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Don’t Wait ‘Till the Cows Come Home: Establish Your Deposit Strategy Today

February 16, 2018
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Don’t wait for the day your deposit dollars walk out the door to figure out how to stop them from leaving or how to get them back. Otherwise, you will lose valuable momentum in the wake of heightened deposit competition.

The Federal Reserve has raised its benchmark rate three times since the financial crisis. As such, when I talk with my financial institution partners, most of them ask about deposit strategies: how to identify their deposit strengths and opportunities and how to develop a formalized plan they can deploy to both retain and grow deposits as needed. 

Deposit growth and retention is not something new to the financial industry. However, there’s an even greater risk today of those valuable balances leaving, due to the significant level of deposit balances sitting in liquid accounts, which has steadily increased over the last decade.

Your product mix, pricing and services help mitigate the outflow of those deposit dollars. The sad truth is the cows always get out, no matter what your fencing strategy is: barbed wire, electric fences, or cattle guard. Can you tell that I’m from the West? Similarly, rate-sensitive deposit dollars can leave at any given time. The goal is to slow that down with effective retention strategies while balancing with meaningful deposit growth strategies.

Before that can happen, you must first establish your baselines:

  • Do you know how many head of cattle you have (how many deposit households you have?)
  • Have you identified your “branded” cattle or certificate of deposits and high-balance relationships, versus your “maverick” cattle or liquid deposit balance relationships?
  • Are you tracking your “normal” deposit balance activity?

Once you have defined today’s deposit balances, deposit account mix and typical deposit balance fluctuation, you can identify your opportunities to retain those balances and grow them. Consider establishing some of the following deposit retention and growth strategies today so you are not waiting until the cows come home.

Deposit Retention Strategies
American West ranchers typically brand their cows to help identify ownership of the animals. This is important when cattle are grazing in public lands and might mix with other herds. No, I’m not saying you should brand ownership over your deposit households. Where I’m going with this is: make sure you know who your High Balance Savers are. These are folks that have aggregate deposit balances of $20,000 or more. For a given financial institution, 14.2 percent of retail households provide 85.3 percent of the institution’s deposits. “Brand” them by identifying who they are, knowing what products and balances they have with you and tracking these balances and services each month to determine if this group starts to move their deposit balances and “graze” in someone else’s institution.

Another retention strategy is to manage the transfer of wealth occurring within your customer base. On average, 11 percent of retail household relationships found at financial institutions are headed by a customer over the age of 71. These households typically account for 30.3 percent of retail deposit balances, with each carrying a little less than $44,000. Consider establishing relationships with the next of kin for these aging households, and communicating the opportunities your institution provides for these deposit balances.

I also recommend evaluating your average deposit balances by generational segment to understand how best to recover transferred wealth in the most cost-effective manner. If the average Traditionalist household has $50,000 in deposit balances with your institution and Baby Boomer households has around $40,000 in deposit balances, you could assume that you would need to attract at least five additional Baby Boomer household deposit relationships to replace four lost Traditional households. Likewise, you would need to acquire deposit relationships with nearly eight more Generation X households, and just about ten more Millennial households. Manage your target marketing accordingly.  

Finally, I encourage you to identify your households that have a single product relationship with you. Determine which of these households have higher deposit balances and market to them with a goal of deepening that relationship to reduce the risk of those deposit balances leaving. Establishing an active checking relationship with the household should be a priority. In our Performance Analytics program, a stronger products per household ratio – meaning depth of relationship – correlates with greater degrees of customer retention. 

Deposit Growth Strategies
As rates increase, it will become more challenging to hold the line on your cost of funds. The first approach I recommend to grow deposit balances is leveraging a relationship pricing method. The deeper the relationship you have with your customer, the more likely you will be able to retain those deposit balances. Keep it simple, like requiring an active checking account to obtain a higher rate on a money market account. You could also look at the entire deposit relationship by requiring a minimum aggregate deposit balance to get a higher rate on a money market account. The easier it is for the consumer to understand, the easier it is going to be for your front line to sell it.

If your institution requires an even greater degree of deposit balance growth, a certificate of deposit (CD) promotion may be in order. I recommend establishing a “New Money Only” requirement when launching new CD offers to help manage your cost of funds. The reason being, the more existing deposit funds that roll into your CD promotion, the more expensive it’s going to be to manage those funds. That’s the cost of cannibalization.

A New Money Only requirement is good for your bottom line, but it may alienate your existing customers and place a burden on your front-line. Some of my clients have avoided stepping into these unpleasant cow pies by implementing the following tactics:

  • Allow existing money to take advantage of the new CD rate by placing an Existing Money balance cap on the fund. For example, only allow up to $10,000 of existing money to open the CD.
  • Allow recent deposit balances to move to the new CD rate if they have not yet earned a dividend. This removes the cost of cannibalization from the equation.

In order for these strategies to be most effective, your employees need to be adequately trained. What is the average tenure of your tellers or financial representatives? When was the last time your front line was encouraged to sell deposit products outside of a checking account? Take the time to train your employees on these products. The most effective training approaches I’ve seen address the following:

  • Answer, “Why is it important for me to sell this product?”
  • Answer, “What’s in it for me?”
  • Answer, “What’s in it for the customer?”
  • Compare your products to the local competition’s products, as well as online competition
  • Align goals and bonuses with selling these deposit products

The deposit competition conversation is just warming up. Cows can sense when a storm is coming. The more prepared you are with knowing your herd of deposit balances and the more quickly you are able to establish a well-thought out deposit retention and growth strategy, the faster you will get through the storm with profitable deposit balances. Round ‘em up, cowboys.