By John Matheny, Director of Sales & Marketing with Susan Connor, PhD
Core deposits are critical. Consider the following:
At the 2007 ABA Community Bankers Conference, CEOs who participated in facilitated round table discussions rated core deposit acquisition and retention as their number one area of concern.
In Grant Thornton’s 2006 survey of bank executives, 96% stated that core deposits are critical to success. At the same time only 51% indicated they are comfortable they have the right strategies in place to achieve their core deposit goals.
Bankers have reason to be concerned. Core deposits in the 8700 active community banks have dropped to the lowest level since the FDIC was founded in 1933. And in late 2006, national net interest margin dropped to a 17-year low.
The bigger challenge, though, is that profitable customers “share their wallets” among two, three, or sometimes more financial institutions. Unable to afford large marketing budgets, community banks have difficulty differentiating themselves as the best place for those profitable customers to keep their core deposits, and executives are seeking a solution.
Not only are they stable, low cost funds, core deposits are also the basis of the banking relationship. Ask “Where do you bank?” and regardless of where their millions are stashed, people typically reply by telling you where they have their primary transaction account.
And that primary deposit account is critical to a bank’s success. These basic deposit accounts represent reliable sources of fee income, cross sell opportunities, and referrals to new customers. One of Brintech’s client banks found that by increasing each of their five primary core deposit account types (DDA, NOW, Relationship Checking, MMA, and Regular Savings) by just 2% each and decreasing their dependence on CDs by that same 10%, they would realize a 21 basis point reduction in cost of funds. So what’s a banker to do? Unfortunately there is no silver bullet.
For a core deposit strategy to be effective, a bank must align and integrate all the fundamental ways it touches its customers. In its work with high performance banks across the country, Brintech has identified 10 key factors that impact a bank’s ability to acquire and retain core deposits:
These 10 factors, in turn, roll up into four primary functions within a financial institution:
Do you have a competitive product line? Can you define what differentiates your bank on each of its products? Every bank on the block has free checking. The most recent ABA Community Bank Competitiveness Survey finds that 91.5% of bankers report free checking is common in their market. Yet 65% said free checking offered no competitive edge.
So what’s the next method of differentiation? By giving customers a tangible benefit to keep the account (better rates, lower fees, gift promotions) and simultaneously requiring accountholders to utilize channels that keep your costs down or generate fee income (or both!), you can achieve greater product differentiation and profitability.
Your front line employees need efficient and effective technology in order to serve their customers, open new accounts efficiently and capture pertinent customer information. At the same time they need to see a customer’s relationship with the bank at a glance, and your marketing team needs to be able to reliably determine household, customer, product, and business line profitability.
When a front-line employee can see the customer’s relationship, they should also be equipped to cross sell appropriate products and services. Employees should have a thorough understanding of all the bank’s offerings and be able to identify the next most appropriate solution.
A critical factor in sales support is an incentive structure. On average, the ROE of banks that have an effective incentive compensation strategy is 40% higher than those that do not.
An effective incentive plan clearly identifies expectations, captures whether employees are meeting those goals, and has a mechanism for communicating everyone’s performance to the entire organization.
Brintech also recommends developing and implementing a comprehensive training program. The program should include all customer interfacing personnel from teller to commercial calling officer.
Sales training does not have to include high pressure tactics. In fact, in the community banking arena, it is ill advised to take this approach. Customers expect to be informed about products and services that would be useful to them so the sales approach should simply be gathering pertinent information about the customer and suggesting appropriate solutions.
This chart summarizes the comprehensive sales and sales support structure recommended to the Bank. As you can see, communication, goal setting, measurement and reporting mechanisms, etc. are all in place prior to implementation of training.
While training is a key component of establishing a sales culture, it is not effective unless it is supported by the other components of a sales culture already discussed: competitive products, the right technology and operations support, goals and expectations, measurement and reporting mechanisms, and management commitment.
An effective core deposit marketing strategy requires a segmented customer base and a clear understanding of customer profitability. Since 28% of customers really represent a 23% loss, a bank must identify those customers, move them into another level of profitability, or price them out of the bank.
Brintech also recommends that a marketing plan be developed on both Strategic and Tactical levels. Brintech’s marketing planning methodology revolves around the customer experience. We recommend that marketing planning begin at a strategic level: analyzing customer needs, segmenting and targeting the potential customer base, acquiring customers, then servicing and retaining those customers.
At the tactical level, banks should create strategies to move customers through the Purchase Decision Continuum, below.
As the figure to the right illustrates, banks have a finite number of ways to break down the market as sources of core deposits. The position of each segment in the triangle represents the relative number of prospects in each segment in the market place, with current business customers at the top and having the fewest targets, to the mass market at the bottom with the highest number of target households.
While most bankers would agree that the ideal market segments to serve are the more affluent segments, in most markets this is not feasible given that core deposit acquisition is largely a numbers game with the goal of acquiring as many basic checking accounts as possible.
The bottom line is that core deposits are critical. They are a cost-effective way to improve bottom line performance. Before launching any major core deposit generation initiative, Brintech recommends that a bank assess each of the factors in the areas of product assessment, technology and operations, sales training and support, and marketing. Once a bank determines where it stands on each of these key components, creating an effective deposit generation and retention strategy becomes a much simpler task.