Behavioral economics gives national banks the edge over community banks and credit unions.

Understanding and implementing the following two principles of the science of behavioral economics will help community banks and credit unions compete effectively against national banking.

Risk averse vs. risk assertive.

Banking has two types of risk-behavior customers. Risk averse are people who avoid risk, and as such are the only banking group that utilizes deposits for their savings. Risk averse people prefer low yield; low deposit return because it is insured and stable. The best way to compete for risk averse deposits is to use Deposits Dynamics to optimize your deposit rates.

The second group of customers is risk-assertive people. These people, who make up about half of your customers or members, are self-directed investors, who are willing to take calculated risks in pursuit of greater returns with extremely high level of confidence. Risk-assertive customers do not use deposit accounts, such as money market or CDs, for their savings. Instead, they seek greater return from the equity market by shifting money to national banks that have brokerage firms.

Checking is not a saving account.

Not all deposit accounts are alike. I am referring to the behavioral economics distinction between deposit accounts; those with positive relasticity and those with inverse relasticity. The distinction is done based on the response of customers to changes in the rate of these accounts. Savings accounts, which includes savings, money market and CDs, have positive relasticity, and checking account has inverse relasticity (Users of Deposits Dynamics are familiar with this distinction.)

Why is this principle important? Because rates of savings accounts are important to risk-averse customers, which is the reason rate optimization is critical with these accounts. Conversely, the rate of checking account is irrelevant. A checking account is a transactional account that is used by risk-assertive people as a gateway to transfer money to their investment account in one of the largest national banks. Therefore, community banks and credit unions that are paying interest on their checking accounts are subsidizing the transfer of their balances to the national banks.

So, what should community banks and credit unions do next?

First, they should recognize that they can’t survive if they serve only the needs of half their customers or members. Second, they should start implementing the Scientifically Predictable program that will provide their risk-assertive customers or members with the gateway to self-investing in equities with a very high level of confidence and peace of mind.

Aside from making their risk-assertive customers or members incredibly happy and very loyal, community banks and credit unions are going to enjoy other benefits from the Scientifically Predictable program. They are going to reduce their interest expense because there is no longer a need to pay interest on checking accounts if you give customers or members the Scientifically Predictable program. Additionally, they will receive liquidity at no cost as customers or members will have to maintain a minimum balance in their checking account.

Overall, everyone wins with the Scientifically Predictable program. Customers and members of community banks and credit unions are enjoying abundance through self-investing, and community banking is halting the shift of deposits and accounts to national banks.