The End of the Basic Checking Product Suite

The future bank account needs to go beyond simply enabling purchases. It needs to work on the basis of context; informing a customer of their balance, how well they are managing their cash and whether they can afford a desired purchase. More than a transaction account, this new account platform stimulates engagement.

In May of 1728, the Edinburgh-based merchant William Hogg, discovered that his growing business had some problems financially. Hogg was a diligent merchant, which meant that he would always pay his suppliers as they delivered product and stock to his stores and warehouse, but his customers were not as diligent and he’d often had to chase them to settle their accounts. This meant that his account would regularly drop to zero, leading to the business growth potentially stalling or on occasion some collection letters, and operational issues.

Hogg approached the Royal Bank of Scotland in an effort to find a solution that would allow his business to keep growing, and after many hours of intensive debate, RBS came up with an idea: What if the bank would allow him to go into the red for a few days, so Hogg could pay his creditors? After all, historical activity showed his account would soon be back in the black. Hence, the overdraft was born!

If you were to track the basic path a new company or new retail banking account holder might take in navigating a banking relationship, a modern financial institution would probably put overdraft protection right up there as one of the basic ‘engagement’ products offered fairly early to a stable customer. In fact, the optimal path for a newly acquired retail banking customer would ideally be something like this over the early years of the bank relationship:

  1. Basic Checking or Current Account, with a Savings Account
  2. Overdraft Protection
  3. Credit Card (basic limit)
  4. High-Yield Savings such as Term Deposit or CD

As the relationship became more established, maybe a Personal Loan or even a Mortgage would hopefully come next.

Later, the opportunity would present itself for investment products, insurance, and additional cross-sell or up-sell moments.

All of this is about to change…

Read More: From Passbook to Mobile: The Evolution Of The Bank Account )

Basic Checking is Unprofitable Despite Record Spreads

In 2014, spreads on basic bank accounts are about as high as they have ever been. Remember the old adage the 3-6-3 rule of banking? That used to represent that a banker took money on deposit at 3%, lent it back out to the market at 6% and made 3% margin on spread … or if you prefer the humorous version … the saying ends with the banker being on the Golf Course by 3 O’clock in the afternoon.

Today, basic banking interest rates in the US and UK are hovering around 0-1%, with credit card APRs still as high as 13-16% in the US. In the UK, the interest rate spread is even wider, with the top some credit card rates reaching well over 20% .

However, despite these record spreads, the core bank account today remains a loss leader or a loss maker for many, if not most retail banks. In the U.S., this translates to 40 -60 % of all basic checking accounts being unprofitable (according to various surveys and studies).

JP Morgan Chase went one step further, claiming that 70% of customers with less than $100,000 in deposits and investments are likely to remain unprofitable in the medium term. In the UK, the situation is comparable, with Brian Hartzer, the CEO of RBS’ UK Retail and Wealth Management business, articulating to the House of Commons in 2013:

“At the moment, as interest rates have fallen, what has happened is that the profitability of deposits has become probably break-even at best and in some cases a loss, and the margins on mortgages and some loan products are wider, so in a sense are contributing to a larger portion of our profitability.”
Brian Hartzer – CEO UK Retail and Wealth Management, RBS

This could be attributed to any number of facts, but the reality is that offering a basic checking account is actually expensive for a bank based on what little revenue these accounts achieve. The conventional wisdom has been that even though these accounts are loss leaders, or break-even at best, the cross-sell and up-sell opportunities for credit, mortgages, high yield deposit accounts, etc. make generating a basic banking account worthwhile.

Yet, despite this potential, the reality is that the metrics on cross-sell and up-sell for basic retail bank accounts has not shown results that warrant confidence in this model, or the assumption that it generates lots of additional revenue opportunities.

“Ten years ago the average cross-sell ratio in U.S. retail branches was 2.2 products per household. Today, after years of investments in sales training and incentive programs, the average cross-sell ratio in US retail branches is… 2.2 products per household! Yes, you read that correctly: 10 years of sales management programs, zero change in the depth of the relationships we’re establishing. Across the industry, half of all relationships still include only a single product.”
– Bancology Quarterly Report September 2011

While the date of this quote is 2011, the reality of cross-sell ineffectiveness, for most institutions, has been the same for decades and it hasn’t changed. In other words, the model of the basic bank account is pretty much, fundamentally broken.

The cost of acquisition and cost of distribution are two of the major issues here. But, just as critical is the ability to generate revenue from a basic checking or current account relationship. That is where the current model is most in need of a reboot.

Read More: Are Bankers Ready For The Bank 3.0 Reality? )

The Smartphone Represents Entirely New Revenue Opportunities

“Apple will sell a few to its fans, but the iPhone won’t make a long-term mark on the industry…”
Jan 14, 2007 – Bloomberg News

When the smartphone appeared, the industry didn’t really know what all the fuss was about.

But when we had gotten over all that skepticism, the financial services industry thought that the smartphone was about two core opportunities – putting Internet banking on a smaller screen and putting a debit card in a mobile wallet.

We were wrong!

Despite Bloomberg’s lukewarm reception, the smartphone was always going to be a game changer. But, the nature of the shift in consumer behavior took some time to become apparent. We didn’t anticipate significant shifts in behavior around sharing, video content production and consumption, and phenomenons like the #selfie. These were new behaviors, built on a device that you carried with you.

Unlike a plastic card, or a computer running a browser with Internet banking access, the smartphone has the ability to provide context, information, advice or a solution in real-time as the opportunity presents itself. This is at the core of what the bank account will become on top of the smartphone platform.

Brett King Visual

The future bank account needs to go beyond simply enabling you to purchase something. It needs to work on the basis of context; informing you not only what your balance is, but how fast you are spending and whether you can afford to buy that new iPad or Flat Screen TV. More than just a platform for day-to-day money management, this new account platform becomes more about stimulating engagement.

Today, if a bank wants to stimulate engagement, it can only do this via loyalty programs, rewards, a small interest rate differential or potentially convenience (although in a smartphone world, the app is most convenient). In theory, a smart bank account that was being used 3, 4 or even 5 times a day wouldn’t need to use incentives or advertising to stimulate cross-sell, up-sell and loyalty – the app would simply be there whenever you needed it to solve your problems.

This is why Revenue Moments generated from a smart bank account as an app platform are far superior to the concept of product up-sell or cross-sell from a base of a checking or current account. They are responses, in real-time, to a customer’s needs from the bank as a platform. At that point, introducing the branch, or introducing an additional product, is purely introducing either the friction of the process, or trying to fit a product to a need.

Revenue moments, based on an engaged customer using a money management tool daily, changes the provision of banking into a service proposition, rather than trying to up-sell a product. Because this happens in real-time, the features we used to ascribe to a product are now delivered as a solution to a problem, and thus are much better suited to attach a price or fee for service.

Revenue moments shift the cost of the product not to marketing, advertising, incentive or sales programs, but to understanding customer behavior and engaging the customer. However, these costs are nominal compared with the costs we’ve carried previously in the traditional distribution and marketing of the core retail banking relationship. The real benefit is that revenue is delivered much more efficiently, and is based on a premise where you don’t need to incent customers to buy – you just need to solve their problem.

About Brett King’s Newest Book

“In the next 10 years, we’ll see more disruption and changes to the banking and financial industry than we’ve seen in the preceding 100 years”—Brett King

Breaking Banks: The Innovators, Rogues, and Strategists Rebooting Banking is a unique collection of interviews take from across the global Financial Services Technology (or FinTech) domain detailing the stories, case studies, start-ups, and emerging trends that will define this disruption.

  • Features the author’s catalogued interviews with experts across the globe, focusing on the disruptive technologies, platforms and behaviors that are threating the traditional industry approach to banking and financial services
  • Topics of interest covered include Bitcoin’s disruptive attack on currencies, P2P Lending, Social Media, the Neo-Banks reinventing the basic day-to-day checking account, global solutions for the unbanked and underbanked, through to changing consumer behavior

Breaking Banks is the only record of its kind detailing the massive and dramatic shift occurring in the financial services space today and is available on Amazon.com.

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