Bank Deposit Services: Undervalued + Misunderstood = Mistake

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.


-DBM

Bank Deposit Services: Undervalued + Misunderstood = Mistake

Understanding customer behaviour: the transition from memory to knowledge

There are essentially three ways a bank can use customer behavioural information to better manage customer relationships.

The first is to develop a corporate memory and understanding of who each customer is, based on historical information. Databases of historical service and account data organized by customer identity provide a basis for analyzing customer value (profitability), channel preferences product affinities, geographic and demographic data all of which are useful for segmenting customers and developing customer management strategy. Using historical customer information capably is table stakes in today’s relationship managed banks.

The second way to leverage customer behaviour data has a more responsive orientation. It involves parsing through transactions and service contact data in near-real time to know what customers are doing. Analyses can be automated to identify exceptions that prompt an intervention by sales and service staff. Ideally, identification of exceptional customer activity enables timely responsive customer interaction. There is certainly value in responsive behavioural analytics provided the process can work quickly and accurately enough to provide leads to sales and service staff that are credible, timely and relevant. False leads delivered to the front lines can foment resistance in the field quickly stalling responsive programs with inadequate business rules.

The third way to leverage customer data is more proactive. Models are developed to predict what customers are likely to do and allocate resources using this knowledge. Most banks already use predictive credit scores to adjudicate loans and to evaluate likelihood of default for credit loss provisioning. Similar predictive scores can be developed to identify customers at risk and those most likely to accept an offer. Predicting behaviour enables proactive customer management programs to be developed for acquisition, cross-selling and retention. If you can predict what customers are going to do, you can improve sales and service performance. The keys to program effectiveness are precision in scoring coupled with effective customer engagement by sales and service staff.

In all three cases what matters most of all is relevance. There is no point in identifying or predicting something that does not matter with a high degree of precision. Or worse, identifying / predicting the wrong thing.
Unfortunately this is exactly what happens a lot of the time in bank customer intelligence analytics. Models are created that identify “significant deposits” or predict “probability of account closure”, for example. Neither of these things is the right target behaviour of interest. Significant deposits may or may not reflect a significant source of new money to the bank. Similarly account closure may not bear any relation to the withdrawal of funds from an account.

We need to remember that the retail banking business is about flow of funds, and managing their cash flow is what customers do in real life. We need to understand the types of cash flow behaviours from a customer perspective rather than a transactional or data driven perspective. Focusing on what customers do with their money and the patterns of these behaviours offers a sharper and more effective basis for understanding historical behaviour, predicting future behaviour and reacting to current activity. The essential thing is to know what customer behaviour really is, then measure it, then model it.

- David McNab

Understanding customer behaviour: the transition from memory to knowledge