By Ray Birch
BOSTON—It’s getting a “little nutty” in the financial services space now as institutions grapple for deposits, says one expert, who is offering suggestions for how CUs can most effectively secure funds to support lending.
“It's not just credit unions waging the war for deposits,” said David O’Connell, senior analyst at Aite Group. “I am working on research on this topic, and there is a frenzied fight on for deposits in the banking industry. It's making everybody little nutty now.”
The Big Driver
O’Connell pointed to a few reasons for the deposits battle, and none is bigger than the ease with which consumers can move their money locally and across the country.
“The situation today, as rates started to rise following years of little to no movement, is that the number of banking relationships consumers have is dramatically higher than before,” explained O’Connell. “Seven to eight years ago everyone had one or two banking relationships.”
He reminded the change has been driven by the Internet and now mobile banking, as consumers widen their net to include many more financial institutions across the country.
“As a result, consumers have dispersed their deposits across many financial institutions. And the implications for each FI is they are experiencing deposit leakage—in other words they’re getting less from each consumer.”
Margin Pressures
O’Connell emphasized the increased competition is lowering margins as banks and credit unions have to pay up to attract new money, but loan rates are not moving up accordingly.
“Too many institutions and too much capital are chasing too few loans,” he said. “When that happens the spread you earn on your loans goes down.”
What successful financial institutions are doing now—not only to win the war for deposits but to boost overall—said O’Connell, is emphasizing cross-sales much more aggressively.
“They are really creating a strong cross-sales culture within the institution, and trying to make sure every borrower has not only a lending relationship in place but also a deposit relationship, and vice versa,” he explained. “They are becoming the uber-banker for the customer, thinking out every need that the customer has and trying to cross sell every possible product. They see lending now as the tip of the spear and are cross selling things such as wealth management services.”
What’s Necessary
Staff is critical, he said.
“To cross sell effectively you need highly educated staff so they can participate in as much of the sales cycle as possible,” said O’Connell. “They need to be highly educated on all your products.”
And they have to pe paid well, he added.
“You educate them and you pay them,” O’Connell said. “They have to be motivated to sell not only the products they know well but all lines. Properly aligned and attractive incentives are the key. A banker can be sitting there and be really concerned about getting a loan to close or a CD sold, but then the next thing he wants to do is read the new comp plan. The financial institutions that figure this out are going to be the ones who win in this fight for deposits.”