“I don’t think there’s any more important topic at this time in our recovery in the economy and the state of community financial institution management,” said Dave Koch, managing director of Advisory Services at Abrigo on the topic of core deposits. “Deposits are a thing that we have coveted for a while and became quite easy. Now once again we’re back to the question of, where do I go to get more deposits? It’s a challenging and vexing business in a strong and growing economy.”

There are three, successful deposit management strategies that financial institutions can use to update the assumptions in their asset-liability models and to satisfy internal and/or regulatory requirements, according to Koch in a recent webinar, “Analyzing Core Deposits for Risk Management and Loan Growth.”  

Understand the makeup and behavior of your depositors. An institution should be able to look at the actions they have taken and determine what the demographics and behaviors of their depositors are today as the depositors of today look different than those of of 10 or 15 years ago. An important question to research is, “What makes this depositor engage with us?” This new class of depositors expects different kinds of conveniences, like online access and easy transfer of money with technology. This changing depositor landscape is shifting the strategies utilized for successful deposit management. 

Develop your pricing strategy relative to the behavior of deposits. After figuring out whom the depositors are, it is important for a financial institution to have a firm idea on pricing strategy. This includes knowing if an account will be stable or reactive to specific market conditions. Financial institutions are looking for stable deposits that are not sensitive to pricing; however, it is unlikely that deposits will behave in a steady manner. It is more common to have reactive money, which is caused by people demanding to receive the market rate when rates are higher. Although this situation can be manageable, it is important to identify the split of price-sensitive and insensitive deposits. How can a financial institution keep depositors engaged on levels other than price?

There are a lot of depositors who choose to go with other financial institutions not solely because of price but based on what they get from the relationship. Specific perks include cashback based on the number of transactions, free on-line banking and other rewards. A financial institution should learn more about those benefits and identify whether it will be profitable to incorporate those relationship-building strategies into their lines of business. 

Understand deposits’ impact on the balance sheet. Lastly, for an effective deposit management strategy, there should be an awareness of how deposits act on balance sheets. From a contractual term, deposits can look different from how they are being used in practice. On paper, non-maturity deposits are short-term contracts that can be canceled with the stroke of a pen or a click of a mouse. Yet, in practice, it’s much more common for these deposits to have a long shelf-life, and leadership should still be able to identify how this money can be leveraged and what can be funded by their deposits. In order to do this, a core funding duration or life should be calculated so that deposits are allocated in a way that continues to accomplish the overall institutional mission, which is providing excellent credit services to the market place.