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

Dave McNab's BAI Blog

Management consulting insights from Objective Business Services Inc.