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2006 4th Quarter:

Addressing the Deposit Dilemma Is Critical

By Tom Richards

Recent polls and earnings announcements confirm a growing problem: Financial institutions have been unable to attract and retain the deposits necessary to profitably fund their loan growth. The Federal Deposit Insurance Corp. reports that the average institution has a historically high 105 percent of its deposits loaned out. Meanwhile, more discerning customers have increased both the cost and the competition for coveted core deposits. The predictable result has been a squeeze on net interest margin. Some industry experts estimate that deposits actually account for 75 percent of industry profits. So this is a bigger problem than it first appears to be.

According to Grant Thornton’s recent survey of bank CEOs, 96 percent see retaining deposits as a factor critical to their success, more than any other factor. Yet CEOs also reported that it was one of the critical factors they were least confident in addressing. In many ways, it has become a dilemma—the Deposit Dilemma.

The lack of confidence is understandable. Unscientific promotional offers often result in little more than an increased cost of funds. And leveraging more expensive brokered deposits isn’t a long-term solution either. It’s expensive. The reason for the lack of confidence in addressing deposits is that there is no single answer to the Deposit Dilemma. And while there are proven tactics in the battle for deposits, each financial institution faces a different market with a different mix of products. Like addressing any medical ailment, there is an institution-specific diagnosis needed to go along with any prognosis or recommended remedy.

Harland’s benchmarking database of financial institutions nationwide containing millions of consumer and small business households is providing new insight into the underpinnings of the Deposit Dilemma. Harland initiated this ongoing benchmarking process a decade ago when the Federal Reserve retired its functional cost analysis, but today it is providing unique insights into acquisition, organic growth, and retention of deposit relationships.

Considerable Variability

Deposit Benchmarking service participants experienced an average 9.2 percent annual deposit growth rate, which aligns with the industry overall as reported by the FDIC. To achieve that growth, 11 percent of deposits came from new customer acquisitions, while 7.3 percent of deposits were lost to customer attrition. Making up the critical difference was 5.5 percent organic growth, the net result of cross-selling and customer development efforts. Digging deeper into consumer households, business clients, and mixed business/ consumer relationships and exploring product specific areas, the analysis is compelling and instructive on an individual institution level. The findings show considerable variability among institutions, re-emphasizing the need for a specific diagnosis. One institution’s approach to tackle attrition, for example, is not appropriate to attack another’s acquisition or organic growth needs. As institutions develop more sticky services and relationship-oriented product packaging, it is critical to know how their efforts measure up in, for example, checking or premium money-market product development.

Beyond deposit acquisition and managing products, solid customer retention and organic growth rates indicate customer loyalty and increased franchise value. While many banks have perfected their inorganic merger-and-acquisition activities, we find that the industry still seeks better answers to organic growth. And there are best practices which demonstrate that profitable deposit growth can be achieved the old-fashioned way—not expensive “brokered” deposits or “advances” on your balance sheet, but real deposits developed from real accountholders to profitably fund loans.

Here’s an example. One of the more interesting findings of this relationship-based benchmarking study is the need for more development in growing client relationships. After opening a new relationship with a financial institution, it takes an average of 48 days before an accountholder is sold a second product. Knowing how an institution measures up in this area alone is highly instructive, since we found that 62 percent of attrition comes from single-service households.

The annual attrition rate among new accountholders is nearly double in the first 90 days. This is an area of tremendous opportunity for the institution. Harland has taken a significant interest in the process of onboarding and helping financial institutions get their clients more quickly and profitably oriented into the right mix of products and services. Evidence also suggests that the industry has considerable fulfillment errors that need to be addressed. Only through improved customer engagement does the process improve.

There are several potential solutions to the Deposit Dilemma. Not every sore knee requires surgery. Comparative economic pricing analysis helps determine where the institution is competitive and if money is being left on the table in certain areas. If customer experience appears to be an issue, mystery shopping and a careful review of delivery channel automation might be appropriate. Onboarding and other targeted direct-marketing efforts are often part of the solution. And a marketing customer information file (MCIF) can improve understanding of retention, attrition and organic growth drivers. But achieving the right prognosis is based on a solid diagnosis. Ongoing benchmarking provides the necessary insight and helps provide the right diagnosis and mid-course corrections to build effective strategies to fight the Deposit Dilemma.

Tom Richards is executive vice president and general manager of retail solutions for Harland Financial Solutions, a wholly-owned subsidiary of the John H. Harland Company, that supplies software and services to thousands of financial institutions of all sizes, in both an in-house and service bureau environment. Richards has more than 30 years of experience in the application of information technology in the banking industry with Financial Insights, Digital Equipment, IBM, JP Morgan and the American Bankers Association. He can be reached at 1-800-989-9009 or