Avoiding the Most Common Pitfalls in Battle for Deposits

The deposit environment has changed drastically in the last couple of years. During the Covid-19 pandemic, interest rates were at zero for an extended period, while the government injected cash into the economy through stimulus payments and PPP loans. The economy started to rebound before the end of the government cash infusions. With all of that cash and relatively little loan demand, financial institutions were awash with deposits.

In the last three years, the pendulum has swung completely, with financial institutions battling fiercely for deposit growth, with some institutions paying lucrative premiums for deposits. Even the ones that have a strong deposit base need to be defensive because their customers are likely being exposed to offers with above market rates.

Paying Premiums for Net New Deposits

Some customers will inevitably move their deposits to other financial institutions that are offering above market rates. However, attempting to compete by repricing existing deposits to keep up with the bank down the street is unlikely to keep these customers for the long term. If a customer is ready to jump for a few extra basis points, another financial institution is going to be willing to pay it.

The result? A rate war that might attract new deposits in the short-term, but at a serious cost to the bottom line. The key to sustained, profitable deposit growth is not in chasing rates, but cultivating deep, loyal customer relationships.

Many financial institutions also make the mistake of paying premiums only for new deposits. They might pay as much as 100 extra basis points to attract new deposits. But much like the rate wars, relying on this approach to generate deposits can make the cost of funds unmanageable. Instead, it’s more impactful to focus on growing wallet share with existing households. By offering current customers as little as 25 extra basis points, financial institutions can oftentimes accomplish the same goal in terms of deposit growth, while keeping the cost of funds under control.

Instead of paying premiums to compete, data should serve as the driving force in your institution’s approach to deposit growth. When data informs the strategy, bank leaders don’t have to gamble with the cost of funds to attract deposits.

But that’s only half the battle.

Banking on Marketers Lacking Banking Expertise

Many banks, especially community banks, do not have the in-house expertise or the bandwidth to thoroughly analyze deposit data and then use that analysis to drive their marketing campaigns. Instead, they will often outsource this work to a consulting firm or marketing agency.

Yet, amid pressures to cut costs, marketing tends to change quickly from an investment to an expense. Bank executives may be questioning whether marketing brings in more than their institution spends or is it the other way around?

If marketing is not generating profitable deposit growth, the reaction should not be to cut it from the budget altogether. Instead, consider whether you have the right marketing partner and resources.

Not every agency can make sense of the data, and then use it to find ways to maximize revenue and relationship growth through effective marketing campaigns – all while navigating the complex compliance requirements of the financial services industry.

Some financial industry consultants may offer thorough deposit analysis but lack sufficient marketing expertise. And some marketing firms may be able to devise campaigns to attract net new deposits, but at what cost? Very few agencies or consultants have both the analytical and banking expertise, backed by strong marketing experience, to design and execute campaigns that meaningfully impact the financial institution’s bottom line.

According to a recent article in The Financial Brand, “Today, new partners have responded by taking on the marketing costs, allowing financial institutions to pay for marketing only when it produces asset or funding growth. Companies like Infusion Marketing Group have assembled the systems, data, and skills to bet on themselves. This has allowed marketers at banks and credit unions to tie what they’ve spent to outcomes and not just to email opens and form conversions.”

For marketing to drive profitable growth, it takes more than simply running the right ads or using the right copy. Financial services and data analytics expertise is critical. Financial institutions need marketers that not only know how to reach the right audience, but also what campaigns will trigger the desired response without overpaying for new business.

Managing cost of funds, noninterest expenses and deposit growth are among the top concerns for banks and credit unions in 2024, according to Cornerstone Advisors’ What’s Going On In Banking report. Armed with the right marketing tactics and resources, financial institutions can stabilize and grow their balance sheet while deepening customer relationships.

To learn more about this approach to deposit marketing and real-world examples of how these strategies have paid off, download our latest whitepaper. 

Author Bio

Baker Hill empowers progressive financial institutions to increase revenue, reduce risk, and drive more profitable relationships.

Streamline business, consumer direct and indirect lending with our common origination platform. Understand profitability and risk at every level with our sophisticated business intelligence and analytics. Monitor and maintain a healthy financial portfolio with our statement analysis, exception, and risk management solutions.

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