Deposit Strategies Must Be Revised Before Funds Exit for Higher Rates

For many banks and credit unions the battle for deposits hasn't started yet, but it's coming. For others it's already here. Keys to winning: Don't offer top rates to people who don't demand them and rethink the design of traditional products like CDs.
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There is a growing sense that as rates rise and severe inflation continues, more financial institutions, especially community banks, will need to return to aggressive deposit marketing. Just behind that is a conviction that now is the time to be getting deposit raising and retention strategies together and start adjusting your marketing.

“We feel like today banks have to always be defending their brand online,” says Derek Baker, Vice President, Sales and Innovation at Mills Marketing. “Companies like Chime are constantly going to be picking at your deposits.”

Some institutions may think the time isn’t quite right. But Baker points to Nike, the hugely successful footwear seller. “Consumers don’t have to educate themselves that Nike sells the best shoes, because Nike is always telling you that in its marketing — still. So if a company like that keeps marketing, banks should pay attention to that.”

It’s not just fintechs that banks need to be watching. Tracking by Mintel indicates that direct banks have been paying up for deposits and larger institutions have been aggressively promoting savings accounts and offering cash bonuses for new checking accounts.

Baker notes that Chase, as part of its massive nationwide branching effort, opened its fourth branch in his firm’s West Des Moines backyard in the summer of 2022 and was sending out direct mail deposit promotions every week. Indeed, Mintel has found that direct mail has seen a resurgence for deposit promotion among traditional banks, with direct banks more often using paid social.

Other financial institutions and fintechs are not the only competition now. Federal I bonds, specially designed for consumers seeking inflation protection, are paying very high rates and enjoying record sales. And TreasuryDirect — the government website that I bonds and regular Treasury securities are frequently sold through — received a makeover that made it less clunky and more mobile friendly.

“Lowly T-Bills Are Suddenly Sexy. Yes, Treasury Bills!”

— Bloomberg.com headline

Higher Treasury rates alone are changing how consumers and businesses are looking at bank deposits.

In talking with analysts, there’s a sense of more banking companies oiling up deposit promotion machines that haven’t been used much for some time. Let’s look at other deposit trends and the steps experts are recommending financial institutions consider.

What’s Going On Out There With Deposits?

In the second quarter of 2022, U.S. banks in the aggregate lost a record $370 billion in deposits. Of course, no one does business in the aggregate. In spite of the overall drop in deposits, just over half of the banks — 51.2% — reported higher levels over the first quarter. Analysis showed that consumer deposits were not the cause of the massive outflow.

“The interesting part of this environment is that we just typically don’t see market rates move 400 basis points in what will be a one-year time horizon,” says Justin Bakst, Executive Director at Darling Consulting Group.

There are multiple trends going on right now.

“Some banks have had very strong loan growth this year and they might not have the same liquidity position that they had six months ago,” says Bakst. “For many this issue is compounded because they are starting to see some larger balance deposits starting to leave — including consumer, business and public funds. These are the banks that you will typically see in your market with the most aggressive new product pricing.”

“We’ve moved rapidly from an environment where a number of banks’ outflows have really ramped up and are beginning to get concerning,” adds Adam Stockton, Director, Head of Retail Deposits Benchmarking & Strategy at Curinos.

By contrast, Bakst says that outflows overall are not yet meaningful. However, there is pent-up demand for higher rates showing up in his firm’s predictive models.

Stockton says most institutions are focused on retention right now, rather than acquisition. However, since retention concerns arise in part when others start pushing to acquire deposits, there’s going to be a chicken-egg pattern pretty quickly.

“How do banks protect and defend their deposit books without pricing the whole thing up?”

— Adam Stockton, Curinos

“It’s kind of crazy,” says marketer Derek Baker. “I’m hearing things from both sides of the spectrum. Among those who are heavy on deposits, I hear ‘loans, loans, loans.’ Others say, ‘We need to get our deposits back up, we need to give them a push’.”

Bakst says the erosion in balances is occurring slowly. On the business side, in his firm’s database the average account size moved from about $40,000 per account in February 2020 (pre-Covid) to a peak of $65,000 at the end of 2021. Through August, on average the balances are starting to slowly trend downwards at roughly $64,000. On the retail side, says Bakst, per account average balances went from $12,000 in February 2020 (again, pre-Covid) to a peak of $17,000. They are moving closer to $16,000 today.

“The large balance deposits are going to be the first to move. That’s where there is the most pent-up pressure,” says Bakst. “We’re already seeing this dynamic in the public funds market.”

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Blast from the Past: The CD is Making a Comeback

Banks hungry for deposits are going back to the old standby, certificates of deposit, according to analysts.

“It’s a quick grab, but it is a ‘live by rate, die by rate’ kind of tool,” says Mills Marketing’s Baker. He adds that after years of low rates making personal liquidity inexpensive to maintain because all savings rates were low, the return of rising interest rates is a puzzlement to younger consumers.

In fact, it’s hard to discern what would be more confusing to Millennials and Generation Z: The concept of listening to music played on a “CD” or putting your hard-earned cash into a “CD.”

“Nowadays, your staff is going to have to explain CD logic.”

— Derek Baker, Mills Marketing

He says the younger depositor is used to savings accounts and money market deposit accounts and being able to move money pretty much at will. The idea of tying funds up, and especially the concept of agreeing to pay a penalty for early withdrawal … well, they just don’t get it, says Baker.

P.S. They may not have to, either.

Marisa Frys, Associate Research Analyst at Mintel, says the firm’s research has found a major increase in marketing of CDs and MMDAs in 2022. However, the firm has also picked up a fresh trend: Major financial brands are specifically stating that they are not going to charge penalties for early withdrawal. That’s not a waiver of penalties on the back end, but promotion of the absence of them up front.

“Traditionally those accounts got locked in for a specific time period,” says Bella Broccolo, Associate Research Analyst at Mintel. As penalties fall by the wayside, she says, the line between MMDAs and savings accounts is getting blurred.

The Mintel analysts also say that when they compared 2022 CD offers to those in 2021, the terms needed to get the best rates have fallen substantially. Consumers can obtain a good rate for maturities as few as seven months. Last year, a commitment of 24 months was necessary to get the best returns.

Given such changes, financial institutions need to consider who is working in their branches and contact centers today — many may be younger people who are just as unfamiliar with “CD logic” as their peers in the general population. Bakst says this underscores the need for a lot of relevant training in a hurry.

“A well-trained branch network is crucial,” says Bakst. “Some of these branches haven’t had a new special in three years. They’ve had a lot of turnover and getting the training needed to have the right conversations with customers is a challenge. The best performers are focused on training, technology, and managing the total relationship, not one product.”

Today’s Deposit Campaigns Demand Data Analytics

Baker says many institutions are doing a lot of data gathering in a hurry, to figure out what their customer bases and their markets really look like in deposit marketing mode.

The lowest-hanging fruit, says Baker, is the existing customer base, marketing to them to encourage them to bring more of their business to your institution, and away from competitors. The double challenge is going to be not only the tug of war with other institutions and fintechs for deposit dollars, analysts say, but also the fact that inflation will suck deposits out of accounts as prices keep rising.

In a recent Curinos webinar, Sarah Welch, Managing Director, stressed the need for stratifying the deposit audience into multiple groupings. Using data analytics, institutions need to determine what the motivation is for each group of customers or prospects. How much does rate matter for each group?

“You have to avoid cannibalization of money that didn’t need the highest rates,” Welch warns. When raising deposits in an environment like today’s, she says, “rate is the primary lever,” not every group of customers and prospects needs the same rate to be satisfied.

Some will require the highest rate the institution can manage, while relationship-building efforts and helpful financial content, with a lower rate, will satisfy others.

Broad customer objectives include growing balances fast, growing quality balances, retention of at-risk balances, and building accounts that represent cross-sell potential, according to Welch.

Aside from rate there is new thinking on what will appeal to consumers. Mintel analysts Frys and Broccolo note that some larger institutions have marketed combined offers for both a checking account and a savings account.

Where an institution might have proffered a $300 bonus for opening a checking account and $200 for a savings account, for the bundle they will offer $600, says Frys.

Both direct mail and email enable fine targeting for different variations that can be fitted to various depositor categories.

Broccolo notes that some players, notably Capital One, have also promoted their lack of fees. “They position it as a means for consumers to save cash,” she explains. “Today brands are recognizing that any angle that can convey savings to consumers is important.”

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