Do Bank Teaser Rate Campaigns Work?

Teaser rate campaigns have become commonplace for acquiring and cross-selling client deposit and investment balances but most banks we talk with struggle to know whether they are really delivering the value that was hoped for. 

The most common questions we hear are: 

Are we bringing in new money or cannibalizing our existing base? 
Does the money stay in the bank when the campaign ends?

Knowing the splits between new money and product substitution is critical to understanding the return on investment of any teaser rate campaign.  Balance growth from the campaign will inevitably include significant amounts of product substitution – in fact even without a teaser rate offer a third of account balance growth in a US regional bank’s demand, term and mutual fund deposits is actually funded by internal substitution. Under a teaser rate scenario, the substitution effect is significantly amplified.

To understand the real value of a teaser campaign you need to deduct the profitability margin you were earning on the “old money” from the margin you are getting on the campaign target funds. To do that you need to know which products the old money was coming from so you can attach the right margin to each source of old money. To do that you need to be able to measure the flow of funds between all the accounts in your portfolio, which is where the challenge lies.

Similarly, once the campaign teaser rate period is over there is typically some run-off in the deposit funds in the target product. To the extent that the product level runoff stays within the bank the campaign results can include the margin of the successor product as part of the value added. Again the key is isolating where the money flows to within the bank – and knowing how much actually leaves after the expiry of the teaser incentives.

Both of these issues are solved by measuring the flow of funds into, out of and among products in your portfolios and there are two ways to achieve this. The first approach is to analyze the transaction details of every deposit that occurs in the campaign target product. This is impractical due to both the cost and complexity of trying to trace flows through the systems of the bank. Most money flows from one product to another by passing through a demand deposit or suspense account which makes tracing transaction flows extremely difficult.

 The second way is through a patented analytical technique that enables banks to measure flows of funds into, out of and across the bank product portfolios at the account level without having to dig through transactions or make high level assumptions that produce doubtful results. If you want to understand if your teaser rate campaigns are really working, please talk to us about how our FlowTracker solution can enable you to truly understand and measure money in motion at your bank.


Customer Profitability Analytics Book

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Understand how and why you need to measure Customer Profitability, and the key things you need to know about selecting, implementing and managing a Customer Profitability Analytics solution from globally recognized subject matter expert, thought leader and practitioner Dave McNab.
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Customer Profitability Analytics: a practical guide to methods and technologies

Bank KPIs :: Sales, Attrition, Cross-sales

9 questions that are essential... please inform us about the way you measure these core KPIs and how happy you are with how they work... ... we'll summarize and publish a synopsis if we get a response rate that is meaningful.  Anonymous no sign in needed.

Please invest 5 minutes in this initiative !


Analytics in Banking: Using Customer Profitability Analytics to Enhance Financial Performance [videocast]

IBM Customer Profitability Analytics in Banking
Date: Wednesday, March 20, 2013 at 12 pm ET
Click here to register Customer Profitability Analytics Videocast

By understanding who your most valuable customers are, what they want, and how they will behave in the future, banks can better and more cost-effectively meet their needs. More importantly, you can use those insights to better measure and manage profitability.

Frank McKeon, Banking and Financial Markets Industry Executive, IBM and I will be discussing Customer Profitability Analytics with Farhana Alarakhiya, Director of Industry Solutions, IBM Business Analytics in this session.

Join us on Wednesday, March 20th at 12:00 PM ET, during this one hour video-cast where banking industry experts will discuss new approaches for optimizing customer relationships and engagements to drive profitability. Using illustrative and case study examples, the panel of experts will help you answer questions such as:

  • Who are my best customers, and how to I attract others like them?
  • How do you measure profitability?
  • How do profitability insights help to improve pricing, cross-selling and other point of impact decisions?

Registrants are invited to submit questions regarding customer profitability analytics and the panel will attempt to answer as many as possible during the conversation.

(All registrants will receive the "Banking for Success: Using Analytics to Grow Wallet Share" white paper from IDC Financial Insights).

I hope you will join us. (And yes, there is no cost to register.)

- David McNab, CPA, CA

About Bank Deposit Services and Value TO Customers

The outstanding value delivered every day to consumers by core demand deposit account (DDA) services through retail banking operations of consumer banks is getting lost in the currently fashionable cacophony of media bank bashing. As an industry we have been remiss in communicating just how good we are at serving the interest of individuals, businesses and even the government through provision of deposit services. Let's revisit what we should be talking about in addition to fee levels...
First and most visible is the service of efficient, convenient clearing of billions of day-to-day transactions, through conveniently located branches, ATMs, telephone call centers, debit card terminals, cheques, money orders, wire transfers, the internet - just about any way people communicate we facilitate the exchange of value. This service is what freed us from the medieval chains of the barter system, enabling efficient local, regional and international exchange of goods and services. Without retail clearing operations our economy would collapse completely and utterly. Yet when you ask the proverbial "(wo)man on the street" how the cheque they used to buy jewelry in Tokyo got back to the envelope their bank statement (or e-statement) arrived in at the end of the month do you think they know ? The answer is no: people generally have no clue how complex and fantastically efficient clearing operations are. We give this service at nominal cost to millions, and they don't even know what we are doing for them ! The time has come to get this message out there... the value proposition is absolutely fabulous: as an industry we desperately need to improve awareness of it.
The second service we deliver through DDA is a secure haven for safekeeping of the earnings and savings of millions of individuals, with complete recordkeeping services and guaranteed fidelity of custody. In no other situation can you warehouse your assets at such nominal cost. Yet this service is not valued highly by most consumers (or businesses or governments). Without secure repositories for cash every individual in our society would be at far more at risk day and night of being robbed or even killed for the money they are now able to safely store in banks. This service is essential to maintaining law, order and property rights of individuals that are fundamental to society…yet no-one even seems to notice we do it.
The third service embedded in the DDA business is, of course, intermediation between depositors and creditors. Demand deposits are the backbone of the funding base for credit cards, lines of credit and similar loans that are essential to modern living for the vast majority of consumers. Without consumer credit the availability of goods and services to most consumers would be severely reduced. The consumer-driven economy we live in simply could not function.
Despite the extraordinary – in fact unique - value that the retail banking industry delivers every day to every participant in the economy bankers are under siege for the pricing of DDA services today. Consumer resentment over fees for processing NSF cheques and the potential elimination of free checking in the US has become the stuff of politics. In reality the retail banking industry has been undervaluing these essential services for decades, and any of the three value propositions outlined above should easily justify charges sufficient to make these services profitable to banks. The time has come to embrace public enquiry, present the real business case for DDA services to consumers and charge what they are worth.


Customer value and management strategy

Too often we see articles and blogs claiming expertise in customer value and customer profitability management that are regurgitating lessons learned at business school instead of in the trenches of business. Simple two-by-two martices that show "how you should use customer value to manage customers" are only illustrations - we fear for those who take them as strategies.

Why ? Because these "strategies" are one-size-fits-all ideas that frankly are too naive to be a basis for proper customer management strategy. There is a vast amount of judgement and nuance implicit in the calculation of cusomter value, and these judgements that go into making calculations of customer value have a direct impact on how the results can be properly used. For example if one is using current value to rank customers in a matrix this does not reflect lifetime customer value. Similarly if actual pricing is used in the modeling of value strategic and tactical discounting may afect customer ranking in unintended ways. As a practical illustration it is not uncommon for banks to price term deposits at negative margins in times of tight money - this can drive an investment customer value into negative position quickly - does this reflect properly the customer management objectives for these clients or is the boiler-plate strategy defective ?

Also the infamous strategy matrices fail to consider mission critical dimensions of information such as corporate strategy, product strategy and delivery channel strategy. For example loss leaders in product lines and market entry discounting in channels is common strategic management activity. These dimensions of information are normally not considered in the preparation fo customer value data, are not reflected in the values calculated and will misallocate resources if simple strategy matrix formulae are applied.

The long and the short of it is that there is no substitute for professional judgement in both the preparation and interpretation of customer value metrics and strategy. Beware of the academic "truths" being promoted in business schools today - they are not sufficiently context-sensitive to apply to a real business !

- David B. McNab

Unprofitable Customers: Naughty or Nice ?

Customer value helps identify the top tier customers we need to focus retention activity on, but what of the other 80% of customers who generate nominal or even negative contribution? Are they naughty or are they nice to have in your portfolio?

This question has been troubling strategists and marketers since customer profitability measurement first became viable in the early 1990s. And with good reason: depending on what you are measuring and what your goals are customer value can suggest very different actions. It is imperative to measure customer values using a model appropriate to the decisions you want to make. More often than not you will discover that a variety of measurement models are needed to support different kinds of decisions. (See CMA article How should we measure customer profitability). Even if you’ve got the models you need, however, it is inevitable that 60% of your clients are going to be somewhere in the middle and 20% at each of the top and tail of your list.

Let’s consider the bottom 20%. Are they “bad” customers that we should de-market? Are they “abusers” of our services? Customers in the bottom quintile of value rarely have an “average” customer profile. In this tier you will find customers with a wide variety of business relationships with your bank, most of them fairly substantial in terms of balances and activity. If you dig deep enough into the numbers, you are likely to find pricing at the root of their negative value. Some will have their value depressed by shrewd negotiation of rates and fees, others by strategic discounting and others still by irrational market pricing conditions.

Negotiated discounts in fees and rates certainly need to be taken into account when assessing customer value. But pricing anomalies driven by market conditions or strategic discounting have little to do with the customer, and should not be included in customer value. The extreme case of this is when the market prices entire business lines at negative spreads, which happens from time to time in periods of crisis. Whole segments of customer values can turn from gold to brass in a matter of months when this happens.

Obviously one cannot switch customer relationship strategies with these shifting winds of chance. You need to look past the numbers to manage customer strategy effectively. Clearly we need to reprice relationships where excessive discounting is negotiated. It is equally clear we should not penalize customers for aberrations in market or strategic conditions. There is no substitute for wisdom and understanding when working with customer value !

Best holiday wishes to all.
David McNab

Current value, historical value, present value, lifetime value....

One of the more interesting aspects of customer value measurement - the precedent to customer value management - is that it can have so many different temporal definitions. There is a vast difference between each of these terms:
  • customer current value
  • customer historical value
  • customer present value
  • customer lifetime value
 and even within those terms there are variants in meaning. For example current value may mean last week | month | year or it may mean the value of the customer's current business over the next week | month | year.

Getting basic definitions right is crucial to successful acceptance of your customer value measurement techniques. Each of the value metrics identified above has validity - there is no one right answer or single version of the truth that everyone seeks. The reality of customer value measurement is that the techniques and policies used to define the metric must be tailored to the decisions that are to be based on this information.

For pricing decisions one set of definitions might be ideal, while for customer retention strategy another might be more applicable. You need to get the relationship between definitions and decisions right if you want to encourage the right behaviour...and that is what it is really all about.

- David McNab

The illogical logic of credit card rates

We have been hearing a lot of talk in Washington and Main Street about how credit card issuers are managing risk and rates lately, so I thought it would be a good idea to offer up a quick analysis of the so-called rationale that supports raising rates on deteriorating-credit clients.

The pricing mantra goes like this...
the expected credit losses on the portfolio is rising so we need more revenue to pay for those losses. And we raise the rates more on people with the worst credit scores because they are the most likely to go under.
Well, this is not very sensible, folks. There are several problems with this way of thinking.
First and foremost the issuing card company (that is, issuing the credit i.e. making the credit card loan) is supposed to be in the business of adjudicating credit and taking managed amounts of risk. When they oversell by issueing cards to people who are bad risks the issuing bank/ card company is supposed to take a hit - it's their fault for making the bad loans i.e. failing to adjudicate credit responsibly. It is not the responsibility of the vast majority of credit card holders to "make it up" for them through higher rates. Allowing credit losses to be built into the portfolio rate base promotes bad credit card sales and shifts the burden of credit adjudication cost to cardholders which is patently unfair.

Second, raising rates on the least-capable-to-pay customers is also inappropriate. The right thing to do - for both the card company and the customer - is to limit and reduce the amount of credit available, not raise the rate. Deteriorating credit status that occurs after after a loan is made (credit authorized / limit granted) is something that was supposed to be assessed and factored into the cost of credit before credit is granted to the customer. The risk of deterioration in credit quality should be taken as a pooled risk at the time the card is issued, not after-the-fact. And even then, does it make sense to push the customer with the worst risks into bankruptcy faster by raising rates ? The answer is clearly NO. Individual credit risks need to be assessed and predicted and factored into credit underwriting before lending to people, not afterwards. It doesn't even make any sense from a collections perspective, because the high risk=high rate paradigm makes credit quality worse, increasing lending losses. Reducing the available credit amount is the only sensible way to work out a deteriorating risk situation.

And on another note, has anyone noticed that merchants are getting whacked with horrible charges to pay for excessive "loyalty" programs ? My local restaurant gets charged one rate for Amex, another for regular cards and a different rate for premium cards. To him it is all the same - payment for a sanwich and a cup of coffee - but the interchange he gets charged differentiates between cards. So my local restaurant is paying for the bells and whistles on their customers' cards. That isn't fair either. So I don't use a card with my local vendors, I want them to prosper - I pay them cash and that is only fair to them.

Rationing resources

One of the best ways to ration resources is to limit the effort applied in unproductive activity. Learning the differences between customers in terms of their contribution to value is even more of an imperative in difficult economic times than normally. Check out the latest blog entries below for insights that can save you some real money - and reduce customer frustration - at the same time... IF your firm has the will to cut back on irrelevant and unproductive communications.

- David B. McNab

Dave McNab's BAI Blog

Management consulting insights from Objective Business Services Inc.