Understanding the Profitability of Accountholders
The pandemic and its accompanying economic slowdown have compressed margins at banks and credit unions, putting pressure on earnings. To mitigate this impact, consider understanding how your accountholders contribute to the bottom line. Are they bringing the necessary value as consumers of your products and services?
Some financial institution executives might be surprised to learn that fewer than half of their accountholders are profitable. In fact, that number is much less than half, according to Raddon Performance Analytics data, which measures the member data at more than 300 credit unions. On average, only 29.8 percent of credit union members are profitable, down from 33.9 percent two years ago. There are many contributing factors to this downward trend: increased operating expenses, decreased NSF/courtesy pay income, increased deposits and decreased loan volumes.
It’s an important time to understand what makes an accountholder profitable and how to derive more profit from the increasing group of unprofitable accountholders.
The biggest driver of profitability is relationship, both by number of products and by balance. The more products accountholders use, the more profitable they are. But the products must be active and carry a balance – the larger, the better. For example, if an accountholder opens a checking and credit card account but doesn’t use either one, the result is usually a very unprofitable accountholder. Inactive accounts are costly to institutions.
At Raddon, we break down levels of profitability into five groups.
Households are assigned to groups A through E based on their annual net income contribution to the institution. A’s are your institution’s most profitable households, with annualized profit per household at $500 or more per year. The average profitability of these households is $2,101, and that small group of accountholders contributes 360.4 percent of profit to the average institution.
When we look at the average products for an A household, it is 2.95, whereas the average products for a D household is the lowest at 1.43. E households use an average of 2.24 products.
D households also have the lowest balances. This is usually where the single-product accountholders stop in for a visit and tend to overstay their welcome. You have a choice: You can ask them politely to leave, or you can ask them to participate more fully in the institution if they’d like to stay.
Accountholders in the most unprofitable group, or E households, could be there for many different reasons. It could be an issue of pricing (such as, they received a high rate on a CD) but usually accountholders are in that category because they carry very low balances in the few products they have.
The Credit Union Dilemma
Sometimes in the credit union industry, executives are not comfortable talking about the profitability of their members. This must change in order to prosper and grow. Credit unions need to be more comfortable from top to bottom and across departments, including talking about profitability and understanding who their most prosperous members are.
They also need to be more comfortable asking members for the business. I recently worked with a credit union whose marketing executive said they pay close attention to how their employees are cross-selling to members, but they never want to use the “s” word and even had me delete the word “sales” from every page of the presentation. This culture runs rampant in the credit union industry, and if credit unions want to grow, they need to get more comfortable with selling.
Your members are flocking to the big banks daily. In fact, Raddon Research Insights data tells us that for Gen X and millennials, those who said a big bank is their primary financial institution increased from 38 and 47 percent to 52 and 68 percent in between the years 2018 and 2020. Big banks are not afraid to ask your members for the business, so you shouldn’t be either. Focus on relationship-building with your current members because adding one new member could cost anywhere from $200 to $1,200.
Although you will never get to a place where 100 percent of your accountholders are profitable, you can begin to increase your earnings by understanding who your most profitable and unprofitable accountholders are, and then develop a strategy to continually engage those who have the largest opportunity for improvement. You don’t have to use the dreaded “s” word, but in order to develop a culture that comprehends accountholder profitability, you may need to embrace the idea of “sell” being more than a four-letter word.