A few months ago, we released a podcast episode entitled, “The Fierce Battle for Deposits.” During this conversation with Tim Shanahan, SVP of Enterprise Client Development & Success and former banker, we chatted about why banks are pushing so hard to win more deposits, and also discussed ways that banks can move ahead in this competitive market.
It’s been one of our most popular podcasts, so we decided to provide an abridged text version of it, as well. We’ve included some of the highlights of that conversation below.
Factors Behind the Push for Deposits
The liquidity coverage ratio requirements for banks, especially the G-SIBS (Globally Systemic Important Banks) and the larger banks, have put a premium on operating deposits. In addition, the increases in interest rates since 2015 or so have caused a flight of deposits from non-interest bearing deposits to interest bearing accounts, which has also caused an increase of funds to banks. So, it just costs them more to raise deposits.
Lastly, that incremental loan growth out there has to be funded by deposits. As banks are looking to increase their balance sheets on the loan side, they’ve created a need for additional deposits, as well.
Attracting Deposits Via … Branch Expansion?
Despite what we may hear in the media today about the need to move to digital, there is strong evidence that a growth in branches can help your bank grow its deposits. For example, Chase ascribes 70% of their growth to branches. They’ve been targeting large metro areas, like Boston, Philadelphia, and Washington D.C., for their branch expansion. 99% of the population growth over the past 12 years has been in metro areas.
There is still a spot for community and regional banks to compete for deposits, as well. The rural markets see much less competition. Granted, deposit growth is about 25% less than metro areas, but there is still a spot and a need for these types of markets to be covered by the financial system.
Bringing in Stray Deposits
At one of Tim's previous banks, they compared client deposit levels at the bank with their stated cash positions on their balance sheets. They did this via the spreading system. As your clients submit their financial statements and you spread those, you get an understanding of the type of liquidity that the company has in cash and cash equivalents.
Tim says they would evaluate the amount of money the client likely had in terms of cash, again, comparing it to the deposits the bank had on its balance sheet. If there was, say, five million in cash and cash on hand at the company and the bank had one million in deposits, that could be up to a four million dollar deposit opportunity.
Tim's bank auto-loaded, so to speak, opportunities within their CRM platform, and asked the RMs to chase those opportunities down. This was wildly successful. They had massive deposit growth because there are a lot of stray deposits out there from clients at a myriad of different banks.
If you're their core operating bank, their lead bank, then you want them to do all their banking activities with you.
Five More Tactics for Increasing Deposits
First, split your consumer side and commercial side. On the consumer side, look at your branch strategy, like we just mentioned above. Are there opportunities for you to do some de novo branches or even some de novo markets, as well? Does that make sense for your bank?
Second, look at your product bundling. Consumer loans are also a great place to secure consumer deposits. Effective bundling with your consumer products can lead to an increase in consumer deposits. On the commercial side, train your bankers to ask for deposits and incentivize them to do so. You can also evaluate your spreading system. Do your customers have all their cash with your bank? If not, that’s a tremendous sales opportunity for bankers.
Third – and this one can sometimes be controversial - is tying. If you’re extending the credit to a customer, you should absolutely be getting the corresponding deposits. So, consider making tying a part of the actual contractual agreement between the bank and the client.
Fourth, evaluate your technology. Many banks today are investing in their treasury management capabilities because solid functionality is needed there if the bank is growing a commercial customer or business banking customer’s deposits.
Finally, don’t under serve small business. The small business and lower business banking folks have a ton of deposits relative to the credit that they’ve extended. The better your bank’s ability to service small business, the better its ability to bring in a ton of deposits with little impact to credit exposure.
One Word of Caution …
If a bank can’t bring in deposits, a bank can’t survive. One ineffective way we’ve seen of bringing in deposits is choosing to chase “hot money.” These banks offer higher rates for deposits versus the market. That’s the type of deposit that comes into the bank and then quickly leaves when the client sees the next best interest rate at another bank.
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