Executive Summary:Adding to the initiatives discussed last week, selecting sub-segments to target for deposit growth and executing effectively against them can protect and grow deposits. Multiple best practice examples offer opportunities for adaptation and adoption.
Last week’s newsletter built off of a presentation given by Bill Hippensteel of BBVA Compass Bank to St. Meyer & Hubbard’s annual Client Executive Meeting. Bill’s topic: “Generating Deposits in Challenging Times.”
Our previous newsletter discussed three of the five areas that Bill termed “Select Deposit Strategies that are Working:”
- Channel/distribution expansion
- Aggressive pricing
- New product introduction
Channel/distribution expansion includes deposit-centric activities such as de novo branching and direct banks. Aggressive pricing entails high yield accounts and limited time offers aimed at pulling in deposits. New product introduction centers on the value of remote deposit capture (RDC) and health savings accounts. It is unlikely that any single one of these or other areas will fully address a bank’s deposit shortfall. Each has cons (and costs) as well as pros. However, they all serve as pieces of the deposit building puzzle. The weight given by a bank to one activity versus another will depend on many factors including a bank’s internal skill base and culture, the competitive environment, and customer demographics.
Sub-Segment Targeting
In addition to the three topics listed above, Bill mentioned two additional deposit approaches: sub-segment targeting and customer development programs. This newsletter focuses on issues related to sub-segment targeting, defined by Bill as activities such as “value extension, affinity programs, and deposit-rich segments.”
* Value extension related to the deposit arena positions payments-related activities as “center stage” in a bank’s relationship with its clients. In many cases, the customer is already ahead of the banks on this topic. Fewer than 50 percent of small businesses or middle market companies are borrowers; at least until the recent credit crunch, an increasing number of companies put more relationship value on their cash management partners with reduced significance given to their lenders.
While we could supply multiple examples both from U.S. and overseas banks, Bill cites Bank of America, PNC, and Wells Fargo. Each bank emphasizes the value of its payment-related services, whether payroll, merchant processing, or related areas. These banks succeed to the extent that their cash management and deposit strategies are closely interlinked. They define themselves as payment leaders and differentiate their customer’s experience based upon what that leadership provides.
Another example of value extension allows a bank to differentiate its product by encouraging personalization. Compass Bank offers “build-to-order checking” whereby the customer selects certain product features as he/she creates a customized product “package.” Personalized debit cards offer another example of creating value by allowing a customer to upload a picture or image and create a unique card which, ideally, increases use and decommoditizes the bank’s offer.
Other examples of banks that focus on creating value include:
- USAA offers an innovative checking product that has no fee “regardless of balance,” no ATM fees worldwide, and takes RDC one step further by allowing customers to deposit checks “using your computer and scanner.” The convenience offered by USAA to its customers with this capability complements their already stellar customer service reputation.
- More banks are now providing a concierge service to assist customers in transferring their accounts from a competitor to their bank. For example, National City Bank operates an “Online Switch Center” to assist in shifting a customer bill pay account to their bank. Inertia is a major factor that keeps customers at their old bank; tactics such as Nat City’s aim to replace inertia with quick action in the bank’s deposit favor.
* Affinity programs have existed for many years, but relatively few players have operated with the focus required to select and build affinity opportunities. Community banks, with their local knowledge and contacts, should have a competitive advantage and be leaders in this area; few are. Creating targeted offers that solicit local groups with similar interests and an interest in community growth offers a significant path to deposit growth.
* Deposit rich segments are multiple in number and relatively easy to recognize and target. Market positioning and day-to-day execution distinguishes the few effective segmenters from the also-rans. Importantly, Bill highlighted that banks need to target both deposit-rich business and consumersegments. While the approach, degree of customization, and per customer opportunity differs for these groups, each should play an important part in the bank’s deposit mix.
Deposit-rich businesses include: professionals, healthcare companies, insurance brokers, real estate agencies (at least in better times), government, not-for-profits, and home associations. Banks focusing on segments design a product offer that anticipates the deposit, cash management, borrowing, and other needs of the company.
Banks such as Citibank with legal services and SunTrust and Stillman National Bank with doctors focus on the professional services segment. Compass, JP Morgan Chase, and Capital One, among others, have had success generating deposits from the government sector, in particular, municipalities. Banks such as Union in California have a strong not-for-profit focus aimed at deposits and cash management fees. Other players have found that churches and synagogues merit focused messaging and sales.
Regarding the consumer, a bank needs to pick its focus to concentrate on the highest potential opportunities. Bill’s deposit-rich consumer segments incorporate the personal business of small business owners, the mass affluent segment, the Hispanic segment, affinity programs, and the under-banked. Most banks will find that, for them, the owner and the mass affluents provide the most likely route to new deposits.
We have written about the mass affluent before and they continue to be highly attractive deposit targets for many banks. But another group should receive clear priority, namely, the business owner. A recent Greenwich Research report shows that “approximately six in ten companies do not use their primary business bank for personal services.” The major reason for this has remained the same for many years: “Over 40% of companies cite not being solicited by their primary business bank for personal services.” What a significant opportunity and how woefully has the banking industry performed in this area! Developing a dual business/personal relationship builds deposits and overall profitability while increasing account retention. Any bank not giving this area the highest priority as part of its deposit strategy should immediately rethink its approach.
Concluding Thought
Developing a coherent and focused deposit strategy is critically important for senior management. In our third and final newsletter on this topic, we will review the fifth deposit strategy mentioned at the St. Meyer & Hubbard meeting: customer development programs. We will also recommend specific tactics for deposit retention and growth.