KQ Article

Earlier this year, while walking between venues at a meeting of bankers, we overheard two top banking executives discuss their frustrations around attracting new deposits. The problem, they felt, was in their inability to consistently provide the highest rates of return on deposits in their respective markets.

It presented an intriguing question for a couple of market researchers like us to ponder: When it comes to attracting new customers or getting more deposits from current customers, is the decision really based solely on rate of return?

That chance encounter got us started on a quest to answer the question for ourselves on behalf of the financial services industry. We wanted to know what factors, offers or circumstances are most effective for a financial institution to attract new depositors or garner more deposits from their existing customer base.

UNDERSTANDING DEPOSIT BEHAVIOR
We began by immersing ourselves in the existing industry research on customer attitudes and trends, as a way to form the basis of our initial hypotheses and research methodology.

Aside from the obvious skyrocketing consumer debt, the sub-prime mortgage crisis and rising unemployment, we found that a key trend contributing to decreasing deposits is the emerging tendency for depositors to spread their money among a wider range of new nontraditional competitors — from the low-cost, low-service players (like ING) offering slightly higher returns, to the new, nontraditional players like Allstate Insurance, who promise a greater range of integrated financial services.

We chose the small business owner segment as the focus of our research because it represents some of the most personally affluent customers, along with some of the most deposit-rich prospects across all geographic segments. We reasoned that any strategies focused on small business owners with annual revenues ranging from $2 million to $10 million would likely yield effective outcomes across all sizes of financial institutions and across the country.

Our research team led in-depth ethnographic research with small business owners who were customers of both the largest institutions and small regional banks in four major U.S. markets. We set out to understand their deposit decision-making process and the value of measures used by banks to lure new depositors. Next, we worked with them using creative brainstorming techniques to construct new customer-focused offerings. This approach led to some surprising discoveries that financial institutions that don’t want to give away the bank, can leverage to gain both new customers and more deposits from their existing book of business.

SURPRISING FINDINGS
The research uncovered the real motivations of small business owners when they decide where to put new funds or consider moving to a new financial institution. We were surprised to learn that while rates are a key consideration for a portion of their deposits, small business owners focus primarily on the job of cash flow. Rate of return has little or no impact on their decisionmaking for another portion of their deposit funds.

Most would forgo some return in exchange for help from the financial institution that can show them how to create greater flow with the funds they have. In addition, they indicated a willingness to reward such financial institutions with more than deposits alone. They responded with feelings of greater loyalty, along with a desire to help the financial institution build its book of business with others like themselves.

While each financial institution must develop an individualized strategy around its unique strengths, brand and market situation, these recommendations for increasing small business deposits will likely apply to all:

• Help the small business owner create flow.
• Analyze and profile each small business depositor’s needs around flow.
• Create deposit evangelists from your current customer base to drive growth.

Banks and credit unions that best understand the mechanics of flow — and that help small business depositors best leverage theirs — will win the battle to attract new deposits over competitors that offer gimmicks, gifts and even higher rates of return. Since this flow-based strategy is built solidly upon each financial institution’s strengths and brand, it is an ownable differentiator insulates it from marketplace whims threatening to sweep current depositors from customer rolls.