Two lasting legacies of the bank-run crisis will be:
• Depositor inertia can no longer be taken for granted.
• The stability of a deposit portfolio will take precedence over the longtime emphasis on cheap deposits.
This shift will drive financial institutions to re-examine their business models and make adjustments in ways that influence their ability to raise and retain deposits, say Leo D’Acierno and Rohan Shah of the consulting firm Simon-Kucher & Partners.
The long-term impact will take time to sort out, but look for relationship banking to gain momentum, distribution models to get tweaked, and customer mix to get reviewed.
The shift can’t be pinned entirely on the crisis. It’s more of a one-two punch.
For years the Federal Reserve kept rates so low that many younger financial marketers had never had to help their banks or credit unions scrap for deposits. Depository institutions grew used to very cheap deposits, especially banks that relied on businesses’ non-interest-bearing checking accounts.
That comfort level has been shrinking since the Fed began raising rates in March 2022. But any sense of comfort evaporated entirely with the bank-run crisis that proved fatal for two large regionals and strained other institutions across the industry.
“What’s changed in the industry, virtually overnight, is that there’s now recognition that institutions have to balance low funding cost with stability. I want to know that deposits are going to stay with me and not vaporize at the slightest hint that there may be any difficulty in the economy. That’s really new.”
— Leo D’Acierno, Simon-Kucher & Partners
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Major Deposit Flux Subsides, But Effects Are Lasting
Banks and credit unions rely on the tendency for customers and members to stay put through low-rate periods. When hardly any institutions other than online banks were paying up for money, depositor mobility was relatively low.
But the consumer jitters that prompted many to move their deposits — even when they were fully covered by the Federal Deposit Insurance Corp. — are going to have lasting effects.
How much of a factor this is will depend on each institution’s deposit-gathering model, according to the consultants.
For the time being at least, the boat may be done rocking. An April 2 analyst note from Keefe, Bruyette & Woods indicated that deposits at community banks were stabilizing.
Community banks had lost more than $100 billion in deposits following the failure of Silicon Valley and Signature banks, based on March 15 data from the Federal Reserve. But a week later, the deposits were essentially flat for this group — “an encouraging sign that outflows are normalizing and the initial panic has subsided,” the KBW report said.
Even so, rising rates continued to drain money out of all banks into money market funds and other higher-yield opportunities. KBW suggests that some of the deposits that left smaller institutions for larger ones were only there for a short time, before leaving again for greener pastures. (Interestingly, money market funds and other investments don’t have any deposit insurance.)
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Strategic Change Can Take Banks Years
In structural terms, major institutions that rely on a coast-to-coast branch network face the least change, enjoying a broad range of customers on both the retail and business side. “But that’s reserved for the biggest of the big banks” that can afford a huge physical presence, says D’Acierno, a senior advisor at Simon-Kucher.
For digital players, their technology platform serves as their distribution system. For business-oriented banks, the human relationship manager is a big part of how they hold onto people.
“But a result of this crisis is that it’s now very easy for institutions to see a need to revisit which model they are pursuing, because different segment focuses mean they have different levels of susceptibility to deposit outflows,” D’Acierno explains.
“When you become an institution where businesses with a lot of excess cash keep it or where you’re pursuing typically affluent and professional segments that accumulate cash, you’re going to take notice of what happened to Silicon Valley and Signature,” he says.
Some financial institutions depend heavily on law firms that maintain “IOLTA” accounts, a rich source of deposits, he says, and that’s another segment that will be more susceptible to movement. (IOLTA stands for “interest on lawyer trust account,” and these accounts hold funds belonging to clients, not the firm.)
You can’t change such strategies overnight, Shah, a partner at Simon-Kucher, points out. Making such transitions, if warranted, may take a couple of years to have meaningful effect, he says.
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In the Short Term, Banks Will Pay Up for Stability
Other effects will become apparent sooner.
In the short term, banks and credit unions will pay more to retain and attract stable deposits. This won’t necessarily be just through higher rates, but with a reliance on signup bonuses that some institutions have returned to.
The shift from ruthlessly minimizing deposit costs to focusing on stable deposits is a “180 degree change,” says D’Acierno. This was already coming into play as market rates began rising, but D’Acierno says institutions are leaning harder into the strategy now.
Spending extra money for deposits only buys institutions some time, though.
The real question is:
“How do you make your deposits stickier?”
— Rohan Shah, Simon-Kucher & Partners
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Building on Relationship Banking in Fresh Ways
Stability is going to hinge not on continually giving customers more interest, but on making it attractive for them to centralize more business with your institution, the consultants say. This is going to take more than the traditional community bank model of friendly local service — it helps, but it’s not everything.
“You have to help them achieve financial goals. You have to be seen as a partner that will help them achieve financial health,” says D’Acierno. “Your institution has to take complexity out of their financial transactions and you have to deliver them convenience because they are busy.”
Those institutions that have stressed this broader attitude towards customers will enjoy greater stability going forward, according to D’Acierno. For those that haven’t up until now — instead regarding depositors as a source of “fuel” that could be turned on and off like a faucet with rate — will have a tougher time.
“Those institutions are going to be really challenged,” D’Acierno says, “because now they will find that every time you need to pay up, it’s going to mean an even bigger rate premium. That strategy is going to be a more and more expensive one.”
Further, whenever there are economic hiccups, “those customers are going to be out the door faster than they used to go. So those institutions will be sitting on a much more volatile and lower profitability business,” he says.
The traditional community bank relationship can tick off many of the boxes mentioned, but even if they have that connection and a scaled-down version of big banks’ branch advantage, that won’t be enough, the consultants say. They will have to upgrade their digital experience to maintain that edge.
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The Advantage of Having a Separate Digital Bank May Grow
A wrinkle here is the plethora of affiliated digital-only banks, according to Shah. These often have different branding and different names, and even some community banks have launched them in the last few years. While a few that launched to much fanfare have been folded back into the parent, others have remained in the fray. (One example is MyBankingDirect, the online-only arm of New York Community Bank, which bought much of New York’s Signature Bank through its Flagstar Bank brand.)
“I think many more banks will now start to create these second brands,” says Shah. This will be the deposit equivalent of a “second front.” Financial institutions will pursue the strategies outlined above to build their main business, for stability, Shah reasons, but will use their digital-only outreach for a strict deposit-based play when extra fuel is desired. They can tune the rates offered to control volume and yet not affect their main strategy.
Of course, in this increasingly competitive business, and in the internet age, keeping these streams apart will not always work. Many tools on the web can help diligent rate shoppers maximize their return.
And D’Acierno says that customer service representatives already have their institution’s “second brand” in their back pockets. A customer who comes in wanting a higher rate may not like what the CSR offers. Lest they take their money out the door, the CSR can simply say, “we do have this digital product you can sign up for. It pays more.”
Will that undermine the relationship play? Maybe not. Savvy business travelers always know it can pay to ask the desk clerk, “Do you have a better deal than the one I reserved?”
And they happily grab it.