Core Depostit Retention: Transparency and Accountability Via Flow of Funds

By McNab, David B. | Journal of Performance Management, May 1, 2007 | Go to article overview

Core Depostit Retention: Transparency and Accountability Via Flow of Funds


McNab, David B., Journal of Performance Management


Portfolio growth is the single most important revenue driver in our industry, yet achieving transparency of performance metrics and accountability for portfolio management has always been elusive. We believe that a sea-change is about to occur, as banks adopt flow of funds metrics as a basis for understanding and managing sales, retention, products, branches and customers. In this article we examine just one aspect of portfolio performance measurement - deposit retention -as an example of the potential of these new metrics for improving transparency and accountability of portfolio results.

We will first review the strengths and weaknesses of the common approaches to measuring deposit retention to provide a backdrop and perspective for our case. You might want to use this review to assess how comfortable you are with your bank's present approach. We will then discuss using flow of funds as retention metrics, and show how this can provide you with entirely new insights into the performance of your branches, products and customer segments.

Core Deposit Retention

Portfolio growth is a primarily a function of acquiring and retaining business. We spend millions managing the "front door" sales and marketing efforts within our banks, but always seem to pay less attention to the "back door" where business slips quietly out of our book.

This isn't because we don't think it matters. On the contrary the industry average defection rate for deposits is believed to be around 15% in the USA every year. Deposit defection typically erodes more than 90% of the good that results from all our sales and marketing efforts every year. So why don't we do more about it?

The problem, we assert, is not that we have been unaware of the business issue but that we have been unable to get a solid handle on measuring and understanding it. What we don't measure we don't manage, and this is as true in banking as any industry. The bottom line is that we have a big transparency and accountability weakness in our basic performance stats.

So why is measuring deposit retention so difficult? The problem is rooted in the fact that deposit account products are to some extent substitutes for one another. Money can be transformed from one product to another relatively freely by any customer, and when they do "switch" money around, our banking systems have no way of tracking these flows. Let's look more closely at what we do in many banks today.

Metric 1: Net Portfolio Change

That we measure portfolio change is pretty obvious but nonetheless important. When we report to our shareholders there is inevitably discussion in the MD&A about how this product went up and that product went down over the course of the quarter / month or whatever. Everyone does this and that's fine, it does give some indication of whether we are winning or losing overall.

Unfortunately this approach to portfolio analysis reveals nothing of cause, symptom or effect of management action. If we want to achieve accountability for portfolio growth we need the flows in and out of each portfolio to be transparent, and to do that we need to better metrics than net portfolio change.

Metric 2: Lost Households

With the advent of customer databases and MCIF systems, many banks have adopted customer-centric metrics, looking at lost households as a basis for monitoring and managing retention performance. While it is true that lost households really do represent lost business to your bank and a serious form of it, lost households account for only a small fraction of lost business volume - about 15% of core deposit balance defection.

The lost household metric fails to take into account what is going on with ongoing customers - the vast majority who remain with the bank from period to period. These ongoing customers close accounts and reduce balances in ongoing accounts, accounting for 85% of deposit defection. Household analysis cannot explain the change we see in our portfolios and cannot be reconciled to your financial reports because they are incomplete. …

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