The higher rate environment is resulting in banks placing increased focus on deposit retention and generation.
Last week’s Wall Street Journal highlighted what it viewed as the negative impact of higher interest rates on Commerce Bank of New York, a bank that distinguishes itself based on customer service and convenience: “When rates were near zero, it doesn’t matter what a customer gets on a certificate of deposit. Friendly service stands out. But, as rates have risen, customers have started to relearn that Spinal Tap tune, “Gimme Some Money.”
This week’s Journal features a more broadly focused article on the impact of rising rates on regional banks, stating, “Americans are transferring their money into high-yielding bank accounts, a trend that is taking its toll on the nation’s regional banks…results will be hurt by rising rates.” The article goes on to state that, “even as people move their money into higher-yielding accounts, banks are competing fiercely to retain those customers and attract new ones.”
Increasingly, the consumer and business customer have become sensitive to the higher rate environment and want to take advantage of it. At the same time, competitors are selling rate-based offers to gain share. However, while the customer and some competitors have focused on deposits, many business and middle market bankers continue to operate with a business as usual mentality. Some continue to focus primarily on loans, putting secondary emphasis on deposits. Even many of those with a deposit emphasis have failed to energize or refocus their approach, despite increased customer rate sensitivity.
In the near term, how should banks operating in the small and mid-sized (SME) markets respond to their deposit challenges and opportunities?
Assess the deposit product set. Banks should retain their customers within the bank even if that involves shifting them internally to higher rate deposit products. The worst case is one in which customers exit the bank; once gone, they are not returning. While little need for a state-of-the-art product exists, management needs to ensure that they have a competitive rate-sensitive product offer and that their staff knows of its existence and how best to sell it. Banks should also assess the opportunity to develop product bundles that tie the customer into the bank.
Market the higher interest product. In years past, many banks seemed to keep their sweep and other high interest accounts under the table, irregularly offering them to business customers. Banks wanted to exploit the low interest rate environment as much as possible and, if the customer was willing to accept low rates, so much the better. Now, business customers are more sensitive to rates and smarter about their options. Banks can no longer depend on customer ignorance nor indifference. If a bank does not introduce the higher interest products to its customer, someone else will…and take the customer.
One important action in this environment is to review your SME customer base and actively approach high-balance business customers. Proactivity will protect the customer from other players and help to maintain the customer relationship for the longer term. Obviously, Merrill Lynch contacting your customer with a high-rate offer before you do jeopardizes the relationship.
Emphasize the non-borrowing customer and prospect. More than 50 percent of SME customers are non-borrowers. However, at many banks this majority continues to be given minor emphasis, with relationship managers and business banking officers concentrating their efforts on borrowing accounts. While we think that has always been a mistake, it is particularly inappropriate now, in the current rate environment.
Conversely, some of the best SME banks have long operated with a segmented product or industry focus on non-borrowers. Chase in the middle market has emphasized hedge funds and not-for profits, not for lending purposes but to attract their deposits and investments. In another case, Citibank has long had a strong offer aimed at serving the escrow needs of law firms.
Unfortunately, too often, banks say they serve the non-borrower as effectively as the borrower but the reality differs from the assertion.
Launch a deposit-only sales force. Among some banks we know, deposit turnover rates range from 10 percent to close to 40 percent; turnover at that rate makes net deposit growth difficult to achieve. Highlighting the needs of the current customer will help to stem deposit outflows. At the same time, creating a deposit-focused sales force places clear emphasis on this effort and takes deposit sales out of the realm of the day-to-day to give it significant emphasis.
A deposit only sales force (in effect, “hunters”) can concentrate with laser-like focus on this one initiative. At a minimum, piloting a deposit-only approach as a test makes sense.
Circle back to sales management. One bank we know does emphasize obtaining deposit accounts over loan customers and offers a competitive product set. Nonetheless, deposit runoff is high and net deposit growth is negative. Why? The bankers are not making enough calls nor are the calls themselves effective. In this case, the offer and message are on target, but it is being communicated inadequately. The bank needs to improve its sales management process in order to ensure that it is reaching as many clients and prospects as possible. As is so often the case, execution needs to be evaluated and strengthened.
Concluding Thought
Virtually, every senior banker we speak with notes that the easy days for deposit generation are over, at least for the foreseeable future. The rising tide that increased cheap deposits has quickly receded. Banks that assess and refocus their deposit products, emphasize key target segments, and execute an effective sales strategy will dramatically outperform banks that continue to conduct business as usual. A business as usual approach will result in increased deposit leakage, customer dissatisfaction, and an unsustainable competitive position.