By Jan Trifts and Megan Cummins

In a recent Raddon Report article, Understanding the Profitability of Accountholders, we discussed how the pandemic and its accompanying economic slowdown have compressed margins at banks and credit unions, putting pressure on earnings. We stressed the importance of understanding what makes an accountholder profitable. In this report, learn how to identify and retain your most profitable retail accountholders, focusing on the top two performing groups – the A and B retail households.

Retail households are assigned to the A and B groups based on their annual net income contribution to the institution. A’s are your institution’s most profitable households, with annualized profit of $500 or more per year. B households have annualized profit between $100 to $499 per year.

So what’s driving the difference in profitability? How are the relationships different for the A and B households?

The chart above highlights the main differences between the A and B households. The A households are simply more engaged. The percentage of single-product users is much lower with the A households. Loan usage is higher, with real estate loans contributing to the higher balances and lower loan margins for the A households. Even though the loan margin is higher for the B households, the significantly higher balances of the A households drives the overall level of profitability. Balances have a major impact on household profitability.

A detailed comparison of product usage for the A and B households reveals more.

The chart above shows that not only do the most profitable households have multiple products, but it reveals how significantly the balance of those products drives profitability. Beyond savings, the most popular mix of products for profitable accountholders are checking, credit cards and autos.  One strategy is to focus on this mix of products and increase the penetration to accountholders in the lower profit tiers. Do your most profitable members or customers have the same product mix, or is it different? Focus first on the areas where the product and/or balance gap is the highest.

The Power of Balance

Now that we know the products driving the profitability of the A and B households, it's time to recognize and understand the power of balance. Real estate holdings are three times higher with A households versus B households, which contributes significantly to the higher household balances. However, the higher balances are not restricted to just real estate products. For the more than 300 institutions processing through Raddon Performance Analytics, when we look solely at average household combined deposit and loan balances, those in the top quartile have more than twice the balances as those in the bottom quartile.

As shown below, these balances have a significant impact on net income and efficiency. Those institutions with higher average balances can “spend more to make more” and are able to keep net income strong despite being in a low-rate environment with compressed margins.

Balance is the main driver of profitability. Although both A and B households are profitable, on average, A households are more than eight times as profitable as B households, carrying over 182 percent of the financial institution’s overall profit. This is a lot of responsibility for such a small group of households, and losing just a handful of these could cause a dramatic impact. Therefore, it's important to understand your accountholders in the lower-profit groups and develop strategies to make them more profitable.

A and B Strategies

Strategies regarding A households should focus on retainment. Develop a list of your top 100 most profitable households and thank them for the business. This could be a simple phone call by your CEO, a card in the mail, or you could send them a branded mask and hand sanitizer to help them be safe during the pandemic.

The strategies for B households should focus on cross-selling more products and services to increase profit and move them to an A household status. Start by finding B households with no checking or credit cards. These are the “stickiest” products; when consumers use them, they usually refer to that institution as their primary financial institution. Beyond those products, the most profitable and largest-balance products revolve around real estate. Since we know millennials have a high propensity for buying a home in the next year, find millennials between ages 25 and 40 with no mortgage and target them with a first-time mortgage product.  

After you’ve focused on the A’s and B’s, it’s time to shift to the accountholders who are in the not-so-profitable D and E categories. In our next blog, Characteristics of Your Most Unprofitable Households, find tips for engaging those accountholders.