Updating deposit-gathering strategies for new times
By Cheryl Winokur Munk
Many community banks are still clinging to outdated deposit-gathering strategies that are no longer adequate to support ramping-up lending initiatives and a rising interest rate environment, some bank management consultants say. Thanks to the recession and the prolonged period of low interest rates, banks haven’t had to aggressively seek deposits for nearly a decade. Actually, many of their strategies to attract deposits date back even further—to the 1990s.
“The iPhone did not exist when most community banks’ deposit strategies were developed,” says Neil Stanley, a former bank chief executive who now runs The CorePoint, a firm in Omaha, Neb., that offers a pricing and sales platform for financial institutions.
Deposit-gathering strategies are in dire need of an update to meet the realities of myriad social, technological and information changes that have occurred over the past two decades, consultants say. Especially now, with interest rates on the rise for the first time in nine years, community banks may have to break out of their holding pattern and work harder to attract deposits. In the least, banks should review their deposit-gathering practices and strategies, several consultants agree. If those practices and strategies rely merely on raising interest rates to attract certificates of deposit or lowering account service fees to generate new accounts, a more thoughtful, sophisticated strategy that maintains profitability is likely in order.
In some cases, that’s easier said than done. Consider a recent quarterly Bank Executive Business Outlook Survey by Promontory Interfinancial Network LLC that finds that many banks say attracting fresh retail deposits is their highest-ranking funding goal. Even so, some banks expressed concern about their ability to attract sufficient retail deposits to support their lending opportunities. Among community banks—defined as those with $1 billion or less in assets—only 11 percent had high hopes for attracting deposits in 2016. (However, somewhat fewer community bank executives who responded to ICBA’s State of the Industry survey last fall said attracting deposits was a major goal for this year. Read “Pulse of the Industry”.)
The right mix
Although there’s no precise formula for growing deposits, at minimum a bank’s strategy should include the right mix of technology, customer service and bundling, consultants say. For instance, David Powell, president of Vitex Inc., a bank consulting firm in Mooresville, N.C., still talks to banks that are just now adopting mobile banking and remote deposit capture, which puts them at a disadvantage in attracting new deposits. Another hurdle: using cumbersome systems for on-boarding customers, he says. With the right system, it should take only five to 10 minutes for customers to open a deposit account.
While banks have a huge opportunity to attract deposits online, some still lack the proper functionality to achieve this virtual reality. Recent research suggests that up to 70 percent of community banks don’t have the capability to allow consumers to fully open and fund deposit accounts online or with a mobile device, says Edward Guerin, vice president of MeridianLink Inc., a Costa Mesa, Calif.-based provider of account origination software. When community banks offer this digital capability, they typically see about an 18 percent increase in new deposits, he says. “It’s significant.”
Once you build the appropriate digital capability, the next step to gathering more deposits is to make sure customers can open accounts in any channel. So if they start to open an account online and get distracted, customers should be able to save the information and then, if desired, call a branch and finish the process without having to start over, Guerin says.
Community banks also should consider bundling products and services that please customers and attract more stable deposits for the long term. So if a customer opens a checking account, he or she could perhaps be rewarded with a lower credit card interest rate. If the customer opens a deposit account, perhaps fees could be waived for remote deposit capture or some number of transactions covered with overdraft protection.
“It’s a way of creating differentiation in the market. You need to dangle a carrot in front of the consumer that says, ‘Grab me,’” Guerin says.
Of course, community banks have to determine their own mix of incentives based on their own mix of goals and products and services.
L.T. (Tom) Hall, president and chief executive of Resurgent Performance Inc., sees a deposit-gathering opportunity for community banks to more aggressively offer commercial money-management accounts to small and midsize businesses with $1 million to $5 million of revenue.
Hall, whose Alpharetta, Ga., company advises banks on ways to boost their financial performance, says he is not usually a fan of banks trying to gather deposits based on pricing, but commercial money market accounts can be an exception. He believes that businesses with excess liquidity of more than $50,000, even if they are already big-bank customers, would be willing to move those deposits for slightly better rates and the promise of better service. But that would be true as long as a bank can offer an expansive product suite that matches big-bank offerings, which includes mobile banking for consumers and robust treasury services for commercial customers. (See the “15 Minutes With …” interview with Citizens Bank of Edmond’s Treasury Services Manager Janice Morgan.)
By instituting the right pricing thresholds on commercial money-management accounts, community banks have an opportunity to “provide a pretty stable deposit base, and it would take a number of consumer accounts to equal what these small businesses are turning out,”
The amount of deposits in a particular marketplace is fixed, but the dynamics of deposit-gathering success probably isn’t. So banks should experiment with new ideas—and the right timing of certain promotions in the product sales cycle—to find a balanced formula that can lure new deposits, some consultants say.
Some community banks also are exploring ways to attract deposits that big banks have cast aside due to new liquidity rules. Andrew Frisbie, a managing director and head of the product and pricing division at New York-based banking analytics and advisory firm Novantas Inc., says his firm has been getting inquiries from banks with less than $10 billion about how to gather more municipal and financial-institution deposits the big banks have neglected. However, those deposits may not be the stickiest and sometimes require some special operations or technology.
“The bank has to make sure that it really understands the behavior of these deposits and that they have the operational capability to handle them,” Frisbie says. “Banks also have to make sure regulators are on board with the new strategy.”
Community banks also should consider the opportunity to compete more heavily for commercial demand deposits in the future now that interest rates are on the uptick. The repeal of Regulation Q in the Dodd-Frank Wall Street Reform Act allows banks to offer interest on commercial transaction accounts. But with the recession and low interest rate environment, such competitive bidding for commercial deposits hasn’t yet begun.
That could change if interest rates continue to rise and the economy rebounds, consultants say. “Some people are predicting three or four rate hikes in 2016. In that case, I think you’ll see the gloves come off and community banks will start paying interest on commercial checking accounts,” says Christopher Cole, ICBA’s executive vice president and senior regulatory counsel, a former community banker.
Community banks have to be careful not to overlook the low-hanging fruits that can make a big difference in attracting deposits. For instance, Stanley says he knows of banks that hand customers rate sheets from a previous year. Even though rates haven’t changed much, consumers shouldn’t be handed what appears to be outdated information. “It makes the bank seem like it’s not paying attention or it has fallen asleep,” he says.
Banks that have been able to coast these past several years may be in for a jolt as rates continue to rise. “The bankers have been content because the depositors have been content. They really don’t know what depositors are going to do as the rate cycle matures,” Stanley says.
Cheryl Winokur Munk is a freelance financial writer in New Jersey.