The Deposit Squeeze Has Begun

After nearly a decade in which deposit funding has largely been taken for granted, many industry analysts predict a deposit squeeze for the banking industry, and for mid-sized and community banks in particular. Core deposit growth has stagnated at banks under $10B in assets. Many of our clients tell us they are beginning to experience low to negative growth in core deposit balances and turning to CD specials to help fund loan growth. And JP Morgan recently predicted that deposit shortages at smaller and mid-sized banks could become acute (assuming the Fed proceeds later this year with moves to limit quantitative easing), leading to constraints on lending and forcing many community banks to seek partners through M&A.

Many bankers today are too young to remember what a rising rate environment feels like. But astute senior FI executives can feel the warm breeze of a funding squeeze blowing in from the horizon.

Many banks are out of practice when it comes to deposit generation. Rates have been so low for so long that Pricing Committees have largely been abandoned. Customers continued to park more and more cash at their banks after the crisis, initially to keep it safe but more recently because of limited opportunities to redeploy it for any type of return. And banks, for the most part, haven’t done much of significant interest on the competitive front in terms of innovative strategies to attract core deposits.

But now core deposits are once again taking center stage as a critical strategic challenge for many financial institutions, and growing core deposits is not going to be easy. Most institutions will feel the need for core funding at exactly the same time, resulting in a rather rapid increase in rates and ramp up of marketing and sales activities. Even for seasoned bankers, it’s been so long since the deposit growth “muscle” has been exercised that it likely needs to be rehabilitated. Finally, consumers and media have changed considerably since the last cycle, so strategies that worked in the past are not necessarily going to be as effective this time around.

Now is the time to get a lot more focused on core deposits.

A Deposit Growth Sprint

Despite being in a low rate environment for years, there are FIs that have grown core deposits and households at a more rapid rate than the industry. While every institution is different in terms of its customer segments, geography, and strategy, many core deposit best practices will be applicable.

We are seeing an approach emerge in the past year that has proven beneficial for many banks. It consists of clarifying your internal situation and agreeing on your objectives, looking outward for best practices and benchmarks, screening the ideas for strategic fit and highest payoff, then project managing for rapid deployment. This approach is both fast and cost-effective.

A Deposit Growth Sprint consists of three sequential steps.

  1. Scope the Opportunity – Before gathering a team, it’s critical to understand your situation both externally and internally. How have your local competitors performed? What have the top performers done that the others have not? Nationally, who are the core deposit standouts and what strategies and tactics did they rely on? What kind of deposit volumes should we expect from Consumer, Small Business, and Commercial segments? How have analytics and digital marketing played a role in these organizations’ success?

Internally, how have you performed compared to these local and national leaders? What has your funding strategy been, and how does it need to change over the next few years? What, if anything, have you done that has worked and what can you learn from that?

  1. Set the Deposit Funding Strategy – Now it’s time to gather your team for an all-day Deposit Summit. Create and distribute briefing materials from Step One above in advance. Begin with a discussion of your current funding strategy and performance. Create a “burning platform” by outlining the funding gap that has or is likely to appear in the near future. Lay out the negative repercussions for each line of business if this situation is not rectified. Then begin to discuss growth opportunities and review the best practices to stimulate discussion.

Finally, evaluate the ideas for strategic fit and payoff. Discuss at a high level whether the organization has the capacity and expertise to develop and implement them, and how quickly.

Don’t leave the room until the prioritized initiatives each have an owner, and you have an agreed upon timeline to get back together with action plans.

Who should this brainstorming group include? Most banks limit it to a small group of senior executives and managers representing all lines of business and sales forces.  However, we have seen a very successful case where the CEO brought together every single manager who would be involved in implementing the plans to allow them to prioritize the projects and gain buy-in. This reduced the need for communication after the meeting, increased the feeling of ownership, and permitted more rapid deployment.

  1. Take Action – Immediately following the group session, each initiative owner creates a team to define the initiative, more fully size the opportunity and cost, and create detailed action plans and timelines. A project management structure is put in place, with regular progress reports provided to executive management during development and following execution of each of the initiatives.

Establishing First Mover Advantage

While competition has already begun heating up in some markets, it’s early days in the battle for deposits. Now is the perfect time, with warm summer breezes beginning, to get your team together to map out and implement a core deposit growth plan, before those breezes turn into a squall and you are playing catch-up with your local and national competitors.

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