Deposit competition is heating up quickly in 2018, and community bankers say they are moving with haste to meet existing customers' needs and explore ways to win more market share.
Following three Federal Reserve interest rate increases in 2017, depositors started shifting more of their money into higher yielding accounts, giving banks, credit unions and financial technology companies reason to ramp up attempts to win over new customers. Deposits costs for banks rose notably as a result.
The total cost of funds for the banking industry was 0.58% in the 2017 fourth quarter, up from 0.40% a year earlier, according to an S&P Global Market Intelligence analysis. With further rate hikes anticipated, bankers say they expect pressure on pricing will continue throughout 2018.
Against that backdrop, community bankers say they are highly motivated to develop new deposit products and marketing strategies to both increase relevance with existing customers and to attract new ones. That was a clear theme to emerge this week at the Independent Community Bankers of America annual convention in Las Vegas.
"Deposits are front and center now," Preston Kennedy, president of Zachary Bancshares Inc. in Louisiana, said in an interview at the convention. His bank is drawing on staffwide input to develop a unique deposit product that may include new rewards for customers. The goal is to retain long-term depositors and to provide appeal to new customers at a time when more banks are experiencing greater loan demand and need to maintain strong funding levels.
Prior to last year, banks for years had little trouble keeping deposits, said Kennedy, who also is chairman-elect of the ICBA. Following the 2008 financial crisis, Fed policymakers pushed rates down and left depositors with little reason to consider moving their money. Now, with rates rising, Kennedy said banks such as his are peppered with staffers who "have never really seen" an ultra-competitive deposit environment.
So bank managers are working in earnest to educate employees on the importance of strong deposit levels and motivating them to prioritize deposit gathering.
"This is the first time in years we are shifting our focus back to getting deposits, and it's new work for a lot of people," Timothy Zimmerman, CEO of Standard Bank PaSB in western Pennsylvania, said in an interview in Las Vegas.
He also said loan demand is building as more commercial clients digest the benefits of recent federal tax cuts and make plans to use the savings to invest in growth. Business owners often tap bank credit lines to help finance expansion plans. This is putting added pressure on banks to look for ways to amass more deposits to fund loan growth.
"We are seeing more activity across all of our business customers," said Zimmerman, who also is chairman of the ICBA. "But right now loan demand is outrunning deposit growth."
Becki Drahota, CEO of Mills Marketing and an adviser to banks on deposit gathering, said at the convention that community banks face stiff competition from megabanks and credit unions, as well as from fintech companies that are meshing savings-account like products with social media.
As such, she advised, small banks must first focus on keeping and deepening ties to existing customers. Drawing on industry research and her own experience with the banks she advises, Drahota said that most banks hold less than 30% of their middle- and upper-income customers' total deposits. That means there is plenty of room to bolster links to these customers and win more deposits, she said.
Drahota said banks should then of course look to innovate, with the ultimate goal of bringing in more customers via low-cost digital means. She also championed the idea of new products, including on the commercial side. She said more banks are now experimenting with ideas such as paying interest on commercial checking accounts. The idea is to offer business clients favorable rates to attract the big sums of deposits they can bring.
This may sound expensive, she said, but if a bank pays certain business customers 2% on their accounts, it would have less need to pay rising rates on certain consumer deposits. And offering interest on a business checking account effectively serves as the marketing tool, minimizing costs on that front.
She said community banks need to act "urgently" to get on the forefront of funding competition because deposits "are very, very susceptible to being disrupted."
