For years, community and regional banks tossed proverbial pebbles to gain deposits as Goliath-like megabanks rolled out massive marketing campaigns. But in 2018, and into the new year, the Davids of the banking world may now have better slingshots.
Small- and mid-sized banks gained an opening to build deposits thanks to the Federal Reserve, which has throughout 2018 followed a course of consecutive interest rate hikes.
In September, it took rates up a quarter of a percentage point to a range of 2 to 2.25 percent, with a majority of central bankers in favor of a future increase. While the next Fed hikes largely depend upon the growth of the U.S. economy in coming months, the central bank notes that economic activity is rising “at a strong rate.”
That’s Fedspeak for a potential need to slow bank lending, raise rates more and curb inflation. And it's good news for banking customers who’ve suffered from paltry yields on savings products since the crash of 2008.
According to Ken Tumin, editor of DepositAccounts, “smaller banks and credit unions have been offering much higher deposit rates than the megabanks. The higher deposits rates are seen in CD specials.”
For example, Tumin found in his recent survey CD specials from small/regional banks that included: Chemical Bank (Michigan) 17-month CD special, 2.75 percent APY; Reliance Bank (Missouri) 19-month CD special, 2.75 percent; and F&M Bank (Tennessee) 24-month CD special, 3.00 percent.
Tumin is also seeing higher rates from smaller banks in interest-bearing checking accounts. “Most reward checking accounts are free and reward customers when certain activity requirements are met. The activities typically include monthly debit card usage.”
In a nutshell, rising rates fuel the competition for deposits. A growing economy also accelerates lending, which can expand with increased deposits. Another competitive force comes via pressure traditional brick-and-mortar institutions face from online banks and roboadvisors—which don’t have (or need) costly bank branches.
What’s more, banks with less than $10 billion in deposits have found themselves lodged behind the eight ball when it comes to building deposits. In fact, banks in this category have generally not grown their core deposits in the past three years, according to Darling and Associates.
That established, one notable exception in this trend popped up last year, when community banks reported more deposit growth overall than larger banks, notes the FDIC. That may be due to a widespread downsizing of bank branches, an ongoing trend. Meanwhile, more than 14,000 community banks did business in the mid-1980s; by 2007, it had dropped to 8,400—and has since dwindled to slightly more than 5,500. One bright spot: Community banks slightly increased their number of branches in 2017 and over the previous five years.
How are regional and local banks gearing up for the deposit war? By deploying more aggressive deposit strategies. Last year, “close to 64 percent of bankers said that deposit competition had increased in the last year, and 77 percent expected it to increase during the subsequent 12 months,” according to Promontory Interfinancial Network’s Bank Executive Business Outlook Survey.
As for the lay of the battleground, millennials will grab a lion’s share of the attention—though the battle will largely be fought in cyberspace. In the latest BAI Banking Outlook survey, respondents name millennials as the top group likely to bank online for better rates, regardless of the type of institution (28 percent, compared to just 18 percent in 2017).
Meanwhile, as interest rates have inched up, smaller banks have boosted yields to attract deposit product customers. Some 13 of 20 of the highest-yielding products were offered by banks with less than $25 billion in assets, according to DepositAccounts, which tracks savings rates. The smaller institutions also have been quicker to offer higher yields, the newsletter notes.
Institutions that succeed in the deposit war will also need to employ an innovative, multi-layered marketing campaign, observes Brian Reilly, digital marketing strategist for BankBound Digital Marketing, a company that specializes in local bank growth. Smaller banks may be able to leverage quicker turnaround times for strategies and a community focus.
“It’s something that every company talks about, but the experience is truly different at local banks,” Reilly says. “There is a unique level of personal interaction and accountability that goes both ways at local banking offices.”
Here’s what Reilly suggests smaller banks do to ramp up the deposit competition:
- Special high-rate promotions, especially targeting existing customers (e.g. a higher rate checking product with higher minimum requirements marketed to existing customers that have free/basic checking).
- Cross-channel marketing to existing customers. This can be done cost-effectively through print/electronic statements, website, social media and email.
- Free gifts still open accounts (e.g. Fitbits and other high-tech devices).
- Search engine ads that target people who actively search for deposit products, demonstrate “in-market” behavior or browse relevant websites.
- Delivering paid ads to people based on “life events” such as recent moves, marriages and graduations.
- Checking products that are completely fee free and/or designed for consumers who need a “second chance” account.
- Accepting deposit applications online.
- Referral incentives for signing up friends/family.
But how do these strategies stack up when the largest banks can spend billions on promotion, technology and marketing?
“Megabanks and digital banks may offer innovative technology, but they often struggle with engagement and loyalty,” Reilly notes. “Cultivating customer loyalty and engagement is an area smaller banks excel at. They also serve many locations where megabanks don’t have a presence, such rural and farming communities.”
Despite their local advantage, smaller banks still need to hustle in other ways. “I do think smaller banks need to invest more heavily in technology, prioritizing mobile banking features and tools,” Reilly points out.
“While many smaller banks depend on their core banking software provider for basic digital banking technology, megabanks are building their own innovative platforms and starting to really distance themselves from local and regional banks.”
In other words, the David banks may want to pay less attention to the Goliaths and more on to the turf wars they can win. For when it comes to deposit growth in 2019, they have ample reasons to look up to gain—and step up the game.
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John F. Wasik has written 17 books and contributed to The New York Times, Wall Street Journal, Forbes, Financial Planning, Bloomberg and Reuters. His firm JK Enterprises provides editing and writing services for financial services firms. He has spoken about investing, innovation and creativity across North America.
For more content like this, view our recent executive report, Rewriting the rules for deposit growth.