5 Tips For Boosting Core Deposits

08/20/2020 Larry Brown & Mike Ballenger

During these extraordinary times, most community financial institutions have seen an increase in customer deposits. In the past, it was a challenge for community financial institutions striving to grow their core deposits to fund lending activities; however the pandemic can provide some opportunities to help maintain and grow core deposits. Consider how a combination of these strategies can be used to maintain and grow a core deposit base that will last well into the future.

Take the right steps

Here are five tips for attracting core deposits while keeping costs under control:

  1. Avoid short-term fixes. It’s important to recognize that building core deposits is a long-term strategy — there are no quick fixes. Offering above-market interest rates, for example, may attract new customers in the short term, but it’s unlikely to support sustainable deposit growth. That’s because customers who are attracted to higher rates are more likely to abandon you when a better rate comes along. In the long run, it’s better to focus on customers who value service over interest rates.
  2. Don’t underestimate the importance of branches. A recent J.D. Power banking satisfaction study offers insights into the value of branches. According to the study, although 28% of retail financial institution customers are now digital-only, they are among the least satisfied. The most satisfied customers are “branch-dependent digital customers” — those who take advantage of online or mobile banking but also visit a branch two or more times during a three-month period.

    Interestingly, the satisfaction gap between branch-dependent customers and more “digital-centric” customers was most pronounced among Millennials and Generation Xers. This is a bit surprising, since it’s commonly thought that younger customers eschew branches. It’s still the case that the majority of customers, including younger generations, prefer to open accounts at a branch — with personalized guidance — because they find it confusing to do online.

    In addition, ensure the steps you have taken to protect your employees and customers during the pandemic are readily available and easily found to improve current and potential customers’ comfort in traveling to a branch.

  3. Focus on service. According to J.D. Power, weaker performance in the areas of communication and advice, new account openings, and products and fees caused lower satisfaction levels among digital-only customers. To attract and retain engaged customers and grow core deposits, financial institutions need to improve communications and provide quality, personalized advice and other services consistently. Train your employees to cross-sell during interactions to create interest in deposits even if another service was the reason the customer engaged the financial institution. It’s key to make these strides across both digital and branch channels. The pandemic has undoubtedly inhibited many customers from leaving their home, which could make selling new accounts, or encouraging more deposits, very difficult. As such, it is important to increase the communication channels available, such as chat, phone, text, and email features, to give customers every opportunity to engage with your financial institution.

    There are incredible opportunities to take advantage of customers experiencing service issues with their current financial institution. Community financial institutions were critical to the success of the Payroll Protection Program by helping community businesses access the funds critical to keeping businesses open. This has created opportunities to increase commercial deposits as businesses are transferring their entire lending and deposit relationship to the community financial institution that helped them through difficult times.

  4. Specialize. Community financial institutions that specialize in particular industries or types of banking are often able to attract customers who value specialized services over interest rates. The right niche — whether it’s health care, professional services firms, hospitality, agriculture or some other industry — depends on the financial institution’s history and the needs of the community. Do the research on which industries provide the most deposit benefits and shape your incentives or marketing strategies to attract them.

    Within these industries, don’t count out the small businesses who may need loans from your financial institution. Customer retention is increased when a financial institution provides more than one service for the customer. If you can get your customers in the door with a loan offer, their deposits could follow as the relationship grows.

  5. Consider reciprocal deposits. A provision of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 creates an opportunity for community financial institutions to boost deposits by taking advantage of reciprocal deposits. These are deposits a financial institution receives through a deposit placement network in exchange for placing matching deposits at other financial institutions in the network. One advantage of these networks is that they enable financial institutions to attract large-dollar, stable, local depositors by offering them insured deposits beyond the $250,000 FDIC threshold. (Insurance coverage is increased by spreading deposits among several network financial institutions.)

    The act made it easier for financial institutions to take advantage of reciprocal deposits by providing that these deposits (up to the lesser of 20% of total liabilities or $5 billion) won’t be considered “brokered deposits” if specific requirements are met. Brokered deposits are subject to a variety of rules and restrictions that make them more costly than traditional core deposits.

Develop a strategy

These days, it’s easy for customers to switch financial institutions to obtain a higher interest rate. The key to attracting and retaining stable core deposits is to have a strategy for providing value (apart from interest) that makes customers want to stick around. Work on tailored marketing efforts to improve customers’ knowledge of what sets your financial institution apart from others and you can create a brand that will attract customers from other financial institutions to you.

For any questions related to this article, or financial institutions in general, contact Larry Brown, VonLehman’s community bank specialist, at lbrown@vlcpa.com or 800.887.0437.

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