StratAgree™ – Flow of Funds
Deposit Flow of Funds — Measuring New Deposits vs. Existing Deposits
The tracking of deposits, both new to the bank and existing can be a challenge. Thankfully, advances in product and customer analytics make it possible for management to monitor funds flow to better understand the effectiveness of their deposit campaigns. Not only can we track total deposits captured within a product, but we can also tell how much is new money and how much comes from funds already in your bank.
This knowledge sheds light on the impact and return on investment of deposit campaigns, and their effect on particular customer segments and deposit product categories. It can also help us identify a product, bundling and pricing considerations that can improve retention and grow revenue.
While these advantages are very valuable, creating a Deposit flow of funds analysis can be extremely complicated when you consider all the decisions you need to make.
You need to consider all the potential paths into, out of and across the organization—loan payments, ACH deposits, interest and fee posting and product transfers to name a few. Also, when a customer’s checking account is receiving regular ACH deposits and offset by withdrawals (Checks, auto payments and transfers) tracking the deposit flows becomes very complex. Gaining internal agreement on how to value and handle these decisions adds to the precision but at what cost and value to the overall results?
A simpler approach
We believe a more direct approach is to aggregate individual account balances at the household level and compare balance changes over predefined periods (e.g., weekly, monthly, etc.). You should also consider accounts opened and closed within that period to understand and compare the net balance change and to identify new money inflows. For example:
- Net balance growth of $13,000
- Net Interest income decreased by approximately $8.
- 83% new money. ($12,500 of $15,000)
In this example, we did not consider the $500 gain in the checking as part of the % new money calculation. We established a minimum change of +/-$2500 or more in any checking account to be a “real” change rather than the timing of regular deposits and withdrawals.
With this approach, you’ll clearly understand the impact a particular money market offer has on a household. In this example, you moved cross-sell from 3 to 4, grew balances by $13,000 of which over 80% were new to the bank. All of this at an implied Net Interest Income reduction of $8 over the period. Consider what all new Money Market index households looked like during these two periods and you have an excellent understanding of the impact it would have on the revenue, balances, customer retention and cross-sell. It also helps you better understand and evaluate the ROI of the marketing program that supported this campaign.
What do I need to get started?
Your data becomes critical in this type of analysis. First you have to have a household view of your customers.
At a minimum, you will need the following:
- Account level data with:
- Open and close dates
- Account Status (it is best to remove accounts that are not in good standing during the analysis period)
- Account type by product category (Checking, Savings, Money Market, CD, etc.). Be sure to exclude any unique accounts. For example a school district or local / state government account.
- Account balances for each measurement period (average or point in time)
- Interest rate by account (needed along with a cost of funds measurement to calculate Implied Net Interest Margin)
- Funds Transfer Pricing or similar cost of funds measure that can be associated with each account
- Entity indicator (Business, Consumer, Municipal, etc.)
- Agreement on what constitutes real balance growth in a checking account – in our example checking account changes between +/- $2,500 were excluded from the new money calculation
- Campaign start and end dates – These are needed if you want to determine campaign ROI and other campaign measures.
You should also consider competitive offers during the period. For example use a simple High, Medium and Low indicator or more specifics about competitive offers. We recommend this simple approach to start.
If you are using a customer segmentation methodology could this help you better understand and evaluate customer segments? Could this approach improve your understanding of a geographic or region within your bank’s footprint?
Once you have this data assembled, you have the ability to examine the impact by segments, markets, or and even balance categories (e.g., households with deposits balances >$50k). But don’t stop there, consider other ways to cut the data to improve your customer understanding and the value marketing and product offers play in managing your customer relationships.