Today's Market for Driving Low-Cost Core Deposits

By Craig Simmers, Founder of Stellar Strategic Group
Summer 2018

Over the last 18 years of working with community banking institutions, we have not experienced a better market to drive low-cost core deposits than we have today. Yet, it is surprising to me how few are taking advantage of this opportunity. There are numerous factors contributing to the current core deposit environment detailed in this article.

Having built a business strictly on helping community banking institutions, I sincerely hope sharing what we see nationwide will not only be thought-provoking but move many of you to take advantage of the opportunity that exists.

3D bar chart showing growth trend

Let's start by examining market conditions in the early 2000s and identifying the tools that were available for growing core deposits. A highly competitive market existed before the near crash of the banking industry in 2009 – one that was not favorable for community banking institutions. Deposit products and pricing were virtually the same regardless of whether you were a community, regional or national banking institution. Practically everyone offered free checking; many began to offer a version of a free rewards-based or interest checking product, plus there was a battle for new deposits with high-dollar incentives.

In short, community banking institutions had very little to offer that differentiated them from the big banks. Additionally, they lacked the ancillary technology-driven services and the convenience factor based on (in most instances) smaller branch and ATM footprints. With the rise of online and mobile banking, along with the decline of consumer reliance on in-branch transactions, the market changed drastically during the period from 2009 to 2011. At this point, the competitive advantage shifted positively to community banking institutions.

'Free Checking' as a viable checking product, was part of the model adopted by many institutions throughout the 80s, 90s and early 2000s. Therefore, we had conditioned consumer expectations that checking accounts be free of charge. That all changed in 2009 when several large banks abruptly converted to a fee-based account in place of free checking. This change created a massive opportunity for those that maintained free checking as an estimated 30 million accounts fled the larger regional and national banks.

Unfortunately, many community-based institutions that were well-positioned in their market cut their marketing budgets and didn’t take advantage of this windfall. Those that maintained an aggressive marketing approach reaped huge market share growth. The good news is we still see this as an opportunity today… and given the loan growth over the past few years, many institutions are now faced with the need to grow core deposits.

Fortunately for community institutions, there are some additional advantages today that did not exist just a few years ago. As consumers spend more time online, new digital and social marketing capabilities can be utilized to effectively target new opportunities. This approach has enabled many smaller institutions (with fewer traditional marketing options due to economies of scale) to develop cost-effective growth strategies.

Just a few years ago, our company’s solution for growing low-cost core deposits required at least ten branches to produce an aggressive ROI. That requirement for a minimum branch footprint is now gone. Also, institutions that struggled with low brand awareness now have multiple options to build this critical component for growth.

Today, we firmly believe any institution can market efficiently - and most importantly - in a more cost-effective manner than a few years back. These new tools exist and can be very productive for a community-based institution when driven by a proper and proven analytical approach in growing core deposits and profitability.

Let's get specific and identify some of the essential tools that are changing the core deposit landscape regarding banking services and marketing:

From the previous list, none of these can be productive alone and only represent part of a cost-effective, guaranteed ROI approach to growth. The following list is the intelligence needed to apply the essential tools effectively:

The easiest part of designing an effective marketing program for core deposits is identifying the possible tools to be used. However, real success is in determining how and where to apply those tools.

We constantly hear the phrase artificial intelligence. I would suggest starting with the intelligence we have at our fingertips today and honing that intelligence to maximize your current marketing results.

The opportunity exists for any community banking institution to grow core deposits and retail market share. The question is who will decide to take advantage of this limited opportunity? Given the expansive regulatory issues we are faced with today - as well as skyrocketing loan to deposit ratios - failure to seriously consider your growth strategies is a missed opportunity for success.

In summary, the disruption we will experience over the next two years in terms of bank mergers and branch divestitures will be unprecedented. Having a plan in place to react quickly will generate a disproportionate share of growth for your institution. The opportunities exist, are you up for the challenge?

Craig Simmers is Founder of Stellar Strategic Group. Craig can be contacted via email at craig.simmers@stellarstrategic.com or call 410-990-0172.

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