A rat race is defined as “a way of life in which people are caught up in a fiercely competitive struggle for wealth or power.” This is the circumstance in which virtually all North American banks find themselves when it comes to deposits.
Never have bank customers been less loyal — among Millennials alone, one third say they are open to switching banks in the next 90 days. The struggle to grow deposits has played out through that lens, with banks responding to this short-term outlook with short-sighted offers. You know the ones:
“Open a checking account with us that has two pre-authorized debits and earn $300!”
“Get a 3.0% bonus interest rate for new checking account deposits made between (date range)!”
While the fine print and reward on each offer is different, they are all designed to capture deposits from people chasing rates. These offers are purely transactional and are not designed to build loyalty or retention.
This is the Rat Race Rate Race: banks chasing rate chasers and rate chasers chasing marginally better rates.
The rising rates environment adds another dimension to this: it’s been years since most banks had to actively focus on growing deposits. Many banks report having disbanded their pricing committees because competitive rates went unchanged for so long.
This means that a large number of banks have neglected their “deposit growth muscles.” In seeking to rehabilitate them, 
banks may find that trying to recover muscle memory might do more harm than good. This is because it’s been so long since rates have changed that what worked in the past won’t be nearly as effective now. Consumer behavior, preferences, and expectations have changed even more than rates have, so much so that focusing on old strategies, such as growing bank branches, may not only be ineffective but counter-productive. As we’ve written about before, 38% of Millennials never visit bank branches.
And so, finding themselves in a world where rates are rising and deposits are falling, banks offer incentives to the most fickle consumers, essentially renting short-term deposits. Not only are banks racing to offer better rates, they are feeding into a cycle of consumer behavior that does them harm: if banks keep one-upping each other, consumers won’t hesitate to keep switching banks. This will reduce margins, reinforce less than ideal customer behavior, and further restrict banks’ lending ability.
As for the bonus interest rate incentive, many existing bank customers are tempted to transfer money from their savings account to their checking account to take advantage of the deal. But this is not true deposit growth — deposits do not really grow, and the bank’s margins on the promotion are reduced.
How to Ensure True Deposit Growth
Renting customers in this way is unsustainable. Regional banks cannot possibly keep up with the larger players. According to a Wall Street Journal analysis of Federal Deposit Insurance Corp. data, “in 2017, 10 of 22 major regional banks experienced declining U.S. deposits, compared with only two in 2016.”
To take just one regional banking example, let’s look at M&T Bank. M&T Bank is a Buffalo, New York-based bank with over $117B in total assets. Their deposit growth fell 6% in the first quarter of 2018. In the words of M&T Bank CFO Darren King, the sudden shift in deposits is very much attributable to banks like JPMorgan Chase, Bank of America, and Wells Fargo who “built an M&T…and probably somebody else, over a short period of time.”
To banks with $2T in total assets, banks like M&T can be easily copied and challenged. And if that is the case for banks with over $100B in assets, what happens to banks with less than $10B in assets? According to the Darling Consulting Group, banks under $10B in assets have not grown core deposits sufficiently to fund loans for the past three years.
If deposits are the lifeblood of banks, then regional banks are beginning to bleed out. Before they can start taking proactive measures, these banks need to triage and stop the bleeding. A good starting point is ensuring that new deposits are truly sustainable.
One of the key features of Zafin Cloud is ensuring True Deposit Growth. Traditionally, banks and their legacy core systems have been unable to distinguish between new deposits from existing ones. This has forced banks to pay out bonuses and rewards to customers who have simply shifted money between accounts rather than making new deposits. By shoring up their margins on rate or reward-based promotions, regional banks can buy themselves time to research more effective treatments for the illness of low deposit growth.
For any bank that isn’t one of The Big Three, deposits growth isn’t a Rat(e) Race. In the words of RBC Capital Markets Analyst Gerard Cassidy, deposit growth is becoming “an arms race.” And for any bank with less than $10B in assets, this is nothing less than the start of a war for survival. If regional banks are going to capture territory, they’ll need weapons and strategies that play to their strengths. We will discuss what these are in part 2 of this blog post.
Want to learn more about how your bank can with the deposit growth arms race? Get in touch with us today!
About Zafin
Zafin (@zafin) is a leading financial technology provider that enables banks to form richer, more personalized client relationships. Built from the ground up for financial services, its platform empowers banks to enhance revenue and operational efficiency. Founded in 2002, Zafin sits among North America’s top FinTech companies, and is trusted by retail and corporate units at some of the largest banks worldwide. Headquartered in Toronto with global offices, Zafin has a proven track record with a 100 percent client retention rate as validation.
Jeremy De Mello
Jeremy De Mello is an Associate Account Executive on the Zafin Growth team. He is passionate about how financial technology can create a better customer experience. In his spare time, Jeremy enjoys personal development, cooking and baking, and working towards his goal of being described as dashing. You can follow him on Twitter @JeremyDeMello or connect with him on LinkedIn.
