According to Harte Hanks Financial Advisors Frank Noyes and David Funsten, roughly 2/3 of a bank’s marketing budget is acquisition oriented.  The problem is that 75% of new accounts are unprofitable and 20%-30% of these new accounts and balances leave after the first year. 

Banks, therefore, are spending too much chasing accounts that just add expense not profit.  The solution involves optimized targeting, better servicing, and more relevant and focused selling following the opening of a new account in order to improve both the service and value of the customer’s relationship. 

Noyes and Funsten made their comments during a February 8, 2007 Webcast entitled, “Strategies to Optimize Deposit and Loan Acquisition, Retention & Profitability,” hosted by OnsiteConference, Inc. a privately held research
marketing firm located in Tampa, Florida

The challenge to achieve profitability is compounded by a fundamental problem.  “According to U.S. Bank and First Manhattan Consulting, only 25% of new checking customers are approached for cross sell,” stated Funsten. 

Funsten explained that, “To optimize the opportunity and value of each prospect and customer, companies must understand and predict current and potential customer needs and behavior patterns.” The focus needs to not only be on acquiring new accounts, but also on a subsequent process of on-boarding and cross-selling.

Regarding acquisition, saturation mailing is losing effectiveness, Funsten observed.  According to Harte Hanks research, the banking industry in an attempt to acquire more deposits through new checking accounts, mailed 505 million acquisition pieces in 2004.  In 2005, 650 million checking account mailers were sent, a 28% increase. The volume increase another 7% in 2006 to 700 million.

But, according to Noyes and Funsten, the results didn’t really come in so the practice of mailing for new account acquisition will show flat growth in 2007.  Still, this means with 700 million pieces mailed to 110 million households that, on average, every household is getting mailed 6.3 times.  Funsten concludes that this resulting clutter is ultimately ineffective.

The reason for saturation mailing losing effectiveness is that competitors are trying to “one-up” each others offers.  “First consumers see the cooler as a gift incentive, but they don’t act because they’re waiting for the iPod offer,” Funsten stated.

Noyes cited a McKinsey Research Institute study that segmentation is the key to checking account acquisition profitability.  “There are really three general market segments, high checking balance, medium checking balance, and low checking balance, Noyes commented.  The related strategies for each segment include:

•         High checking balances: Bundle discounts on deposit and investment service. Provide financial planning.

•         Medium checking balances: Bundle discounts on transaction, credit and insurance services. Encourage use of remote channels (ATM, online banking).

•         Low checking balances: Free checking emphasis but impose fees on exceptions (NSF, excessive checking writing, etc.).

The mistake of most acquisition programs is that they focus only on promoting free checking.  The profitability, therefore, rests solely on NSF income, where, according to Funsten, just 5% of the accounts generate 80% of the fees.

Better acquisition programs use some sort of targeting to improve upon saturation mailing.  According to Funsten, “one is geographic which is the simplest.  Where is the most productive carrier route and then mail into that.” 

To improve upon carrier route information, Funsten observes that a second approach involves using, “different data that is attached to that carrier route and that’s where you get into the summarized credit data and the other kinds of summarized information.” 

The third type of targeting involves household specific data which adds demographic and behavior based data.  “What we advocate and what we see as being most productive is all three [approaches to targeting].  Ideally, you base your targeting and your segmentation using mass mailing tactics but [add] different types of household specific information…to really target,” he concludes.

Funsten refers to this level of targeting a “relationship acquisition” which he argues provides the greatest return on investment. 

Relationship acquisition involves:

•         Radius Targeting

•         Response Modeling

•         Deposit Propensity modeling

•         DDA Profitability

•         Relationship Profitability

“Here we not only consider the profitability of the checking account, but also the other products that are purchased within the on-boarding period, somewhere between 3 and 6 months.  So you create this relationship number, net present value, that you can rationalize and substantiate more aggressive offers to folks who essentially produce more profit for you, thereby not treating everybody the same.  You’ll want to just target those carrier routes with the highest net present value,” added Funsten.

Using net present value changes your targeting from just going after the highest responders to those prospect that can generate for you the highest value. What you eliminate from the mailings are those segments that have a very high response but very low profit.  What you add is a chance to attract those prospects that may have a low response but very high profit. 

“What we’ve seen in this kind of analysis is what happens in doing the numbers here is you rationalize and substantiate mailing more aggressive offers to folks such as the mass affluent or for that matter small businesses,” Funsten observes.  It helps justify sending different offers to various households.

Funsten argues that using net present value, you will end-up identifying two basic segments.  The first generates more fees, a low-end balance, but also low expenses.  The second segment generates more revenue through a combination of spread income and longer tenure. 

“Through these two basic groups you can start having different types of testing relative to product offer, channel mix, contact strategy, and to essentially optimize the MPV over the time.  What is inherent in this is you’re tracking a household over a long period of time as opposed to each campaign,” Funsten adds.