Building Your Core Deposits For The Long Term

In the current unpredictable and volatile economy, community banks need to stay at the top of their game to maintain both stability and profitability. To that end, banks have many technological, regulatory and digital factors to consider. Among the most basic factors is attracting and sustaining the bank’s core deposits.

Take these steps

Here are some steps your bank can take to grow core deposits, while keeping costs under control:

Avoid short-term fixes. It’s important to recognize that building core deposits is a long-term strategy — there are no quick fixes. Offering above-market interest rates, for example, may attract new customers in the short term, but it’s unlikely to support sustainable deposit growth. That’s because customers who’re attracted to higher rates are more likely to abandon you when a better rate comes along. In the long run, it’s better to focus on customers who value service over interest rates.

Recognize the importance of branches. A recent J.D. Power banking satisfaction study offers insights into the value of branches. According to the study, although 28% of retail bank customers are now digital-only, they’re among the least satisfied. The most satisfied customers are “branch-dependent digital customers” — those who take advantage of online or mobile banking but also visit a branch two or more times during a three-month period.

Interestingly, the satisfaction gap between branch-dependent customers and more “digital-centric” customers was most pronounced among Millennials and Generation Xers. This is a bit surprising, since it’s commonly thought that younger customers eschew branches. It’s still the case that most customers, including younger generations, prefer to open accounts at a branch — with personalized guidance — because they find it confusing to do online.

Focus on service. According to J.D. Power, weaker performance in the areas of communication and advice, new account openings, and products and fees caused lower satisfaction levels among digital-only customers. To attract and retain engaged customers and grow core deposits, banks need to improve communications and provide quality, personalized advice and other services consistently. It’s key to make these strides across both digital and branch channels.

In addition, community banks that specialize in particular industries or types of banking are often able to attract customers who value specialized services over interest rates. The right niche — whether it’s health care, professional services, hospitality, agriculture or some other industry — depends on the bank’s history and the needs of the community.

Consider reciprocal deposits

A provision of the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 created an opportunity for community banks to boost deposits by taking advantage of reciprocal deposits. A bank receives these deposits through a deposit placement network in exchange for placing matching deposits at other banks in the network. One advantage of these networks is that they enable banks to attract large-dollar, stable, local depositors by offering them insured deposits beyond the $250,000 FDIC threshold. (Insurance coverage is increased by spreading deposits among several network banks.)

The 2018 law made it easier for banks to take advantage of reciprocal deposits by providing that these deposits (up to the lesser of 20% of total liabilities or $5 billion) won’t be considered “brokered deposits” if specific requirements are met. Brokered deposits are subject to various rules and restrictions that make them more costly than traditional core deposits.

Keep refining your methods

Competition between community banks has never been higher. Your bank has to find ways to differentiate itself from the crowd. In the end, retaining customers requires a multifaceted effort, and focusing on attracting core deposits is key.

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