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You've Got a (Deposit) Problem

“What’s your deposit strategy?” is one of my favorite questions for bankers. It gives me a very quick insight into how they think about their bank and their strategic acumen. For years the middle of the pack answers were, “We’re more of a Small Business Lender,” or, “We already have too many deposits.” When rates came out of the cellar, the answer quickly shifted to, “We’re thinking of getting into fintech.” Today, we hear, “We’re adding digital account opening but we don’t want to raise our rates.”  


Banks, you don’t have a deposit problem, you have a relationship problem. Nine out ten bankers are stunned right now because they think relationships are their unique competitive advantage. So let me say it again: You have a relationship problem, and it is about to get worse.  


One of my favorite takeaways from the Alloy Labs Annual Member meeting came from Eric Schurr, Chief Strategy Officer at Sunrise Banks. In the safe space that is our membership, he uttered an absolute heresy (repeated with permission): “Relationships are the most important thing… …until real money is on the line.” 


Banks and fintechs are about to go through a painful reckoning that an effective strategy must deliver value to customers in excess of the cost to deliver that value. The Zero Interest Rate Policy (ZIRP) world masked some fundamental shifts in the financial world.  


For banks, proximity was a tangible value when opening and managing an account required visiting a branch. That value is not just on fire, it is burning to the ground. The personal nature of your relationship is no match for the personalization of artificial intelligence (even if it is really just machine learning) and Open Banking (even if it isn’t fully open). This may sound like the buzzword bingo from some self-proclaimed futurist on a conference stage, but it will happen, in two ways. Slowly, then suddenly.  


Startups that depended on the VC funded gravy train need to find viable business models that support positive unit economics and customer acquisition costs that aren’t dependent on raising billions of dollars.  


Interest rates are unlikely to go down to zero; Kiah Haslett at Bank Director likes to point out that we aren’t even above historical averages. Even if they were to go down dramatically, even to zero, industry shifts won’t be undone.     

 

Customers have more choice than ever, and electronic tools reduce the friction of starting, building, or moving relationships. One of my favorite pieces from Ron Shevlin compared checking accounts to cheap motels. The money checks in and just as rapidly it checks out. It is now sprinkled across a dozen places, each providing some unique source of value from instant credit on returns at Amazon to a linked debit card for teens.  


To capture and retain deposits without competing on rates, financial institutions need to rethink value in tangible ways. We call our strategy at Alloy Labs “the edge of money.” We look beyond the account and the transactions for new ways to create value for the customer. Much of this is done through partnerships like Carefull, The Postage, and Eko. These partners weren’t necessarily pursuing bank partnerships, but it quickly became clear working together created new value for customers and the banks.  


It’s not without its challenges though: 


1. Banks don’t have a robust enough understanding of their unit economics. Simply looking at the net interest margin on SMB and Commercial loans oversimplifies the dependency on a robust deposit franchise.  


2. Fintechs overvalue their impact and underestimate the economics of the deposit account. 


3. Both underestimate the amount of work that goes into making a partnership successful goes well beyond availability in the Q2 App Store. Don’t get us wrong, the App Stores and sandboxes being developed by JackHenry, FIS, and Fiserv (and others) are essential for banks to compete. They are necessary, but insufficient.  


4. Too often partnership conversations start with what the bank needs and what the startup is selling rather than what the customer needs and how the value is shared. 


5. Franchises are built over time and rarely dependent on a single player. Banks need to put together a roster that differentiates them from the thousands of institutions, fintechs, and non-fintechs competing for their customers’ money.  

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