Thinking Ahead About Deposits

Three years ago, banks were desperate for deposits of all kinds, having felt an outflow to the stock market for the lengthy bull market of the ’90s. Aggressive CD marketing and another cycle of free checking were the answer for many banks. Then an interesting thing happened: As the small investor became disenchanted with the stock market, even a low rate environment wasn’t enough to stop a wave of new money coming back to the banks.

But now we again see outflows, as bank customers receive their CD renewal slips in the mail, and see their returns falling in halfu00e2u20ac”even to the psychologically frightening 1% level. Regardless of the lack of safe alternatives, people just don’t want their money earning so little.

In the record-low interest environment of the moment, it is especially important that core deposits remain stable. For the first time in memory, when the Fed lowered its discount rate in late June, banks didn’t rush to lower their own prime rate to their best customers. Nor did they rush to cut rates on deposits, rightfully fearful of losing deposits.

Bankers are justifiably proud of the skills they have gained in the last couple of decades in managing risk in their portfolios, balancing assets and liabilities, and calculating the durations of their investments. But isn’t it amazing what short-term thinking goes into that most basic of functions of the bank, building its deposit base?

The fact is, those banks that do well year-in and year-out have been those whose focus is on building their depositor baseu00e2u20ac”not just their deposit base. Though Citigroup, Fifth Third, Wamu, and New Jersey’s Commerce Bank have all had their stumbles, these banks have been unwavering in their belief that deposits are the long-term lifeblood of a bank.

They know that the only way to assure the low-cost of those deposits is to build a large, loyal depositor base who can be counted upon to buy new services and to not complain too loudly when, in tight times, fees and lending rates drift upward.

For too many banks scurrying for profitability, though, short-term thinking prevails. What’s the quickest fix for a bank feeling the margin squeeze? Increase fee income. Item: Positioning a huge increase in overdraft charges as “overdraft protection” or “overdraft assurance,” hundreds of banks have set themselves up for charges of gouging customers with fees far exceeding their cost of providing the service. Item: Credit-card issuers have quietly mined their bases for fee income by dramatically increasing late fees. MBNA, the nation’s second-largest issuer, has increased its late charge to a hefty $39. Few stones have been left unturned in increasing fees to retail customers.

Bank customers are not stupid. They realize when they are being taken advantage of. After a while, they react. They switch banks. They migrate to nonbanks, which seem increasingly to be gaining the high moral ground in the battle for the hearts and minds of disillusioned bank customers. It is a long-term effect of short-term actions of bankers with sharp pens and dull memories.