In the late 1990s I received an unsolicited call from a Merrill Lynch broker. Basically, his pitch consisted of offering FIC a rate of three percent or more on its business checking account balances. At that point, we were receiving zero percent from our bank. The difference was huge and it was an easy choice for me and many other business owners to make.

Go Beyond Rate in a Low-Rate Environment
Our most recent newsletters focused on the need to build a deposit factory and the potential value of selecting a Chief Deposit Officer (CDO). To reiterate, the CDO can serve as the focus point of a bank’s deposit effort, turning hypotheses about how to build deposits into practical action steps. This is one of the topics we will discuss during this week’s webinar, “Maintaining and Growing Deposits in Turbulent Times.”

But we think at least two of the “tricks of the trade” used to attract deposits in past years are either inadequate or highly suspect today:

* Rate. Today rates are at historic lows. For example, Bankrate.com lists a deposit rate of 1.7% for a six month CD, 2.17% for a one-year, and 2.72% for five-year money. These low rates do not provide sufficient incentive to overcome customer inertia and, with the industry under increasing earnings pressure, most deposit institutions are unable to offer significantly higher rates than their competitors. Paying high deposit premiums is not sustainable; in some cases, the government will cap rates, but more regularly, return requirements limit the amount of premium that banks offer.

* “Free” Checking. Five or more years ago, free checking was the new, new thing. However, many banks found that, given the type of customer that “free” attracted, as many or more of them were going out the back door as new customers were coming in the front. In addition, in many cases the economics of “free” checking rely on NSF fees. NSF fees may be good for short-term revenues, but they can alienate customers and erode relationship building. Also, this area is now being closely examined by regulators concerned with bank abuse of customers.

It’s the Offer, Not Just the Pricing
Without rate as the major weapon, what’s left in the deposit-gathering tool kit? The good news is, a great deal. Banks need to differentiate themselves by excellent sales and service execution of a well-defined customer-focused offer that sets them apart from others. The offer, the sales process, and the service approach all have to be in synch in order to have market impact. We find that many banks have identified the problem and have developed reasonable product offers. Unfortunately, their sales process is often uneven at best and their service effectiveness and “deposit culture” differ significantly between business lines and even from branch to branch. In short, implementation and execution are inconsistent at best and poor at worst.

* The Customer-Focused Offer. Bringing deposits in the door in a low-interest rate environment requires banks to focus on their value proposition and product package. Each element needs to be considered in light of its importance to the targeted customer as well as its impact on bank profits. Different customer segments will be attracted to different deposit features. Banks should consider whether to provide no fee and no minimum checking, free online transfers and bill paying, a rewards program tied to deposits, various affinity programs, and other offers to distinguish the bank, such as tiered pricing for larger and/or longer term deposits. Related to small business cash management, some banks include employee and personal account balances into the overall analysis for cash management pricing. Here’s the hard but critical exercise: banks need to do a cost/benefit analysis for each of these elements. We find that product people are much better at creating features than at ensuring their profitability. That has left some banks with too many deposit/checking products, confusing both the sales staff and the customer.

* Sales Process. Consultative and relationship-based selling has to be given priority in this environment, particularly when many customers feel skittish about their personal economics and, frankly, skeptical about the health of many banks. The deposit sales staff needs to be well informed about product features relative to customer needs and capable of providing good advice about the various trade-offs. Inevitably, a discussion of the institution’s financial strength must become part of the sales process, particularly when convincing prospects to entrust it with their cash.

* Service Approach. Every bank says it prizes the customer, but relatively few prove they do by offering first-class service. Companies like the pre-First Union Wachovia that maintained a “sundown rule” (they would get back to a customer with an answer to a question or a status update by end-of-day or “sundown”) have disappeared and been replaced by voice response units and voice mail, particularly at larger banks, eroding customer goodwill. Our experience is that the typical community or regional bank is outperforming the big banks in service.

Nevertheless, technology can play an important role in differentiating service and providing a more personal experience. One example: online chat capabilities whereby the customer can have “instant” access to a problem solver.

Exploit Segmentation
When we conduct customer profitability analysis we often find that the highest return customers are primarily deposit-based. Going further, the big deposit generators also tend to share other characteristics such as industry, geography, and sometimes, banker. In certain cases offering different rates in different regions or even within the same region based upon segmentation analysis can challenge the competition and build share.

Concluding Thought
With competition for deposits intensifying, top deposit banks will move beyond pure price plays and short-term gimmicks to create and consistently deliver a value proposition that generates deposits and promotes retention and longer-term customer loyalty.