Banks under $10 billion in assets have not grown enough core deposits to fund loans for the past three years says Darling and Associates, and competition for core deposits is expected to heat up even more in 2018.

That’s the situation community bank marketers are facing.  Caught in a struggle between paying higher rates to attract more deposits and keeping rates low to maintain a decent profit margin, banks must enter 2018 sharpening their marketing skills.

Marketers have a strong incentive to improve: holding down the cost of funds has a larger impact on profitability than either loan yield or non-interest revenue.  But keeping a lid on rates and attracting deposits will be a struggle for most institutions.

The introductory step is acknowledging that core deposit acquisition is a slow strategy – there are no short cuts.  Because it requires stealing customers from other institutions, this is a long-term ground war, requiring committed, sustained and coordinated effort between all departments. An advertising campaign that promises only undelivered superlatives, will not make the grade.

A review of recent research and the practices of successful banks offers these eight insights into building a successful core-deposit strategy.

  1. Focus your core deposit strategy almost exclusively on two segments: the top most profitable 10% and another 10% with the highest potential.  Together, they constitute your best chance of attracting core deposits.  The high balance group are engaged and loyal, and likely have accounts elsewhere, just waiting for you to invite them over.  The second group are those with minimal checking balances with you but high balances elsewhere.   Append your customer database with lifestyle data to identify your low balance customers with likely high balances elsewhere — and reach out to them relentlessly.
  2. Quality customers switch banks because they are unhappy with service. If you want to grow deposits you must deliver quality service in every customer interaction — in-person or online.  High balance customers expect personalized service and custom communications.   Every interaction, every piece of correspondence starting with onboarding should be personalized to the habits and interests of the customer. All front line personnel should refer to each customer by name and reference any recent transactions.  These systems are essential for core growth.
  3. Don’t pay above-market interest rates. Consumers that are attracted to higher rate checking accounts are transitory. Although it’s tempting to bump up rates to steal market share, it’s an expensive, fruitless proposition.  Those who respond to higher rates don’t provide a foundation for stable, core deposit growth. Focus on those who value service over rates.
  4. Although branch proximity is no longer the leading convenience driver among shoppers, 62% of them say they wouldn’t even consider a bank that doesn’t have branches in their community.  The definition of convenience has extended beyond branches and ATM networks to include easy, intuitive online and mobile banking.  Smaller banks do not have to match the slick offerings of national institutions but they must offer reasonable online and mobile convenience.
  5. Banks with a distinct brand or a specialty market always perform better than generalists.   Double-down on marketing to specific businesses or consumer markets, or minimally, create a distinct brand that is authentic to your history and personality.
  6. New customers are most receptive to product offerings within their first six months. In fact, they want you to offer products and services that make their financial life easier. Make sure you have a system in place to identify customer wants and offer those products systematically through a series of monthly emails, online messages or telephone calls.
  7. Implement relationship pricing. Reward profitable customers by providing more discounted or free services and as balances increase. Discounts for retailers are less appealing than in-house financial products. Also, eliminate nuisance fees.  Set reward levels just above current balances. A well-constructed, incentivized pricing structure will upsell 24/7.
  8. Conduct semi-annual performance surveys to monitor customer happiness and head off potential problems.   Invite suggestions for improvement and follow-up with programs improvements or adjustments.

The war for core deposits is heating up and waving high rates as a flag to attract core deposits is an expensive, short-sighted and ultimately ineffective acquisition strategy. Community banks are much better off sticking with market rates and providing a higher degree of customer service.  Yes, results will take longer but that’s the price for profitability.  Remember, the race between the tortoise and the hare is not just a children’s story, it’s a parable for well-run banks.

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