The New War for Deposits

A new war for deposits is creating a less than positive outlook this year among credit union and bank executives.

Less than half of senior credit union executives are optimistic and only 50% of bank executives are of the same mindset, according to research released in January by Ron Shevlin, director of research for consulting firm Cornerstone Advisors in Scottsdale, Ariz. The research report was based on 300 interviews with senior credit union and bank executives during the fourth quarter of last year. Moreover, among credit union senior executives, their optimism has plunged by nearly 30% from 2018.

What is contributing to this negative outlook, and what is also alarming and worrisome among financial institution executives, is that the competition for deposits has become increasingly fierce and unrelenting. More than half of credit union executives and 50% of bank executives said their top concern for 2019 is to grow deposits. Last year and in 2017, increasing deposits was not even on their radar.

“The level of competition on deposit rates and lack of growth will be a challenge to grow,” John Dwyer, president/CEO of the $1.2 billion New England Federal Credit Union in Williston, Vt., said.

Greg Gibson, CFO for the $2.4 billon Georgia’s Own Credit Union in Atlanta, Ga., also said he is concerned about the increase in competition for deposits driving costs up and the increasing competition in many lending sectors indicated by the underpricing of credit risk.

“Liquidity will become more challenging as rates continue to rise and savers increasingly seek higher yields, moving to money market funds and high yield savings accounts,” David Mooney, president/CEO of the $10.9 billion Alliant Credit Union in Chicago, Ill., said. “More banks and credit unions will introduce online high-yield offerings, increasing upward pressure on cost of funds. I’m also more concerned about household debt and the impact of a potential economic slowdown.”

Senior bank executives echoed similar concerns about deposits.

Mary Beth Sullivan, managing partner of management consulting firm Capital Performance Group in Washington, D.C., sounded the alarm in June 2017 that bank clients with assets of $10 billion or less were beginning to experience low to negative growth in core deposit balances and were turning to CD specials to help fund loan growth.

The largest banks – JPMorgan Chase, Bank of America, Wells Fargo and Citigroup – saw a combined 5% drop in domestic deposits that earn no interest at the end of last year’s third quarter compared with a year ago. In the 12 months preceding June 30, customers withdrew more than $30 billion from U.S. bank accounts that do not earn interest, which marked the first annual decline in more than a decade, according to FDIC data.

Core deposits are taking center stage as a critical strategic challenge for many financial institutions and growing core deposits will not be easy, according to Capital Performance Group.

“Most institutions will feel the need for core funding at exactly the same time, resulting in a rather rapid increase in rates and a ramp up of marketing and sales activities,” CPG wrote in a blog post last month. “Even for seasoned bankers, it’s been so long since the deposit growth ‘muscle’ has been exercised that it likely needs to be rehabilitated. Finally, consumers and media have changed considerably since the last cycle, so strategies that worked in the past are not necessarily going to be as effective this time around.”

This deposit challenge was triggered by deposit displacement, meaning the diversion or displacement of funds from traditional checking accounts to alternative accounts, according to Cornerstone Advisors research. More consumers, primarily older millennials (aged 30 to 38), Gen Xers, (39 to 54) and younger millennials (21 to 29), are depositing their money into health savings accounts, P2P payments tools like Venmo and Square Cash, savings tools such as Acorns and Stash, and robo-advisory tools like Betterment and Wealthfront.

“Bottom line: Checking accounts have become paycheck motels – temporary places for people’s money to stay before it moves on to bigger and better places,” the Cornerstone Advisors report stated. “[That’s] making the goal of growing deposits more difficult than it was in the past.”

Narmi, a New York City-based technology solutions provider, pointed out because of API-enabled core banking systems and less scrutiny from regulators over the fintech segment, deposit-taking financial technology firms are able to offer government-insured deposit accounts with their current products, creating even more competition for consumer deposits that credit unions and banks are also vying for.

Narmi was founded by former executives of the $15.3 million Georgetown University Alumni and Student Federal Credit Union in Washington, D.C., the largest student-run cooperative in the nation.

Although the transactional components of banking (depositing checks, checking balances and transferring funds) remain necessary, today’s consumers are searching for financial institutions that focus more on affecting their financial lives.

“For example, which financial partner can help the consumer save more, spend smarter and solve financial problems before they occur?” a Narmi blog post questioned. “We describe this as a shift from transactional banking to emotional banking.”

Narmi describes how Acorns enables consumers to invest and save money daily and automatically. If a consumer pays $3.87 for a Starbucks coffee, Acorns rounds the charge to $4 and invests the 13 cents in the stock market.

This money movement is not facilitated by the consumer, who is also not notified every time this happens, according to Narmi, which claims to empower consumers to save money without taking extra steps or even thinking about it. Other fintech firms such as Qapital also provide consumers with “round up” or “set it and forget it” rules, and other savings options that make it easy for their customers to save more of their money.

Ten years ago, before P2P payment apps and robo-advisors, credit unions and banks successfully attracted consumer deposits by offering high-interest checking accounts. But Shevlin noted he is not sure whether that strategy from the past will work with today’s consumers.

“The way to combat it is with some combination that’s going to be very different for every credit union,” Shevlin said. “Can you keep some of the deposits with a higher interest rate strategy? Can you keep some of it by offering a better P2P capability, maybe even through Venmo itself so that you can keep the money in the accounts? Can you offer a robo-advisor and partner with somebody like Sigfig to stem the tide of your members who might be going to somebody else? I don’t know that there’s a single answer here.”

To address the declining deposits problem, about 60% of credit unions and nearly 50% of banks said a fintech partnership, collaboration or investment is an important goal to achieve in 2019. Credit union and bank executives said they want to leverage a fintech partnership for digital account opening, lending and payments.

However, Cornerstone Advisor Partner Terence Roche said if credit unions and banks believe that digital account opening will be the driver of deposit growth, they are only partially correct.

“If their view of digital account opening is ‘opening’ and doesn’t include a hefty focus on digital marketing, contextual product offers, data-driven campaigns and a very tight, easy fulfillment process (i.e., the marketing tool is very tightly integrated with the fulfillment tool or they are one tool), then it won’t matter what investment they make. It won’t work,” Roche said.

Shevlin noted there seems to be a delusion among many credit unions that they can just take a few of their digital channel or IT people and tell them to go find fintech partnerships. “It’s not that easy,” he said.

Assuming the credit union has undergone a strategic planning process that identifies the critical issues of its strengths and weaknesses, marketplace opportunities and where it can bring value to consumers, executives need a rigorous vetting process to decide whether a fintech partnership or investment has the potential to produce positive results.

“You’ve got to look at who’s far enough along from a technology perspective to help you, or if they aren’t very far along, could you bring something to the table to help them get there? Shevlin explained.

Among many other aspects to consider, credit union executives need to understand how to negotiate a fintech partnership, know how the credit union and fintech will develop a potential product or service, and then scale and test it to determine a marketplace launch for consumers.

All of this due diligence requires credit unions to hire individuals who have the right skill sets to identify partnership priorities, evaluate potential partners and negotiate terms of an agreement.