The Battle for Deposits: Firepower Through Data and Digital
Though it hasn’t gotten to the point of bankers begging kids to crack open their piggy banks, the battle for deposits is in full swing—and indeed, some banks have come out swinging. CEO Joe DePaolo of New York-based Signature Bank has gone so far as to call it “a steel-cage match … as tough as it’s ever been.”
The good news is that for now, a fickle Fed has left interest rates stable. Yet that hardly changes this fact: Banks that lose out on deposits will be forced to borrow them, a move that increases costs and drives down profitability. Adding to the trials, banks and credit unions face more competitors today than ever, with alternative lenders such as Kabbage and OnDeck grappling for market share.
But as is so often the case in financial services, an acute challenge viewed from a slightly different angle reveals opportunities. Deposit assets fund loans—that much is certain—but each financial institution needs to ask itself a related question: how well is the loan machine working in tandem with the portfolio? For many, the answer will prove disquieting.
Answers in Analytics
One peek under the hood could well expose multiple, disjointed systems for loan origination and portfolio management: the equivalent of isolated engines powering each wheel. This limits the ability to compete effectively with the largest institutions and maximize profitability all the way down to the account level.
Fortunately, analytics can go a long way towards meeting these challenges. Strategizing around revenue growth should begin with the elimination of disparate spreadsheets to house data in favor of a single, centralized repository. With all metrics in one location, banks and credit unions can maximize profitability based on data—not guesswork—and probe deeper into other questions that get to the heart of thriving, rather than simply surviving: What are our risks? What areas are most profitable?
Easier access to data builds the foundation for a first-rate strategic plan. Turning that data into insight, then action, is a neater trick for the digital age than spinning straw into gold.
Profit, Risk and Loss: No Longer Lost
Banks and credit unions feel a dire need to supercharge profitability as they super-shrink risk and loss. While that sounds like a fine idea, most available solutions today focus on one or the other. That forces financial institutions to make tough choices as to where to focus their investments and resources. But data analytics will help banks rise to the two-sided task.
Let’s return to the above question: What areas are most profitable? Studying the data can help banks discover the spending patterns of the customers; identify the main channels they use to transact; create sharper customer segments and profiles; and determine which products to cross-sell to which people. That last category stands out as especially important, for while cross-selling took a beating in the wake of recent Wells Fargo scandals, it works to the benefit of banks and customers alike when the right products are pitched to the right people at the right time. Here, the data tells the story.
A CFO with access to relationship data who analyzes loan-to-deposit ratio might uncover underutilized deposits. Knowing this represents revenue left on the table for the institution. The CFO can deliver these insights to the finance team to analyze “what if” scenarios and ultimately determine the best outcome for these funds.
In terms of risk, there can no longer be any doubt that data analytics gives a big boost to fraud management and prevention, risk assessment, compliance and reporting.
Seizing on all this demands a paradigm shift that considers the entire financial picture that only the data can paint in detail. Focusing on cross-selling in general or risk as an overarching category fails to capitalize on the priceless resource financial institutions already have—and that will only grow exponentially. By at least one projection, the amount of data generated each second will grow 700 percent by 2020.
What Next? From Wrestling to Resetting
Banks and credit unions that play it smart on the deposit turf do not need to tone down their competitive instincts. In an arena where everyone fights for the same thing, it’s high time to enlist strategies no one else can steal, because they rely on the treasures in your own digital vault.
When you consider the other options, the way forward becomes clear. Relying on sheer gut instinct? If you’re lucky, your gut instinct will tell you that’s a bad idea. It is difficult to predict the movements of the Fed without reviewing data at the financial institution’s fingertips.
Or, you could choose to join the battle for deposits by climbing into the steel cage. However, why join the crowd – especially when you can use the data you already have to think outside the cage.
Posted on Friday, June 14, 2019 at 10:15 AM
by Baker Hill