Most bank and credit union marketers likely have at least a basic understanding of the term “fracking,” the shorthand reference to “hydraulic fracturing” used to extract oil and gas reserves from deep-rock formations.
The process itself is fairly old, but when it was paired up with the latest advances in horizontal drilling, suddenly it became economical to go after hard-to-reach reserves.
Can the concept be applied to banking? That is, can banks and credit unions “extract” more deposits that traditional marketing methods have missed?
Some financial marketers are beginning to recognize that by using a combination of available — but not widely used — approaches, they can greatly expand the amount of long-term, properly priced deposits that can be economically harvested.
The banking industry’s equivalent to fracking can be found in a combination of three more refined deposit-gathering approaches:
- Dynamic pricing and sales platform
- Improved long-term deposit products
- Sequential deposit sales processes
We’ll discuss each further on. First, let’s look at the shortcomings of current practices.
Conventional Processes Can Be Materially Deficient
The traditional methods of approaching the sales of long-term bank deposits involve quoting APY for conventional maturity terms; assuming an order-taking posture; and offering CD specials to harvest deposits that are waiting on the surface to be taken.
These approaches are widely used and were developed and refined to their current state because of the value they have proven to deliver given the situation in which they were conceived.
A bank or credit union’s approach to pricing and selling deposit accounts to long-term savers has likely been in place for decades without much change. As the conditions around the process evolve, the ability to adjust and implement new ideas becomes more likely to produce significant enhancements to traditional processes.
Thinking of fracking again, the petroleum industry over decades has certainly had practitioners who developed standard disciplines around drilling for oil and gas. To change the process could not have been a random or casual thing. Even though they were only harvesting a fraction of the reserves available, the traditional methods were effective by historical standards. But could achieving historical performance results be the wrong objective?
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Advantage Can be Developed Into Major Economic Impact
Adding steps to an existing process creates demands on the team and its leadership. The question is always, “Is the juice worth the squeeze?” The value of what is produced must be evaluated against the resources and efforts required to get the marginal or incremental improvement.
In the case of oil, the economic advantage was closely related to the price of a barrel of oil. And also to the cost of production.
Let’s compare this to deposit-gathering in banking today. The legacy “order taker” approach toward growing long-term savings deposits often includes the following attributes:
- Little, if any, guidance or training for the front line
- Using static rate sheets that tend to commoditize CDs.
- Running random rate-focused CD specials.
- Taking an ad hoc approach to exception pricing.
The FDIC reports over $2 trillion of time deposits are held in the industry. Further, their data reveals that on an annualized basis banks are spending more than $45 billion on time deposit interest as of the third quarter of 2019.
What banks pay for time deposits by percentile group averages (Dec. 16, 2019)
Source: Uniform Bank Performance Report
The Uniform Bank Performance Report data above show considerable disparity with 10% of banks paying less than 1.05% while 10% are paying more than 2.30% on time deposits. This points to the potential for a major economic payoff for improvements in the pricing and sales process bankers are using to gather deposits today. Here are three key approaches referenced earlier:
1. Dynamic pricing. To enhance the productivity of harvesting deposits, financial institutions are replacing their passive order-taking approach. Instead of displaying all of the options on a static rate sheet offered to the depositor, customer service reps are using a more consultative interactive approach to assess the dynamics of each depositor’s situation and present the most relevant offers.
2. Enhanced long-term savings products. Such products offer a trade-off between yield and liquidity that is no longer black and white. With new hybrid offerings like debit-only savings accounts, depositors learn that they can qualify for yields equivalent to term deposit yields without locking-up their money in a conventional CD. In this environment, the ability to fit the deposit offering to the needs and wants of the depositor enables banks and credit unions to more professionally serve the depositor.
3. Sequential sales process. This helps avoid the erroneous and harmful conclusion that all bank CDs offerings are the same with the same lack of liquidity. This sequential conversation enables the competent frontline banker to confidently claim that their institution offers flexible options, competitive rates, and the best tools to help depositors manage their money.
We intuitively understand that every long-term saver is seeking safety, growth, and liquidity. The conventional wisdom is that time deposit owners must give up liquidity to get yield. While directionally true, the options can be much less rigid than most consumers and bankers assume. Demonstrating your institution’s ability to offer and deliver uncommon flexibility and value is key to “fracking” more properly priced retail funds from the deposit reserves around you.
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A Combination of Techniques Can Unleash Opportunities
Independently, new approaches like the three just described can be beneficial. However, when linked together they can gain much greater impact than could have been foreseen by their independent application.
Specific enhancement opportunities available to financial institutions currently include:
- Displaying the monetized value of each offer extended.
- Showing how each offer stacks up to the competition.
- Sequentially graduating depositors from low, to medium, to higher pricing strata as they qualify.
- Customizing the maturity of a time deposit to meet the specifications of the depositor.
- Rewarding new time deposits with a specialized high-yield savings to grow deposits.
- Rewarding maturing time deposits with a specialized high-yield savings to retain deposits.
- Graduating depositors to a new product that minimizes early withdrawal penalties.
- Helping depositors refinance time deposits as interest rates rise.
While each individual approach may not be recognized as the Silver Bullet, the combined power of the systems that incorporate these techniques definitively changes the game.
One Key Contrast — No Pressure
Due to fracking existing in the physical realm compared to banking, one contrast can be confidently addressed. Fracking applies intense pressure to get enhanced results, while better bank sales processes remove high pressure and substitute consultative sales instead.
Untapped potential lies in depositors discovering that your financial institution has gone beyond the conventional approaches to long-term savers. The value of banking with you goes beyond interest rates alone. Banks and credit unions are using enlightenment where fracking uses pressure.
With the enhanced processes for capturing long-term savings accounts, opportunistic bankers can apply more advanced techniques which deliver performance enhancement equivalent to fracking.