A Fragmented Deposit Market is Leaving Some Banks Behind – Why SVB May Be the Canary in the Coal Mine

With the news of the Silicon Valley Bank (SVB) failure, a lot of people are wondering about the safety of our financial institutions. But the reality is, banks fail surprisingly often. The difference with SVB is that its sudden demise impacted a large number of known brands, start-ups, and venture capital firms who all had complete confidence in their financial partner. And there’s concern that “herd mentality” could cause other companies to start pulling deposits back from other financial institutions as well, creating a financial domino effect.

So, should we be concerned? Yes and no.  

The reason banks fund the Federal Deposit Insurance Corporation (FDIC) is to protect against situations exactly like SVB. Over the weekend, we learned that depositors should all recoup their deposits starting today, without requiring a tax-funded bailout from Americans. So, in the short term, this will (hopefully) be a blip on the financial radar and a major inconvenience to those companies impacted, but it’s not going to sink the whole economy.  

But, what about the long term? Are banks healthy?  

That’s a more complicated question. Over the past 10 years, many more non-traditional financial institutions have emerged. We’ve got companies like Robinhood and Acorn, mobile banks like SOFI, Chime, and GO2Bank, and even cryptocurrency. Deposits are being fragmented, and fewer are going to traditional financial institutions.  

Because of this, traditional banks and credit unions have been experiencing deposit losses, and the consequences are starting to show. This market fragmentation wasn’t as much of a concern when banks were full of stimulus checks and PPP money. But these funds have subsided, and rising interest rates have created a slowdown in revenue streams for banks, creating an unusual period of stagnated growth.  

SVB and others like Signature may be the canaries in the coal mine – the first hard sign that banks and credit unions need a differentiated deposit strategy, and they need to put it into action now. Read on to learn about strategies to keep deposits flowing and confidence high.  

Short-Term Deposit Strategies

Improve engagement to retain and expand

1. Onboarding campaigns: Encourage product engagement and activation, such as active debit cards, online/mobile banking downloads, logins, and bill pay usage. Reboard inactive customers/members by following the same process.

2. Create rewards checking accounts: For customers and members meeting specific criteria, reward them with higher-than-normal APR, cash back on debit purchases, or the ability to earn points for rewards. Measures can include a higher rate on balances up to a certain amount, requiring a minimum of debit card transactions per month, using local small businesses, going paperless or having direct deposit, or a minimum time in the account.  

3. Monitor households for declines in deposit balances: Reach out to accounts that experienced balance drops of $25,000 or higher with special offers. These drops may consist of multiple transactions, so look at the aggregate over time. Use this same data to determine the destination of the funds. Funds may be used for large purchases, such as a down payment for a house. But other times, it could indicate that the account holder is moving to a new depository institution, investment application, or broker. Proactively reach out with an enticing offer, such as deposit products or wealth management, to help win back dollars.

4. Develop a list of triggers to monitor for deposit attrition signals: Key indicators could include a decline in deposit balances, closing of deposit accounts, change of address, dropping direct deposit, reduced activity in bill pay, inactive debit cards, or debit cards with no action. Contact those accountholders with special offers. Thanks to technology, branch proximity is less important now, so educating the customer on the online tools and process for opening a loan can help retain customers who have relocated.

Offer rewards for positive behavior and improve financial health through personalized offers and education

1. Institute relationship pricing: Offer a higher interest rate on savings and money market accounts if the account holder has a minimum dollar amount stored in core deposits to strengthen relationships and recognize loyalty. This pricing strategy can include savings on fees or loan rates with certain deposit balances, activity, or direct deposits.  

2. Create a reverse-tier savings account for low-income depositors: This account should offer a higher rate on deposits up to a maximum of a specific dollar amount, then drop to a rate on all remaining balances. Analysis needs to occur to develop rate and balance thresholds. Reverse-tier savings accounts help consumers save more but also help foster good saving habits and provide emergency cash. Some institutions leverage round-up functionality to fund these accounts. If using round-up functionality, the rate must be high enough for the consumer to want to leave the balance.

3. Expand the number of tiers on your high-rate savings or money market accounts: Most banks and credit unions do not offer multiple rate tiers. Adding tiers will reward customers or members as they increase balances. This can be counterintuitive, considering the recommendation above. Recommendation #2 is for low-income depositors, and this recommendation is designed for high-income depositors.

4. Financial education: Consumers are more confused than ever. Based on their behavioral data, share your expertise in a targeted and personalized way. For example, pull relevant content in a newsletter specific to individuals covering topics like:  

• Liquidity: Explain how your institution can help those in financial need and how different financial vehicles are better leveraged at different times. For example, when to use a HELOC versus cash. Show how difficult it can be to remove money from alternative or all-digital accounts like Robinhood and SOFI.
• Compounding: Help explain how compounding works. Show how much interest they are earning with your account versus accounts elsewhere.
• Secondary account holders: You are not allowed to market to beneficiaries of accounts, but nurturing secondaries on large dollar depositors can be crucial in attempting to stem the transfer of wealth. Educate them on your most attractive investment products and their features.  

Long-Term Deposit Strategies

Nurture existing accounts to build a long-term pipeline

1. Show appreciation: Have executives reach out to top depositors to thank them for their business and reassure them of the institution’s strength. This can be done via email, telephone, or even personalized video through a tool like Bombbomb. Remind them that the FDIC and NCUA insure their funds up to specific amounts.

2. Provide a renewal incentive: Actively manage the CD renewal process by offering rate specials to more active accountholders with a robust relationship with the institution. Communicate well in advance and provide relationship-based incentives.

3. Offer a certificate of deposit (CD) incentive: Allow one opportunity to increase the rate before maturity. This provides an incentive for account holders to make a longer-term commitment knowing that if rates rise, they benefit from the increase. This also limits the rate increase and risk to your institution.

4. Financial education: Explain what CD means and how they work. Explain possible fine print with other products.

5. Offer no-penalty CDs: Appeal to accountholders concerned about locking in funds for a longer maturity to get a higher return. Removing the early withdrawal penalty after a set period provides peace of mind if funds are needed sooner than expected.

6. Data-assisted CD campaigns: Market to traditionalist consumers who do not bank with your institution. Leverage introductory rates and education to show how the rate increase more than justifies the early withdrawal penalty. Then leverage the land and expand the model to cross-sale relationship-priced offerings as part of the CD onboarding process.

SVB is just one example of the impact that a fragmented deposit market is having on traditional banks and credit unions. Now, more than ever, large financial institutions must fight for their share of customers and members. But fight with knowledge, data, personalization, education, and relationships built on trust and value.  

Complacency will only lead to further erosion of loyalty and deposits, leaving a literal wealth of opportunities for smaller, more nimble fintechs to scoop up.

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