Keeping current with rapid technological changes and dealing with economic headwinds can take up a large share of a community bank’s attention. But it’s important not to let your bank’s core deposits fall through the cracks. Maintaining existing core deposits and attracting new ones are essential to increasing bank profitability over time. Here are some points to help you build core deposits while controlling costs.
Long-term strategies
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.
Many retail bank customers are now digital-only, but they’re among the least satisfied, according to many metrics. 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. In fact, it’s commonly thought that younger customers eschew branches. It’s still the case that most customers, including younger generations, prefer to open accounts at a branch — with personalized guidance — because they find it confusing to do online.
Good service is key. Banks with weaker performance in the areas of communication and advice, new account openings, and products and fees have reduced satisfaction levels among digital-only customers. To attract and retain engaged customers and grow core deposits, banks need to improve communications and provide quality, personalized advice and other services consistently. It’s important to make these strides across both digital and branch channels.
In addition, community banks 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, hospitality, agriculture or some other industry — depends on the bank’s history and the community’s needs.
Reciprocal deposits
In 2018, a provision of the Economic Growth, Regulatory Relief and Consumer Protection Act created an opportunity for community banks to boost deposits by taking advantage of reciprocal deposits. A bank receives these deposits through a deposit placement network in exchange for placing matching deposits at other banks in the network. One advantage is that these networks enable banks 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 banks.)
The 2018 law makes it easier for banks 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 various rules and restrictions, making them more costly than traditional core deposits.
Keep refining your methods
In this increasingly unpredictable and rapidly changing economic environment, community banks need to find ways to not only survive, but thrive. Focusing on growing core deposits can provide both monetary and relationship-building benefits for banks, increasing long-term stability.
