A Proven Deposit Growth Strategy

By Grant Ossenkop, Vice President

Does your financial institution have a viable deposit growth strategy?

Why You Need a Deposit Growth Strategy 

During the financial crisis, when institutional survival was top of mind at banks and credit unions throughout the nation, this question received far less attention. Interest rates hovered at historic lows, core deposits were dormant and the lending capacity within the banking industry was severely limited.

Now, with the wreckage of the Great Recession further behind us, the performance of financial institutions is much improved. Amid this industry-wide recovery, confidence has returned, balance sheets are healthier, profits are growing, and interest rates are rising.

As interest rates have risen, the need to fund rapidly increasing loan demand has again become a strategic imperative at banks and credit unions throughout the country. Attention has shifted back to the importance of checking accounts, deposit products, and the need for financial institutions to develop a core deposit growth strategy. Indeed, for CEOs at many banks and credit unions throughout the country, the TOP concern is: “How are we going to grow core deposits?”

As interest rates have risen, the need to fund rapidly increasing loan demand has again become a strategic imperative at banks and credit unions throughout the country.

In a rising-rate environment, with the marketplace consolidating, attracting new checking accounts and growing deposits has become an increasingly expensive and fiercely competitive endeavor.

In response, banking executives, as is their wont, usually turn to conventional methods to address funding challenges as they arise. Whether it is a retail bank holding more than a billion dollars in assets or a small credit union with a fraction of that amount, the typical approach of financial institutions is to try traditional marketing techniques and customer incentives that offer short-term solutions to increase deposits.

For example, a financial institution might introduce new rate-based deposit products which they attempt to cross-sell to their existing customers, or perhaps raise deposit rates on existing accounts.

It has become increasingly common for financial institutions to promote their new deposit products and rates online, through their social media outlets, or via mobile banking.

Haberfeld’s Deposit Growth Strategy

At Haberfeld, we believe that there is no quick fix or magic solution to growing core deposits. We believe that banking executives seeking to grow core deposits as they profitably grow their branch networks and successfully serve the broader community must critically evaluate new solutions and creatively deploy them.

Further, we believe that conventional wisdom often discourages critical thinking, diminishes creative energy, and slows growth. This applies to any business in every industry, but it is particularly true for community banks and credit unions, and especially relevant to increasing core deposit growth. (For more on breaking from conventional wisdom, read The Mortician’s Guide to Retail Banking.)

Haberfeld’s growth strategy is founded on the premise that community banks and credit unions can (and do) prosper and grow in this consolidated, competitive, rising-rate environment. Moreover, they can thrive without having to compromise. Community financial institutions do not need to mirror the business models of the big banks. They do not need to copy their products or mimic their marketing strategies.

Community financial institutions do not need to mirror the business models of the big banks.

And they do not need to charge their fees. Consumers abhor fees and will change institutions to avoid paying them. That is why Haberfeld has developed a growth strategy that empowers community financial institutions to increase fee income without raising fees.

Fill Up Your Branches

Community banks and the largest financial institutions don’t compete on a level playing field.

The larger institutions have four times the number of customers per branch and a broader network with which to serve them. Their marketing budgets dwarf those of most community banks. Consumers typically believe that larger institutions use a higher-grade of technology and offer a bigger menu of products and services to select from.

Community banks, however, enjoy some key, strategic advantages that the big banks can’t match.

They are, for example, more attuned to the personality of the community they serve, and better equipped to address the unique concerns of individual customers. Perhaps the most important advantage that community banks have over their larger competitors is CAPACITY. Throughout their branch network, community banks enjoy the luxury of being able to serve vastly more customers than they currently do.

Throughout their branch network, community banks enjoy the luxury of being able to serve vastly more customers than they currently do.

This additional capacity that exists at community banks is by design – a by-product of the business model typically used by community banks. That model calls for the construction of a network of costly, labor intensive factories that banks refer to as branches. These branches are never full and rarely crowded. In fact, they operate far below their actual capacity and could easily welcome and serve more customers without significantly impacting costs. Bankers however, given that they are often beholden to conventional wisdom, ignore the value of this excess capacity and the opportunity that it presents in helping their institutions increase profitability, boost fee income, and GROW CORE DEPOSITS.

Haberfeld encourages bankers to turn conventional wisdom upside down, and to approach challenges with creative solutions driven by reliable data. For a community bank that is seeking to successfully steal market share from their larger competitors, our data suggests that they must first, understand the true value of their branch network and the opportunity that excess capacity presents and, second, take appropriate steps to reduce that excess capacity by filling their branches with more profitable new customers. For banks that take those two initial steps, our data is also clear on the results they can expect to achieve: they will take market share away from their larger competitors and generate profitable growth that can be measured right away, and that will continue over time.

Eschewing conventional wisdom also comes into play when evaluating a community bank’s high fixed costs and very low marginal costs. For example, on average, a typical community bank services about 1,200 core checking relationships at each branch. For big banks, the number is much higher, up to 5,000 per branch. Imagine what would happen if bankers, taking their business model into account, chose to do an analysis of the marginal revenues from selling one more widget compared to the marginal costs of producing that widget. Most community bankers, however, have not been trained to think that way.

Leverage Fixed Costs with Marginal Revenues

Haberfeld has identified a key strategic opportunity for community banks when they leverage the infrastructure investments they have already made (i.e., all their fixed costs) by growing their core customer base. For most community banks, marginal revenues from the next core customer are multiples of the costs to acquire and service them. Significant growth is possible for many organizations, but it may take tossing outmoded, conventional wisdom and replacing it with new ideas based on data analysis and validated by results.

As bankers, we monetize core customers in two key ways: balances (deposits and loans) and non-interest income. Start with the cost side of the equation – what does it cost you to service one more core relationship? How much does it cost the bank to:

  • Issue someone a debit card?
  • Print paper statements?
  • Put them on your core operating system?
  • Charge off some principal for some of them?

Most of our clients report that the actual marginal costs associated with servicing one more core customer is generally in the $30 – $50 per year range.

Now look at the revenue that is produced. Among our clients, the average consumer household produces:

  • Non-interest income — $150/year;
  • Deposits — $17,000+
  • Loans — $9,000+

Certainly, many assumptions can be made here as to the “value” of this based on an individual bank’s loan-to-deposit ratio, yield on assets, etc. If the new households borrow $9,000 of their own money (on average), which they lend to the bank at almost no cost, doesn’t that create value in some way? Give that transaction a spread of, say, 3.5% and that generates about $315 in value even if you totally discount the other $8,000 in deposits.  Now, the typical core customer has an average life greater than 8 years, so certainly that money will have some value over time. Even if it has a value of zero, that still means an average new relationship generates marginal revenues of $450.

Some would say that using averages in this way is dangerous and that this approach creates the risk of attracting unprofitable customers. We would make this point:  All of the “unprofitable” customers in the above example reduced revenue to only $450, while marginal costs were only $30-50. What we’ve found over time is that community banks can successfully get more of the customers they were getting to begin with, but they generally can’t make them look much different. If you decide to grow, you will certainly get more customers in the lowest quartile, but you will get more in the highest quartile as well.

The idea of having unprofitable customers is anathema to many bankers. It defies the time-honored conventional wisdom of banking and runs against the grain all bankers have been taught.

In practice, however, there are scores of businesses with excess capacity where marginal revenues exceed marginal costs and those business owners realize they make more money at the margin. Movie theaters are an excellent case in point. Data indicates that more than 80% of theater profits derive not from selling tickets, but from the profit margin generated by selling concessions – (and not every patron buys popcorn and a drink). Instead of charging an exorbitant amount for movie tickets (which is, in essence, what most bankers traditionally have done) theater owners understand the fundamentals of their business model and wisely choose to make more money by serving more people. More to the point, they don’t become fixated on movie patrons that don’t buy popcorn — as bankers tend to do.

Win the New Customer Every Time

Bank CEOs will consider making significant investments to make an acquisition, or to acquire and build new branches to grow, but they severely underspend to fill existing branches, which are effectively empty most of the time. Your goal should be to fill up excess capacity in your existing footprint. This requires a strategic marketing approach with clear, measurable benchmarks to track your ROI.

If a customer switches today and you don’t capture them, you likely won’t get that opportunity for another 8 or 9 years.

People switch financial institutions for a variety of reasons but it is almost always event driven. In a given year, up to 15% of households and businesses change banking relationships. It is an infinite pipeline of opportunity over time, but it is perishable. If a customer switches today and you don’t capture them, you likely won’t get that opportunity for another 8 or 9 years. You also can’t force anyone to switch and your marketing needs to recognize that. You need to be top-of-mind before they decide to switch so they will pick you once that event happens for them. Marketing for core banking relationships is a really weird space – you can’t create primary demand and your entire goal is to get into the coveted #2 role; it’s not very sexy, but it is powerful if you recognize the unique dynamics and do it correctly. (Read more in Winning People Over.)

To win new customers – and successfully grow core deposits – you need to offer simple, easy to understand products, you need to show that you are convenient to a prospective customer, and you need to demonstrate that you are a great place to bank. With good marketing and effective execution, most community banks can double the rates at which they are acquiring core customers.

Learn more about Haberfeld