We’re attending the ABA Bank Marketing Conference, September 27-29.
In an effort to grow or retain deposits, the primary and sometimes only lever CFOs and bank treasurers pull is interest expense. But often the more powerful lever can be non-rate-based drivers such as targeted marketing, branch-based tactics and focused customer communication. Curinos has found that in many cases an investment here, which can be small relative to repricing deposits, can achieve the same effect on deposit growth, or even surpass it. Unfortunately, among most financial institutions, budgets for these initiatives, while a fraction of the interest-expense line, are declining. This can be highly counterproductive in managing the institution’s overall cost of funds.
In today’s high-rate environment, the implications are profound. Across the industry, the portfolio cost of funds increased by 0.43% during the first quarter, and based on its latest data, Curinos is estimating a further increase of 0.20-0.25% during April and May. That overall ~0.65% increase translates to about $120B in incremental industry interest expense, or $65 million in lost revenue for every $10 billion of deposits.
Reduce The Reliance On Rate
Only about one third of consumer deposit balances are currently priced above 25 basis points (bp), in a market in which the leading direct players are currently offering rates of nearly 5% on high-yield savings and even higher rates on CDs. So why are the majority of balances in the industry not at a higher rate? Simply put, these depositors aren’t seeking rate. Most customers maintain balances at an institution because it’s where they have their primary checking account and they’re maintaining a buffer for their short-term cash-management needs. As a result, Curinos data show a large difference in betas (the amount that the cost of funds moves relative to the Fed Funds rate) between banks that successfully acquire primary checking and those that don’t.
During its Investor Day in May, Chase provided a compelling illustration of this dynamic. Although the bank lost $118 billion in deposits, which it referred to as “yield-seeking outflows,” it experienced an increase of $80 billion in deposits tied to its customer growth of more than 3% during the same period. Among other tactics in its pursuit of quality originations, Chase made cash offers for new-customer accounts and thereby acquired balances that helped offset its deposit outflows. The example highlights how viable customer growth can be in managing cost of funds. When executed properly – focusing targeted marketing and offers on the right target segments – it can be an effective alternative to having to pull the rate lever.
Targeted Offers, Customer Communications
One of the most expensive actions a bank can take is repricing its back book, yet that’s effectively what most banks are doing today. Let’s assume a bank has $5 billion in its high-yield savings product at a rate of 2.0%, two-thirds of its total balances are at or below 0.25% and the most aggressive rate players are offering market rates of 4-5%. As a defensive move, the bank raises its high-yield savings rate by 0.10%, which costs it an additional $5 million in interest expense. What did the bank get for it?
Not much. The customers who were focused on rate had probably left several months ago when rates lagged those of the direct players. Meanwhile, the occasional shoppers that are waking up are more likely frustrated than appeased by a mere 10 bp increase. They’re now sensitized to the fact that their bank is under the direct players by more than 200 bp.
The better strategy would have been to maintain the high-yield savings rate at 2.00% and to launch a promotional money market rate where only 5% of the balances reside. That could be a balance-augmentation campaign that offers 4% on new money to people who are thought to have significant balances at other institutions. While rate is still being utilized as a lever, focusing efforts on people would increase balances for that rate paid as opposed to pure repricing.
Targeted Marketing Is A Must
It’s difficult to overstate how critical it is for the marketing team to understand the institution’s pricing strategy when deploying targeted tactics. Branch signage, generally a staple in rate promotions, for example, can be hugely expensive because it leads to significant exception pricing for existing customers who see that they’re not getting the best rate. And there’s a material increase in cost of funds without incremental balances because non-customers are not seeing the rate at all. The objective of a targeted promotion, on the other hand, is not to disturb existing customers with large balances but to attract customers identified as having material balances elsewhere.
Clearly, marketing is a major ingredient in any strategy to grow core customers. But it should be a critical component of any rate-based strategy as well. Imagine a bank’s having a 5.1% rate on a high-yield savings account, which would currently be about 9 bp higher than the highest rate on an aggregator site. If the bank has the highest rate in the market but doesn’t advertise on the aggregator sites, publish it in newspapers or blast it on the radio, the only people who will find out about it are those going into the branches or passing by branches that may be using outdoor signage.
Not only would this cannibalize the existing book (only existing customers would open new accounts) but it would also suboptimize overall performance. If, instead, the promotion featured a rate of 4.9% and invested the other 20 bp in marketing it, the bank could show up at the top of the list on the aggregator sites as a featured/sponsored participant. This approach would drive outsized balance-acquisition volumes from those who shop the aggregator sites — namely, the rate-sensitive customers the bank is seeking.
Taking this example even further, if rather than a 5.1% rate, the bank were to offer a rate of 4.5% and invest the other 60 bp on radio advertising in a market where it had a limited presence or none, it would drive much more significant deposit acquisition. More important, it would attract many customers who are situationally elastic — that is, they’re more flexible than the purists who shop the aggregator sites for the rates at the top of the tables.
A New Path Forward
To produce much higher growth at a lower cost of funds, banks increasingly need to consider and engage all the drivers of retention and growth. In today’s environment, one in which Curinos expects competition for retail deposits to continue to heat up, it will be increasingly critical for banks to look for and apply sources of optimization to rein in deposit costs.