If a “secret sauce” exists to improve bank performance, it’s likely via capturing and retaining low-cost deposits. Low-cost funds feed a strong net interest margin and allow lenders to maintain a strong discipline and avoid higher yielding, riskier transactions.
So it was a surprise to hear a regional bank CEO recently (and confidently) state that because the Federal Reserve has curtailed interest rate hikes, he felt the “pressure was off” on deposit gathering. But that view seems shortsighted. It overlooks the long-term systemic issues that impact how banks collect and retain those funds.
Banks face an unprecedented and growing level of deposit competition, both from traditional players and new entrants. Let’s look at the current environment.
Peaks and valleys in the deposit landscape
Many small and regional banks operate at a 100 percent deposit/loan ratio. This raises concerns about cost of funds and ability to grow.
The biggest banks are building nationwide branch systems and online banks to capture more deposits. One example: Citizens Access, the digital-only offshoot of Citizens Financial Group, gained $4.6 billion in deposits in the first quarter of 2019. That’s up from $3 billion at year end 2018.
More non-banks focus on deposits. T-Mobile recently teamed with BankMobile to introduce an app-based checking account. Beyond focusing on its 70 million-plus customer base, the company offers a four percent yield on balances up to $3,000—dramatically higher than others deposit seekers.
New digital competitors target specific lifestyle and age segments. Aspiration, an online only startup, aims at customers who support “socially-conscious businesses” by grading companies based on “their treatment of employees and the environment.” Its website also identifies four big U.S. institutions as “bankers of fossil fuels” and mentions how “Big Banks hire lobbyists.” Aspiration donates 10 percent of earnings to charities and represents one of many “newcos” nipping at heels of the banking industry.
More deposits are now held outside banks via loyalty cards (Starbucks cards have more than $1 billion in balances), Health Savings Accounts, and with Venmo and other payment companies.
Some of these initiatives will fade but others will redefine how consumer and business customers view bank deposit offers versus other attractive options.
Ten deposit culture checkpoints
While many banks spotlight deposits, few establish a deposit culture. This means operating with an approach that creates long-term, sustainable deposit success. More typical is the approach one banker recounted. His institution ran an initiative last year that provided bankers with bonuses for the total new deposits they generated. That experiment netted a small but significant lift in deposit numbers. Once the year ended, though, deposit growth turned lackluster.
Banks should change their deposit approach after they assess performance based on ten critical criteria for success.
1. Does the bank have a deposit leader?
As one senior banker asked, “Who wakes up in the morning thinking about deposits?” If you answer, “We all do,” you are likely deceiving yourself. Until a bank establishes a deposit culture someone must shepherd the effort who carries the accountability and clout to make things happen.
2. Does compensation align with capturing deposits?
The old adage that bankers do what they are paid to remains true as ever. Some CEOs believe they already pay bankers to focus on deposits. But reality is that this area demands targeted compensation.
Two of the best deposit-oriented banks we know of encourage their teams to capture demand and low-interest deposits, paying little for CDs. Each team generates its own cost of funds that feeds into their profit and loss and, ultimately, their yearly bonus payout. Lower funds cost means higher banker income.
3. Are you lending to deposit-rich segments?
Banks have already identified cash-rich segments that include professionals, homeowner associations, municipalities and churches, among others. Unless a bank focuses on higher rates, they must also lend to these segments and serve their cash management and related needs. Late last year Signature Bank of New York established a Fund Banking Division focused on the private equity segment. These clients are deposit heavy but will only provide deposits to a bank that meets their loan needs.
4. Are you proactively identifying “at risk” deposits?
The 80/20 rule applies to deposits as well as other areas. Banks that assess their portfolios find a small percentage of clients generate most deposits; those customers need attention. One bank found that its depositors’ median age was very high, which threatened reliability and so focused elsewhere. Banks can diagnose their current deposit mix and act on it.
5. Do you focus on capturing more wallet share from current customers?
The first priority for building deposits centers on getting more dollars from current customers.
6. Who tracks the competition and highlights innovations our bank can consider?
Banks should research and take advantage of competitor innovations. One example: More banks provide deposit products that give customers greater flexibility rather than lock in their funds for set periods.
7. Do you have a “swat team” for product development and pricing?
Banks can ponder a product for weeks if not months. While the current deposit picture is calm, the need to make quicker decisions to keep and add depositors will increase alongside rate volatility.
8. Have you considered a deposit-only sales force?
Banks that wish to jump start a deposit effort should set up a dedicated focus group with laser-like intensity. These bankers must grasp deposits and cash management and work with colleagues for loan-related requests.
9. Do senior banker discuss deposits with the same urgency as other areas?
We find that banks often focus on a critical area for a few months and then move. Deposit growth and costs must inform ongoing monthly/quarterly review processes and identify specific steps to correct missteps and maintain emphasis.
10. Do you believe your bank has a deposit culture?
Many bankers may think so—but most would be wrong. In such a culture, retail and commercial bankers often lead with deposits in their customer conversations and get paid to do so.
In the next few years, the ability to gather and maintain high levels of low-cost deposits will likely separate the mediocre banks from the leaders. The path requires top management and board commitment, but the payoff makes the effort worthwhile: truly, the power of “depositive thinking.”
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The president of Financial Institutions Consulting (FIC), Charles Wendel is a regular contributor to BAI. He can be reached at [email protected].
Listen to Charles Wendel on his BAI Banking Strategies podcast, “Aiming to please SMBs.”
