FIS New Deposit Volume Report: First Half of 2012
By Martin Romain, Senior Vice President and General Manager, FIS Risk Fraud and Compliance: Chex Systems, Inc. ("FIS")
On a continuous basis, FIS examines trends in new deposit account applications among its U.S. bank and credit union clients in aggregate to gain perspective on volumes and risk in the marketplace. Generally speaking, an increase in volume of new account applications signals an upturn in the economy. But, increase in volume of new account applications should be examined through the lens of the risk associated with those applications. This FIS semiannual published report looks at both volume and risk trends. The report also breaks out movement of account applications by financial institution (FI) size and type to examine market share shifts by FI segments.
Historical Trends in New Account Applications
The historical timeline presented below represents the volume of U.S. consumers applying for new deposit accounts between Q1 2007 and Q2 2012 from more than 7,000 FIS clients using QualiFile®, a deposit account origination product offered by Chex Systems, Inc (Figure 1). Application volumes, which exceed 30 million annually, have been adjusted in three ways: 1) inquiries are seasonally adjusted; 2) volumes include only FIS clients for which FIS has complete data for the entire time period; and 3) volumes exclude FIS clients that have made signifi cant acquisitions or changes in their strategies during the time period.
Hikes and dips in volume have meaning and are driven by a number of factors:
- In general, an annual boost in holiday seasonal hiring drives an increase in new deposit account applications in the fourth quarters of most years, regardless of other factors impacting the market. In addition, a significant amount of new deposit account application volume is influenced by changes in employment and consumers changing residences – both of which declined during the recession.
- The slight decline in volume in Q1 2008 signaled the beginning of the impact of the financial crisis on consumers’ behaviors – especially among the financially vulnerable who were hit hardest at the start of the recession.
- Later in 2008, new deposit account applications were boosted by nervous consumers moving their money around to mitigate their financial risk. In some cases, consumers feared failures of their banks and sought the shelter of what they considered “safe” financial institutions. Some consumers with more than the limit for insured funds in one financial institution likely opened a second deposit account elsewhere. Some also likely pulled money out of the market and into a new deposit account.
- During 2009, new deposit account applications remained above the baseline (i.e., Q1 2007) as the federal stimulus package counteracted the stall in economic growth.
- When federal stimulus funds ran out, the housing market remained weak and financial institutions focused on cost cutting. New deposit account applications faltered from 2010 through the first half of 2011.
- New deposit account applications began to pick up in the second half of 2011 as the economy began to turn around. In Q4 2011, seasonal hiring and negative consumer sentiment toward the “big banks,” peaking on Bank Transfer Day, drove up new deposit account applications.
- Although the level of new deposit account applications in the first half of 2012 fell short of prerecession levels, they were up considerably from their nadir (i.e., Q2 2011).
The takeaway message in the first half of 2012 is that new deposit account growth is getting healthier as the economy improves.
Shares Shift by Financial Institution Type
The next timeline looks at trends in new account applications by financial institution type (Figure 2). Findings reveal:
- Credit unions fared far better than banks in new deposit account applications from the baseline of Q1 2007 through Q2 2012. In particular, note the steep rise in credit union volume in Q4 2011 concurrent with Bank Transfer Day.
- Regional/community banks’ new deposit account applications were relatively flat during the time period. Because volumes, in aggregate, declined during the recession, regional/community banks actually gained share in new deposit account volume.
- After enjoying a rise in new deposit account applications while the stimulus package remained in place, national banks fared poorly post-stimulus.
- Super-regional banks performed the worst during the time period after benefitting for a short period when nervous consumers mitigated their risk by moving funds to larger banks during the second half of 2008.
Proxy for Risk Remains Stable
A good proxy for measuring potential risk associated with new deposit account applicants is their histories of forced deposit account closures (referred to as “closures” in the rest of this article). About one out of six new applicants have had a prior account closure (Figure 3). Despite the recession, the figure has remained relatively steady between 2008 and the first half of 2012. However, variability in closure rates among particular applicant segments is high.
- Financial institutions that run large new checking account opening campaigns attract potential customers, but not necessarily credit-worthy ones. As a result, larger financial institutions tend to have higher percentages of applicants with prior account closures.
- Variations exist by geography. Financial institutions in the South historically record higher percentages of applicants with prior account closures.
FIS’ Client Closures Trending Downward
Between 2008 and the beginning of 2012, FIS’ clients got better at managing credit risk and demand deposit account (DDA) risk and deposit accounts forcibly closed gradually trended downward (Figure 4). The inquiry ratio trend equals forced closures (for all demand deposit accounts, not just checking accounts) divided by new deposit account applications. It represents a good proxy for the industry average closure rate. The decline in the inquiry ratio was noted across financial institution segments.
What drove the decline in forcibly closed deposit accounts between 2008 and the beginning of 2012 were improvements in tools for deposit account origination and managing demand deposit account risk. Clients most successful in reducing their forced closure rate for deposit accounts leveraged the QualiFile DDA risk score, which predicts the likelihood of a DDA to be forcibly closed within a year.
In addition to applying the QualiFile behavioral risk-based statistical score as part of their deposit account origination program, clients also transitioned away from manual and subjective decisions toward the automation QualiFile provides at the new deposit account desk. Other tools, which complement QualiFile, and are known to reduce risk and fraud at the new deposit account desk include the ChexSystems® suite of know-your-customer products, back-office fraud and behavioral risk monitoring services, along with a real-time OFAC service.
Despite the overall downward trend, closures rose in the first half of 2012 as more consumers applied for new deposit accounts. Another factor impacting the reverse in course is a rise in fraud (e.g., giving false information, forgery or check kiting) vs. abuse as a percentage of closures. While the rate of fraud in credit unions has always exceeded that in banks, there has been a substantial uptick in credit unions’ fraud rate, as well as the average loss amounts, in 2012. For credit unions, fraud as a percentage of total forced closures is 5.5 percent vs. 3.0 percent for banks. Credit unions’ average closure amount (also known as charge-offs) for fraud jumped to $1,255 (passing $1,100 reported by banks). Closure amounts for abuse also rose for credit unions (averaging $398 vs. $410 for banks) while remaining flat for banks. Credit unions have increased market share but also need to adjust their strategies to combat fraud.
FIS’ semiannual published report on new account applications reveals a “good news vs. bad news” story. The good news in the first half of 2012 is new account applications are picking up with the uptick in the economy. The bad news is potential customers are just as likely to have risky financial histories and fraud rates are trending higher. To counteract the evolution of fraudsters and enable financial institutions to do a better job of opening the right products for riskier consumers, FIS is continuously upgrading its risk, fraud and compliance solutions. For more information on the products and services available from FIS Risk, Fraud and Compliance Solutions, call 800.822.6758 or e-mail us at MoreInfo@fisglobal.com.