-growing state such as Nevada, Utah,
eaten up by the cost of Capital Markets at SouthState
Idaho, Arizona, Texas, Florida, or South Carolina, popula on and
acquisi on, sales, and Bank, an ACB Associate Member.
business forma on growth result in lower acquisi on costs.
marke ng expenses. S ll, this He can be reached at
However, the majority of customers require a referral, a marke ng account throws off cnichols@correspondent.
effort and a sales effort to bring them in the door. For a quality approximately $490 of net southstatebank.com
commercial customer, this acquisi on, sales and marke ng costs is profit. Not bad, but not great.
around $14,000 spread over a 32-month sales cycle. If you have a

unique brand, product, service or offering, this cost, and me, can be
drama cally reduced.
A High-Yield Account Sells Itself
The old banking adage that the right rate sells itself is true. Offer a loan
rate that is low enough or a deposit rate that is high enough, and your
demand will go parabolic. Not everyone needs rewards points, instant
payments, or weekend service, but everyone needs cheap capital and
more income. If you were to offer a 6% CD promo on in the current
market, like a handful of credit unions and fintechs currently do
(HERE), marke ng becomes close to free, sales costs drop to near- The Math of a High-Yield Business Savings Account
zero, and the sales cycle can be measured in hours, not years. This In contrast, a bank down the street wants to quickly raise deposits and
feels like a win, but it is most likely not. Like ea ng that extra dessert, acquire customers so they offer a 4% business savings account
it feels good going down, but the problem is you now have to live with (currently offered by several banks in the market today). This bank’s
baggage that comes with that dessert. average excep on pricing is in the 5% area, so this seems like a good
Looking at the Math of an Average Business Savings Account – Case deal for the bank. They offer this high-yield savings account as a hook
Study when you open a transac on account. Sure enough, money comes
flooding in. The economics and performance metrics are below.
Let’s take one of the most underu lized products in banking: the

business savings account. This account is rarely pushed by banks and
o en not even appropriately understood. While a topic for another
me, many banks offer a business savings account, but then offer a
higher rate money market account while also offering short-term CDs
at a similar rate. The combina on of compe ng products ends up
driving up costs for the bank, while robbing the bank of product
op ons all the while confusing the customer. If properly designed,
your business savings account should have a dura on and es mated
life comperable to your transac on account offering, and larger than
your money market offering.

Se ng aside the product line up, let’s look at a case study. We will Now, if you are not tracking product or customer profitability, you are
take a mature business in wholesale distribu on that would be a likely happy with the inflow of new accounts that you are ge ng by
target corporate customer of almost any bank. The business doesn’t offering this high-yield account. It is also likely that you have some
have real estate to finance, and your branch and corporate team court vague plan to reduce the rate on the account in the future and cross-
them over from another bank with the lure of be er service and a sell this customer into other products.
be er rela onship. They open a $60,000 transac on account and a
debit and credit card but don’t need treasury services. Your banker Unfortunately, this is rarely the case.

A COMMUNITY BANKER | 22 | Summer 2024
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