Are Your Core Deposits at Risk?

Are Your Core Deposits at Risk?

Competitive forces are putting pressure on core deposits at US community banks. In fact, nearly 85% of respondents to CSBS’ 2020 National Survey of Community Banks said market competition was either an important or very important factor as an impediment to attracting and retaining core deposits. The definition of core deposits varies by institution, but the Federal Deposit Insurance Corporation (FDIC) refers to the concept as “the sum of demand deposits, all NOW and ATS accounts, MMDAs, other savings deposits and time deposits under $250,000, minus all brokered deposits under $250,000.” Essentially, this is a measure of stable funding at the bank, namely from deposits that customers have placed directly into checking and savings accounts, making it of extreme importance to resiliency, especially in times of trouble. These days, those streams are being threatened not only by other banking institutions, but also by fintech players leveraging digital channels to eliminate geographic boundaries and win over consumers and their deposits.

Neobanks have acquired millions of users by this point, many of whom are starting to turn to these upstarts as their primary financial provider. That’s because challengers like Chime are wooing consumers with perks like early access to paychecks when they set up direct deposit, and they’ve made waves by giving customers early access to stimulus checks issued by the government. What these fintechs are really good at is understanding and anticipating customer needs, and then providing the right services to serve them. For example, Chime, which typically targets lower income consumers, offers a round up feature that allows users to save spare change automatically. And it offers real-time notifications of all of these transactions within its app. Its peer, Current, meanwhile, shows users their spending balance with every transaction notification. Some of their moves — like early access to funds — are big, while others — like real-time notifications — are small, but together all of these touches create a sticky experience for the consumer that brings them closer to the brand.

Of particular concern when it comes to community banks is that, while they acknowledge these competitive threats, many became less worried about core deposit growth in the last year, as business conditions became a bigger concern in the pandemic era. According to CSBS, funding, represented by “cost of funds” and “core deposit growth,” was identified as the single greatest challenge by just 11% of respondents, compared with 33% in 2019. Meanwhile, 34% cited business conditions as their biggest challenge, by far more than any other category. This is understandable, for sure, but it doesn’t mean the competitive landscape has improved, and market pressures are likely to roar back into focus as overall business conditions stabilize. That means that banks should be thinking about how they can make their deposits stickier today. It comes back to the customer — who are you trying to serve, what do they want, and how can you deliver? Competitive forces don’t look the way they used to; it’s time for banks to stop playing defense and start thinking outside the box.

Leaders in Bank Consulting