Commercial banks have "attracting deposits" at the top of their priority lists this year. But that's much easier said, than done.
Which banks are faring the best in this battle? And what are they doing to stay ahead of the competition?
Tim Shanahan, PrecisionLender's Head of Enterprise Solutions, joins the Purposeful Banker podcast to provide the answers.
Helpful Links
What's Going On in Banking 2019: Is the Party Over? (Cornerstone Advisors)
Is Now A Good Time to Start Building New Branches? (The Financial Brand)
This Bank Is Winning the Competition for Deposits (Bank Director)
Podcast Transcription
Jim Young: Hi, and welcome to The Purposeful Banker, the podcast brought to you by PrecisionLender, where we discuss the big topics from the minds of today's best bankers. I'm your host, Jim Young, director of content at PrecisionLender, and I'm joined today by Tim Shanahan, our head of enterprise solutions here at PrecisionLender.
We're going to be taking a look today at deposits. I've framed it as the fierce battle for deposits. Tim's got a lot of insights on this, both from his career as a banker as well as his time here at PrecisionLender working with our clients and with potential customers.
Okay, first question, Tim. As I mentioned before, we frame this podcast as the fierce battle for deposit, but let's take a step back here and try to get some perspective. During your career as a banker, has there ever been a time when there wasn't a fierce battle for deposits?
Tim Shanahan: Well, like anything, things cycle. Actually, yes, there actually was a time when the fight for deposits wasn't nearly as tough, and part of it is really just dependent upon the liquidity of the overall financial system. The Great Recession initially caused a massive need for deposits. We saw a fair amount of bank failures, et cetera, out there. The federal government stepped in and really provided a ton of liquidity for the financial system. At the time, interest rates were then negligible, banks were flushed with deposits.
Anyway, there's actually an adage in banking that the best time to secure deposits is when you don't need them. So the banks that are really fighting hardest for liquidity today are those that likely weren't nearly as focused on deposits maybe two to three years back as they should have been.
Jim Young: Yeah. It's the old storing up your nuts in the summer for the winter thing. That makes a lot of sense, actually.
Tim Shanahan: Yeah, that's right.
Jim Young: All right. So maybe it would be more accurate to say that the battle for deposits has gotten fiercer in recent months. What have you been hearing from your conversations with bankers about their level of pursuit of deposits right now?
Tim Shanahan: Well, it's definitely gotten fiercer. You can see that in the headlines that are out there across the different banking publications and websites and so on. It's definitely gotten fiercer. I think the liquidity coverage ratio requirements for banks, especially the G-SIBS and the larger banks, have put a premium on operating deposits.
I think in addition to that, the increases in interest rates since ... call it 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 that's out there, that loan growth has to be funded by deposits. I think as banks are looking to increase their balance sheets on the loan side, they've created a need for additional deposits as well.
Jim Young: Yeah. As you mentioned, you touched on some of the publications out there. One of the ones that we'll have a link to in our show notes is from the friends over at Cornerstone Advisors. "What's Going on in Banking in 2019 is a little bit of a State of the Union for banking, and the top priority listed on their from their respondents to the survey is growing deposits at their banks. So I think that everything you've said there reflects that.
That report also pointed to the effect that, as it's called, deposit displacement is having on financial institutions. They're never afraid of turning an interesting phrase there at Cornerstone. They described checking accounts as turning into "Paycheck motels, temporary places for people's money to stay before it moves onto bigger and better places." Agree? Disagree? Does it match what you're hearing?
Tim Shanahan: Oh, absolutely. I think this is especially true on the consumer side because there are just so many more options available to consumers these days, things like Venmo, Acorn, Stash, Betterment. There are so many different places to place that excess personal liquidity either to earn interest or to invest. Again, lots of available options out there to consumers. Probably, frankly, a good thing overall for the financial system to have stronger, higher savers and higher investors out there in the marketplaces.
Jim Young: Yeah. I will tell you as one data-point consumer, I get so used to from the Great Recession time period when my checking account, interest on that thing was so microscopic. I'd get the numbers back and it would be like, "You added one cent this last month." I've totally almost lost interest in that area, no pun intended. I wonder if others might have that same experience.
All right. Something else, though, in going through the research on deposits and looking at some of the articles out there. A couple of them, one from Bank Director and one from Financial Brand, which had some interesting points in there.
The Financial Brand one had this headline that I was not expecting. It was basically saying if you're looking to ramp up deposits, and then the question they ask is, "Is now a good time to start building new branches?" Which I found very interesting, considering if you listen to this podcast, you know that Dallas Wells and I did a recent one on the perils of tough times for small banks, and one of the things we pointed to was the case where they bought some branches and it turned out to be a disaster.
But there's that Financial Brand piece, and then there's another one in Bank Director really pointing out the success that JPMorgan Chase has had with attracting deposits in their branches. JPMorgan is known for being on the cutting edge of digital banking, but the piece really says the lion's share of the credit for ... again, no pun intended, but the lion's share of the credit for what they're doing in terms of attracting deposits was branches.
So Tim, what is going on here? Are we having a retro movement in banking?
Tim Shanahan: This is actually a great point. No, since ... I think it's 2014, Chase has increased their deposits on average per year of 9.4%. That's actually double the industry average.
Jim Young: Wow. Wow.
Tim Shanahan: Double the industry average of 4.6%. You could say, "Hey, it must just be a big bank thing," but if you look at the other big banks, they average 5.3%. You could also say, "Hey, it's all digital." Chase's digital offerings are absolutely incredible. But adding to your point, Jim, they actually ascribe 70% of their deposit growth to their branches.
Now given their size and scale, they're really playing the marketplace. 99% of the population growth over the past 12 years or so has been in the metro areas. So what Chase is doing, they're targeting large metro areas for branch expansion, markets like Boston, Philadelphia, Washington, DC. We're seeing other players do the same thing. Bank of America into Denver, US Bank and PNC into markets like Dallas.
So I think you're definitely seeing that, and you're also seeing some other trends with branch expansion as well that compared to pre-recession, banks are being much more selective on the markets that they enter. They had on average about 147 different metro areas were targeted for de novo branch expansion pre-recession, and it's 118 post-recession. Definitely focused on a smaller grouping of markets.
Now given all that flight to metro areas, I think there is a spot for community banks and some regional banks to target maybe the rural markets where there's overall less competition. Now that said, deposit growth in those types of markets is about 25% less on the deposit side than the broader metro markets, but there is a spot and a need for those types of markets to be covered by the financial system.
So I think again, you see a flight to population via some of the big banks, but it doesn't mean that there aren't opportunities for the smaller banks as well.
Jim Young: Yeah. But touching again back on the previous podcast we did, if you're a smaller bank and going to do that sort of thing in a rural area, still, you've got to make sure your digital offerings are up to snuff as well because then that could lead to flight out of your branch.
Jim Young: But it's an interesting development, and it's one of those probably lessons, again, that ... This happens not just in banking but in all industries that sometimes, we get a little bit too quick to go to the latest thing and forget some of the real fundamentals out there that are still the bedrock. Branch banking still very much serves a very important purpose for banks on the deposit front.
I want to shift now to go in a little bit of a story mode, which is something we're fond of doing here on Purposeful Banker. So Tim, I'm wondering if you can indulge us with a story or two from your days in banking about deposit gathering, particularly a story about a bank, either one you've worked at or one you've witnessed, that was just really good in deposits, had that knack for it.
Tim Shanahan: I think there's a number of good stories. There's one that I think was probably the best one, and that is we had this idea to compare client deposit levels at the banks with their stated cash positions on their balance sheets. We did that via the spreading system. I'm sure lots of the bankers that are listening to this podcast would know. As your clients submit their financial statements and you spread those, you get an understanding of the type of liquidity that that company has in cash and cash equivalents.
So we would evaluate the amount of money they likely had in terms of cash, again, comparing it to the deposits we had on our balance sheet. Then if there was, say, five million in cash and cash on hand at the company and we had one million in deposits, we considered, well, that could be up to a four million dollar deposit opportunity.
We did that. We actually auto-loaded, so to speak, opportunities within our CRM platform, and we asked the RMs to chase those opportunities down. This was actually wildly successful. We had massive deposit growth because what you realized is there are a lot of stray deposits out there from your clients at myriad different banks. If you're their core operating bank, you're their lead bank, you're their sole bank, then you want them to do all of their banking activities with you.
So in that particular case, we were able to, again, ask the bankers, "Go out there. Be in search of these deposits." It was incredible, the amount of incremental deposits we were able to obtain.
Jim Young: That is brilliant in its simplicity, actually. When you lay that out, it's like, "Well, that seems like a really super logical way to approach things." It's a great story.
You and I talked about this one, actually, off air because I wanted to ask you the flip side of this, which is, okay, tell me about banks that just can't really figure out how to bring in deposits. You had, again, once you answered it, what seemed to be a pretty obvious answer to this question. I wondered if you can share it with our listeners.
Tim Shanahan: Oh, sure. First and foremost, if a bank can't bring in deposits, a bank can't survive. Banks are in the business. They take money in and they lend it out. That's the core service of a bank. But at the same time, different folks are effective in different ways.
One of those that I've seen ineffectively used is some banks really choose to chase what some call hot money. They offer higher rates for deposits versus the market, and that's the type of deposits that come into the bank and then quickly leave when they see the next best interest rate out there.
I think banks really need to focus on core consumer deposits or core commercial deposits, and those banks that don't raise deposits effectively, they're less profitable. They pay too much for the deposits that are on their balance sheet. They can't grow their loan book as effectively. Their net interest margin isn't nearly as good as what it is in the broader market. So the role deposits play is incredibly important in the ongoing growth of a bank and the ongoing profitability of a bank as well.
Jim Young: Moving onto another one here, a lot of the pieces that we've talked about in this podcast, we're talking about consumer deposits, talking about the branches and bringing in consumers that way. I want to make sure ... We're about commercial banking here. We want to focus on commercial banking as well.
Tim, when you worked with commercial relationship managers, what set apart the ones that just were the best in attracting deposits? What were they doing that the others didn't do as well?
Tim Shanahan: Well, the first one, which is actually going to sound totally cliché, is that they ask for them. They actually ask for the deposits. For so many years, so much of the focus, and it's probably been right because it's so much of the complexity, has been on the credit side of the commercial banking business. I think bankers either weren't trained or just forgot about the other side of the balance sheet.
Then certainly over the past 10, 12 years, there's been a migration from what some would call lenders to bankers. Whether it's a C&I or commercial real estate, lenders were always focused on the loan. They wanted loan spreads, and upfront fees, and unused fees, and loan covenants, and leverage levels, and so on. Again, that's where banks can really trip up is extending loans to folks that aren't credit worthy. There needs to be a considerable amount of focus on the credit side.
But today's business customers require bankers, folks that bring good ideas on ways to increase revenue, ways to decrease cost, ways to manage risk. Your best bankers today think like the equity. They think like the business owner. They're looking to help challenge the status quo to help bring about improved business outcomes. That includes ways to improve how a company uses their deposits. A way a company can better leverage his liquidity really helps that company become more profitable. It helps them make better investments.
So focusing on the deposit side of the balance sheet in addition to the credit side of the balance sheet is just incredibly important. It's certainly what the best bankers do today.
Jim Young: Yeah. As a writer by trade, it makes me happy when we get another example of where words matter. I know in a lot of stuff I wrote three to four years ago, lender was the word I used. We pretty much a lot of times, on cue from our customers, have moved away from that term and to bankers or relationship managers. Same sort of thing with that full relationship, which is about much more than just the loan. It's a really valid point about that need to ...
I would imagine also, Tim, let me ask you this, that you've got to structure your incentive programs as well. If you're only incentivizing someone on growing their loan portfolio, then that's what you're going to get is a lot of loans and maybe not as many deposits.
Tim Shanahan: That's for sure. It does have to run full cycle there. You have to incentivize the right behaviors, determining how a bank makes money. It is able to make some level of money on the credit side, so you're able to address improved loan spreads and improved loan fees and so on. I think having more core operating deposits decreases your cost of goods, so to speak. So if you can pay less on your deposits, you can earn more on your loans. You're widening that interest margin.
You can improve that interest margin on the loan side. You can also improve it on the deposit side by having, again, stronger access to deposits, and then certainly complimenting that with good fees as well, whether cash management, foreign exchange, interest rate derivatives, capital markets, et cetera, being able to augment that profitability that way as well.
But no, the incentive system is incredibly important for driving the right behaviors with bankers.
Jim Young: All right. Well, you've touched on a few of these already, but let's put a nice bow on this topic here. The last question for you is a banker comes to you and says, "Hey, our bank really needs to increase deposits, Tim. What advice would you give us?"
Tim Shanahan: Well, I'd probably in the first place split it a little bit on the consumer side and some on the commercial side. So on the consumer side, some of the stuff that we've even covered here is take a look at your branch strategy. 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 particular bank? That's one.
Two is take a look at your product bundling. This actually may sound counterintuitive, but consumer loans are also a great place to secure consumer deposits. You do that through effective bundling strategies with your consumer products. That would be on the consumer side.
On the commercial side, first and foremost is to train your bankers to ask for deposits. This is the number one strategy. Ask and train your bankers to ask for deposits. Actually, to your point, Jim, also incentivize that as well.
Two, evaluate your spreading system, your customer spreads versus your own balance sheet. Do your customers have all of their cash with your bank? If not, that is a tremendous sales opportunity for bankers. Frankly, the listeners out there, that's something you can do today. You can take a look at ... Jim Young, Inc. has five million on the balance sheet. Jim Young Inc. has a million dollars with us. That's a four million dollar sales opportunity out there.
The third one, and this one can sometimes be controversial, is tying. You can consider tying deposits to the loan. Certainly, check your local legal restrictions, but tying core financial services offerings is typically legal. If you're extending the credit to a customer, you should absolutely be getting the corresponding deposits. So consider tying, making it a part of the actual contractual arrangement between the bank and the client.
And then another one: evaluating your technology. Many banks today are investing in their treasury management capabilities because you need solid functionality there if you're going a commercial customer or business banking customer's deposits.
I'd say maybe the last one is don't under-serve small business. When it comes to small business and the lower end of business banking, the deposits that small businesses hold within banks ... You can actually hear this on [Gita Tolleson's 00:17:58] webinar that I know she did here at PrecisionLender, but the small business folks and lower business banking folks have a ton of deposits relative to the credit that they're extended. So the better ability for you to service small business is actually going to bring in a ton of deposits with very little impact to the credit exposure. That would be the last idea as well.
Jim Young: Well, Tim, that's a ton of really useful information about deposits. Thanks so much for coming on the show and sharing your knowledge with us.
Tim Shanahan: Absolutely. Thank you much.
Jim Young: All right. Well, that will do it again for this week's show.
A few friendly reminders. If you want to listen to more podcasts, check out more of our content. You can visit our resource page, precisionlender.com. A reminder that there will be a page in which they will have the podcast on it as well as our show notes, which will have links to those articles that we referenced from Cornerstone Advisors, from Bank Director, and from Financial Brand. You can also head over to our homepage, precisionlender.com, to learn more about the company behind the content.
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Until next time, this has been Jim Young and Tim Shanahan. You've been listening to Purposeful Banker.
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