Over the summer an American Banker article, "In Cash Glut, Banks Try to Discourage New Deposits" [July 27], reported that several large banks — flush with excess liquidity but precious little loan demand — were resorting to policies and pricing that discourage deposits in an effort to protect margins and earnings. The reasoning is sound, but it doesn't tell the full story.
A revealing table of the shrinking loan-to-deposit ratios of many of the nation's largest banks accompanied the article. One might expect, based on the article's logic, that these financial institutions would all have compelling reasons to discourage deposits. However, many of the banks listed are among the most aggressive purveyors of remote deposit capture, a service historically touted as the best mechanism for gathering low-cost deposits.
So what gives? Why would banks with low LTD ratios aggressively market RDC to commercial and retail clients in today's environment? The answer is twofold: cost savings and customer relationships.
In a tough economy cutting costs is crucial, and customer self-service offerings like RDC enable a financial institution to minimize the costs associated with handling deposit relationships; particularly branch and teller-servicing costs.
In fact, while the costs of in-branch transactions have risen 30% to 40% over the past four years, those of accepting deposits remotely have dropped dramatically due to economies of scale, declines in substitute-check volumes and the proliferation of ever-cheaper check scanners. For top-tier banks, bilateral check-image exchange agreements have also reduced back-end costs, making RDC the most cost-effective means of taking and processing deposits.
Combined with low interest rates on deposit accounts, RDC enables the savvy financial institution to grow deposits strategically without killing margins.
No matter how much a bank may be tempted to enhance margins in the short term by discouraging deposits, it must take care not to sacrifice long-term success.
In the article cited, Donald Mullineaux, a finance professor at the University of Kentucky, warns that the greater risk for banks is not margin compression but rather lost potential revenue tied to deposit relationships that are turned away.
The long view drives the aggressive RDC campaigns of many top-tier banks. As the economy recovers and loan demand returns — something we already see happening in certain regions and markets — eleventh-hour efforts to reacquire the low-cost deposits necessary to fund new loans will be too little, too late. Now is the time for banks to acquire quality relationships, and RDC is especially attractive to business clients looking to improve collections, cut costs and increase control in the current environment.
Since the average lifetime value of a middle-market commercial banking relationship is $45,784 — and because RDC is one of the stickiest of payments services — aggressive RDC campaigns make a lot of sense in tough times. Those banks that forfeit these relationships short-term for modest margin improvement will pay five times more to reacquire these relationships later, if at all.