Key Points:
As the Federal Funds Rate increases, and funding competition begins to come home to financial institutions, leadership teams are under pressure to retain and grow core deposits. But, with economic conditions signaling a potential recession, which may bring with it lower inflation and lower rates, it’s just not clear whether institutions should offer consumers and businesses a higher rate of return.
Fortunately, there are other strategies leaders can turn to when it comes to deposits, strategies that make rates matter less for the organization’s overall performance. Far more of the cost – and waste – of gathering new deposits comes from the account origination process and its inconvenience and inefficiency. In fact, those costs often far outpace any rate increase offered to attract depositors.
By focusing on the account opening process, financial institutions are finding they don’t need a crystal ball for the economy. They can focus on elements of the deposit operation in their control and can achieve far more profitable results than if they had focused on interest rates.
This article walks through two common inefficiencies that institutions face as they gather deposits: Conversion rates and branch costs.
Institutions spend huge amounts on marketing to get people to apply for new accounts, often expending more than they need to because their conversion rates are so low. But it’s not the marketing that’s falling short, it’s the account opening process.
At MANTL, we commonly speak with institutions that are seeing only 10% of their applications completed. That’s the same as 10 customers walking into a branch, and nine of them walking out the door and taking their business elsewhere. When you look at how that loss rate scales, it doesn’t make management feel at ease.
It takes about $10 in marketing cost to get one application, so what would it take to obtain 10,000 new accounts at a conversion rate of 10%? Since the institution needs 100,000 applications to obtain 10,000 accounts, it will cost $1 million – just on marketing! Now take into consideration the operational expenditures, technology cost, and salaries on top of the marketing spend. That 10% conversion rate is a significant problem.
So, how do organizations scale deposit gathering without blowing up the marketing budget? It starts with the conversion rate from lead to application to funded account.
It’s counterintuitive, but success at deposit gathering online is closely tied to branch banking for many institutions. Consumers are willing to try a remote relationship with an institution so long as banking digitally works. If the process doesn’t work, however, they want to be near a branch.
That is why many online deposit-raising strategies are often limited or unsuccessful: Most online account opening ends up requiring the new depositor to go to a branch. And the consumer isn’t going to bank with an institution with no branches nearby when the process requires in person.
At the end of the day, inconvenient digital account opening – meaning it requires people to come to the branch – makes people consider how close they are to the branch. In that scenario, the institution is both not providing online account opening, and not providing a good customer experience.
In that case, what reason does a consumer have to change institutions or open new accounts? No one likes an online account opening process – especially when it’s marketed as “online” – that ends up in an unwanted trip to a branch. An organization can go out with a new interest rate, but if there’s no change in convenience, the rate offered almost does not matter.
Looking at it another way, a new deposit campaign for online account opening doesn’t move a family any closer to a branch. If getting the account open online requires in-person, why change where you bank, or why add a new place to bank? Nothing has changed in terms of convenience. Consider why a prospect doesn’t already have an account with the institution. Is it really that they don’t know the branch is there on that main thoroughfare, just off the highway? Branches are usually positioned very well. If it’s remotely near their house or business, people know about the brand and the branches.
Deposit campaigns, then, are being used as an awareness bandaid for an operational problem. People knew you were there before and didn’t bank with you. Solve the operational problem, add convenience, and the institutions’ deposit growth will respond.
To improve convenience, institutions must deliver ease, access, and success at digitally opening an account. At MANTL, we see institutions doing this within the account opening experience with tremendous success.
For example, LendingClub Bank, Lehi, Utah, reduced the time to apply for a new account by 75% – to 2:30 minutes from more than 10 minutes with MANTL. Another customer, Midwest BankCentre, St. Louis, reduced application time to less than three minutes.
Midwest BankCentre raised $100 million in net new deposits powered by a 48% average conversion rate from application to funded account. Both LendingClub and Midwest BankCentre achieved both faster application times and significantly reduced fraud – as well as the need for new depositors to visit the branch in person.
For Midwest BankCentre, account opening experience created conversions and added miles to its branch service areas, which we call the “halo effect.” Where before, when online account opening was unavailable or ineffective, branches serviced about three to five miles, afterwards they saw the radius increase to seven or even 10 miles.
Assuming a banking organization wants to grow by 10,000 accounts, a 40%+ conversion rate has a massive effect, especially when leaders factor in lower dependency on branches.
Just looking at a marketing cost of $10 per application, with a 40% conversion rate, an institution only needs 25,000 applications to get 10,000 accounts. That’s a savings of $750k on just the marketing costs.
New branches cost millions to build. Looking just at branch salaries saved from the halo effect, cost reductions would start in the range of $250,000, and that’s probably very conservative.
Leaders should absolutely make a wise decision about their rate offering as they navigate this economic cycle. But, why focus only on competitive options like deposit pricing when waste reduction and convenience in the account origination process provide such gains?
While others focus on deposit costs, you can protect profitability and remain competitive on rates because you can use a high-performing account origination solution that controls what deposit gathering costs you.
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