You don’t need a consultant to tell you that deposits are important. Your experience may be similar to some of our clients who can trace 80+ percent of consumer and small business profitability to deposits.

Given their importance, why is the focus on deposits at many banks insufficient and what should senior bank management do to create a deposit factory that focuses on grinding out deposits as a matter of course?

 

Deposit Roadblocks

Our experience suggests that multiple factors currently limit a bank’s focus on deposits. First, let’s look at some internal constraints:

 

• No segmented deposit focus. The best deposit-oriented banks have a segmented focus on “deposit-only” customers, setting up specialized industry groups or dedicating personnel to pursue deposits. But rather than highlighting deposit-rich customers, many banks largely ignore them since they have few borrowing needs.

 

• Poor proactive selling. Banks should begin by mining current customers for additional deposits, pitching them for a greater share of both personal and business deposits where appropriate.

 

• Putting the customer second. Proactive selling also means counseling your customer to move some deposits from non-interest bearing accounts to gain interest income. That move may reduce short-term account earnings but should ensure longer-term retention and relationship building. One business owner told me about keeping close to a million dollars in her business DDA with no interest. When a competitive bank told her how much interest income she was losing, she moved her entire account.

 

• Lending as king. At least until recently, most banks leaders came out of the lending side of the bank, with a view of lenders as being of a higher caste than others.

 

• Dysfunctional incentives. We have heard many business and commercial bankers say, “Management says they want deposits, but they are paying us for loans.” You get what you pay for.

 

Customer concerns also create roadblocks for banks selling deposit services:

 

• No deposit-oriented value proposition. Virtually all banks want low-cost deposits today, but why should customers provide them? Banks need to provide economic, service, rewards, or other benefits.

 

• Perceived “costs” of switching. The value of a loan to a customer, particularly today, is clear. Hence, a recent survey of business customers showed that an unprecedentedly high number of companies were considering switching their banks, largely because of unmet lending requirements at current providers. No similar need exists to change banks because of deposit or cash management needs. In fact, the customer’s perception is that account switching is time consuming, leading to inertia.

 

Deposit Factory

The above is hardly a complete list of internal and customer roadblocks, but the bigger issue is how to overcome the constraints to create a deposit focus across the bank.

 

* Begin with the current portfolio. The first step requires a bank to understand the deposit makeup of its current customer set; many do not:

 

• Obviously, all deposits are not of equal value to a bank. Who are the 20 percent of depositors that generate the majority of deposit profits? (The 80/20 rule exists here as in all other businesses.) At a minimum, banks need to develop defensive strategies to retain these customers while determining if they can provide even more funding.

 

• Which geographies are driving deposits? In one recent analysis we found that a handful of regions and a handful of branches within those regions generated the majority of deposits. The implications for this bank? In the near term, the core of the deposit generating effort could be concentrated in a subset of all branches. In addition, the bank needed to assess its other geographies to determine their deposit potential.

 

• Are certain industries deposit-heavy? In less difficult economic times, banks focused on trust companies, homeowner and condo associations, and non-profits.

 

• What percentage of deposit wallet share has been achieved? We find significant deposit “leakage” exists at many banks, whereby, another 20-40 percent (and sometimes more) of deposits are lost to other players.

 

• Which deposit generators are at risk, either due to changes in their ability to generate deposits or their desire to take advantage of higher rates?

 

• Which geographic regions are likely to undergo economic strain resulting in reduced deposit levels? For example, we found that one client was dependent on an industrial region of the U.S. that was likely to suffer severely from the economic downturn. Deposit levels that the bank thought were “safe,” were in fact highly suspect.

 

The net result of the above is the creation of a fact base that the bank can use to determine performance gaps, set priorities for the future, and build a consensus and sense of urgency concerning what needs to be accomplished.

 

Next time we will focus on some of the other key action areas related to building a deposit factory, including segmentation, assessing best practices, changes to the product set, process streamlining, organizational issues, and incentives.