The Bottom Line

Get to the bottom of all things banking with weekly expert musings from SRM. The Bottom Line takes what we hear from financial institutions, fintechs, and industry influencers - separating the news from the noise. We offer unfiltered observations and thoughtful forecasts responding to industry developments and trends as they happen, with emphasis on how financial institutions can better serve their stakeholders.

Low-Cost Deposits: Banking’s New Battleground

Posted by Bob Koehler on Jan 29, 2019 11:30:00 AM
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It’s fascinating how quickly economic tides can turn. For the past decade, banks and credit unions have been focused on lending—first in shoring up the quality of their portfolios, then in attracting new customers to prudently expand loan activity. With rates now on the rise and net interest margins widening, however, attention has shifted to attracting and retaining deposits.

Recent financial institution merger and acquisition announcements have positioned deposits and traditional loan growth as the primary rationales for the change. Interest rates ticking upward means the cost to fund a loan portfolio through borrowing becomes more expensive. Consequently, the stage is set for deposits to be the most cost-effective alternative.

The complicating factor, of course, is that most competitors are chasing the same pool of deposit dollars. Therefore, financial institutions must strategize to differentiate themselves and maximize the opportunities that exist within their current customer base.

The New Stars of the Ad Campaign

Not so long ago, the airwaves were dominated by the likes of Samuel L. Jackson and Jennifer Garner touting the benefits of credit card rewards programs (and, presumably, encouraging the buildup of revolving loan balances in the process). Now, recent campaigns feature convenience at the forefront, focusing instead on enhanced P2P and voice response capabilities and showcasing branches re-fashioned as comfortable cafes. These subtle shifts in brand marketing show that major financial institutions are investing staunchly in the stickiness of deposit programs, requiring account holders to maintain deposit balances to enable such conveniences.  Behind this strategy is the idea that it’s easier to retain existing funds than hunt down new sources.

How’s a Community Financial Institution to Compete?

As always, it’s the big banks that have seemingly limitless resources to throw at these initiatives, whether through ad spending or technology investment. For instance, in a recent Wall Street Journal interview, Capital One’s Chief Information Officer Rob Alexander mentioned nearly quadrupling his firm’s tech staff to 9,000 FTEs, with a goal of developing chatbots and moving to the cloud to speed product time to market.

When bumping up against resources as vast as these, there are key steps that community institutions can take to keep pace. First, to remain competitive with market leaders, smaller banks must select providers capable of offering timely, convenient features in high-profile areas (such as mobile and increasingly AI-powered services) while limiting the implementation burden. This may sound easier said than done, but with the increased use of APIs (the software equivalent of a USB port), it has become much easier for FIs of all sizes to “plug in” such services to existing systems.

Smaller banks must also design programs that solidify top-of-wallet status for their institution’s debit cards by incenting desired behaviors in a way that resonates with their target audience.

On the cost side, financial institutions can spend less by streamlining processes to run more efficiently. For example, mitigating service fees and interchange rates during vendor contract or card processor negotiation processes can help alleviate costs and free up funding for new marketing efforts.

The Bottom Line: When you think about it, deposits are the fuel that keeps the banking cycle humming along. With proper planning and a keen eye on vendor relationships, small banks and credit unions can keep pace with the competition by laying a foundation for continued growth on both the top and bottom lines.

Topics: Vendors & Contracts

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