You don’t need consumer deposits now, but what if you need them in 2023? After all, an economic “soft landing” could pump up loan demand, fueling the need for additional deposits. And with a growing number of new entrants already offering attractive rates, how will you woo depositors?
One of the best growth opportunities for financial institutions in coming months will come from the episodic rate shopper who, as opposed to chronic, hot money shoppers, move their money only when an external event makes them aware of the better rates. The challenge is to attract the episodic shopper without pulling in the chronic shopper at the same time.
The good news is that digital marketing strategies and customer segmentation can help financial-services providers target consumer who are most likely to be swayed by higher rates. Such effective targeting can help prevent a widespread repricing of the deposit book that eats into profitability.
Curinos believes that episodic shoppers will be critical for the next round of deposit-raising activity. As such, financial institutions must first identify them and then create strategies to acquire and keep their deposits. This can be accomplished by rewarding loyalty, creating promotions for a niche audience or even building a direct bank that keeps new deposits separated from the existing portfolio.
And you may want to reel them in now before rates rise even further.
The Value Of The Episodic Shopper
In contrast to chronic shoppers, episodic rate shoppers are driven by events and attitudes. News headlines about central banks raising rates, for example, trigger rate awareness and new shopping behavior from a consumer who seldom, if ever, follows price trends. Once an acceptable rate is found and the money is deposited, the episodic customer’s rate awareness often disappears; the money is out of sight and out of mind. The life (or “persistence”) and the value of these deposits reflect the behavioral tendencies of these customers and don’t require ongoing rate support.
There is little need to worry about the episodic shopper when deposit coffers are full, but they become increasingly attractive to financial institutions when liquidity tightens.
Curinos estimates that roughly 20% of U.S. bank deposits come from episodic shoppers, who are especially inclined to move when the Fed is raising rates. (See Figure 1.) Another 30-40% of deposits come from continuous shoppers who are fast to come and fast to go, moving for a rate as little as 0.10% higher than their current rate. The remaining customers are insensitive to rate moves, viewing the account as merely a place to park funds.
It took a while, but episodic shoppers appear to have awakened from their typical slumber. Although global rates began rising in the first few months of 2022, Curinos has only recently observed a significant increase in customer churn. In the U.S., for example, the pace of customer churn in consumer portfolios has soared to more than 16% on an annualized basis compared with just 5% in March. (See Figure 2.)
Figure 1: Consumer Elasticity
Figure 2: Annualized Switch | Jan ’22 – Sep ’22
Branch Banks’ Switch as % of End Balances
How To Woo Episodic Shoppers
Curinos believes that financial institutions can unleash a number of strategies aimed at episodic shoppers. Indeed, some of these approaches are already being seen in other markets where traditional players are now responding to higher rates being offered by niche providers. Episodic shoppers don’t always move for the highest rate, but they may be responsive to another type of perceived value.
To attract episodic shoppers:
- Focus on loyalty by creating a “fence” for existing customers by offering a high interest rate, but only up to a certain deposit amount. This is appealing for small-dollar savers and is available only to customers whose primary operating account is with the bank.
- Encourage deposits by rewarding customers with a higher rate if they add to balances each month.
- Offer high rate to customers who either primarily engage in digital channels or in the branch.
- Enter a new market with a high rate, but not necessarily the highest rate, to lure new customers.
It is important to note that these strategies carry some risk, especially because they may attract chronic shoppers who want only the highest rates and will be quick to leave when rates are higher elsewhere. To weed out these customers and retain the episodic shopper, banks can offer competitive rates that aren’t necessarily at the top of the market.
The Case For Starting A Direct Bank
It may seem counterintuitive, but this also might be the right time to woo episodic shoppers by launching a direct bank. Like the other strategies, this requires digital marketing to identify the right targets. The results are readily apparent for banks that need deposits: U.S. direct banks added the same amount of balances in the first half of 2022 than they did in all of 2021. (See Figure 3.)
Direct banks provide an advantage because their structure creates a ringfence around new depositors, preventing the bank from having to raise rates on the back book that likely holds the bulk of deposits. That said, efforts by existing direct banks to attract episodic shoppers may wind up being expensive if they are forced to reprice the entire direct-bank portfolio.
The timing may also be good for a direct bank because many institutions are migrating toward cloud-based platforms that will make it easier to start a new entity. A direct bank also provides a regional institution with a strategy to create a national footprint without building physical branches.
In addition, it is important to be aware of the stumbles that some U.S. players have experienced while starting a direct bank. One institution, for example, underestimated the rate it would need to pay in order to grow at its planned pace. Another didn’t adjust its marketing program to help propel the new rate strategy. Yet another launched a high online rate product with a strong marketing program but suffered because its app and funding processes were cumbersome.
There’s little doubt that rate can be a successful strategy to attract episodic shoppers. The trick, however, is to properly target them with attractive offerings that won’t break the bank.
Figure 3: Direct Bank Deposits vs. U.S. Traditional Retail Deposits
Source: FDIC Call Reports and OTS Thrift Financial Reports, Regulatory Reports, SNL, Curinos BranchScape, Curinos CDA
Note: Pure DTC bank list excludes Brokerage Sweep Deposits and excludes brokered deposits as reported in regulatory filings; U.S. domestic deposits only
