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How Community Banks Can Win the Battle for Deposits

November 6, 2018
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Across the country, community banks are facing an increasingly relevant problem: Large banks are winning the battle for deposits. From 2013 to 2017, total deposits fell at banks with $1 billion or less in assets by 7.5 percent as total deposits at banks with $1 billion more in assets increased by trillions of dollars. One looming question that community institutions must answer to start 2019 off strong is how will they catch up and win back a significant share of deposits?

Retail deposits – such as checking accounts, savings accounts, money markets or certificates of deposit (CDs) – serve as a primary method for community banks to balance liquidity and onboard loans. Without a steady stream of deposits, community banks miss out on a valuable method to fund loans.

The Federal Reserve has increased federal fund rates five times since 2015, and small banks should take note.  Due to the increased rates, online-only banks have gained market share of deposits over the past year by amplifying interest rates on deposits. Synchrony Bank, Ally Financial, Goldman Sachs increased deposits by 11.5 percent, 16.2 percent and 20.6 percent respectively from June 2017-June 2018 using this tactic. In addition, large banks are beginning to set up shop within rural, deposit-rich areas,  which can affect smaller institutions with little competition in rural communities. 

In an American Banker article, Neil Stanley, CEO of deposit consulting firm Core Point, said, “…smaller banks need to consider increasing deposit rates and improving their deposit and loan products to give consumers more compelling reasons to switch from banks that have vast branch and ATM networks and, generally, more sophisticated mobile banking technology.”

For community financial institutions, the time to focus on retail products is now. As the competition intensifies for bank deposits, two options for smaller banks to retain deposits and attract new deposits are to:

1) embrace client-facing technology the way their larger bank peers have, and

2) capitalize on their strong relationship-banking capabilities.

Improve client-facing tech and backend technology

Despite the Federal Reserve’s increase of federal fund rates, large banks have yet to similarly boost rates on deposit accounts. Why not? Larger financial institutions provide a technology-driven accountholder experience that reduces the pressure to raise rates in order to remain attractive.

Big banks with a high revenue stream through deposits place a high priority on reinvesting back into the business for technology advancements that keep accountholders, often pouring millions of dollars into the effort to win tech-savvy customers. This year alone, JPMorgan Chase spent $1.4 billion on technology.

Whether looking for a small business loan or a deposit account, today’s bank customers still expect an online component to their banking experience. Sixty-four percent of borrowers say it’s important to have devices that allow them to access their online banking according to an Accenture report.

Digital features, such as an online loan application or a borrower portal, offer easy access to information for on-the-go accountholders and can be more enticing to millennial retail and commercial customers, who may not have time to visit bank locations during the daytime. A strong online presence with access to convenient services during the lending process also builds your financial institution’s reputation as a forward-looking, tech-driven bank in other areas as well.

Community banks can also tap technology for the direct benefits it can provide the institution. A customer relationship manager made for banks provides a full view of the borrower’s credit history, previous business with the institution and connections throughout the local community for a global cash flow analysis.

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Capitalize on relationship banking

When speaking about relationship management vs. technology in an American Banker article, Michael Iannaccone, vice president at Plexus Financial Services,  said, “Banks are using more technology to gather deposits, including virtual branches and more aggressive social media tactics to lure people through mobile banking. But relationship banking is still needed to woo the no interest cost customer.”

Financial professionals that practice relationship banking and act as both relationship managers and resource managers can play an integral role in the onboarding and cross-sale of deposits at community banks.

Relationship managers refer to lending professionals who build personal relationships with the client, gain a deep understanding of their finances and act as a consultant to help clients reach personal and business financial aspirations through relationship banking. Resource managers go one step further, providing supplemental help to customers by passing along helpful information based on customers’ personal or business ventures or connect clients with other financial professionals who can help them achieve their financial goals.

With access to analytics and reporting about a borrower or accountholder, financial institutions can connect the dots and better qualify customers for additional bank products. Smart lenders who work with low-risk, high-value borrowers can see the benefits of continuing business with quality customers or their cohorts and might cross-sell low-cost deposits. For example, a spouse of an ideal borrower could open a checking account or a co-borrower could open up a savings account, creating a deeper partnership between the institution and the original borrower.

Relationship banking extends beyond the doors of your community bank. Financial institutions that encourage employees to involve themselves in the community through philanthropic or volunteer work often see the benefit of relationships built at those events. Community banks that communicate their involvement with local charities to its existing customers and prospects build a positive reputation that can lead to new business. Community institutions can also strengthen their reputation and gain deposits through recommendations.

According to the American Marketing Association’s Journal of Marketing study, Referral Programs and Customer Value, referrals can be priceless. The study states referred bank customers are 25 percent more profitable for the bank, 18 percent more likely to stay with the bank and have 16 percent higher lifetime value.

As community banks finalize their 2019 plans, outbidding large banks and online-only banks for deposit accounts will be an important consideration, and as loan demand improves and interest rates increase, the competition for deposits will only grow as well. Community banks that implement a strategy integrating relationship banking and technology will have the best chance of leveling the playing field with competitors.

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