Executive Summary: With attractive deposits seemingly increasingly elusive in the current environment, banks need to intensify their deposit focus. Consistency and rigor across the footprint need to complement local knowledge in order to build a deposit engine.
Last week, we wrote about the deposit roadblocks that exist at banks. Roadblocks include the lack of a deposit-oriented value proposition, poorly-designed incentives that fail to put the sales spotlight on deposits, and a culture that has historically given priority to lending. We also outlined a multistep process for establishing a foundation for deposit retention and growth.
We discussed the need to begin building a deposit factory by assessing the current deposit portfolio in much the same way that a risk group deciphers loans: What are the sources of deposits? Which groups, geographies, etc. generate the most profitable deposits? What are recent trends in the portfolio?
Once management has determined its deposit performance, several related areas merit focus: segmentation, best practices, the product set, process streamlining, organizational issues, and incentives.
* Target Segmentation. Banks need to avoid a scattershot approach to deposit generation, particularly today: The deposit market is as volatile and dynamic as it has ever been.
In some cases, traditional sources of deposits have gone dry; internal bank resources are under increasingly intense performance pressure; banks may need to attract a larger number of customers to obtain the same level of deposits, given the reduced cash positions of many companies and consumers. Further, specific geographies, industries, and customer types generate more deposits than others.
As some industries and geographies suffer from the downturn, so too does their ability to generate deposits. Historically, deposit rich segments have included professionals, non-profits, homeowner associations and churches, among others. The level and reliability of these deposits is now in question, meaning that banks may need to dig deeper into these segments to stay even on deposits with prior years. In addition, some banks are selectively broadening their marketing focus to include previously excluded segments such as, remarkably enough, retailers.
Data analysis allows banks to highlight specific industries, geographies, and customer types that are more likely to provide deposits or are at risk. For example, Oxxford Information Technology provides provocative data concerning the risk of deposits tied to industries and geographies. In one case, deposits that our client viewed as stable and reliable were, in fact, subject to quick disappearance due to the erosion of local consumer and business performance, a wake-up call to the client.
* Best practices. We have written previously about the value of capturing both internal and external best practices. Internally, many individual bankers can offer lessons in deposit generation that will benefit many others. Evaluating external practices has similar value. One example: a client has a deposit-focused sales group working on commission tied to the “quality,” that is, profitability, of the deposits generated. These deposit sales people operate with a sharp focus on deposits; their commission payout concentrates their efforts. In addition, many of them are part-timers with their businesses, allowing them to be plugged into the business community as peers rather than bank employees.
This same bank also had a senior executive who reviewed every loan at a regular scheduled meeting to determine if the bank had “all” available deposits from the borrower, both business and personal. This was not a one-time blitz-like event, but a standard operating practice that sent a clear message that bankers would be held accountable for deposit growth.
* Products. Typically, when we evaluate the product suite, we find a competitive product set that needs to be simplified. For example, in one case, a client had six variations on business checking when no more than three were necessary. Deposit product managers need to be careful that their enthusiasm and creativity do not exceed the needs of the market. Deposit product rationalization is often a first step in improving the sales effort.
* Process streamlining. We know of bank clients where it can take 30 minutes or more to open up a business checking account. Account on-boarding should be an opportunity to cross-sell multiple deposit-related products (personal and business DDAs, debit cards, online banking, mobile banking, remote deposit capture, among others) that improve account retention and build higher levels of household deposits. Instead, these banks provide clients with what is often an excruciating experience.
Beyond simplifying initial account opening, banks also need to establish a consistent process for contacting new customers within their first three months. While they are meant to test customer satisfaction, these calls are sales calls at which specific products should be offered based upon analyzing the customer’s characteristics.
* Incentives. Too many managers step around the deposit incentive issue as if it is toxic; in fact, “solving” incentives can have a dramatic effect on deposit performance. Some rules:
- KISS. Keep it simple, stupid: New deposit growth, growth in preferred types of deposits, growth in profits. No more than three or four metrics need to be tracked and form the basis of payouts.
- Pay out regularly. Deposit performance should result in payouts on a quarterly or monthly basis rather than annually. That approach plays a role in creating a deposit oriented culture.
- Emphasize net, not gross deposit growth. In years past, one bank set net new deposit growth from businesses as a hurdle that branch managers had to meet in order to qualify for quarterly bonuses. It did not matter if they blew away their goals for credit cards or mortgages; they had to meet the business deposit hurdle. Obviously, management was sending a strong message about the importance of deposits. Given the current environment, many banks should consider a similar approach.
Next week we will focus on organizational issues related to deposits and evaluate whether banks should consider appointing a Chief Deposit Officer with responsibilities related to deposits that parallel those of the Chief Risk Officer and lending.