Mastering the Art of Data Analytics: How to Manage Deposit Growth & Cost of Funds in 2023

It’s no secret that the historic series of interest rate hikes have banks concerned about where the flow of deposits is heading this year. While the exceptional liquidity of the pandemic left many banks with a flush of deposits, the tides are changing. Customers are beginning to pay more attention to what they earn on their deposits to keep up their purchasing power, given higher interest rates and ongoing inflation. Many consumers are finding opportunities to get better returns on their deposits and are gravitating towards other investments, even if it means switching financial institutions.

Banks cite the ebbing of deposits as one of the most pressing issues of 2023. In fact, 53% of banks say the interest rate environment is their top concern this year, according to the latest research from Cornerstone Advisors. Cost of funds is a close second, at 43% - up significantly from 8% in 2022.

The good news is data can eliminate the guesswork from your financial institution’s deposit growth strategy. With the right data analytics tools, banks can maintain strong funding positions and achieve sustained growth, despite the challenging economic climate.

Boost Retention for Your Most Profitable Customers

In many financial institutions, 20% of customers account for a large portion of the bank’s revenue, oftentimes over 80% of the revenue. To increase profitability, banks and credit unions are constantly searching for ways to increase wallet share and deposits among the remaining 80% of their client base while retaining the high earning 20%.

Data makes this easier for community financial institutions of all sizes. Plus, it eliminates the guesswork when it comes to pricing deposits competitively. In 2023, banks should implement a data-driven deposit strategy to target and retain those customers with the highest share of deposits.

Banks can use customer data and analytics to develop product offerings and pricing that meets their top customers’ unique needs while providing the highest level of service. Small banks especially can reap the benefits of a data-driven approach, using analytics to support discussions with customers about the right products and offer competitive rates on those products.

Data can also help community financial institutions manage their deposit growth strategy in other ways. For example, a bank may choose to carve out new niches by targeting market demographics with lower deposit behavior. Access to data can also help banks significantly improve their cross-selling efforts.

Eliminate the Guesswork from Cross-Sell Efforts

One of the most important ways that a strong data strategy can improve your bank’s growth is by identifying customers with the capacity to deposit or borrow more money. Just one additional product can mean the difference between a profitable customer and an unprofitable one.

Banks can use a data solution like Baker Hill NextGen® Analytics and Marketing to recognize and segment customers with greater deposit potential, and then reach out to them with targeted digital advertisements around offerings and programs. These ads can be tailored to cross-sell, create stronger engagement for specific products and expand customer relationships.

Baker Hill also makes it possible for banks to get a 360-degree view of customers and determine if they have deposits elsewhere, or even flag when a customer could be at risk of churning. It does this by analyzing external data from relevant second- and third-parties, such as credit bureaus, along with external and demographic data.

To illustrate how this works, your bank might use analytics to determine that a certain product would be a great fit for a niche demographic. For example, an individual living in a particular zip code, within an income range, with a high-school aged child, may be an excellent prospect for a low-fee checking account geared toward college students. Your bank can use this information to provide more tailored service and cross-sell to this customer.

Data: The Key to Unlocking Sustained Profitability

Uncertainty about the Fed’s trajectory and the economic environment certainly make it challenging for banks to manage risk and count on growth. Despite businesses and consumers having less cash on hand, there is still good news for banks. With a focused data analytics strategy, banks can find new ways to boost profitability and unlock opportunities for revenue growth, even as competition for deposits intensifies.

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