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After Free... What Is There to Offer?
BY BILL STONEMAN
As Free Checking joins a long line of has-been deposit premiums, the industry seeks new ways to attract deposits. Today?s deposit war places a premium on execution.
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SYNOPSIS | The pressure is on to grow organically. As free checking loses its luster, banks try a variety of tactics to boost deposit growth, including building new branches, pursuing small business customers, specializing in specific market niches, bundling products and marketing promotions. Many plan to build customer satisfaction over the long term, by focusing on consistent high-quality execution.
Midway through 2006, it’s the rare financial institution today that isn’t focused on organic growth, of which deposit growth is a key component. Large and small banks alike have been building branches at a fast clip, counting on the power of proximity to residences and businesses to bring in depositors.
For a variety of reasons, however, deposit growth — or at least growth in core deposits — has become more difficult recently. Investors who sold stock and parked funds in bank accounts earlier in the decade are venturing back into the market. Rising interest rates reawakened the price-shopping urge in both individual and business depositors, and that fueled 22% growth in time deposits last year at the expense of lower cost accounts (see table on p. 26). And, of course, the lure of free checking, the hottest item in consumer banking three or four years ago, has become a lot less special.
The result of these trends is that bankers are searching anew for the secret to deposit growth, hoping they can seize on the next hot idea before their competitors do. It’s a quest some bankers view as futile. “I don’t see a silver bullet out there,” says Candace Fitzek, a senior vice president for retail banking with Fifth Third Corp. in Cincinnati. She notes that product design, branch locations, pricing, incentive compensation structure and the interpersonal skills of bankers on the front line all contribute to deposit-gathering results. “It’s going to take a lot of different things. It needs to be a holistic approach to the customer base, both existing customers and prospective customers.”
Analysts agree. To satisfy customers means living up to one’s claims about customer service by working on all the details that make an impression with customers. Experts note that retaining customers and expanding relationships with them can be more productive than bringing new customers aboard.
Otherwise, “you’ve got to run real hard to drive enough people in the front door if the back door is open,” says Rolland Johannsen, a senior consulting associate with Capital Performance Group, a bank consulting firm in Washington. Seemingly small things add up to make a big difference in retention, Johannsen and others say. Friendly tellers, tenured branch managers, calling new customers systematically and making sure that new checks are printed right the first time every time are just a few “details” that need to be done right.
Financial institutions today are in a battle for share of existing markets, which “puts a premium on each bank’s ability to execute,” Fitzek says.
Deposit Plateau
Total deposit growth was strong from 2000 to 2004, when banks were firing up their biggest branch network expansion plans in more than a decade. Total domestic deposits grew at a compound annual rate of 8.0%, including 12.8% in core deposits, according to an analysis of Federal Deposit Insurance Corp. and Federal Reserve Board data by Novantas LLC in New York.
But deposit growth slowed to an annualized rate of 7.1% in the first nine months of 2005, according to Novantas. With time deposits growing at an annualized rate of 21.8%, growth in core deposits, comprising checking, savings and money market accounts, was just 3.2% in the period.
So, how are banks responding to what may be a secular trend? Branch building remains a top priority for many, including J.P. Morgan Chase & Co., which plans to open 150 branches this year, all within existing markets. “The number one reason people open up checking accounts is the location of your branch,” says company spokesman Tom Kelly. J.P. Morgan Chase believes it can leverage its name and infrastructure in existing markets to take customers from competitors, he adds.
BB&T Corp., in Winston-Salem, N.C., is another institution that believes in the branch. BB&T has announced its intention to build 60 branches this year, 20% more than last year, as part of a shift in emphasis from lending to deposit-gathering.
Banks differ, however, on the wisdom of de novo branching in mature markets, where one company’s gain must be another’s loss. Commerce Bancorp Inc. in Cherry Hill, N.J., has done this with great success as it expands into metropolitan New York. Fifth Third, on the other hand, will do most of its branch building in faster-growing Sunbelt states like Florida and Tennessee, opening new offices farther north only where it spots a chance to fill gaps in its existing markets, Fitzek says.
Most analysts say free checking has run its course. “It’s no longer a competitive advantage, everybody has it,” says Sherief Meleis, a consultant with New York-based Novantas. But it’s still a leading offering for many institutions, such as Webster Financial Corp. in Waterbury, Conn. With many people moving regularly, even in the mature markets of the Northeast, free checking is still an effective way to draw customers into the bank, where they might be sold other accounts, says Scott McBrair, executive vice president and director of retail banking at Webster.
Free checking, in fact, seemed to set a second wind recently when Seattle-based Washington Mutual Inc, added some new perks to its free checking account, such as free checks for life, a once-a-year exemption from bounced check fees, free outgoing wire transfers, and a debit card that pays customers 3 cents every time it’s used to make a purchase.
Small business banking, which many consultants view as the richest overlooked source of deposits, is also impor-tant at Webster. Keeping small business owners happy isn’t complicated, according to McBrair. “Pay attention to them. Call them. Get out and visit them,” he says.
Some banks take a niche approach, seeking to serve particular markets exceptionally, rather than many markets adequately. City National Corp. in Beverly Hills, Calif., for example, is often cited by analysts for its strategy of serving wealthy individuals and businesses, but not pursuing mass market retail.
Corporate business provides about half of all deposits at San Francisco-based UnionBanCal Corp., which has for years focused much of its effort on deposit-intensive industries, says JoAnn Bourne, an executive vice president and manager of commercial deposits. Calling officers specialize in 17 niches, where business customers make banking decisions based on the deposit and cash management side of the ledger. Among those niches are title companies, property management companies, home-owner associations and labor unions.
Specializing like this improves Union Bank’s service to many of its customers, keeping attrition to a minimum, which in turn supports deposit balance growth, Bourne says. Bank employees, for example, understand that wire transfers to title companies are inherently urgent, as someone is waiting to close a real estate transaction. “Every stop gets pulled out to process that wire transaction,” Bourne says.
Novantas’ Meleis encourages banks marketing free checking, and perhaps all banks, to bundle accounts to encourage customers to open checking and savings accounts at the same place. For example, some banks combine balances in qualifying customers for benefits such as assignment of a relationship officer or shorter waits on the phone.
Bank of America Corp. introduced a package last fall that links checking and savings accounts together. Called “Keep the Change,” the package encourages consumer savings by automatically making small transfers from a customer’s checking account to his or her savings account with each debit card transaction. Few observers believe, however, that product design alone is likely to produce breakout success in deposit gathering, if only because products are copied so easily. And it remains to be seen whether BofA can generate significant savings balances with a program that transfers less than $1 at a time to savings accounts, the difference between a debit card purchase and the next dollar up, plus a 5% bonus from the bank, up to a maximum of $250 a year. BofA also requires a minimum opening balance of $100 for savings accounts eligible to receive the matching funds.
Banks can always compete for deposits with rates, of course, and many do regularly or from time to time. But that’s a dangerous game, experts say. “The guy who bites on your high-rate deposits is going to be the same guy who takes it away from you the next time,” says J. Marshall Reid, president and chief operating officer of Mercantile Bank & Trust in Baltimore, the largest among 13 banking subsidiaries owned by Mercantile Bankshares Corp. And, of course, high-cost deposits produce thinner margins.
Consistent Execution
In theory, the surest way to achieve long-term deposit growth is with a strongly differentiated identity that reduces the cost of marketing and engenders customer loyalty. Commerce in New Jersey is often credited by banking industry observers with actually doing that. Its branches shout out the company’s trademark red. They’re open long hours. Gimmicks like coin-counting machines with sounds and flashing lights make its branches fun to visit. Live operators rather than voice response units answer the phone in the call center. And foreign ATM fees are rebated, giving customers free worldwide access to their deposit accounts.
No wonder, perhaps, that Commerce’s deposit growth is practically off the charts. First Manhattan Consulting Group (FMCG), which calculates “same store” deposit growth figures by adjusting FDIC data to eliminate acquisitions and divestitures from the picture, reports that Commerce posted a 14% compound annual growth in deposits on a same branch basis from June 2002 to June 2005, compared with about 3% for the banking industry as a whole.
Commerce’s success in attracting customers is further underscored by a recent J.D. Power and Associates survey. See “Why Can’t Some People Commit?” in the March/April 2006 issue of Banking Strategies.
But all 9,000 banks in the U.S. fight the fear of being perceived as providers of commoditized products and services. That’s why execution on day-to-day business, customer service and a focus on retaining existing customers may be the key to consistent deposit growth for most banks.
Consultant Johannsen says banks should be especially mindful of the risk of attrition in the first few months after account opening. Identifying certain operating glitches, perhaps with issuance of debit cards or new checks, and fixing them, should be part of a marketing commitment to new customer retention, rather than an operations responsibility, he says. For more information about the importance of onboarding, see “90-Day Window of Opportunity,” a BAI Research white paper.
On some level, analysts say, service quality is overused as a differentiator in banking. “Everybody says they have better service,” says Gordon J. Goeztmann, managing vice president of FMCG in New York. “It’s the most hollow statement out there.” Still, Goetzman says, consistent execution on service quality is a top priority at a number of leaders in same-branch deposit growth.
Wachovia Corp., with 6% compound annual growth from June 2002 to June 2005, ties its results to slower household attrition, about 11% annually vs. 14% for the industry, says Betty Cowell, an executive vice president and director of retail banking. Slower attrition vastly eases the pressure to continually open new accounts, she says.
While it’s difficult to pin slower attrition on any specific factor, Cowell says that Wachovia, the top-ranked bank in a survey of consumer satisfaction conducted by the University of Michigan Business School for five consecutive years, works hard to understand what customers are thinking. For example, researchers for the company call 80,000 customers each quarter a day or two after they visit a branch to ask about their service. One of the main lessons is that customers indeed want to be treated like they’re important. To help ensure that they are treated well, staff members carry small cards reminding them to convey to customers sentiments such as, “I will warmly welcome you” and “I’m pleased that you’re here.”
Mercantile’s Reid says his bank, with 7% same branch deposit growth from 2002 to 2005, is often the last one on the block with the latest technology. But important as something like electronic banking is, it doesn’t define customer service, he says. “We try to fit our products with what our customers need so there’s a level of trust here that maybe the larger product-floggers don’t have,” Reid says.
Other banks seem to be picking up on the thinking. David J. Rudis, president of the consumer banking group of LaSalle Bank Corp. in Chicago, says growing deposits begins with recruitment of staff members who are comfortable engaging customers. LaSalle provides extensive training on issues like listening for customers to identify their needs.
“In our business model, people are everything,” Rudis says. “In other business models, price or technology might be more important.”
For more information about building customer relationships at the frontline, see “Give The Customers What They Want,” in the November/December 2005 issue of Banking Strategies.
Questions or comments about this article? Post them at the Banking Strategies blog.
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