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.