Be honest, if you are over 40, you have most likely been there. You are in a restaurant and have forgotten your reading glasses. Not being able to read the menu in dim light, but not wanting to give into age, you decide to play it cool and just point to what you want for dinner. It is a little awkward when the waiter says "Do you really want "A 17% gratuity will be added to parties of 8 or more"? Which you say (because you can't hear well either in a crowded restaurant) - "Yes, but please put the dressing on the side."
Growing old is no fun, however growing old at a bank should have its benefits. As money flows into DDA accounts from CDs, money market mutual funds and the stock market, one thing banks are faced with is how to manage liability duration. While the interest sensitivity is low now, astute bankers (and regulators) know that a 400bp shift up in rates will have a significant impact on a bank's asset/liability position. In other words, the new money that is flowing in to DDAs now, is serving to shorten deposit duration of one of the longest duration liabilities on the balance sheet. As such, banks are becoming more liability sensitive to upward rate movements.
To mitigate that risk, banks are finding ways to extend liability duration. Cross selling products is one way that we have discussed in this column in the past. Layering in remote deposit capture or a loan, extends both duration and convexity of the deposit base. In past columns, we have also discussed using goal oriented savings accounts that pay a bonus rate if a certain long term savings goal is reached. In similar fashion, we have also talked about business-oriented financing plans that is a combined savings account and loan product that allows businesses to save for the down payment of certain large ticket equipment purchases such as MRIs for doctors or additional fleet delivery vehicles.
Today, we highlight another idea in that banks should consider tying business package fees or attributes to the length of time they have been a customer of the bank. While there are a number of ways to do this, banks can reduce an elite business bundle fee from $100 per month to $75 per month, once the account gets past 3Ys. Alternatively, the bank could add attributes such as an unlimited number of wires past 2Ys and free remote deposit capture or electronic invoicing past 5Ys. Banks could build out a menu of items to 15Ys in order to aid in retention, but also dramatically increase the duration of deposits. In doing so, this single business account could potentially eclipse the value in almost every other account including business checking.
At the next new product committee, look at your average life of your customers and then design a customized schedule to incent them to continue to use your bank in the future. Brainstorm ideas of what product and services can be profitably bundled to increase usage of this type of account. Instead of giving away items for free, you are giving away items to a positively selected group of accounts that have said they want to be your customer for the long term. This not only creates future margin value, but also allows your bank to trade at a larger multiple to both book and earnings by increasing its core balances and quality.
With some banks throwing around $100 or $250 incentives to move business accounts, this structure would better protect and reward customers that don't mind growing old with you.