Worried about the fragmented deposit market post SVB collapse?

Given ongoing news of banking system challenges, including the Silicon Valley Bank (SVB) failure, a lot of people are wondering about the stability of our banks and credit unions. The reality is that it’s not uncommon for banks to fail. The difference with SVB is that its sudden demise impacted a lot of well-known brands, start-ups, and venture capital firms, who all had no reason not to trust their financial institution. Some institutions are concerned that recession fears will cause other companies and consumers to pull back deposits.

One big question at the moment is, should credit unions be worried? Yes and no.

There’s no need to react as if this event will sink the whole economy, but it’s certainly a short-term (hopefully) disruption to most credit unions that rely on stable deposits. Credit unions fund the National Credit Union Administration (NCUA) to protect themselves against failures like SVB. Depositors will be able to recoup their deposits without a bailout from American tax dollars.

Short-term, yes, things will be okay. What about the long term?

The financial landscape has evolved significantly over the last decade. The Covid-19 pandemic accelerated a lot of digital, non-traditional institutions and investments, thus changing the expectations of traditional consumers. Companies like Robinhood have changed what it looks like to invest, and Afterpay has allowed consumers to spend money like never before. Innovations like these and mobile banks like SOFI and Chime have completely changed the deposit game. Deposits are fragmented, and fewer are going to traditional institutions like credit unions.

Credit unions are starting to feel the consequences of deposit losses. Market fragmentation wasn’t much of a concern over the past few years as cash flow was high with stimulus checks and PPP money. But inflation and rising rates have caused growth to slow down, and those funds have diminished as members have spent savings and others have chased rates.

SVB may be the canary in the coal mine—the first hard sign that banks and credit unions need a differentiated deposit strategy, and they need to put it into action now. Read on to learn about strategies to keep deposits flowing and confidence high.

Short-Term Deposit Strategies

Improve engagement to retain and expand

• Onboarding campaigns: Encourage product engagement and activation, such as active debit cards, online/mobile app downloads, logins, and bill pay usage. Reboard inactive members by following the same process.
• Create rewards checking accounts: For members meeting specific criteria, reward them with higher-than-normal APR, cash back on debit purchases, or the ability to earn points for rewards. Measures can include a higher rate on balances up to a certain amount, requiring a minimum of debit card transactions per month, using local small businesses, going paperless or having direct deposit, or a minimum time in the account.
• Monitor households for declines in deposit balances: Reach out to members that experienced balance drops of $25,000 or higher with special offers. These drops may consist of multiple transactions, so look at the aggregate over time. Use this same data to determine the destination of the funds. Funds may be used for large purchases, such as a down payment for a house. But other times, it could indicate that the member is moving to a new depository institution, investment application, or broker. Proactively reach out with an enticing offer, such as deposit products or wealth management, to help win back dollars.
• Develop a list of triggers to monitor for deposit attrition signals: Key indicators could include a decline in deposit balances, closing of deposit accounts, change of address, dropping direct deposit, reduced activity in bill pay, inactive debit cards, or debit cards with no action. Contact those members with special offers. Thanks to technology, branch proximity is less important now, so educating the member on the online tools and process for opening a loan can help retain customers who have relocated.

Offer rewards for positive behavior and improve financial health through personalized offers and education

• Institute relationship pricing: Offer a higher interest rate on savings and money market accounts if the member has a minimum dollar amount stored in core deposits to strengthen relationships and recognize loyalty. This pricing strategy can include savings on fees or loan rates with certain deposit balances, activity, or direct deposits.
• Create a reverse-tier savings account for low-income depositors: This account should offer a higher rate on deposits up to a maximum of a specific dollar amount, then drop to a rate on all remaining balances. Analysis needs to occur to develop rate and balance thresholds. Reverse-tier savings accounts help members save more but also help foster good saving habits and provide emergency cash. Some institutions leverage round-up functionality to fund these accounts. If using round-up functionality, the rate must be high enough for the member to want to leave the balance.
• Expand the number of tiers on your high-rate savings or money market accounts: Most banks and credit unions do not offer multiple rate tiers. Adding tiers will reward members as they increase their balances. This can be counterintuitive, considering the recommendation above. Recommendation #2 is for low-income depositors, and this recommendation is designed for high-income depositors.
• Financial education: Consumers are more confused than ever. Based on their behavioral data, share your expertise in a targeted and personalized way. For example, pull relevant content in a newsletter specific to individuals covering topics like:

• • Liquidity: Explain how your institution can help those in financial need and how different financial vehicles are better leveraged at different times. For example, when to use a HELOC versus cash. Show how difficult it can be to remove money from alternative or all-digital accounts like Robinhood and SOFI.
  • Compounding: Help explain how compounding works. Show how much interest they are earning with your account versus accounts elsewhere.
  • Secondary account holders: You are not allowed to market to beneficiaries of accounts, but nurturing secondaries on large dollar depositors can be crucial in attempting to stem the transfer of wealth. Educate them on your most attractive investment products and their features.

Long-Term Deposit Strategies

Nurture existing accounts to build a long-term pipeline

• Show appreciation: Have executives reach out to top members to thank them for their business and reassure them of the institution’s strength. This can be done via email, telephone, or even personalized video through a tool like Bombbomb. Remind them that the NCUA insure their funds up to specific amounts and you can expand those amounts with certain account structures.
• Provide a renewal incentive: Actively manage the CD renewal process by offering rate specials to more active accountholders with a robust relationship with the institution. Communicate well in advance and provide relationship-based incentives.
• Offer a certificate of deposit (CD) incentive: Allow one opportunity to increase the rate before maturity. This provides an incentive for account holders to make a longer-term commitment knowing that if rates rise, they benefit from the increase. This also limits the rate increase and risk to your institution.
• Financial education: Explain what CD means and how they work. Explain possible fine print with other products.
• Offer no-penalty CDs: Appeal to members concerned about locking in funds for a longer maturity to get a higher return. Removing the early withdrawal penalty after a set period provides peace of mind if funds are needed sooner than expected.
• Data-assisted CD campaigns: Market to traditional consumers who are not members of your credit union. Leverage introductory rates and education to show how the rate increase more than justifies the early withdrawal penalty. Then leverage the land and expand the model to cross-sale relationship-priced offerings as part of the CD onboarding process.

SVB is only one example of the impact that a fragmented deposit market can have on financial institutions. It’s important for credit unions to fight for their share of members with knowledge, data, personalization, education, and relationships built on trust and value. As a credit union, it is also our responsibility to help ensure our members’ financial health by encouraging them to use our products and services. Doing nothing will only lead to further loss of deposits and cost our institution in the long run because we know that fragmented relationships are ripe for fintechs to take advantage of.