How Lenders Can Grow and Protect Their Deposits in a Competitive Market

The pressure on financial institutions to grow and protect deposits has been a major topic of interest for the past couple of years, and it shows no signs of slowing down. In a recent episode of the Equifax Market Pulse podcast, I sat down with Ian Wright, Chief Strategy Officer at Equifax, to discuss how banks, credit unions, and other lenders can effectively grow and protect their deposits. With rising consumer debt, competition from non-traditional banking players, and the ever-present fluctuations in interest rates, understanding the nuances of deposit strategies is essential.

Why Deposit Growth and Protection are Crucial

Deposit growth is not just a financial health metric for banks; it's fundamental to their stability and ability to lend.

"There is still pressure on banks and credit unions to ensure that their deposit-to-loan ratio is sound and within regulatory limits," Wright says. This balance is critical, especially in times of economic uncertainty, as institutions need deposits to continue issuing loans at sustainable levels.

However, the competition for these deposits has increased sharply, both from traditional players and new market entrants like fintech apps and neobanks. Wright points out that the playing field has changed.

"Today, it's a different world. There are neobanks out in the market that don't have any brick-and-mortar [branches]." These digital-first competitors often appeal to younger consumers, creating a new set of challenges for traditional banks.

Key Strategies for Growing and Protecting Deposits

According to Wright, institutions can use several strategies to bolster their deposit growth while safeguarding their existing accounts, such as:

1. Leverage Existing Depositor Relationships

   Wright recommends that banks start by deepening their existing relationships.

   "The first and most beneficial step a bank can take is [to] look at their existing deposit base," he explains.

   Financial institutions should identify customers who already have some assets with the bank but may also hold significant deposits elsewhere. By offering competitive rates or incentives, banks can encourage these customers to consolidate their deposits, which reduces acquisition costs and leverages their existing loyalty.

   "Why not take advantage of the affinity I have for you and the lower acquisition costs to give me a higher promotional rate to bring some of that money over?" says Wright.

2. Target Non-Deposit Account Holders

   Another strategy is to look at clients who have non-deposit accounts, such as credit cards or loans, with the institution. These customers already have a level of trust with the bank, making them likely candidates for deposit accounts.

   "You can conduct similar campaigns and promotional activities to capture those households" and encourage them to open deposit accounts with the institution, Wright says.

3. Identify High-Potential Market Segments

   Banks can also use data to focus on high-value prospects in their markets. Wright explains that Equifax's data-driven insights can help banks pinpoint potential customers who are likely to be a good fit based on their existing customer base.

   "Either through segmentation or modeling, understand who your best customers are," he advises, so that institutions can focus their efforts on the right segments rather than casting too wide a net. Additionally, "protect your best customers" by treating them well and providing incentives, he adds, as competition is intense, and these clients are attractive targets for other institutions as well.

4. Adapt to Changing Customer Preferences and Technology

   The competition is not only from traditional institutions but also from digital-first fintech apps. These companies often attract younger consumers with mobile-first solutions and tools tailored to specific financial needs. Therefore, traditional banks need to adapt.

   "You have to open up your definition of who's your competition to start looking at these new entrants," he said.

   For younger consumers, who are more comfortable with digital solutions, this competition is particularly challenging, as fintech apps build brand loyalty early on. This shift emphasizes the importance of banks offering convenient digital experiences and connecting with young people where they are-often on social media.

Emerging Consumer Segments: Young Affluents and HENRYs

Wright also points to specific consumer segments that financial institutions should consider targeting: young affluents and HENRYs (High Earners Not Rich Yet). These groups represent a valuable opportunity because they not only can increase deposits today but also offer potential for long-term relationships.

Young affluents are members of Generation Z (under 27 years old) with notable wealth for their age, while HENRYs are high-earning individuals who are expected to grow their wealth in the coming years.

"They present the opportunity to have a high customer lifetime value," says Wright, adding that building a relationship now can ensure banks have these customers' loyalty in the future.

Wright stresses that while "young affluents" are relatively few in number, targeting these clients can pay off significantly in the long run.

Looking Forward: A Changing Interest Rate Environment

Another critical element is the shifting interest rate landscape. During the episode, Wright discusses how rate fluctuations affect deposit growth and customer behavior. As rates rise, many customers move their deposits to institutions offering the highest returns. However, as rates begin to fall, banks will need to adapt their strategies to retain these deposits.

"We're entering an environment where we anticipate rates to be going down," Wright notes. This change could lead to further movement in deposits, as consumers look for institutions offering competitive rates. The challenge for banks is to retain these customers without compromising their margins.

A Long-Term Focus on Deposit Strategies

While the intense focus on deposits may eventually ease, Wright believes the overall priority on deposits will remain.

"Even once rates go down, I still see there will be demand for banks to try to capture higher levels of deposits," he concludes.

Growing and protecting deposits is an ongoing priority for financial institutions, and the strategies discussed here can serve as a roadmap for navigating today's competitive landscape.

In this era of heightened competition and rapidly shifting consumer expectations, financial institutions must stay proactive, using data-driven insights to retain and grow deposits. Wright's insights provide a clear framework for doing so-focusing on existing customers, targeting high-value prospects, adapting to new competition, and understanding the dynamics of key consumer segments. By implementing these strategies, banks and credit unions can stay competitive and meet their goals for deposit growth in the years to come.

Learn more about the IXI Network, and explore additional Wealth Trends. Get even more in-depth insights around growing deposits in our eBook.

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*The opinions, estimates, and forecasts presented herein are for general information use only. This material is based upon information that we consider to be reliable, but we do not represent that it is accurate or complete. No person should consider distribution of this material as making any representation or warranty with respect to such material and should not rely upon it as such. Equifax does not assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. Such information and opinions are subject to change without notice. The opinions, estimates, forecasts, and other views published herein represent the views of the presenters as of the date indicated and do not necessarily represent the views of Equifax or its management.

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