Executive Summary: Senior bank management knows that generating low-cost deposits is critically important to ensure funding stability and to allow for continued profitable loan growth. To protect and build deposit levels, banks need to explore multiple approaches, some tactical and near-term and others more strategic and long-term.
This week I spoke at St. Meyer & Hubbard’s annual Client Executive Meeting. St. Meyer & Hubbard specializes in providing sales training to U.S. banks, in particular, focusing on their success with business clients. One fellow speaker was Bill Hippensteel, EVP of BBVA Compass Bank, a $60 billion-plus bank headquartered in Alabama. Bill’s topic was “Generating Deposits in Challenging Times,” which these times certainly are for banks.
While a relatively small number of (typically big) banks are suffering from credit quality issues, many more are finding themselves limited in growth by their inability to find low-cost deposits. As the quote accompanying this newsletter suggests, many banks are “lent up,” unable to take advantage of attractive lending opportunities because of deposit shortages. Other banks want to retain and grow their low-cost deposits because of the funding advantage they provide. All the banks we know, big or small, well-performing or limping, are spending an increasing amount of time on deposit-related issues.
Five Paths for Deposit Growth
Bill’s presentations summarized a number of approaches available to banks wishing to build deposits (that is, all banks):
1. Channel/distribution expansion
2. Aggressive pricing
3. New product introduction
4. Sub-segment targeting
5. Customer development programs
While no one area provides the deposit building “silver bullet” we would like to find, exploiting selected opportunities within these areas will provide banks with multiple paths for growing deposits. As always, however, rigorous execution is essential for success. We will focus on discussing each of the above areas as well as some additional suggestions in this and our following newsletter.
1. Channel/distribution expansion. Included in this area are de novo branching and direct banks. Research from multiple sources indicates that most of the branches opened over the past three years remain unprofitable, with many unlikely ever to become profitable. Branch proliferation, a changing rate environment, and decreased branch-based activities are among the factors undercutting the attractiveness of de novos.
However, a number of banks have managed to turbo-charge their de novos. One of the banks attending the meeting mentioned that they select advisory boards for each of their branches, including de novos. While advisory boards are often a waste of time and money, this bank has managed them successfully so that they, in effect, help to jump-start a new branches’ deposit base. Advisory board members bring in their own deposits and the deposits of friends while also serving to quickly establish the bank’s presence in its new geography.
Like de novos, success with direct banks can also be problematic. One issue centers on avoiding the conflict that can occur when current “traditional” customers learn that new online customers receive higher interest rates. One of the banks attending admitted that they respond reactively to increase rates when a customer complains. However, another largely avoids this issue by operating its direct bank under a different name. Even in that case, however, online deposit generation has to be closely monitored because of the relatively high cost of these deposits. Direct-bank-generated deposits have to be a limited part of the overall deposit mix.
2. Aggressive pricing. This area includes: high-yield accounts and limited time offers. While these activities are definitely worth exploring, we consider them to be short-term in impact and, potentially, expensive to a bank. High-yield accounts usually result in low-yield returns for a bank. Obviously, rates need to be competitive, but players want to avoid being on the “bleeding edge” of pricing. Apparently, as noted above, some of the direct banks face that challenge.
As for limited-time offers, these serve to focus the bankers’ sales attention for a period of time and only for a period of time. Internal competition with a payoff (for example, trips or cash) to the top performing bankers or branches will have a near-term positive impact. However, once the promotion ends, so too do most bankers’ enthusiasm for emphasizing deposits. Limited-time offers will move the dial, but only temporarily. It is one valid weapon in your deposit generating arsenal but, as we will discuss in the next newsletter, it will have less impact than a longer-term compensation approach that promotes deposit generation.
3. New product introduction. Deposit-related new products include remote deposit capture (RDC) and health savings accounts. We have seen clients generate significant new deposit levels with their introduction of RDC. However, many of the bankers attending the St. Meyer & Hubbard meeting expressed disappointment in its impact.
The banks that have succeeded with RDC introduced an intense and focused marketing effort aimed at distinguishing themselves with this capability. They have been aggressive in selling it both to current clients and targets rather than passively or reactively offering it. In a sense, RDC has become part of their value proposition to their customers, namely, that they will provide 24/7 convenience and accessibility to customers. RDC is simply one current tool for the customer to use and indicates the innovative choices that these banks will continue to offer. Basically, failure in realizing the benefits of RDC is probably a failure in execution and in market positioning.
Next Issue
In our next newsletter, we will discuss the other areas highlighted by Bill:
4. Sub-segment targeting. The focus Bill emphasizes here involves: value extension, affinity programs, and deposit rich segments.
5. Customer development programs. Developing customer relationships encompasses acquisition of multiple product relationships, on boarding activities, and targeting analytics.
In addition we will highlight other issues and opportunities critical to deposit success.