Is paying up, and up, for deposits the only way for traditional banks and credit unions to compete for deposits as rates rise?
There are alternatives to simply keeping up with aggressive offers from online banks and other competitors.
Banking experts offered the following advice on getting a handle on how to price and promote deposits and how to adjust a deposit strategy as rates rise.
Some reflect fresh thinking on familiar ideas … and a couple come out of left field.
This is the second of three related articles concerning deposit-gathering in the wake of renewed rate competition. The first installment is “Deposit Competition Is On, But Should CDs Still Be the Go-To?” and the third one is “Rate Wars: How Digital Banks Keep Pushing CDs Higher.”
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1. Start with a complete understanding of your bank or credit union’s funding.
The stakes are too high for a financial institution to rely on instinct, experts agree. Hard facts are what’s called for.
Deposit-raising activity shouldn’t be like panic-buying of eggs and milk before a forecasted storm. Knowing what portion of deposits is at risk can determine how aggressively the institution has to meet competitive rates.
Every financial institution — regardless of size or charter — will have a different deposit profile. Deposit strategy has to be managed according to that profile, says Val Srinivas, senior research leader, banking and capital markets, Deloitte Center for Financial Services.
Data analytics is essential to determine where the institution’s deposit vulnerabilities and strengths are. Understanding how much of the deposit portfolio is likely to be “sticky” is critical. The volume of customers who bank with the institution for reasons other than their deposit accounts is also important to know, Srinivas says.
Do You Need the Dollars?:
There’s no point in paying up for deposits that won't be deployed profitably. So assess how much lending your institution intends to do.
Srinivas points out that for some institutions tapping shorter-term wholesale funding such as Federal Home Loan Bank advances may make more sense than matching deposit rates from competitors.
Overall liquidity is also essential to understand, knowing where the institution is today versus where it could be down the road given current trends, according to Srinivas. Regulators’ view of the institution’s liquidity plays a major part.
Adam Stockton, head of retail deposits at Curinos, stresses the importance of having a complete picture of the competitive situation. This entails not only a view of local conditions, but regional and national trends.
“What are my competitors doing? Where are my deposits going? Where are my peers’ deposits going? Looking at what’s happening in other markets, what will it mean if what’s happening there begins happening here?” are all things that strategists should be asking, according to Stockton.
The advice of these consultants applies to not only the big picture, but the one-on-one interactions with customers who ask for higher rates lest they take their accounts elsewhere.
Clear data will help determine who the institution has to keep happy — and how happy to keep them — and which accounts can be permitted to walk.
2. Maintain perspective and don’t be ruled by one loud voice.
Without adequate data, banks and credit unions risk “tail wags the dog” syndrome. Justin Bakst, executive director at Darling Consulting Group, warns against being reactive rather than proactive.
“Many institutions may react to one customer complaining about their rate or one competitor pricing unreasonably and define their deposit strategy based on that. But rate is just one lever institutions have,” Bakst explains.
“I’ve seen some reactive institutions roll out really aggressive pricing and they wind up causing cannibalization of their existing deposits by their new offers,” says Bakst. “All they do is reprice their entire deposit base at higher levels without necessarily improving retention or gathering many new deposits.”
Even if pushing CDs is the answer for your bank, Bakst urges restraint in setting rates. Locking in higher-rate CDs running four or five years right now may bring in money but could prove very expensive money a couple of years out, he warns.
Timothy Partridge, principal and commercial banking segment leader at Deloitte Consulting, suggests that institutions have to avoid getting swept along by online players.
“Among some of the digital-first banks, there’s always a bit of a race of who’s going to get the highest rate out there and who’s going to top the list on Bankrate.com and whatnot.”
— Timothy Partridge, Deloitte Consulting
Another key data point is understanding whether your institution has a primary or secondary account relationship with the depositor, according to Mac Thompson, founder and president of the consulting firm White Clay. A primary account, with ancillary relationships and balances beyond monthly household expenses, is more meaningful, so spending extra to keep the accountholder happy makes sense, Thompson says.
Well-informed decisions are less likely to create blowback, Stockton adds. If executives at individual institutions plunge into rate-raising without properly evaluating data on both customers and the competitive threat, it can start a “cascade effect” that will engulf others in the market and then force yet another increase at their own institution later on.
3. Others are thinking big. Try thinking small.
In the urge to squeeze more value out of paying up for CDs, some institutions are tiering their rates. The larger the amount put into a CD, the higher the rate.
In some markets it is credit unions that are focusing on this strategy, says Derek Baker, vice president, growth and innovation, at Mills Marketing.
The logic is to get more bucks for the bang. But Baker says sometimes courting smaller depositors with juicy rates can make more sense in the long run.
“Everyone wants to catch the biggest fish. But they’re going to be nibbled at by all your competitors,” says Baker.
Here is Baker’s argument. Having $10 million in deposits from a comparative handful of accounts sounds great.
“But I’d love to have a thousand $10,000 accounts instead,” Baker says. “That makes a thousand households I can interact with, that I can cross-sell to.”
4. Reinvigorate your approach to relationship banking overall.
Stop thinking of marketing individual products in favor of structuring multiple-product relationships, Deloitte’s Partridge advises.
“Institutions have to focus not just on increasing their rates, but on how they can provide a better value proposition to their customers,” he says.
Rather than just standalone higher rates on CDs, offer those depositors a special bundle of deals, such as on personal loans or credit cards.
“Ask what is the holistic set of solutions that you can offer the customer so that they will want to bank with you, not just keep their deposits with you,” says Partridge. “When most people wake up, they aren’t focused on the rate they’re getting on deposits.”
Baker has seen a relationship product approach that makes sense. Consumers can apply for a new credit card that provides a preferential interest rate if they also open a deposit account, which also gets a better-than-normal rate. Including deposit-account incentives to encourage certain spending behaviors can also enhance the package.
SoFi has a new package account that goes even further, unveiled in late 2022, and called “SoFi Plus.” Customers who agree to a direct deposit relationship receive an upfront cash bonus, a higher rate of interest on savings and checking account balances, a rate break on personal loans, a higher cashback rate on credit card purchases and more.
5. Encourage saving, rather than promoting high rates.
As research from Mintel demonstrates, the idea of being able to save money resonates more with consumers than the idea of getting a higher interest rate.
So for more effective messaging, promote reasons to save money, instead of putting rate front and center, Baker suggests.
“Are you saving for your kid’s graduation? Are you saving to finally take a summer vacation post-Covid?” he says. “No matter what the reason, you don’t care about rate, you care about the time you have to save a certain amount of money toward a goal. Financial institutions can promote products that help consumers keep those savings outside of their checking accounts so they can meet those goals.”
Baker suggests that while some consumers fixate on rate, for many of them accumulation of dollars from their regular income is how their deposits will grow most steadily.
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6. Get your act together on online deposit enrollment.
In many ways, the deposit market is a national one. Search engines and social media promotions put offers from online-only banks, neobanks and fintechs in front of consumers. And NerdWallet, Bankrate and other affiliate marketing sites offer exposure for competitors across the country.
Consumers who are comfortable moving money around the internet and have no geographic loyalty are quite comfortable with online enrollment.
But does your institution have that option?
Don't Tolerate a Tech Handicap:
Even if your institution offers a rate or package that compares favorably with online competitors, requiring a visit to a branch to open the account represents more friction than some consumers will tolerate these days.
7. Think about news developments and geography.
The financial marketer who ignores trends in the news — nationally, regionally or locally — is going to miss out on developments that could influence who wants to become a depositor.
An obvious one — which many bank and credit union executives have reacted to with messages on social media, on local news programs and in newspapers — is the failure of both Silicon Valley Bank and Signature Bank, and the voluntary liquidation of Silvergate Bank, in rapid succession. Deposit runs led to the demise of all three.
But there are less dramatic developments too.
Keep an eye out in general for relevant news that could impact how you approach deposit marketing — and who you target.
For example, population movement can give a local institution a tailwind. Thompson, of White Clay, says the much-publicized migration of people from California to Texas has brought a lot of money along with it.
While it’s true that the internet and mobile banking make many people comfortable with maintaining relationships of some degree with institutions they don’t live near, Thompson says that people still like to have deposits close to home — or even their second home. He notes that many “snowbirds” who leave colder climates during the winter for Florida leave money in Florida year ’round.
Of course, what makes a tailwind for some institutions can make a headwind for others.
- Why Silence Isn’t Golden on SVB & Signature Bank Failures
- Making Sense of the Silicon Valley and Signature Bank Failures
- Credit Unions Bulk Up in Commercial Lending and Home Equity, Along with CDs
8. Take a fresh look at your branches and your digital interface.
Building a broader relationship with customers takes more than it used to. The two Deloitte consultants suggest a review of both branch and digital banking strategies.
On the digital front, institutions must work to “humanize the digital experience,” Srinivas says. What he means is that banks and credit unions need to take steps to put people at ease with using technology.
Having chatbots available in more places rather than static aids and adopting conversational artificial intelligence to make the interactions more appealing will help. “This has the potential to infuse more human-like interactions even through digital interfaces,” Srinivas says.
At the same time, further refine the training of branch and call center staff, so they can guide customers and help them get more comfortable with the digital options.
Partridge says institutions that rely on branches need to consider ways to make those branches more conducive to consultations rather than simply new account sales. Part of that is about spaces that are warm and inviting and have comfortable furniture.
“You need almost a kitchen table or family room type of engagement that helps foster a deeper relationship,” he says.