Modernizing Your Retail Banking Business

The Covid-19 pandemic accelerated the decline of traffic in most banks’ retail branches, leading many organizations to reexamine the cost of their branch services and the ultimate viability of their branch-based services. Bank boards and executive teams must address the changing operating risks in today’s retail banking environment and assess the potential strategic risks of both action and inaction.

Speculation about the impending death of branch banking is nothing new: industry observers have debated the topic for years. As customers have become more comfortable with online banking, banks experienced a sizeable drop in in-person transactions. Regulatory changes, social trends and the growth of fintech alternatives exacerbated this development, leading many banks to cut back or centralize various branch-based activities. Between June 2010 and year-end 2020, branch offices have decreased by more than 16,000, or 16.7%, according to a Crowe analysis of report from the Federal Deposit Insurance Corp.

The pandemic also introduced important new challenges. Many banks had already shifted the focus in their branches, but greater consumer acceptance of remote and self-service options clouded the role of the branch even further. At the same time, pandemic relief programs produced a wave of liquidity, which hid or delayed the recognition of fundamental challenges many bankers expect to face: finding new ways to continue growing their core deposits at an acceptable cost.

So far, banks’ responses to these challenges have varied. Some banks — both large and small — have accelerated their branch closure plans. Others have notified regulators that they do not plan to reopen branches shuttered during lockdowns. But some banks actually are adding new offices as they reconfigure their retail banking strategies. What is the underlying strategic thinking when it comes to brick and mortar locations?

Developing and Executing an Effective Strategy

There is no one-size-fits-all approach, of course. Closing a majority of branches and becoming a digital-only organization is simply not appropriate for most banks. Nevertheless, many aspects of the physical model require innovation. Directors and executive teams can take several steps to successfully modernize their retail banking strategies.

  • Rethink branch cost and performance metrics. Banks use a variety of tools to attract deposits, sell products and build relationships, which means conventional performance metrics such as accounts or transactions per employee, cost per transaction or teller transaction times often are inadequate measurements.

A branch’s contribution also includes the visibility it provides as a billboard for the bank, access to and support for the specialized products and services it can deliver and the role it plays in establishing a community presence. Management teams need to develop tools to determine and measure the value of such contributions to the bank and its product lines, as well as their associated costs. Branches are long-term investments that require longer-term planning strategies and tactics.

  • Identify customer expectations. One factor contributing to the decline in foot traffic is what customers experience when they visit a branch. Although branch greeters can establish a welcoming atmosphere, such encounters often succeed only in a nice greeting — not necessarily in service.

Because customers can perform most banking business online, banks must ascertain why customers are visiting the branch — and then focus on meeting those needs. Ultimately, customers must leave the branch feeling fulfilled, having accomplished a transaction or task that would have been more difficult outside the branch.

  • Execute a coordinated digital strategy. Having a digital strategy means more than updating the bank’s website, streamlining its mobile banking interface or even partnering with a fintech to offer new digital products. Such catch-up activities might be necessary, but they no longer set a bank apart in today’s digital landscape or improve profitability and growth.

Beyond technology, banks should consider how their digital strategy and brand identity align and how that identity ties back to customers’ expectations. Traditionally, banks’ brand identities were linked to a specific geographic location or niche audiences, but brand identity also can reflect other communities or affinity groups or a particular service or product at which the bank is especially adept. This identity should be projected consistently throughout the customer experience, both digitally and in person.

Although most banks should not abandon their branches altogether, many will need to reevaluate their market approaches, compare opportunities for improved earnings performance and consider reimagining their value proposition for in-person services. Strategies will vary from one organization to the next, but those that succeed will share certain critical attributes — including a willingness to question conventional thinking and redeploy resources without hesitation.

Balance Sheet Opportunities Create Path to Outperformance

How important is net interest margin (NIM) to your institution?

In 2019, banks nationally were 87% dependent on net interest income. With the lion’s share of earnings coming from NIM, implementing a disciplined approach around margin management will mean the difference between underperforming institutions and outperforming ones. (To see how your institution ranks versus national and in-state peers, click here.)

Anticipating the next steps a bank should take to protect or improve its profitability will become increasingly difficult as they manage balance sheet risks and margin pressure. Cash positions are growing with record deposit inflows, pricing on meager loan demand is ultra-competitive and many institutions are experiencing accelerated cash flows from investment portfolios.

It is also important to remember that stress testing the balance sheet is no longer an academic exercise. Beyond the risk management, stressing the durability of capital and resiliency of liquidity can give your institution the confidence necessary to execute on strategies to improve performance and to stay ahead of peers. It is of heightened importance to maintain focus on the four major balance sheet position discussed below.

Capital Assessment, Position
Capital serves as the cornerstone for all balance sheets, supporting growth, absorbing losses and providing resources to seize opportunities. Most importantly, capital serves as a last line of defense, protecting against risk of the known and the unknown.

The rapid changes occurring within the economy are not wholly cyclical in nature; rather, structural shifts will develop as consumer behavior evolves and business operations adjust to the ‘next normal.’ Knowing the breaking points for your capital base — in terms of growth, credit deterioration and a combination of these factors — will serve your institution well.

Liquidity Assessment, Position
Asset quality deterioration leads to capital erosion, which leads to liquidity evaporation. With institutions reporting record deposit growth and swelling cash balances, understanding how access to a variety of funding sources can change, given asset quality deterioration or capital pressure, is critical to evaluating the adequacy of your comprehensive liquidity position.

Interest Rate Risk Assessment, Position
In today’s ultra-low rate environment, pressure on earning asset yields is compounded by funding costs already nearing historically low levels. Excess cash is expensive; significant asset sensitivity represents an opportunity cost as the central bank forecasts a low-rate environment for the foreseeable future. Focus on adjusting your asset mix — not only to improve your earnings today, but to sustain it with higher, stable-earning asset yields over time.

Additionally, revisit critical model assumptions to ensure that your assumptions are reflective of actual pricing behaviors, including new volume rate floors and deposit betas, as they may be too high for certain categories.

Investment Assessment, Position
Strategies for investment portfolios including cash can make a meaningful contribution to your institution’s overall interest income. Some key considerations to help guide the investment process in today’s challenging environment include:

  • Cost of carrying excess cash has increased: Most institutions are now earning 0.1% or less on their overnight funds, but there are alternatives to increasing income on short-term liquidity.
  • Consider pre-investing: Many institutions have been very busy with Paycheck Protection Program loans, and we anticipate this will have a short-term impact on liquidity and resources. Currently, spreads are still attractive in select sectors of the market.

Taylor Advisors’ Take:
Moving into 2021, liquidity and capital are taking center stage in most community banks’ asset-liability committee discussions. Moving away from regulatory appeasement and towards proactive planning and decision-making are of paramount importance. This can start with upgrading your bank’s tools and policies, improving your ability to interpret and communicate the results and implementing actionable strategies.

Truly understanding your balance sheet positions is critical before implementing balance sheet management strategies. You must know where you are to know where you want to go. Start by studying your latest quarterly data. Dissect your NIM and understand why your earning asset yields are above or below peer. Balance sheet management is about driving unique strategies and tailored risk management practices to outperform; anything less will lead to sub-optimal results.

Banks, Fintechs Uniting for Bottom-Line Wins

Banks have been losing consumer market share to fintechs for more than a decade. But in the middle of a pandemic, their focus has shifted to expediting consumer loan opportunities for balance sheet and bottom line wins. Why?

For one thing, deposit growth is well outpacing loan growth this year, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile. At the same time, tech companies like Apple and Amazon.com are dipping their big toes into the consumer finance industry. With less of a need to focus on growing bank deposits and an ever-growing list of competitors entering the lending market, banks should take — and are taking — more-calculated risks to maintain their relevance with digitally savvy customers at their points of financial need. To connect with prospective customers where they want to be reached, banks will need to rely on partners that can help them scale their offerings in a fast, frictionless and secure manner.

The easiest way for banks to lower customer acquisition costs and reach more prospective customers with loan opportunities is to use relevant plug-and-play technologies from fintechs. It’s hardly a new concept at this point; most leading banks have already adopted this methodology as the way to unlock more revenue. Per the Global Fintech Report, 94% of financial services companies said they were confident that fintechs would help grow their company’s revenue over the next two years; 95% of technology companies said the same.

The banks struggling to justify the need to partner are missing the big picture: growth opportunities and low-hanging fruit. Take business clients as an example. Far too many banks wait for a business to become frustrated at competitors before competing to win their business. A fintech partnership can help banks go on the offensive and create a strategy that positions businesses as the face of financing by offering point-of-need lending to consumers, driving revenue for the business and improving the bottom line at the bank.

“Coming together is a beginning, staying together is progress, and working together is success.” – American industrial and business magnate Henry Ford

Being open-minded about fintech partnerships allows banks to offer valuable and attractive services to business clients and consumers, especially at a time when both are faced with a life-altering pandemic and natural disasters. Consumers need quick access to credit at reasonable rates; in the face of excess liquidity from deposits and a continued low-rate environment, banks should be look to provide better loans for their customers than their online finance competitors.

Banks that choose not to use fintechs partners may find themselves lacking the ability to get embedded into consumer loan deals and unable to offer consumers a frictionless experience during the process. They can’t leverage alternative data, machine learning and artificial intelligence to get a more-accurate portrayal of a consumer’s creditworthiness outside of their FICO credit scores. Accessing value-add technology and creative solutions allows banks to innovate rapidly to improve efficiencies and meet the future needs of businesses and consumers.

Fintechs have demonstrated their ability to meet banks’ third-party standards. Banks sitting on the partnership sidelines are cautioned to set aside their “sword and shield” mentality in favor of an approach that’s more inviting and open to collaborative innovation. Today’s current economic environment can act as a catalyst for this change.

Banks have proven they are capable of being highly responsive to meet business and consumer needs during recent challenges. This is an opportunity for them to think differently and invest in partnerships to quickly offer new experiences as demand for financial products and services increases.

How Innovative Banks Grow Deposits


deposits-8-14-19.pngCommunity banks are under enormous pressure to grow deposits.

Post-crisis liquidity concerns have challenged firms to find low-cost funds, while mega-banks continue to gobble up market share and customers demand digital offerings. In this intense environment, some banks are looking for ways to shake up their approach to gathering deposits. But some of the most compelling opportunities — digital-only banks and banking-as-a-service — require executives to rethink their banks’ strengths, their brands and their future roles in the financial ecosystem.

Digital Bank Brands
When JPMorgan & Co. shut down its digital-only brand called Finn after just one year, some saw it as a sign that community banks shouldn’t bother trying. But Dub Sutherland, shareholder and director of San Antonio, Texas-based TransPecos Banks, argues that there are too many unknowns to make extrapolations from Chase’s decision to ditch Finn.

Sutherland’s bank, which has $224 million in assets, successfully launched a digital-only brand that caters to medical professionals: BankMD. TransPecos is using NYMBUS’ SmartLaunch solution to focus on building products that meet the particular needs of medical professionals. BankMD has its own deposit and loan tracking system, so it doesn’t affect TransPecos’ existing operations. Sutherland says most BankMD customers don’t know and don’t seem to care about the bank on the back end.

Bankers who’ve spent decades crafting their institution’s brand might bristle at the thought of divorcing a digital brand from their brick-and-mortar signage.

I think there’s a fear for those who don’t understand branding and marketing, and don’t understand the new customer. The fact that being “First National Bank of Wherever” doesn’t really carry anything in this day and age,” explains Sutherland. “I do think there are a lot of bankers who fear that they’re going to somehow dilute their brand if they go and launch a digital one.”

That should never be the case, if executed properly. Sutherland explains the digital brand should be “targeting entirely different customers that [the bank] didn’t get before. It should absolutely be accretive.”

Community banks may be able to use a digital-only offering to develop expertise that serves different, niche segments and to experiment with new technologies — without putting core deposits at risk.

Banking-as-a-service
A cohort of banks gather deposits by providing deposit accounts, debit cards and payment services to financial technology companies that, in turn, provide those offerings to customers. In this “banking-as-a-service” (BaaS) model, banks provide the plumbing, settlement and regulatory oversight that enables fintechs to offer financial products; the fintechs bring relatively lower-cost deposits from their digitally native customers.

Essentially, BaaS helps these banks get a piece of the digital deposit pie without transforming the institutions.

“These are low-cost deposits. [Banks’] don’t have to do any servicing on them, there’s no recurring costs, no KYC calls,” says Sankaet Pathak, CEO of San Francisco-based Synapse. Synapse provides banks with the application programming interfaces (APIs) they need to automate a BaaS offering. He says banks “have almost no cost” with deposit-taking in a BaaS model that uses a Synapse platform.

Similar to a digital brand, providing BaaS for fintechs means the bank’s brand takes a back seat. That was a big consideration for Reinbeck, Iowa-based Lincoln Savings Bank when it explored the BaaS model, says Mike McCrary, EVP of e-commerce and emerging technology. Lincoln Savings, which has $1.3 billion in assets, has been running its LSBX BaaS program for about five years, using technology from Q2 Open.

McCrary began his career at the bank in the marketing department, so the model was something his team seriously weighed. In the end, though, McCrary says he’s proud to be enabling fintech partners to do great things.

“It doesn’t diminish our brand, because our brand is really for us, within the places that we touch,” he says. “We definitely continue to try to maximize that and increase the value of the brand within our marketplace, but we’re able to then offer our services outside of that immediate marketplace, with these other really great [fintech] brands.”

Bankers need to grapple with whether they are comfortable putting their firms’ brand on the backburner in order to launch a digital bank or BaaS program. But regardless of how banks choose to grow deposits, the time for considering these new business models is now.

“The cost of deposits, in particular, is a challenge that creates a ‘We need to do something about this’ statement inside a board room or an ALCO committee,” says Q2 Open COO Scott McCormack. “My advice would be to consider alternative strategies sooner than later[.] The opportunity to grow deposits by building a direct bank, partnering with or enabling a fintech … is a strategy that is more compelling than it has ever been.”

Potential Technology Partners

NYMBUS SmartLaunch

SmartLaunch leverages Nymbus’ SmartCore to offer a “digital bank-in-a-box” that runs deposits, loans and payments parallel to the bank’s existing infrastructure.

Q2 Open

Its CorePro system of record helps developers easily build mobile financial services. With a single set of API calls, CorePro can also be used to develop a BaaS offering.

Synapse

BaaS APIs serve as middleware, allowing banks to offer products and services to fintechs and automate the internal Know Your Customer, Anti-Money Laundering and settlement processes for the bank.

Treasury Prime

Their APIs enabled Boston-based Radius Bank to provide BaaS support powering a new checking account called Stackin’ Cash.

Learn more about each of the technology providers in this piece by accessing their profiles in Bank Director’s FinXTech Connect platform.

The Key To Creating A Profitable Deposit Strategy


deposit-5-6-19.pngSmall and mid-size banks can leverage technology to retain and grow their retail relationships in the face of fierce competition for deposits.

Big banks like JPMorgan Chase & Co., Bank of America Corp. and Wells Fargo & Co. continue to lead the battle for deposits. They grew their domestic deposits by more than 180 percent, or $2.4 trillion, over the past 10 years, according to an analysis of regulatory data by The Wall Street Journal. To survive and thrive, smaller institutions will need to craft sustainable, profitable strategies to grow deposits. They should invest in technology to become more efficient, develop effective marketing strategies and leverage data and analytics to personalize products and customer experiences.

Banks can use technology to achieve efficiencies such as differentiating net new money from transfers of existing funds. This is key to growing deposits. Traditionally, banks and their legacy core systems were unable to distinguish between new deposits and existing ones. This meant that banks paid out promotional interest and rewards to customers who simply shifted money between accounts rather than made new deposits. Identifying net new money allows banks to offer promotions on qualified funds, govern it more effectively, incentivize new termed deposits and operate more efficiently.

To remain competitive, small and mid-sized banks should leverage technology to create experiences that strengthen customer retention and loyalty. One way they can do this is through micro-segmentation, which uses data to identify the interests of specific consumers to influence their behavior. Banks can use it to develop marketing campaigns that maximize the effectiveness of customer touchpoints.

Banks can then use personalization to execute on these micro-segmentation strategies. Personalized client offerings require data, a resource readily available to banks. Institutions can use data to develop a deeper understanding of consumer behaviors and personalize product offers that drive customer engagement and loyalty.

Consumers deeply valued personalization, making it critical for banks trying to attract new customers and retain existing ones. A report by The Boston Consulting Group found that 54 percent of new bank customers said a personalized experience was “either the most important or a very important factor” in their decision to move to that bank. Sixty-eight percent of survey respondents added products or services because of a personalized approach. And “among customers who had left a bank, 41 percent said that insufficient personalized treatment was a factor in their decision,” the report read.

Banks can use data and analytics to better understand consumer behavior and act on it. They can also use personalization to shift from push marketing that promotes specific products to customers to pull marketing, which draws customers to product offerings. Institutions can leverage relationship data to build attractive product bundles and targeted incentives that appeal to specific customer interests. Banks can also use technology to evaluate the effectiveness of new products and promotions, and develop marketing campaigns to cross sell specific, recommended products. This translates to more-informed offers with greater response, leading to happier customers and improved bottom lines.

Small and mid-sized banks can use micro-segmentation and personalization to increase revenue, decrease costs and provide the kind of customer experience that wins customer deposits. Building and retaining relationships in the digital era is not easy. But banks can use technology to develop marketing campaigns and personalization strategies as a way to strengthen customer loyalty and engagement.

As the competition for deposits heats up, banks will need to control deposits costs, prevent attrition and grow deposits in a profitable and sustainable way. Small and mid-size banks will need to invest in technology to optimize marketing, personalization and operational strategies so they can defend and grow their deposit balances.

Retail Checking Realities



Forty percent of retail checking relationships are unprofitable, so crafting retail checking accounts that deepen customer relationships, drive deposit growth and enhance the bottom line is a challenge faced by most financial institutions. How can bank leaders tackle this issue? In this video, StrategyCorps’ Mike Branton shares two common mistakes banks make regarding their retail checking products. He also shares his thoughts on enhancing the appeal of checking products and explains technology’s role as a deposit driver.

  • Driving Deposit Growth
  • Why Big Banks are Winning Customers
  • Making Checking More Profitable

 

This Bank Is Winning the Competition for Deposits


deposits-3-15-19.pngFrom the perspective of a community or regional bank, one of the most ominious trends in the industry right now is the organic deposit growth at the nation’s biggest banks.

This trend has gotten a lot of attention in recent years. Yet, the closer you look, the less ominous it seems—so long as you’re not a community or regional bank based in a big city, that is.

The experience of JPMorgan Chase & Co. serves as a case in point.

Deposits at Chase have grown an average of 9.4 percent per year since 2014. That’s more than twice the 4.6 percent average annual rate for the rest of the industry. Even other large national banks have only increased their deposits by a comparatively modest 5.3 percent over this period.

This performance ranks Chase first in the industry in terms of the absolute increase in deposits since 2014—they’re up by a total of $215 billion, which is equivalent to the seventh largest commercial bank in the country.

If any bank is winning the competition for deposits, in other words, it seems fair to say it’s Chase.

But why is it winning?

The answer may surprise you.

It certainly helps that Chase spends billions of dollars every year to be at the forefront of the digital banking revolution. Thanks to these investments, it has the single largest, and fastest growing, active mobile banking base among U.S. banks.

As of the end of 2018, Chase had 49 million active digital customers, 33 million of which actively use its mobile app. Eighty percent of transactions at the bank are now completed through self-service channels, yielding a 15-percent decline in the cost to serve each consumer household.

Yet, even though digitally engaged customers are more satisfied with their experience at Chase, spend more money on Chase-issued cards and use more Chase products, its digital banking channels aren’t the primary source of the bank’s deposit growth.

Believe it or not, Chase attributes 70 percent of the increase in deposits to customers who use its branches.

“Our physical network has been critical in achieving industry-leading deposit growth,” said Thasunda Duckett, CEO of consumer banking, at the bank’s investor day last month. “The progress we’ve made in digital has made it easier for our customers to self-serve. And we’ve seen this shift happen gradually across all age groups. But even as customers continue to use their mobile app more often, they still value our branches. Convenient branch locations are still the top factor for customers when choosing their bank.”

This bears repeating. Despite all the hoopla about digital banking—much of which is legitimate, of course—physical branches continue to be a primary draw of deposits.

Suffice it to say, this is why Chase announced in 2018 that it plans to open as many as 400 new branches in major cities across the East Coast and Mid-Atlantic regions.

Three of Chase’s flagship expansion markets are Boston, Philadelphia and Washington, D.C. This matters because large metropolitan markets like these have performed much better in the ongoing economic expansion compared to their smaller, nonmetropolitan counterparts.

The divergence in economic fortunes is surprising. A full 99 percent of population growth in the country since 2007 has occurred in the 383 urban markets the federal government classifies as metropolitan areas. It stands to reason, in turn, that this is where deposit growth is occurring as well.

Chase isn’t the only big bank expanding in, and into, large metropolitan markets, either. Bank of America Corp. is doing so, too, recently establishing for the first time a physical retail presence in Denver. And U.S. Bancorp and PNC Financial Services Group are following suit, expanding into new retail markets like Dallas.

The point being, even though the trend in deposit growth has led analysts and commentators to ring the death knell for smaller community and regional banks without billion-dollar technology budgets, there’s reason to believe that the business model of many of these banks—focused on branches in smaller urban and rural areas—will allow them to continue prospering.

It’s ‘Game On’ in the Battle for Bank Deposits


deposits-2-13-19.pngAs both interest rates and loan demand rise, the battle for deposits among community financial institutions is only getting tougher.

Following the financial crisis, consumers generally parked their money in banks across the U.S. Despite the little or no interest these institutions offered, deposits grew steadily—to historic levels, in fact.

After multiple interest rate hikes and a burgeoning economy, depositors now more often shop for higher yields. According to third quarter 2018 Federal Deposit Insurance Corp. data, noninterest-bearing deposits declined by $72.9 billion (2.3 percent), the largest quarterly dollar decline since the first quarter of 2013.

This shift is concerning for community banks because deposits help fund loans and serve as a key factor in determining overall profitability. As a result, community bank management teams must develop strong deposit strategies that ensure future growth and institutional stability.

Loan Funding and Deposits
Community institutions must seek more expensive funding—which shrinks profitability—or even decrease lending. The latter strategy is not what most banks want to do, especially since loan demand has generally been improving.

Fifty-five percent of bankers reported an increase in loan demand over the past 12 months, up two percentage points from the previous quarter, according to Promontory Interfinancial Network’s Bank Executive Business Survey, published in the third quarter of 2018. A recent survey conducted by JPMorgan Chase & Co. found about 91 percent of small and midsize companies expect to maintain or increase capital expenditures in 2019.

This scenario brings new attention and importance to loan-to-deposit ratio (LDR), a ratio of total outstanding loans to its total deposit balance. Traditionally, banks try to maintain an LDR around 80–90 percent, to maintain adequate liquidity.

Beating the Competition
Promontory’s study states that 90 percent of 389 bank CEOs, presidents and CFOs that were surveyed across all asset sizes and regions expect to see an increase in deposit competition over the next 12 months.

Growing deposits is especially important for regional and community banks that lack the branch networks, digital footprints and marketing budgets of the nation’s largest institutions, which have experienced above-average deposit growth.

Promontory also asked what strategies they are using to increase deposits. The majority said offering higher interest rates is the best strategy.

While many institutions hold off on interest rate increases as long as possible, it may be time to consider this strategy. But with so many banks also raising rates, other efforts to create differentiation in the marketplace is essential, including:

Target growth in specific deposit products, including commercial deposits, treasury management activities and retail time deposits.

  • Consider employing time deposit sales strategies, including training frontline staff to negotiate tailored CD rates and terms.

Employ client-focused approaches not dependent on rate, like enhanced customer service and establishing stronger relationships with depositors.

  • Capitalize on the bank’s data to personalize the consumer journey across all channels and touchpoints, including account onboarding. McKinsey estimates personalization can deliver 5 to 8 times the return on investment in marketing expenditures, and can lift sales by 10 percent or more. 
  • Emulate the service standards set by Amazon and Google, which personalize, predict and suggest a next purchase.
  • Provide tailored financial education based on individual goals and cross-sell based on current product penetration. 

Invest in a digital referral program. Your current customers are your best source for profitable checking account growth. Using digital word-of-mouth referral programs on phones, tablets, computers and social media is key to brand awareness and recommendations.

  • According to the EY’s Global Consumer Banking Survey, 71 percent of global consumers consult friends, families and colleagues first about banking products and relationships.

Improve marketing and advertising efforts

  • Banks can use automated marketing platforms, local search engine optimization (SEO), geo-targeting, social media, mobile technology, etc. 

Capitalize on reciprocal deposits, which are no longer considered brokered deposits thanks to the Economic Growth, Regulatory Relief, and Consumer Protection Act, signed into law in May 2018. In a nutshell, the new law can make it possible for qualifying banks to more readily tap stable, mostly local funds while reducing the risk for customers to deposit more than $250,000.

Invest in cost-effective digital and cloud-computing technology that delivers faster, more transparent and smoother access to services.

  • These technologies include digital lending for consumers and small businesses, online account opening and onboarding, user-friendly apps, mobile payments, biometrics, contactless ATMs, etc.

Today’s bank customers want to maximize return on their deposits and banking relationship. For community banks, collecting and keeping these deposits is a strategic objective that may not be achieved with a lone “silver bullet” tactic. Absent a merger/acquisition proposition, these institutions are wise to adopt a proactive, multi-pronged approach.

New Law Offers Banks a Way to Accelerate Deposit Growth


deposit-8-31-18.pngFor a long time, it seemed as if the deck was stacked against community banks. Since the financial crisis, the nation’s largest banks have gobbled up some $2.4 trillion in new deposits. Big banks have deep pockets to spend on technology—money that smaller banks don’t have. And because of their concerns about safety, customers with more than $250,000 to deposit often shy away from community banks, thinking they are risky places to park deposits given the potential for a bank failure.

But now, some of that imbalance has shifted in favor of community banks. In May, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act. One of many bank-friendly aspects of the new law is a change in treatment of most reciprocal deposits. (Reciprocal deposits are deposits that banks place through a deposit placement network in exchange for matching deposits. Exchanging deposits on a dollar-for-dollar basis via a deposit placement network enables participating banks to provide their customers with access to FDIC insurance beyond $250,000.) Subject to certain restrictions, most reciprocal deposits are now considered nonbrokered. In enacting this change, Congress and the president have essentially acknowledged that most reciprocal deposits tend to behave like other deposits that come from locally based customers, and therefore, are a more stable source of funds than traditional brokered deposits.

Thanks to the new law, a well-capitalized bank with a CAMELS rating of 1 or 2 can hold reciprocal deposits up to the lesser of 20 percent of its total liabilities, or $5 billion, without those deposits being treated as brokered. (Reciprocal deposits over these amounts are treated as brokered.) Further, a bank that drops below well-capitalized status no longer requires a waiver from the Federal Deposit Insurance Corp. to continue accepting reciprocal deposits so long as it does not receive an amount of reciprocal deposits that causes its reciprocal deposits to exceed a previous four-quarter average.

The change in classification is pivotal for many banks. Here’s why:

  • Banks can seek out more large-dollar, safety-conscious customers—business they may not have attracted before, particularly if they’re a smaller community bank competing with a bank that is perceived as “too-big-to-fail.” Many business and nonprofit customers fall into this bucket.
  • Additionally, community banks can pursue more government and financial institution deposits as the nation’s largest banks—which are subject to liquidity coverage ratio calculations—look to shed these deposits. This will provide an opening for community banks to win these large-dollar deposits and to go after the whole banking relationship.
  • But that’s not all. Banks can also do more to replace or reduce their reliance on:
    • Collateralized deposits, which can be associated with significant opportunity costs, since they require banks to invest funds in U.S. Treasuries or other securities that might otherwise be used to fund loans that generate higher returns, and require additional cash outlays for such things as tracking securities.
    • Deposits that come through internet listing services. Such deposits don’t build franchise value the way reciprocal deposits do, and they tend to come from more rate-sensitive customers, not to mention out-of-state or out-of-market customers—who tend to be less loyal.
    • Higher-priced wholesale funding.
  • Finally, community banks can use reciprocal deposits to lock in more low-cost funding as a hedge against higher rates in the future—to take advantage of low deposit betas for services like Insured Cash Sweep® and CDARS®, and to secure customers for longer terms through, for example, a CD offering like CDARS.

Each of these can have a significant, positive impact on the bottom line and on return-on-assets and return-on-equity ratios. And each of these is something that banks can do more of now. Bottom line: With the new law, reciprocal deposits have become even more attractive for well-capitalized banks to use so that they can have more funds on hand and can make more loans.

Funding may still be a challenge for community banks in an environment of increased deposit competition. But thanks to the new law, community banks will at least have greater access to a tool to that can make their jobs easier.

A New View for Deposit Strategies



As rates continue to rise, now is the time for bank boards and management teams to consider deposit strategies for the future. In this video, Barbara Rehm of Promontory Interfinancial Network sits down with H.D. Barkett, senior managing director at Promontory Interfinancial Network, who shares his thoughts on what banks should consider in today’s environment.

Barkett discusses:

  • Balance Sheet Advice for Today’s Banks
  • Impact of Regulatory Relief on Reciprocal Deposits

For more information about the reciprocal deposits provision in the Economic Growth, Regulatory Relief and Consumer Protection Act, please visit Promontory Interfinancial Network by clicking here.