U.S. banking industry deposits, which stood at $19.4 trillion one year ago, are expected to decline by $1.6 trillion in 2023 and another $1.4 trillion in 2024.
Remember all those stimulus dollars? All those PPP funds? “That’s all leaving,” said Jim Lutter, chief funding officer and head of training of PMA Funding, which provides deposit capacity for community banks via political subdivision (municipal) funds. “It’s tightened on the government side. It’s impacted by solid loan growth as corporations use funds for their products. And, on the retail side, it’s evaporating because of inflation.”
Banks with strong core deposit franchises will be less vulnerable to liquidity challenges, predicts credit rating agency Fitch. For others, the shifting winds will refocus community bankers on alternative funding strategies, e.g. wholesale funding, in addition to new products and tried-and-true strategies to support organic growth.
It’s also time for bankers to look at their book of uninsured deposits, because FDIC Chair Martin Gruenberg promised that regulators would be paying closer attention, too.
Does all of this mean community banks’ cost of funds is headed north? You bet! But if you believe Neil Stanley, who argued in the September edition of BankBeat that the rising cost of funds does not correlate to lower return on assets, you might take this most recent funding challenge in stride.
Wholesale funding and reciprocal networks
When the FDIC took control of Silicon Valley Bank on Friday, March 10, and word got out that more than 93 percent of SVB’s deposits were uninsured, Luanne Cundiff, president and CEO of First State Bank of St. Charles, Mo., convened a management meeting to discuss FSB’s book of uninsured deposits.
Not all of First State Bank’s commercial customers had concerned themselves with deposit insurance prior to last winter’s trio of failures. But the time to discuss the risks had come. “We were proactive,” Cundiff said. “We conducted outreach to those customers and talked about their options,” which included the reciprocal deposit network offered by IntraFi.
She wasn’t the only banker initiating such conversations.
“Some [customers] said ‘We’re good,’” Cundiff recounted. “Others opted into IntraFi’s ICS products thinking it was a good idea.”
Reciprocal deposits are designed to allow depositors to retain access to the better customer service they get by working with a community banker and still be assured their funds are as safe as they might be at a too-big-to-fail bank. That’s a value proposition that allows community banks to both hold and attract large deposits. And in the wake of SVB, the auditors of large companies had started to raise eyebrows when they found the bulk of a company’s deposits exceeded deposit insurance limits.
Uninsured deposits comprise the majority of domestic deposits for about 15 percent of banks between $1 billion and $50 billion in assets, according to the FDIC.
Reciprocal programs like those offered by IntraFi, R&T Deposit Solutions and others, act like a fire suppression system when panic prompts a company to consider splitting their deposits among multiple banks to stay within insurance limits, or move them to a systemically important institution.
And the idea that the government might pick winners and losers when banks get into trouble isn’t unreasonable. A week after the feds covered SVB’s uninsured deposits, Treasury Secretary Janet Yellen went on the record to say that not all deposits would be protected in future bank failures.
Worry over a run at the $550 million FSB was unfounded, Cundiff said. First State Bank had had a relationship in place with IntraFi for more than a dozen years, she said, referring to its products as an important “balance sheet management tool” critical to the success of her institution. And while not all customers availed themselves of the offering, “it’s there as a recommendation.”
Further, because the infrastructure was in place, FSB managers meeting in the wake of SVB’s implosion didn’t need to focus on choosing, vetting and implementing a new deposit tool. Instead, they could focus on talking to customers and being reassured of their confidence.
Of course it’s less expensive to hold uninsured deposits. But that may soon change. In a mid-August speech to the Brookings Institution, FDIC’s Gruenberg promised increased regulatory scrutiny for banks with a “certain threshold” of uninsured deposits. Gruenberg didn’t define the threshold, but he did say that SVB’s 90-plus percent of uninsured deposits was too high.
The three bank failures from earlier this year did shine a light on the topic of uninsured deposits and prompted conversations with bankers and their large-deposit customers.
Wholesale funding that is securitized, such as funds coming from governments and school districts, avoids the quandary of deposit insurance limits. When he was a guest on the Banking with Interest podcast last year, Chief Balance Sheet Strategist and head of Piper Sandler’s Financial Strategies Group Scott Hildenbrand advocated for wholesale funding to manage interest rate risk and grow earnings. “It should be in every bank’s playbook,” he said. “It also enables banks to determine which part of the curve to be on without bothering their customers.”
“Municipalities invest for safety, liquidity and yield,” said PMA’s Lutter. And, they’re limited in what they can invest in: Bank products. Therefore, community bankers, who are relationship-motivated and community-focused, are uniquely positioned to work with local officials to win large municipal deposits, provided they can pledge the necessary collateral, he explained.
PMA Funding acts as a money manager for political subdivisions, connecting public funds to community banks in- and out-of-market. That’s key, Lutter said, to prevent the sawtooth effect that occurs as tax revenues are spent down throughout a year. Municipal deposits are cyclical, said Lutter, but they’re “also predictable.”
The current dearth of deposits is also cyclical, Cundiff said. “That’s why we have these and other products in place, so we can act quickly on behalf of our customers when market forces change. If we had excess funds, we could sell them into the network. Now, it’s all about the reciprocal deposit products, which are great for our customers.”
Slow but steady growth wins?
There are plenty of depositors on the hunt for the best money market or CD rates. Some bankers don’t want to engage in rate wars. Maybe your team thinks rate shoppers aren’t worth your time, that they’ll disappear as soon as the introductory rates do. Could you consider that a rate-hunter might also be shopping for a new banking home? Do you not want nine or 15 months to earn their loyalty? While you mull that question, consider how that customer finds you in the first place: Local SEO.
Local SEO (Search Engine Optimization) refers to the practice of optimizing a bank’s online presence to improve its visibility and search engine rankings in local search results. It involves strategies and tactics aimed at helping the bank’s branch locations appear prominently when potential customers search for banking services or related keywords within a specific geographic area.
For banks, local SEO is essential because customers often conduct local searches to find nearby branches, ATMs or financial services. Google reports it processes more than 8.5 billion searches every day (Wordle being the top search); other research reveals that 88 percent of consumers shop online first before opening a checking account. “It’s about gaining visibility through organic means,” said Bailey Ronnebaum, business development manager at forbinfi, a bank marketing firm. “Organic means” is translated as “not paying” to turn up at the top of the search engine through Google Ads.
What’s critical for banks is to fill their websites with things that Google cares about, such as keywords. “If you aren’t putting content on your site with keywords, you are less likely to be seen,” Ronnebaum explained. “When I give advice on that, I mainly talk about looking at your site and looking at different pages where you talk about deposits (savings and checking accounts). Look at your page. Do you even have content on there?”
Some banks have very little content on their pages, meaning there’s nothing for Google to crawl. Maybe it’s a paragraph on each deposit product; maybe it’s a comparison chart, Ronnebaum said. Charts prevent you from having to build multiple pages for all deposit accounts.
“Start with a description of the product, then add keywords,” Ronnebaum advised. “If I am speaking about a specific checking account, that’s a keyword; use it in a paragraph; use it in a heading; use it in FAQs; if you have a blog, use it some more.”
The more frequently a bank uses its product keywords throughout its product pages, the more likely Google will see it and show it as a search result.
And while Google’s search engine is essentially the only game in town, processing roughly 93 percent of all searches, there are listing services that are key to mastering local outreach.
A tie-in to local SEO is map listings, sometimes called directory listings, which sometimes fall through the cracks with community banks, especially those with numerous locations. Apple Maps, Google Business, Bing and Yelp are the top four directory listings that banks need to claim, create and keep current, Ronnebaum advised. “It’s a lot of work. Maybe a bank misses a location. Maybe they don’t realize Apple Maps and Google Maps are different.”
Ronnebaum suggests banks treat their Google My Business listing like they would a social media site: Add posts, respond to reviews, even drop in some photos. And while Google won’t admit it gives preference to one business over another, “they like when you use their services,” Ronnebaum said. “That’s tied to local SEO, and your bank locations.”
Impact and affinity deposits
Soliciting commercial deposits to make an impact in low-income neighborhoods or with underserved communities is a strategy that has been deployed at a handful of U.S. community banks.
At St. Louis, Mo.-based Midwest BankCentre, Impact Banking is a fully-formed program that deploys a shared-risk model where depositors choose to accept a lower return in order to foster investments in under-served communities. “Impact banking is the natural next step in the ESG [environmental, social, governance] investing approach with the distinct advantage of being hyper local,” writes bank CEO Orvin Kimbrough in a position paper.
The program’s goal is to encourage large corporations to enter depository relationships with the bank to provide loans in underserved communities. The bank currently has 10 Impact Banking depositors, including individuals, corporations and nonprofits. One of them, BJC Healthcare, signed on earlier this year. BJC is the largest employer in St. Louis; Dr. Jason Purnell, vice president of community health improvement, said the partnership made sense because “building wealth is a health intervention.”
When it comes to retail deposits, the Top 20 banks have already secured 80 percent of the market. The challenge facing community bankers jockeying for their piece of what’s left is differentiating their banks from the regional or national brands, which have large budgets earmarked for digital innovation and the customer experience.
“When community bankers try to create affinity and engagement with customers, they find that it’s hard,” said Shawn Melamed, founder and CEO of Spiral, the fintech that emerged with the MVP award from ICBA’s 2023 ThinkTECH Accelerator.
Spiral, a tool that enables philanthropy at any level, is built for community banks to “showcase to the world their aggregate impact” using quantifiable measurements, Melamed said. “Where we help them is to attract and grow deposits … and we help them win through their community affinity or impact.”
There’s an emotional component when linking transaction to impact, Melamed explained, with the belief that the resultant feelings from participating in a positive social, economic or environmental act of philanthropy will cement the relationship with the local bank over, say, banking with Chase or BofA.
While Melamed admitted that Spiral was too new to offer churn statistics, he did say users of Spiral had 3.65 more transactions than non-users, placed three times more deposits in the community bank, and had a 30 percent higher digital engagement.
When community banks leverage cause-based marketing, they reduce the cost to acquire a new customer ($280/person, Melamed said) by 65 percent. And for deposit-hungry institutions looking to bank nonprofits, a tool that offers them a pipeline of donations is a great conversation starter. “Half of nonprofits bank at the largest banks,” the 45-year-old Melamed said. “They do nothing for them.”