Tracking deposit cannibalization: As the deposit season winds down Finance and Marketing executives across the industry ask “how much did deposit cannibalization cost us?” It’s an important question because many deposit products are near-perfect substitutes from a consumer perspective. Deposit offerings with similar return/liquidity characteristics will be highly sensitive to deposit cannibalization – money flows out of one deposit product into another deposit product and even flows from loans to deposits. When incentives like special premium rates and features (e.g. cashable, indexed) are introduced, new products and services (and new deposit pricing policies) can create surprisingly large deposit cannibalization money flows.
Why deposit cannibalization matters
Deposit cannibalization is huge. Under normal conditions about 30% of all observed deposit account balance growth is funded by internal money flows. Introducing new deposit products disrupts the norm, increasing the rate of deposit cannibalization to as much as 80-90% of deposit balance growth in new deposit products.
Deposit cannibalization can be expensive. The features and pricing that make new deposit products attractive to consumers come with a cost e.g. liquidity premiums, price premiums, hedging costs. When these costs are fully considered, new deposit products often have a lower contribution margin than other products your customers/members already hold. When money flows from higher to lower margin products, it increases the all-in cost of funding, lowering profitability.
Why deposit cannibalization money flows are hard to measure
When consumers act on decisions about their deposit portfolios, they often gather money from multiple sources (new money, other deposit, and loan accounts) into their Checking or Savings accounts on their way to their ultimate destination accounts. It usually requires several transactions on the gathering side, the destination side, or both to achieve the desired outcome.
Core systems record each transaction as a self-contained “to-from” event without capturing or tracking the original sources of money flows that are included in the transaction. So that is the first problem: cannibalization money flows simply aren’t captured by your core system. A second problem is the recorded transactions can’t be matched up after the fact because they have “many too many” relationships that cannot be resolved programmatically. The bottom line is banking systems can’t measure deposit cannibalization flows… period.
Traditional ways to track deposit cannibalization money flows
Most credit unions and banks don’t have any means of tracking deposit cannibalization money flows. At best, they track new money deposits and assume that “the rest” of deposit growth was funded by deposit cannibalization money flows. There are a host of issues that arise when measuring new money deposit flows which make this approach both costly and imprecise (see Tracking new money deposit flows: problem solved!). And the analysis lacks critical information about which products are the sources and destinations of deposit cannibalization money flows. Without knowing the source products it’s impossible to understand the impact on contribution margin and funding costs that are incurred when deposit cannibalization occurs.
While one can argue that the cannibalization money flows would have gone to competitors if new products/pricing were not introduced, this assertion is can only be tested with an advanced econometric model of price elasticity of demand for the entire market. Few banks and credit unions have that capability (nor should they). What really matters is deposit cannibalization money flows have a real cost and understanding those costs is essential information for marketing, product management, pricing, and treasury decision making.
Tracking deposit cannibalization money flows – problem solved!
To manage the deposits business properly you need to measure money flows at the account level, to support analysis by customer/member (who), product (what), branch (were), and time period (when). And the types of money flows should distinguish between true new money deposit flows and money moving between accounts – cannibalization, product substitution, account substitution.
FlowTracker Analytics’ patented analytics solution does that and more: it also tracks new money, deposit-to/from-loan money flows, and separates routine fluctuations from significant behavioral changes so you can focus on what matters. Our solution is actionable, accessible, and affordable. A trial with your data can be completed in a few weeks at a nominal cost. If you want to manage new money deposit flows talk to us – we’re the experts.