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Core Deposits More Critical than Ever to Bank Profitability

WP 08.05.2010

Unable to afford large marketing budgets, community banks have difficulty differentiating themselves as the best place for those profitable customers to keep their core deposits, and executives are seeking a solution. As usual, there is no silver bullet.

In addition to be being stable, low cost funds, core deposits are the basis of the banking relationship. Ask "Who do you bank with?" and regardless of where their millions are stashed, people usually reply by telling you where they have their primary transaction account.

These basic deposit accounts represent reliable sources of fee income, cross sell opportunities, and repeat customers. One of our client banks found that by increasing each of their five primary core deposit account types (DDA, NOW, Relationship Checking, MMA, and Regular Savings) by just 2% each and decreasing their dependence on CDs by that same 10%, they would see a 21 basis point reduction in their cost of funds. This $2.5 billion bank saw a $5 million difference to their bottom line.

For a core deposit strategy to be effective, all the fundamental ways a bank touches its customers and prospects need to be aligned and integrated, and each financial institution can address the four critical factors impacting core deposits: products, technology and operations, sales support and training, and marketing.

When analyzing the bank's products, consider the following questions. Do you have a competitive product line? Can you define what differentiates your bank on each of its products? By giving customers a tangible benefit to keep the account (better rates, lower fees, gift promotions) and simultaneously requiring accountholders to utilize channels that keep your costs down or generate fee income (or both), you can achieve greater product differentiation and profitability.

Technology and Operations.
Your front line employees need efficient, effective technology to serve their customers, open new accounts, and capture pertinent customer information. They also need the ability to see a customer's relationship with the bank at a glance, and your marketing team must reliably determine household, customer, product, and business line profitability.

Sales Support and Training.
Once a front-line employee can see the customer's relationship, they should also be equipped to cross sell appropriate products and services. Employees should have a thorough understanding of all the bank's offerings and be able to identify the next most appropriate solution.

The second critical factor in sales is an incentive structure. On average, the ROE of banks that have an effective incentive compensation strategy is 40% higher than those that do not. An effective plan clearly identifies expectations, has mechanisms in place for capturing whether employees are meeting those goals, and communicates everyone's performance to the entire organization.

An effective marketing strategy requires a segmented customer base and a clear understanding of customer profitability. Since 28% of customers really represent a 23% loss, you need identify those unprofitable customers, move them into another level of profitability, or price them out of the bank.

The Bottom Line.
Core deposits are critical. They are a cost-effective way to improve bottom line performance. Before launching any major core deposit generation initiative, we recommend that a bank assess each of the factors in the areas of product assessment, technology and operations, sales training and support, and marketing. Once a bank determines where it stands on each of these key components, creating an effective deposit generation and retention strategy becomes a much simpler task.