Want to attract more deposits? Prioritize safety

Gathering and managing deposits is the bedrock of banking – and increasing interest rates is often the first “dial on the dashboard” that banks use to attract new customers, namely because it’s easy for bankers to explain and for clients to quantify the benefit. But just because it’s the easiest dial a bank can turn doesn’t always mean it’s the best.

Higher rates may attract more deposits, but they squeeze net interest margin.  In a climbing rate environment, turning rates up too quickly compared to lending rates, or for too long, could even make the bank less stable. That instability could result in fewer clients or worse.

That’s why banks (particularly smaller ones) would be well served to leverage another dial available to help attract deposits: safety.

‘Safety’ as a core value proposition

The bank failures in the first half of 2023 served as a strong reminder that bigger banks aren’t always safer. Early this year, select large banks announced softer earnings results despite paying some of the lowest interest rates on deposits in the country. It follows that smaller banks, which generally offer higher rates to offset the perception of less security, might be wise to rethink that strategy and lead with safety as a core value proposition.

Specifically, banks should consider talking to their clients about some of the safety-related investments they are making, such as:

Biometric authentication: A recent study found that the average internet user has 100 passwords, making it impractical to manage them according to the best practices for password management.  To address this vulnerability, banks are implementing biometric authentication methods such as fingerprints, facial and voice recognition to help prevent password hacks and protect depositor assets and personal information.

Artificial intelligence: It is well known that AI is being used to help banks detect fraud or criminal activity that can keep depositors’ assets protected from bad actors.  But increasingly AI can also help banks detect potential liquidity problems earlier.

Diversification of assets: Deposit administration technology is increasingly being used by banks and their clients to diversify deposits across many banks in a network.  Banks with too many deposits can use these solutions to better manage their own assets and liabilities by converting a liability into fee-generating income.

Clients can also use the technology to safely place deposits well above current FDIC limits. The technology diversifies deposits across a network of hundreds or thousands of banks in a way that protects funds and monitors for potential bank risk.

While this provides safety, an emerging use case is to use this technology to place deposits only into institutions that align with the corporate values of the depositor.  Solutions like this help level the playing field for large and small banks and can help overcome the perception that small banks are too risky.

Encryption: Banks are increasingly implementing systems that allow them to communicate and exchange documents with their clients through private, dedicated encryption methods. This not only helps protect sensitive information during transit, but also improves efficiency and lowers costs for both the bank and their client.

While these digital solutions deliver tremendous advantages to bank clients – including safety, convenience, lower costs and more flexibility – they also expose bank customers to various cybersecurity risks. Understanding and mitigating these risks will be key for bank leaders should they choose to make these investments.

A key differentiator

Technology-driven products like those mentioned above are available to both large and small banks.  Yet for smaller banks, who have historically struggled by being viewed as riskier, adopting them may create a significant competitive advantage.  For instance, it is often easier – and faster – for a smaller institution to implement bank-wide technology initiatives than it is for their larger counterparts. More importantly, it is usually easier for a smaller institution to implement the proper procedures and controls necessary to make such initiatives successful.

Encouraging banks to look for new and innovative ways to protect deposits will help them attract more clients.  While adjusting the interest rate “dial” will probably always have the benefit of attracting depositors, there are now additional factors that customers care about. And, with new technologies, banks can increasingly deliver those features.

Reid Thomas is Chief Strategy Officer at Ampersand.