Page 23 - Summer 2024 - 2.pub

For starters, and no surprise, paying a 4% rate eats up most of the And Then There is the Employee
bank’s profit here. While it is true that acquisi on, sales, and The worst part of the high-yield deposit strategy is what it does to
marke ng costs drop drama cally, there is a glaring problem in the your employees. Employees quickly learn that it is OK to pay a high
analy cs. This customer is highly rate sensi ve (numerically a rate to a ract a customer. They then learn that you have to keep
sensi vity or beta of 88%), which is why they were a racted to the paying a high rate to keep the customer. This training gets ingrained,
offer in the first place. Because of this sensi vity, they will likely leave and a er several years, your bank loses the art of growing and
your bank when the next best offer comes around or you drop rates. managing deposits.
The combina on of the high interest rate offering and the high
sensi vity means their expected life is short and their dura on low. When banks stop paying a high rate, they o en take it out on the
employee thereby hur ng morale. Moreover, lower profitability also
Because of the high beta and short expected life, you need to amor ze means lower compensa on to the employee. The combina on of all
the acquisi on, sales, and marke ng costs quickly and have li le me these factors means employee churn increases, driving up opera ng
to cross-sell other products. Not only is product life me value clipped, costs.
but customer life me value is even more truncated.
Doing BeƩer Than a High-Yield Account
This customer values your rate and not your service or rela onship.
This is ironic, as you likely marketed this product by telling your Leading with credit is a tradi onal tac c that is some mes overlooked.
prospects how you are offering 8x the na onal average on rate It is far be er to give up 25 basis points on a reduced rate for a loan
because you value the rela onship. and get both a transac on and business savings account in the process
than paying an extra 3% in deposit balances. Even if economically
If you try to market the next best product to this customer (which is a more expensive to start (depending on the size of the loan and deposit
re rement account for the owners and then an HSA account for the balances), it gets you a be er-performing customer over me. Lock in
business), you will find that you will spend more money than average a long-term loan and requiring deposit balances is one easy tac c to
in acquisi on costs and/or have to offer the lowest loan rate and the reduce acquisi on costs and improve deposit performance.
highest deposit rates to open that next account.
Another key to separa ng your bank from the compe on is using
The lower expected life and rate sensi vity likely results in a greater anything BUT rate to market and build product features around it.
customer churn rate. The high-yield bank must keep acquiring new Ins tu ng savings alerts, and gamifica on, allowing for subaccounts,
customers to offset the churn. New acquisi on, sales, marke ng, prize-linked savings, savings round-ups, smart automated transfers,
support and management costs drive up the opera ng cost over me
sweep accounts, and other innova ve features can drive acquisi on
further hur ng profit.
cost down and engagement up. For that ma er, we are s ll shocked at
Monte Carlo SimulaƟon Comparison the fact that a large number of banks s ll do not have the ability to
allow prospects to open business savings digitally.
The advantage of the high-yield account is that it can quickly and
efficiently (other than the interest expense) gather deposit balances. Banks that want to drive deposits should start with paying
We set up a Monte Carlo model to simulate marke ng both the compensa on to increase the opening of business savings. This is
tradi onal and high-yield business savings account. We used actual another o en overlooked tac c and can serve banks well to drive
conversion data and had the model create 5,000 different “paths” of deposit balances.
various conversion rates and account deposits. The marke ng was
Targe ng specific industries such as high-tech manufacturing,
based on either new account opening or reminders to exis ng
insurance, payment companies, law firms, hospitality, and many
customers to contribute to the respec ve accounts.
others has more of a need for business savings, which results in a
At the end of ten months, the high-yield account had an impressive shorter sales cycle and lower acquisi on costs. Be er s ll, these firms
$40 million in balances opening 6,400 new accounts. This blew the tend to have average balances above $60,000, thereby helping the
tradi onal savings account away that only had $8.7 million in balances economics of the product.
and 1,550 new accounts. In short, marke ng a high-yield account was
Puƫng This Into AcƟon
almost five mes more effec ve in mee ng a balance objec ve.
While using rate as an offensive weapon is always temp ng, it is lazy
However, if your goal is to build value, then marke ng the tradi onal banking. Strategically, paying rate o en prevents the development of
business savings account was superior. While balance building is 5x the products, culture, marke ng, and rela onship management that is
slower, value building is 15x greater. As such, profit and cumula ve needed to build long-term franchise value through any rate cycle.
life me value is greater at every sale. This compounds and despite
greater variability in sales, the product accretes significantly more High-yield accounts result in a quick hit of balances but sap a bank of
value that compounds to make a more profitable bank in both up and needed capital and profitability to invest in the long run. It is be er to
down rate cycles. The higher rates go, the more effec ve a tradi onal slow growth and build profitable products and customers for the long
business savings account is. run than sacrifice the quality of the balance sheet and income
statement.

While you can ra onalize paying a rate in place of marke ng and

acquisi on costs, paying a high rate for deposits gets you more rate-
sensi ve customers that cost you more in the long run. Credit card
companies and specialty banks such as Capital One, Bank, and Ally can

afford it because of their margins, but most banks cannot.

A COMMUNITY BANKER | 23 | Summer 2024
RKANSAS