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From deposit competition to determined direction

Dec 14, 2018 / Consumer Banking

Call it the slowwwwww squeeeeeeze: Competition for deposits has produced tremendous force—the kind steamroller drivers would envy—as big banks, fintechs and smaller banks feel the pressure to collect the money they badly need to fund loans.  

And as the Federal Reserve continues to raise interest rates, so rates on savings accounts and CDs have moved higher than they have in years. Competing for those depositors, to put mildly, has become fierce.

“Nearly nine out of 10banks have a funding gap, meaning loans in their market are anticipated to grow faster than deposits,” says Anne High, senior bank strategist, bank intelligence at Fiserv. “As a result, deposit costs are advancing and we project they will increase further.”

Is this a crisis for banks? Or about to be a crisis?

Greg Wempe, chief client officer at Kasasa, says that for community banks, the picture isn’t as dire as some might think. “Some are still flush with deposits, so they could actually benefit from seeing some of those more interest-sensitive deposits—which are the most expensive for them to keep on the books—leave their balance sheets,” Wempe says.

That group is shrinking, though. “For community banks that have seen their loan demand reignited and need deposits to continue to fuel that flame, having to fight for those deposits could prove problematic,” he says.

Crisis no, dilemma yes, says Lindsay Lawrence, chief operating officer of California’s First Foundation Bank. “The challenge, especially for community banks, is that we still see that the large institutions aren’t adjusting. This causes all of the community banks to become extraordinarily competitive.”

Yet Lawrence, who oversees First Foundation’s deposit banking activities, adds this: “I also see an opportunity. Now that rates have moved so much and the big banks are still so low, the hope and potential winning strategy is that we will start to displace those big bank clients and get them to finally move.”

“At this time, renewed focus on deposit generation is wise,“ High notes. “Competition in this cycle is likely to be much different than the last time banks faced this type of an environment, because of the ease with which customers can now shop rates nationwide.”

For consumers, what rates beyond rate

Among banks big and small, who’s succeeding and what do their winning strategies look like?

“The winners will be those institutions that can offer their customers something more than a rate: rather a bank that they trust and want to be with,” Lawrence contends. “That really is going to be the winning solution, because everyone will be rate competitive. It’s being there for your clients and doing the right thing for them every time.”

High of Fiserv says: “One key to attracting more deposits is deepening customer relationships. This can include utilizing analytics to better understand your customers, what share of wallet you own and where to prioritize cross-sell opportunities. An example of low-hanging fruit would include the promotion of additional account services to current loan-only clients.”

Fiserv is an advisor to the Korean-American Open Bank, a Los Angeles-based institution that grew from $206 million in 2013 to $901 million at the end of 2017. A new CEO, Min Jung Kim, was convinced that Open Bank could better serve small and medium-sized businesses in the Korean-American community.

You could also say that Open Bank is growing deposits at double-digit levels through faith in its business—literally. A blog post describes how the bank went from one branch in 2012 to eight branches today, “with a vision rooted in faith-based values to serve as a steward to its communities, customers and employees.” The website even quotes Matthew 5:16: “Let your light so shine before men that they may see your good works and glorify your Father who is in heaven.”

High time for lessons from high-tech leaders

Joe Salesky at CRMNext says a winning strategy combines product and ease of communications. “At the core, are you easy to do business with? Is it easy to open an account or develop a broader relationship, as easy as buying something on Amazon? The consumer responds to both value and convenience,” he notes.

First Bank offers “a terrific example of a community bank focused on organic growth in their communities,” Salesky says. The bank has a single set of documents to e-sign and onboard customers, which makes it simple and fast.

“Get the right product,” he stresses. “Apple doesn’t want you to get just any product, they want the right product for you. It’s not as much selling as fitting to the right products.”

Then there is Silver State Schools Credit Union in Nevada, which has racked up roughly  two dozen quarters of consistent growth. “It’s a tremendous example of growth through service, value in their offerings, and a brand that is known for this,” he says. “Silver State has done this with a classic focus on the community.”

Wempe also suggests a sound strategy through demand deposit accounts, or DDAs. “Traditional deposit tools–CDs, money market accounts [MMAs], savings—are purely margin plays,” he says. “Given that margin is the problem, the only way these can work is through volume.”

Larger volumes require more competitive rates, which further squeezes margins. That said, “The oft-overlooked beauty of DDAs is that unlike CDs, MMAs and savings accounts, they bring in both deposits and non-interest income,” he says. “When your interest margin starts to compress, your only opportunity is to look to the non-interest side of the books, and that is where DDAs and the deposits they bring with them really shine.”

Are there any historical points that can suggest bold alternate courses of action? That depends—especially when we’re making history even as you get ready to make your next banking transaction.

“Rates have gone up and rates have gone down throughout modern history but we’ve never been down for 10straight years and then just started up,” Lawrence points out. “We just simply don’t know because it’s a bit of an unprecedented time.”

Wempe agrees. “Anyone looking at historical behavior as an indicator for how to address this problem today will run into two big issues.” First, historical data won’t reflect “the influence of fintech and non-traditional bank or credit union players now competing in this space”; and second, there is “the unbelievable increase in regulatory influence on lending.” 

Wempe’s conclusion? “Said plainly, there’s no map from someone who has done this before.” Or if you prefer, this slowwwwww squeeeeeeze—crawling at steamroller speed—lacks precedent, defies prediction and demands proactivity.

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Jeanne Pinder is the founder of ClearHealthCosts.com, an award-winning startup bringing transparency to the health care marketplace.