Ask a bank or credit union executive to share their biggest challenge for 2023, and many will put gathering and retaining deposits at the top of their list. It is a remarkable reversal from previous years when FIs were awash in deposits and struggling to find optimal ways to put that liquidity to work.
A series of aggressive interest rate hikes have forced many banks and credit unions to make a difficult choice: Increase what they will pay for a deposit relationship or risk losing the customer or member to a competitor.
Deposits at FDIC-insured institutions have fallen by 2.9% since hitting a high-water mark in the first quarter, though federally insured credit unions have been able to increase them slightly this year.
Conditions will undoubtedly get more challenging as the calendar flips to 2023.
An outflow of deposits could force some FIs to sell securities – at a potential loss – to free up liquidity. Losing a deposit relationship could also mean losing a chance to introduce an individual or business to loans and other fee-generating services.
Banks and credit unions need to dust off an old playbook that has been put to the side in recent years, while also deploying new tools to keep deposits on the balance sheet. Here’s a look at some strategies that could help separate winners and losers in next year’s battle for deposits.
Let Data Be Your Guide
Consumer and business deposits are a critical, low-cost, and, hopefully, stable source of funding for loans. Until recently, deposits, even CDs with mid-term commitments, were paying mere basis points to depositors – removing “rate shopping” motivations for all but the largest balances.
Depositors expect to be paid more for their business with every rate increase. Enticing rate offers, a long-standing practice for FIs, are already appearing on social media, a channel that barely existed the last time there was intense competition. In short, depositors are fully aware that they have alternatives.
Monitoring the market to understand competitors’ moves while using data analytics to identify account segments is critical. Develop appropriate strategies along the way. Understanding depositors and the broader market will help determine which accounts offer the most-promising opportunities to deepen relationships – helping you identify the best candidates for outreach and the correct messaging.
The trick is to save your best offers for depositors with the potential to engage across multiple products over the extended horizon. Existing internal and external data should enable you to uncover such opportunities. Be competitive, but only when it makes financial sense.
SRM’s Account Boost Marketing programs can help you utilize data, focus on deposit opportunities, and reprice existing deposit products, which will assist in keeping an eye on funding costs.
There’s No Business Like Small (or Midsize) Business
Assuming the goal is to attract/retain the most deposit dollars, keep in mind that business accounts tend to carry higher balances. Small businesses are an excellent place to start. Analyze your portfolio of retail customers – there’s a decent chance some are operating full-time mom & pop businesses or “side hustles.”
We’ve previously discussed strategies for mining deposit relationships for potential lending opportunities. Now is the time to do the opposite: Evaluate your lending relationships for possible deposit offers.
Consider creating new specialized business accounts tailored to your FI’s key demographics, focusing on features, pricing, rewards, and other bells and whistles likely to resonate. Even if you only focus on small businesses, many successful ones will grow into midsize companies with even bigger balances.
Your front-line staff are your best ambassadors. Ensure they’re adequately trained, including honing active listening skills to ask the right questions, quickly recognize opportunities, and respond with appropriate offers.
Consider creating incentives for deposit gathering at the individual or branch level. Of course, checks and balances are essential to prevent employees from gaming the system.
The Bottom Line
As balances come under pressure, the ability to retain (and perhaps gain) deposits will serve as a differentiator for banks and credit unions, particularly when demand for loans returns. Capturing low-cost deposits will assuredly help FIs stave off margin pressure.
SRM has the tools – like our successful Account Boost Marketing offering – and expertise to help you with retaining and/or attracting deposits. Now is the time to plan as more rate increases loom.