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The Struggle for Deposits

By Malcolm McDowell Woods

Increased market volatility, competition from fintechs, and a hodgepodge of other consumer investment opportunities means banks need to step up their game in order to attract new deposits and hold onto existing accounts, but anyone looking for a single solution is probably out of luck.

That’s the consensus from several banking officials and other experts in the financial services industry, who say there are a number of proven strategies to accomplish deposit growth: going big, either by marketing your products beyond your own geographic region, or by seeking larger deposits; going digital, by fully embracing digital banking or joining forces with a fintech; by developing and offering new or unique products; or by going old school and refreshing the customer service experience and community-building endeavors banks have long practiced.

“Every bank in the country wants deposits,” maintains Tim Kotnour, president and CEO of State Bank Financial of La Crosse, “and our bank is no different.” But banks in search of deposits, and the consumers they serve, are navigating a rapidly changing environment. Kotnour notes that from 2010 on, steady low interest rates meant there hadn’t been much change in consumers’ preferences, but all that started to change a couple years ago.

“Interest rates are quite a bit higher now. They were at zero for a gazillion years and now they have shot through the roof, from zero to four or five percent,” says Kotnour. That change has been a significant driver of customer demands. “We have seen a lot more pressure to reward our clients with money today.” That dialog wasn’t happening five years ago, because nobody was paying anything, he adds. Customers had quit asking.

Today, though, Kotnour says that impatient customers seeking higher returns after years of low rates are helping to fuel a deposit war. “I would say the customer preference is, ‘for five years nobody paid me anything,’ and if they’re going to put money in my bank, they are going to want more for it.” The days of customers placing $50,000 in a money market that pays .25 percent are over. “I would lose that account.”

Competition among institutions along interest rates is only one of the drivers causing a shift in consumer behavior, though. Technological advances have radically changed the battleground. “Digital banking, digital banking, digital banking,” says Kotnour. Five years ago, about one-third of his customers used his bank’s mobile banking offerings. Today, nearly all do.

“The world really is moving away from an analog place,” agrees Shana Hennigan, chief business officer with Raisin, a fintech firm which has partnered with more than 70 banks and credit unions across the country to offer consumers a variety of deposit options. “While generations of consumers grew up going into banks and their local branches, I would wager that some members of the younger generations have never stepped foot into a branch.” For consumers, she adds, being able to have digital access is increasingly important.

Firms like Raisin can work with community banks to provide access to a much wider potential market, one not necessarily constrained by geography. “Particularly if you’re a community bank, you can get your products in front of savers nationwide.” For consumers, the firm sells convenience, offering a one-stop shop where they can select from numerous savings account choices. The company’s mobile app boasts that savers can manage all their deposits at member institutions via a single login.

That convenience and ease of use is a powerful attraction, one that smaller financial institutions might have trouble matching. It means not only having a robust and smooth website, but also a mobile app consumers can easily utilize. Not that any of this comes cheap. Developing a robust, effective and efficient website can be very expensive, but debuting a clunky mobile app devoid of features may be even more costly.

“I have a 23-year-old son and I work in a bank, but unless he’s coming down to mooch a lunch off me, he’s hardly ever been in the bank,” notes Kotnour. He adds that he had to teach his son how to write a check but acknowledges that he can easily send a check through his mobile phone via any number of apps.

Fintechs that have created simple pathways for money transfers, such as Venmo, PayPal, Apple Wallet represent significant competition for banks. “What does everyone use to pay friends with?” Kotnour asks. “Venmo, PayPal, Apple Wallet, Google Pay, right? Well, with those you have to move money out of your account. Now, it doesn’t seem like a lot, but when the whole world is doing it, we’re losing deposits. That money used to be in the bank, and now I have to move my money over to Venmo to pay my brother 10 bucks for lunch.”

Kotnour’s bank has taken several steps to remain competitive. The bank has worked with its core service provider, FIS (Fidelity Information Services), to offer customers a full-featured online presence and mobile banking app, as both are consumer expectations. “It’s got to be a good product,” he notes. “There are a lot of junky ones that basically give you your balance and maybe you can move money back and forth a little bit, but the consumer now expects a robust experience.”

The bank’s mobile app also incorporates Zelle, an online payment system that boasts a network of more than 2,200 banks across the country and offers bank customers a secure peer-to-peer payment system. Kotnour is realistic about a community bank’s ability to compete in the technological sphere with giant fintechs, but he believes Zelle can be a useful tool in attracting customers. His staff pitches both the convenience and the security of using Zelle through the bank’s app. “If something goes wrong, you’re not calling the Venmo guy, you’re calling Tim Kotnour.”

Like State Bank Financial’s relationship with Zelle, other banks are looking to remain competitive by joining ranks with fintechs. Hennigan says numerous banks have turned to Raisin to market their products to other markets. “If you’re a community or regional bank, you can leverage the Raisin platform to get your products in front of savers nationwide,” she says, without large investments in technology, administrative or marketing costs. “You could really plug into this to efficiently raise retail deposits and have this as another funding tool at the ready to use when it makes sense for the bank.”

For many financial institutions, solutions like the ones offered by Raisin represent another tool in the toolbox, says Hennigan. “You may not need to use all of them but being able to have access to them and know that, when you need it, that funding source is available, it’s really just basic best practices. Make sure you’ve got all the tools and you can deploy them when you need them.”

At CCFBank in northwestern Wisconsin, those fintech tools have been primarily internal. “We have partnered with fintechs and have seen the greatest impact from the operational software providers (banker training, BSA/AML and Loan Origination Software) which has improved knowledge and efficiency,” says Steve Bianchi, the bank’s president and CEO. “We tried an online account opening platform and found a high percentage of new accounts to be fraudulent and terminated that experiment. Our view is to focus on what we do well as a community bank and not be distracted by bright, shiny objects that could distract us.”

Besides the strength in numbers approach, another pathway towards growing deposits is the pursuit of large-scale deposits. Intrafi is a Virginia-based firm which oversees a network of more than 3,000 financial institutions across the country. It was founded with the objective of providing greater security for larger deposits by effectively spreading those funds across multiple member institutions, thereby maintaining FDIC coverage.

H.D. Barkett, a senior marketing manager at Intrafi, says that market volatility, the current economic uncertainty and inflation fears have all combined to place on emphasis on deposit safety. “Many of the banks we speak with are stressing safety and the benefit of millions in aggregate FDIC insurance coverage across network banks available via deposit placement networks,” he notes, adding that while it isn’t a new strategy, it is critically important in today’s environment.

“While corporate accounts and public funds are a consistent marketing focus, we are seeing increased interest in banks marketing to high-net-worth individuals,” reports Barkett. “Given that there are ways to provide access to FDIC insurance for their total deposit amounts, including aggregate amounts more than the $250,000 limit at any one bank, banks can be more aggressive about competing with the largest banks for those customers.”

The ability for customers to place their deposits through a single bank and still maintain access to FDIC insurance coverage for aggregate deposits over $250,000 across network banks is a significant benefit for Intrafi’s partner banks, says Barkett. “It is hugely beneficial for the customer, allowing them to negotiate a rate for their total deposit. As for the bank, once those deposits are placed through that institution, the depositor is less likely to move the money to multiple banks (to be eligible for FDIC insurance coverage).” That security may prove more alluring than higher rates. “Deposit retention is higher for insured deposits vs. uninsured deposits” says Barkett. “While initially, rates may entice a depositor to become a customer, without the ability to consolidate the customer’s total deposit relationship with benefits such as access to millions of dollars in FDIC insurance across network banks, those deposits tend to be more rate sensitive.”

For customers, services such as Intrafi and Raisin offer the opportunity to access offerings from banks far beyond their own neighborhood, but finding one’s way through hundreds of offerings can be daunting. Hennigan says Raisin works to tell each bank’s unique story. “Consumers care where their money goes,” she notes. “The Raisin platform is able to kind of tell the story of our individual institutions. Are they family owned? Have they been in their community for decades? Are they a community development organization? Are they a minority owned or women-led institution? All of these things are ways for institutions to differentiate.”

Kotnour values those types of differentiators. State Bank Financial has been operating in the La Crosse region since 1858. “We’re the second oldest bank in the state,” he points out. The bank’s messaging relies on its history and presence in the community. “We haven’t changed. Old, stodgy, boring, with good relationships, smart bankers and cool technology. That attracts deposits.”

Bianchi reports that CCFBank has embraced its roots as a community bank, by reinforcing the basics of business development and relationship banking. “We have seen momentum build over the last two plus years,” he says. “We also aligned incentive plans to better reflect our values and the results that will make us a stronger community bank for our customers. Product knowledge throughout the bank on cash management is everyone’s job. That is something we have been able to build and leverage to grow value in our relationships.”

At the Bank of Sun Prairie, CEO Jimmy Kauffman also stresses his bank’s role in the community. It’s part of a multi-faceted strategy the bank has adopted to gather deposits, combining financial literacy programs with new products aimed at an underserved population and by leveraging partnerships in the community. For example, the bank introduced a fresh start checking program along with a micro-lending initiative with St. Vincent De Paul in Sun Prairie and created move-in packages in partnership with multi-family housing developers.

“It’s really forced us out of a singular approach to deposit gathering,” says Kauffman, and to focus instead on a variety of components. “I think long term it’s really good for banking and for our bank to make sure we have all these different tools in the toolbox. Consumers bank at a bank because that partnership helps manage the risk of the services they’re using.”

Local expertise still matters, maintains Kauffman. “You wouldn’t go to your medical doctor for an eye exam,” he notes. “There’s a reason you go to an eye doctor.” For banking, the same logic holds. “I see a lot of value in continuing to have those local relationships with your financial institution.” Customers know the bankers and they anticipate that the money – their money – stays in the community.

“The value proposition of banking locally, with a community bank, continues to be very strong,” Kauffman concludes.

McDowell Woods is a freelance writer and an instructor of journalism and media studies at the University of Wisconsin–Milwaukee.

May 6, 2025/by Katie Reiser
https://www.wisbank.com/wp-content/uploads/2021/09/Triangle-Backgrounds_Dark-Blue-on-Light-Blue.jpg 972 1921 Katie Reiser https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Katie Reiser2025-05-06 06:57:132025-05-06 06:57:13The Struggle for Deposits
Compliance, News

What Are Brokered Deposits and What Is the Significance of FDIC Reform?

The below article is the Special Focus section of the April 2019 Compliance Journal. The full issue may be viewed by clicking here.

Brokered deposits are relatively simple in concept but subject to complex regulatory restrictions. By concept, “brokered deposit” is a term used to describe a source of funding for financial institutions. That is, funds managed by a deposit broker, being an individual who accepts and places funds in investment instruments at financial institutions, on behalf of others. This concept has evolved over the years, grown controversial, and subjected to regulatory restriction. To that extent, the question is: what deposits are considered brokered for purposes of regulatory coverage? 

According to section 29 of the Federal Deposit Insurance Act (FDI Act) and Section 227 of the Federal Deposit Insurance Corporation’s (FDIC) rules and regulations, brokered deposit means any deposit that is obtained, directly or indirectly, from or through the mediation or assistance of a deposit broker.1 A deposit broker is:

  1. Any person engaged in the business of placing deposits, or facilitating the placement of deposits, of third parties with insured depository institutions, or the business of placing deposits with insured depository institutions for the purpose of selling interests in those deposits to third parties; and
  2. An agent or trustee who establishes a deposit account to facilitate a business arrangement with an insured depository institution to use the proceeds of the account to fund a prearranged loan.

This broad language gives FDIC significant discretion to determine whether a deposit is brokered, making the above question difficult to answer. 

Emerging technologies continue to create innovative deposit opportunities. For example, internet and mobile banking did not exist when the rules were written. Brokered deposits were born from new technologies, but those technologies continue to evolve, and with them, the concept of what a brokered deposit is. 

Background 

The inception of brokered deposits came with the ability to transfer funds electronically. These technologies made it quick, easy, and cheap to access before un-reached markets, which enabled greater bank liquidity and growth. Controversy exists as to whether such growth contributed to the 1980 financial crisis, an examination of which is outside the scope of this article. However, the 1980 financial crisis did result in FDIC launching a study into brokered deposits which led the agency to write rules in 1989 and amend them in 1991. 

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 added Section 29 of the FDI Act, titled “Brokered Deposits” (Section 29). Section 29 places certain restrictions on “troubled” institutions. Specifically, Section 29 provides:

  1. Acceptance of brokered deposits is restricted to well-capitalized insured depository institutions.
  2. Less than well-capitalized institutions may only offer brokered deposits under certain circumstances, and with restricted rates.

In 1991 Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA). The FDICIA resulted in threshold adjustments to the brokered deposit restrictions under Section 29 and gave FDIC the ability to waive those restrictions under certain circumstances. 

More recently, the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) amended Section 29 which excepted certain reciprocal deposits from treatment as brokered deposits. As seen above, Section 29 does not define the term “brokered deposit.” Rather, it defines the term “deposit broker.” Following EGRRCPA, on February 6, 2019, FDIC published an advance notice of proposed rulemaking and request for comment on unsafe and unsound banking practices: brokered deposits and interest rate restrictions (ANPR). The ANPR announces FDIC’s comprehensive review of its regulatory approach to brokered deposits and their interest rate caps. As part of its re-evaluation FDIC seeks comment on how it should revamp its definition of brokered deposits and interest rate restrictions. 

While the EGRRCPA implementation is specific to reciprocal deposits, FDIC’s ANPR is broader in scope, and presents an opportunity to re-examine the definition and treatment of brokered deposits as a whole. 

Impact 

How Brokered Deposits are Used 

Brokered deposits are a relatively new mechanism to the financial service industry. They provide:

  1. A quick, cheap, alternative sources of funding from national markets.
  2. An additional tool for institutions to maintain liquidity and interest rate risk analysis for balance sheet management.
  3. A potential tool for community banks to expand their deposits and maintain funds that do not move away when the local market shifts.
  4. Flexibility in availability of funds to institutions with varying demands in regional markets for deposits vs. loans.
  5. Greater opportunities to match deposit terms to loan funding.
  6. Alternative, competitive rates for investors.
  7. An additional tool for investing institutions to manage funds.

Significance of Regulation under Current Rules 

As discussed above, Section 29 restricts acceptance of brokered deposits and limits deposit interest rates. A well-capitalized institution is, generally, unrestricted. However, an undercapitalized institution may not accept, renew, or roll over any brokered deposit. An adequately capitalized institution may not accept, renew, or roll over any brokered deposit unless FDIC grants a waiver. Even though a well-capitalized institution is unrestricted, examiners consider the presence of core2 and brokered deposits when evaluating liquidity management programs and assigning liquidity ratings.

Furthermore, brokered deposits are a significant source of assets for some institutions. Institutions also seek to meet their customers deposit needs in an age of constantly evolving technologies. This creates uncertainty as to whether a particular deposit qualifies as a brokered deposit. The answer to that question is complex, as it lies not only in statute, but FDIC issued studies, interpretations, advisory opinions, regulations, and an FAQ on identifying, accepting, and reporting brokered deposits. 

Brokered deposit determinations are fact-specific and influenced by a number of factors. FDIC has broad discretion in application of its rules, which involves complex methodologies for determining and adjusting rates, and considers brokered deposit determinations on a case-by-case basis. For example, the term deposit broker has been applied to social media platforms, fintech, homeowners associations, and employee benefits providers. How FDIC views brokered deposits is also up to interpretation. Fortunately, FDIC states its view of brokered deposits in its 2016 FAQ:3 

“Brokered deposits can be a suitable funding source when properly managed as part of an overall, prudent funding strategy. However, some banks have used brokered deposits to fund unsound or rapid expansion of loan and investment portfolios, which has contributed to weakened financial and liquidity positions over successive economic cycles. The overuse of brokered deposits and the improper management of brokered deposits by problem institutions have contributed to bank failures and losses to the Deposit Insurance Fund.”

FDIC still appears to view brokered deposits as volatile and scrutinizes them accordingly. One direct result is rate cap limitations. By rule, rate caps only apply to less-than well capitalized banks. However, regulators have looked to the limits during exams, regardless of capital levels, pointing to potential volatility. Furthermore, under its 2009 calculation method, current rate caps are artificially low and hardly reflect what a customer can get from other sources. For example, as of April 22, 2019, a 12-month CD had a national average rate of 0.66% and a cap at 1.141%.4 On April 22, 2019, the Treasury yield was at 2.46%.5  

So, the current rules require financial institutions to identify deposits that are brokered, mind the rate cap limitations, and consider liquidity rating implications, in anticipation of regulatory examination. As technologies continue to evolve, and the financial industry follows those trends, the brokered deposit regulations designed before the age of online banking are outdated. For example, such broad coverage means banks seeking deposits through the internet could be subject to rate caps.

Significance of FDIC’s ANPR

The ANPR is an opportunity to comment and guide FDIC’s future approach to brokered deposits. Issues to comment on include:

  1. Clarify the definition of brokered deposit and deposit broker for the modern era of technology.
  2. Create a methodology to calculate a rate cap that appropriately reflects the cost of deposits.
  3. Provide examples of what brokered deposits mean to your institution with today’s modern technologies (ex: internet deposits such as online, mobile banking, and social media).
  4. Refocus of policy goals: original intent was to restrict large volumes of volatile funds. Brokered deposits were suspect of this category of deposit, but did not, and do not, necessarily continue to merit fierce restrictions.
  5. Reconsider limitations on brokered deposit offerings for well-capitalized institutions.

FDIC’s ANPR means a potential to modernize and even narrow the designation of a deposit as brokered, given the current wide scope of interpretation, stigmatization, limitation, and regulatory burden over a broad categorization of deposits. An update to Section 29 could mean new opportunities for banks to seek funding from new sources and explore new technological applications to deposits.

Conclusion

In 2019, many consumers bank from their phone. Various internet technologies give access to funds quickly, and new technologies are surely on the horizon. As businesses, banks need to accommodate these technologies in order to stay competitive. The ANPR is an opportunity to explore how brokered deposits are treated and can be better utilized. Comments can direct FDIC’s regulatory framework to enhance the functionality of brokered deposits as another deposit tool. 

Comments on the ANPR are due May 7, 2019. After the ANPR, FDIC will issue a proposed rule, with another opportunity for comment prior to a final rule. The ANPR can be found here: https://www.fdic.gov/news/board/2018/2018-12-18-notice-sum-i-fr.pdf 

1. 2 C.F.R. § 337.6(a)(2)

2. Core deposits are distinct from brokered deposits in that they are considered “stable,” including checking, savings, and CD accounts made by individuals rather than a deposit broker.

3. FIL-42-2016, Identifying, Accepting and Reporting Brokered Deposits: Frequently Asked Questions (Updated June 30, 2016; Revised July 14, 2016).

4. https://www.fdic.gov/regulations/resources/rates/

5. https://www.macrotrends.net/2492/1-year-treasury-rate-yield-chart

By, Ally Bates

April 26, 2019/by Jose De La Rosa
https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg 0 0 Jose De La Rosa https://www.wisbank.com/wp-content/uploads/2021/09/Wisconsin-Bankers-Association-logo.svg Jose De La Rosa2019-04-26 16:52:172021-10-13 13:48:23What Are Brokered Deposits and What Is the Significance of FDIC Reform?
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