Deposits: Measure what you manage
Author: David B. McNab, CA
President, FlowTracker Analytics Inc.
BAI Banking Strategies, July, 2009, Bank Administration Institute, Chicago, USA
What is “deposit acquisition?”
At first blush, the answer seems easy: new customers. But when we look at this more closely in a retail banking context, the picture becomes cloudier. Are we talking only about new customers and their balances? Or new products sold and their associated balances? Or growth in account balances overall, which includes growth from existing customers?
This lack of precision can cause confusion when bankers try to get a handle on measuring their deposit growth to identify the true sources of growth. If they simply focus on new accounts and related balances, the lion’s share of their growth opportunity will actually go un-measured because 80% of account balance growth in a quarter typically comes from existing customers (see chart, “Old Customers, New Money”). Institutions that fail to focus on that 80% are going to miss a lot of potential growth opportunities.
To alleviate this confusion, we believe deposit acquisition should be defined as all the new money flowing into the deposit portfolio – including capitalized interest added to balances – because that is what constitutes your total portfolio growth. The problem then becomes designing a measurement system that captures and analyzes this growth of new money.
Here’s how our firm worked through that issue:
Product Sales
Taking new product sales as the basis for measuring deposit acquisition overcomes some of the problem by including both new and ongoing customers in the basis of measurement. It also, however, introduces a new problem: product cannibalization.
When a new customer (20% of growth) opens any account, you can count that as a new product sale because it brings in new money. When an existing customer (80% of growth) does the same thing, however, it isn’t always easy to tell what has really happened. The new product may result from a cross-sale, a product substitution or both. A cross-sale occurs when an existing customer places new money into a new product. But, if that customer is simply transferring money from one product to another, we categorize it as product substitution. And, of course, a customer can be doing both at the same time, which really makes things complicated.
Product acquisition, in fact, often does have different funding components associated with it. These include:
- Funds from outside the bank. This is clearly something that should be called sales (cross-sales if from an existing customer) and included in our acquisition definition.
- Product substitution. This is a substitution within one side of the balance sheet that results in no change to the customer portfolio balances overall as, for example, converting a term deposit to savings or vice versa. Product substitution is something different and should not be included in our definition of acquisition.
- Loan proceeds. This differs from product substitution in that the customer’s portfolio balances will grow as a result of increases in both loans and deposits. This kind of growth should be included in the definition.
To better understand the impact of these complexities, we conducted research to see just how descriptive product-based acquisition metrics really are. After analyzing the flow of funds for a million households over three months during 2005, we found that 46% of deposit growth occurs in new products and the rest derives from accounts of products that already existed in customer portfolios. Looking at just new product balances, we learned that nearly a quarter (22%) of the funds flowed in as product substitutions or loan-to-deposit transfers (see chart, “New Deposit Product Funding”).
Based on this analysis, we concluded that product acquisition metrics are not sufficient for managing deposit acquisition because they include things they shouldn’t (product substitution) and omit things they should (growth in ongoing product holdings).
New Accounts
So what about measuring new accounts? Every bank has likely used account-based acquisition metrics simply because they are easy to obtain from internal systems. Unfortunately, these metrics are fraught with the following deficiencies.
- New accounts account for only 53% of deposit portfolio growth, omitting growth from augmentation of ongoing accounts by ongoing customers,
- New accounts can be funded by new money, product substitutions or loan to deposit transfers,
- New accounts can also be funded by account substitutions, i.e., renewals and account transfers.
We extended our research to include analysis of the flows of funds at the account level. Using the same sample populations, we saw that only two-thirds of the money added to new deposit accounts came from outside the banks. The remaining sources of funds were account switches (17%) product switches (15%) and loan-to-deposit transfers (see chart, “New Deposit Account Funding”). Augmentation of ongoing accounts, which accounted for 47% of total portfolio growth, was split between new money (85%) and internally-funded flows (15%).
This research demonstrated that using new accounts to measure acquisition excludes a huge amount of account augmentation growth and that the growth we do see at the account level is a blend of new and old money. Our conclusion: the traditional ways of looking at portfolio growth – by product sales or new accounts – lacks the level of integrity we’d expect for something as important as understanding and measuring a bank’s deposit acquisition performance.
Putting it Together
When managing deposit acquisition, bankers are focused on customers, whether new, ongoing or lost, so that they can monitor the effectiveness of their relationship-management strategies. They also care about products and accounts, whether new, ongoing or lost, to measure their product management activities. And they care about the flows of funds that contribute to balance growth.
When we look at the changes in any customer’s balances with a bank over time, we can classify those changes in terms of customer status. New customers, with their associated accounts and balances, represent one component, 20%. The remaining 80% of deposit growth is associated with ongoing customers.
We can also look at balance changes in terms of the status of accounts and products. As with customers, accounts and products may be classified as new, lost or ongoing. There is, of course, a logical relationship between new accounts and new products. A new product always involves a new account, but an account may also be opened as a new account within an ongoing product category. Introducing the account and product status dimension into the measurement framework enables us to define cross-sales and account acquisition as separate types of activity that can be explicitly managed.
We completed the acquisition measurement framework by adding a third perspective to the analysis: the source of funds flowing into accounts. This can be classified into four components: new money, lost money, product substitutions and loan-to-deposit transfers. Flow-of-funds identifies the actual funding sources of portfolio growth, which are independent of the status of the customer, product or account. Introducing funding flows enables us to distinguish new money growth from internally-funded growth.
By assembling all of these classifications into a single analytical framework, we can create unique cells corresponding to each combination of customer status, product status, account status and funding flow (see chart, “Deposit Categories Drive Analysis”). This framework can be used to classify, analyze and report on deposit portfolio acquisition metrics. It embraces all of the key dimensions of information required to measure acquisition, retention and cross-sale volume and provide banks with a transparent, verifiable and consistent view of portfolio dynamics.
Each cell in the framework has a specific meaning for analytical purposes. The cells can be combined to provide a vast array of specific-purpose metrics. For example, acquisition can be defined as new money brought into all accounts regardless of customer, product or account status. It is also possible to subdivide acquisition into sub-categories such as cross-sales and provide clearly defined metrics to support objective setting, performance measurement and incentives for each subcategory of acquisition activity.
Finally, the framework enables you to quantify and analyze product substitution flows to better understand customer reaction to value proposition differentials by observing actual flows between products, which is otherwise very difficult to do.
Core Deposit Retention: Transparency and Accountability via Flow of Funds
Author: David B. McNab, CA
President, FlowTracker Analytics Inc.
Journal of Performance Management, Volume 20, Number 2, December, 2007, Association for Management Information in Financial Services
Synopsis of the article
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 aa 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. To establish verifiable reporting and accountability for retention we simply can’t ignore these large flows.
Another major shortcoming of the household analysis is that it does not provide any insight into the specific products or branches that contributed to the lost business. The information is too summarized to be useful for measuring performance and accountability of branch and product management. The bottom line is that analysis of customers won and lost cannot give us the information we need.
Metric 3: Lost Accounts
Counting new and lost accounts and the balances related to them is one of the more common methods of measuring sales and retention performance. It is useful as an indicator of activity levels associated with new and lost business, but falls seriously short of explaining what is really going on.
We know that lost accounts are not a perfect barometer of lost business because money may leave accounts over time, so there will often be a drain on balances before an account actually hits zero or closes. We also know that we can lose part of an account without losing all of the business.
Our research (see note 1) has shown that only 35% of deposit balance losses occur in lost accounts (of which less than half were accounts of lost households). The majority – fully 65% of all deposit balance losses – happen in accounts that continue to be open, with some balance. Clearly getting a handle on these “partial defections” is imperative to have a proper understanding of retention rates.
Looking at lost accounts cannot explain the change we see in our portfolios, or be reconciled to your financial reports because the information is incomplete. New and lost account analysis simply cannot give us the information we need.
Metric 4: Transaction Analysis
Another widely used portfolio flow analysis method involves classifying transactions into categories such as deposit, withdrawal, renewal, redemption, interest credit, fee debit and the like. This analysis does produce a holistic view of the flows within a product portfolio, “explaining” how the portfolio rolled forward from one period to the next.
Unfortunately this approach to portfolio analysis overlooks the flows that occur between products. When a customer shifts money between accounts the transaction analysis identifies the flows as lost business from one account and a sale in the other.
Does this really matter? Indeed it does: our research shows that over 1/3 of the value of account outflows actually flow into other accounts of the same customers. The implication is that the transaction analysis method can overstate sales and lost business by more than 30%. If we want to achieve accountability we need transparent and verifiable information… this method fails the test.
Comment
We can see that each of the popular methods of measuring retention and it’s complement, lost business, have significant drawbacks in terms of being sufficiently verifiable, transparent or actionable to be used as a basis for accountability and performance measurement. If your bank is presently using one or more of the methods outlined above, you are in good company. This is what most banks are doing today.
On the other hand, should we be settling for the status quo? Obviously this depends on how comfortable we are with not knowing what is really going on. Our sense is that many banks have become complacent with their portfolio metrics because they have always seemed “good enough”. We suggest that these metrics appear to be good enough only because internal movements of money do not change the overall deposits of the bank. We believe this point of view overlooks some persuasive arguments for better information:
- If sales are overstated by 30% so is performance based sales compensation.
- Marketing and retention interventions are aimed at the wrong customers a third of the time.
- Product performance measures are distorted by product cannibalization and substitutions.
- Branch performance is distorted by internal flows of business that are simply relocating within the bank.
We could go on and on with reasons to justify better information, but let’s stop there on the assumption you agree that these are sufficient. The question now turns to what we can do to fix this problem.
Flow of Funds
We need a better way to look at deposit retention. What we require is a flow of funds at the account level that accounts for different types of flows that happen within each individual customer’s portfolio. We need to be able to tell if an account balance has declined because it transferred to a different deposit product or rolled over into a new account of the same product. We should also be able to tell if deposit proceeds were used to pay off loans, or were actually taken out of the bank.
A well designed flow of funds approach to measuring and analyzing portfolio change will enable you to precisely identify and measure:
- Internal versus external flows (i.e. outside the bank)
- Flows between locations
- Flows between products, and
- Flows between accounts of the same product.
When these flows are measured properly they will “explain” portfolio change totally and reconcile 100% to your overall portfolio by branch, product and customer. This can be done today, using information that already exists in the MCIF files of most banks.
Should your bank be considering the benefits of managing business flows ?
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1 Research citations refer to proprietary studies of the banking product account flows of one million US households over a 3 month period conducted by FlowTracker Analytics Inc.
December 2007 - Core Deposit Retention: Transparency and Accountability via Flow of Funds, Published in Journal of Performance Management, The Association for Management Information in Financial Services, December 2007.
November 12, 2007 - FlowTracker Analytics reveals new way of looking at bank customer relationships
Integration With Your Bank's Existing Analytics Infrastructure
FlowTracker was designed from the very beginning to resolve a specific information challenge faced by banks, with an absolute minimum of effort.
This design principle drove our decisions from the initial logical design through to the selection of programming languages. We have made every effort to ensure that FlowTracker can be implemented into your bank's existing infrastructure with as little effort as possible.
For example, the data requirements for FlowTracker are minimal, to ensure rapid deployment in even the most complex data environments. If your bank has a data mart, a data warehouse or customer information file of virtually any design, it will likely contain the account data that is needed.
Similarly we designed the business rules and product hierarchy functionality of the FlowTracker solution with no presets other than that some products are deposits and others are loans. Every other aspect of product definition and business rule construction is 100% tailored to your bank's conventions.
To ensure that FlowTracker works in your physical environments we chose to construct the code using the SAS Base System's programming language. Virtually all banks already have licensed Base SAS installations, so FlowTracker will run within an environment you are already supporting.
All of this adds up to minimization of cost, time and effort required to deploy FlowTracker in your bank. FlowTracker can be up and running in as little as a few weeks in your bank.
Multi-Dimensional Customer Behaviour Analysis
FlowTracker data can written back into your datamart and joined with all of the other rich information you have about customers, products, the market and your bank.
This chart illustrates some of the typical reporting dimensions where FlowTracker data illuminates new insights into behaviour and performance. For example it is possible to summarize and report FlowTracker information about sales by branch, salesperson, territory, company, city and so forth, provided the hierarchies defining the groupings exist within your data mart. Because FlowTracker data is created and stored at the lowest possible level - flow event by account - it can be summarized with complete integrity on any basis that is linked to accounts.
Portfolio Rollforward : Continuity Report
The Portfolio Rollforward is a standard report produced by FlowTracker. It provides a product level summary of the flow of funds that have occurred in all of the accounts in the retail banking portfolio (deposits and loans) within a time period.
The flows are classified by the type of funding activity FlowTracker has identified. The flow types displayed are account switches (e.g. renewal, branch transfer), product switches (e.g. savings to term deposits), small changes (interest, fees, amortization, other small changes), and new and lost money. Also included are the portfolio opening balance and closing balance, providing a complete reconciliation of the portfolio on a flow of funds basis.
On this report the flow figures shown are the net of increases and decreases. The underlying data provides full detail of increases and decreases all the way down to the account level.
This report is accompanied by a SAS dataset and an ASCII text file of the same name ready for import into your analysis and reporting tools of choice.
Product Funds Flow : Cannibalization, Cross-sell, Acquisition and Attrition
The Product Funds Flow report shows a cross-tab matrix of sources and destinations of funds flows into, out of and between product portfolios.
This report illuminates the extent of product substitution and cannibalization that has taken place within a period of time, along with new money and lost money flows. Underlying this report is account level event data, which details the source and destination of every flow of funds for every account in the portfolio.
This data is extermely useful for understanding the relationships between products as they are used by your customers, a key input for management of relative product value propositions and product bundling strategies in a multi-product business such as retail banking deposits (and lending, too).
In addition the detailed data is useful for predictive analytics by enabling far more precise target behaviour selection and adding new events representing individual customer-product decisions into the predictor data population.
Branch Funds Flow : Network Growth Analysis
The Branch Funds Flow report shows a cross-tab matrix of sources and destinations of funds flows into, out of and between branch locations.
This report is useful for evaluation of branch acquisition and retention performance, because it explicitly measures flows between branches. The underlying data enables full drill down within these flows to identify the products, customers and accounts that moved within the network.
When you acquire a set of branches through M&A activity, open new locations or close branches it is crucial to track flows of money between locations to ensure that real acquisition and retention performance is tracked and "branch raiding" is controlled.
CUSTOMER CENTRIC BEHAVIOR ANALYSIS FOR BANKS: focusing on acquisition, attrition, cannibalization
Executives of full-service consumer banks know the difficulty of focusing resources on acquiring new money and curbing attrition of balances. Internal competition for balances among product and geographic silos within a financial institution diverts resources from actions that grow your deposit and loan portfolios. Cannibalization also introduces false positives when targeting growth and attrition prospects. The solution to these problems is performance metrics that separate new and lost money from money moving between business unit, branch and product silos across all financial services products within the bank and its affiliates.
FlowTracker is a repeatable process that derives and classifies flow of funds information from account balances precisely and efficiently, with a minimum of set up and maintenance cost. We have assembled an optimal business solution consisting of a proprietary analysis method, platform independent software, business rules that are readily customized to work with your data and the banking business expertise to solve the problems of inter-silo competition and false positive targets efficiently.
This diagram shows results of a study we conducted on 1 million banking customer households over three months. Fully 30% of all account balance changes arise from internal flows between accounts" i.e. "old money".
Internal flows mask key performance results by mixing new money sales with product substitution and lost money with product cannibalization. Distorted analysis of customer behavior results in excess contact cost, inappropriate customer contact, employee frustration, diminished customer satisfaction and ultimately lost business. FlowTracker is the only commercial solution available today for getting this information into your decision makers' hands.
Demonstration videos
Get a quick feel for FlowTracker's analytic power in a few minutes by seeing our demonstration videos.
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Applying FlowTracker Analytics
- FlowTracker Sales Metrics Time: 2:40 - Shows how analyzing sales using FlowTracker is superior to traditional methods, enabling you to differentiate new money from product substitution.
- FlowTracker Lost Business (Attrition) Metrics Time: 3:00 - Shows how analyzing lost business (aka attrition) using FlowTracker is superior to traditional methods, enabling you to differentiate money that is truly lost to the bank from product and account substitution.
- FlowTracker Target Marketing and Scoring Time: 2:00 - Shows how eliminating false positives and FlowTracker time series event data sharpens the focus and predictive power of your data mining and modelling techniques, enabling you to dramatically increase Campaign ROI and portfolio growth.
Analyzing FlowTracker Information
Here are some videos that will give you a glimpse into the analytical power FlowTracker can bring to your bank.
These demonstrations show the accounts of 250,000 real customers selected from a Regional US bank and how they change over a quarter. You will see that FlowTracker analyzes this information in an entirely new way and delivers it in accessible and understandable formats. The demos here use standard MS Excel pivot tables to power the analyses... the real power is in the data FlowTracker creates.
- Flow of Funds Time: 2:40 - Shows the types of funds flow information that Flowtracker measures.
- Product Analysis Time: 1:30 - Shows how quickly and easily you can drill down through the product hierarchy of funds flows.
- Product Cannibalization Time: 2:50 - Shows how FlowTracker measures product substitution and product cannibalization flows between products. This capability is unique to FlowTracker.
- Drilling Deeper Time 1:30 - Shows how easy it is to drill down through the FlowTracker data to discover Branch, Customer and even individual Account level flows.
Under the Hood
Here we give you a glimpse at the way the FlowTracker application actually looks to the user.
- Inside FlowTracker Time: 1:50
Deposit and loan product substitution and cannibalization
Interestingly our research using FlowTracker on US retail bank data has indicated that there are substantial differences in product substitution and corresponding cannibalization activities between deposit and loan products.
We had best start with some definitions. What we call deposits in this context are all (customer viewpoint) assets found in a retail financial institution including demand deposits, term deposits, annuities, IRA accounts, brokerage investments and trusts. When we refer to loans, we mean all (customer viewpoint) liabilities such as credit cards, loans, lines and mortgages.
Using these definitions of deposits and loans we analyzed portfolio dynamics of several banks and found that product substitution is primarily a deposit-side story. Of the total changes in customer accounts, over 30% of the dollar value is actually the result of product substitution or cannibalization.
On the loans side, only about 3% of money movement is attributable to cannibalization effects. Both of these measures are exclusive of small dollar activity, compound interest / amortization effects and renewal activity.
Our findings suggest that understanding and quantifying product substitution / cannibalization in retail banks is imperative for the effective management of deposit portfolios.
What can you do differently with this information ?
Having access to the detailed and comprehensive insight into customer's use of products over time is a powerful innovation. FlowTracker illuminates the relationship between products within customer portfolios as customer needs drive usage changes.
With this insight you can identify products that should be bundled together because customers actually use them together. You can actively manage value proposition differentials through pricing and features based on factual observation of product substitution and cannibalization behavior. You can identify and close gaps in your product array, where money is "leaking" out of the bank. You can design product pathways to guide sequencing of offers based on what customers really do. You can identify emerging trends and seasonal effects within your portfolios, guiding product design and introduction timing.
And you can do all of these things in context, because FlowTracker data is easily viewed and analyzed by customer segment and location in addition to the product dimension.
What about performance measurement ?
Product managers in banks have always run the risk of being penalized or rewarded inappropriately for money that leaves their portfolios to go somewhere else in the bank. In the case of money market accounts, for example, as much as half of the apparent loss in customer balances in the quarter after IRA season is the result of transfers into other investment products within the bank.
FlowTracker completely resolves this issue. As a performance measurement innovation for bank product managers, FlowTracker is revolutionary: plans, targets and actual results can be broken down to explicitly recognize balance movement within the bank, where it is going and coming from, the effects of cross-sales, new money sales and lost business. For the first time we can provide a basis for measuring, planning and managing the flows product managers are accountable for creating.
Demo video
See the linked video to get a sense of how FlowTracker reveals product cannibalization & substitution flows.
How important is deposit and loan acquisition ?
Purchases of branch networks (not in distress situations) reveal that banks may pay between 5 and 8 percent of balances to acquire retail deposit account relationships. On 10 billion of deposits this translates to 500 to 800 million dollars of acquisition cost. Loan acquisition costs of 1.5% percent are not uncommon. This translates to 150 million for every 10 billion of loans acquired.
These are large costs in relation to the net interest margin and fees yielded by these accounts, which means increasing efficiency of acquisition has a big impact on botttom line performance and the rate of capital growth in your bank.
Deposit account balance growth and where it comes from
This is the profile of a typical US bank's deposit balance growth composition by customer status (new, ongoing) and account status (new, ongoing). We have applied a "filter" to screen out small account changes arising from interest capitalization and nominal account activity.
Only 12% of growth comes from acquiring new customers. 80% comes from ongoing customers, and half of that growth occurs in accounts that already existed in the bank.
If the bank measures acquisition volume based on new customers, only 12% of the total growth is captured. If they use new accounts as their growth metric, only 52% of the total growth is accounted for.
At the same time, a portion of this growth comes from product substitution and cannibalization effects. The next section takes a look at the new money growth excluding product substitution.
New money deposit growth (funds sourced outside the bank)
In this chart we are seeing the growth in the bank's deposit portfolio looking at new money only (excluding product and account substitution and cannibalization).
Growth from new customers amounts to 16% of total new money. New accounts (including new customers) account for only 44% of the total, and an equal amount of new money growth appears in ongoing accounts of ongoing customers.
Clearly if you want to measure acquisition programme success in a bank, it is imperative to include new money growth from all sources - new accounts, new customers and ongoing accounts and customers.
FlowTracker is the only method available today that enables you to track these flows.
Why the differences ?
The difference between new money growth and total growth in the bank's balances is the result of three phenomenon:
- Customers move money between accounts of the same product, for example, renewing a term deposit or loan (account switch)
- Customers move money among products, shifting deposits or loans into different types of accounts. This is product substitution and product cannibalization (product switches).
- Customers move money from deposits to loans paying down debt, and from loans to deposits when they borrow to invest (transfers).
FlowTracker identifies and quantifies each of these flows for every customer for every account in every location within your portfolio.
Sales | Acquisition | Cross-sales Demo video
See a short video describing how FlowTracker compares to customer, product and account based sales metrics.
You may also wsish to see this video showing how FlowTracker can help you focus on increasing the accuracy of acquisition predictive analytic models.
How important is deposit and loan attrition ?
According to First Manhattan Consulting Group:
"Deposit balance erosion results in $20 million to $25 million in pretax income leakage per $10 billion in deposits annually, with as much as 25% of customers’ balances permanently removed from existing accounts. Consistently, the highest-value (top 10%) households account for over 70% of the deposit balance attrition and income loss."
Loan business attrition costs are additional....
The challenge of accurate
retention measurement
Understanding true retention in Retail Banking is challenging because customers move money around among products. Most banks have come to these realizations:
- It is relatively easy to measure new and lost customers (households)
- It is even easier to measure new and lost accounts
- Neither of these measurements accounts for portfolio change properly... we need to understand the balances that have left the bank.
One problem is that most new and lost business is related to ongoing customers. In fact, as the chart (top) shows, only 24% of lost business is accounted for by looking at lost customers.
Another problem is that looking at accounts doesn\'t work either. If we define lost business to mean lost accounts, we will pick up another 25% of the true lost business, leaving fully 40% of lost business undetected.
FlowTracker measures attrition precisely and completely...
FlowTracker completely solves the attrition measurement dilemma. Because the flows among accounts are tracked at the account level, we can see when money has shifted among accounts of the same product, between products, from assets to liabilities and vice versa, and when it has left the bank entirely.
FlowTracker accounts for 100% of the change of your portfolio without relying on observed changes in customer or account status (though these useful codes are created for reporting).
FlowTracker enables you to identify product switch events that are driven by changes in your customer\'s preferences and needs. Because FlowTracker identifies every one of these events in every time period, it lays the foundation for a new breed of predictive analytics based on the subtle shifts in customer behavior and precise definitions of attrition, product substitution and transfer that FlowTracker creates.
... in multiple levels and dimensions of detail.
Not only can you get the top-line measurement of customer defection activity right, FlowTracker provides the detail to support in-depth analysis and understanding of the attrition behavior:
- Individual customer
- Product
- Account
- Branch
- Account relationship manager
and FlowTracker provides this information in time-series (every month etc.) automatically, so you can mine this new data and predict who is at risk, where, and when.
Retention | Attriton Demo videos
Here is a short video presentation descrbing how FlowTracker compares to customer, product and account based retention / attrition lost business metrics.
You may also wish to see how FlowTracker can help you target retention opportunities.
Your business is all about flows
Your key business drivers are sales, retention and growth of customer relationships that produce business volume. You spend a lot of money on sales, marketing, service and product management to make these success drivers perform for you but are you really managing them ?
In our view many traditional portfolio management metrics are obsolete, because they fail to focus on the activities you are actually managing that produce results. Too often performance metrics are limited to observations of net change between two snapshots of your portfolios. These metrics hide all of the manageable flows that explain what contributed to the results, giving you no control over or insight into performance improvement opportunities.
Another problem with snapshot based metrics is caused by products that have similar uses. Customers often switch between products to suit their needs which is great (if you retain the business), but it clouds the performance of your individual product managers and even your overall sales and retention stats. Product substitution can also point to operational, product design and profitability management issues which go undetected by most performance measurement methods.
Moving to flow-based metrics solves these problems and more. The gross activity volumes of business changes are what drive your business and they are what you need to manage.
You can't manage what you can't measure, which is why you need FlowTracker.
Real issues, real solution
Marketing accountability
The cry for marketing accountability today is a symptom of ineffective measurement tools that only address part of the picture. Campaign and sales metrics almost invariably report flashy results that indicate more growth than appears when you finally get your financial reports. Why ? Because they are using metrics that fail to account properly for product substitution, growth, attrition, cannibalization and other critical flows that are needed to provide a complete understanding of business acquisition performance. Response rates and lift are useful barometers but are not integrated with real business performance metrics that explain the growth in your portfolio.
If you need to measure and manage campaign results that actually tie into your portfolio results, you need FlowTracker.
Attrition management
High rates of defection and attrition of 10% to 15% per year are common in service businesses, yet there are no established and credible norms for evaluating retention performance. Why ? Again the effects of intra-product flows, renewals, growth and amortization obscure the volume of business that is truly defecting away from your company. The truly sad fact is that effective retention management programs are rare, and those that plan and measure retention effectively even rarer.
The enormous cost of defection can be mitigated by having a clear understanding of the process, timing and nature of defection events. Since at-risk customers are already in your database, you can build predictive models to detect them - and intervene before it is too late. To do this well, you need to be able to observe defection events and the behavior changes that precede them by measuring business flows. You also need to understand why these events are taking place, which requires market research. Targeting your research and your efforts both depend on being able to identify who is at risk through effective flow-based metrics.
If measuring and managing retention results matters to your business, you need FlowTracker.
Cross-sales and referral management
If you are running a multi-divisional businesses that has complementary lines, the imperative to manage cross sales will be second nature to you. Lower acquisition unit costs associated with the trusted supplier advantage and knowing your customer are the keys to cost effective growth strategies.
Managing sales and referral activity and compensation demand metrics that can identify movement of customer business among different business units, products, locations and sometimes even companies. You need to know the volumes that are being produced, who is producing, who is receiving the business, how much came from existing business and how much has been up-sold, cross-sold and referred.
We frequently see sophisticated companies with clear intra-divisional sales strategies in place that have absolutely no way of planning, tracking and evaluating the performance of their referral and cross-selling practices. Without the right (flow) metrics in place, compensation schemes become a administrative nightmare, results lose visibility and ultimately these strategies wither and die.
If you need to foster and manage effective cross-selling and referral activity, you need FlowTracker.
Branch and store network location management
Introducing new stores or branches into a trading area or acquiring part of a competitor's network always raises management concern about new versus existing business. how much are you retaining ? How much of the growth is really new business ? Are the effects of increased outlet density complementary or cannibalistic ?
If you need to know how branch locations are interacting with your customer base, you need FlowTracker.
Targeting new business
Identifying prospects to increase the effectiveness of acquisition campaigns has been around for a long time. What is changing is the definition of acquisition: FlowTracker distinguishes between new money sales and existing business volume that is being cannibalized by alternative products within your portfolio of customer business. This "clean" definition of new business enables you to narrow your campaign target to customers whose profiles have the most likelihood of bringing you new business.
Armed with a cleaner definition of the target, you can use the events that FlowTracker creates to identify patterns of customer behavior that are predictors of purchase events. Combining cleaner targeting with precise event tracking will enable you to significantly improve your ability to predict which customers will buy, what they will buy and when you should be communicating offers to them.
If improving acquisition campaign effectiveness and efficiency is important to you, you need FlowTracker.
Demonstration videos
See for yourself !
FlowTracker reveals the flows of money into, out of and throughout a retail banking portfolio using real data in these short demonstration videos.
Genesis of the FlowTracker concept
FlowTracker is an innovation over two decades in the making. Here is how the business problems came to our attention.
We first became aware of the business problem while working in Retail Banking finance. Our Wealth Management sales people we earning commissions based on a scale that rewarded them for "new money" sales... and there was no way to identify new money from internal transfers. Compounding the urgency of the issue was the growth in Mutual Funds sales, which were "cannibalizing" the bank's term deposit base to an unknown - but suspected to be very large - extent. We also realized that there were no really good metrics of lost business or "attrition" in retail banking.
Many bright people worked for a long time on the problem of product substitution measurement and never reached a truly satisfactory solution. As business priorities shifted, so did attention to the question of true metrics for retail bank business volume changes, but the underlying challenges remained unresolved.
The first prerequisite: databases that supported MIS
The introduction of Management Information Systems that supported end-user analytics in banking was the beginning of a new age in analytics.
The time was the 80's and mass storage databases were really only starting to make inroads into the business management information space. What grew out of these new capabilities were new reporting paradigms: we could analyze information by branch location and by product right down to the account level for the first time.
These analyses had some false starts: compensation programs were aimed at account opening and closing activities and similarly misguided measures, largely because it was finally possible to micro manage to these metrics. Of course the result was that lots of accounts got opened without generating any real new business, and staff slowed account closing to a crawl, neither of which benefited customers or the bank.
What account based metrics did achieve, however, was the measurement of new and lost account volumes, as illustrated above. The limitation of these measures is that they don\'t identify whether we are dealing with new money, product substitutions or internal transfers between deposits and loans. Account analysis also offers little meaningful insight into account growth and reduction activity, since the source of the growth or reduction is unknown.
The second prerequisite: customer centric views
With the advent of CRM, many banks created customer views in their databases to enable a holistic understanding of a customer's relationship with the bank. Most often a customer is defined as either an individual or a household, and all of their accounts are linked to a single reference number or code that represents the customer.
This enabled a substantial improvement in customer understanding and behavior analysis. The customer information systems added another dimension to measurement - customer - that could be layered on top of the knowledge gained from account and product analyses.
When the customer is the focal point of metrics, we can differentiate between new, ongoing and lost customers and superimpose those behaviors on the dimensions revealed by product and account analysis. For example, new customers are really a special case of product and account acquisition. Similarly lost customers are a special case of account and product attrition.
One major advantage of customer centric measurements is that when the customer is viewed in total, we can tell if their overall business volume is going up or down, because internal transfers among accounts cancel each other out. And of course, we know that when a customer is new or lost their business is certainly won or lost.
The third dimension: business flow
In both account and customer based analysis of portfolio changes the missing link has always been the problem of account and product substitution. When an account renews, for example, it is important for the bank too be able to tell that the new account is not a sale and the lost account is not attrition (as account analysis would indicate). It is also important not to overlook the fact that this event has taken place, even though no new business has been generated (a customer centric view would see no change).
What we need is an analytic method that can identify where changes we see in customer and account business come from and are going to. It is meaningful to know that customers are renewing - or not. It is meaningful to be able to "see" product substitutions apart from sales and attrition. It is also helpful to know whether significant behaviors like borrowing to invest or liquidating investments to pay down debt are happening in our customer relationships.
This "funding" dimension is the key to differentiating between "real" new and lost business and internal changes in our customer relationships. Both are important to understanding both the performance of the products, locations and people and the quality, nature and behavior of our customer base.
Putting it all together : FlowTracker
Combining the analysis of behavior in the account/product dimension, customer dimension and business flow dimension simultaneously is what FlowTracker is all about. The result is a set of "cells" of behavior that are identified specifically for each individual account in your database.
The power of the FlowTracker innovation lies in it's ability to subset observable changes in business volume into meaningful cells. You can identify all of the permutations and combinations of customer behavior that affect your portfolio, and reconcile completely and exactly to the portfolio at large.
This means that you can explicitly and reliably quantify the results of your marketing campaigns, sales activities, attrition/retention programs, product substitution and cannibalization, cross sales and fully understand the who, what when and where of customer events and behavior.
FlowTracker advantages
Simply put, FlowTracker software will help you focus resources on growing your business better, faster, repeatably and with a lower total cost of ownership than in-house development or ad-hoc analysis can.
We designed FlowTracker to be the optimal solution to the challenges of measuring attrition, new money acquisition, cross-sales, product cannibalization and inter-branch transfer flows of funds. Here are the reasons FlowTracker should be your solution...
Precise and efficient
- Over 7 years of business logic development
- Verifiable output in every dimension
- Highly scalable, fast processing runtime
A great deal of care has gone into making sure FlowTracker has been designed optimally. Flow type x account level detail is created consistently across time periods at lightning speed. FlowTracker provides complete analysis of half a million accounts analyzed in 3 minutes using a standard (P4) desktop computer... faster on your server... enabling you to analyze your whole portfolio every day.
Repeatable process
- Run on any cycle
- Backfill history as far back as data available
Efficient design enables FlowTracker to be tailored to run on any cycle - daily, weekly, monthly etc. to match your data refresh cycle. FlowTracker can analyze any point-to-point time period as a single interval as well.
Minimization of data requirements and purity or business logic design enable FlowTracker to be applied retroactively to your data - giving you the option to backfill history for trending and data analytics without waiting months and even years to build up your history base.
“Thin” data requirements
- Spot (period end) balances
- Product ID
- Branch ID
- Account ID
- Customer ID
This is the complete list of data requirements for FlowTracker, all of which is likely already in your customer information database. No transaction data is required in order to derive the flow of funds within each account using FlowTracker's unique business logic. Branch ID is optional, useful for identifying flows among branches.
“Bolt-on” solution integrates easily with existing platform
- Data mart or warehouse
- Reporting and analysis tools
- Existing SAS installation
- No new languages or databases to worry about
FlowTracker has been written in Base SAS language to enable integration with virtually any pre-existing data environment - Unix, Linux, Sun Sparc, Oracle, Tradata, DB2, Microsoft SQL Server etc.
FlowTracker also creates information rather than reports, so it can be fed into any reporting suite you use for reporting, analysis and business intelligence including Business Objects, Cognos, SAS, SPSS, KXEN and others.
Perhaps best of all technical features, FlowTracker will not introduce any new languages or databases to your bank that require additional support in your IT department.
Minimal maintenance cost
- Core business logic is unchanged by introducing new products and services
- Business rules are easily entered and verified
- Open code for loading data and exporting results
Adding new products and services into the FlowTracker analysis process is as simple as adding a row to a spreadsheet and uploading the data. FlowTracker will prompt you when there are mismatches between the business rules and data so you know when updates are required before processing takes place.
Extract, transformation and load into and out of FlowTracker is all handled by open code SAS-SQL so you can easily maintain it in-house. No need for ongoing external support when you change source tables in your data warehouse or data mart. Similarly on the output side, data fed back into your warehouse can be tailored to your needs and changed as required in-house.
FlowTracker : Revolutionizing portfolio and behavior analysis
Think of the relationship between your income statement and your balance sheet. Which do you measure performance with ? The universal answer is the income statement, of course, because it measures flows of revenue and expense instead of snapshots of your assets and liabilities. FlowTracker is to portfolios what an income statement is to your business - it reveals what is going on in your portfolios enabling you to understand, manage and act on what you are really managing: customer acquisition, retention and relationship extension.
For the first time, you can understand customer behavior and it\'s impact on your portfolios, branches and products by looking at flows instead of snapshots. And did we mention that FlowTracker results agree exactly to your books ? FlowTracker always accounts for all of the changes in your book of business from one time period to the next. You can look at an individual customer, a customer segment, a campaign, product line or branch with the assurance that what you are measuring agrees exactly and completely with your whole book with no reconciling items.
FlowTracker : What it does
FlowTracker is an application that examines changes in business volume and "figures out" what has happened in individual customer portfolios at the account level. This represents a sea-change in portfolio analysis for banks, telecommunications companies and other service industries where product substitution and customer volume changes are relevant.
Customer portfolio data is turned into meaningful information for reporting, analysis and predictive modelling in multiple dimensions to reveal who is doing what, where and when within your customer and product portfolios, by:
Account | Product | Customer | Branch network location | Relationship manager | Source or destination of funds | Time period
When combined, these dimensions reveal new insights into customer behavior, enabling you to identify precise answers to many analysis questions such as these:
New business questions:
- How much is coming from new customers ?
- How much is coming from other products ?
- How much is coming from organic growth ?
- How much is coming from existing customers ?
- Which products are being transferred into this one ?
- How much new money did my marketing campaign bring in ?
Attrition questions:
- How much business have I lost from ongoing customers ?
- How much have I lost from lost customers ?
- How much is being transferred to other products in the bank ?
- How many customers - and which ones - have paid down debt by liquidating investments ?
- How much of my lost business is lost internally ?
FlowTracker : Easy to implement and extensible
In the more than twenty years we have been serving the Financial Services industry, we have learned that speed and ease of implementation are critical success factors. With these lessons in mind, we set out to design FlowTracker to use an absolute minimum of data in order to produce robust, verifiable results.
- Results can be analyzed using simple tools such as pivot tables in MS Excel, MS Access or more sophisticated tools like Business Objects, Cognos or other business intelligence and data visulaization products.
- Data requirements are extremely "narrow" - a subset of your MCIF.
- Processing is lean and fast due to optimized design.
Banks that qualify to implement FlowTracker must meet these minimum requirements:
- A production data mart or data warehouse storing basic account data in time series
- A customer or household-to-account cross reference table
- A desire to truly understand how customers interact with your bank.
FlowTracker is not only easy to implement, it is also extensible.
- Unlimited product types can be analyzed within the FlowTracker Core framework.
- Unlimited customer and account volumes are easily accommodated.
- History can be generated retroactively, depending only on the availability of your data.
- Customer can be defined as individual, household or both.
- Different business rules can be applied by customer segment and product type.
And with relatively small modifications to suit your particular business requirements FlowTracker can be implemented to support any update cycle (quarterly, monthly, weekly, daily).
FlowTracker : Available exclusively from FlowTracker Analytics Inc.
FlowTracker is software based on a proprietary analysis method which is protected by United States and Canada patent laws (patents pending). FlowTracker Analytics Inc. has exclusive worldwide rights to use and develop products based on this method.
FlowTracker is a repeatable process that derives and classifies flow of funds information from account balances precisely and efficiently, with a minimum of set up and maintenance cost. We have assembled an optimal business solution consisting of a proprietary analysis method, platform independent software, business rules that are readily customized to work with your data and the banking business expertise to solve the problems of inter-silo competition and false positive targets efficiently.
This diagram shows results of a study we conducted on 1 million banking customer households over three months. Fully 30% of all account balance changes arise from internal flows between accounts" i.e. "old money".
Internal flows mask key performance results by mixing new money sales with product substitution and lost money with product cannibalization. Distorted analysis of customer behavior results in excess contact cost, inappropriate customer contact, employee frustration, diminished customer satisfaction and ultimately lost business. FlowTracker is the only commercial solution available today for getting this information into your decision makers' hands.
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