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Grow From Within A Practical Approach to Increasing Checking Account and Debit Card Profitability in an Economic DownturnBy Ben Colvin and Michele Tucci

Profit from Our Perspective™

Executive Summary Banks can expect fewer new retail customers in a steep economic downturn like this one, as consumers struggle with unemployment, wage cuts, falling home values, and diminished savings. Even in the best of times, attracting a new customer is at least five times more expensive than getting increased revenues from an existing one,1 and the cost–return ratio is even more exorbitant

at the moment. The best way, then, to drive net account growth and gain wallet share appears to be focusing on those current customers with potential to contribute strongly to your institution’s bottom line.

Accurately understanding each customer’s lifetime value to your bank begins with taking an enterprise perspective—looking

at the full range of products that a customer uses, measuring customer engagement, and forecasting the lifespan of each relationship. This article is aimed at showing retail banks a practical approach to generate net account growth through improved account retention and the deepening of relationships with current customers who can bolster your institution’s bottom line.

1 Emmett C. Murphy and Mark A. Murphy, Leading on the Edge of Chaos, 2002.

MASTERCARD ADVISORS 2GROW FROM WITHIN

Manage from the Core The current or demand deposit account (DDA) is at the core of the relationship between banks and their customers. It drives cross-sell opportunities for other financial products as well. Banks would do well to adopt a “whole customer” profitability framework similar to one developed by MasterCard Advisors in its payments strategy practice (Figure 1). You can determine the value each customer segment contributes to your business by adding debit card revenue, net interest income, and cross-sell revenue, while subtracting expenses, such account service and maintenance, check processing, ATM maintenance, and the cost of rewards.

Figure 1 demonstrates the sizable portion of bank revenue—more than a third in the U.S. and one quarter in Europe—that comes directly from the DDA or current account. In addition, if banks can persuade customers to shift

their behavior and increase their use of debit cards at the point-of-sale instead of using cash, they may see a direct boost in revenues through increased fees generated by the transactions and incremental net interest income.

Customers who stop withdrawing large amounts of cash at the beginning of each week, and instead increase their debit card usage may increase the average daily balance in their DDAs, thereby generating higher net interest income for the bank. When this more profitable behavior is spread across the entire customer base, the bottom-line impact can be substantial, and the bank can acquire a new more stable source of low-cost funds for its lending business.

New Needs Produce New BehaviorsConsumer banking needs are changing rapidly as the economic downturn

prompts many customers to reconsider their banking behaviors. Consider three recent trends that have put a damper on new customer acquisition:

• First, people often switch banks when they change jobs. But with weak labor markets around the world, fewer workers are moving into new jobs.

• Second, home buyers often move the bulk of their banking business to an institution that has just given them a new mortgage. But with home sales still flagging, fewer new mortgages are being written.

• Finally, investor anxiety about the security of their financial assets has led people to withdraw substantial amounts from the stock markets. U.S. banks have derived some short-term benefit from these worries because consumers have sharply increased their deposits in FDIC-insured accounts. Much of that

Figure 1: How Payments Optimization Can Impact Multiple Retail Bank Revenue Streams and Retail Bank Revenue

% of Total RetailBank Revenue

% of DDA Accounts Revenue

CreditCards

Mortgages

ConsumerLoans

Long-termSavings

DDA Accounts:CheckingandSaving

10

36

6

13

34

CR

OS

S-S

ALE

S R

EV

EN

UE

25

70

Debit CardRevenues

Net InterestIncome

Fees and Other Income

5%

10

31

20

14

25

20

72

CreditCards

Mortgages

ConsumerLoans

Long-termSavings

Current Accounts:CheckingandSaving

% of Total RetailBank Revenue

% of CurrentAccounts Revenue

CR

OS

S-S

ALE

S R

EV

EN

UE

Debit CardRevenues

Net InterestIncome

Fees and Other Income

8%

U.S. Europe

Sources: U.S.: Retail Bank Revenue Federal Reserve Bulletin, profits and balance sheet developments at US commercial banks in 2007, June 2008. Current Account Revenues: MasterCard Advisors estimates on Federal Reserve data. Europe: European Commission Retail Banking Survey, 2005–2006.


increase, however, may be due to the government’s temporary boost in FDIC deposit insurance—to $250,000 per account from the previous $100,000.

Changing needs and concerns like these create ample opportunity for banks to deepen and broaden customer relationships by implementing timely marketing strategies that engage current customers and generate incremental revenues from the most promising segments.

Begin with a Disciplined Approach to Customer SegmentationThrough close analysis of customer activity and engagement, banks can segment relationships according to the number, combination, and cost of products and services used by each customer. The bank also can identify the behavioral paths most likely to lead to cross-sell opportunities on one hand—or attrition on the other. We recommend a two-pronged segmentation approach: First, look at how customers use their checking accounts; and second, look at how they spend their funds.

The first type of analysis measures such basic factors as checking account debits, credits, and average balances to track customer engagement and distinguish primary from non-primary customers:

Primary customers are those with long-established relations with the bank, more liquid assets, and more frequent transactions compared to the average customer. Primary customers may also have a salary mandate or use direct deposit; bank in close proximity to home or office; have a mortgage or other loans; and hold investments with the bank.

Non-primary customers are all those customers who don’t regard the bank as their primary financial institution of choice. They usually fall into one of the following categories:

• Savers – those who use their accounts primarily to keep funds, not to transact

• Convenience users – those with accounts held for pensions or salary deposits, with singular or regular large withdrawal amounts

• Secondary users – those using their accounts for specific, limited purposes, such as paying for utilities, emergencies or unexpected bills; or those with attrited primary accounts that they choose to downgrade due to such factors as a bad service experience or increased costs

None of these segments are unprofitable by nature, but Savers who park considerable funds in their accounts for long periods may be more profitable than Primary customers who require high levels of service. The old 80/20 rule usually applies: Primary customers typically generate most bank revenues and non-primary segments contribute considerably less (see Figure 2).

Once banks understand their customer relationships, they can identify important customer payment behaviors—such as spending at point-of-sale (POS), check-writing, direct debits, ACH transactions, ATM withdrawals, and so on—and use the data to track deposit and payment preferences. These preferences can identify further sub-segments into which customers are divided and can be used as a basis for offering more tailored products and services. Sub-segment examples might include: cash dependents; branch lovers; ATM users; transactors; low debit card users and high debit card users.

Once a bank has gained in-depth knowledge of its debit cardholders’ attitudes, behaviors, and preferences and determined which changes in cardholder behavior are most profitable, it can turn that knowledge into actionable marketing strategies.

Paym

ents

Eng

agem

ent

Account Relevance & Engagement

SECONDARY

CONVENIENCE

SAVERS

PRIMARY

+

+–

–

Figure 2: An Accurate Assessment of Engagement Helps Retail Banks Make More Informed Investments in Customer Segments

By tracking checking account debits, credits, and average balances as well as debit card payment behaviors, customer segments can be plotted across the engagement continuum. Depending on debit card usage patterns, Primary and Secondary segments could be found anywhere along the payments engagement axis. Source: MasterCard Advisors.


STRATEGy ONE: Deepen Customer RelationshipsStrengthening and cultivating customer relationships requires ongoing effort at each point of interaction. Such efforts must become habitual—part of business as usual—and not a random, last-resort strategy in response to customer complaints.

Retain existing customers – The first step is to review the existing customer experience as well as your anti-attrition and retention strategies, processes, and performance metrics. Among the common solutions to improving retention:

• Employ models to monitor changes in spending behavior—say, a drop in POS transactions or an increase in outflow balances—to detect early indicators of attrition and take preventative measures

• Put a Quality Assurance team in place to identify issues and anomalies in customer relationships before problems are reported

• Make use of a specialized retention unit that is trained to manage disputes and service problems and to retain valuable customers

• Consider developing a rewards program if one is not in place

• Proactively score and offer an overdraft line of credit to customers who experience frequent overdraft fees, or include an application for an overdraft line of credit in overdraft notices

• Customers using another bank’s ATMs should be provided easy ways to locate your own ATMs; MasterCard’s online ATM Locator—now available on Apple iPhones—lets banks embed offers in the location information to prompt customers to in-store promos at merchant partners

Encourage Convenience customers to increase usage – Salary mandates or direct deposits typically produce one large monthly deposit to the checking account and an equally large monthly withdrawal or transfer. Banks can employ a variety of tactics to further engage such customers. For example, an estimated 1.5 million customers opened new savings accounts when Bank of America launched its Keep the Change program.2 Consumers embraced this simple savings program—which transferred the “change” from a debit purchase to a customers’ savings account. With every debit card purchase, the customer was also making small, incremental transfers to their savings account, which might easily add up to $500 or more in savings in a year.3 Programs that help consumers save in this economy could be very popular—and demonstrates that their bank is trying to help them.

Make a compelling offer to Secondary users – Customers who use their checking accounts for only limited purposes need some compelling reason to increase their business with the bank. Using segmentation models, your bank can gain better understanding of Secondary users’ payments needs, attitudes, and behaviors. Based on these insights, you can design relevant offers—from savings accounts for parents of children bound for university to small business accounts rewarding business owners for their debit card spending through promotion of category expansion education and promotions. Each customer is unique, and segmentation is the key to finding the right value proposition for each.

STRATEGy TWO: Up-Sell and Cross-SellLeverage the DDA or current account by migrating valuable customers to the products and services that are most relevant to them. Customer needs and desires change over time as customers experience different life stage events. Banks that respond to these changing needs with relevant product offerings increase the potential for customer satisfaction and engagement at each stop along the engagement continuum. For example, you should periodically evaluate customers who consistently maintain higher balances in entry-level checking accounts. If your bank offers a higher-tiered relationship product with better services, proactively offer to upgrade them. For customers who accept such an upgrade, quickly follow-up with a cross-

Non-existent rewards program

28%

28%

26%

18%

Overdraft fees

ATM surcharge fees

Poor rewards program

Reasons for dissatisfaction with their debit issuer. Source: MasterCard Advisors, Comparative Cardholders Dynamics, Debit and Payment Choices Study, 2009.

Figure 3: Why Debit Cardholders Become Dissatisfied

2 Bank of America, Press Release August 28, 2008. 3 TowerGroup, Brian Riley, “Just Rewards: Adapting Credit Card Loyalty Feature to a Debit Card World,” June 2009.


sell offer to ensure that they continue to maintain and grow their checking account balances, as required for that higher-level product.

Savers may have limited migration potential – While a more effective savings product may attract increased deposits, the bank may find that optimization of this segment is more likely to come from growth in net interest income (NII) or through increased or retained balances than from any new product offerings. Depending on the customer’s age and estimated wealth, a Saver may turn out to be an affluent customer trying to diversify his or her portfolio. One common tip-off: the customer in question does not have or use a debit card because they don’t feel they need to. Alternatively, a customer may simply regard the account in question as a “piggy bank.” Such customers often welcome financial planning and retirement advice from an in-branch advisor. Offering them liquidity solutions to help manage their affairs can often lead to increased deposits and growth in net interest income.

Find the sweet spot for Primary users – With customers who already are frequent users of their current accounts, the secret to cross-selling is determining what drives their engagement with your financial institution. For budget-minded consumers who spend primarily on essentials, merchant discounts on everyday products may be compelling. For the more affluent household, rewards offering unique experiences may be the strongest motivator. Configuring the right offer and the right marketing message for each customer segment will help expand your customer relationships and stimulate profitable payments behaviors.

Stimulate recurring payments – Online bill pay and recurring payments (RP) have been shown to increase spend and loyalty. A bank may reward the debit cardholder who signs up for RPs in such categories as telecommunications, insurance, utilities, and satellite/cable/TV by offering a credit on their next statement. MasterCard has seen a lift in overall card spend whenever cardholders use debit cards for recurring payments or set up RPs through a merchant. Debit cardholders who use their debit card to make recurring payments also spend 36 percent more with their debit cards than those who don’t make recurring payments, and they also are much less likely to stop using their cards in the future (6 percent vs. 11 percent).4

STRATEGy THREE: Increase Debit Card UsageAnother way to deepen engagement is to understand customer preferences for POS, cash, and branch transactions and then use that understanding to help increase debit card usage. The most effective kinds of offers vary with each region and with each region’s specific debit-card revenue dynamics. In building the business case, it’s important to consider the broader benefits of debit cards, such as increased balances, improved retention, and cost savings associated with reducing costly ATM, cash, check, and branch transactions.

Primary

Secondary

Convenience

Savers

CU

ST

OM

ER

SE

GM

EN

TS

MIGRATION PATH TO INCREASED VALUE AND ENGAGEMENT, WHERE DEBIT IS THE ENTRY POINT

DebitCards

AutoLoans

PersonalLoans Mortgage

CreditCards

Best Worst

Potential For Customer Adoption

InvestmentAccount

Figure 4: Cross-Sales to Customer Segments Moves Them Up the Value Chain

Source: TowerGroup

4 MasterCard Advisors, Comparative Cardholder Dynamics: Debit and Payment Choices, 2008.

Position the debit card as the smart way to pay – Those accustomed to spending cash or who make few debit card purchases may respond to well-crafted educational messages and incentives that encourage debit card usage. During this global economic downturn, banks may want to capture as much non-discretionary spend as possible. Banks can promote debit cards as a better way to control spending and stay within budget, and emphasize their convenience over making multiple trips to the ATM for cash. In addition, such POS migration efforts can boost the profitability of ATM users —especially when they are coupled with special offers, or expansion of contactless terminals and cards, to capture more of the spend that might otherwise be made in cash.

Encourage debit usage through loyalty or rewards programsCustomers averaging just a few transactions per month might be offered promotions or rewards with specific merchants in exchange for increasing their card usage—to, say, five times per month. Advisors propensity models can help identify which offers may appeal to certain debit-inactive cardholders. Cardholders can then be invited to use their debit cards for eligible purchases in order to qualify for a reward. By making a $15 debit card purchase in a participating department or hardware store, for example, the cardholder might qualify for a $10 gift card, with further purchases qualifying for additional gifts. Such programs have resulted in 1.5-to-5 percent opt-in rates, with spending lift of up to 60 percent (over control) and a spending increase of 15.5 percent (over control) for customers who received the offer but did not opt in.

ConclusionEconomic uncertainty and growing solvency concerns are changing what consumers want from banks. The historical drivers of account switching— a new job or new home—are less relevant in this environment.

Today, generating net account growth is about nurturing commitment and engagement among key client segments. Savvy banks that want to build long-term relationships will measure each customer’s lifetime value and use tools to understand their “migration likelihood”—the probability of that customer moving up the value chain and welcoming a wider variety of bank products. Only with such customer insights can the bank pursue the cross-sell and up-sell strategies that are most meaningful to each customer segment.

© 2009 MasterCard. All Rights Reserved.

Ben Colvin is a Global Practice Leader at MasterCard Advisors’ Retail Banking and Debit Practice. He and his team help global client banks leverage their payments platform to drive the profitable growth of their retail banking value proposition. Based in Purchase, N.Y., Mr. Colvin can be reached at [email protected].

Michele Tucci is a Managing Consultant at MasterCard Advisors’ Retail Banking and Debit Practice. He advises global client banks on strategies and implementation tactics that promote revenue growth and drive point- of-sale debit usage. Based in Purchase, N.Y., Mr. Tucci can be reached at [email protected].

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