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The Platonic Ideal for Deposits

In an ideal world, deposits would be inexpensive to acquire, stable, retained through generations, and would grow at a sustainable rate. 

Many bankers are working tirelessly to manifest this vision. Many more are discouraged as their funding costs rise and their deposits churn. Out of desperation, banks are turning to rate-based acquisition strategies and brokered deposits. 

But let’s go back to the ideal to see what options exist.

What would have to be true to acquire core deposits at a lower rate than your competitors? Let’s consider the customer’s point of view, when will they willfully tolerate low interest rates?

  • Low Balances: Customers may be willing to keep low balances in an account that pays low interest rates because the opportunity cost is relatively low.

  • High switching costs: Customers may tolerate lower rates because of the work involved with moving their account. It’s worth noting that this category of deposits is at risk as open banking lowers the barrier to move.

  • High Value: More often, customers accept lower rates in exchange for differentiated value. Here I am referring to something that the customer perceives as being more valuable than the interest they could earn elsewhere. Note that security and accessibility are table stakes when it comes to deposits, not advantages.

What would have to be true for core deposits to remain stable? Here I’ll quote my high school youth pastor: “What you get them with you keep them with.” The reason a customer chooses their bank in the first place is likely going to be the reason they stay. Let’s play that out:

  • Rate: Customers who choose a bank solely for its high rates are unlikely to stay if those rates fall. They are always on the lookout for better offers.

  • Product: Customers who choose a bank based on the value of a product are retained with continuous value. They are subject to leave if the bank does not continue to invest in making their life better, allowing a competitor to win them away.

  • Service: Customers who choose a bank based on service are retained with continued positive experiences. The high value they place on interactions with the bank make it more likely that they’ll leave should they have a negative service experience.

What would have to be true for core deposits to be retained through the generations? Many banks are focused on keeping deposits on their balance sheet through a generational transition of wealth.

  • Hot take: I believe banks are overreaching in trying to retain customers across generations. The era of familial loyalty to a single institution is bygone. Instead, banks should focus on optimizing the top of the funnel, attracting new customers with compelling offers and innovative services.

What would have to be true for core deposits to grow at a sustainable rate?

  • Acquire customers at a faster rate than you lose customers. See ideal #1.

  • Help existing customers grow their wealth. I love this strategy for banks. That’s a high value, making those new deposits sticky.

Deposit gathering was not a priority for most banks when the economy was flush with cash. Combine that with the increasing competitive pressure from large banks and fintechs, community banks all but quit competing for retail customers, retreating to focus on SMB.

When I reflect on the ideal deposits, delivering product value stands out at the clearest path to acquiring inexpensive, stable deposits. Banks that choose to compete on value can pay less for deposits. The key is to design a business such that the bank can continue to create value at a lower cost than rate-driven acquisition.


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