I did a recent Google search on “fight for deposits” and the results were eye-opening. Headlines evoked war, strife and fear – there was even a reference to a “steel-cage match.” Writing like that gets noticed, but is it true that banks, credit unions and fintechs are locked in combat for consumer deposits?
In a word – yes. Since mid-2017, several folks in the industry have been beating the war drums. As the Credit Union Times points out in a recent article:
“Mary Beth Sullivan, managing partner of … Capital Performance Group … sounded the alarm in June 2017 that bank clients … were beginning to experience low to negative growth in core deposit balances and were turning to CD specials to help fund loan growth.”[i]
Many of the conversations I overheard at the recent CBA Live 2019 event echoed that sentiment. This battle has been building for more than 18 months, and there’s a strong sense that it will not end any time soon. Strategies to bring on deposits vary from bank to bank, but the overall theme remains the same: grow deposits or prepare for the worst.
In this corner…
What is driving this competition? Why are banks thinking about deposit growth now, when “last year and in 2017, increasing deposits was not even on their radar”?[ii]
First is the overall impact of rising federal rates. A recent American Banker article notes: “Deposits are the cheapest source of fuel for loan growth, but the cost to get and keep them is soaring as the Federal Reserve raises interest rates.”[iii] That increase in rates means consumers can take deposit dollars from non-interest bearing checking and savings accounts, and put them into deposit products like CDs that provide greater return.
From the middle of 2017 through the middle of 2018, that is exactly what they did. CD growth over that time was just over 15%, while checking account deposits saw single digit percentage growth – and savings deposits saw overall declines. Because “CDs typically cost a bank more than other types of interest-bearing deposit products,”[iv] they are not an overly attractive vehicle for companies looking to increase deposit volume.
And in this other corner…
Compounding the threat of rising rates is the increasing prevalence of online banking, fintechs and other digital competitors. Without the overhead of a brick-and-mortar branch, online competitors have the flexibility to provide a wide range of consumers with enticing product offers.
Because digital banks and fintechs are not necessarily tethered to a specific geographic location, they have the entire country as a potential market. And that represents much lower acquisition costs, as PNC Bank CEO and Chairman Bill Demchak notes of his company’s high-yield digital savings accounts: “[T]he cost to produce them is much lower than having bricks and mortar surrounding it”.[v]
And in the third corner…
Consumers themselves are driving the increase in competition for deposits. The modern consumer is a digital native, much more comfortable putting information into a phone or computer than filling out paperwork under the watchful gaze of a banker in a branch.
Consumers have a whole new perspective on what it means to manage money, thanks to the rise of online self-service (think Amazon and Netflix), combined with the proliferation of new financial products like P2P payment systems (Zelle, Venmo) and savings apps (Qapital, Acorns). Long gone are the days when a customer had to have the personal interaction with a banker to achieve their financial goals. Now, people expect to manage their money through their phones, on their time and at their convenience.
Larger institutions that have the capital can keep up with these changing expectations by investing in digital banking technology. But for smaller banks, regional players or local credit unions, keeping up with the pace of digital change can be cost- and resource-prohibitive.
How can you make it a fair fight?
With banks squaring off against these three significant factors, how can they compete – and win – in the fight for new deposits?
One of the primary factors that any company will have to consider is its current digital acquisition strategy. Banks that have online account opening capabilities “can enter new markets geographies or market segments that would be prohibitively expensive…using traditional approaches.”[vi]
By implementing an automated decision engine with full online capability, banks can engage with digitally savvy consumers, regardless of where they are. And a recent commissioned study we completed showed that organizations using Zoot’s automated decision engine, WebRules®, to support DDA applications can expect:
- “Better conversion rates on DDA applications because of faster decisions” resulting in tens of millions in operating profit
- “Reduced DDA application decisioning expenses due to auto-decisioning” that can drive millions in saved expenses
- Reductions in fraud losses due to “comprehensive and rigorous screening of DDA applicants” that can total over $1 million[vii]
In addition to those benefits, companies can expect reduced dependence on internal IT resources, improved organizational agility, and an enhanced customer experience.
Financial institutions are certainly looking at new ways to improve deposit acquisition, and “about 60% of credit unions and nearly 50% of banks said a fintech partnership, collaboration or investment is an important goal to achieve in 2019.”[viii]
There’s no better time to invest, and no better partner in your corner than Zoot as the fight for deposits gets heated.
[vii] “The Total Economic Impact of Zoot’s WebRules,”an October 2018 commissioned study conducted by Forrester Consulting on behalf of Zoot Enterprises.