Time for a new chassis...

Published on Nov 19, 2015

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Time for a new chassis...

in retail banking

Typical Account Structure

  • The checking account is really a long term service contract - NOT a product
  • The retail banking approach is a multi-tier profit model
  • Core product is a standardized service that is your competitive firewall
  • The base layer cannot be undercut via cost for solid feature set
  • In retail banking, the checking service is the 'firewall' 
Typical Current Account Structure: Multi-tier profit model*
1. Core product is a standardized service (but high quality and efficiently produced) Tiered structure results from a low-end competitive base layer product through to a ‘Rolls-Royce’ set of products and services.
2. The checking account service is the lifeblood of a retail bank; most profitable product sales 'up the pyramid' come from that base.
3. Works best if the core product cannot be undercut by a low cost competitor. In banking, that has become free checking. Even though bankers talk about the difference in checking accounts, most consumers wouldn't be able to differentiate.

* In The Art of Profitability' by Adrian Slywotzky, he calls this the 'Pyramid Profit Model'. This is slightly different but similar in concept.

The 80/20 Rule in Retail Banking

However, profit dynamics in the base product are not uniform.

The lowest decile was profitable due to a lot of 'bad' fees. The highest decile was profitable due to large deposit balances or a significant lending relationship. (up to $700 per account profitability)

The 80% of accounts in the middle lost $60 per year on average.

The crux: The current checking account chassis with free access, checks, and float is too expensive for a large portion of consumers. Mass-market retail banks will need to ‘lower the base layer’ to compete more effectively.

Add a base layer

  • Current base product costs to much for revenue realities
  • Drop the base of the pyramid down a notch and broaden it
  • Cut $60 per year out of the cost structure
  • New  account breaks even and opens up to a whole new customer base
  • Ensure you have an easy upgrade path with real points of value.
How should banks do this? Adjust the account structure to go after big sources of cost in a checking account and make the mass middle accounts break even or have smaller losses per account. The current state adds extra pressure to management to continue to move up market where all the national banks are competing. Once a bank stops the bleeding on a large percentage of accounts, the institution has a much more solid competitive position and opens up a whole new customer base.

Photo by Mark Fischer

Points of Cost

  • Fraud ($15): Shift to a prepaid model
  • Physical distribution ($15): Digital first and only
  • Checks ($5): Consumer pays for the convenience
  • Statements ($15): Paper statements are costly
  • Opening and fulfillment ($10): Digital first 
A new product would need to change the paradigm on the the biggest cost drivers. Ultimately it saves about $60 per account per year:
• Fraud ($15)- shift to a prepaid model
• Physical distribution ($15) – digital first, downloadable
• Checks ($5)– still necessary but a consumer will pay for the convenience
• Statements ($15)– Paper statements are costly: why bother?
• Opening and fulfillment costs ($25-$50 amortized over 3 years) – digital first
• Brick and mortar acquisition costs –($ ?) a truly convenient product, sticky payment solutions, social media, and a better UI will reverse the traditional marketing funnel

Additionally, the industry has a platform and a mislabeled, misunderstood product (prepaid) as an opportunity

The Account

is now a phone and a debit card.....
The new core offering is basically prepaid plus a phone without the punitive fees.......but don't use the word prepaid.

Its a loaded term because the history of prepaid is full of load fees and inactivity fees....for no reason. DDA - lite doesn't work because that, too, carries with it a specific definition.

Consumers are happy to pay fees where they get real value - especially convenience. Foreign ATM usage, pre-authorized paper check issuing, and a small monthly fee are places where fees could be charged. However, the mentality should not be trying to make money on the service but rather to recover costs to make the service break even and build an base ecosystem. Amex Bluebird is a good example of this. It is not clear why they need to crowd the field with Amex Serve.

Photo by kenteegardin

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Drew Wolff

Haiku Deck Pro User