Fighting The New Deposit War

BY RICK SPITLER

Rising rates and margin pressure require tactics that go beyond pricing

| SYNOPSIS | To grow deposits in a rising interest rate environment, financial institutions will need product innovation, needs-oriented communications and some branding basics to address customers' underlying needs and buying behaviors.

Low-cost deposits have been a godsend for the banking industry in recent years, but what has been a bright spot is dimming as financial institutions head into 2006. Deposit growth has slowed significantly with the recovering economy. Clearly, one-off product and pricing initiatives won't suffice in turning this tide.

Core deposits pose the most urgent concern, especially the outlook for household "nest egg" balances, typically kept in money market deposit accounts (MMDAs) and savings accounts. These are the most valuable of all deposits, and also the most vulnerable to withdrawals, as customers are tempted by rising rates on alternatives such as certificates of deposit and money market mutual funds. Additionally, the checking account business requires attention as banks search for new ways to attract customers now that free checking is commonplace.

The advantage will go to institutions that look beyond products to their customers' underlying needs and buying behaviors. Account usage is often driven by factors other than rates. This certainly is true of the MMDA/savings category, prized for its combination of high balances and spreads and low transaction volume. People variously use this family of accounts as a safe place for savings; as a place to park money they want to segregate from their checking accounts; for funds earmarked for long-term investment; and for high-yield savings with easy withdrawal.

There are pragmatic steps that banks can take to capitalize on such differences. First, it is important to deal with the extremely rate-conscious customer. By combining attractive rates with selective restrictions and conditions, such as withdrawal limitations and Internet-only offers, it is possible to cater to aggressive rate shoppers without triggering widespread rate changes across the customer base. To do this, institutions need to elevate their skills in targeting offers, and systematically identify special conditions and features that help with competitive differentiation and product profitability.

A second priority is to develop and position products in ways that more closely resonate with customer needs beyond just favorable rates. Examples include accounts positioned for house-hold funds intended for long-term investment, "rainy day" savings accounts that emphasize safety and product bundles that offer a complete household cash management solution for the sophisticated. There are many possibilities to design and market such products. Also, there are untapped opportunities to cross-sell savings and investment products and even credit.

Winners will distinguish themselves in acquiring new customers on the basis of factors other than free checking or simple neighborhood convenience. This is not about giving away iPods and toasters. It is about building strong brand appeal with both emotive and functional components of value that reinforce each other. It is essential to have a strategy in place to pursue and acquire new deposit business with distinctive marketing themes and campaigns, tailored products and strong front-line execution.

Through product innovation, controlled pricing initiatives, needs-oriented communication and the basics of branding, there are many ways to acquire and retain valuable core deposits without resorting to the lowest common denominator, raw price. Success with these measures will define the front-runners as the deposit business continues to tighten.

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