Ask 100 bankers, “Is retail checking profitable?” and you’ll likely get nearly 100 answers.

StrategyCorps tracks over six million retail checking accounts with over 600 million data points – primarily from customers at community and small regional financial institutions – to get our answer to this question. Our analysis is based on householded revenue that includes relationship loans and deposits associated with the checking account holder(s).

Here are some of our economic reality-based findings:

  • Thirty-five percent (35%) of checking accounts’ householded relationships (we call them the Small and Low segments) generate less than $350 per year in revenue, which is conservatively what it costs a financial institution to manage and maintain that relationship. In other words, these accounts represent a “drag on earnings” due to their inherent lack of profitability. And in most cases, these accounts have their primary banking relationship at another financial institution.

  • These 35% of total accounts represent less than 2% of all the relationship dollars (deposits other than DDA balances and loans) associated with the retail checking portfolio and generate only about 3.25% of revenue. Therefore, acquiring new accounts that chronically fall into these Small and Low segments with this level of financial productivity is a false economy – getting more new accounts of this type is not more; fewer new accounts of this type is actually more.

  • Some of the characteristics of these Small and Low segments include:
    • Average checking balance of $936
    • Average total relationships (including checking balance) of $1,500
    • Average annual revenue of total relationship of $112
    • 61% have debit cards and use 8.8 times per month (13.6 is overall average)
    • 28% have online banking
  • Sixty five percent (65%) of checking accounts generate over $350 per year in revenue. Ten percent (10%) of total checking accounts produce at least $5,000 of revenue annually (we call this segment Super).

  • Some of the characteristics of the Super segment include:
    • Average checking balance of $25,914
    • Average total relationships (including checking balance) of $180,129
    • Average annual relationship of total relationship of $6,534
    • 46% have debit cards and use it 9.4 times per month (13.6 is overall average)
    • 29% have online banking
  • For all checking accounts, commonly used comparative metrics are:
    • Average account balance of $5,890
    • Average total relationship (all deposits and loans) of $28,305
    • Average annual NSF/OD fees of $74
    • Average monthly service charges (or maintenance fees) of $.63
    • Average monthly debit swipes of 13.6
    • Average account holder age of 50.2 with 52% of accounts having the primary account holder over 50 years old
  • Interest checking generates the most average annual revenue at $1,639, with 93% of this revenue from the net interest income of higher total relationship balances and 7% from fees.

  • The highest revenue-generating non-interest bearing account is a value-added benefits account (sometimes referred to as a club account) at $1,123, with 18% of revenue ($198) represented by fee income.

  • Free checking is the second to last revenue-producing account type (student is last, excluding second-chance checking) with average annual revenue of $870.

From these results, here are five practical takeaways that every institution should act upon to make sure that the financial productivity of its retail checking portfolio is optimized:

  1. The Small and Low segments making up 35% of accounts that are not generating at least $350 in revenue to be financially productive need a “fix-and grow” solution that increases their productivity. These segments represent the “curse of free checking,” as free checking is easily the most common account type of these segments (57%).

  2. The Super segment ($5,000+ in revenue) needs a “protect-and-grow” solution to further engage these customers, so they aren’t stolen away by competitors (who are aggressively pursuing these customers, especially the megabanks). This solution needs not only a first-class customer service component but also a best-in-class checking product component.

  3. Service charge income averaging $.63 per month is the result of these fees being “sold out” to get to the more lucrative NSF/OD fee stream, primarily via free checking. As NSF/OD fees have declined, checking product lineups need a modern service charge income pricing strategy to offset the continuing decline in NSF/OD fees.

  4. While debit card interchange revenue is a primary source of fee income, seeing material increases here has become more difficult as usage growth has slowed, downward market pressure on the debit interchange rate per transaction has grown and credit card rewards continue to trump nearly all debit card rewards. This is another reason to seek modernization of future fee income strategies.

  5. Consumers over the age of 55 aren’t any more financially productive than consumers under that age. Many bankers think the older demographic “has most of the money,” but the results don’t confirm this assumption. Segmentation for checking product and pricing strategies needs to be based on financial productivity rather than age demographics.

The answer to the question of retail checking profitability doesn’t have to be complicated, mysterious or even debatable. Smart institutions understand the value of undertaking a keenly insightful and objective analysis. Letting the numbers tell the story of the economic realities of retail checking performance is a winning game plan for formulating and implementing high-performing product and pricing decisions.

By Mike Branton

Originally published on Financial Managers Society

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the Financial Managers Society.