Building a Deposit Machine that Won’t Cannibalize Existing Accounts

Stock market conditions and uneasy murmurs about a recession pressure conservative consumers with lots of financial assets to look at increasing their holdings in insured deposits at funding-hungry banks and credit unions. Don't just use higher rates to attract these folks. That just starts an interest-rate war. Instead, use innovative multi-account structures to produce a better deal for everybody.

Financial institutions are stretching loan-to-deposit ratios to the limit. They need to build additional stable deposits. But how can banks and credit unions grow balances without starting a price war?

How can they identify prospects, what should they offer, and how can they convince depositors to move their money? A key point is a deeper understanding of depositors’ needs.

Market Volatility Creates Deposit-Raising Opportunity

Depositors in long-term insured savings accounts are often past their income-producing years. They need simple, safe and predictable investments for their life savings. Ultra-cautious investors have kept much of their investment portfolio in insured deposits for some time. But with enhanced products and improved processes, banks and credit unions can consistently acquire and keep more than their fair share of these very conservative depositors’ accounts.

Beyond these legacy depositors, stock market investors represent a new opportunity. Many have become worried about market volatility and some worry about a recession. This has enhanced predictable savings and CD products in their eyes.

Mine the Right Consumers for Hidden Growth Potential

Chances are good that you can offer a stronger benefit to your depositors, and that is an incentive for them to shift part of their investment portfolio to you.

How do you find the best prospects? Too often, financial institutions resort to price advertising to drive deposit growth. These promotions tend to commoditize banks and credit unions as they announce high rates or low fees without establishing a broader sense of value. Making it all about pricing stimulates competitor responses and can create a losing proposition where there is not enough profit in new business to justify the cost of repricing existing business.

To identify the best prospects, institutions can use data programs to analyze household files to predict investable assets. Segmenting the institution’s households to include only the highest probability prospects require selecting appropriate filters. For example, the institution could only match those who have significant checking or mortgage balances.

Once the matches are complete, you will have a file of those households with large investable assets. Further segment the file by only focusing on those likely to have large investments elsewhere. This should help assure that acquired balances are almost certainly new money. Some data sources can also help your institution target households in your branch trade areas with high deposits, or investment balances, at competitors. Using this data can further refine your marketing and sales efforts.

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Crafting a Compelling Offer Helps Draw Funds

It’s a basic: Depositors consistently seek high yields and short commitments. So, give them what they’re looking for — but with a qualifier.

If they want a high-yielding savings account, they can get one —as long as they are willing to place some of their funds in a new term deposit at the same time. A Companion Deposit Account is just the thing to attract and retain depositors who are willing and able to enter a core long-term deposit relationship.

The simplest product offer is a competitively priced CD. It doesn’t have to be the highest rate in town. The key is to beat the yields of the safe harbor investment products your households already own — adding the plus of federal insurance.

As long as you price this below the cost of wholesale funding sources, with a yield that remains attractive to the client, you have a mutually valuable price point.

The “secret formula”: Require the coincident opening of new term deposits, and allow no subsequent deposits to the Companion Deposit Account. This avoids much of the potential cannibalization that usually comes with high-yield money market deposit accounts.

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Try Offering a ‘Smarter CD’ Product

If we find ourselves in a falling rate environment — in June it looked like the Federal Reserve might cut rates this summer — waiving early withdrawal fees could be in your institution’s best interests (no pun intended). Your CD offering can be structured that way. CDs with this feature have been in the market for almost a decade.

In today’s dynamic rate environment, it’s easy to see their value to both consumers, and to the bank. Most CDs have a fixed penalty, usually based on the length of time remaining. In this case the penalty is specifically selected to minimize the amount charged to the depositor and yet make the bank “whole.”

This means that the depositors can benefit from falling rates. And yet, when rates rise, they will still not have to pay any greater penalty than the conventional early withdrawal penalty of their financial institution. This approach is better for the depositor in every scenario, and it is better for the bank as well.

Combine this smarter CD with the special savings account and you have an intriguing offer for new depositors: an attractive savings account that offers liquidity, and simple and logical term deposits to give depositors very compelling reasons to move their accounts to your institution.

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Keep Your Eye on the Objective: New Money

Our analysis consistently shows that many sales initiatives cannibalize existing funds, whether they are loan or deposit promotions. Often relationship managers are tempted to use better pricing for everyone. It’s important to remember that the objective is to generate new money. Proper training and proactive management of the promotional presentation can help keep efforts on track.

Initially, these products might be presented only to households on the targeted list. Over time, as the sales force becomes accustomed to the judicious use of these products, they may also be offered as a selective retention tool.

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