FINANCIAL INSTITUTIONS CONSULTING, INC.
http://www.ficinc.com/
August 13, 2008
TODAY'S TOPIC: DEPOSIT GENERATION: A MULTI-PRONGED APPROACH
- PART II
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By Charles B. Wendel
Executive Summary: Adding to the initiatives discussed last week, selecting sub-segments to target for deposit growth and executing effectively against them can protect and grow deposits. Multiple best practice examples offer opportunities for adaptation and adoption.
Last week's newsletter built off of a presentation given by Bill Hippensteel
of BBVA Compass Bank to St. Meyer & Hubbard's annual Client Executive Meeting.
Bill's topic: "Generating Deposits in Challenging Times."
Our previous newsletter discussed three of the five areas that Bill termed "Select Deposit Strategies that are Working:"
Channel/distribution expansion includes deposit-centric activities such as de novo branching and direct banks. Aggressive pricing entails high yield accounts and limited time offers aimed at pulling in deposits. New product introduction centers on the value of remote deposit capture (RDC) and health savings accounts. It is unlikely that any single one of these or other areas will fully address a bank's deposit shortfall. Each has cons (and costs) as well as pros. However, they all serve as pieces of the deposit building puzzle. The weight given by a bank to one activity versus another will depend on many factors including a bank's internal skill base and culture, the competitive environment, and customer demographics.
Sub-Segment Targeting
In addition to the three topics listed above, Bill mentioned two additional deposit approaches: sub-segment targeting and customer development programs. This newsletter focuses on issues related to sub-segment targeting, defined by Bill as activities such as "value extension, affinity programs, and deposit-rich segments."
* Value extension related to the deposit arena positions payments-related
activities as "center stage" in a bank's relationship with its clients.
In many cases, the customer is already ahead of the banks on this topic. Fewer
than 50 percent of small businesses or middle market companies are borrowers;
at least until the recent credit crunch, an increasing number of companies put
more relationship value on their cash management partners with reduced significance
given to their lenders.
While we could supply multiple examples both from U.S. and overseas banks, Bill
cites Bank of America, PNC, and Wells Fargo. Each bank emphasizes the value
of its payment-related services, whether payroll, merchant processing, or related
areas. These banks succeed to the extent that their cash management and deposit
strategies are closely interlinked. They define themselves as payment leaders
and differentiate their customer's experience based upon what that leadership
provides.
Another example of value extension allows a bank to differentiate its product
by encouraging personalization. Compass Bank offers "build-to-order checking"
whereby the customer selects certain product features as he/she creates a customized
product "package." Personalized debit cards offer another example
of creating value by allowing a customer to upload a picture or image and create
a unique card which, ideally, increases use and decommoditizes the bank's offer.
Other examples of banks that focus on creating value include:
* Affinity programs have existed for many years, but relatively few players have operated with the focus required to select and build affinity opportunities. Community banks, with their local knowledge and contacts, should have a competitive advantage and be leaders in this area; few are. Creating targeted offers that solicit local groups with similar interests and an interest in community growth offers a significant path to deposit growth.
* Deposit rich segments are multiple in number and relatively
easy to recognize and target. Market positioning and day-to-day execution distinguishes
the few effective segmenters from the also-rans. Importantly, Bill highlighted
that banks need to target both deposit-rich business and consumer segments.
While the approach, degree of customization, and per customer opportunity differs
for these groups, each should play an important part in the bank's deposit mix.
Deposit-rich businesses include: professionals, healthcare companies, insurance
brokers, real estate agencies (at least in better times), government, not-for-profits,
and home associations. Banks focusing on segments design a product offer that
anticipates the deposit, cash management, borrowing, and other needs of the
company.
Banks such as Citibank with legal services and SunTrust and Stillman National
Bank with doctors focus on the professional services segment. Compass, JP Morgan
Chase, and Capital One, among others, have had success generating deposits from
the government sector, in particular, municipalities. Banks such as Union in
California have a strong not-for-profit focus aimed at deposits and cash management
fees. Other players have found that churches and synagogues merit focused messaging
and sales.
Regarding the consumer, a bank needs to pick its focus to concentrate on the
highest potential opportunities. Bill's deposit-rich consumer segments incorporate
the personal business of small business owners, the mass affluent segment, the
Hispanic segment, affinity programs, and the under-banked. Most banks will find
that, for them, the owner and the mass affluents provide the most likely route
to new deposits.
We have written about the mass affluent before and they continue to be highly attractive deposit targets for many banks. But another group should receive clear priority, namely, the business owner. A recent Greenwich Research report shows that "approximately six in ten companies do not use their primary business bank for personal services." The major reason for this has remained the same for many years: "Over 40% of companies cite not being solicited by their primary business bank for personal services." What a significant opportunity and how woefully has the banking industry performed in this area! Developing a dual business/personal relationship builds deposits and overall profitability while increasing account retention. Any bank not giving this area the highest priority as part of its deposit strategy should immediately rethink its approach.
Concluding Thought
Developing a coherent and focused deposit strategy is critically important
for senior management. In our third and final newsletter on this topic, we will
review the fifth deposit strategy mentioned at the St. Meyer & Hubbard meeting:
customer development programs. We will also recommend specific tactics for deposit
retention and growth.
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QUOTE OF THE WEEK
"We expect a dislocated market through 2009. Having a diversified deposit base is critical."
--Executive of small business-focused lender
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ABOUT US
FIC is a strategy consulting firm addressing issues related to growth and profitability for financial services clients. We emphasize practical, bottom-line results for your company. For more information about our consulting services or if you have questions or comments, please e-mail info@ficinc.com.
Financial Institutions Consulting
324 Silver Spring Road
Ridgefield, Connecticut 06877
Telephone: 203-431-8330
Email: SME_Newsletter@ficinc.com
URL: http://www.ficinc.com
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