What deposit strategies and tactics should banks be employing in a rising rates environment? And how can Uber's business model act as a guiding principal for banks seeking to attract and retain properly priced deposits?
Neil Stanley, of The Corepoint and TS Banking Group, joins The Purposeful Bank podcast to answer those questions and more.
Helpful Links
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Podcast Transcription
Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics on the minds of today's best bankers. I'm your host, Jim Young, director of communications at PrecisionLender. I'm joined today by Neil Stanley.
Neil is a director for the TS Banking Group, as well as the founder and CEO of The Corepoint. We'll let him describe The Corepoint in just a bit, but for now just know that he's a friend of the program, having appeared on The Purposeful Banker before. Today he's here to talk both in general and in tactical terms about deposit strategies in this rising rate environment.
Neil, actually let's start by, can you give me your elevator pitch on what The Corepoint is?
Neil Stanley: Certainly, Jim. Thank you for having me here today. Well, The Corepoint was developed after years of being a bank executive and realizing that most bank leaders thought that deposits were just a rate game. If we just pay more, we'll get more. Well there's certainly some truth to the fact that the supply of deposits is impacted by price. No one should deny that. But what else is there? There's a lot more to it. The processes and the products and the analytic tools that bankers are using today in a Google and GPS world have changed the way that banks can attract and retain properly priced retail deposits, Jim.
Jim Young: Great. Listeners will hear a lot of echos to a lot of the things we talk about with PrecisionLender and in terms of loans and the way that The Corepoint approaches deposits. Neil, you mentioned to me as we were in our pre-show discussions about an analogy that you make when you speak at various events and conferences about Uber versus the Metro bus pass basically. Can you retell that and put it into the context again of what we're talking about with deposits right now?
Neil Stanley: Yes, thank you. I've been at this for many years. I started the business in 2010 to help bankers across the country better price and sell time deposits. In a recent meeting where I was with about 20 bank CEOs, it occurred to me that I had taken an Uber during my trip and I just asked these bank CEOs, "How many of you have taken an Uber here in Fort Lauderdale?" A whole bunch of hands came up. I said, "How many of you have ridden the Metro bus?" Nobody responded to that.
Well, it's very interesting, as we think about a GPS world, a Google world, an Uber world where we're customizing solutions for the party of interest. For me, as a person wanting to go from point A to point B, I don't want to go to a bus stop and have them drop me off at the bus stop, the next bus stop. I want them to pick me up where I am and I want to know where they are and who they are and who's coming to get me.
The reality is so many banks, Jim, today are still using the technology of the Metro bus. Hey, we created these deposit accounts. They were designed to get people from point A to B, take their money into the future. Haven't really thought about the opportunity to Uber-ize that. Why don't we ask the depositor, "Well when do you want this money to have available to you in the future?"
So when we set up a time deposit it doesn't have to just be on our schedule as 6 months, 12 months, 24 months. It can be Uber-ized. It can be right-sized for their particular needs. Most bankers are saying, "Well, you know, we've always done it this way. It's how we do it here." Well that's what the Metro bus route would say too. They've always done it that way. Yet they're losing market share to people who are more agile, more nimble.
Jim Young: Yeah, we'll talk a little bit about an Uber-like tactic or product a little bit later, the companion deposit account. But I want to still stay high level here in terms of, and I said rising rate environment. This is not a newsflash. They've been rising for a while, but you were explaining again before the show about how things have changed in this year of interest rates rising that's really affected deposits for banks.
Neil Stanley: Well Jim, as every treasurer of a bank would be able to attest, when interest rates started to rise in December of 2015, bankers were in a wait and see mode. Let's don't change anything. Let's just see what happens. As time progressed, the increases by The Fed of The Fed's fund target have been very slow. It took a year for the next iteration of that from December of '15 to December of '16. So, patience paid off until 2018, where we get to this tipping point of interest rates, where the depositors have moved from being content: "Oh rates are pretty low. It really doesn't matter. I know rates have gone up, but I'm not gonna get much for my energy." Is the juice worth the squeeze if I as a depositor go out and try to manage my long term savings? In 2016, they said, "It doesn't really matter." In 2017, it didn't matter that much. But in 2018, we've now seen eight increases. We're at 2.25 for The Fed funds.
Meanwhile, many banks have rates that are still starting with point something. Those long term savers are challenged now. Do I just stay where I am, or do I take action? That idea of attrition for the banker is very vulnerable because what's different is the loan to deposit ratios. The loan to core deposit ratios have gone to the point that many banks are now above 100%. I'm never surprised when I talk to a banker who says, "My loan to core deposit's now above 100%." In that environment, they have to be understanding, where's my raw material coming from?
Jim, I like to think of banks as factories. In our factory at the bank, we produce a finished good called loans. We have to have the raw material to produce that, deposits. We can get some deposits wholesale, some funding wholesale, but the raw material, the ultimate advantage of an FDIC insured institution is that we can get local depositors to bring us funds and be able to create a spread on that.
That is really why all these banks today are saying, "It's important that we be efficient in our cost of operation, be efficient in how we price loans. It's vital." We are such enthusiastic PrecisionLender clients here at TS Banking Group, and many of my clients at The Corepoint are also PrecisionLender clients because it makes sense to do price differentiation. We are risk based pricing. We need to do that because if we offer one price to everybody, we're gonna get adverse selection.
On the loan side, if we throw out, here's out stated price for lending. Well, everyone who's marginal is gonna go: "That's a great rate. I'm very happy to get it." But many of them won't qualify. Then the premier borrowers are saying, "I can get better deals than that." We would choke off the vital business development that we have to have as a bank.
Now what we're doing, because of loan to deposit ratios and interest rates rising, is we're taking that same strategy to the other side of the balance sheet. How do we do price differentiation in a meaningful holistic healthy way, not just random, because that never works. We can't just do rate matching because if you do rate matching, you will end up with the pricing of your most aggressive competitors going into your raw material.
So, you can't just match price. You have to have a strategy as a banker about how you're going to deliver a sequence of offers that maximizes the pool of raw material, deposits, in a very healthy price point.
Jim Young: So, yeah. Take me through maybe a little bit of a hypothetical here where you're competing, you say another bank. You know you've got to raise those rates now on those deposits because, like you said ... and I think about it in a way that when mortgage rates were dropping and you're like, "Okay. When do I refinance? When do I refinance? Okay, now I want to refinance." But in this way, it's when do I go ahead and move deposits? Or when do I go ahead and open up new deposits?
So, you've got a competitor who is maybe charging, decided they're going to offer a rate that's just for your bank, a little more than you're comfortable offering. It's just not going to work out. It's gonna make your cost of funds such that it's really going ... your raw materials essentially cost too much for you at that point. How do you ... What's the thought process then, if you're not gonna, if rate's not gonna work for you, on how you can offer something then that can still allow you to win new customers and hold onto the ones you have?
Neil Stanley: Let's go back to the Metro bus approach. What does the industry usually do? Let's ask that question. What do we find bank's legacy approach to new deposit development is? First of all, let's raise the rates. Okay. So, raising the rates is gonna directly increase our cost of funds. Well, if we don't just raise all the rates, then let's run a special. Specials are helpful. Many of your clients are running specials right now. But the problem with specials is if you run them all the time, they're no longer special. If you become reliant on a special because your frontline says, "If we don't have a special, I'm dead in the water," I can't attract or retain deposits without a special. Then you're ultimately moving to a position where that special loses its vitality. It's just another offering and you're conditioning your depositors to look for specials.
Jim Young: Yeah. That's like when everybody has the technique of calling up the cable company to go ahead and say, "I'm canceling," so you know you can get the lower offer that they've got sitting there. Everybody knows it, so nobody ever just renews anymore. That's a pathway to a bad ending.
Neil Stanley: You got it. That's exactly the parallel scenario. Here's a couple other things that they will do. Let's use a teaser rate. Let's run a money market promotion. We'll only give it 90 days and then we'll lower the rate right back down. Okay. How about new money only? Let's run a new money only special. ALCOs think it's a great idea, but they haven't been around the frontline when depositors are yelling at them about how, well if that's what it's gonna take, I'll close my account here. They'll use a word we have to bleep out in order to close that account, so that I'm now eligible for your new product.
What we find are these institutional legacy ideas are alienating the very people that we want to attract and retain. What we're doing is we're moving to better processes, better products, that Uber-ization that we talked about. How do we do it? We find ways of changing the product. You mentioned the companion deposit account. Now companion deposit accounts effectively get a lot of the new money only impact without the alienation of not qualifying for our current clients. The idea has been on the drawing board many, many years, but we didn't launch it until 2018. We launched it when it mattered because we could have thrown out, hey we'll do a buy one, get one, but when rates were so low, nobody really cared.
In 2018, as The Fed was getting the rates up, we launched this product in selective clients, knowing that it would become an industry aware thing. We were able to get articles published about it in a couple places. BAI Banking Strategies picked up on it right away. The Financial Brand said they liked this. Then subsequently, other entities, other publishers have now started to write about it as well. So, we didn't even introduce it to them. They just saw it as a phenomenon in the industry.
Jim Young: Can you walk us through that just real quickly? Like you said, I think it's becoming a pretty well known topic, but just in case, for people that may be are going, "Hey, what exactly is that?" Can you walk us through the basics of it?
Neil Stanley: Absolutely. We all know what a savings account is. We all know what a CD is. Everyone of us bankers, me included, I have these paradigms. I think about, well I know what that is. I've seen that before. So, we as professional bankers, think that we've invented all of the things that could be out there, not really using the mind of the depositor.
But what is the mind of the depositor? If you spend time at the frontline with people interacting with retail depositors, long term retail depositors, what you'll find is that they all want the same thing. They want a high yield and a short commitment. We've become jaded as bankers sometimes to go, "Yeah. All these rate shoppers are calling me up, trying to get a better rate. They're negotiating. Will you match?" All this.
Well, the reality is, most people just want to be treated fairly. They maybe don't think they're gonna get a cutting edge price, but they'd love it if you give it to them. What they're really looking for is they want a high yield and a short commitment, and they don't want to be taken advantage of.
So, we as bankers are offering CDs. We're asking them to compromise that short commitment, lock in the money for a particular period of time, and then we'll tell them there's a substantial penalty for early withdrawal, but here's the rate. So we're using a rate as an inducement. We'll give you a rate and you can lock up your money here with us. They know what that is and they're comfortable. That's a paradigm they understand.
Then on the savings account, those are variable rates. In our bank, they're pretty low rates, and occasionally we'll run a teaser rate or some promotion, but then the rate goes back down. So, they see savings as not very attractive. What we've done in 2018 with many banks across the country, and said, "You don't have to be stuck with those two paradigms." You can take attributes of the CD, which is open and fund on a particular day, and you can have the yield of a CD. High yield, much closer to Fed funds. And simultaneously, you can have it be variable rates. And the depositor doesn't have any schedule whatsoever. They're not gonna get a maturity notice like they would with a CD.
It's like a savings account in the way the depositor thinks about it, except it has a yield more like a CD. Every depositor wants high yield and short commitment. Why don't we give it to them? That's what this debit only or withdraw only product does.
In this environment, it is, in a rising rate environment, you will be able to price as a banker close to those online bank offerings, and still not get tons of cannibalization because the moment somebody calls you up and says, "Hey I see you're offering this high yield savings account. I just want you to transfer my low yield savings account to that." The banker responds very simple and very clear. "We'd be happy to do that as long as you open up today a new retail deposit with us, a new retail CD with us simultaneously."
Jim Young: Ah, okay.
Neil Stanley: Now that takes commitment.
Jim Young: You of got to me because as we're talking, I'm listening going, "Well why wouldn't I just take all of my other stuff then? This sounds great." But what you're saying is, is essentially you can do that as long as you give me something else essentially. Is that basically what you're saying?
Neil Stanley: Bingo. We can't just be a high yield money market shop because what we know for sure is if you offer a high yield on a savings account, you will get hot money. When I say hot money, I mean volatile money. The retail depositor who's willing and able to move, they are just as willing and able to move the next day after they open up your account as they were the day when they opened it. That's what we don't want in the industry. We don't want to be the bank for the volatile high rate shopper.
What we want to be is the bank for that real retail depositor who wants a fair rate and they don't want to be abused. Great. We are more than happy to take you and put you in a product as long as you show commitment to our bank by opening up a long term commitment at the same time you open up this high yield no commitment account called companion deposit account.
Jim Young: Gotcha. Well, okay. Sounds good. Do you have any sort of results so far for this thing? With the banks that you've consulted with and talked through this product, and the ones that are offering it, do you have any sort of, for lack of a better word, evidence?
Neil Stanley: Yes. Yes. Well, as you know Jim, I am an officer of TS Banking Group. I'm also a provider of services to banks across the country. What I'm gonna give you is not for just one entity, but I'll give you a sampling. That is that this product on some of the banks that we've looked at is attracting the level of depositor that will bring in about $100000 worth of relationship.
So in setting these accounts, we're finding these are not nickel and dime kinds of relationships. They're material. Whether they're new accounts with this financial institution, brand new relationships that didn't exist before we offered it, or they may be accounts that we're here, but we're shopping, and they chose this product. Either way, they end up being about $100000 relationships in the samplings that we've looked at, and the specific accounts that are going into what we call the companion are about $30,000. A typical companion account will average about $30,000. The other accounts then of course would be the other non-maturing accounts, like the DDA and savings.
Then CDs, they're required to have at least as many CDs. We would expect that if you have $30000 companions, they would at the time of opening have at least $30,000 of CDs. So it's not surprising that the relationships are much larger. In fact, we find that typically so far in the time we've done it, $30,000 companion accounts with a total relationship for each averaging around $100,000.
Jim Young: Well, I think this is a ... There's a lot of different areas that we could go into, but this is but one podcast. Is there anything else that you would want to touch on, just backing back out of the companion deposits and back to our bigger discussion about products and tactics that banks can use to essential Uber-ize deposits? Anything else you want to touch on before we wrap up this show?
Neil Stanley: Well, it's a great broad spectrum question. Let me just do, as I do with our clients and many prospects we talk to. We've been doing this since 2010. The ideas that we developed were generated by working with bank management teams that were very distributed, very much differentiated. We learned a lot of things. This is just one particular idea in a toolkit that our clients are able to use that includes many processes that have been used now over many years. What we told you about today is a new one.
Let me tell you about just a really high level of some of the process we consider basic now because they've been used so long. That is dollarizing everything you do. When you make a CD quote to somebody, don't just give them rates. Dollarize it because that relevancy of how many dollars that is, is so critical in that process. You can also show how it stacks up against the competition because Jim, you don't want them to leave your desk to go shop the competition. You want them to shop the competition from the desk in your bank, working with your financial professional. Then customizing the solution.
I know at PrecisionLender, one of the things I love about your tool is that when we're working with a situation, we don't just give them, here's the rate on your loan. We can give them a variable option, a fixed option, an adjustable option with rate caps and floors. Essentially what we're doing in the deposit side is customizing maturity dates and embedding a relationship pricing. These are not new ideas in 2018, like the companion account.
The last one I would just throw out there is that there's a variant of the companion account that every one of your bank clients should be using. Any time somebody threatens to leave ... See, it's one thing to not know who's leaving and who's maybe just rate-sensitive. It's a very different thing when they say, "I'm cashing in my account and I'm going elsewhere unless you'll match." There's a variant of what we talked about this morning, that debit-only, withdraw-only product that every bank should have in their toolkit, so if somebody says they're gonna leave, that we offer a withdraw only savings product that pays a CD yield.
I knew that we talked about something quite new and innovative. I want you to know that some of these things are not new, but they still may be different for your clients. I thought this would be a great occasion for you to share some of those other ideas with them.
Jim Young: All right. Great. Lots of different ways to attract that raw fuel that matters so much to banks. Thanks for coming on the show, Neil.
Neil Stanley: My pleasure, Jim.
Jim Young: And a reminder, you can learn more about his company, The Corepoint at, it's httpbank-ps.com. So, bank-ps.com. Now for a few self-serving reminders. If you want to listen to more podcasts, or check out more of our content, you can visit our resource page at PrecisionLender.com where you can just head to our homepage to learn more about the company behind the content. Finally, if you like what you've been hearing, make sure to subscribe to the feed in iTunes, Sound Cloud, Google Play, or Stitcher. We love to get ratings and feedback on any of those platforms. Until next time, this has been Jim Young for Neil Stanley. You've been listening to The Purposeful Banker.
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