Publications & Resources

September/October 2010
Deposits & Liquidity

 

The Landscape of Core Deposit Gathering Is Changing

By Rich Weissman

Deposit gather has become more complex. The consumer is purchasing products in different ways than traditionally thought, and this trend will affect the landscape for core deposit gathering at community banks.

Traditionally, consumer deposit gathering and the mix of deposits were fairly limited, constant, and predictable. The options available for the consumer focused on no interest checking, low rate fixed savings, and high interest time deposits. However, consumers have turned more towards interest checking, money market deposits, investments in mutual funds, equities/bonds/etc., and are more comfortable with a mix of after/pre-tax deposits through a variety of retirement products. Today, we estimate national penetration rates (on a total household basis) as follows:

Product  Penetration Rate
No Interest Checking 55%
Interest Checking 45%
Low Rate Fixed Savings 74%
Money Market Deposits 24% 
Time Deposits   22%
Mutual Funds 14% 
Equities/Bonds/Treasuries/
Annuities/Other Investments		 44%   

(all of the above exclude 401k's)       

It is remarkable that interest checking is getting close in penetration to no interest checking, and that money market deposits penetration exceeds that for time deposits. And, interest checking and money market deposits have been growing at the fastest rate and typically stay on the books for longer periods of time. The life of an interest checking product is longer than a no interest checking product; the life of a money market deposits product is longer than the life of a time deposit (when including all of the roll-overs). It may seem counter-intuitive, but liquid products are stickier. If consumers were simply looking for the “highest rate” then these trends wouldn’t be there. Instead, the consumer is no longer saying, “I’ll keep my no interest checking deposits low and keep the rest in the product with the highest APR, and if it means tying up my money, so be it.”  Instead, they want interest paid on their deposits, but are not willing to give up liquidity for the maximum return. This is not a recent phenomenon, but has been a trend for well over 10 years, and we project it will continue going forward. High absolute deposit rates and high product longevity are no longer necessarily correlated, adding a wrinkly to the typical ALM approach. 

And, consumers now have a broader mix of deposits/investments with an ability to move money around as the interest rate environment changes, and as the stock market fluctuates. With market certainty, consumers are more comfortable shifting funds into the market. When the market appears more uncertain, then they quickly retreat back into insured products.  This makes it more challenging for banks to plan deposits over long periods of time, because they are increasingly more linked to how the DOW, NASDAQ, and S&P are performing.    

Add to this another new critical factor. Younger markets are more focused on issues of “control” vs. issues of “maximum return.” Our research shows that GenX and GenY focus more on liquidity as a control factor (even if they intend to keep the deposits on the books for long periods of time) and less on other factors, such as rate or “free” offers. For them, the ability to be in control is a benefit that often outweighs the traditional approach of hot money shopping for the highest time deposit rate. They gravitate away from the “free” no interest checking offers (and they are wary of and desensitized from anything called “free” – they know nothing is “free and there must be “gotcha’s”) and away from products with terms, preferring acceptable rates with maximum control, with the safety that can be found in bank insured products.  

Right now, the financial services industry is awash with consumer deposits, as consumer fears have created a significant flight to safety. This can change quickly when the market shows improvement and consumer confidence grows. Consumers can be fickle with their deposits/investments, and they move them when the economic environment changes. 

How should community banks plan for deposit growth? Here are some ideas:

  • Understand the cyclical nature of deposit gathering. Current deposit growth may not continue at its current growth rate as the economy improves.

  • Re-assess the mindset. The absolute rate is not the key driver. Instead, target liquid products as drivers for growth. Bring down rates and focus on account access benefits.

  • Re-evaluate ALM strategies to ensure that they address the longevity of liquid products. Give these products “credit” for their stickiness.

  • Develop GenX and GenY products to target these markets where control is the dominant feature and account access through liquid vehicles is primary.These are the future depositors.

Rich Weissman is president & CEO of DMA Corporation. He can be reached at 503-597-0088 or rich.weissman@dmacorporation.com. 

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