By John J. Coffey, C.P.A. and Gene Palm, www.profitres.com, originally published February 2002, ABA Bank Marketing

§         Using ACH data to profile your customers

§         Using ACH data to increase your bank’s profitability

In the next series of columns, we will be showcasing the work of advanced MCIF users and industry leaders who have successfully utilized profitability data within their fields of expertise.  This month we are featuring the work of Michael Uline, an expert in the integration of ACH data, MCIF and bank marketing technologies.

With the rapid growth in electronic banking, from ATM to Debit cards, from Internet to Automated Clearing House (ACH) transactions, banks more than ever have the opportunity to lock in customer loyalty while increasing profits – simply by focusing on increasing their customers’ use of electronic banking.

One of the strongest loyalty indicators in banking today is the ACH relationship.  In 2001, there were more than 6.9 billion ACH transactions, a 13% increase over the past year alone.  Customers routinely make use of your bank’s ACH service when they make electronic payments for utilities, cable, mortgages, etc. by pre-authorizing these payments or by making these payments through the use of their personal financial software.

Using ACH data to profile your customers

ACH data is an extremely rich source of transaction data.  With the combination of ACH data, MCIF data and demographic data, you can produce a more complete picture of your banking customer, allowing for the opportunity to cross-sell your banking services more effectively.  For example, you can identify customers with mortgages and home equity loans at other financial institutions, allowing for your bank to effectively market your lending products.  You can also determine which customers are on the Internet, but are not utilizing your online banking capabilities.  Additionally, you can identify which customers have relationships with other competing investment institutions.

Using ACH data to increase your bank’s profitability

The low-cost of ACH transactions allows you more flexibility in positioning your ACH customers in more profitable products, with less risk of losing the customer.  For example, if a customer is a single-service DDA customer with no ACH relationships, the risk that the customer will leave the bank as a result of a fee increase is great.  However, the DDA customer with an ACH relationship (and the perception that changing ACH transactions to another bank is difficult to accomplish) may be more willing to tolerate slight changes to pricing.

Case in point – after evaluating a major bank’s customer profitability profile, the following was determined.  Overall, retail customers with a DDA relationship had an average annual profit of $22.61.  When you segment these retail customers into two categories, retail customers without an ACH relationship and retail customers with an ACH relationship, the average annual profit was ($45.07) and $104.01 respectfully!  Further, the average deposit balances for the two groups were $3,663 and $4,695 respectfully.  In addition, the average number of years that retail ACH customers were with the bank was 27% longer than non-ACH retail customers.

More amazing were the results of the commercial sector.  Overall, businesses with a DDA relationship had an average annual profit of $403.13.  When you segment the commercial customers into two categories, businesses without an ACH relationship and businesses with an ACH relationship, the average annual profit was ($9.89) and $1,230 respectfully!  Further, the average deposit balances for the two groups were $21,730 and $29,494 respectfully.

Developing an "ACH – Profit Quadrant Matrix" will provide further insights into the relationship between profitable customers and their use of ACH transactions.  This bimodal matrix can be segmented into profitable and unprofitable customer quadrants as well as high number and low number ACH transaction quadrants.

For you to utilize ACH transaction data and take advantage of the opportunities it affords, you first need to use your MCIF to evaluate which customers are utilizing your ACH service and how they are using it.  For example, are your customers receiving only paychecks or are they making payments as well?  Secondly, develop an "ACH – Profit Quadrant Matrix" evaluating the profitability of the DDA customers that utilize ACH transactions.  Thirdly, analyze the opportunity for modifying the fee structures within the DDA products to enhance profitability while minimizing the impact to your ACH customer relationships.

By strategically utilizing your ACH data in this manner, the length of time that your customer stays with your bank increases and their profitability to your bank increases as well!

John J. Coffey, C.P.A. and Gene Palm are the principals of Profit Resources, a consulting company that specializes in MCIF technologies.  © Profit Resources, Inc. 2006