Core Deposit Growth

How to Survive the Coming Core Deposit Crisis (Cross-Selling Secrets Revealed)

Steer Clear of Trouble in Your Core Deposit Strategy by Avoiding These Common But Costly Mistakes—Emmerich Can Help

Regulators are looking a little cranky again—and for good reason.

They are coming in fairly heavy-handed with community banks that are floundering in their core deposit strategy and execution.

Not absolutely certain your bank’s core deposit strategy is “regulator-ready?” Then you’d be wise to perform a quarterly Deposit Loyalty Study to assess how well you’re mastering the DEPOSIT SACRED SIX.

What’s the Deposit Sacred Six? It’s a litmus test to measure your community bank’s performance against minimum standards that regulators require you to meet to prove you won’t have liquidity issues. They are:

  1. Relationship depth
  2. Location
  3. Price
  4. Size
  5. Relationship length
  6. Transactions

It is about to get ugly for many community banks because, quite frankly, most of them don’t look very strong on these six.

Here’s why.

It wasn’t that many years ago when most community banks were scrambling for core deposits. Rates went to ridiculous levels and many banks confused the easy attraction of deposits with a “solution.”

The real test of whether a bank can generate its own core and low-cost deposits is about to hit. And that’s a problem because almost every bank is dead wrong with their deposit strategy—and regulators are all over it.

Almost every bank is dead wrong with their deposit strategy—and regulators are all over it

Common and Costly Core Deposit Strategy Mistake #1: Advertising rate (AKA dancing with the Devil)

When a community bank advertises rate, it’s a real sign it has some serious misunderstandings about how a good deposit strategy works.

Advertising rate attracts rate-sensitive customers. On average, banks lose money on 87 percent of customers. So if you mostly attract customers who’ll cost you money, it’s hard—as the old joke goes—to make that up on volume.

Let’s test the strategy of advertising rate against the Deposit Sacred Six:

Relationship depth: NO, a deep relationship isn’t likely. Customers attracted by this tactic have already shown you they are rate-sensitive.

Location: Yes, they might be local.

Price: Ah, no. That one was easy.

Size: Perhaps a win in some, but not all.

Relationship length: Not likely.

Transactions: Also not likely.

So overall, advertising your rate on CDs or checking accounts is a TERRIBLE strategy for gaining sticky core deposits that will appease regulators.

“But all of the customers and prospects in my area ARE rate-sensitive!” you lament. Don’t even try to make that case. If you have even one restaurant in your market *without* golden arches, your assumption is delusional. The reality is you just haven’t given them something worth paying for.

Common and Costly Core Deposit Strategy Mistake #2: Not targeting the top 20 percent of the top 20 percent of core deposit prospects

The best way to help the poor is to not become one of them.

Many banks miss the point—they market and sell to the whole lake instead of focusing on the fishing hole that will yield the most profitable customers.

National research shows that 83 percent of your sales come from your top quartile of salespeople, and only 6 percent from your bottom quartile. Sounds remarkably like the 80-20 rule applies there.

Not only that, but 80 percent of your profits from low-cost deposits come from a very narrow psychographic and firmographic of customers. Remarkably, folks with those psychographics and firmographics also stay “sticky,” don’t defect over rate, and buy everything you have.

Sounds like a plan to go after and get all of those kinds of prospects would be the answer, doesn’t it?

Unless you have a deployment strategy that you can execute to bring in all the next best customers, your people are probably spinning. Instead of qualifying prospects, they’re talking to whoever walks in the door… and when the prospects ask for a rate match, your salespeople give it to them.

Unless your marketing and sales efforts are integrated and designed to create extreme value for your next best 100 prospects—and unless you implement a system focused on getting all of them and all their business, it probably won’t happen.

Common and Costly Core Deposit Strategy Mistake #3: Not getting a minimum average of 7 cross sales on new accounts

Before they start a process to radically move the needle on this indicator, most community banks start with an average of 2.2 cross sales on new accounts. That’s not even close to good because it takes at least 6 or 7 cross-sales to make that new customer “sticky” enough and cure their price sensitivity.

If this needle doesn’t move up, you’re at substantial risk of liquidity issues… not to mention setting yourself up for Net Interest Margin compression coming from the deposit pricing side.

You can bet the regulators will notice. Community banks who aren’t all over this will need—and get—a regulatory slap before they get serious about challenging their old-school deposit-gathering “strategies” that somehow continue to fail even as rates go up.

It’s not too late for your community bank to attract a massive amount of sticky core deposits in a short period of time that meet the regulators’ marks and protect your safety and profits… but the window is short. Get ahead of it! The Emmerich Group’s Certified Community Bank Team Members are experts at guiding banks on the exact steps to take to stop making these common and costly core deposit strategy mistakes.

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Roxanne Emmerich