This Month In Retail Banking
In striking a balance between checking acquisition and rate-based deposit acquisition, banks have often tilted toward checking because it leads to low-cost deposits, deeper relationships and the purchase of additional products. But the need for deposits has intensified in recent months and, as a result, financial institutions have increasingly focused on acquiring rate-based deposits. With them, not only can a bank move the needle more quickly on balances when acquisition is targeted (for example, with CDs), but they also tend to attract new money without significantly cannibalizing the existing customer base.
But as rates for rate-based deposits continue to rise (along with the marketing expense needed to acquire them), the cost of acquiring rate-based deposits is now roughly equal to that of checking deposits, particularly where banks are tying offers to higher deposit balances. For most organizations, the question will increasingly be how quickly the needle needs to move on near-term deposit growth versus investing in long-term relationships. With the costs now essentially the same, it would seem a no-brainer to invest in relationship growth. The volume most banks can realize through this option, however, will not be sufficient. Growing rate-based deposits almost always drives greater immediate volume.
Another dilemma that arises is what to recognize as a marketing expense. Many institutions tend to lump an introductory offer, whether cash or bonus rates, into the overall marketing burden rather than recognizing a portion of it, or even all of it, as interest expense. This means that relationship growth is often adversely affecting the non-interest expense line, which is increasingly under fire. At the same time, rate-based deposit growth is largely hitting the interest-expense line, which, while critical, is typically not affected drastically by acquisition campaigns.
One way to strike the right balance between interest expense and non-interest expense is to make sure the right people across the entire organization – product, pricing and marketing – are at the same table. By knowing the requirements for deposit acquisition, they can line up in pursuit of the common goal. In the illustration below, marketing expense and interest expense vary widely by type of customer, but the cost per $1,000 of deposits is very similar. What this reveals is that these cross-functional teams need to align not only on the balance goals but also on the combination of interest expense and non-interest expense required to achieve them.