Quality vs. Quantity vs. Retail Banking

Banker and customer

By Ryan Harbry

The tension between quality versus quantity is age-old, affecting industries of all kinds, especially banking. 

Community banks and credit unions are intimately familiar with weighing quality versus quantity. Financial institutions have quite the split personality in this arena if we’re honest with ourselves. 

When it comes to lending practices, no stone will be unturned. Every back alley will be explored, while all red tape will be exhausted to ensure that loan quality falls within acceptable risk parameters. 

And rightly so. Not only can funding a bad loan be incredibly costly, but we have regulators we are accountable to and examinations we need to be in good standing with, so this type of rigor is more than warranted. 

Here’s where the so-called split personality comes into play. Banks and credit unions are laboring over loan quality, but when it comes to the acquisition of new checking customers, we are basically in the market for warm bodies with little more than a pulse — even while it is not only possible but, in fact, highly likely that we will acquire a high percentage of unprofitable relationships. 

On the one hand (loans), we seek quality over quantity. On the other hand (checking customers), we seek quantity over quality. Meanwhile, the possibility of unprofitability exists on both ends of the spectrum. 

I believe this contradiction has run its course. There will be a need for a quality approach to checking acquisition. If not, a healthy retail banking bottom line will be increasingly undermined from months, quarters, and maybe even years from an earnings drag from financially unproductive checking accounts. 

Why? Simply put, because the economics of the banking industry have changed. 

The current prolonged low-interest-rate environment shows no sign of going away any time soon. When coupled with rising technology costs and increasing compliance costs, we can no longer let checking products, in particular, serve as a loss leader like in the past. 

Back in the day when interest rates were sky-high by comparison and overdrafts were incredibly lucrative, we could afford to give away our products for free to any and everyone under the sun. This is simply no longer the case, and more and more institutions are catching on to this fact. 

New Banker Deposit Survey Results!

Across our industry, there has been a long lag in coming to terms with these things, which is expected, but I submit The Great Awakening is right around the corner. Many have already awoken and have adjusted their strategies, products, and pricing accordingly to foster deeper and more engaged relationships from the outset. The expressed mission of winning more primary relationships is not just any kind of relationship.  

Moving forward, a more nuanced dance between quality and quantity is needed in the acquisition of new checking accounts because financial institutions will be increasingly unable to subsidize unprofitable relationships. Fortunately, many community financial institutions have already paved the way for those who have yet to recalibrate their strategy in this way, serving as examples that focusing on quality versus quantity can make a big difference.

Ryan Harbry is regional director at StrategyCorps. For more information about how your financial institution can generate replacement revenue to subsidize unprofitable relationships, connect with him on LinkedInsend him an email, or give him a call at 404.819.1438.