Deposit growth in tricky times

It’s critical that banks utilize solutions that help them more efficiently and effectively find, attract and retain deposits by identifying target markets.

By Karen Kroll

When it comes to 2023, “we’re calling it the year of deposits,” says John Meyer, senior director with Cornerstone Advisors, a consultancy focused on financial institutions. In a Cornerstone survey from December, 70 percent of bank executives ranked small business deposits a priority for 2023, up from 40 percent a year earlier. Since then, volatility in depositor behavior post-Silicon Valley Bank and continued rises in rates have kept deposit trends at the top of bankers’ radar screens.

Kenneth Kelly, CEO and chair of Detroit-based First Independence Bank, says his institution has “been growing deposits to give us a broader base to serve wider swath of customers.” The bank had focused more on capital in 2020 and 2021, which enables it to now focus on increasing deposits. “We’ve been moving the needle on all three: capital, assets, and liabilities,” says Kelly, who is also immediate past chairman of the National Bankers Association, the group focused on the priorities and needs of minority-owned and operated banks.

Several macro trends are driving interest in deposit growth, says Chris McGee, managing director and financial services practice leader with consulting firm AArete. They include a heightened focus on banking resilience, the evolving banking business model and the proliferating number of choices available to banking customers.

Banking resilience

The ongoing economic uncertainty is prompting banks to boost deposits as a way of building resilience. “Consumer deposits are traditionally a steady source of funding and a core (element) of customer loyalty,” McGee says. Many banks are also trying to become less reliant on investment banking revenue, given its tendency to fluctuate, he adds.

Banks also are monitoring the commercial real estate market, with an eye toward their loan exposure here, Meyer says. Office vacancy rates rose in the fourth quarter of 2022 to a post-pandemic peak, Moody’s Analytics reports. This shift is prompting banks to look to commercial and industrial loans, to which they hope to add these companies’ deposit accounts, he adds.

As the financial services industry evolves, banks are adjusting. “Competition from challenger banks, including those with stronger digital capabilities, is increasing the contest for deposits across the banking sector,” says Vinod Prashad, managing director in the financial services practice of management consultancy SSA & Company.

And as interest rates have risen, depositors have new options for earning a return on their money, says Joe Fielding, senior partner and lead of the Americas banking practice with Bain and Company. As of late March, some high yield savings accounts, often provided by online financial institutions, were offering rates topping 5 percent, albeit with minimum balance requirements in some cases. Post-SVB, banks also saw accelerated competition from money market funds for deposits. Moreover, the ease with which consumers can move money from one institution to another “creates a lot of strategic risk” for financial institutions, Fielding adds.

Banks are feeling the impact. Four or five years ago, an average bank branch would open about 28 accounts per month, Meyer says. That’s dropped to fewer than 20, he says.

Attracting deposits

These challenges are prompting banks to intensify their efforts to attract deposits. Technology is playing a key role. Systems that streamline account openings and other digital transactions can help banks better compete with digital-only institutions.

Also critical are solutions that help banks more efficiently and effectively find, attract and retain deposits by identifying target markets.

“As a bank, you have access to a wealth of information,” says Brandon Koeser, financial services senior analyst with RSM US. “What is your internal data and available external data telling you and how can it help find the target market or demographic?”

Many Americans have multiple checking accounts, Meyer says. A small percentage of progressive banks are mining data, such as ACH transactions. If they see transfers of cash between accounts, they may assume the other account is a checking account, and then try to identify ways to capture it.

The obstacle to leveraging this data often is resources. Few banks have the time and solutions needed to identify and clean the data so they can use it, Meyer says.

Service remains critical

While technology is essential, banks will want to “be digital first, but not digital only,” McGee says. Many customers still find value in personal service, especially for larger transactions, like mortgages.

Service is essential to differentiation and customer retention. “If you only play rate the card, you’re in a tenuous position,” Fielding says. The minute you no longer offer the best rate, customers may be tempted to jump to another bank.

The bank branch of the future will be more consultative than transactional, says Bill McKenna, with McKenna Marketing Network and formerly chief marketing officer with ESSA Bank & Trust. Banks should devote time to not only doing product and service training, but to turning their front-line teams into financial consultants, he says. To fully leverage the trusted, one-on-one relationships branch personnel have with customers, bankers need to watch for lifestyle triggers such as job changes, marriages among others. “These create ideal opportunities to add value and deepen relationships,” he says. The smart use of data will also identify and accelerate these opportunities, he adds.

Effective, value-based content marketing can also help in attracting and retaining customers, McKenna says. For business clients, banks might offer insight on industry trends. For retail customers, they can provide information to help them better manage their money. The key, McKenna says, is to offer information that’s relevant and important to customers. “Nobody likes to be sold to, but when we add value people are willing to listen,” he says.

Building a strong brand is an often overlooked but critical component of marketing, McKenna says. Banks that build compelling brands and are engaged in the community tend to have fewer rate shoppers. “Customers won’t jump for (a lower) rate as quickly as people who aren’t engaged with the brand,” he says.

Focus on streamlining operations

Appeals to efficiency and streamlined operations can attract business customers. A company that keeps its deposit accounts with the bank that handles its line of credit may find it easier to renew the line, as the bank will already have a handle on cash inflows and outflows, Meyer says. The company also might be favorably positioned to negotiate for, say, a quarter-point off the interest rate on their loan.

Expanding offerings around treasury management services also represents an option to bring in new deposits, Koeser says.

First Independence brought on several individuals to focus on small business deposits, Kelly says. The bank has also been leveraging the bank’s social media presence and pursuing public relations initiatives with a goal of acknowledging the good work the bank is doing and acting as a “beacon of hope” for the communities it serves, he says. While there’s more work to do, it has helped to be proactive, he says.

Building trust

Reading Cooperative Bank, a depositor-owned cooperative in Massachusetts, has boosted deposit growth, in part, by deepening relationships with Paycheck Protection Program borrowers in its existing markets and its newest market of Lawrence, says Shanna Cahalane, SVP and director of marketing and community development.

Lawrence is one of the poorest cities in the United States, Cahalane says. Before the pandemic, however, it enjoyed an economic resurgence as micro-businesses sprouted up across the city, she says.

When the pandemic hit, Lawrence business owners found many banks accepted PPP applications only from companies that had active accounts. “RCB opened the process up to all business owners, not just its current customers,” Cahalane says. During 2020 and 2021, the bank made 1,316 loans, with a total value topping $56 million, to local business owners.

The team also worked diligently to gain the trust of the community through a “boots-on-the-ground strategy,” Cahalane says. Bank executives in the market are all personally in touch with PPP borrowers, letting them know the bank’s services didn’t end with the pandemic, and that RCB can help their business continue to grow.

As RCB officially opens its doors in Lawrence this spring, the profit from in-market loans and pre-existing relationships will cover overhead costs. RCB will be “in the black from day one,” she adds.

When the economy is uncertain, banks that have a personal connection to the community and an authentic interest in its well-being can build loyalty, Cahalane says. “You can’t just tell your customers they matter; you show it through your actions,” she adds.

Navigating the bank failure fallout

Finally, how is the failure of Silicon Valley Bank and others affecting other banks’ efforts to boost deposits? “When customers have concerns and uncertainty — or during downturns — it has been our experience that local deposits tend to return to local banks,” Cahalane says.

Banks looking to reassure customers will want to focus on “engagement, transparency, and reliability,” says Hemal Nagarsheth, partner in the financial services practice of Kearney, a global strategy and management consulting firm. This includes clearly communicating their actions to keep customers’ financial wellbeing at the forefront, such as outlining and reviewing risk management strategies and controls, he adds. The run on SVB showed that many business clients and retail depositors were unaware that they can access deposit insurance protection above the $250,000 level through reciprocal deposit services like those provided by Intrafi; proactive outreach to offer this enhanced protection can be a value-add to retain depositors.

Because customers and regulators expect banking to “be always on and fully dependable,” a review of the bank’s availability, disaster recovery and capacity is a prudent step to avoid potential technology issues, Nagarsheth says. Any technology problems that might occur “could create a more amplified impact in today’s environment,” he adds.

Karen Kroll is a frequent contributor to ABA Banking Journal.