A recent Credit Union Times article reminds us that, for better or worse, the primary products and services that financial institutions (both banks and credit unions) offer are commodities. In a way, that makes the business of attracting new consumers the business of providing value adds. The trick is providing value adds that go both ways: benefitting the consumer while driving revenue. It’s not as tricky as it sounds.
As one example, the article references a white paper authored by BancVue’s Greg Wempe. It finds that reward checking accounts, a clear monetary benefit for the consumer, are a prime example of the win-win value add. At first glance, they appear to have a high cost of funds (an average 0.79% COF to be exact). But closer inspection reveals these accounts actually generate a more than 2% profit margin. Before being deployed for loans or investments.
How? These accounts incentivize account holders to do simple, time-saving activities that drive interchange revenue while reducing operating expenses. This isn't chump change either. Analytics from several hundred institutions illuminate a 45% lift in non-interest income and a 69% decrease in overall statement expense. And since there’s no penalty fee assessed for not qualifying, there is no reputation risk for your institution from angry consumers.
The chart below shows exactly how much profit this “value add” can generate. It compares traditional free checking to Kasasa Cash®, a nationally branded reward checking account carried at 200 community financial institutions (and counting) nationwide.
Interestingly, the profit margin for Kasasa Cash accounts (2.04%) is significantly higher than the profit margin for non-Kasasa branded reward accounts measured from well over 400 community institutions offering a non-Kasasa version (0.83%).
Some of the science behind these impactful numbers can be found here: “What’s In A Brand Name? New Study Reveals Truth.”
The CU Times article also touches on shifts in thinking about lending decisions that could potentially drive more revenue. These however are dependent upon a community financial institution’s demographics, consumer base, and appetite for risk. But no matter your level of risk aversion, turning a commodity account into a highly profitable, relatively risk-free revenue stream will always be in your favor. And for the icing on the cake: consumers will love you for offering it.
For more data, detail, and insights, download Wempe’s full white paper, “Finding The Silver Bullet For Margin Compression,” for free.