Thursday, May 10, 2018

Hot Rates - Swipe Left

Retail customers are not growing at community financial institutions.

According to my firm's profitability outsourcing service, branches have fewer retail checking accounts than two years ago. Deposit gains were made through growth in average balances per account. 

If you're a commercial bank, you may be fine if this trend is happening at your institution. So I ask you, what percent of your deposits are retail?

You should check. Because even the most commercial of commercial banks tend to have significant retail deposits. And if you are losing retail customers, how do you win them back?

Loan to deposit ratios have been on the rise over the past couple of years (see chart). Regulators are starting to ask a lot more questions about your liquidity during exams. Our ALCO meetings have done an about face from the 2012 "what are we going to do with all of this money?" to "how are we going to fund next month's loan pipeline?" 

And when you ask about funding next month, you rely on short-term, tactical fixes. We're not talking strategy here. 

In comes the rate promotion. It's like 2006 all over again.

And it's too bad. Because so many readers of this blog have done an excellent job "righting" their deposit mix to be less dependent on hot money. And we have had plenty of time to anticipate funding pinches, given the three year trend of loans growing faster than deposits. 

When I asked a community bank director of marketing about rate promotions and the success at turning them into loyal, core deposit customers, she was skeptical. The very premise of how you got that customer should tell you that they value rate above all else. And what is different today than 2006 is how easy it is to move money between financial institutions, and how transparent the rate environment is. A quick search on "bank rate promotions" gave me a trove of sites to compare offers, including this Nerd Wallet article.

It is difficult enough to turn retail customers into profitable customers, as so aptly stated in this BAI Banking Strategies article. Balances and spreads drive revenues. Winning a $100,000 account isn't much of a win if you can only drive five basis points of spread from it. Better to get a $10,000 account at a 300 basis point spread, right (math)? But to fund the pipeline, I would need ten of those accounts. That is why core deposit gathering is so strategic.

If you are struggling to fund loans, it may not be too late to avoid the 2%, 13-month CD promo. Here are some suggestions:

1.  Reward existing core deposit customers - In a recent conversation with a bank marketer, they spoke of the power of word of mouth marketing among one of their customer niches. Imagine the word of mouth marketing if you shared your institution's financial success with core depositors in the form of a special dividend to them. Execution is key. Use a long-term average balance as your guide, encouraging loyalty, and keeping more of their deposits at your bank. Better than paying non-depositors, right?

2.  Flash sale to core depositors - Along the same theme, reward your core deposit customers with a "flash sale" rate promotion to gain more of their deposit dollars. Execute wisely. Do those customers have a "real" core deposit account with you, that has direct deposit going into it, and the electric bill coming out of it? Don't fear mass promoting it, as non-customers may get the feeling "hey, I want to be a customer there". 

3.  Build relationships - I hear this a lot among bankers, but don't see it a lot. As I have said on so many occasions, I have not been called by my current bank. Ever. And I think my experience is not unique. I know nobody there. But if I have a relationship with a banker, and the bank does not conspire to "screw" me (see below), than I would be open to bringing more balances to them.

4.  Don't screw your customers - See my post A Time of Reckoning for Your Bank's Core Deposits?. Having products match market interest rates automatically is an ALCO nightmare. But paying 1/3 the market rates on a customers' savings, and then bragging about it in your investor presentations, can't be a way to strengthen relationships and increase the amount of business you do with them. Could this be a reason why customers spread out their banking relationships?

If you are reading this, and you are having some liquidity pinches, it might be too late to execute on the above and get funding for next month's loan pipeline. And perhaps some wholesale approaches would work to relieve the pressure. 

But, long-term, don't give up the core funding gains you worked so hard to achieve.

What do you suggest to get more short-term retail funding into your bank?

~ Jeff

Note: Many thanks to my ABA Bank Marketing School faculty and friends for fodder for this post, including it's title. Get a couple of drinks in a bank marketer... 


  1. Bundle and get paid for it. Consumers buy cell phone insurance and identity theft protection. Consider bundling it into a checking account and have them buy it from you instead. For those customers with lower average balances, it can be used as a “value-added” service in exchange for a monthly fee. For those customers with high average balances, it could be provided at a reduced fee or free.

  2. Mike,

    I agree. In an age of pricing transparency, and ease of moving money, our strategy of hoping our customers don't notice the burgeoning gap between what our bank pays them for their deposits, and what others are willing to pay, are going the way of the flip phone.

    Thank you for the comment!

    ~ Jeff

  3. Jeff, what sort of relationships do you think bankers could and should attempt to build? As well as how? As I know that if I got a random call from who I bank with, I would expect it to be a sales call or that something is wrong. I mean, you could do it as a form of feedback gathering (which is the only way I can think of that wouldn't reflect poorly), but I'm not sure that is enough.

  4. How do other financial advisers build relationships with clients?

    But your point is well taken, and shows the gulf between how clients perceive financial institutions, and how financial institutions want to be perceived.

    Thank you for the comment!

    ~ Jeff