In a recent American Banker editorial titled “People Primed to Put Deposits in Banks”, Eugene Ludwig, a former comptroller of the currency in the US, wrote:
Banks should aggressively reach out to individuals to take in their savings. Of course, establishing a meaningful deposit relationship has not been easy. Customers have increasingly been rate-sensitive and inclined to turn to the
capital markets and Internet to earn a few basis points more on their deposits. Success entails designating someone — or a team — whose entire job is bringing in deposits. Success-based bonuses should be used to motivate these folks, who guide an organization’s sales program and act as its “spark plugs.” Banks can do more to make themselves the centers of choice for customers who want to save and invest prudently. Not every investor is right for a bank’s trust and investment program, but there are vastly more potential customers available than the industry is signing up.”
My take: Mr. Ludwig misses the point about why the situation is the way it is and what banks are doing about it.
Mr. Ludwig rightly points out that consumers are rate-sensitive and look to earn a few points more on their deposits. As consumers have become more rate conscious, they’ve succumbed to the lure of higher potential returns on their money, and have put more of their money in investment accounts.
Who created this lure? Sure, the traditional and newer online-only brokers contributed, and have redirected some potential deposit funds to investment accounts. But as banks have become full-service financial providers over the past 10 years, they’ve helped cannibalize their own deposit bases.
Appointing an individual or team to turn this around is doomed to meet with limited success. Even worse, entrusting the bank’s entire sales programs to these “spark plugs” is neither wise nor feasible.
Putting the deposit team in charge of the organization’s sales program — and incenting them on deposit growth — is like putting the fox in charge of the hen house. In fact, many banks already have these teams, and while they generate some success, they’ve not helped banks become the center of savings and investment choice for consumers.
Banks who want to become that center of choice must overcome three “lacks”:
1) Lack of customer strategy. Mr. Ludwig also states that “not every investor is right for a bank’s trust and investment program.” Go tell that to the folks selling investment accounts. They’re focused on selling accounts to people with assets to invest — who are likely to be older (and less likely to see a bank as a place to park their investment funds), and not to younger consumers who might help drive deposit growth. With no clear focus on what customers the bank wants to attract, the sales and marketing approach is business unit by business unit free-for-all.
2) Lack of business unit integration. Most banks are comprised of far-too-independent product-centric lines of business who are tasked with maximizing the profitability of their business unit on the sale of their products. This issue is deeper than what a couple of spark plugs can fix.
3) Lack of distinction between savings and investment. Perhaps, back in 1957, consumers made that distinction (especially since just a small percentage of consumers had what they call investments). But today, that distinction is non-existent. So to focus on deposit growth, without considering — let alone integrating — investment account growth is foolish for banks. And, in fact, this un-integrated approach to marketing strategy is what causes the lack of investment sales that Mr. Ludwig points to.
The core of the problem is that the banking industry (in the US) isn’t helping most consumers to manage their money. Consumers want to make the best use of the money they have. And they want to get the money they need from the best place on the best terms.
Fancy online screens and charts and graphics that tell us where our money is and what it’s earning isn’t the solution. That’s a look backwards, or at best, a snapshot of today.
Dealing holistically with consumers’ financial situations — in the context of what’s right for the customer and not just the firm’s bottom line — is what will put banks in the position of being customer’s “center of choice,” Mr. Ludwig. Not appointing a deposits czar.
It isn’t about saving versus investment versus credit. Savings accounts, CDs, IRAs, mutual funds, etc. are constructs of the industry. The industry created them to meet perceived customer needs — and they can tear them down. Not easily, but that’s what a real revolution in financial services would look like.
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