Four steps to build an effective deposit strategy
Talks of a possible recession continue to make headlines. More than two-thirds of economists at 23 large financial institutions predict the U.S. will have a recession in 2023. Financial institutions should prepare themselves now to face a downturn ahead. Part of this preparation should be to build and execute a deposit pricing strategy. For almost 15 years, financial institutions have kept their deposit rates low or nonexistent, instead focusing on loans and fees. The environment has changed due to an increased supply of cash, rising inflation and interest rates, job openings, and wage inflation. Non-interest deposits (currently viewed as core deposits) have become high-interest products (non-core deposits). The combination of these events requires banks and credit unions to build a deposit strategy that consists of the following:
- Building a deposit strategy up from your asset and liability strategy. Loans, lines of credit, and deposits should be priced appropriately to cover the financial institution’s liquidity, capital, and risk costs. Financial institutions should set a goal for loan growth, then determine how much they will need in deposits to support that growth. With that in mind, financial institutions should also determine what deposits are the most valuable to their organization. White Clay believes the bulk of an institution’s liquidity should come from properly priced relationships. Financial institutions should start identifying existing customers/members whose deposits they need to protect and determine the rate they are willing to pay to hold on to them.
- Identifying where customers/members have deposits 3-6X above their monthly spending.Understanding account holder spending is key to understanding how they save, which in turn is imperative to knowing how sensitive a person may be to deposit pricing. A relationship visibility system can help financial institutions gain this type of insight into each customer/ member relationship. The amount each account holder spends monthly, multiplied by 3-6 months (the exact number should be decided by each institution) represents their core deposits. Any amount higher than that should be considered a deposit flight risk. Account holders with significant balances above that threshold should be proactively addressed to shield those balances from competitors.
- Educating and developing bankers to understand, execute and communicate deposit pricing tactics. Many bankers were not around the last time rates were this high so they will need to be taught how to execute on and communicate about deposit pricing. Financial institutions should develop internal and external communications plans, including guidelines around how bankers should determine relationship value and price deposits, and language on how to communicate and implement rate changes.
- Implementing a deposit pricing process. This process should include measurement, inspection, and coaching. Executives and managers should be able to track performance at the organization, representative, and branch level. An accurate view of performance, specifically around deposit pricing, can lead to better coaching and sharing of best practices, with the additional benefit of ensuring reps offer relevant services that also drive revenue.
Financial institutions should be proactively preparing for a recession, including how they will develop and execute a deposit strategy. This strategy will take a considerable amount of time and organization-wide alignment to be successful. Because this will be new for many institutions and their reps, banks and credit unions must start preparing their data now to build holistic relationships that can be optimized. Having both a deposit and lending strategy will help financial institutions become resilient while delivering value to their customers and members.
About Author: Scott Earwood is the Director of Community Solutions at White Clay, a provider of customer visibility software that FI leaders use to make fully-informed decisions to maximize value for the community and regional financial institutions as well as its customers.