It could be said the ebb and flow of core deposit growth in banks is influenced more by external factors than by internal factors. For example, a down stock market typically triggers a flight to safety from riskier investments to FDIC-backed accounts, which in turn translates to core deposit growth as investors become more willing to give up any designs on investment return in exchange for eliminating risk. Conversely, when the markets do well and as the Wall Street machine bombard us with headlines touting astronomical stock returns day after day, our fear of missing out gets the better of us and the concept of taking on more risk for higher return suddenly becomes more palatable, resulting in core deposit outflow. Finally, to cite a more extreme example in recent history, the financial crisis ten years ago triggered many runs on banks not seen since the savings and loan crisis in the 1980s.
When banks do try to directly influence core deposit growth, one arrow in their quiver they often select is to compete on price. Let’s say a bank decides it needs to attract core deposits to shore up its balance sheet, and so the bank comes up with a tantalizing tiered teaser rate for a special money market promotion. The bank then takes a full-page spread out in all the local newspapers advertising their promotional rate, and all the branches get new marketing collateral prominently displaying the highest tiered APY. The branch bankers then participate in a core deposit growth sprint to see which branch can attract the most net new dollars, with the winning branch earning bragging rights and a pizza party.
As you might guess, the pitfall of competing on price is often times you end up predominantly attracting price sensitive rate shoppers, and so you must keep running on that attractive APY treadmill indefinitely, because the moment you’re no longer the best deal in town, the mass exodus will begin as funds flow to the bank down the street that took your interest rate crown.
To further complicate matters, we’re now in a rising rate environment. Most banks have many fixed rate loans on their balance sheets all saddled with some of the lowest interest rates in modern history. As rates rise, that puts a squeeze on the bank’s net interest margin (NIM) as savings and money market rates slowly tick upward simply so banks can preserve their loan to deposit ratios.
How then, can a bank attract substantial low-cost core deposits that aren’t as susceptible to changes in external market factors? One very effective way is for banks to insert themselves into the cash management process of the millions of businesses and municipalities in the US, and the cash management product that exclusively focuses on converting accounts receivable to cash (read: core deposit inflow) is offering lockbox to your corporate and government banking customers.
Even better, lockbox activities are often times the linchpin of the banking relationship, and beyond the funds directly generated by the lockbox also comes the ancillary larger share of wallet which cash management customers tend to bring over to consolidate their banking relationship for simplicity’s sake.
Offering lockbox has never been more important to a bank’s strategy in attracting low cost core deposits. Give Lighthouse Payment Services a call to see how easy it is to introduce a cutting-edge lockbox service to your cash management program.