Every Bank and Credit Union Wants Deposits. How is Your Organization Going to Win?

by | Jan 29, 2024 | The NBS Group

Less than two years ago, very few financial institutions were looking for deposits.  Pandemic-era stimulus funds had flooded banks and credit unions, driving most institutions to increase loans.  But as economic uncertainty, interest rates and the competition from non-banks have risen, more institutions are turning their attention to deposits.  The question is, with so many options available to consumers and businesses, how will your organization win without risking your profitability, giving away your brand or taking on deposits that could leave tomorrow?

That is not an easy question to answer and the factors that will drive the direction you take vary from customers’ preferences and market to risk sensitivity and cost.  The key is to match your strategy to your institution’s objectives, your stakeholders’ expectations and the market’s wishes.

If you are small community bank or credit union with a small number of branches in a small geographic footprint, particularly in rural areas, the first thing you need to do is hold on to the deposits you have and attract as much of your local market as possible.  With fewer competitors, this may sound like an easy task, but the impact of digital banking makes this exponentially harder.  Your institution must keep up technologically or you will be left with an older clientele base that, over time, will shrink in both numbers and dollars.  The technology investment will be worth it if you also modernize your offerings (read on).

As we look at banks and credit unions that are closer to or in more urban areas, the challenge is to understand what your target market wants.  Both older and higher net worth customers are looking to maximize the value of their dollars, i.e. higher interest rates.  Families are looking for financial advice as well as ways to save for future needs, i.e. college.  Younger customers are looking for convenience and fast service, some advice and rewards.  No one deposit product is going to satisfy them all.  Let’s explore.

High-Interest DDA Products

These products are good for attracting money but often these customers move their money at the slightest drop in rate or if they find a higher rate elsewhere.  However, any conditions you set, such as only “new” money can earn the higher interest rate or the customer must transact a certain way to earn the higher rate (and often only on the first tranche of dollars), can dampen the success of the offering.  And, in the case of the first condition described above, can often lead to damaging the relationship with current customers as they struggle to understand why your institution is willing to give a high interest rate to a new customer but not a loyal one.  

An alternative approach is to marry a higher interest rate with another benefit that naturally ties the customer to your organization.  For instance, requiring a higher balance for the higher rate but providing a free assessment of their financial well-being can often lead to a deeper relationship with the client.

There are many institutions that offer higher interest rates if the customer transacts in certain ways, i.e. direct deposit, a minimum number of debit card transactions.  These DDA products have proven successful time and again although they may require an investment in additional technology or through an agreement with a third party.  The latter option is cost effective over the first few years but, as we have often seen, many institutions tire of signing the check to the third party every year.  In addition, these arrangements may require the use of a certain branding that overshadows the institution’s own brand.  After the investment you’ve made in establishing and maintaining your brand, do you really want to give it up?  The technology investment option, while having higher up-front costs, has a more viable long-term pay-off and gives you greater flexibility to tweak the features and requirements of your DDA products.

“Earn Your Way to Free” DDA Products

As NSF/OD income has fallen over the past couple of years (a drop of 22.7% from Q323 to Q32023 according to S&P Capital), the model for free checking is no more.  Financial institutions can no longer afford to provide DDA products and services for free.  Many organizations are looking to start charging a monthly service charge but how do they handle the customer backlash after decades of free checking?  We have found the best way is to give the customer a path to free.  Give them the ability to earn credits toward their monthly service charge through transactions, use of digital banking and a deeper relationship with your institution.  This is particularly effective with the current customer base as they are already utilizing many of these features and products and won’t feel the impact of a new monthly charge.  And new customers will like it, particularly if your institution is one of the first to offer the “earn your way to free” accounts in your markets.

ATM Fee Refund Products

Checking accounts that offer ATM fee refunds are very popular but make sure that you are offering this only because you have few ATMs and you DO NOT belong to a nationwide ATM network.  Otherwise, you’re just cannibalizing your own revenue and encouraging customers to use competitors’ and big banks’ ATMs.

Other Products

There are other ways to incent new customers with products and services outside of their checking account.  These can be effective if the perks are modern and current.  The best offer ID Theft Protection, cellphone insurance, a bump in rate on a CD or, conversely, a reduction in rate on a loan, a free wealth assessment, etc.  Traditional perks like free checks, certified checks or safe deposit boxes have very little value the way consumers bank today.

One final common feature with new accounts today is cash.  Many of the large banks are offering hundreds of dollars in cash bonuses just for opening an account and making minimum dollar deposits within a limited time.  While this can be highly effective, it is also very expensive and probably too expensive for most community banks.  And, just like high-interest checking accounts, it can attract deposit shoppers who will move their money as soon as the next best deal is found.

Do Something

The point is, if you are going to build deposits, you need do to something beyond the traditional free, senior, student and interest checking accounts that have been the staple of the industry for decades, Consumers are looking for accounts that reward them for behaving in a certain manner.  And while you’re at it, take a look at your small business checking accounts and think about how they can be rewarded for behaviors that drive your institution’s profitability. Doing nothing is not a choice in this highly competitive, highly digital and deposit-starved world.