The Importance of Diversifying Your Deposit Base

We were already seeing banks and credit unions step up efforts to attract and retain deposits before last month’s bank fallout resurrected discourse about the importance of liquidity.

Financial institutions of all sizes are doubling efforts to hold onto depositors while serving people who have moved their accounts from Silicon Valley Bank, Signature Bank, and others. Deposit balances have become a hot topic – the Independent Community Bankers Association just announced that it would be a focus of its next fintech accelerator season.

The Fed’s aggressive hikes quickly reversed years of unusually low interest rates and a stretch where FIs found themselves awash in deposits because of pandemic-related stimulus programs. We’ve been seeing FIs become much more competitive lately, where that means higher pricing, increased marketing, or both.

Here are some lessons we’ve learned, many of which have been punctuated by recent events.

Consequences of Concentrations

Recent bank failures have highlighted the risks of having weighted exposure to specific industries and demographics and an elevated level of uninsured deposits. These situations can create distress if many clients with high balances need cash or get frightened and decide to take their business elsewhere.

By now, most FIs have run queries to identify accounts that exceed the $250,000 limit for FDIC insurance. We recommend taking the analysis several steps further by looking at various tranches (e.g., $100,000-$250,000, $10,000-$50,000, $2,500-$10,000), each of which has proven to demonstrate unique characteristics over time.

We also suggest gathering other vital data by deposit tier, segmenting customers by those with and without checking accounts and the number of products they have. It is also beneficial to look at the number of single-service households and depositors that do/do not have credit relationships with your financial institution.

All of this data can be critical elements for crafting an outreach and retention plan that uses relationships to anchor accounts and balances.  

Numbers Matter

SRM’s Boost Opportunity Assessment tool aggregates this data in tabular form, benchmarking it against industry norms and best practices. One essential action item, for example, would be to expand the wallet share of high-deposit single-service checking households by adding new savings relationships to anchor the checking product.

Since business accounts tend to carry higher balances, the same cross-selling effort applies to all such relationships. This can lead to other profitable business expansions while solidifying an important source of funds.

A longer-term play involves promoting planned savings tools such as automatic transfers and financial literacy to underbanked households to encourage systematic saving. Over time, this will reduce deposit concentration as smaller account households move into higher-balance tiers. Debit card activation programs for dormant consumers are also helpful in retaining and growing existing checking account balances while creating new sources of fee income to offset inevitable increases in funding costs.  

The Bottom Line

Hopefully, the above points will prove helpful in navigating your bank or credit union through the turmoil currently impacting deposit markets. The process begins with a data-driven analysis of an institution’s portfolio, and the resulting insights will inform a series of follow-on opportunities with existing customers.

Watch this space for more SRM deposit strategy insights in the coming weeks. We welcome the opportunity for dialogue on an important topic that has become far more urgent.