Wednesday, July 28, 2010

Can Banks Find Ways to Make Deposits Work Harder?

As was mentioned in yesterday's American Banker article, In Cash Glut, Banks Try to Discourage New Deposits, many banks are currently in a somewhat disadvantageous position of having an abundance of deposits at a time of depressed loan demand. With loan to deposit ratios dropping from a median of more than 105% to less than 95% in less than two years for the 15 largest banks, the excess liquidity is costing banks money.

This inability to earn adequate interest on these deposits, combined with lower overdraft fees and the potential for lower interchange income has banks that I am working with scurrying for ways to make up the revenue shortfall.

Some banks are reconfiguring their checking account pricing either by adding fees for enhanced services such as privacy protection or rewards program participation or are reducing costs by offering new streamlined products that have limited service structures (like Bank of America's new online checking test).

And there is no end in sight to the inflow of deposits, as the confidence level of both consumers and businesses is weak enough to encourage a heavier savings mentality and with the equity markets too risky for many investors. Many banks are seeing inflows even with historically low interest rates being paid on deposits.

While loan demand will eventually pick up and banks will most likely find ways to recoup some of the lost fee income through new products or pricing structures, the best long-term solution is to change from a transaction support mentality to a customer relationship perspective. This holistic view encourages the acquisition of accounts with a greater long term potential, a stronger emphasis on engagement of these accounts to increase fee income and reduce attrition, and a focused effort on increasing share of wallet through needs based cross-selling.

At a time when margins are razor this, loan/deposit ratios are anemic and traditional fee income is being attacked by new regulations, it is imperative that we maximize the value of relationships at every step of the customer lifecycle. Historically, too much revenue has been 'left on the table' and we have been accepting of people who open new accounts simply for a premium (gamers), customers with dormant or low activity accounts, and single service customers. Going forward, we need to refocus our efforts on increasing our value proposition at the same time we reduce delivery costs and maximize relationship value.

Has your bank stopped their deposit acquisition efforts? Has there been an increased focus on the engagement and cross-sell processes at your bank? I would love to hear about your bank's strategy for dealing with the abundance of deposits that currently exists.

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