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It’s ‘Game On’ in the Battle for Deposits

Posted February 2, 2019 - Cindy Draper

As both interest rates and loan demand rise, the battle for deposits among community financial institutions is only getting tougher.

Following the financial crisis, consumers generally parked their money in financial institutions across the U.S. Despite the little or no interest these institutions offered, deposits grew steadily—to historic levels, in fact.

After multiple interest rate hikes and a burgeoning economy, depositors now more often shop for higher yields. According to third quarter 2018 Federal Deposit Insurance Corp. data, noninterest-bearing deposits declined by $72.9 billion (2.3 percent), the largest quarterly dollar decline since the first quarter of 2013.

This shift is concerning for community financial institutions because deposits help fund loans and serve as a key factor in determining overall profitability. As a result, community bank and credit union management teams must develop strong deposit strategies that ensure future growth and institutional stability.

Loan Funding and Deposits

Community institutions must seek more expensive funding—which shrinks profitability—or even decrease lending. The latter strategy is not what most banks or credit unions want to do, especially since loan demand has generally been improving.

Fifty-five percent of financial institution executives reported an increase in loan demand over the past 12 months, up two percentage points from the previous quarter, according to Promontory Interfinancial Network’s Bank Executive Business Survey, published in the third quarter of 2018. A recent survey conducted by JPMorgan Chase & Co. found about 91 percent of small and midsize companies expect to maintain or increase capital expenditures in 2019.

This scenario brings new attention and importance to loan-to-deposit ratio (LDR), a ratio of total outstanding loans to its total deposit balance. Traditionally, financial institutions try to maintain an LDR around 80–90 percent, to maintain adequate liquidity.

Beating the Competition

Promontory’s study states that 90 percent of 389 bank CEOs, presidents and CFOs that were surveyed across all asset sizes and regions expect to see an increase in deposit competition over the next 12 months.

Growing deposits is especially important for regional and community financial institutions that lack the branch networks, digital footprints and marketing budgets of the nation’s largest institutions, which have experienced above-average deposit growth.

Promontory also asked what strategies they are using to increase deposits. The majority said offering higher interest rates is the best strategy.

While many institutions hold off on interest rate increases as long as possible, it may be time to consider this strategy. But with so many institutions also raising rates, other efforts to create differentiation in the marketplace is essential, including:

  • Target growth in specific deposit products, including commercial deposits, treasury management activities and retail time deposits.
    • Consider employing time deposit sales strategies, including training frontline staff to negotiate tailored CD rates and terms.
  • Employ client-focused approaches not dependent on rate, like enhanced service and establishing stronger relationships with depositors.
    • Capitalize on the financial institution’s data to personalize the consumer journey across all channels and touchpoints, including account onboarding. McKinsey estimates personalization can deliver 5 to 8 times the return on investment in marketing expenditures and can lift sales by 10 percent or more.
    • Emulate the service standards set by Amazon and Google, which personalize, predict and suggest a next purchase.
    • Provide tailored financial education based on individual goals and cross-sell based on current product penetration.
  • Invest in a digital referral program. Your current account holders are your best source for profitable checking account growth. Word-of-mouth advertising has become more vital in today’s world. Using digital referral programs on phones, tablets, computers and social media is key to brand awareness and recommendations.
    • According to the EY’s Global Consumer Banking Survey, 71 percent of global consumers consult friends, families and colleagues first about banking products and relationships.
  • Improve marketing and advertising efforts
    • Banks or credit unions can use automated marketing platforms, local search engine optimization (SEO), geo-targeting, social media, mobile technology, etc.
  • Capitalize on reciprocal deposits, which are no longer considered brokered deposits thanks to the Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law in May 2018. In a nutshell, the new law can make it possible for qualifying financial institutions to more readily tap stable, mostly local funds while reducing the risk for consumers to deposit more than $250,000.
  • Invest in cost-effective digital and cloud-computing technology that delivers faster, more transparent and smoother access to services.
    • These technologies include digital lending for consumers and small businesses, online account opening and onboarding, user-friendly apps, mobile payments, biometrics, contactless ATMs, etc.

Today’s account holders want to maximize return on their deposits and banking/credit union relationship. For community financial institutions, collecting and keeping these deposits is a strategic objective that may not be achieved with a lone “silver bullet” tactic. Absent a merger/acquisition proposition, these institutions are wise to adopt a proactive, multi-pronged approach.

Cindy Draper

Cindy is a Retail DDA Strategist and Director of Training at Velocity Solutions. Cindy has over 20 years of experience in the banking industry. She has worked her way up through the ranks, holding positions as teller, teller supervisor, personal banker, loan officer, branch manager, loan administration manager, and vice president of retail banking and marketing.

 

1 https://www.fdic.gov/bank/analytical/qbp/2018sep/qbp.pdf

2 https://www.wsj.com/articles/the-biggest-banks-are-gobbling-up-deposits-heres-whos-not-1524999612

3 https://www.americanbanker.com/news/lending-preview-c-i-will-surge-cre-will-slump-in-2019

4 https://www.investopedia.com/terms/l/loan-to-deposit-ratio.asp

5 https://www.forbes.com/sites/greatspeculations/2018/06/25/largest-u-s-banks-to-benefit-from-improving-loan-to-deposit-ratios/#7a720dfb6f03

6 https://www.promnetwork.com/home/news/articles/what-community-banks-are-doing-to-increase-deposits

7 https://www.mckinsey.com/business-functions/marketing-and-sales/our-insights/personalizing-at-scale