The Great Deposit Race: When Less Is More

Pruning Branches with Garden Shears

Pruning unproductive accounts seems radical. Is it?

Finding your least productive (and most costly) accounts is a key way to build primacy, grow deposits organically, and generate more non-interest income.

In fact, credit unions like yours have been doing this for more than two decades. Does it work? Yes! With surprisingly low risk, if done as part of a member-centric, flat-fee checking upgrade. In other words, by embracing the value-added checking you’ve seen here for years.

Editor’s note: Gregg Early originally wrote this article for our friends at StrategyCorps. It has been lightly edited to fit the Learning Library voice and content guidelines.

Costs & Risks of New vs. Existing Member Growth

House on Jenga Tiles

Deposit growth is the new black at credit unions. Yet the devil (wears Prada?) is in the details of how. Do you focus on new members? Or look to build revenue from existing account holders? Perhaps some combination of both?

Growing by attracting members is expensive. And while a strategy common to our industry right now, CD offerings, does increase assets, it also just results in parked cash. Many institutions are competing for dollars by raising CD rates, effectively “buying money”. When rates begin to fall, these become increasingly expensive to service.

Plus, the dollars didn’t even produce an engaged member. If they arrived looking for the highest rate, they’ll move their money somewhere else when it matures.

Long-term, this strategy narrows NIM (net interest margins), the opposite of your original goals! Growing total number of accounts won’t produce the results you want. The smart path to sustainable revenues and asset balance is through building primary relationships through primacy and organic growth.

Value-Added Checking: Risks and Rewards

One proven way to make this journey is with flat fee checking accounts. But not just a fee for the heck of it. These accounts adopt a subscription model, providing value-added benefits. Making such a change from free to fee should always be done with care. It includes the possibility of account consolidation and loss. Here’s what that means for your credit union and members.

On average, 34% of checking accounts at a community financial institution like yours are non-performing. That has a major effect on your overall performance, especially as new deposits are hard to find or expensive to attract (CDs are the anti-liquid asset for your members, and thus don’t contribute to their activity at your institution).

The annual cost of maintaining a checking account for the average credit union is $350. Take your total number of checking accounts, now a third of that. Multiply by $350. No matter your result, that’s a lot of money, time, and energy poured into non-productive accounts.

So what happens if you move one of those accounts into a flat fee value-added checking account? On average, 15% of them close (remember, they were inactive members already). If managed well, this is actually a net positive for all those who choose to remain. Based on StrategyCorps data collected over 20 years, for the remaining 85%:

  • Balances go up 23%
  • OD/NSF occurrences increase by 0.93 per year (there’s always opportunity to adjust your policies here to be more mission-focused)
  • Average monthly POS debit card swipes rise by 5.08 per month

StrategyCorps Subscription Model Client Story - Cover

Learn how one credit union made the change to subscription and the gains they saw following. Could you duplicate with your members? Get the data and honest insights needed in the Client Story.

Create More Primary Relationships

Many of your low relationship accounts are a loan payment away from no longer being a loan holder. When that loan is paid, they’re done. Despite having a share and perhaps a share draft (checking) account, they’re not using them. An idle account has only one way to go: Up!

By converting those members into a flat fee checking account, you earn the opportunity to build a deeper relationship with them. Right now, they hardly consider your institution. But when they learn about the change, you can empathetically communicate to help them adopt the credit union as their primary institution.

Checking accounts are the fundamental roots of financial relationships, and if you can provide significant value through them, this gives your institution a competitive edge compared to the more commonly-used options (mega-banks, regional banks, fintechs). Earn those primary relationships!

Accounts For Mutual Benefit

Face Ratings

A common objection we hear from credit union leadership is about the transitioning of accounts for low-relationship members. The practice makes sense when considered from the perspective of creating a mutually-beneficial experience. Currently, the member has effectively no relationship with the credit union. Thus, the credit union has no active relationship with them.

Upgrading them to a better account, which produces more value for all parties, is more financially productive (and mission-focused) than just increasing fees. For those you convert into a deeper relationship, it opens the door to growing consumer-friendly non-interest income, becoming their PFI, and addressing their other financial needs.

Less Risky, More Rewarding

Proactively pruning unproductive accounts may seem radical, but it’s simply replicating smart, data-driven strategies employed across the business world. Ask your outbound marketing team how they maintain your email prospect lists – best practices include regular pruning of unengaged recipients to maximize metrics.

Could your credit union see a small number of members close their accounts rather than enjoy the new offering? Yes, but they were costly to your institution and members in name only (minimal relationship). Watch expenses fall after they leave, and free up resources to dedicate to engaged members.

Will some unproductive account holders stay? Sure, but now you have a new non-interest income source, reducing the impact of their drag on earnings.

May the total number of accounts decrease? Possibly, for a short time. However, you have two things working in your favor:

  1. Stronger relationship with existing members, while generating greater revenues per account
  2. A more exciting checking account that can attract new members for all your services

Most importantly, you won’t need to narrow net interest margins (NIM) by attracting people in a way that fails to build any lasting relationship. Say goodbye to depending on the strategy of “best rate in town” (a game where “winning” means you’re also losing). Embrace and expand your existing relationships to win your own “great deposit race”.

Original author credit: Gregg Early is a financial writer and editor who’s worked as a journalist for American Banker, Bond Buyer, and others covering the SEC, MSRB, Supreme Court, and various Congressional finance committees. His expertise is fintech, emerging technologies, biotech, ESG, green tech, cryptocurrencies and derivatives. His work has been featured on CNBC, CNN, and Bloomberg, as well as in The New York Times, Washington Post, Wall Street Journal, and Businessweek.

Joe Winn - CU Geek

Blogger. Speaker. Futurist. Part-time Jedi.

Dedicated to helping your credit union, large or small, deliver mission-focused financial empowerment to your members. And make a positive impact on your community while you’re at it.