For more than 20 years, the Demand Deposit Account (DDA) has been very effective as a core product in strengthening customer acquisition strategies and driving footprint expansion. As regulations and customer preferences change rapidly, DDA’s role -- while still of great significance to banks -- is now very different than it was in years before. That isn’t to say that it is no longer a viable go-to product, but evolutions in the banking industry have created a new dynamic for DDA, maximizing its ROI in non-traditional ways.
Due to today’s market saturation, the importance of sustainable bank growth is at an all-time high, and there is an emerging awareness of alternative solutions that can create new entry points and more effectively engage households. For many financial institutions, the key to accelerating growth lies in identifying where the DDA best fits in the overall profitability machine.
Then and now
Until recently, DDA was the basis for how customer relationships were initiated, but debit account growth has decreased over time, while credit accounts have grown. In fact, according to the latest Equifax "National Consumer Credit Trends Report":
- The total number of new bank-issued credit cards year-to-date in July is 28.8 million, a six-year high and an increase of 21.2% from same time a year ago.
- In that same time, the total dollar amount of new credit originated for new bank-issued credit cards is $141 billion, also a six-year high and an increase of 27.8%.
- The total balance of bank card credit outstanding in September is $557.6 billion, the highest total in 44 months.
- The total number of loans outstanding in that same time is more than 325 million, the highest in more than five years.
Today’s customers are more sophisticated. When it comes to financial services, they want simplification, ease, and speed from their bank. They prefer to access and interact with financial institutions through online and mobile channels. Branch traffic has decreased over the last decade, and customers now view debit as just another “means to pay” versus a relationship account. That is why many financial institutions are using credit and alternative data solutions in order to create entry points into other life-stage products and solutions, turning the DDA into a household engagement tool that increases profits and drives more customer loyalty.
[For more on household engagement, check out FDIC: Percentage of US Unbanked Households Decreasing]
As customer preferences have changed, so have the rules. The Durbin Amendment has impacted the profitability of DDA accounts. In Mercator Advisory Service’s August research note, “Debit Profits Under Pressure: Alternative Revenue Models Needed,” Ron Mazursky, director of Debit Advisory Services, stated: “Issuers of all sizes are experiencing downward pressure on debit profitability. This is a direct result of changes in the regulatory environment, changes in the competitive market, and changes in consumer preferences.”
While some restrictions have throttled the profitability of debit, the prohibitive rules that excluded other lending products from the traditional banking umbrella have been lifted. Consolidations in the marketplace and relaxed legislation have allowed traditional product offerings to become more comprehensive and versatile. This means that many financial institutions have been able to bring their credit card portfolios back in-house and approach prospecting differently.
Repositioning DDA to accelerate growth
Since the mid-1990s, there have been advances in both data and analytics, which enable financial institutions to take a more efficient and effective approach to onboarding new customers. Through more in-depth data and sophisticated analytical capabilities, financial institutions are able to get a more complete view of consumers and match them up with the right product, offer, or channel to meet their needs. In other words, they are able to determine: Is the greatest chance for customer acceptance through a bank account, a credit card, or a home equity line of credit?
Data -- whether of the credit, income, and employment or wealth and asset variety -- provides a 360 degree view of consumers’ financial capacity. For example, maybe you look at a prospect’s file and see that they don’t have a home equity line of credit, but they exhibit a high propensity to be eligible for one. This is easily determined by knowing the value of their home as well as the detailed information about their mortgage. Arming financial institutions with this data gives them the opportunity to initiate a relationship by offering a home equity line of credit instead of leading with a DDA product. The same thing could happen on a mortgage refinance, credit card, or many other products. Recognizing the different entry points available empowers banks to match product offers with the prospect’s life stage, leading to more household engagement and accelerated growth.
Another important consideration is that using the right data also gives insight into a consumer’s loyalty to a specific brand or type of financial institution, giving a clear picture of who is truly "in play" for a new banking relationship and who is unlikely to leave their current provider.
Good, better, best
For customer acquisition, the stakes are higher than ever. As financial institutions think about their growth objectives for 2015 and beyond, they need to consider changing the way they market to new and existing customers. DDA is a strong product by itself, but its impact on a bank’s business is dictated by how effectively it is used.
There is a seemingly infinite amount of robust data that helps engage households. The smartest financial institutions are leveraging powerful insights that identify the best point of entry to attract, grow, and retain profitable households and to capture valuable market share, while maximizing the strength of DDA.
Nancy Conner serves as the Senior Director of Product Marketing for the Retail Banking vertical at Equifax Inc. She has more than 20 years of experience in the financial services industry, spending most of her career directing marketing communications and go-to-market ... View Full Bio