Overcoming the allure of ‘hot money’

Gain more insights into growing deposits and pulling in customers for the long haul in our Executive Report: Strategies for customer growth, deposits and retention   

“There’s no silver bullet to attracting deposits,” says Isio Nelson, managing director, research, at BAI. But a couple of factors are critical: fees—preferably none—and rates—preferably high.  

Citing BAI research, Nelson says fees and rates strongly influence a consumer’s decision on where to open a deposit account. “Fees and rates will always play a factor across segments. But that just means you need to be in the ballpark before different services and incentives become important to different segments.” 

Factors beyond fees and rates include 24/7 customer service, easy access to deposits, better mobile/digital capabilities, cash-back rewards, a convenient branch network, stellar fraud protection and an institution’s reputation. Financial services organizations not only need to attract deposits but to retain them.  

“Bankers have to consider share-of-wallet with existing customers versus trying to attract new deposits,” Nelson says. “Banks that know more about what drives existing customer behaviors have a better shot of getting them to increase their allocation.” Deposits are the lifeblood of a bank. “Low-cost deposits are important for net low-cost margin—the difference between what you pay to have funding versus what you charge for loans,” Nelson explains. “The bigger the spread, the more the bank makes— and that’s how banks are graded by investors and shareholders.  

Banks need to have enough low-cost deposits on hand to satisfy the demands of lending that generates revenues.” Unfortunately for bankers, checking and savings accounts offering yields of only a fraction of a percentage aren’t attracting much attention from depositors amid the current inflationary environment.  

It’s the high-yielding deposits—the so-called hot money— that entice consumers. According to the BAI Banking Strategies Executive Report: 2024 banking outlook, the No. 1 business challenge for bankers will be growing their deposits. It’s hardly a surprise that bankers say their top priority in 2024 is deposit growth after more than a year of deposit outflows as bank customers sought higher yields. Others drew down their checking or savings accounts in response to inflationary pressures. 

Michael Powers, president and CEO of Garden Savings Federal Credit Union, Parsippany, N.J., says, “My friends in the industry are all struggling with deposit retention and acquisition right now. You can get deposits if you want to pay crazy rates. But to pay that much is not the best thing for your balance sheet, especially over the long term.” 

The $425-million asset credit union with four branches in central and northern New Jersey is paying over 4% on its high-yield savings account, according to Powers. But it’s apparently not enough to dissuade a few members from moving their savings to an institution in a neighboring state offering a nearly 6% rate of return for two-year CDs, Powers says. “That’s a rate that I’m not willing to compete with at this point because that’s a long-term rate that we’re going to be on the hook for, for years. That’s not the best thing for our balance sheet. … It doesn’t always make sense to match or beat every rate out there.”  

Before being named head of Garden Savings in January 2023, Powers spent 20 years as a marketer for credit unions. In more normal times, he says an ad highlighting a credit union’s extraordinary customer service was often enough to catch the eye of a prospective member. But the pitch to prospects these days emphasizes rates. “It’s when you have to compete on rate that it gets challenging,” Powers adds. But the rate climate may soon be returning to normal, he believes. “The high-rate environment is definitely at its peak right now.”  

BAI’s Nelson essentially concurs: “Checking [account] deposits decline will continue,” he says. “Increased spending, inflation and reallocation of low-yield deposits to higher-yield deposits will also continue. But as we get to mid-year, conditions begin to normalize. We will see deposits go from negative to positive.”  

Amid these inflationary times, Discover Bank, a unit of Discover Financial Services, the $143.4 billion-asset credit card and banking giant based in suburban Chicago, has seen a strong inflow of deposits, including many from customers of brick-and-mortar financial services organizations seeking higher yields.  

Ram Subramanian, Discover’s vice president and chief marketing officer for deposits of the online bank, says, “We don’t have any brick-and-mortar locations, so we pass on those savings in the form of high-yield products like savings accounts, money-market accounts and CDs to our customers.” Depositors are attracted to Discover Bank, Subramanian says, because of its savings account that is more than five times the national savings average and no monthly fees. “Typically, customers look for banks that charge no fees, so that certainly is a strong value proposition as people look at Discover Bank. There is nothing more frustrating than having to spend your hard-earned dollars on fees.”  

In January, Discover’s online savings account’s annual percentage yield was 4.35%. But will Discover’s recent rush of deposits melt away if and when interest rates begin to recede? Subramanian doesn’t think so. “We will continue to retain and deepen the relationships with our customers regardless of the interest rate environment,” he says.  

“Yes, we have an unusual, high-rate environment right now. But the interest-rate cycle is not something unknown to us.” In addition to its competitive rates, Discover Bank will retain its new-found depositors, he says, for several reasons: 24/7 U.S.-based customer service, cash-back debit products, a convenient app, easy access for depositors to their money and other features. Reputation matters to most depositors or prospective depositors, and Discover benefits from a strong, recognizable brand. 

Positive third-party ratings, such as J.D. Powers citing Discover as having the best overall savings account for direct banks or NerdWallet naming Discover the top online bank, carry enormous weight with consumers, he adds.  

Bill McKenna, a former bank chief marketing officer who now heads his own organization called the McKenna Marketing Network in Allentown, Pa., says banks and credit unions must build customer loyalty. Otherwise, they’re chasing the next shiny object. “I always tell my clients that when someone jumps to another institution for a couple of basis points, it proves to me that they are not loyal to your organization,” McKenna says. “When people are chasing deposits with high rates, hot money will always hurt core deposits, and that’s a huge problem.” But, he says, “When you build a brand that really resonates with your customers or members, you’re more likely to not lose those customers for a basis point or two.”  

Tactical steps that banks and credit unions can take to attract and retain depositors include:  

» Value-based content marketing. “Anytime someone is making a switch for a CD or any investment service, you have to assume they are looking for a higher return,” McKenna says. An article that provides a consumer insight on how best to deposit money in a CD will be valuable.  

» Train branch staff to recognize opportunities. “For front-end people to be consultative, they need to be trained to listen for triggers to open a conversation that could lead to a deposit or new product.”  

» Streamline the online account-opening process. McKenna says a bank that offers a great rate on a deposit product must make the onboarding process seamless to seal the deal. But too often the system is “clunky and slow. And no one likes that, especially younger people.” 

Edmund Lawler is a contributing writer for BAI.